If a machine whose original cost is ₹40,000 having accumulated depreciation ₹12,000, were sold for ₹34,000 then while preparing Cash Flow Statement its effect on cash flow will be :
Answer & explanation
Correct answer: option 3
The correct answer is option 3- Cash flow from investing activities ₹34,000.
As per AS-3, investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building, etc. Transactions related to long-term investment are also investing activities. So, firstly it is an investing activity.
Machine cost = 40,000
Accumulated depreciation = 12,000
Sold = 34,000
Book value of machine = Cost - depreciation
= 40,000 - 12,000
= 28,000
Profit on sale = 34,000 - 28,000
= 6,000
Sale value will be the inflow of cash to the company. So, 34,000 is an inflow of cash from investing activity.