GSEB Class 12 Accounts Solutions Chapter 6 Cash Flow Statement

GSEB Class 12 Accounts Accounting Cash Flow Statement Text Book Questions and Answers

 

Question 1. How many activities are there in cash flow statement?
(A) Five
(B) Four
(C) Three
(D) Two
Answer: (C) Three
In simple words: A cash flow statement categorizes cash movements into three main types of activities.

🎯 Exam Tip: Understanding the three core activities (operating, investing, financing) is fundamental for cash flow analysis and often tested in exams.

 

Question 2. Cash equivalent has ........................................
(A) higher liquidity
(B) higher solvency
(C) higher profitability
(D) all of the above
Answer: (A) higher liquidity
In simple words: Cash equivalents are assets that can be quickly converted into cash, indicating a high level of liquidity.

🎯 Exam Tip: Liquidity is a key characteristic of cash equivalents, highlighting their readiness for immediate use without significant loss in value.

 

Question 3. Decrease in current assets and increase in current liabilities ........................................
(A) are cash inflow and cash outflow respectively
(B) are cash outflow and cash inflow respectively
(C) both are cash inflows
(D) both are cash outflows
Answer: (C) both are cash inflows
In simple words: A reduction in current assets or an increase in current liabilities both result in cash coming into the business.

🎯 Exam Tip: Remember that a decrease in assets means cash was received from their sale or usage, while an increase in liabilities implies borrowing or delaying payment, thereby conserving cash.

 

Question 4. Increased in current assets and decrease in current liabilities ........................................
(A) both are cash outflows
(B) both are cash inflows
(C) are cash outflow and cash inflow respectively
(D) are cash inflow and cash outflow respectively.
Answer: (A) both are cash outflows
In simple words: An increase in current assets means cash was spent to acquire them, and a decrease in current liabilities means cash was used to pay them off.

🎯 Exam Tip: Grasping the inverse relationship between changes in current assets/liabilities and cash flow is crucial for accurately preparing a cash flow statement.

 

Question 5. Collection of debtors and bills receivable is ........................................
(A) cash inflow of operating activity
(B) cash outflow of operating activity
(C) cash inflow of financing activity
(D) cash inflow of investing activity.
Answer: (A) cash inflow of operating activity
In simple words: Receiving money from customers and bills owed is a direct source of cash from a company's primary business operations.

🎯 Exam Tip: Identifying whether a transaction relates to core business activities (operating), asset management (investing), or capital structure (financing) is key to proper classification.

 

Question 6. Which of the following transaction is always transaction of operating activity?
(A) Interest paid on loan
(B) Dividend received
(C) Dividend paid
(D) Salary expense
Answer: (D) Salary expense
In simple words: Salary expenses are directly linked to the day-to-day running of the business and its income-generating functions.

🎯 Exam Tip: Operating activities include revenues and expenses from a company's main business function, which are generally reflected in the profit and loss statement.

 

Question 7. Dividend or interest received on investment is ........................................
(A) added to cash flow of operating activity
(B) deducted from cash flow of financing activity
(C) added to cash flow of investing activity
(D) deducted from cash flow of investing activity
Answer: (C) added to cash flow of investing activity
In simple words: Income generated from holding investments, such as dividends or interest, is considered cash inflow from investing activities.

🎯 Exam Tip: Remember that the receipt of interest and dividends is generally classified under investing activities because it relates to returns on assets held for investment purposes.

 

Question 8. Bank overdraft ........................................
(A) is current liability but considered as financing activity
(B) is current liability but considered as operating activity
(C) is current liability but considered as investing activity
(D) is not activity of cash flow statement.
Answer: (A) is current liability but considered as financing activity
In simple words: A bank overdraft, although a short-term debt, fundamentally alters a company's financing structure and is therefore categorized under financing activities.

🎯 Exam Tip: While many current liabilities fall under operating activities, bank overdrafts are an exception, classified as financing activities due to their nature as short-term borrowing impacting capital structure.

 

Question 9. Rent received ........................................
(A) is added to operating activity and deducted from financing activity
(B) is added to operating activity and added to financing activity
(C) is added to operating activity and added to investing activity
(D) is deducted from operating activity and added to investing activity.
Answer: (D) is deducted from operating activity and added to investing activity.
In simple words: Rent received is considered an investing inflow as it comes from property investments, and thus it must be adjusted out of operating profit when using the indirect method.

🎯 Exam Tip: For cash flow statements, revenues from non-operating assets (like rent from property not used in core business) are typically reclassified from operating to investing activities.

 

Question 10. Reduction in goodwill in current year as compared to previous year is ........................................
(A) sale of goodwill
(B) purchase of goodwill
(C) written off goodwill
(D) all of the above
Answer: (C) written off goodwill
In simple words: A decrease in the value of goodwill from one year to the next usually signifies that a portion of it has been recognized as an expense or impaired.

🎯 Exam Tip: Goodwill write-offs are non-cash expenses that need to be added back to net income when calculating cash flow from operating activities, as they reduce profit but not cash directly.

 

Question 11. Cash deposited in bank is ........................................
(A) cash outflow of operating activity
(B) cash outflow of financing acitvity
(C) cash outflow of investing activity
(D) not cash flow
Answer: (D) not cash flow
In simple words: Moving cash from hand to a bank account, or vice-versa, is merely a change in the form of cash, not a cash flow transaction itself.

🎯 Exam Tip: Transactions that only change the composition of cash and cash equivalents (e.g., depositing cash, withdrawing cash) are not considered cash flows for the statement.

 

Question 12. Which of the following is included in financial expense?
(A) Factory expenses
(B) Administrative expenses
(C) Sales expenses
(D) Interest expenses
Answer: (D) Interest expenses
In simple words: Interest expenses are costs incurred for borrowing funds and are thus categorized as financial expenses.

🎯 Exam Tip: Financial expenses like interest are related to the financing structure of a company and are typically adjusted in the operating activities section or directly shown in financing activities.

 

Question 13. Payment of interim dividend is ........................................
(A) deducted from operating statement and added to financing activity
(B) deduced from operating statement and added to investing activity
(C) added to operating statement and deducted from financing activity
(D) none of the above.
Answer: (C) added to operating statement and deducted from financing activity
In simple words: Interim dividends are paid to shareholders and thus represent a financing cash outflow; they are added back to operating profit in the indirect method.

🎯 Exam Tip: Dividend payments are always classified under financing activities as they relate to the return on capital provided by shareholders.

 

2. Answer in two or three sentences :

 

Question 1. What is cash flow?
Answer: Cash flow refers to the movement of cash and cash equivalents, representing the total receipts and payments of these assets within a specific period. It indicates how an entity generates and uses cash.
In simple words: Cash flow means the actual money coming into and going out of a business, including both cash and items easily turned into cash.

🎯 Exam Tip: Defining cash flow accurately is a common basic question; emphasize both inflows and outflows, and the inclusion of cash equivalents.

 

Question 2. What is cash and cash equivalent?
Answer: Cash refers to physical cash on hand and balances held in bank accounts. Cash equivalents are highly liquid, short-term investments that can be readily converted into a known amount of cash and are subject to an insignificant risk of changes in value, such as government securities.
In simple words: Cash is money on hand or in the bank, while cash equivalents are investments that can quickly become cash with minimal risk, like short-term government bonds.

🎯 Exam Tip: Clearly distinguishing between cash and cash equivalents, particularly the "highly liquid" and "insignificant risk" criteria, is vital for correct understanding.

 

Question 3. What is cash flow statement?
Answer: A cash flow statement is a financial document that presents the closing balance of cash and cash equivalents at the end of the year, along with the cash inflows and outflows from various activities (operating, investing, and financing) during the year for a business entity. It provides insights into how a company manages its cash.
In simple words: A cash flow statement shows all the cash that came in and went out of a business during a period, categorized into daily operations, investments, and financing, to explain changes in cash balance.

🎯 Exam Tip: A comprehensive definition of the cash flow statement should highlight its role in showing cash movements across all three major activity types and its utility in understanding liquidity.

 

Question 4. What is operating activities?
Answer: Operating activities encompass the primary, revenue-generating activities of a business. These are the main activities undertaken to earn income and are distinct from both investing and financing activities, representing the core operations of the enterprise.
In simple words: Operating activities are the main day-to-day business actions that create revenue, like selling products or services.

🎯 Exam Tip: Focus on operating activities being the "main" or "primary" source of income, excluding anything related to investments or financing structure.

 

Question 5. What is investing activities?
Answer: Investing activities involve the purchase and sale of long-term assets and other investments not classified as cash equivalents. These activities typically arise from transactions related to the asset side of the balance sheet, excluding cash and cash equivalents.
In simple words: Investing activities involve buying and selling long-term assets, like property or equipment, and other investments, but not cash itself.

🎯 Exam Tip: Remember that investing activities primarily deal with changes in non-current assets and long-term investments, reflecting a company's asset acquisition and disposal strategy.

 

Question 6. What is financing activities?
Answer: Financing activities are those activities that cause changes in the size and composition of the owner's capital (equity) and the borrowed capital (debt) of a business. They relate to how a company raises and repays funds to finance its operations and investments.
In simple words: Financing activities are how a company gets and repays money from owners and lenders, changing its capital structure.

🎯 Exam Tip: Financing activities directly impact the equity and long-term debt sections of the balance sheet, showcasing how a company funds its operations and growth.

 

Question 7. Which transactions are always operating activities?
Answer: Transactions such as salaries, wages, bonuses paid to employees, and employee welfare expenses are consistently classified as operating activities. These are direct costs associated with running the core business.
In simple words: Payments for employee salaries, wages, and welfare benefits are always operating activities because they are part of running the main business.

🎯 Exam Tip: Core personnel expenses are prime examples of direct operating cash outflows, essential for earning revenue.

 

Question 8. Which transactions are always investing activities?
Answer: Transactions involving the purchase of non-current tangible and intangible assets, such as machinery, furniture, and patents, are consistently categorized as investing activities. These represent capital expenditures for long-term growth.
In simple words: Buying long-term assets like machines, furniture, or patents are always investing activities.

🎯 Exam Tip: Capital expenditures for acquiring long-term productive assets are the most straightforward examples of investing activities.

 

Question 9. Which transactions are always financing activities?
Answer: Transactions like paying dividends on share capital and interest on debentures are consistently classified as financing activities. These actions relate to managing the company's capital structure and providing returns to capital providers.
In simple words: Payments such as dividends on shares and interest on debentures are always financing activities.

🎯 Exam Tip: Payments to shareholders (dividends) and lenders (interest on long-term debt) are classic financing activities because they relate to the cost of capital.

 

Question 10. Give illustration of such transaction from where two activities are taking place.
Answer: In a hire purchase transaction where installment payments are made, the principal amount paid is typically a financing activity (repayment of a loan), while the interest portion of the payment is an operating activity (cost of borrowing). This single transaction thus involves two types of activities.
In simple words: When paying a hire purchase installment, the principal part is a financing activity, and the interest part is an operating activity.

🎯 Exam Tip: Recognize hybrid transactions where a single payment or receipt needs to be split and classified under different cash flow activities based on its nature (e.g., principal vs. interest).

 

Question 11. Give illustration of such transaction which is cash transaction but not cash flow.
Answer: An example of a transaction that involves cash but is not a cash flow for the statement is depositing cash into a bank account or withdrawing cash from a bank. These actions merely change the location or form of cash within the cash and cash equivalents pool, rather than generating or consuming cash from external activities.
In simple words: Depositing cash into a bank or withdrawing it from a bank is a cash transaction but not a "cash flow" for the statement, as it just moves cash around.

🎯 Exam Tip: Distinguish between a "cash transaction" (any movement of cash) and a "cash flow" (movement of cash into or out of the total cash and cash equivalents pool).

 

Question 12. Where are the self-constructed assets recorded?
Answer: Self-constructed assets are recorded under the activities of cash outflow from investing activities. The costs incurred in building these assets internally represent an investment in long-term productive capacity.
In simple words: Costs to build assets internally are recorded as cash outflows under investing activities.

🎯 Exam Tip: Capital expenditures, whether for purchasing or self-constructing assets, are always classified as investing activities, reflecting resource allocation for future benefits.

 

Question 13. To which activity increase/decrease of bank overdraft is recorded?
Answer: Both an increase and a decrease in bank overdraft are recorded within financing activities. An increase signifies additional short-term borrowing, while a decrease represents repayment of borrowed funds, both impacting the company's financial structure.
In simple words: Changes in bank overdraft, whether increasing or decreasing, are recorded as financing activities.

🎯 Exam Tip: Bank overdrafts, even though current liabilities, are treated as short-term financing and thus fall under financing activities, not operating activities.

 

Question 14. For which activity underwriting commission paid is considered?
Answer: Underwriting commission paid is considered a cash outflow from financing activities. This is because companies pay underwriting commissions to underwriters when issuing shares or debentures to raise capital, which is a financing function.
In simple words: Underwriting commission paid for issuing shares or debentures is a financing activity cash outflow.

🎯 Exam Tip: Costs associated with raising capital, like underwriting commission, are linked to the financing structure and are therefore classified as financing activities.

 

Question 15. As which activity income tax payment and income tax refund are considered? Why?
Answer: Income tax payments and income tax refunds are both considered operating activities. This is because income tax arises from the profit and loss statement, which primarily reflects the outcomes of a company's core operating activities. Therefore, these cash flows are included within the operating section.
In simple words: Income tax payments and refunds are treated as operating activities because they directly relate to the company's profits from its main business.

🎯 Exam Tip: For simplicity and consistency, income taxes are generally linked to operating activities as they are a consequence of operating profit, even though they are determined after other income/expense categories.

 

Question 16. Give illustration of any two operating incomes.
Answer: Illustrations of operating incomes include:
• Sales income from goods or services
• Collection from debtors and bills receivable
• Commission or brokerage received
• Income tax refund.
In simple words: Two examples of operating income are money from selling goods or services, and cash collected from customers who owed money.

🎯 Exam Tip: Operating incomes are directly derived from the core business activities and contribute to the gross profit calculation.

 

Question 17. Where addition in general reserve is recorded?
Answer: An addition to the general reserve is recorded by being added back to profit under the provision head in the operating activities section of the cash flow statement. This adjustment is necessary because the transfer to general reserve is a non-cash allocation of profit.
In simple words: Money put into general reserve is added back to profit in the operating section because it's a non-cash adjustment of earnings.

🎯 Exam Tip: Non-cash items that affect net income but not actual cash flow, like transfers to reserves, must be adjusted back in the operating activities section (indirect method).

 

Question 18. Describe whether cash flow would increase or decrease due to following transactions :
(i) Increase in current assets
(ii) Decrease in current assets
(iii) Increase in current liabilities
(iv) Decrease in current liabilities
Answer:
(i) Increase in current assets - Cash flow decreases
(ii) Decrease in current assets - Cash flow increases
(iii) Increase in current liabilities - Cash flow increases
(iv) Decrease in current liabilities - Cash flow decreases
In simple words: An increase in current assets or a decrease in current liabilities reduces cash flow, while a decrease in current assets or an increase in current liabilities boosts cash flow.

🎯 Exam Tip: Remember the inverse relationship for current assets (assets up, cash down) and the direct relationship for current liabilities (liabilities up, cash up) when calculating cash flow from operating activities.

 

Question 19. In which activity the received dividend and interest are recorded?
Answer: Received dividends and interest on investments are recorded under investing activities. These represent returns generated from the company's investment portfolio.
In simple words: Dividends and interest received from investments are recorded as part of investing activities.

🎯 Exam Tip: Income from investments (dividends, interest received) is consistently categorized as an investing activity cash inflow.

 

Question 20. In which activity the paid dividend and interest are recorded?
Answer: Paid dividends and interest are recorded under financing activities. Dividend payments are distributions to shareholders, and interest payments are costs of borrowed funds, both relating to the company's capital structure.
In simple words: Dividends and interest that are paid out are recorded as financing activities.

🎯 Exam Tip: Payments to capital providers (shareholders for dividends, lenders for interest) are core financing activities.

 

3. Answer the following questions in brief :

 

Question 1. Describe the operating activities for the following companies :
(i) Trading companies
(ii) Insurance Companies
(iii) Bank
Answer:
(i) Trading Companies - The primary operating activities involve the purchase and sale of goods.
(ii) For Insurance companies - Operating activities center around premium income and the payment of claims.
(iii) For Banks - Key operating activities include lending loans and accepting deposits.
In simple words: For trading companies, it's buying and selling goods; for insurance, it's collecting premiums and paying claims; for banks, it's giving loans and taking deposits.

🎯 Exam Tip: The definition of "operating activities" is industry-specific; tailor your explanation to the core revenue-generating actions of each business type.

 

Question 2. Explain cash flow from operating transactions of non-finance companies and finance companies.
Answer:
(A) Non-Finance Companies :
1. Cash Inflow:
• Receipts/Income from the sale of goods or services,
• Collections from debtors and bills receivable,
• Income from royalty, commission, and brokerage,
• Income tax refunds (excluding financing activity related refunds),
• Any other income not arising from investing activities.
2. Cash Outflow :
• Payments for the purchase of goods or services,
• Payments to creditors and for bills payable,
• Factory expenses,
• Administrative and selling-distribution expenses,
• Wages, salaries, rent, and bonuses,
• Employee welfare expenses,
• Income tax paid (excluding financing activity related payments).
(B) Finance Companies :
1. Cash Inflow:
• Sale of securities,
• Interest received on securities,
• Interest received on loans extended,
• Income tax refunds (excluding financing activity related refunds).
2. Cash Outflow :
• Purchase of securities,
• Interest paid on deposits or loans,
• Salaries or amounts paid to employees (e.g., bonuses),
• Income tax paid (excluding financing activity related payments).
In simple words: For non-finance companies, operating cash flow includes money from sales and customer payments, minus expenses like salaries and supplier payments. For finance companies, it's about cash from selling securities and receiving interest, minus buying securities and paying interest/salaries.

🎯 Exam Tip: Note that for financial companies, typical investing/financing activities like interest and dividend income/expense often become operating activities due to their core business model.

 

Question 3. From the following transactions, identify transactions of operating activities :
(i) Wages paid
(ii) Purchase of building
(iii) Sale of furniture
(iv) Payment to creditors
(v) Dividend paid
(vi) Rent paid
(vii) Office expenses paid
(viii) Sales-distribution expenses paid
(ix) Carriage inward
(x) Carriage outward
(xi) Royalty paid
(xii) Income tax
Answer:

Transaction	Explanation
(i) Wages paid	Operating activity. This is a transaction from the profit and loss statement.
(ii) Purchase of building	Not an operating activity. An outflow of cash for investments makes it an investing activity.
(iii) Sale of furniture	Not an operating activity. An inflow of cash from investments makes it an investing activity.
(iv) Payment to creditors	Operating activity. Creditors arise from purchases, and purchasing is an operating activity.
(v) Dividend paid	Not an operating activity. Dividends paid on equity share capital constitute a financing cash outflow activity.
(vi) Rent paid	Operating activity. This is a transaction from the profit and loss statement.
(vii) Office expenses paid	Operating activity. This is a transaction from the profit and loss statement.
(viii) Sales- distribution expenses paid	Operating activity. This is a transaction from the profit and loss statement.
(ix) Carriage inward	Operating activity. This is a transaction from the profit and loss statement.
(x) Carriage outward	Operating activity. This is a transaction from the profit and loss statement.
(xi) Royalty paid	Operating activity. This is a transaction from the profit and loss statement.
(xii) Income tax paid	Operating activity.

In simple words: Operating activities include wages, payments to creditors, rent, office expenses, sales-distribution costs, carriage, royalty, and income tax, as they relate to the daily running of the business.

🎯 Exam Tip: Correctly identifying the activity type for each transaction is fundamental. Generally, expenses from the income statement are operating, while asset purchases/sales are investing, and capital structure changes are financing.

 

Question 4. Explain cash flow transactions of investing activities.
Answer: Transactions related to investing activities are categorized into two main sections:
1. Cash inflow activities:
• Sale of fixed tangible and intangible assets and long-term investments (non-current), such as shares, debentures, and bonds.
• Return on long-term lending.
• Interest and dividends received on investments.
• Rent income from assets.
2. Cash outflow activities:
• Purchase of fixed tangible and intangible assets.
• Capitalized expenses, including self-constructed assets.
• Purchase of long-term investments (non-current), such as shares, debentures, and bonds.
• Long-term lending.
In simple words: Investing cash flows cover money coming in from selling assets or investments and rent, as well as money going out for buying assets, creating self-made assets, or lending long-term funds.

🎯 Exam Tip: Investing activities primarily involve the acquisition and disposal of long-term assets and investments, driving a company's growth and operational capacity.

 

Question 5. From the following transactions, identify transactions of investing activities :
(i) Salary paid
(ii) Rent paid
(iii) Purchase of investments
(iv) Sales of land
(v) Purchase of building
(vi) Interest received on investments
(vii) Sale of furniture
(viii) Collection from debtors
(ix) Payment to creditors
(x) Issue of equity shares
(xi) Redemption of debentures
(xii) Dividend received on investments
Answer:

Transaction	Explanation
(i) Salary paid	Not an investing activity. This is a cash flow from operating activity.
(ii) Rent paid	Not an investing activity. This is a cash outflow from operating activity.
(iii) Purchase of investments	This is a cash outflow from investing activity. Investment leads to an increase in assets.
(iv) Sales of land	This is a cash inflow from investing activity. Investment leads to a decrease in assets.
(v) Purchase of building	This is a cash outflow from investing activity. Investment leads to an increase in assets.
(vi) Interest received on investments	This is an inflow of investing activity. Interest earned on investments is a component of investment returns.
(vii) Sale of furniture	This is a cash inflow from investing activity. Investment leads to a decrease in assets.
(viii) Collection from debtors	Not an investing activity. This is a cash inflow from operating activity.
(ix) Payment to creditors	Not an investing activity. This is a cash outflow from operating activity.
(x) Issue of equity shares	Not an investing activity. This is a cash inflow from operating activity.
(xi) Redemption of debentures	Not an investing activity. This is a cash outflow from operating activity.
(xii) Dividend received on investments	This is a cash inflow from investing activity. Dividends received on investments are considered part of investment returns.

In simple words: Investing activities include buying investments and buildings, selling land and furniture, and receiving interest and dividends from investments; other listed items are either operating or financing activities.

🎯 Exam Tip: Pay close attention to how each transaction affects long-term assets or investments. Purchases are outflows, sales are inflows, and income from these assets (interest/dividends received) are also inflows for investing activities.

 

Question 8. What are non-cash transactions? Give two illustrations.
Answer: Many business transactions do not involve the direct exchange of cash and are therefore disregarded when preparing the cash flow statement. These are known as non-cash transactions. Examples include depreciation charged on tangible assets, the amortization of intangible assets, issuing equity shares or debentures without cash consideration, and converting debentures into equity.
In simple words: Non-cash transactions are business activities that don't directly involve money movement. They are excluded from cash flow statements because they don't impact the actual cash balance.

🎯 Exam Tip: Focus on understanding the core concept that non-cash items do not reflect actual cash inflows or outflows, hence their exclusion from cash flow statements. Being able to provide relevant examples is key.

 

Question 9. What are non-operating incomes? Give two illustrations.
Answer: Incomes that do not originate from a company's primary business operations are categorized as non-operating incomes. These are distinct from operating income and are not factored into the computation of cash flow. Illustrative examples include profits earned from the sale of investments, gains from the sale of assets, interest revenue generated from investments, and dividends received on investments.
In simple words: Non-operating incomes are earnings from activities outside a company's main business, such as interest or profit from selling old assets. They are not part of the core cash flow calculation.

🎯 Exam Tip: Distinguishing between operating and non-operating incomes is crucial for accurately preparing the operating activities section of a cash flow statement. Remember that non-operating items are adjusted to arrive at operating cash flow.

 

Question 10. Where is interim dividend recorded in the cash flow statement?
Answer: The provision for interim dividend is added back to profit and subsequently presented as a cash outflow within the financing activities section of the cash flow statement.
In simple words: Interim dividends are added back to profit and then shown as a cash outflow under financing activities because they are a distribution of profits to shareholders.

🎯 Exam Tip: Understand that dividends, whether interim or final, are treated as financing activities because they relate to the capital structure (distribution to shareholders) rather than core operations or investments.

 

Question 11. Where are the accounting treatments of taxation provision and tax payment given in cash flow statements?
Answer: Taxation provision is presented under the current liabilities section of the operating activities statement and is added to the profit figure. Tax payments, on the other hand, are shown as changes in working capital and are deducted from the profit and loss statement.
In simple words: Tax provision is added to profit in operating activities as a current liability, while actual tax payments are treated as a deduction from profit-loss as a working capital change.

🎯 Exam Tip: Remember that tax provisions and payments are integral to operating activities, as they arise from the company's profitability. Be precise in distinguishing between the provision (non-cash) and the actual payment (cash outflow).

 

Question 12. Explain the effect of bonus shares in the cash flow statement.
Answer: The issuance of bonus shares leads to an increase in equity share capital. This type of transaction boosts equity without involving any actual cash movement. It also signifies the capitalization of either profit or existing reserves.
In simple words: Bonus shares increase a company's equity capital by converting reserves or profits into shares, but they don't involve any cash changing hands, so they are not a cash flow transaction.

🎯 Exam Tip: Non-cash transactions like bonus share issues are important to understand conceptually but are excluded from the cash flow statement because they do not impact cash balances. They are essentially internal adjustments to capital and reserves.

 

Question 13. Where is the conversion of debentures into shares recorded in the cash flow statement?
Answer: The conversion of debentures into shares is classified as a non-cash transaction and, consequently, is not reflected in the cash flow statement.
In simple words: Converting debentures into shares doesn't involve cash, so it's not shown in the cash flow statement.

🎯 Exam Tip: Any transaction that changes the composition of capital or liabilities without involving cash is a non-cash item and should be explicitly excluded from the cash flow statement. This rule applies to debenture conversion as well.

 

Question 14. Which kind of activity is the payment of underwriting commission? Why?
Answer: The payment of underwriting commission is categorized as a financing activity, specifically a cash outflow. This is because a company incurs underwriting commission expenses when issuing shares or debentures, which are activities directly related to obtaining finance.
In simple words: Underwriting commission is a financing cash outflow because it's a cost associated with raising capital through shares or debentures.

🎯 Exam Tip: Costs directly related to issuing securities (shares, debentures) are always classified under financing activities. This helps in understanding the true cost of raising capital.

 

Question 15. From the following transactions, calculate cash flow from operating activities:

Particulars	Rs.	Particulars	Rs.
Profit before taxes	99,000	Interest received	20,000
Income tax provision	29,000	Interest paid	28,000
Proposed dividend	39,000	Goodwill written off	15,000
Depreciation	22,000	Profit on sale of asset	12,000
Dividend received	21,000

Answer:

Cash flow from Operating Activities

Particulars	Rs.	Rs.
Profit before taxes		99,000
Add: Non-cash expenses appropriation and provisions :
Income tax provision	29,000
Proposed dividend	39,000
Goodwill written off	15,000
Depreciation	22,000
Interest paid	28,000	1,33,000
		2,32,000
Less: Non-operating incomes :
Interest received	20,000
Dividend received	21,000
Profit on sale of asset	12,000	53,000
Profit (cash flow) before changes in Working Capital		1,79,000

In simple words: To calculate cash flow from operating activities, we start with profit before tax, add back non-cash expenses like depreciation and provisions, and then subtract non-operating incomes like interest and dividends received, arriving at the cash flow before working capital changes.

🎯 Exam Tip: Accurately identifying and separating non-cash expenses and non-operating incomes from the profit figure is critical for correctly calculating cash flow from operating activities. Ensure all figures are placed in the correct "Add" or "Less" sections.

 

Question 16. From the following information, calculate cash flow from operating activities:
Particulars 31-3-2017 (Rs.) 31-3-2016 (Rs.)

Particulars	Rs.	Rs.
Profit and Loss A/c	45,000	30,000
Depreciation	90,000	70,000
Goodwill	40,000	55,000
Stock	60,000	45,000
Debtors	50,000	90,000
Creditors	40,000	60,000
Bills payables	70,000	20,000
Prepaid expenses	10,000	15,000

(i) Dividend received Rs. 2,000
(ii) Interest paid Rs. 3,000
(iii) Rent received Rs. 10,000
Answer:

Particulars	Rs.	Rs.
Closing balance of profit and loss A/c	45,000
Less : Opening balance of profit and loss A/c	30,000
Profit of current year		15,000
Add : Non-cash expenses and provisions :
Depreciation (90,000 - 70,000)	20,000
Goodwill (55,000 - 40,000)	15,000
Interest paid	3,000	38,000
		53,000
Less : Non-operating expenses :
Dividend received	2,000
Rent received	10,000	12,000
Profit (cash flow) before changes in working capital		41,000
Add : Decrease in current asset
Debtors (90,000 - 50,000)	40,000
Prepaid expenses (15,000 - 10,000)	5,000
Increase in current liabilities
Bill payable (70,000 - 20,000)	50,000	95,000
		1,36,000
Less : Increase in current assets
Stock (60,000 - 45,000)	15,000
Decrease in current liabilities
Creditors (60,000 - 40,000)	20,000	35,000
Cash flow from Operating Activities		1,01,000

In simple words: This calculation begins with the current year's profit, adjusts for non-cash items and non-operating incomes, and then incorporates changes in current assets and liabilities to arrive at the net cash flow from operating activities.

🎯 Exam Tip: When dealing with comparative balance sheet items, remember that an increase in current assets (excluding cash) or a decrease in current liabilities implies a cash outflow, while a decrease in current assets or an increase in current liabilities signifies a cash inflow for operating activities.

 

Question 17. From the following information, calculate cash flow from operating activities:

Particulars	31-3-2017 (Rs.)	31-3-2016 (Rs.)
Profit and Loss A/c	60,000	25,000
General reserve	45,000	35,000
Taxation provision	38,000	48,000
Depreciation fund	42,000	32,000
Goodwill	27,000	38,000
Debtors	49,000	39,000
Creditors	39,000	29,000
Outstanding expenses	12,000	17,000
Prepaid expenses	14,000	10,000

(i) Profit on sale of assets Rs. 15,000
(ii) Loss on sale of furniture Rs. 8,000
(iii) Income of rent Rs. 48,000
(iv) Interest paid on debenture Rs. 32,000
(v) Dividend payment Rs. 10,000
Answer:

Cash flow from Operating Activities for the year ending on 31-3-2017 :

Particulars	Rs.	Rs.
Closing balance of profit and loss A/c	60,000
Less : Opening balance of profit and loss A/c	25,000
Profit of current year		35,000
Add : Non-cash expenses and provisions
General reserve (45,000 - 35,000)	10,000
Depreciation (42,000 - 32,000)	10,000
Taxation provision (of current year)	38,000
Goodwill (38,000 - 27,000)	11,000
Loss on sale of furniture	8,000
Interest paid on debentures	32,000
Dividend payment	10,000	1,19,000
		1,54,000
Less: Non-operating incomes :
Profit on sale of assets	15,000
Income of rent	48,000	63,000
Profit (cash flow) before changes in working capital		91,000
Add : Increase in current liabilities
Creditors (39,000 - 29,000)	10,000
Less: Increase in current assets
Debtors (49,000 - 39,000)	10,000
Prepaid expenses (14,000 - 10,000)	4,000
Decreases in current liabilities
Outstanding expenses (17,000 - 12,000)	5,000	19,000
		82,000
Less: Tax paid of previous year		48,000
Cash flow from Operating Activities		34,000

In simple words: This calculation begins with the year's profit, adjusts for changes in reserves, non-cash items like depreciation and goodwill write-offs, and non-operating gains/losses. Finally, it accounts for changes in working capital and tax payments to determine the net cash from operations.

🎯 Exam Tip: Pay close attention to the opening and closing balances of P&L, reserves, provisions, and current assets/liabilities. Remember that an increase in a provision or a current liability is generally added, while an increase in a current asset is deducted in the operating activities section.

 

Question 18. From the following given information, calculate cash flow from investing activities:

Particulars	Rs.
Sale of non-current investments	88,000
Purchase of land	1,48,000
Purchase of machine	98,000
Sale of furniture	45,000
Dividend received on investments	40,000
Paid for goodwill	32,000
Issue of shares	1,20,000
Redemption of debentures	45,000
Loan borrowed	28,000

Answer:

Statement of cash flow from Investing Activities

Particulars	Rs.
Sale of non-current investments	88,000
Purchase of land	(1,48,000)
Purchase of machine	(98,000)
Sale of furniture	45,000
Paid for goodwill	(32,000)
Dividend received on investments	40,000
Cash flow from Investing Activities (cash outflow)	1,05,000

Note:
(1) Amounts not enclosed in brackets represent cash inflows, while amounts shown in brackets indicate cash outflows.
(2) Transactions classified as investing activities primarily reflect changes in the asset side details of the balance sheet and alterations in asset-related items.
In simple words: Investing activities cash flow is calculated by summing up cash inflows from selling long-term assets and receiving investment income, and subtracting cash outflows from purchasing long-term assets or goodwill.

🎯 Exam Tip: For investing activities, remember to include only cash transactions related to fixed assets and long-term investments. Non-investing items like share issues or loan borrowings should be ignored for this specific section, and recognize that dividend/interest *received* are investing cash flows.

 

Question 19. From the following given details, calculate cash flow from investing activities:

Particulars	31-3-2017 (Rs.)	31-3-2016 (Rs.)
Profit and Loss A/c	60,000	25,000
Plant and machines	9,20,000	7,20,000
Depreciation fund on plant and machines	1,50,000	1,20,000
Goodwill	90,000	95,000
Patent	70,000	1,30,000
10% Investments	95,000	2,70,000
General reserve	45,000	30,000
Profit and loss A/c	60,000	40,000
Equity share capital	6,00,000	4,50,000
Bank loan	1,00,000	1,50,000
Current liabilities	90,000	60,000

Interest received on investments Rs. 18,000.
Some of the patents were sold during the year.
Answer:To determine investing activity, it is necessary to prepare Plant and Machines A/c, Patent A/c, and 10% Investment A/c as follows:

Dr. Plant and Machines A/c Cr.

Date	Particulars	Amt.(Rs.)	Date	Particulars	Amt.(Rs.)
	To Balance b/d	7,20,000		By Balance c/d	9,20,000
	To Cash A/c (Purchase)	2,00,000
		9,20,000			9,20,000

Dr. Patent A/c Cr.

Date	Particulars	Amt.(Rs.)	Date	Particulars	Amt.(Rs.)
	To Balance b/d	1,30,000		By Bank A/c	60,000
				By Balance c/d	70,000
		1,30,000			1,30,000

Dr. 10% Investment A/c Cr.

Date	Particulars	Amt.(Rs.)	Date	Particulars	Amt.(Rs.)
	To Balance b/d	2,70,000		By Bank A/c	1,75,000
				By Balance c/d	95,000
		2,70,000			2,70,000

Statement of cash flow from Investing Activities

Particulars	Rs.
Plant and machines	(2,00,000)
Sale of patents	60,000
Sale of 10% investments	1,75,000
Interest received on investments	18,000
Cash Inflow from Investing Activities	53,000

Note:

1. The difference amount on the debit side of Plant and Machines A/c, which is Rs. 2,00,000, will be recognized as the purchase of plant and machines.
2. The difference amounts on the credit side of Patent A/c (Rs. 60,000) and 10% Investment A/c (Rs. 1,75,000) will be treated as sales of patents and investments, respectively, and presented as cash inflows under investing activities.
3. The interest received on investment, amounting to Rs. 18,000, will be recorded as a cash inflow from investing activities.
4. The increase in the depreciation fund for plant and machines, which is Rs. 30,000, is a non-cash transaction and will be added to the operating profit.
5. The written-off amount of goodwill, Rs. 5,000, will also be added to the operating profit.
In simple words: This calculation involves preparing T-accounts for assets and investments to find purchases and sales. Cash inflows from selling assets and receiving interest/dividends are added, while outflows from purchasing assets are subtracted to get the net cash flow from investing activities.

🎯 Exam Tip: For complex investing activities, always prepare ledger accounts (like Plant & Machinery A/c, Patent A/c, Investment A/c) to accurately determine the actual cash purchases and sales of assets/investments during the year. Remember to account for depreciation and other non-cash adjustments.

 

Question 20. From the following information, calculate cash flow from financing activities:

Particulars	Rs.
Purchase of land	1,88,000
Equity shares issued	1,45,000
Redemption of preference shares	60,000
Redemption of debentures	70,000
Borrowed bank loan	90,000
Debenture interest paid	6,000
Dividend paid	8,000
Dividend-interest received	9,000
Sale of furniture	32,000
Purchase of machine	68,000
Interest received on investments	13,000
Paid for patents	19,000

Answer:

Statement of cash flow from Financing Activities

Particulars	Rs.
Equity shares issued	1,45,000
Redemption of preference shares	(60,000)
Redemption of debentures	(70,000)
Borrowed bank loan	90,000
Debenture interest paid	(6,000)
Dividend paid	(8,000)
Cash Inflow from Financing Activities	91,000

In simple words: Cash flow from financing activities is calculated by adding cash inflows from issuing shares or borrowing loans and subtracting cash outflows for repaying loans, redeeming shares/debentures, and paying interest or dividends.

🎯 Exam Tip: Only transactions related to changing the size and composition of owner's capital and borrowed capital are included in financing activities. Exclude any operating or investing transactions. Distinguish between interest/dividend *paid* (financing) and *received* (investing).

 

Question 21. From the following information, calculate cash flow from financing activities:

Particulars	31-3-2017 (Rs.)	31-3-2016 (Rs.)
Profit and Loss A/c	60,000	25,000
10% Debentures	2,45,000	1,95,000
Equity share capital	3,45,000	2,50,000
12% Debentures	1,00,000	1,50,000
Preference share capital	80,000	1,00,000
Bank overdraft	45,000	68,000

Additional information:
(1) Debenture interest paid Rs. 12,000.
(2) Paid Rs. 22,000 for equity share dividend and preference share dividend.
(3) Paid bank overdraft Rs. 4,000.
Answer:

Statement of cash flow from Financing Activities

Particulars	Rs.
Issue of 10% Debentures (2,45,000 - 1,95,000)	50,000
Issue of Equity share capital (3,45,000 - 2,50,000)	95,000
Redemption of 12% Debentures (1,50,000 - 1,00,000)	(50,000)
Redemption of Preference share capital (1,00,000 - 80,000)	(20,000)
Decrease in Bank overdraft (68,000 - 45,000)	(23,000)
Debenture interest paid	(12,000)
Dividend paid	(22,000)
Paid bank overdraft	(4,000)
Cash Flow from Financing Activities (Net Outflow)	(36,000)

In simple words: This calculation determines the net cash flow from financing by considering changes in equity, debentures, and bank overdrafts, along with actual interest and dividend payments. Inflows from new issues are added, while outflows from redemptions and payments are subtracted.

🎯 Exam Tip: For financing activities, carefully track increases and decreases in equity and long-term debt. Remember that the interest and dividend payments specified in additional information are direct cash outflows, and reductions in bank overdrafts are also cash outflows.