Cash Flow Statement Test - 1

The correct answer is All the above.

• A Cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period.
• The primary objective of a cash flow statement is to provide useful information about the cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing activities, and financing activities.

Key Points

• The main objectives of the cash flow statement are:
  • Analysis of Cash Position
  • Short term cash planning
  • Classification of Activities
• Assessing Liquidity and Solvency Position
• Evaluation of Future Cash Flows
• Supply Necessary Information to the Users
• Helps the Management to Ascertain Cash Planning

The correct answer is Cash outflow in Investing Activities ₹8,000.

Important Points

• Goodwill is a non-current asset and its effect is shown in investing activities.
• Since goodwill at the end of the year is more than that in the beginning, it means goodwill has been acquired during the year for Rs. 8000 (Rs. 48000-40000= 8000).
• This involves payment of cash and is recorded as a cash outflow from investing activities. 

Additional Information

• Operating activities are the activities that constitute the primary or main activities of an enterprise. For example, for a manufacturing company, operating activities are procurement of raw material, the incurrence of manufacturing expenses, sale of goods, etc.
• Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to the purchase and sale of long-term assets or fixed assets such as machinery, furniture, land, and building, etc.
• Financing activities relate to the long-term funds or capital of an enterprise, e.g., cash proceeds from the issue of equity shares, debentures, raising long-term bank loans, repayment of bank loans, etc.

The correct answer is AS- 3

Key Points

Accounting Standards: Accounting Standards can be any form of statement which consists of rules and guidelines, issued by the accounting institutions, for the preparation of uniform and consistent financial statements. This also includes disclosures required by the different users of accounting information.

Important Points

List of few Accounting Standards in detail:

1. Policies related to accounting disclosure (AS 1): This standard deals with the disclosure of significant accounting policies that are followed in preparing and presenting financial statements.
2. Valuation of Inventories (AS 2): This standard deals with the determination of value at which inventories are carried in the financial statements, including the ascertainment of cost of inventories and any write-down thereof to net realizable value.
3. Cash Flow Statements (AS 3): This standard deals with the historical changes in cash and cash equivalents of an enterprise. This is done by preparing a statement popularly called Cash Flow Statement. This statement classifies cash flows during the period from operating, investing, and financing activities.
4. Contingencies and Events Occurring After Balance Sheet Date (AS 4): This Standard deals with the treatment of contingencies and events occurring after the balance sheet date.
5. Net profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies (AS 5): This standard should be applied by an enterprise in presenting profit or loss from activities in the normal course of business, extraordinary items, and prior period items. This also includes changes in accounting estimates and changes in accounting policies.

Therefore, the Cash flow statement is prepared as per accounting standard As- 3.

The correct answer is Cash used (Payment) from financial activities ₹2,10,000.

• Financing activities relate to long-term funds or capital of an enterprise,
• Examples:  cash proceeds from issue of equity shares, preference shares, debentures, raising long-term bank loans, repayment of bank loan, payment of interest etc.
• Thus issue of preference shares comes under financing activities. 

Important Points

Amount of issue of shares = Rs. 200000+5% of Rs. 200000
= Rs. 200000+ Rs. 10000
= Rs. 210000

Cash flows from Investing Activities:

• It is the section of the company's cash flow statement that displays how much money has been generated from or used in making investments during a specific period of time.
• Investing activities include the purchase of long-term fixed assets like plant, property, equipment, etc., acquisition of other businesses, and investments in marketable securities like stocks and bonds.

​Cash flows included and not included from Investing activities are listed below:

• There are more items that can be included in this list; the only sure way to know what's included is to look at the balance sheet and analyze any difference between non-current assets over the two periods.
• Any changes in the value of these long-term assets (other than depreciation) mean there will be investing items to display on the cash flow statement. 

Therefore, according to the accounting profession, Cash outflow to acquire fixed assets would be considered a cash-flow item from an "investing" activity.

Important Points

Additional Information

• Non-cash items such as depreciation, goodwill written-off, provisions, deferred taxes, etc., are to be added back.
• All other items for which the cash effects are investing or financing cash flows. The treatment of such items depends upon their nature. All investing and financing incomes are to be deducted from the amount of net profits, while all such expenses are to be added back. For example, finance cost which is a financing cash outflow is to be added back while other income such as interest received which is investing cash inflow is to be deducted from the amount of net profit.
• Changes in current assets and liabilities during the period. An increase in current assets and a decrease in current liabilities are to be deducted, while an increase in current liabilities and a decrease in current assets are to be added up.

The correct answer is It does not affect cash flow.  

• When land is exchanged for shares, it does not involve any inflow or outflow of cash.
• Thus it is a non-cash transaction and will not appear in the cash flow statement. 

Additional Information

• Operating activities are the activities that constitute the primary or main activities of an enterprise. For example, for a company manufacturing garments, operating activities are procurement of raw material, the incurrence of manufacturing expenses, sale of garments, etc.
• Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to the purchase and sale of long-term assets or fixed assets such as machinery, furniture, land, and building, etc.
• Financing activities relate to the long-term funds or capital of an enterprise, e.g., cash proceeds from the issue of equity shares, debentures, raising long-term bank loans, repayment of bank loans, etc.

The correct answer is Current assets and current liability.

• Cash flow from operating activities (CFO) indicates the amount of money a company brings in from its ongoing, regular business activities, such as manufacturing and selling goods or providing a service to customers.
• It is mainly concerned with current assets and current liability as it is included in the working capital changes.
• Current assets and current liabilities are part of the company's core business activities.

Key Points

• Current assets are all the assets of a company that are expected to be sold or used as a result of standard business operations over the next year. 
• Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. 
• Non-current liabilities (long-term liabilities) are liabilities that are due after a year or more.
• Fixed assets are long-term assets that a company has purchased and is using for the production of its goods and services.
• Working capital, also known as net-working capital (NWC), is the difference between a company's current assets, such as cash, accounts receivable (customers' unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.

The correct answer is gain on sale of land. 

As per AS-3, under the indirect method, net cash flow from operating activities is determined by adjusting net profit or loss for the effect of :

•  Non-cash items such as depreciation, goodwill written-off, provisions, deferred taxes, etc., are to be added back.
• All other items for which the cash effects are investing or financing cash flows. The treatment of such items depends upon their nature.
• All investing and financing incomes are to be deducted from the amount of net profits while all such expenses are to be added back.
• For example, finance cost which is a financing cash outflow is to be added back while other income such as interest received which is investing cash inflow is to be deducted from the amount of net profit.

Key Points

• Depreciation, goodwill written off and loss on the sale of furniture are expenses that are non-operating expenses. Thus, they are added back in net profit. However, gain on the sale of land is subtracted since it is a non-operating income. 

The correct answer is Both 1 & 2

• Cash flow statement is also known as ‘Statement of Changes in Financial Position on Cash basis’ and ​‘Statement of accounting for variation in cash’.
• A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.
• The cash flow statement measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.
• The primary purpose of the statement of cash flows is to provide information about cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period.

Additional Information

• Cash flow from operating activities (CFO) indicates the amount of money a company brings in from its ongoing, regular business activities, such as manufacturing and selling goods or providing a service to customers. It is the first section depicted on a company's cash flow statement.
• Investing activities in accounting refer to the purchase and sale of long-term assets and other business investments, within a specific reporting period. It is the second section depicted on a company's cash flow statement.
• Financing activities include transactions involving debt, equity, and dividends. Cash flow from financing activities provides investors with insight into a company's financial strength and how well a company's capital structure is managed. It is the third section depicted on a company's cash flow statement.