1. In the Indirect Method of preparing a Cash Flow Statement, why is "Depreciation" added back to Net Profit?
Because it is a cash inflow.
To calculate tax liability.
Because it is a non-cash expense that reduced profit but did not reduce cash.
Because it is a non-operating income.
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"?
Sale of Machinery.
Cash paid to suppliers.
Dividend paid to shareholders.
Interest received on investments.
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 Financing Activity.
Cash Outflow from Investing Activity.
Cash Inflow from Operating 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.
Inventory.
Treasury Bills with maturity of 3 months or less.
Machinery.
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.
Issue of Debentures for Cash.
Purchase of Machinery 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:
Extraordinary Item.
Financing Activity.
Investing Activity.
Operating Activity still.
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:
Operating Activities.
Extraordinary Activities.
Investing Activities.
Financing 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:
Financing Activity
Operating Activity
Investing Activity
Extraordinary 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:
Investing Activity.
Operating Activity.
Financing Activity.
Component of Cash and Cash Equivalents.
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:
Financing Cash Flow
Investing Cash Flow
Extraordinary Item
Operating 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:
Cash flow from Investing.
A deduction from Net Profit.
Cash flow from Financing.
An addition to Net Profit.
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:
Investing Activity.
Financing Activity.
It is not recorded.
Operating Activity (Extraordinary item).
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 ignored completely.
They are not cash flows but are shown separately to reconcile cash balances.
They are treated as Investing Activities.
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:
Operating Activity
Investing Activity
Extraordinary Activity
Financing 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:
Application of Cash (Investing)
No Cash Flow
Source of Cash (Financing)
Source of Cash (Operating)
Explanation:
Buying assets is an outflow (Application) of cash and falls under Investing Activities.