Corporate Accounting and Auditing · Cash Flow Statement

Cash Flow from Investing and Financing Activities: Rules and Calculation

Updated 10 October 2026 · Fact-checked

Investing activities cover buying and selling long-term assets and investments. Financing activities cover changes in owners' capital and borrowings. To solve, rebuild each account from the balance sheet, find the cash amount, and show inflows and outflows. Under Ind AS 7, interest paid and dividends paid are financing; interest and dividends received are investing.

Understand Cash Flow from Investing and Financing Activities

A cash flow statement splits cash movements into three groups: operating, investing and financing. This page covers the last two.

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Think of fixed assets, long-term investments, and the cash you earn from them.

Financing activities are activities that result in changes in the size and composition of owners' capital (including preference share capital in a company) and borrowings. Think of issuing shares, raising or repaying loans, and paying the cost of that money.

The balance sheet shows only closing balances, not the cash behind them. So you rebuild the movement. Opening balance plus additions minus reductions equals closing balance. The unknown figure is your cash flow, after you remove non-cash items such as depreciation, bonus issue or revaluation.

For classification of interest and dividends, Ind AS 7 (para 31) says interest paid is financing for entities other than financial institutions, interest and dividends received are investing, and dividends paid are financing. For a financial institution, interest paid and interest and dividends received are operating. Under AS 3 the illustration also shows interest and dividends received as investing, and interest paid and dividends paid as financing, for an enterprise other than a financial one.

Key rules to remember

Purchase of fixed assets: Purchase = Closing gross block − Opening gross block + Gross cost of assets sold; Use gross (cost) figures. If only net block is given, use: Closing net block − Opening net block + Depreciation + Book value of assets sold.
Sale proceeds of an asset: Sale proceeds = Book value (cost − accumulated depreciation) + Profit on sale (or − Loss on sale); Show the full proceeds in investing. Remove the profit or loss from operating profit as a non-cash adjustment.
Share capital raised: Cash from shares = Increase in (share capital + securities premium) − Bonus shares − Shares issued for non-cash consideration; Only cash received is a financing inflow.
Net borrowings: Proceeds or repayment = Closing borrowings − Opening borrowings (adjusted for non-cash items); Show proceeds and repayments separately if both are known.
Interest paid: Interest paid = Interest expense + Opening interest payable − Closing interest payable; Classified as financing for an entity that is not a financial institution (Ind AS 7, para 31).
Interest or dividend received: Received = Income + Opening receivable − Closing receivable; Investing for an entity that is not a financial institution.
Dividend paid: Cash dividend = Dividend declared + Opening unpaid dividend − Closing unpaid dividend; Financing activity (Ind AS 7, para 31). Dividend tax or deduction at source is part of the cash paid.
Instalment with interest and loan: Instalment on deferred payment asset: loan part → investing; interest part → financing; AS 3 para 10: a single transaction may include differently classified cash flows.

How to solve Cash Flow from Investing and Financing Activities questions

Use this order for any investing or financing question. It keeps your workings tidy and earns step marks.

1Read the additional information first. Note sales of assets, bonus issues, revaluation, conversions and any non-cash items.
2Decide the classification: fixed assets and investments, with income received from them, go to investing; capital, borrowings, interest paid and dividends paid go to financing (non-financial entity).
3Prepare a ledger-style working note for each item: fixed assets (cost), accumulated depreciation, investments, share capital and premium, loans, interest payable, dividend.
4Find the unknown cash figure as the balancing number in each account. Remove non-cash items.
5Calculate sale proceeds of assets from book value and profit or loss, and keep profit or loss out of investing cash.
6Present inflows as positive and outflows in brackets. Do not net unrelated items.
7Total each section as net cash from investing and net cash from financing.
8Cross-check: the total of operating, investing and financing must equal the change in cash and cash equivalents.

Quickest way: T-account in your head

When to use it: Use when the question gives a balance sheet and only a few notes, and time is short.

Write opening and closing for each long-term account side by side.
Mark the change and ask: what non-cash items explain part of it?
Adjust: add depreciation back to net block, remove bonus, remove revaluation.
The remainder is cash. Place it under the correct heading with the right sign.
Check that total change in cash matches the balance sheet before you write the final statement.

Common mistakes in Cash Flow from Investing and Financing Activities

Showing only the net change in fixed assets as the purchase
Students forget depreciation and assets sold.
Fix: Rebuild the asset account fully: opening + purchases − cost of sales = closing, using gross cost, or adjust net block for depreciation and book value sold.
Putting profit on sale of an asset in investing instead of the sale proceeds
The profit appears in the profit and loss account, so it looks like the cash figure.
Fix: Show the full sale proceeds in investing. Deduct the profit (or add the loss) in the operating adjustments.
Treating interest paid or dividend paid as operating
Both reduce profit or reserves, so they feel operational.
Fix: For a non-financial entity, interest paid and dividends paid are financing. Ind AS 7 says dividends are a cost of obtaining financial resources.
Counting bonus shares as cash raised
Share capital rises on the balance sheet.
Fix: Bonus shares are a non-cash transfer from reserves. Leave them out of financing.
Using the closing interest payable instead of interest actually paid
Students copy the expense from the profit and loss account.
Fix: Adjust for opening and closing interest payable. Paid = expense + opening payable − closing payable.
Netting loan proceeds against repayments
To save time, the net change in loan is shown.
Fix: If both amounts are known, show them separately. Net only where the standard allows, for example short-term borrowings with quick turnover.

Worked examples

Example 1

From the following, find cash flow from investing activities. Plant at cost: opening ₹8,00,000, closing ₹9,50,000. Accumulated depreciation: opening ₹2,40,000, closing ₹2,70,000. During the year, plant costing ₹1,00,000 with accumulated depreciation ₹60,000 was sold at a profit of ₹10,000. Long-term investments were bought for ₹1,50,000. Interest received during the year was ₹30,000 and dividends received were ₹20,000.

Show the solution

Cost of plant purchased: closing 9,50,000 = opening 8,00,000 + purchases − 1,00,000. So purchases = 9,50,000 − 8,00,000 + 1,00,000 = ₹2,50,000.
Book value of plant sold = 1,00,000 − 60,000 = ₹40,000.
Sale proceeds = 40,000 + profit 10,000 = ₹50,000.
Check depreciation: closing 2,70,000 = opening 2,40,000 + charge − 60,000. Charge = ₹90,000. This goes in operating adjustments, not investing.
Investing outflows: plant purchase (2,50,000) and investments purchase (1,50,000).
Investing inflows: sale proceeds 50,000, interest 30,000, dividends 20,000.
Net = 50,000 + 30,000 + 20,000 − 2,50,000 − 1,50,000 = 1,00,000 − 4,00,000 = −3,00,000.

Answer: Net cash used in investing activities = ₹(3,00,000).

Example 2

Extracts for a non-financial company: Share capital opening ₹10,00,000, closing ₹14,00,000, which includes ₹1,00,000 bonus shares issued out of reserves. Securities premium opening ₹1,00,000, closing ₹1,60,000. Long-term loan opening ₹6,00,000, closing ₹4,50,000; during the year new loan of ₹1,00,000 was taken. Interest expense ₹60,000; interest payable opening ₹10,000, closing ₹15,000. Dividend declared and paid ₹1,20,000. Calculate cash flow from financing activities.

Show the solution

Increase in share capital = 14,00,000 − 10,00,000 = 4,00,000. Less bonus 1,00,000 = 3,00,000 cash share capital.
Increase in securities premium = 1,60,000 − 1,00,000 = 60,000, assumed received in cash (no bonus issue was made from it).
Cash from shares = 3,00,000 + 60,000 = ₹3,60,000.
Loan: opening 6,00,000 + new loan 1,00,000 − repayment = closing 4,50,000. Repayment = 7,00,000 − 4,50,000 = ₹2,50,000.
Interest paid = 60,000 + 10,000 − 15,000 = ₹55,000.
Dividend paid = ₹1,20,000.
Net financing = 3,60,000 + 1,00,000 − 2,50,000 − 55,000 − 1,20,000 = 4,60,000 − 4,25,000 = 35,000.

Answer: Net cash from financing activities = ₹35,000.

Exam tips

Always show working notes for fixed assets, share capital, loans and interest. Marks are given for the workings even if the final figure is wrong.
Read the additional information line by line. Bonus, revaluation and conversion are classic non-cash traps.
State your assumption in one line when the question is silent, for example that interest is for a non-financial entity and so classified as financing.
In MCQs, check the section first: dividends paid and interest paid go to financing, dividends received to investing, unless the entity is a financial institution.
Keep brackets for outflows and verify that the three sections plus opening cash equal closing cash.

Practice questions from Cash Flow Statement

Cash Flow from Investing and Financing Activities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cash Flow from Investing and Financing Activities: frequently asked questions

How do I find purchase of fixed assets from a balance sheet?

Use the asset account: opening gross block + purchases − cost of assets sold = closing gross block. If only net block is given, add back depreciation and the book value of assets sold to the change in net block. The result is the cash outflow in investing.

Where does dividend paid go in a cash flow statement?

Ind AS 7 says dividends paid are classified as financing activities, because they are a cost of obtaining financial resources. The same treatment appears in the AS 3 illustration.

Is interest paid operating or financing?

For entities other than financial institutions, Ind AS 7 classifies interest paid as financing. For a financial institution, it is operating. Always read the question for the type of entity.

Should I show profit on sale of an asset in investing activities?

No. Show the full sale proceeds in investing. The profit is a non-cash adjustment that you deduct from net profit in operating activities.