# Comprehensive Worked Example — Q2: Full CFS (Indirect Method)
## T-Account Technique for Deriving Cash Flows
When the problem gives opening/closing Balance Sheet balances but does not state the actual cash paid or received, construct a T-account:
1. Enter opening and closing balances on the correct sides
2. Enter all known non-cash entries (depreciation, profit on sale, etc.)
3. The balancing figure = the cash flow (label it CIB — Cash In/out of Bank)
For Sale of Assets — special posting rule:
Post the full sale proceeds on the credit side. Post the profit on the debit side (or loss on the credit side). This makes the T-account balance and directly reveals the cash received.
Example journal entry for sale of Cars at ₹3,400 with profit ₹1,400:
```
Bank A/c Dr 3,400
Cars A/c (NBV sold) Cr 2,000
P&L A/c (Profit) Cr 1,400
```
In the Cars T-account, this shows:
- Credit: Sale proceeds ₹3,400 (the CIB figure)
- Debit: Profit ₹1,400 (balancing entry to reconcile NBV)
## Problem Data (Year Ended 31.3.18)
| P&L Item | ₹ |
|---|
| Profit Before Tax | 8,000 |
| Depreciation — Building | 1,000 |
| Depreciation — Furniture | 2,000 |
| Depreciation — Cars | 5,000 |
| Profit on sale of Cars | 1,400 |
| Profit on sale of Investments | 8,000 |
| Balance Sheet Item | Opening | Closing |
|---|
| Cars (Net Book Value) | 16,000 | 25,000 |
| Furniture (NBV) | 22,000 | 34,000 |
| Investments | 28,000 | 32,000 |
| Equity Share Capital | 1,00,000 | 1,20,000 |
| Income Tax Payable | 2,000 | 3,000 |
| Dividend Payable | 2,000 | 4,000 |
| Cash & Cash Equivalents | 17,000 | 12,000 |
### Example 1
## Full Cash Flow Statement — Q2 Solution
### Step 1: Derive Cash Flows via T-Accounts
Cars A/c (Net Book Value):
```
Dr | Cr
Opening NBV 16,000 | Depreciation 5,000
Purchase (CIB) 16,000 | Sale proceeds (CIB) 3,400
Profit on sale 1,400 | Closing NBV 25,000
────────────────────────────────────────────────────────
33,400 | 33,400
```
→ Cars purchased: ₹16,000 (outflow) | Cars sold: ₹3,400 (inflow)
Investments A/c:
```
Dr | Cr
Opening 28,000 | Sale proceeds (CIB) 10,000
Purchase (CIB) 6,000 | Closing 32,000
Profit on sale 8,000 |
────────────────────────────────────────────────────────
42,000 | 42,000
```
→ Investments purchased: ₹6,000 (outflow) | Investments sold: ₹10,000 (inflow)
Furniture A/c:
```
Dr | Cr
Opening 22,000 | Depreciation 2,000
Purchase (CIB) 14,000 | Closing 34,000
────────────────────────────────────────────────────────
36,000 | 36,000
```
→ Furniture purchased: ₹14,000 (outflow)
Income Tax Payable A/c:
```
Dr | Cr
Cash paid (CIB) 2,000 | Opening balance 2,000
Closing balance 3,000 | P&L (accrued) 3,000
────────────────────────────────────────────────────────
5,000 | 5,000
```
→ Tax paid: ₹2,000
Equity Share Capital A/c:
```
Closing 1,20,000 = Opening 1,00,000 + Issue 20,000
```
→ Shares issued: ₹20,000 (financing inflow)
Dividend Payable A/c:
```
Opening 2,000 + Declared 4,000 − Cash paid (CIB) = Closing 4,000
→ Cash paid = 2,000
```
→ Dividend paid: ₹2,000 (financing outflow)
---
### Step 2: Cash Flow Statement of [Company] for Year Ended 31.3.18
A. Cash Flow from Operating Activities
| Item | ₹ | ₹ |
|---|
| Profit Before Tax | | 8,000 |
| Add: Depreciation — Building | 1,000 | |
| Add: Depreciation — Furniture | 2,000 | |
| Add: Depreciation — Cars | 5,000 | |
| Less: Profit on sale of Cars | (1,400) | |
| Less: Profit on sale of Investments | (8,000) | 6,600 |
| Changes in Working Capital: | | |
| Add: Increase in Trade Payables | | 3,000 |
| Less: Increase in Inventory | | (6,000) |
| Less: Increase in Trade Receivables | | (2,000) |
| Less: Income Tax Paid | | (2,000) |
| Net Cash from Operating Activities (A) | | (400) |
B. Cash Flow from Investing Activities
| Item | ₹ |
|---|
| Sale of Cars | 3,400 |
| Purchase of Cars | (16,000) |
| Sale of Investments | 10,000 |
| Purchase of Investments | (6,000) |
| Purchase of Furniture | (14,000) |
| Net Cash from Investing Activities (B) | (22,600) |
C. Cash Flow from Financing Activities
| Item | ₹ |
|---|
| Issue of Shares | 20,000 |
| Dividend Paid | (2,000) |
| Net Cash from Financing Activities (C) | 18,000 |
Reconciliation:
| ₹ |
|---|
| Opening Cash & Cash Equivalents | 17,000 |
| Net cash flows: −400 − 22,600 + 18,000 | (5,000) |
| Closing Cash & Cash Equivalents | 12,000 ✓ |
### Example 2
## Why Profit on Sale Goes on the Debit Side of the Asset T-Account
This confuses many students. The logic:
When an asset is sold at a profit, the accounting entry is:
```
Bank A/c Dr (full proceeds) ← cash received
Asset A/c Cr (book value) ← asset removed at cost/NBV
P&L A/c (Profit) Cr (profit portion) ← gain recognised
```
In the Asset T-account alone (without the Bank/P&L entries):
- Credit side shows: full proceeds (the CIB entry)
- To balance the account, the profit must appear on the Debit side
This is not a real debit to the asset — it is a bookkeeping device to reveal the full sale proceeds on the credit side so you can directly read off the cash figure.
Verification for Investments:
- Opening: ₹28,000 + Purchases: ₹6,000 = ₹34,000 (Dr total before profit entry)
- Sale proceeds: ₹10,000 + Closing: ₹32,000 = ₹42,000 (Cr total)
- Difference = ₹8,000 → posted as Profit (Dr) → Dr total = ₹42,000 ✓
- Book value of investments sold = ₹10,000 − ₹8,000 = ₹2,000 (makes sense)