1. In the Indirect Method of preparing a Cash Flow Statement, why is "Depreciation" added back to Net Profit?
Because it is a non-operating income.
To calculate tax liability.
Because it is a cash inflow.
Because it is a non-cash expense that reduced profit but did not reduce cash.
Explanation:
Depreciation is an accounting entry, not a cash outflow. Since it was deducted to arrive at Net Profit, it must be added back to find the actual "Cash Flow from Operations".
2. Which of the following is a "Cash Flow from Financing Activity"?
Interest received on investments.
Sale of Machinery.
Dividend paid to shareholders.
Cash paid to suppliers.
Explanation:
Financing activities relate to capital and debt structure. Paying dividends is a return on capital to owners, hence Financing. (Interest received is Investing; Payment to suppliers is Operating).
3. Cash Flow Statement is mandatory for Level I enterprises under which Accounting Standard?
Explanation:
AS 3 prescribes the format and requirements for the Cash Flow Statement. (Corresponding Ind AS is Ind AS 7).
4. Redemption of Debentures results in:
Cash Outflow from Financing Activity.
Cash Inflow from Operating Activity.
Cash Outflow from Investing Activity.
Cash Inflow from Financing Activity.
Explanation:
Redemption means repaying the debt. It involves cash going out (Outflow) and relates to the capital structure (Financing).
5. Which of the following is considered a "Cash Equivalent"?
Investment in Shares.
Treasury Bills with maturity of 3 months or less.
Machinery.
Inventory.
Explanation:
Cash Equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value (typically < 3 months maturity).
6. Which of the following transactions is NOT included in the Cash Flow Statement?
Conversion of Debentures into Equity Shares.
Purchase of Machinery for Cash.
Issue of Debentures for Cash.
Payment of Dividend.
Explanation:
This is a significant non-cash transaction (Investigative/Financing) where no cash enters or leaves the entity. It should be disclosed in notes but not in the body of the Cash Flow Statement.
7. Income Tax paid is usually classified as a cash flow from Operating Activities. However, if the tax can be specifically identified with a Financing activity, it is classified as:
Operating Activity still.
Investing Activity.
Financing Activity.
Extraordinary Item.
Explanation:
Ind AS 7 states that tax cash flows should be operating unless they can be specifically identified with financing or investing activities (e.g., tax on capital gains from selling an asset is Investing).
8. Cash payments to acquire fixed assets are classified as:
Investing Activities.
Operating Activities.
Financing Activities.
Extraordinary Activities.
Explanation:
Investing activities involve the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
9. For a Banking Company, "Interest Received" on loans is classified as:
Extraordinary Activity
Investing Activity
Financing Activity
Operating Activity
Explanation:
For a financial enterprise (Bank), lending money is the main business. Hence, interest received on loans is an Operating Cash Inflow. (For a non-financial firm, it would be Investing).
10. Under Ind AS 7, Bank Overdrafts repayable on demand are usually treated as:
Component of Cash and Cash Equivalents.
Financing Activity.
Operating Activity.
Investing Activity.
Explanation:
Bank overdrafts which are repayable on demand and form an integral part of an enterprise's cash management are included as a component of cash and cash equivalents (negative cash).
11. Interest and Dividends received by a manufacturing company are classified in the Cash Flow Statement as:
Operating Cash Flow
Extraordinary Item
Investing Cash Flow
Financing Cash Flow
Explanation:
For non-financial enterprises, interest and dividends received are returns on investments made, hence classified as Investing Activities.
12. An increase in "Trade Payables" (Creditors) during the year is treated in the Cash Flow Statement (Indirect Method) as:
A deduction from Net Profit.
Cash flow from Financing.
An addition to Net Profit.
Cash flow from Investing.
Explanation:
Increase in Current Liabilities (Creditors) means cash is retained (not paid out). It is a source of working capital funding, so it is Added back to Net Profit to find Cash from Operations.
13. Cash flow arising from an insurance claim received for loss of stock by fire should be classified as:
Financing Activity.
It is not recorded.
Operating Activity (Extraordinary item).
Investing Activity.
Explanation:
Since the loss of stock relates to operations, the insurance recovery is also an Operating Cash Flow but should be disclosed separately as an extraordinary item.
14. How are unrealized gains and losses arising from changes in foreign exchange rates treated in the Cash Flow Statement?
They are treated as Investing Activities.
They are not cash flows but are shown separately to reconcile cash balances.
They are ignored completely.
They are treated as Operating Activities.
Explanation:
Unrealized forex gains/losses do not involve actual cash movement. However, to match the opening and closing cash equivalents (held in foreign currency), the effect of exchange rate changes is reported separately at the bottom of the statement.
15. For a non-financial company, "Interest Paid" on bank loans is classified as:
Extraordinary Activity
Financing Activity
Operating Activity
Investing Activity
Explanation:
Interest is the cost of servicing debt (Capital). Since Loans are Financing activities, the interest paid on them is also a Financing outflow.
16. Cash paid for the purchase of Fixed Assets is:
Source of Cash (Financing)
Application of Cash (Investing)
No Cash Flow
Source of Cash (Operating)
Explanation:
Buying assets is an outflow (Application) of cash and falls under Investing Activities.