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Karnataka 2nd PUC Accountancy Question Bank Chapter 11 Cash Flow Statement
2nd PUC Accountancy Cash Flow Statement Text Book Questions and Answers
Short Questions and Answers
Question 1.
What is a Cash Flow Statement?
Answer:
A Cash Flow Statement is a statement showing inflows and outflows of cash and cash equivalents from operating, investing and financing activities of a company during a particular period. It explains the reasons of receipts and payments in cash and change in cash balances during an accounting year in a company.
Question 2.
How are the various activities classified (as per ASA revised) while preparing cash flow statement?
Answer:
As per the Revised Accounting Standard 3 (ASA), preparation of Cash Flow Statement for each period is mandatory. ASA also specifies the classification of all inflows and outflows basically under the following heads
- Cash Flow from operating activities
- Cash Flow from investing activities
- Cash Flow’ from FinancingActivities
Question 3.
State the uses of cash flow statement?
Answer:
The uses of cash flow statement are as follows:
- It is useful for short term financial planning about inflows and outflow of cash.
- It helps ìn analysing the reason for the change in cash and cash equivalent balances of a company
- It assists in determining and assessing liquidity and solvency positions of a company.
- It enables to analyse and study the trends of receipts and payments of cash from various activities of a company and thereby helps in drafting various po1cy measures and short term planning.
- It enables the segregation of cash flows from operating, investing and financing activities of the business separately.
- It assists in making decision about distribution of profit with reference to the availability of cash.
Question 4.
What are the objectives of preparing cash flow statement?
Answer:
The important objectives Jòr preparing Cash Flow Statement are as follows:
- The most important objective that is fulfilled by preparing Cash Flow Statement is to as certain the gross inflows and outflows of cash and cash equivalents from various activities.
- Secondly. Cash Flow Statement helps in analysing various reasons responsible for change in the cash balances during an accounting year.
- This statement helps in analysing and understanding the liquidity and solvency of a company there by, depicting the true liquidity position to the creditors and the investors
- Cash Flow Statement also helps in ascertaining the requirement and availability of cash in near future.
Question 5.
State meaning of the terms: Cash Equivalents, Cash flows.
Answer:
Cash equivalents are short term, highly liquid investments that are easily convertible into cash and which are subject to an insignificant risk of change in value. In other words, cash equivalents are held for the purpose of meeting short term cash commitments rather than for investment or any other purpose. An investment held for short-term maturity, say three months can be regarded as cash equivalent. Some examples of cash equivalents are treasury bills, commercial papers, etc.
On the other hand, cash flows are inflows and outflows of cash and cash equivalents. A cash inflow results in increase in the total cash balance and a cash outflow results in decrease in the total cash balance.
Question 6.
Prepare a format of cash flow from operating activities under direct method and indirect method.
Answer:
The format of cash flow from operating activities is as follows:
Question 7.
State clearly what would constitute the operating activities for the following types of enterprises:
(i) Hotel
(ii) Film production house
(iii) Financialenterprise
(iv) Media enterprise
(v) Steel manufacturing unit
(vi) Software business unit.
Answer :
(i) Hotels
- Receipts from sale of goods to customer.
- Payment of wages and salaries, electricity, food items and other items used in accommodation.
(ii) Film ProductionHouse:
- Receipts from selling film rights of a film to the distributors.
- Payment to the staff, actors, actresses, directors, etc.
(iii) Financial Enterprises:
- Receipts from repayment of loans, interest incomes from investments,etc.
- Repayment of loans, recovery expenditure for recover of loans etc, salaries of employees.
(iv) MediaEnterprises:
- Receipts from advertisements.
- Payments to staff, reporters, photographers, etc.
(v) Steel Manufacturing Unit:
- Receipts from sale of steel sheets, steel castings, steel rods, etc.
- Payment for iron, coal, salaries to staff,etc.
(vi) Software BusinessUnit:
- Receipts from sale of software and renewal of licenses.
- Payment of salaries to their employees, etc.
Question 8.
“The nature/type of enterprise can change altogether the category into which a particular activity may be classified.” Do you agree? Illustrate your answer.
Answer:
Yes, the nature or type of an enterprise can change the category into which a particular activity may be classified. This can be better understood with the help of an example of two firms. One engaged in financial services and the other engaged in manufacturing services.
For the firm that is engaged in financial services, interests received or paid are classified under operating activities whereas for the firm that is engaged in manufacturing business, interests paid are classified under financing activities and interest received as investing activities. Therefore, the classification of activities depends on the nature and type of enterprise.
Long Questions and Answers
Question 1.
Describe the procedure to prepare Cash Flow Statement.
Answer:
The procedure to prepare Cash Flow Statement is described in the following steps in their chronological order.
Step 1: Ascertain the cash flows from operating activities
Step 2: Ascertain the cash flows from investing activities
Step 3: Ascertain the cash flows from financing activities
Step 4: Ascertain net increase or decrease by summing up the amounts of Steps 1, 2, and 3.
Step 5: Write the opening balance of cash and cash equivalents and deduct it from the amount ascertained in Step 4. The resulting figure arrived is the Closing Balance of Cash and Cash Equivalents.
There are two methods viz. Direct Method and Indirect Method for the preparation of Cash Flow Statement.
Question 2.
Describe ‘Indirect’ methods of ascertaining Cash Flow from Operating Activities.
Answer:
As per the Accounting Standard 3 issued by the Institute of Chartered Accountant of India, an enterprise should report cash flows from operating activities using either of the following methods.
I. DirectMethod
II. IndirectMethod
I. Indirect Method: This method starts with the Net Profit before tax and extraordinary items. For this purpose, the Net Profit as revealed by the Profit and Loss Account cannot be taken into consideration as there exists some items which do not leads to outflow of cash. The following are those items that need to be added back to the Net Profit of the Profit and Loss Account.
- Non-cash items like, depreciation goodwill written off, etc are added to the net profit.
- Non-operating expenses like loss on sale of fixed assets, transfers to reserves, loss on sale of fixed assets are added back to the Net Profit.
- Provisions like, provisions for doubtful debts and discount for debtors, proposed dividends etc. should be added back to the Net Profit.
- Decrease in current assets and increase in current liabilities should be added to the operating profit.
The following are those items that need to deduct from the Net Profit of the Profit and Loss Account.
a. Non-operating incomes like profit on sale of fixed assets, etc. are deducted from the Net Profit.
b. Non-trading Incomes like dividend received, interest received, tax refund, etc. are to be deducted from the net profit.
c. Increase in current assets and decrease in current liabilities should be deducted from the operating profit.
Question 3.
Explain the major Cash Inflow and outflows from investing activities.
Answer:
Investing activities are those activities that are related to sales and purchases of long-term fixed assets like, land and building, plant and machinery, furniture, etc. These fixed assets are not held for resale. The activities like sale and purchase of investments that are not included in the cash equivalents are also included in Investing activities. Any income arising from such investments (assets) are regarded a part of investing activities.
As per the AS3, the major cash inflows and outflows from investing activities are as follows:
a. Cash payments to acquire fixed assets (including intangibles like, goodwill). These payments include capitalised cost of research and development and self constructed fixed assets.
b. Cash receipts from disposal of fixed assets (including intangible assets).
c. Cash payments to acquire shares, warrants, or debt instruments of other enterprises and interest in joint venture (other than payments of those instruments consider as cash equivalents and are held for the trading purposes).
d. Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interest from joint ventures (other than receipts from those held for trading purposes).
e. Cash advances and loans made to third parties (other than advances, and loans made by financial enterprises). These will be treated as cash flows from the operating activities.
f. Cash receipts from repayment of advances and loans made to third parties (other than advances and loans of financial enterprises). These will be treated as cash flows from operating activities.
g. Cash receipts from insurance company for any property involved in accident.
h. Any income arising from fixed assets or investments like interest, dividend, rent etc. In case of financial enterprises interest and dividend is treated as operating activities.
Question 4.
Explain the major Cash Inflows and outflows from financing activities.
Answer:
Financing activities are those activities that are related to capital or long term funds of an enterprise. These activities results in the change in the capital and borrowed funds.
As per the AS3, the major cash inflows from financing activities are as follows:
- Cash proceeds from issue of shares and other similar instruments.
- Cash proceeds from issue of debentures, loans, notes, bonds, and other short and long-term borrowings.
As per the 4S3, the major cash outflows from financing activities are as follows:
- Cash repayments of the amount borrowed in form of debentures, loans, notes bonds, and other short and long-term borrowings.
- Buy-back of shares and debentures.
- Interest paid on debentures, loans, and advances.
- Dividend paid to the preference shareholders and equity shareholders.
An important point that must be noted is that the purchase and sale of securities, interest paid or received and dividend received is treated as cash flow from operating activities for an investment company. But dividend paid is treated as cash flow from financing activities.
2nd PUC Accountancy Cash Flow Statement Numerical Questions and Answers
Question 1.
Anand Ltd., arrived at a net income of Rs 5,00,000 for the year ended March 31, 2014. Depreciation for the year was Rs 2,00,000. There was a profit of Rs 50,000 on assets sold which was transferred to Statement of Profit and Loss account. Trade Receivables increased during the year Rs 40,000 and Trade Payables also increased by Rs 60,000. Compute the cash flow from operating activities by the indirect approach.
Answer:
Question 2.
From the information given below you are required to calculate the cash paid for the inventory:
Answer:
Question 3.
For each of the following transactions, calculate the resulting cash flow and state the nature of cash flow, viz., operating, investing and financing.
(a) Acquired machinery for Rs 2,50,000 paying 20% by cheque and executing a bond for the balance payable.
(b) Paid Rs 2,50,000 to acquire shares in Informa Tech, and received a dividend of Rs 50.000 after acquisition.
(c) Sold machinery of original cost Rs 2,00,000 with an accumulated depreciation of Rs 1,60,000 for Rs 60,000.
Answer:
(a) Part payment Rs 50,000 for acquiring machinery Rs 2,50,000 is related with Investing Activities
(b)
Amount paid to acquire assets and dividend received is a part of Investing Activities.
(c) Inflow of cash of Rs 60,000 on sale of machinery is a part Investing Activities.
Question 4.
The following is the Profit and Loss Account of Yamuna Limited:
Additional information:
(i) Trade receivables decrease by Rs 30,000 during the year.
(ii) Prepaid expenses increase by Rs 5,000 during the year.
(iii) Trade payables increase by Rs 15,000 during the year.
(iv) Outstanding Expenses payable increased by Rs 3,000 during the year.
(v) Other expenses included depreciation of Rs 25,000.
Compute net cash from operations for the year ended March 31, 2014 by the indirect method.
Answer:
Question 5.
Compute cash from operations from the following figures:
(i) Profit for the year 2014-15 is a sum of Rs 10,000 after providing for depreciation of Rs 2,000.
(ii) The current assets of the business for the year ended March 31, 2014 and 2015 are as follows:
Answer:
Question 6.
From the following particulars of Bharat Gas Limited, calculate Cash Flows from Investing Activities. Also show the workings clearly preparing the ledger accounts: Balance Sheet of Bharat Gas Ltd., as on _________
Notes: 1 Tangible assets = Machinery
2 Intangible assets = Patents
Additional Information:
(a) Patents were written-off to the extent of Rs 40,000 and some Patents were sold at a profit of Rs 20,000.
(b) A Machine costing Rs 1,40,000 (Depreciation provided there on Rs 60,000) was sold for Rs 50,000. Depreciation charged during the year was Rs 1,40,000.
(c) On March 31, 2014, 10% Investments were purchased for Rs 1,80,000 and some Investments were sold at a profit of Rs 20,000. Interest on Investment was received on March 31, 2015.
(d) Amartax Ltd., paid dividend @ 10% on its shares.
(e) A plot of Lend had beets put chased for investment purposes and let out for commercial use and rent received Rs 30,000.
Answer:
Question 7.
From the following Balance Sheet of Mohan Ltd., prepare cash flow Statement:
Additional Information:
Machine Costing Rs 80,000 on which accumulated depreciation was Rs, 50,000 was sold for Rs 20,000.
Answer:
Question 8.
From the following Balance Sheets of Tiger Super Steel Ltd., prepare Cash Flow Statement:
Additional Information:
Depreciation Charge on Land & Building Rs 20,000, and Plant Rs 10,000 during the year.
Answer:
Question 9.
From the following information, prepare cash low statement:
Additional Information:
Depreciation Charge on Plant amount to Rs 80,000.
Answer:
Question 10.
From the following Balance Sheet of Yogeta Ltd., prepare cash flow statement:
Additional Information:
Net Profit for the year after charging Rs 50,000 as Depreciation was Rs 1,50,000. Dividend paid on Share was Rs 50,000, Tax Provision created during the year amounted to Rs 60,000.
Answer:
Question 11.
Following is the Financial Statement of Garima Ltd., Prepare cash flow statement.
Additional Information:
1. Interest paid on Debenture Rs 600
2. Dividend paid during the year Rs 4,000
3. Depreciation charged during the year Rs 32,000
Answer:
Question 12.
From the following Balance Sheet of Computer India Ltd., prepare cash flow statement.
Additional Information:
Interest paid on Debenture Rs 600
Answer:
