Chapter cash-flow-statement: Cash Flow Statement Long Questions | accountancy Class 12 CBSE

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Chapter cash-flow-statement: Cash Flow Statement Long Questions | accountancy Class 12 CBSE | ByteNotes.in

Long Answer

Medium difficulty • Structured explanation

Medium

Question 1

Long Form

Describe the procedure to prepare a Cash Flow Statement using the indirect method, explaining the adjustments made at each stage.

The starting point is net profit before tax and extraordinary items. Non-cash items such as depreciation, goodwill amortised, and provisions are added back, since they reduce profit without involving cash outflow.
Non-operating financing expenses (e.g., finance cost/interest paid) are added back, while non-operating investing incomes (e.g., interest received, dividend received, profit on sale of fixed assets) are deducted, as these belong to other activity heads.
Working capital adjustments are made: increase in current assets and decrease in current liabilities are deducted; decrease in current assets and increase in current liabilities are added to arrive at cash generated from operations.
Income tax paid is deducted and the net effect of extraordinary items is adjusted to arrive at net cash from operating activities. Investing and financing cash flows are then listed separately under their respective heads.
The three net figures are summed to give net increase or decrease in cash, which is added to opening cash and cash equivalents to verify the closing balance as per the balance sheet.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 2

Long Form

Compare operating, investing, and financing activities with respect to their nature, examples of inflows and outflows, and significance of their separate disclosure.

Operating activities are the principal revenue-generating activities of an enterprise (e.g., sales, purchases, employee payments); their cash flow indicates the internal solvency and self-sustaining capacity of the enterprise.
Investing activities involve acquisition and disposal of long-term assets and investments (e.g., purchase or sale of machinery, investments); their disclosure reveals how much is being spent to generate future income.
Financing activities relate to changes in capital and borrowings (e.g., issue of shares, repayment of loans, dividend payment); their disclosure helps predict future claims on cash by fund providers.
The same transaction may fall under different heads for different enterprises: interest received is operating for a financial enterprise but investing for a non-financial enterprise, illustrating that classification depends on the nature of the entity's main business.
Separate disclosure under each head allows users to assess liquidity, capital structure decisions, and growth plans of the enterprise, making the cash flow statement far more informative than a simple net cash summary.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 3

Long Form

Analyse the treatment of interest, dividend, and taxes in the cash flow statement for both financial and non-financial enterprises under AS-3.

For a financial enterprise (lending/borrowing as main business), interest paid, interest received, and dividend received are all classified as operating activities since they arise from the core business operations.
For a non-financial enterprise, interest paid and dividends paid are classified as financing activities (they relate to fund providers), while interest received and dividends received are classified as investing activities.
Tax on operating profit is classified as operating cash outflow; capital gains tax paid on sale of fixed assets is classified under investing activities; dividend distribution tax is classified under financing activities along with the related dividend.
AS-3 requires that tax cash flows be separately disclosed; if a specific tax payment cannot be identified with investing or financing, it defaults to operating activities.
This differential treatment ensures that cash flows are accurately reflected under the activity that gave rise to the underlying transaction, making comparisons between different enterprises more meaningful.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 4

Long Form

Explain how non-cash transactions, extraordinary items, and proposed dividends are dealt with in the preparation of a cash flow statement.

Non-cash transactions (e.g., acquisition of machinery by issue of shares, redemption of debentures by issue of shares) do not require the use of cash and are therefore excluded from the cash flow statement as per AS-3.
Such non-cash transactions must be disclosed elsewhere in the financial statements (e.g., Notes to Accounts) to provide relevant information about the investing and financing activities undertaken.
Extraordinary items (e.g., earthquake loss, theft) are non-recurring; their cash flows should be classified and disclosed separately under the relevant activity head (operating, investing, or financing) to help users understand their impact.
Proposed dividend is shown as contingent liability in Notes to Accounts per AS-4; once declared in the Annual General Meeting, the previous year's proposed dividend is treated as declared and paid within the same financial year as a financing outflow.
For the cash flow statement, the previous year's proposed dividend is added back to net profit under operating activities (reversing the debit to surplus) and then shown as a cash outflow under financing activities.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 5

Long Form

Evaluate the benefits of a Cash Flow Statement and explain how it complements the Position Statement and Income Statement in financial analysis.

The Cash Flow Statement reveals the actual cash generation and utilisation of an enterprise, supplementing the accrual-based Income Statement which may show profit even when cash is tight.
It enables users to evaluate the liquidity (ability to meet short-term obligations) and solvency (long-term financial stability) of the enterprise, information not directly available from the Position Statement alone.
It enhances comparability across enterprises by eliminating the effects of different accounting treatments for the same transactions and events, providing a more objective basis for performance assessment.
It helps assess the timing and certainty of future cash flows, allowing investors and creditors to develop models to compare the present value of future cash flows of different enterprises.
It helps in examining the relationship between profitability (shown by Income Statement) and net cash flow, identifying situations where high profit coexists with poor cash generation due to excessive working capital blockage.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 6

Long Form

Discuss how a machinery account and an accumulated depreciation account are used as working notes to calculate cash flows from investing activities.

The Machinery Account is prepared with the opening balance on the debit side and proceeds from sale of machinery on the credit side; the profit or loss on sale is transferred to the Statement of Profit and Loss.
Cash paid for purchase of new machinery is the balancing figure on the debit side of the Machinery Account, representing the investing cash outflow for the period.
The Accumulated Depreciation Account is prepared with the opening balance on the credit side and current year depreciation charged (from Profit and Loss) also on the credit side.
The accumulated depreciation relating to the disposed asset is transferred to the debit side of the Depreciation Account; the closing balance on the credit side represents the net accumulated depreciation at year-end.
The sale proceeds of the machinery (cash inflow) and the purchase cost of new machinery (cash outflow) identified through these accounts are disclosed separately under the head 'Cash Flows from Investing Activities'.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 7

Long Form

How is net profit before tax and extraordinary items ascertained when neither the net profit nor the Statement of Profit and Loss is directly given? Illustrate the approach using balance sheet data.

When net profit is not directly given, it is ascertained by comparing the closing and opening balances of 'Reserve and Surplus' (Balance in Statement of Profit and Loss) in the comparative balance sheets; the difference represents the net profit after tax and after proposed dividend.
To this net profit, the provision for taxation made during the year (difference between closing and opening balances of provision for taxation) is added to arrive at net profit after tax appropriations but before tax.
Any proposed dividend for the current year is also added back, since it was debited to surplus during the year but represents an appropriation of profit, not an operating expense.
This gives the 'Net Profit before Tax and Extraordinary Items', which is the starting point for calculating cash flows from operating activities using the indirect method.
For example: if Surplus rises from Rs. 2,50,000 to Rs. 4,20,000 and provision for tax increases by Rs. 50,000 and proposed dividend is Rs. 50,000, Net Profit before Tax = (4,20,000 – 2,50,000) + 50,000 + 50,000 = Rs. 2,70,000.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 8

Long Form

Examine the classification of cash flows for a transaction where a fixed asset is acquired on deferred payment basis including both interest and loan instalments.

When a fixed asset is acquired on deferred payment basis, each instalment paid comprises two elements: the interest element and the loan repayment (principal) element.
The interest element of the instalment is classified under financing activities for a non-financial enterprise, since interest paid is treated as a financing cash outflow.
The loan (principal) repayment element of the instalment is classified under investing activities, because the loan relates to acquisition of the fixed asset, which is an investing transaction.
This illustrates the principle that a single transaction may include cash flows that are classified differently, requiring the enterprise to bifurcate the payment appropriately.
Correct bifurcation and classification ensures that the cash flow statement accurately reflects the nature of each cash flow and provides users with meaningful information under each activity head.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 9

Long Form

Explain how cash flows from financing activities are ascertained when a company both raises new long-term borrowings and repays existing loans during the year.

A Long-term Loan Account is prepared with the opening balance of existing loans on the credit side and any new loans raised during the year also on the credit side.
The repayment of existing loans is recorded on the debit side; the closing balance of loans is also on the debit side to balance the account.
New borrowings raised (credit side entry) represent a cash inflow under financing activities, while the amount repaid (debit side entry) represents a cash outflow under financing activities.
Both amounts — new borrowings and repayments — must be disclosed separately (gross) under the head 'Cash Flows from Financing Activities' and not netted off, in accordance with AS-3.
The net cash from financing activities from borrowings is the difference between proceeds from new loans and repayments of existing loans, which may be an inflow or outflow depending on the year's transactions.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 10

Long Form

Critically examine the significance of the indirect method in practice and identify the items added and deducted from net profit to arrive at operating profit before working capital changes.

The indirect method is most commonly used by companies in practice because the Statement of Profit and Loss is always available, making it easy to start from net profit and make systematic adjustments.
Non-cash items such as depreciation, goodwill amortised, provision for doubtful debts, and deferred tax are added back to net profit since they reduce profit without any cash outflow.
Non-operating financing expenses (interest paid, finance cost) already deducted in the Profit and Loss Account are added back; non-operating investing incomes (interest received, dividend received, profit on sale of fixed assets) already credited are deducted.
Loss on sale of fixed assets is added back (non-cash non-operating charge) while transfer to general reserve and proposed dividend are also added back since they are appropriations, not expenses.
After these adjustments, the result is 'Operating Profit before Working Capital Changes', which represents the cash that would have been generated if all sales and purchases were on a cash basis; working capital adjustments then convert this to actual cash generated from operations.

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Chapter cash-flow-statement: Cash Flow Statement | Long Questions

Describe the procedure to prepare a Cash Flow Statement using the indirect method, explaining the adjustments made at each stage.

Compare operating, investing, and financing activities with respect to their nature, examples of inflows and outflows, and significance of their separate disclosure.

Analyse the treatment of interest, dividend, and taxes in the cash flow statement for both financial and non-financial enterprises under AS-3.

Explain how non-cash transactions, extraordinary items, and proposed dividends are dealt with in the preparation of a cash flow statement.

Evaluate the benefits of a Cash Flow Statement and explain how it complements the Position Statement and Income Statement in financial analysis.

Discuss how a machinery account and an accumulated depreciation account are used as working notes to calculate cash flows from investing activities.

How is net profit before tax and extraordinary items ascertained when neither the net profit nor the Statement of Profit and Loss is directly given? Illustrate the approach using balance sheet data.

Examine the classification of cash flows for a transaction where a fixed asset is acquired on deferred payment basis including both interest and loan instalments.

Explain how cash flows from financing activities are ascertained when a company both raises new long-term borrowings and repays existing loans during the year.

Critically examine the significance of the indirect method in practice and identify the items added and deducted from net profit to arrive at operating profit before working capital changes.

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