The correct answer is Option (2) - C, A, D, B, E.
Depreciation is non cash expense so it is added back to calculate the Operating Profit before Working Capital changes.
After it, change in inventories is recorded as it is change in current asset. After it, operating from operating activity comes out.
Purchase of fixed Assets is an investing activity.
Proceed from long term borrowings is a financing activity.
This is the correct sequence of preparing cash flow statement-
(A) Cash flows from operating activities
(B) Cash flows from investing activities
(C) Cash flows from financing activities
Net increase (decrease) in cash and cash equivalents (A + B + C)
+ Cash and cash equivalents at the beginning
= Cash and cash equivalents at the end.
* CASH FLOW FROM OPERATING ACTIVITIES-
Net Profit/Loss before Tax and Extraordinary Items
ADD: Deductions already made in Statement of Profit and Loss on account of Non-cash items such as Depreciation, Goodwill to be Written-off.
ADD: Deductions already made in Statement of Profit and Loss on Account of Non-operating items such as Interest.
DEDUCT: Additions (incomes) made in Statement of Profit and Loss on Account of Non-operating items such as Dividend received, Profit on sale of Fixed Assets
Operating Profit before Working Capital changes
Add : in case of increase in current assets (other than cash and cash equivalent) and decrease in current liabilities.
Less : in case of decrease in current assets (other than cash and cash equivalent) and decrease in current liabilities.
Cash Flows from Operation Activities before Tax and Extraordinary items
– Income Tax Paid
+/–Effects of Extraordinary Item | 
