Class 12 Accountancy Important Chapter 10 Cash Flow Statement

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Class 12 Accountancy Important Chapter 10 Cash Flow Statement

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Cash Flow Statement

Chapter: 10

Part B: Company Accounts and Analysis of Financial Statements

IMPORTANT QUESTION AND ANSWER

Answer the Following Question:

1. Why is the cash flow statement important for investors?

Ans: The cash flow statement provides investors with insights into a company’s ability to generate cash, revealing whether the business can meet obligations, pay dividends, and invest in growth, making it essential for sound investment decisions.

2. What are cash equivalents, according to AS-3?

Ans: Cash equivalents are short-term, highly liquid investments that can be readily converted into known amounts of cash with insignificant risk of value changes, typically maturing in three months or less from acquisition.

3. How does the cash flow statement differ from the income statement?

Ans: While the income statement reports a company’s profits over a period, the cash flow statement focuses on actual cash inflows and outflows, offering a clearer view of liquidity and cash management.

4. What is classified as an investing activity in a cash flow statement?

Ans: Investing activities include cash flows related to the purchase and sale of long-term assets such as machinery, land, or investments, excluding items classified as cash equivalents.

5. When preparing a cash flow statement, why are non-cash transactions excluded?

Ans: Non-cash transactions, like asset acquisition through share issuance, do not involve cash movement, so they are excluded to accurately reflect only cash-based changes in financial position.

6. How does the direct method of calculating cash flows from operations work?

Ans: The direct method lists all major classes of gross cash receipts and payments, directly presenting the actual cash collected and spent during the period from core business activities.

7. What is meant by ‘extraordinary items’ in cash flow statements?

Ans: Extraordinary items are rare, non-recurring events—such as natural disasters or theft—whose cash effects are shown separately to help users assess their impact on current and future cash flows.

8. How are interest and dividend payments classified in non-financial enterprises?

Ans: For non-financial enterprises, interest and dividend payments are classified as financing activities, whereas receipts of interest and dividends are considered investing activities.

9. What impact does an increase in trade receivables have on operating cash flow?

Ans: An increase in trade receivables is deducted from net profit when calculating cash flows from operating activities since it represents revenue not yet collected in cash.

10. Why might the classification of an activity differ between enterprises?

Ans: The nature of a company’s business can change how activities are classified; for instance, purchasing shares is an operating activity for a brokerage but an investing activity for other firms.

Fill in the Blanks: 

1. The statement that shows inflows and outflows of cash and cash equivalents during a period is called the __________ statement.

Ans: Cash flow statement.

2. Cash equivalents are short-term, highly liquid investments with maturities of __________ months or less from the date of acquisition.

Ans: Three.

3. Purchase of machinery is classified as a/an __________ activity in a cash flow statement.

Ans: Investing.

4. Cash receipts from customers are recorded under __________ activities.

Ans: Operating.

5. The issue of equity shares for cash is a/an __________ activity.

Ans: Financing.