NCERT Class 12 Accountancy Chapter 10 Cash Flow Statement

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NCERT Class 12 Accountancy Chapter 10 Cash Flow Statement

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Cash Flow Statement

Chapter: 10

PART – II

Short Answer Questions: 

1. What is a Cash flow statement? 

Ans: A Cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period. The primary objective of cash flow statement is to provide useful information about cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing activities and financing activities. 

2. How are the various activities classified (as per AS-3 revised) while preparing cash flow statement?

Ans: As per AS-3, these activities are to be classified into three categories: 

(i) operating. 

(ii) investing. and 

(iii) financing activities so as to show separately the cash flows generated (or used) by (in) these activities.

3. State the objectives of the cash flow statement. 

Ans: The primary objective of cash flow statement is to provide useful information about cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing activities and financing activities.This information is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows.

4. What are the objectives of preparing cash flow statement?

Ans: This helps the users of cash flow statement to assess the impact of these activities on the financial position of an enterprise and also on its cash and cash equivalents.

 5. State the meaning of the terms: 

(i) Cash Equivalents.

Ans: Cash equivalents’ means short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. An investment normally qualifies as cash equivalents only when it has a short maturity, of say, three months or less from the date of acquisition. Investments in shares are excluded from cash equivalents unless they are in substantial cash equivalents. 

(ii) Cash flows.

Ans: ‘Cash Flows’ implies movement of cash in and out due to some non-cash items. Receipt of cash from a non-cash item is termed as cash inflow while cash payment in respect of such items as cash outflow. For example, purchase of machinery by paying cash is cash outflow while sale proceeds received from sale of machinery is cash inflow.

6. Prepare a format of cash flow from operating activities. 

Ans:

Cash Flows from Operating Activities (Indirect Method)
(+) Deductions already made in Statement of Profit and Loss on account of Non-cash items such as Depreciation, Goodwill to be Written-off.	xxx
(+) Deductions already made in Statement of Profit and Loss on Account of Non-operating items such as Interest.	xxx
(–)Additions (incomes) made in Statement of Profit and Loss on	xxx
Account of Non-operating items such as Dividend received, Profit on sale of Fixed Assets.	xxx
Operating Profit before Working Capital changes
Add : in case of increase in current assets (other than cash and cash equivalent) and decrease in current liabilities.	xxx
Cash Flows from Operation Activities before Tax and Extraordinary items	xxx
(–) Income Tax Paid	xxx
(+/–) Effects of Extraordinary Items	xxx
Net Cash from Operating Activities	xxx

7. State clearly what would constitute the operating activities for each of the following enterprises: 

(i) Hotel.

Ans: Revenue from restaurant, room service, hosting events like weddings, and parties. Earning from pool, gyms, spa and housekeeping and maintenance like laundry and facilities.

(ii) Film production house.

Ans: Revenue from movies, T.V. shows, other content. Merchandise related to film produced, sponsored, advertising companies products etc.

Expenses related to casting, sets, costume, special effects etc.

(iii) Financial enterprise. 

Ans: Earning from loans and other financial products. Revenue from, securities,stocks and bonds, fees from account management brokerage service, from buying and selling financial instruments.

Cost related to employees salaries, office operations etc.

(iv) Media enterprise.

Ans: Income from advertising on T.V. radio print and online platforms, organising and hosting media-related events, from online and digital services.

Cost and revenue related to producing news, entertainment and other media content. 

(v) Steel manufacturing unit. 

Ans: Revenue from selling various kinds of steel products.

Cost related to the procurement of raw materials, finished goods cost and investment in developing new steel products.

Expenses for maintaining machinery, equipment and facilities.

(vi) Software development business unit. 

Ans: Revenue from creating and selling software products. Income from clients for software solution and maintenance service.

Cost related to development of new technology and products.

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. 

Ans: Yes, the nature or type of an enterprise can change the category into which a particular activity may be classified.For the firm engaged in property sale of building are considered a part of in operation activity whereas for the firm handling general business, purchase or sale of a building is considered associate investment activity.

Long Answer Questions

1. Describe the procedure to prepare Cash Flow Statement. 

Ans: As stated earlier, a cash flow statement provides information about change in the position of Cash and Cash Equivalents of an enterprise, over an accounting period. The activities contributing to this change are classified into operating, investing and financing. The methodology of working out the net cash flow (or use) from all the three activities for an accounting period has been explained in details and a brief format of Cash Flow Statement. However, while preparing a cash flow statement, full details of inflows and outflows are given under these heads including the net cash flow (or use). The aggregate of the net ‘cash flows (or use) is worked out and is shown as ‘Net Increase/Decrease in cash and Cash Equivalents’ to which the amount of ‘cash and cash equivalent at the beginning’ is added and thus the amount of ‘cash and cash equivalents at the end’ is arrived. 

This figure will be the same as the total amount of cash in hand, cash at bank and cash equivalents (if any) given in the balance sheet. Another point that needs to be noted is that when cash flows from operating activities are worked out by an indirect method and shown as such in the cash flow statement, the statement itself is termed as ‘Indirect method cash flow statement’. Thus, the Cash flow statements prepared in many Illustrations under this category as the cash flows from operating activities have been worked out by indirect method. Similarly, if the cash flows from operating activities are worked by direct method while preparing the cash flow statement, it will be termed as ‘direct method Cash Flow Statement’. However, unless it is specified clearly as to which method is to be used, the cash flow statement may preferably be prepared by an indirect method as is done by most companies in practice.

2. Describe “Indirect” method of ascertaining Cash Flow from operating activities. 

Ans: Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. This is so because statement of profit and loss incorporates the effects of all operating activities of an enterprise. However, Statement of Profit and Loss is prepared on accrual basis (and not on cash basis). Moreover, it also includes certain non-operating items such as interest paid, profit/loss on sale of fixed assets, etc.) and non-cash items (such as depreciation, goodwill written-off, divident declared, etc.

As per AS-3, under indirect method, net cash flow from operating activities is determined by adjusting net profit or loss for the effect of:  

(i) Non-cash items such as depreciation, goodwill written-off, provisions, deferred taxes, etc., which are to be added back.  

(ii) All other items for which the cash effects are investing or financing cash flows. The treatment of such items depends upon their nature. All investing and financing incomes are to be deducted from the amount of net profits while all such expenses are to be added back. For example, finance cost which is a financing cash outflow is to be added back while other income such as interest received which is investing cash inflow is to be deducted from the amount of net profit. Dividend declared is a financial activity and is therefore added back to net profit and shown as out flow under financial activity.  

(iii) Changes in current assets and liabilities during the period. Increase in current assets and decrease in current liabilities are to be deducted while increase in current liabilities and decrease in current assets are to be added up.

3. Explain the major Cash Inflows and outflows from investing activities. 

Ans: Cash Outflows from investing activities: 

(i) Cash payments to acquire fixed assets including intangibles and capitalised research and development.  

(ii) Cash payments to acquire shares, warrants or debt instruments of other enterprises other than the instruments those held for trading purposes.  

(iii) Cash advances and loans made to third party (other than advances and loans made by a financial enterprise wherein it is operating activities).

Cash Inflows from Investing Activities:

(i) Cash receipt from disposal of fixed assets including intangibles.  

(ii) Cash receipt from the repayment of advances or loans made to third parties (except in case of financial enterprise).  

(iii) Cash receipt from disposal of shares, warrants or debt instruments of other enterprises except those held for trading purposes.  

(iv) Interest received in cash from loans and advances.  

(v) Dividend received from investments in other enterprises.

4. Explain the major Cash Inflows and outflows from financing activities.

Ans: Cash Inflows from financing activities:

(i) Cash proceeds from issuing shares (equity or/and preference).  

(ii) Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.

Cash Outflows from financing activities:  

(i) Cash repayments of amounts borrowed.  

(ii) Interest paid on debentures and long-term loans and advances.  

(iii) Dividends paid on equity and preference capital.