Cash Flow Statement

Notes Exam Tips Practice Qs AI Tutor Objectives

Learning Objectives

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Learning Objectives

State the purpose and preparation of the cash flow statement.
Distinguish between operating activities, investing activities, and financing activities.
Prepare the statement of cash flows using the direct method.
Prepare the cash flow statement using the indirect method.

Revision Notes & Summary

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Cash Flow Statement Notes

1. Objectives of Cash Flow Statement

Shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period.
Provides useful information about cash flows under various heads:
- Operating activities
- Investing activities
- Financing activities
Helps assess the ability of the enterprise to generate cash and cash equivalents.

2. Benefits of Cash Flow Statement

Enables evaluation of changes in net assets and financial structure (liquidity and solvency).
Assists in assessing the ability to generate cash and develop models for future cash flows.
Enhances comparability of operating performance reporting across enterprises.
Aids in balancing cash inflows and outflows in response to changing conditions.

3. Classification of Activities

Operating Activities

Cash revenue from operations
Payment of employee benefits expenses
Cash paid to suppliers
Payment of operating expenses

Investing Activities

Purchase of property, plant, and equipment
Proceeds from sale of non-current investments
Cash receipt from interest and dividends

Financing Activities

Proceeds from issuance of equity shares
Payment of dividends
Redemption of preference shares

4. Cash Flow Statement Structure

Main Heads	Amount
Cash flows from operating activities	XXX
Cash flows from investing activities	XXX
Cash flows from financing activities	XXX
Net increase (decrease) in cash and cash equivalents	XXX
Cash and cash equivalents at the beginning	XXX
Cash and cash equivalents at the end	XXXX

5. Important Terms

Cash: Liquid assets available for use.
Cash Equivalents: Short-term investments that are easily convertible to cash.
Cash Inflows: Money received by the company.
Cash Outflows: Money spent by the company.
Non-cash item: Transactions that do not involve cash.

6. Example Activities Classification

Activity	Classification
Purchase of machinery	Investing Activities
Proceeds from issue of equity share capital	Financing Activities
Cash revenue from operations	Operating Activities
Proceeds from long-term borrowings	Financing Activities
Cash paid to supplier	Operating Activities
Interest paid on long-term borrowings	Financing Activities

7. Common Questions

What is a Cash flow statement?
How are the various activities classified while preparing cash flow statement?
State the objectives of cash flow statement.
Describe the procedure to prepare Cash Flow Statement.
Explain the major Cash Inflows and outflows from investing and financing activities.

Exam Tips & Common Mistakes

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Common Mistakes and Exam Tips

Common Pitfalls

Misclassification of Activities: Students often confuse operating, investing, and financing activities. Ensure you understand the definitions and examples of each category.
Ignoring Cash Equivalents: Failing to include cash equivalents in the cash flow statement can lead to incorrect conclusions about liquidity.
Not Adjusting for Non-Cash Items: Remember to adjust net income for non-cash items like depreciation and amortization when calculating cash flows from operating activities.
Overlooking Changes in Working Capital: Changes in accounts receivable, accounts payable, and inventory must be considered when determining cash flow from operations.

Tips for Success

Review Accounting Standards: Familiarize yourself with AS-3 and its requirements for cash flow statements to avoid errors in classification and reporting.
Practice with Examples: Work through various examples of cash flow statements to solidify your understanding of inflows and outflows.
Use the Indirect Method: When calculating cash flow from operating activities, practice using the indirect method to adjust net income for non-cash items and changes in working capital.
Double-Check Calculations: Always verify your calculations, especially when adjusting for depreciation, amortization, and changes in working capital.

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Practice Test – MCQs, True/False

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Multiple Choice Questions

Rs. 3,60,000

Rs. 3,40,000

Rs. 3,50,000

Rs. 3,10,000

Correct Answer: A

Solution:

To calculate the cash flow from operating activities, add non-cash expenses to the net profit before tax. Here, add depreciation (Rs. 50,000) and loss on sale of equipment (Rs. 10,000) to the net profit (Rs. 3,00,000), resulting in Rs. 3,60,000.

Rs. 15,000

Rs. 20,000

Rs. 5,000

Rs. 25,000

Correct Answer: A

Solution:

The interest paid for the current year should exclude the previous year's interest: Rs. 20,000 - Rs. 5,000 = Rs. 15,000.

Rs. 50,000

Rs. 1,50,000

Rs. 1,00,000

Rs. 50,000 outflow

Correct Answer: A

Solution:

The total cash flow from financing activities is calculated by subtracting the repayment of the loan from the cash inflow from issuing shares: Rs. 1,00,000 - Rs. 50,000 = Rs. 50,000.

Increase by Rs. 50,000

Decrease by Rs. 50,000

Increase by Rs. 30,000

Decrease by Rs. 30,000

Correct Answer: A

Solution:

An increase in trade receivables indicates that more sales are made on credit, which decreases cash flow by Rs. 50,000. A decrease in inventories indicates that inventory was sold, increasing cash flow by Rs. 80,000. The net effect is an increase in cash flow by Rs. 30,000 (Rs. 80,000 - Rs. 50,000).

Accounts receivable

Inventory

Treasury bills

Long-term investments

Correct Answer: C

Solution:

Cash equivalents include short-term, highly liquid investments such as treasury bills.

Rs. 2,93,000

Rs. 2,83,000

Rs. 2,88,000

Rs. 2,78,000

Correct Answer: A

Solution:

To calculate the cash flow from operating activities, we start with the net profit before tax of Rs. 2,70,000. We add back the non-cash expenses: depreciation on equipment (Rs. 15,000) and furniture (Rs. 3,000), and the loss on sale of equipment (Rs. 5,000). Thus, the cash flow from operating activities is Rs. 2,70,000 + Rs. 15,000 + Rs. 3,000 + Rs. 5,000 = Rs. 2,93,000.

Issuing new shares

Purchasing machinery

Paying dividends

Increasing trade payables

Correct Answer: B

Solution:

Purchasing machinery is classified under investing activities as it involves the acquisition of non-current assets.

Rs. 3,00,000

Rs. 3,50,000

Rs. 2,50,000

Rs. 4,00,000

Correct Answer: A

Solution:

The closing cash balance is calculated as: Opening Cash Balance + Cash Flow from Operating Activities + Cash Flow from Investing Activities + Cash Flow from Financing Activities = Rs. 2,00,000 + Rs. 3,00,000 - Rs. 1,50,000 - Rs. 50,000 = Rs. 3,00,000.

Rs. 80,000

Rs. 85,000

Rs. 75,000

Rs. 90,000

Correct Answer: A

Solution:

The total cash outflow for investing activities is Rs. 80,000, which is the cost of the equipment purchased. The loss on sale of equipment does not affect the cash flow.

Rs. 2,030,000

Rs. 2,230,000

Rs. 2,000,000

Rs. 1,830,000

Correct Answer: A

Solution:

Retained earnings are calculated by subtracting dividends from the net profit after tax. Therefore, retained earnings = Rs. 3,230,000 - Rs. 1,200,000 = Rs. 2,030,000.

Increase in trade receivables

Decrease in inventories

Increase in prepaid expenses

Increase in trade payables

Correct Answer: D

Solution:

An increase in trade payables indicates that the company is delaying payments, which results in a cash inflow.

Increase by Rs. 1,60,000

Increase by Rs. 1,50,000

Increase by Rs. 1,30,000

Increase by Rs. 1,40,000

Correct Answer: A

Solution:

Net effect = Decrease in inventories + Decrease in trade receivables + Increase in trade payables = Rs. 80,000 + Rs. 50,000 + Rs. 30,000 = Rs. 1,60,000.

Increase of Rs. 1,00,000

Decrease of Rs. 1,00,000

No change

Increase of Rs. 2,00,000

Correct Answer: B

Solution:

The change in inventories is calculated as opening inventories minus closing inventories. Therefore, Rs. 2,00,000 - Rs. 1,00,000 = Rs. 1,00,000 decrease.

Rs. 2,00,000

Rs. 2,50,000

Rs. 1,50,000

Rs. 3,00,000

Correct Answer: B

Solution:

Cash at the end of the year is calculated as cash at the beginning of the year plus net cash inflows from all activities: Rs. 1,00,000 + Rs. 2,00,000 - Rs. 1,50,000 + Rs. 50,000 = Rs. 2,50,000.

Rs. 2,70,000

Rs. 1,70,000

Rs. 2,20,000

Rs. 3,20,000

Correct Answer: A

Solution:

Net profit before taxation and extraordinary items is calculated as the net profit during the year plus provision for tax and proposed dividend. Therefore, Rs. 1,70,000 + Rs. 50,000 + Rs. 50,000 = Rs. 2,70,000.

Rs. 2,10,000

Rs. 2,90,000

Rs. 2,60,000

Rs. 1,90,000

Correct Answer: A

Solution:

Cash flow from operating activities is calculated as net profit plus non-cash expenses (depreciation) minus increase in trade receivables: Rs. 50,000 + Rs. 2,00,000 - Rs. 40,000 = Rs. 2,10,000.

Rs. 1,50,000

Rs. 2,50,000

Rs. 50,000

Rs. 1,00,000

Correct Answer: A

Solution:

The net increase in cash and cash equivalents is calculated as the sum of cash flows from operating, investing, and financing activities: Rs. 2,00,000 + Rs. (1,00,000) + Rs. 50,000 = Rs. 1,50,000.

Rs. 370,000

Rs. 320,000

Rs. 420,000

Rs. 270,000

Correct Answer: B

Solution:

Net profit after tax = Net profit before tax - Provision for tax = Rs. 420,000 - Rs. 50,000 = Rs. 370,000. Net profit after tax and dividend = Rs. 370,000 - Rs. 50,000 = Rs. 320,000.

Rs. 6,50,000

Rs. 6,00,000

Rs. 5,50,000

Rs. 5,00,000

Correct Answer: B

Solution:

Cash flow from operating activities = Net profit + Depreciation + Decrease in inventories = Rs. 5,00,000 + Rs. 1,00,000 + Rs. 50,000 = Rs. 6,00,000.

Rs. 40,000

Rs. 60,000

Rs. 50,000

Rs. 30,000

Correct Answer: A

Solution:

The increase in debtors is deducted from the net profit to calculate cash flow from operating activities: Rs. 50,000 - (Rs. 20,000 - Rs. 10,000) = Rs. 40,000.

Rs. 520,000

Rs. 540,000

Rs. 560,000

Rs. 580,000

Correct Answer: B

Solution:

Using the indirect method: Cash flow from operating activities = Net profit + Increase in trade payables - Increase in trade receivables = Rs. 500,000 + Rs. 60,000 - Rs. 40,000 = Rs. 520,000.

Rs. 2,70,000

Rs. 1,70,000

Rs. 3,70,000

Rs. 2,20,000

Correct Answer: A

Solution:

Net Profit before taxation & extraordinary items is calculated as follows: Rs. 4,20,000 - Rs. 2,50,000 + Rs. 50,000 + Rs. 50,000 = Rs. 2,70,000.

Increase by Rs. 32,000

Decrease by Rs. 32,000

No impact

Increase by Rs. 16,000

Correct Answer: A

Solution:

Depreciation is a non-cash expense and is added back to net profit when calculating cash flow from operating activities, thus increasing it by Rs. 32,000.

Payment of dividends

Purchase of equipment

Sale of goods

Issuance of shares

Correct Answer: C

Solution:

Operating activities include the primary revenue-generating activities of the enterprise, such as the sale of goods.

Purchase of equipment

Payment of dividends

Sale of goods

Issuance of shares

Correct Answer: C

Solution:

Operating activities include the primary revenue-generating activities of the business, such as the sale of goods.

Rs. 100,000

Rs. 200,000

Rs. 150,000

Rs. 180,000

Correct Answer: A

Solution:

The net increase in cash and cash equivalents is calculated as the sum of cash flows from operating, investing, and financing activities: Rs. 120,000 + (-Rs. 50,000) + Rs. 30,000 = Rs. 100,000.

Rs. 0

Rs. 250,000

Rs. -250,000

Rs. 500,000

Correct Answer: A

Solution:

The cash inflow from issuing new shares is Rs. 250,000, and the cash outflow from repaying long-term borrowing is Rs. 250,000. The net cash flow from financing activities is Rs. 250,000 - Rs. 250,000 = Rs. 0.

Long-term borrowings

Trade receivables

Share capital

Non-current investments

Correct Answer: B

Solution:

Trade receivables are considered a current asset as they are expected to be converted into cash within a year.

Rs. 2,55,000

Rs. 2,85,000

Rs. 2,70,000

Rs. 2,60,000

Correct Answer: B

Solution:

The adjusted net profit is calculated by adding back non-cash expenses like depreciation. Thus, Rs. 2,70,000 + Rs. 15,000 = Rs. 2,85,000.

Rs. 3,20,000

Rs. 2,20,000

Rs. 1,70,000

Rs. 2,70,000

Correct Answer: C

Solution:

Net Profit during the year is calculated as Net Profit before taxation & extraordinary items minus Provision for tax during the year: Rs. 2,70,000 - Rs. 50,000 = Rs. 1,70,000.

Payment of short-term loans

Interest paid

Redemption of preference share capital

Purchase of fixed assets

Correct Answer: D

Solution:

Purchase of fixed assets is classified as an investing activity, not a financing activity.

Rs. 5,50,000

Rs. 5,00,000

Rs. 4,50,000

Rs. 6,00,000

Correct Answer: C

Solution:

Cash flow from operating activities is calculated as net profit plus depreciation minus increase in trade receivables: Rs. 5,00,000 + Rs. 1,00,000 - Rs. 50,000 = Rs. 4,50,000.

Rs. 1,00,000

Rs. 50,000

Rs. 70,000

Rs. 1,50,000

Correct Answer: A

Solution:

The total provision made during the year is the sum of provision for taxation and proposed dividend: Rs. 50,000 + Rs. 50,000 = Rs. 1,00,000.

Rs. 2,90,000

Rs. 2,85,000

Rs. 2,80,000

Rs. 2,70,000

Correct Answer: A

Solution:

Cash flow from operating activities is calculated by adding non-cash expenses to net profit: Rs. 2,70,000 + Rs. 15,000 + Rs. 5,000 = Rs. 2,90,000.

It increases cash flow

It decreases cash flow

It has no effect on cash flow

It is deducted from cash flow

Correct Answer: A

Solution:

Depreciation is a non-cash expense that is added back to net income when calculating cash flow from operating activities.

To show the profit and loss of a company

To provide useful information about cash flows from various activities

To list all the assets and liabilities of a company

To calculate the net worth of a company

Correct Answer: B

Solution:

The primary objective of a cash flow statement is to provide useful information about cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing activities, and financing activities.

Rs. 4,70,000

Rs. 4,50,000

Rs. 4,30,000

Rs. 4,00,000

Correct Answer: A

Solution:

Cash flow from operating activities using the indirect method is calculated as: Net Profit + Depreciation + Increase in Trade Payables = Rs. 4,00,000 + Rs. 50,000 + Rs. 20,000 = Rs. 4,70,000.

Payment of dividends

Sale of equipment

Issuance of shares

Payment of interest

Correct Answer: B

Solution:

Investing activities include transactions related to the acquisition and disposal of long-term assets and investments, such as the sale of equipment.

Rs. 550,000

Rs. 600,000

Rs. 650,000

Rs. 500,000

Correct Answer: A

Solution:

Cash flow from operating activities = Net profit + Depreciation - Increase in inventories = Rs. 500,000 + Rs. 100,000 - Rs. 50,000 = Rs. 550,000.

Rs. 3,20,000

Rs. 3,70,000

Rs. 3,20,000

Rs. 3,70,000

Correct Answer: A

Solution:

Net profit after tax and dividend = Net profit before tax - Provision for tax - Proposed dividend = Rs. 4,20,000 - Rs. 50,000 - Rs. 50,000 = Rs. 3,20,000.

Rs. 50,000

Rs. 1,00,000

Rs. 1,25,000

Rs. 2,00,000

Correct Answer: A

Solution:

The net increase in cash and cash equivalents is calculated as the sum of cash flows from operating, investing, and financing activities. Therefore, Rs. 1,50,000 - Rs. 75,000 - Rs. 25,000 = Rs. 50,000.

Purchase of machinery

Payment of dividends

Issuance of shares

Payment of salaries

Correct Answer: A

Solution:

Investing activities include the purchase of long-term assets such as machinery.

Rs. 2,600,000

Rs. 2,700,000

Rs. 2,500,000

Rs. 2,800,000

Correct Answer: B

Solution:

The total liabilities of the company include Share capital, Reserve and surplus, Long-term borrowings, Trade payables, and Short-term provisions. Total liabilities = Rs. 1,500,000 + Rs. 750,000 + Rs. 100,000 + Rs. 200,000 + Rs. 50,000 = Rs. 2,700,000.

Rs. 1,50,000

Rs. 50,000

Rs. 1,00,000

Rs. 0

Correct Answer: B

Solution:

The net cash flow from financing activities is calculated by subtracting the repayment of borrowings from the cash inflow from issuing new shares. Rs. 1,00,000 - Rs. 50,000 = Rs. 50,000.

Rs. 500,000

Rs. 400,000

Rs. 300,000

Rs. 100,000

Correct Answer: C

Solution:

The interest paid for the current year is Rs. 400,000 - Rs. 100,000 (previous year's interest) = Rs. 300,000.

Rs. 4,10,000

Rs. -4,10,000

Rs. 7,90,000

Rs. -7,90,000

Correct Answer: A

Solution:

The increase in tangible assets represents a cash outflow of Rs. 1,90,000, and the decrease in non-current investments represents a cash inflow of Rs. 6,00,000. The net cash flow from investing activities is Rs. 6,00,000 - Rs. 1,90,000 = Rs. 4,10,000.

It increases the cash flow

It has no effect

It decreases the cash flow

It doubles the cash flow

Correct Answer: C

Solution:

An increase in trade receivables indicates that more sales are made on credit, which decreases the cash flow from operating activities.

Rs. 3,00,000

Rs. 3,10,000

Rs. 2,90,000

Rs. 3,20,000

Correct Answer: B

Solution:

Cash flow from operating activities = Net Profit before tax + Depreciation + Loss on sale of equipment + Increase in trade payables - Increase in trade receivables = Rs. 2,70,000 + Rs. 15,000 + Rs. 5,000 + Rs. 60,000 - Rs. 40,000 = Rs. 3,10,000.

Increase by Rs. 30,000

Decrease by Rs. 50,000

Increase by Rs. 80,000

Decrease by Rs. 70,000

Correct Answer: A

Solution:

The increase in trade receivables indicates a cash outflow of Rs. 50,000, while the decrease in inventories indicates a cash inflow of Rs. 80,000. Net effect = Rs. 80,000 - Rs. 50,000 = Rs. 30,000 increase.

Rs. 1,70,000

Rs. 2,20,000

Rs. 2,70,000

Rs. 1,70,000

Correct Answer: A

Solution:

Net profit after tax and dividend deductions is calculated as: Rs. 2,70,000 - Rs. 50,000 (tax) - Rs. 50,000 (dividend) = Rs. 1,70,000.

Increase by Rs. 7,000

Decrease by Rs. 7,000

Increase by Rs. 1,000

No impact

Correct Answer: A

Solution:

A decrease in inventories and an increase in trade payables both result in an increase in cash flow from operating activities. Thus, Rs. 3,000 + Rs. 4,000 = Rs. 7,000.

Payment of salaries

Purchase of raw materials

Repayment of long-term debt

Sale of inventory

Correct Answer: C

Solution:

Financing activities include transactions that affect the equity and borrowings of the company, such as repayment of long-term debt.

Cash and cash equivalents

Trade payables

Fixed assets

Inventories

Correct Answer: C

Solution:

Fixed assets are classified as non-current assets because they are long-term resources used in the operation of a business.

Increase in trade payables

Depreciation

Increase in trade receivables

Amortization of goodwill

Correct Answer: C

Solution:

An increase in trade receivables would be deducted from net profit to calculate cash flow from operating activities as it represents cash that has not yet been received.

Purchase of machinery

Issuance of shares

Payment of dividends

Increase in trade payables

Correct Answer: B

Solution:

Issuance of shares is classified under financing activities as it involves raising capital for the company.

Rs. 170,000

Rs. 220,000

Rs. 270,000

Rs. 320,000

Correct Answer: B

Solution:

Net profit after tax = Net profit before tax - Provision for tax = Rs. 270,000 - Rs. 50,000 = Rs. 220,000.

Rs. 20,000

Rs. 30,000

Rs. 40,000

Rs. 60,000

Correct Answer: D

Solution:

The tax expense is calculated as: Opening provision + Tax paid - Closing provision = Rs. 50,000 + Rs. 40,000 - Rs. 30,000 = Rs. 60,000.

Rs. 1,500,000

Rs. 1,800,000

Rs. 1,300,000

Rs. 1,000,000

Correct Answer: A

Solution:

Shareholders' funds = Share capital + Reserve and surplus = Rs. 1,000,000 + Rs. 500,000 = Rs. 1,500,000.

Increase in cash flow

Decrease in cash flow

No effect

Increase in cash flow from investing activities

Correct Answer: B

Solution:

A decrease in trade payables indicates that the company has paid off some of its liabilities, resulting in a decrease in cash flow from operating activities.

Rs. 1,20,000

Rs. 2,20,000

Rs. 1,70,000

Rs. 50,000

Correct Answer: A

Solution:

Net profit after tax is calculated by subtracting the provision for tax from the net profit before taxation, i.e., Rs. 1,70,000 - Rs. 50,000 = Rs. 1,20,000.

Depreciation

Increase in trade receivables

Decrease in trade payables

Purchase of fixed assets

Correct Answer: A

Solution:

Depreciation is a non-cash expense and is added back to net profit when calculating cash flow from operating activities.

Rs. 1,50,000

Rs. 2,00,000

Rs. 2,50,000

Rs. 1,00,000

Correct Answer: A

Solution:

Retained earnings are calculated by subtracting the declared dividend from the net profit after tax. Here, Rs. 2,00,000 - Rs. 50,000 = Rs. 1,50,000.

True or False

Correct Answer: True

Solution:

The cash flow statement categorizes cash flows into operating, investing, and financing activities, providing a comprehensive view of a company's cash generation and usage.

Correct Answer: True

Solution:

Cash flow statements provide insights into the liquidity and financial structure of an enterprise, helping to evaluate its ability to generate cash.

Correct Answer: True

Solution:

A cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period, classified into operating, investing, and financing activities.

Correct Answer: True

Solution:

According to the excerpts, a cash flow statement classifies cash flows into operating, investing, and financing activities.

Correct Answer: False

Solution:

Interest paid is typically classified under financing activities in the cash flow statement.

Correct Answer: True

Solution:

The excerpt mentions that adjustments for non-cash and non-operating items like depreciation are included in the cash flow from operating activities.

Correct Answer: False

Solution:

The primary objective of a cash flow statement is to provide information about cash inflows and outflows from various activities, not to show net profit.

Correct Answer: True

Solution:

The statement of profit and loss for the year ended March 31, 2017, shows a profit before tax of Rs. 3,530.

Correct Answer: True

Solution:

A cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period, categorized into operating, investing, and financing activities.

Correct Answer: False

Solution:

A proposed dividend is not considered a cash inflow; it is a distribution of profit and is deducted from net profit in the cash flow statement.

Correct Answer: True

Solution:

The provision for taxation for March 31, 2020, was indeed Rs. 13,000 as per the additional information provided.

Correct Answer: True

Solution:

The provision for tax during the year is added to the net profit to determine the net profit before taxation and extraordinary items, as shown in the calculation: Net Profit during the year + Provision of tax during the year + Proposed dividend = Net Profit before taxation & extraordinary items.

Correct Answer: True

Solution:

Depreciation is a non-cash item and is adjusted in the cash flow statement to reflect the cash position accurately.

Correct Answer: False

Solution:

An increase in trade receivables indicates that more sales were made on credit, which means cash has not yet been received, resulting in a cash outflow from operating activities.

Correct Answer: False

Solution:

Interest paid is considered a cash outflow in financing activities, not operating activities, and it is not subtracted from the interest expense for calculating cash flow from operating activities.

Correct Answer: True

Solution:

The excerpt clearly states that the net profit before taxation and extraordinary items for the year ended 31st March 2017 was Rs. 2,70,000.

Correct Answer: True

Solution:

A decrease in trade receivables indicates that cash has been collected from customers, resulting in a cash inflow.

Correct Answer: False

Solution:

An increase in trade payables is added when calculating cash flow from operating activities using the indirect method, as it represents cash that has not yet been paid out.

Correct Answer: True

Solution:

Interest paid is a cash outflow and is reported under financing activities in the cash flow statement.

Correct Answer: False

Solution:

A decrease in trade receivables during the year results in a cash inflow from operating activities, as it indicates that cash has been collected from customers.

Correct Answer: True

Solution:

Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises.

Correct Answer: True

Solution:

The excerpt categorizes interest paid as part of cash flows from financing activities.

Correct Answer: True

Solution:

Correct Answer: True

Solution:

The excerpt specifies that Indian companies must prepare and report a cash flow statement according to AS-3.

Correct Answer: True

Solution:

Cash flow statements provide insights into the liquidity of an enterprise by detailing cash inflows and outflows.

Correct Answer: False

Solution:

An increase in trade payables is considered a source of cash and results in an addition to cash flow from operating activities.

Correct Answer: True

Solution:

Depreciation is a non-cash expense and is added back to net profit in the cash flow from operating activities.

Correct Answer: True

Solution:

The provision for tax is added to the net profit during the year to determine the net profit before taxation and extraordinary items, as shown in the calculation: Net Profit during the year = Rs. 1,70,000, Provision of tax during the year = Rs. 50,000, Proposed dividend = Rs. 50,000, resulting in Net Profit before taxation & extraordinary items = Rs. 2,70,000.

Correct Answer: True

Solution:

The excerpts mention that cash flow from operating activities includes net profit before taxation and extraordinary items.

Correct Answer: False

Solution:

Interest paid is classified under operating activities in the cash flow statement.

Correct Answer: False

Solution:

Depreciation is a non-cash expense and is added back to net profit when calculating cash flow from operating activities.

Correct Answer: False

Solution:

The redemption of preference share capital is a cash outflow from financing activities, not operating activities.

Correct Answer: True

Solution:

The cash and cash equivalents at the end of the year are calculated by adding the net increase in cash during the year to the cash and cash equivalents at the beginning of the year.

Correct Answer: True

Solution:

Interest paid is a cash outflow related to financing activities as it pertains to the cost of borrowing funds.

Correct Answer: True

Solution:

According to the excerpt, the proposed dividend and provision for tax during the year indeed amounted to Rs. 70,000 and Rs. 50,000 respectively.

Correct Answer: False

Solution:

Cash flow from operating activities includes cash flows related to the core business operations, not from the sale of fixed assets, which is part of investing activities.

Correct Answer: True

Solution:

The net profit before taxation and extraordinary items was calculated as Rs. 2,70,000.

Correct Answer: True

Solution:

Cash flow from operating activities is calculated by adjusting the net profit before tax for non-cash items like depreciation and changes in working capital.

Correct Answer: True

Solution:

The cash and cash equivalents at the end of the year for Oswal Mills Ltd. were indeed Rs. 1,200 lakhs.

Correct Answer: False

Solution:

Interest paid is considered a cash outflow from financing activities, not investing activities.

Correct Answer: False

Solution:

The equity share capital of Oswal Mills Ltd. remained the same at Rs. 1,000 lakhs from March 31, 2016, to March 31, 2017.

Correct Answer: False

Solution:

A cash flow statement should be prepared for each accounting period for which financial statements are presented, not just at the end of the financial year.

Correct Answer: False

Solution:

Dividends paid are classified as a cash outflow under financing activities, not investing activities.

Correct Answer: True

Solution:

An increase in trade payables indicates that less cash was paid out, thus it is considered a cash inflow in the cash flow statement.

Correct Answer: True

Solution:

Depreciation is a non-cash expense and is added back to net profit in the cash flow from operating activities.

Correct Answer: True

Solution:

It is required that an enterprise prepares a cash flow statement for each accounting period alongside other financial statements.

Correct Answer: False

Solution:

An increase in inventories during the year is deducted from the net profit when calculating cash flow from operating activities, as it represents cash used to purchase additional inventory.

Correct Answer: False

Solution:

Depreciation is a non-cash expense and is not considered a cash inflow. It is added back to net profit when calculating cash flows from operating activities because it reduces taxable income but does not involve an actual cash outflow.

Correct Answer: False

Solution:

Cash equivalents are not classified under financing activities. They are typically included in the cash and cash equivalents section at the end of the cash flow statement.

Correct Answer: True

Solution:

The excerpt confirms that the cash and cash equivalents at the end of the year were Rs. 1,200,000.

Correct Answer: True

Solution:

The redemption of 10% preference share capital is a cash outflow in financing activities, as it involves the repayment of capital to shareholders.

Correct Answer: True

Solution:

The provision for taxation increased from Rs. 30,000 in 2016 to Rs. 50,000 in 2017 as shown in the notes to accounts.

Correct Answer: True

Solution:

An increase in inventories represents cash outflow, as more cash is tied up in stock, hence it is deducted from the net profit when calculating cash flow from operating activities.

Correct Answer: True

Solution:

The formula for calculating cash and cash equivalents at the end of the year involves adding the net cash flows from operating, investing, and financing activities to the cash and cash equivalents at the beginning of the year.

Correct Answer: True

Solution:

Repayment of long-term borrowings is classified under financing activities as it involves cash outflows related to financing.

Correct Answer: True

Solution:

The redemption of preference share capital is a financing activity as it involves cash outflows related to the financing structure of the company.

Correct Answer: False

Solution:

An increase in trade receivables indicates that more sales are on credit, reducing the cash flow from operating activities.

Correct Answer: False

Solution:

A decrease in inventories indicates that the company has sold more goods than it purchased, leading to a cash inflow.

Correct Answer: True

Solution:

The redemption of 10% preference share capital is recorded as a cash outflow in financing activities, as indicated by the entry: Redemption of 10% preference share capital = (100).

Correct Answer: False

Solution:

An increase in trade payables indicates that the company has delayed payments to suppliers, which results in a cash inflow as it retains cash.

Correct Answer: False

Solution:

An increase in trade receivables is considered a cash outflow because it represents money that is yet to be received.

Correct Answer: False

Solution:

The redemption of preference share capital is a cash outflow as it involves paying back the shareholders.

Correct Answer: False

Solution:

Depreciation is a non-cash item and is not considered a cash inflow. It is an adjustment made to reconcile net profit with cash flows from operating activities.

Correct Answer: True

Solution:

The cash flow statement's primary objective is to provide useful information about cash flows from various activities of a company during a specific period.

Correct Answer: False

Solution:

Provision for taxation is added back to the net profit when calculating cash flow from operating activities, as it is a non-cash expense.

Correct Answer: True

Solution:

Depreciation is a non-cash expense and is added back to the profit to calculate cash flow from operating activities.

Correct Answer: True

Solution:

According to the excerpt, one of the benefits of the cash flow statement is assessing the ability of an enterprise to generate cash and cash equivalents.

Correct Answer: True

Solution:

The total assets for March 31, 2017, were Rs. 6,700 lakhs, while for March 31, 2016, they were Rs. 6,400 lakhs.

Correct Answer: True

Solution:

Depreciation is a non-cash expense that reduces taxable income but does not directly affect cash flow.

Correct Answer: False

Solution:

Non-current investments are classified under investing activities in the cash flow statement.

Correct Answer: False

Solution:

The excerpt states that equipment costing Rs. 80,000 was purchased, not sold, and there was a loss of Rs. 5,000 on sale of equipment.

Correct Answer: True

Solution:

A cash flow statement is required to be prepared and presented for each accounting period alongside other financial statements.

Correct Answer: False

Solution:

A decrease in trade receivables during the year would actually result in an addition to the net profit when calculating cash flow from operating activities, as it implies cash has been collected.

Correct Answer: True

Solution:

Correct Answer: False

Solution:

Depreciation is a non-cash expense and is not considered a cash outflow in the cash flow statement. It is added back to net profit in cash flow from operating activities.

Cash Flow Statement

Learning Objectives

Learning Objectives

Revision Notes & Summary

Cash Flow Statement Notes

1. Objectives of Cash Flow Statement

2. Benefits of Cash Flow Statement

3. Classification of Activities

Operating Activities

Investing Activities

Financing Activities

4. Cash Flow Statement Structure

5. Important Terms

6. Example Activities Classification

7. Common Questions

Exam Tips & Common Mistakes

Common Mistakes and Exam Tips

Common Pitfalls

Tips for Success

AI Learning Assistant

Practice Test – MCQs, True/False

Multiple Choice Questions

Q1.A company has a net profit before tax of Rs. 3,00,000. During the year, depreciation of Rs. 50,000 was charged, and a loss on sale of equipment of Rs. 10,000 was recorded. Calculate the cash flow from operating activities.

Correct Answer: A

Q2.During the year, a company paid Rs. 20,000 for interest, of which Rs. 5,000 was for the previous year's interest. How much should be reported as interest paid in the cash flow statement for the current year?

Correct Answer: A

Q3.What is the total cash flow from financing activities if a company repaid a loan of Rs. 50,000 and issued shares worth Rs. 1,00,000?

Correct Answer: A

Q4.A company's balance sheet shows an increase in trade receivables from Rs. 1,50,000 to Rs. 2,00,000 and a decrease in inventories from Rs. 1,80,000 to Rs. 1,00,000. How will these changes affect the cash flow from operating activities?

Correct Answer: A

Q5.Which of the following is considered a cash equivalent?

Correct Answer: C

Correct Answer: A

Q7.In preparing a cash flow statement, which of the following would be classified under investing activities?

Correct Answer: B

Q8.A company has the following data: Opening cash balance: Rs. 2,00,000, cash flow from operating activities: Rs. 3,00,000, cash flow from investing activities: Rs. (1,50,000), cash flow from financing activities: Rs. (50,000). What is the closing cash balance?

Correct Answer: A

Q9.During the year, equipment costing Rs. 80,000 was purchased and a loss on sale of equipment amounted to Rs. 5,000. What is the total cash outflow for investing activities?

Correct Answer: A

Q10.If a company has a net profit after tax of Rs. 3,230,000 and it has declared dividends of Rs. 1,200,000, what is the retained earnings for the year?

Correct Answer: A

Q11.Which of the following changes would result in a cash inflow in the cash flow from operating activities?

Correct Answer: D

Q12.Consider a company with the following balance sheet changes: Inventories decreased by Rs. 80,000, trade receivables decreased by Rs. 50,000, and trade payables increased by Rs. 30,000. What is the net effect on cash flow from operating activities?

Correct Answer: A

Q13.If the opening inventories of finished goods are Rs. 2,00,000 and the closing inventories are Rs. 1,00,000, what is the change in inventories?

Correct Answer: B

Q14.A company reports the following: cash at the beginning of the year Rs. 1,00,000, net cash inflow from operating activities Rs. 2,00,000, net cash outflow from investing activities Rs. 1,50,000, and net cash inflow from financing activities Rs. 50,000. What is the cash at the end of the year?

Correct Answer: B

Q15.What is the net profit before taxation and extraordinary items if the net profit during the year is Rs. 1,70,000, with a provision of tax during the year of Rs. 50,000 and a proposed dividend of Rs. 50,000?

Correct Answer: A

Q16.What is the cash flow from operating activities if the net profit is Rs. 50,000, depreciation is Rs. 2,00,000, and trade receivables increased by Rs. 40,000?

Correct Answer: A

Q17.A company has the following cash flows during the year: operating activities: Rs. 2,00,000, investing activities: Rs. (1,00,000), and financing activities: Rs. 50,000. What is the net increase in cash and cash equivalents at the end of the year?

Correct Answer: A

Q18.If a company has a net profit before tax of Rs. 420,000, a provision for tax of Rs. 50,000, and a proposed dividend of Rs. 50,000, what is the net profit after tax and dividend?

Correct Answer: B

Q19.A company reports a net profit of Rs. 5,00,000. During the year, depreciation of Rs. 1,00,000 was charged, and inventories decreased by Rs. 50,000. Calculate the cash flow from operating activities.

Correct Answer: B

Q20.If the net profit for the year is Rs. 50,000 and the debtors at the beginning and end of the year are Rs. 10,000 and Rs. 20,000 respectively, what is the cash flow from operating activities?

Correct Answer: A

Q21.A company has a net profit of Rs. 500,000. During the year, trade receivables increased by Rs. 40,000 and trade payables increased by Rs. 60,000. What is the cash flow from operating activities using the indirect method?

Correct Answer: B

Q22.What is the net profit before taxation and extraordinary items if the profit and loss at the end is Rs. 4,20,000, profit and loss in the beginning is Rs. 2,50,000, provision of tax during the year is Rs. 50,000, and proposed dividend is Rs. 50,000?

Correct Answer: A

Q23.If the depreciation charged during the year is Rs. 32,000, what is the impact on cash flow from operating activities?

Correct Answer: A

Q24.Which of the following is classified as an operating activity according to AS-3?

Correct Answer: C

Q25.Which of the following activities is classified as an operating activity?

Correct Answer: C

Q26.Consider a company with the following cash flows: Operating activities: Rs. 120,000; Investing activities: Rs. -50,000; Financing activities: Rs. 30,000. What is the net increase in cash and cash equivalents for the period?

Correct Answer: A

Q27.A company issued new shares worth Rs. 250,000 and repaid a long-term borrowing of Rs. 250,000. What is the net cash flow from financing activities?

Correct Answer: A

Q28.Which of the following is considered a current asset?

Correct Answer: B

Q29.If the net profit before taxation is Rs. 2,70,000 and depreciation on equipment is Rs. 15,000, what is the adjusted net profit?

Correct Answer: B

Q30.If the net profit before taxation and extraordinary items is Rs. 2,70,000, and the provision for tax during the year is Rs. 50,000, what is the net profit during the year?