Capital Reserve is the part of the profit or surplus, maintained as an account in the Balance Sheet that can be used only for special purposes. It is made out of capital profits earned due to the sale of fixed assets at a price greater than its cost or profit on the reissue of forfeited shares.

Mostly capital reserve will be given in question only when any part of fixed asset is sold on profit and that profit is tranferred to capital reserve. So treatment will be tranfer capital reserve amount in account of fixed asset on credit side as a profit means it is not shown in any activity and profit transferred to. capital reserve is also not deducted in operating activity because it is not transferred to profit loss account.

Use of Capital Reserve in Cash Flow Statement

Capital reserve is a part of the shareholders' equity section of a company's balance sheet. It represents the accumulated profits that are not distributed as dividends or used for any other purpose. The use of capital reserve in the cash flow statement provides insights into how a company manages its financial resources and the implications for its future cash flows.

1. Capital Reserve
Capital reserve is created when a company generates profits and decides to retain them instead of distributing them to shareholders as dividends. These reserves are typically used for specific purposes such as funding expansion projects, reducing debt, acquiring assets, or investing in research and development. Capital reserves are not readily distributable as dividends and are therefore classified as a part of shareholders' equity.

2. Cash Flow Statement
The cash flow statement is a financial statement that provides information about the cash inflows and outflows of a company during a specific period. It is divided into three main sections: operating activities, investing activities, and financing activities. The cash flow statement helps investors and analysts assess the liquidity, solvency, and operational efficiency of a company.

3. Impact on Operating Activities
Capital reserve can have an impact on the operating activities section of the cash flow statement in the following ways:

- Non-cash adjustments: If a company utilizes capital reserve for non-cash expenses or adjustments, such as writing off bad debts or depreciation, it will affect the operating activities section indirectly. These adjustments are included in the net income calculation, which is a starting point for determining cash flows from operating activities.

- Working capital: If capital reserve is utilized to improve working capital, such as reducing accounts payable or increasing inventory, it can impact the operating activities section. Changes in working capital are accounted for in the operating activities section, and the use of capital reserve may affect these changes.

4. Impact on Investing and Financing Activities
The use of capital reserve may also impact the investing and financing activities sections of the cash flow statement:

- Investing activities: If capital reserve is utilized for investments, acquisitions, or the purchase of long-term assets, it will be reflected in the investing activities section. This section accounts for cash flows related to the purchase or sale of long-term assets or investments.

- Financing activities: If a company decides to distribute capital reserve as dividends or use it for debt repayments, it will be reflected in the financing activities section. This section includes cash flows related to shareholder distributions, debt issuances, or repayments.

Conclusion
The use of capital reserve in the cash flow statement provides valuable insights into how a company manages its financial resources. It impacts the operating activities section indirectly through non-cash adjustments and changes in working capital. Additionally, it affects the investing and financing activities sections when used for investments, acquisitions, dividends, or debt repayments. By analyzing the cash flow statement, stakeholders can assess the financial health, investment decisions, and cash flow management strategies of a company.