Practice Questions

Justify why an increase in Trade Receivables is subtracted when calculating cash flow from operating activities under the indirect method.

Create a brief scenario for a financial enterprise where interest receipt is an operating activity, and contrast it with a scenario for a manufacturing enterprise where the same receipt would be an investing activity.

Evaluate whether 'Purchase of marketable securities with a maturity of two months from the date of acquisition' should be classified as an investing activity.

Examine the effect of issuing bonus shares on a company's Cash Flow Statement and justify your answer.

List two examples of cash outflows from financing activities.

Identify the category under which the purchase of machinery by paying cash would be classified.

Demonstrate how an increase in 'Income Received in Advance' during the year is treated while calculating cash flow from operating activities using the indirect method.

Justify the exclusion of 'Acquisition of machinery by issue of equity shares' from the cash flow statement's main body.

State the purpose of preparing a Cash Flow Statement.

Calculate the Operating Profit before Working Capital Changes from the following information: Net Profit for the year is Rs. 2,50,000 after debiting Depreciation of Rs. 40,000 and crediting a Profit on Sale of Fixed Asset of Rs. 25,000.

Define 'Cash Equivalents' as per Accounting Standard-3.

Name the accounting standard that governs the preparation of the Cash Flow Statement in India.

A company's net increase in cash is Rs. 50,000. Its cash flow from operations is Rs. 2,00,000, and from financing is negative Rs. 2,50,000. Evaluate the company's performance based on its cash flow from investing activities and what it implies.

Explain the meaning of 'Cash Flows' and distinguish between a cash inflow and a cash outflow.

Describe 'Operating Activities' and provide two examples of cash inflows from these activities.

Recall the starting point for calculating cash flow from operating activities under the indirect method.

Explain why non-cash transactions are excluded from a Cash Flow Statement and provide one example.

Describe 'Financing Activities' with two examples of cash inflows from such activities.

Analyze and state how the purchase of shares of another company would be classified in the Cash Flow Statement for (a) a manufacturing company and (b) a share brokerage firm.

Compare the treatment of 'Dividend Paid' and 'Dividend Received' in the Cash Flow Statement of a non-financial company as per Accounting Standard-3.

A company acquired a building worth Rs. 20,00,000 by issuing debentures of the same value. Analyze why this transaction is not included in the main body of the Cash Flow Statement.

Solve for the amount of 'Income Tax Paid' during the year if the opening balance of Provision for Taxation was Rs. 40,000, the closing balance was Rs. 55,000, and the provision made during the year and debited to the Statement of Profit and Loss was Rs. 60,000.

Calculate the net cash flow from Investing Activities and Financing Activities from the following: Purchase of equipment for Rs. 3,00,000; Proceeds from issue of equity shares Rs. 5,00,000; Sale of old investments for Rs. 1,20,000; Repayment of a long-term loan Rs. 1,50,000.

Apply the rules for working capital adjustments to calculate cash generated from operations, given the following: Operating Profit before Working Capital Changes is Rs. 5,00,000; Increase in Trade Receivables is Rs. 60,000; Decrease in Inventories is Rs. 40,000; Increase in Trade Payables is Rs. 70,000; and Decrease in Outstanding Expenses is Rs. 10,000.

Examine the treatment of 'Extraordinary Items' in a Cash Flow Statement, providing an example.

Evaluate the statement: 'The direct method of preparing the cash flow from operating activities is superior to the indirect method for assessing a company's future cash generating ability.'

Evaluate the financial health of a company that reports positive cash flow from financing, negative cash flow from investing, and negative cash flow from operating activities over three consecutive years.

Create a hypothetical scenario with at least four transactions for a company that results in a high Net Profit but a significant negative Net Cash Flow. Describe the transactions and explain their impact.

Formulate a complete 'Cash Flow from Financing Activities' section for a company with the following transactions: Issued equity shares for Rs. 5,00,000; Redeemed 10% preference shares of Rs. 2,00,000; Paid an interim dividend of Rs. 50,000; Took a long-term bank loan of Rs. 1,00,000; and paid interest of Rs. 10,000.

Justify the separate disclosure of cash flows associated with extraordinary items, such as 'Insurance proceeds from earthquake disaster settlement'. Why not just merge them into the relevant activity?

Summarize the treatment of interest and dividend for a non-financial enterprise in a Cash Flow Statement.

Examine the classification of Bank Overdraft in a Cash Flow Statement and explain why it is not treated as a cash equivalent.

A company's cash flow statement shows a large cash outflow for 'Purchase of non-current investments' and a large cash inflow from 'Proceeds from long-term borrowings'. Propose a narrative explaining what this signifies about the company's strategy and evaluate the potential risks.

Describe the primary objectives and benefits of preparing a Cash Flow Statement.

Explain how the following items are treated in a Cash Flow Statement: Bank Overdraft and Income Tax Paid.

Apply your knowledge to calculate the following from the information provided: (a) Depreciation for the year, and (b) Net cash flow from investing activities related to fixed assets. Opening Fixed Assets (at WDV) Rs. 5,00,000; Closing Fixed Assets (at WDV) Rs. 6,80,000; Purchase of Fixed Assets during the year Rs. 2,50,000. A fixed asset with a book value of Rs. 40,000 was sold for Rs. 50,000.

Solve for the Net Cash Flow from Operating Activities using the indirect method. The company's Net Profit before Tax was Rs. 3,00,000. Adjustments include: Depreciation Rs. 60,000; Goodwill amortized Rs. 15,000; Loss on sale of machinery Rs. 20,000; Increase in Trade Receivables Rs. 40,000; Decrease in Trade Payables Rs. 25,000; Income Tax Paid Rs. 50,000.

Calculate the interest paid on debentures from the following data: 12% Debentures on April 1, 2022 were Rs. 4,00,000. On October 1, 2022, additional 12% Debentures of Rs. 2,00,000 were issued. Interest is paid annually on March 31.

Critique the classification of 'Interest received on debentures held as investment' as an investing activity for a non-financial company. Could it be classified differently? Justify your reasoning.

Critique the practice of treating bank overdraft as a financing activity rather than as a negative component of cash and cash equivalents.

As per AS-3, dividend paid is classified as a financing activity. Justify this treatment. Then, formulate a logical argument for why it could alternatively be considered an operating activity.

Explain the three categories of activities into which cash flows are classified according to Accounting Standard-3.

List five specific items that are added back to 'Net Profit before Tax' when calculating cash flow from operating activities using the indirect method, and explain why one of them is added back.

Demonstrate the calculation of 'Cash Paid for Purchase of Machinery' using a Machinery Account from the following details: Opening Balance of Machinery was Rs. 6,00,000, Closing Balance was Rs. 7,50,000. Depreciation charged during the year was Rs. 50,000. A machine with a book value of Rs. 80,000 was sold for Rs. 65,000.

A manufacturing company has consistently shown net profits but has negative cash flow from operating activities. Propose three distinct strategies the management could implement to improve its operating cash flow, justifying each proposal.