Financial Management and Business Data Analytics · Cash Flow Statement - Preparation and Analysis

Cash Flows from Investing and Financing Activities Explained

Updated 10 October 2026 · Fact-checked

Investing cash flows come from buying and selling long-term assets and investments, plus interest and dividends received. Financing cash flows come from raising or repaying share capital and borrowings, plus interest and dividends paid. To solve, rebuild each balance sheet account, separate cash items from non-cash items, and show inflows and outflows.

Understand Cash Flows from Investing and Financing Activities

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

Investing activities are about acquiring and disposing of long-term assets and investments that are not cash equivalents. Typical items are purchase and sale of fixed assets, purchase and sale of long-term investments, loans given and recovered, and interest and dividends received on those investments.

Financing activities change the size and make-up of owners' capital and borrowings. Typical items are issue of shares and debentures, bank loans taken, repayments, buy-back, and interest and dividends paid.

For a non-financial company, interest and dividends received are usually shown in investing, and interest and dividends paid are usually shown in financing. This is the normal treatment, not a rigid rule. AS 3 and Ind AS 7 allow a consistent alternative classification, so follow the question's instruction.

The balance sheet shows only the change in an account, not the cash behind it. A fixed asset can rise because you bought it, or because you revalued it, or acquired it for shares. So you reconstruct each account to find the actual cash. Only cash items go into the statement. Non-cash items such as depreciation, bonus shares, and assets acquired against shares are left out of the statement and disclosed separately.

Inflows are shown as positive and outflows in brackets. The net of each section tells you where the cash came from and where it went.

Key rules to remember

Purchase of fixed assets (net block method): Purchase = Closing net block − Opening net block + Depreciation + Book value of assets sold; Use only if there is no revaluation. Adjust for any asset bought on credit or against shares if given.
Sale of fixed assets: Cash received = Book value of asset sold + Profit on sale (or − Loss on sale); The profit or loss is removed from operating profit as a non-operating item, and the full sale proceeds are shown in investing.
Shares issued for cash: Cash = Increase in share capital + Increase in securities premium (excluding bonus shares and shares issued for non-cash consideration); Check for calls in arrears or advance and for issue expenses written off against premium.
Borrowings: Raised or repaid = Closing balance − Opening balance (when only one of the two happened); If the question gives both raised and repaid, show them separately as gross figures.
Interest paid: Interest paid = Interest expense + Opening interest accrued − Closing interest accrued; Usually shown in financing for non-financial companies. AS 3 and Ind AS 7 allow a consistent alternative, so follow the question if it says otherwise.
Dividend paid: Dividend paid = Dividend declared + Opening unpaid dividend − Closing unpaid dividend; Only the cash actually paid in the year. Dividend merely proposed is not a cash flow. Usually shown in financing.
Interest and dividend received: Received = Income earned + Opening receivable − Closing receivable; Usually shown in investing activities for non-financial companies. A consistent alternative is allowed, so follow the question.
Net cash from a section: Net = Total inflows − Total outflows; A negative investing figure is normal for a growing business.

How to solve Cash Flows from Investing and Financing Activities questions

Use the same routine for every question. Work from the balance sheet and the additional information, one account at a time.

1List every non-current asset, investment, share capital, reserve and borrowing account. Note opening and closing balances and the change.
2Read the additional information for sales, revaluations, bonus issues, assets acquired on credit or for shares, and write-offs.
3For fixed assets, prepare a ledger account or net block working. Put opening balance, depreciation, book value of sales and closing balance in, and find the purchase as the balancing figure.
4Work out sale proceeds as book value plus profit or minus loss. Show the full proceeds as an inflow in investing.
5For investments, find purchases and sales the same way. Add interest and dividend received, adjusted for any receivable.
6For financing, find the cash raised on shares and debentures, the loans taken and repaid, and exclude bonus shares and non-cash issues.
7Compute interest paid and dividend paid after adjusting for accrued and unpaid amounts. Treat them as outflows.
8Present each section with a heading, individual items, and a net total. Check that no item is counted twice in operating and in these sections.

Quickest way: Account-by-account change method

When to use it: Use when time is short and the question gives clean opening and closing balances with few adjustments.

Write the change in each account beside it in the balance sheet: up or down.
Assets up means cash out, and liabilities or capital up means cash in. Reverse for the opposite change.
Correct each change for depreciation, profit or loss on sale, bonus issues and other non-cash items.
Put the corrected figures under investing or financing.
Add the three sections and check that the total equals the change in cash and cash equivalents.

Common mistakes in Cash Flows from Investing and Financing Activities

Taking the increase in fixed assets as the purchase.
Students forget that depreciation and sales reduced the closing balance.
Fix: Always rebuild the asset account: add depreciation and book value of sales to the increase in net block.
Showing only the profit or loss on sale of an asset.
The profit appears in the profit and loss account, so it feels like the cash flow.
Fix: Show the full sale proceeds in investing. Remove the profit or loss from the operating section.
Including bonus shares as cash from share issue.
Share capital increased, so students treat the whole increase as cash.
Fix: Bonus shares come out of reserves and involve no cash. Deduct them from the increase.
Treating proposed dividend as a cash outflow.
It appears in the balance sheet or profit appropriation.
Fix: Show only dividend actually paid in the year. Use the declared plus opening unpaid minus closing unpaid formula.
Putting interest paid and dividend paid in the wrong section.
Students mix interest paid (usually financing) with interest received (usually investing).
Fix: For non-financial companies, received usually goes in investing and paid usually goes in financing. AS 3 and Ind AS 7 allow a consistent alternative, so apply the classification the question states.
Netting repayments against fresh borrowings.
Students compare opening and closing balances only.
Fix: When the question gives both amounts, show borrowings raised and repaid as separate lines.

Worked examples

Example 1

From the books of Kaveri Industries Ltd. for the year: Plant net block was ₹8,00,000 at the start and ₹9,50,000 at the end. Depreciation for the year was ₹1,00,000. A plant with a book value of ₹60,000 was sold for ₹45,000. Long-term investments rose from ₹2,00,000 to ₹3,00,000 through cash purchases only. Interest received was ₹20,000 and dividend received was ₹10,000. Find the net cash from investing activities.

Show the solution

Purchase of plant = Closing net block − Opening net block + Depreciation + Book value of plant sold = 9,50,000 − 8,00,000 + 1,00,000 + 60,000 = ₹2,10,000 outflow.
Sale proceeds of plant = ₹45,000 inflow. The ₹15,000 loss (60,000 − 45,000) is not a separate cash flow.
Purchase of investments = 3,00,000 − 2,00,000 = ₹1,00,000 outflow.
Interest received ₹20,000 and dividend received ₹10,000 are inflows, total ₹30,000.
Net = −2,10,000 + 45,000 − 1,00,000 + 30,000 = −₹2,35,000.

Answer: Net cash used in investing activities = (₹2,35,000).

Example 2

For Meenakshi Textiles Ltd.: Equity share capital went from ₹10,00,000 to ₹12,00,000 and securities premium from ₹1,00,000 to ₹1,50,000, both through cash issue. 10% debentures fell from ₹5,00,000 to ₹3,00,000 by redemption at par. Term loan rose from ₹4,00,000 to ₹6,00,000 by fresh borrowing only. Interest paid during the year was ₹60,000 and dividend paid was ₹1,20,000. Find the net cash from financing activities.

Show the solution

Shares issued for cash = (12,00,000 − 10,00,000) + (1,50,000 − 1,00,000) = 2,00,000 + 50,000 = ₹2,50,000 inflow.
Redemption of debentures = 5,00,000 − 3,00,000 = ₹2,00,000 outflow.
Term loan raised = 6,00,000 − 4,00,000 = ₹2,00,000 inflow.
Interest paid ₹60,000 is an outflow, shown in financing as is usual for a non-financial company.
Dividend paid ₹1,20,000 is an outflow, also shown in financing.
Net = 2,50,000 − 2,00,000 + 2,00,000 − 60,000 − 1,20,000 = ₹70,000.

Answer: Net cash from financing activities = ₹70,000 inflow.

Exam tips

Show a working note for fixed assets, investments, interest and dividend. Examiners give step marks for the working even if the final figure is wrong.
Read the additional information first. Most traps such as bonus shares, revaluation and assets bought on credit are hidden there.
Label each line clearly as inflow or outflow and put outflows in brackets so the sign is never in doubt.
In MCQs, check which section an item belongs to before calculating. Many questions only ask where interest paid or dividend received is shown, so follow any classification the question states.
Close with the check: total of all three sections should equal the change in cash and cash equivalents.

Practice questions from Cash Flow Statement - Preparation and Analysis

Cash Flows 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 Flows from Investing and Financing Activities: frequently asked questions

How do I find purchase of fixed assets in a cash flow statement?

Rebuild the fixed asset account. Take the closing net block, subtract the opening net block, then add depreciation and the book value of assets sold. The result is the cash purchase, provided there was no revaluation or non-cash acquisition.

Where do interest and dividend paid go in the cash flow statement?

For a non-financial company, interest and dividends paid are usually shown under financing activities, and interest and dividends received under investing activities. This is the normal treatment, not a rigid rule. AS 3 and Ind AS 7 allow a consistent alternative classification, so follow what the question says.

Where is income tax paid shown?

Income tax paid is normally shown under operating activities. It is placed in investing or financing only when it can be specifically identified with those activities.

Do bonus shares appear in the cash flow statement?

No. Bonus shares involve no cash, since they are issued out of reserves. Leave them out of financing and deduct them when working out cash raised from the increase in share capital.