Question

ABC Ltd. has given you the following information:
• Machinery as on April 01, 2016: 50,000
• Machinery as on March 31, 2017: 60,000
• Accumulated Depreciation on April 01, 2016: 25,000
• Accumulated Depreciation on March 31, 2017: 15,000
• During the year, a Machine costing 25,000 with Accumulated Depreciation of 15,000 was sold for 13,000.
Cash flow from Investing Activities on the basis of the above information will be:

• A. Net cash flow 12,000
• B. Net cash used 22,000
• C. Net cash flow 13,000
• D. Net cash used 35,000

Answer 1

The Correct Option is B

\(\textbf{Step 1:}\) Calculate the book value of the machine sold. \[ \text{Book Value} = \text{Cost} - \text{Accumulated Depreciation} = 25,000 - 15,000 = ₹10,000 \]
\(\textbf{Step 2:}\) Sale proceeds = ₹13,000
Hence, there is a profit on sale = ₹3,000 (this is a non-cash item, ignored in investing activity)
\(\textbf{Step 3:}\) Opening balance of machinery = ₹50,000 Less: Cost of machinery sold = ₹25,000 Add: Purchases = X Closing balance of machinery = ₹60,000 \[ 50,000 - 25,000 + X = 60,000 \Rightarrow X = ₹35,000 \] \(\textbf{Step 4:}\) Cash flow from investing activities = Sale proceeds - Purchase \[ \text{Net Cash Flow} = 13,000 - 35,000 = \text{Net cash used } ₹22,000 \] Thus, the solution is Net cash used ₹22,000.