CBSE Class 12 Accountancy Cash Flow Statement Important Questions Set 02

Very Short Answer Questions (1 Mark)

Question 1. Why is separate disclosure of cash flows from ‘investing activities’ necessary? State. [CBSE (F) 2017]
Answer:
Separate disclosure of cash flows from investing activities is necessary in order to know the inflow and outflow of cash and cash equivalents from the acquisition and sale of fixed assets and non-current investments.

Teacher's Note:
1. Investing outflows show how much the company is spending on resources meant to earn future income.

Question 2. What is meant by a ‘non-cash transaction’? Give one example of a non-cash transaction. [CBSE (F) 2017]
Answer:
Non Cash Transactions are those transactions which don’t result in any inflow and outflow of cash and cash equivalents.
For example, issue of shares in consideration of purchase of fixed assets is a non-cash transaction.

Teacher's Note:
1. Other examples: conversion of debentures into shares, issue of bonus shares, depreciation.

Question 3. What is meant by cash flow from operating activities? [CBSE Delhi 2011]
Answer:
Cash flow from operating activities means cash generated from main revenue generating activities of a business enterprise.

Teacher's Note:
1. Operating activities also include all activities that are not investing or financing.

Question 4. List any two investing activities which result into outflow of cash. [CBSE (AI) 2011]
Answer:
(i) Purchase of fixed assets (ii) Purchase of investment.

Teacher's Note:
1. For outflows, use the word ‘purchase’ or ‘acquisition’; sales are inflows.

Question 5. Give one difference between an operating activity and an investing activity. [CBSE Delhi 2010 (C)]
Answer:
Operating activities are related to main revenue generating activities of business, i.e., purchase and sale of goods and services whereas investing activities are related to purchase and sale of long-term assets.

Teacher's Note:
1. State both sides of a difference; one side alone gets no marks.

Question 6. List any two financing activities that will result into outflow of cash. [CBSE (AI) 2011]
Answer:
(i) Redemption of Preference Shares.
(ii) Payment of dividend.

Teacher's Note:
1. Repayment of loans and interest paid are other financing outflows.

Question 7. Under which type of activity, will you classify ‘Proceeds from sale of investment’ while preparing Cash Flow Statement? [CBSE Delhi 2013]
Answer:
Investing Activity.

Teacher's Note:
1. For a financial company dealing in investments, the same item would be an operating activity.

Question 8. Dividend paid by a manufacturing company is classified under which kind of activity while preparing Cash Flow Statement? [CBSE 2008]
OR
‘Payment of dividend’ will come under which type of activity while preparing a cash flow statement? [CBSE (AI) 2011]
Answer:
Financing Activity.

Teacher's Note:
1. Dividend paid is financing for every enterprise, including financial companies.

Question 9. Declaration of Final dividend would result in inflow, outflow or no flow of cash. Give your answer with reason. [CBSE Delhi 2010]
Answer:
No flow of cash as dividend is only declared, not paid.

Teacher's Note:
1. Cash flows only when the dividend is actually paid.

Question 10. While preparing Cash Flow Statement what type of activity is ‘Payment of Cash to acquire Debentures by an Investment company’? [CBSE Delhi 2012]
Answer:
Operating Activity.

Teacher's Note:
1. Buying securities is the main business of an investment company, so it is operating, not investing.

Question 11. Under which type of activity, will you classify ‘Refund of Income Tax received’ while preparing the Cash Flow Statement? [CBSE Delhi 2013]
Answer:
Operating Activity.

Teacher's Note:
1. Tax refund received is treated like tax paid: under operating activities unless linked to investing or financing.

Question 12. Under which type of activity, will you classify ‘Commission and Royalty Received’ while preparing Cash Flow Statement? [CBSE (AI) 2013]
Answer:
Operating Activity.

Teacher's Note:
1. Royalties, fees and commissions received are listed in AS-3 as operating inflows.

Question 13. State with reason whether ‘Purchase of fixed asset on long-term deferred payment’ would result in inflow, outflow or no flow of cash. [CBSE Delhi 2013]
Answer:
There is no flow of cash because purchase of fixed asset on credit will not affect cash.

Teacher's Note:
1. Cash flows arise later, when the instalments are actually paid.

Question 14. Give an example of the activity which remains financing activity for every enterprise. [CBSE (AI) 2013]
Answer:
Payment of Dividend on Shares.

Teacher's Note:
1. Interest paid is not a safe answer, as it is operating for a financial company.

Question 15. State with reason whether ‘Old furniture written off’ would result into inflow, outflow or no flow of cash. [CBSE (AI) 2013]
Answer:
No flow because old furniture written off does not involve cash. It is a non-cash expense.

Teacher's Note:
1. Non-cash write-offs are added back to net profit while calculating operating cash flow.

Question 16. State with reason whether deposit of Cash into Bank will result into inflow, outflow or no flow of cash. [CBSE 2019 (67/3/1)]
Answer:
No flow of cash because it simply represents the movement between items of cash or cash equivalents.

Teacher's Note:
1. Cash in hand and bank are both cash and cash equivalents, so the total does not change.

Question 17. State whether the payment of cash to creditors will result in inflow, outflow or no flow of cash. [CBSE (AI) 2008, 2011]
Answer:
Outflow of cash as cash is decreasing.

Teacher's Note:
1. Payment to creditors is an operating outflow, shown through the change in trade payables.

Question 18. ‘Sale of marketable securities at par’ would result in inflow, outflow or no flow of cash? Give your answer with reason. [CBSE Delhi 2010]
Answer:
No flow of cash because cash includes marketable securities.

Teacher's Note:
1. Marketable securities are cash equivalents, so selling them at par only changes the form of cash.

Question 19. Under which type of activity will you classify ‘cash received from debtors’ while preparing Cash Flow Statement? [CBSE 2010]
Answer:
Operating Activity.

Teacher's Note:
1. In the indirect method this appears through the change in trade receivables.

Question 20. Give any two examples of investing activities of a finance company. [CBSE 2019 (67/5/2)]
Answer:
(i) Purchase of Building, (ii) Purchase of Patents.

Teacher's Note:
1. Do not give purchase of shares or interest received for a finance company, as these are its operating activities.

Question 21. Manvi Finance Ltd. is a company engaged in the business of financing securities. In its Cash Flow Statement, it has shown interest earned under the Financing Activity. Do you think it is a correct presentation? Give reasons to your answer.
Answer:
The business of Manvi Finance Ltd. is financing the securities. Thus, in this case interest earned by the company is its Operating Activity. Therefore, the presentation of interest earned as financing activity is not correct.

Teacher's Note:
1. Interest earned is never a financing activity; it is operating for a finance company and investing for others.

Question 22. Where will you classify factory expenses for both finance and non-finance companies and why?
Answer:
Factory expenses of a business enterprise will be classified under operating activities for both finance and non-finance companies as factory expenses are related to main revenue generating activities of an organisation.

Teacher's Note:
1. Only interest and dividend items change class between finance and non-finance companies; routine expenses are always operating.

Question 23. When and why is ‘receipt of dividend’ classified under operating activities?
Answer:
In case of financial companies, receipt of dividend is classified as operating activities as for financial companies receipt of dividend is considered main revenue generating activity of business.

Teacher's Note:
1. For a non-financial company the same receipt is an investing inflow.

Short Answer Questions (2 Marks)

Teacher's Note:
1. Interest paid and dividend paid by a non-financial company are both financing outflows; do not forget to deduct them.

Teacher's Note:
1. Add back the provision for tax made, not the income tax paid; tax paid is used later in operating activities.

Short Answer Questions (3 Marks)

Teacher's Note:
1. The surplus has fallen, but the net profit is positive once dividend paid and tax are added back; loss on sale of machinery (book value 30,000 − sale 10,000) is a non-operating loss to add back.
2. The increase in goodwill is a purchase (investing activity), not an operating item.

Teacher's Note:
1. Dividend and interest received by a non-financial company are investing inflows; this answer takes them on the opening holdings (16,00,000 and 10,00,000).
2. Plant purchased is the balancing figure: 9,00,000 − 60,000 (book value sold) − 50,000 depreciation + purchase = 12,00,000.

Long Answer Questions (5 Marks)

Teacher's Note:
1. Work backwards from the given subtotal: 80,400 − 29,400 depreciation − 2,000 goodwill written off gives the net profit before tax of ₹49,000.
2. Transfer to General Reserve and interim dividend are appropriations of profit, so both are added back to the change in Surplus.

Teacher's Note:
1. Marketable current investments are treated as cash equivalents, so their fall is part of the change in cash, not an investing inflow.
2. The big fall in Trade Payables (₹66,000) is what turns the operating cash flow negative even though profit is ₹15,000.

Teacher's Note:
1. Interest on the 10% loan is ₹6,000 on the old loan plus ₹1,500 on the new ₹20,000 for 9 months (1st July to 31st March) = ₹7,500.
2. Provision for tax made = 68,000 + 53,000 paid − 70,000 = ₹51,000; add it back to the fall in surplus to get net profit before tax (a loss of ₹44,000).

Teacher's Note:
1. Since the debentures were redeemed on 31st March, interest of 12% is charged on the full ₹5,00,000 (₹60,000) and added back in operating activities.
2. Bank overdraft taken during the year (₹1,00,000) is shown as a financing inflow here; current investments are treated as cash equivalents.

Teacher's Note:
1. Both General Reserve and Surplus fell, so net profit = −20,000 − 50,000 + 80,000 dividend = ₹10,000; then add back loss on sale of machine (₹30,000) and debenture interest (₹20,000).
2. With no depreciation given, the purchase of fixed assets is 7,00,000 − 5,00,000 + 80,000 = ₹2,80,000.

Teacher's Note:
1. Net profit before tax = increase in General Reserve 25,000 + increase in Surplus 12,000 + tax paid 5,000 = ₹42,000.
2. Purchase of fixed assets = 1,66,000 + 20,000 depreciation − 93,400 = ₹92,600.

Teacher's Note:
1. Tax paid = 30,000 + 60,000 − 50,000 = ₹40,000; net profit before tax = 1,00,000 increase in surplus + 50,000 dividend + 60,000 tax = ₹2,10,000.
2. These figures take the 10% Bank Loan as repaid at the start of the year (no interest); if interest of ₹20,000 were paid, operating cash would be ₹1,40,000 and financing ₹1,60,000, with the same net decrease.

Teacher's Note:
1. The Profit and Loss balance fell by ₹50,000 (a net loss); add back depreciation ₹1,20,000 and interest ₹36,000 to get the operating profit of ₹1,06,000 before working capital changes.
2. Interest paid on long-term borrowings is a financing outflow: 4,00,000 shares + 90,000 new borrowings − 36,000 interest = ₹4,54,000.

Teacher's Note:
1. Depreciation for the year = 58,000 − (80,000 − 28,000) = ₹6,000, and the profit on sale of machinery (56,000 − 14,000 = ₹42,000) is deducted in operating activities.
2. Machinery purchased = 4,50,000 + 42,000 − 3,60,000 = ₹1,32,000, so investing = 56,000 − 1,32,000 = (₹76,000).

Teacher's Note:
1. Since the new debentures were issued on 1st April, 2017, interest is 8% on the full ₹8,00,000 = ₹64,000 (added back in operating, paid in financing).
2. Depreciation = 6,00,000 − (5,00,000 − 3,20,000) = ₹4,20,000; profit on sale = 6,40,000 − 4,80,000 = ₹1,60,000 is deducted. The increase in provision for tax (₹20,000) is treated like an increase in a current liability as no tax payment is given.