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

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

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 1

Applied Concept

Anand Ltd. earned a net income of Rs. 5,00,000 for the year. Depreciation charged was Rs. 2,00,000. Profit on sale of assets of Rs. 50,000 was transferred to the Statement of Profit and Loss. Trade Receivables increased by Rs. 40,000 and Trade Payables increased by Rs. 60,000. Calculate cash flows from operating activities using the indirect method.

Net Profit: Rs. 5,00,000. Add: Depreciation Rs. 2,00,000 (non-cash). Less: Profit on sale of assets Rs. 50,000 (investing income). Operating profit before working capital = Rs. 6,50,000.
Working capital adjustments: Less Increase in Trade Receivables Rs. 40,000 (current asset increase). Add Increase in Trade Payables Rs. 60,000 (current liability increase). Net adjustment = +Rs. 20,000.
Net Cash from Operating Activities = Rs. 6,50,000 + Rs. 20,000 = Rs. 6,70,000. This positive figure indicates strong internal cash generation from operations.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 2

Applied Concept

With reference to the treatment under AS-3, classify the following items for Reliance Manufacturing Ltd. (a non-financial enterprise): (i) Interest paid on debentures, (ii) Dividend received on shares held as long-term investment, (iii) Income tax paid on operating profit, (iv) Proceeds from issue of equity shares.

Interest paid on debentures: Financing activity (cash outflow), since it is a cost of long-term borrowing for a non-financial enterprise and is added back in operating activities before being shown as financing outflow.
Dividend received on shares held as long-term investment: Investing activity (cash inflow), since it represents a return on a long-term investing decision by the non-financial enterprise.
Income tax paid on operating profit: Operating activity (cash outflow), classified here unless specifically identifiable with financing or investing; proceeds from issue of equity shares: Financing activity (cash inflow) as it changes the size of owners' capital.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 3

Applied Concept

Pioneer Ltd.'s equipment account showed an opening balance of Rs. 2,00,000. During the year, new equipment costing Rs. 80,000 was purchased. One equipment was sold and the accumulated depreciation on it was Rs. 15,000; depreciation for the year was Rs. 15,000; loss on sale was Rs. 5,000; closing balance of equipment was Rs. 2,30,000. Calculate the sale proceeds and cash flows from investing activities.

From the Equipment Account: Opening Rs. 2,00,000 + Cash purchase Rs. 80,000 – Depreciation Rs. 15,000 – Sale (Bank Rs. 30,000 + Loss Rs. 5,000) = Closing Rs. 2,30,000. Sale proceeds (cash) = Rs. 30,000.
Verification: Cost of sold asset = Rs. 2,00,000 + Rs. 80,000 – Rs. 2,30,000 + (Rs. 30,000 + Rs. 5,000 – Rs. 15,000) = Rs. 50,000 – Accumulated depreciation Rs. 15,000 = Book value Rs. 35,000 – Loss Rs. 5,000 = Rs. 30,000 proceeds.
Cash flows from Investing Activities: Proceeds from sale of equipment (inflow) Rs. 30,000; Purchase of new equipment (outflow) Rs. 80,000; Net cash used in investing activities Rs. 50,000 (outflow).

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 4

Applied Concept

Welprint Ltd. had long-term loans of Rs. 2,00,000 on April 1, 2016, and Rs. 2,50,000 on March 31, 2017. During the year, the company repaid a loan of Rs. 1,00,000. Calculate the new loan raised and prepare the cash flows from financing activities.

Long-term Loan Account: Opening balance Rs. 2,00,000 + New loan raised (balancing figure) = Cash repaid Rs. 1,00,000 + Closing balance Rs. 2,50,000. New loan raised = Rs. 1,50,000.
Cash flows from Financing Activities: Proceeds from long-term borrowings (inflow) Rs. 1,50,000; Repayment of long-term borrowings (outflow) Rs. 1,00,000.
Net cash inflow from Financing Activities = Rs. 50,000. Gross inflows and outflows are disclosed separately as required by AS-3, not netted off.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 5

Applied Concept

With reference to the cash flow statement of Oswal Mills Ltd., how is the 'loss due to earthquake' treated? The loss amounted to Rs. 1,100 lakhs. Also state how net profit before tax and extraordinary items was calculated given net profit after tax was Rs. 700 lakhs, tax paid Rs. 1,000 lakhs, and earthquake loss Rs. 1,100 lakhs.

Loss due to earthquake is an extraordinary item (non-recurring in nature) and its cash impact should be classified and disclosed separately in the cash flow statement as per AS-3.
It is shown separately after 'Cash Flow before Extraordinary Items' under operating activities: Cash Flow before Extraordinary Items Rs. 2,500 lakhs – Earthquake loss Rs. 1,100 lakhs = Net Cash from Operating Activities Rs. 1,400 lakhs.
Net Profit before Tax and Extraordinary Items = Profit after tax Rs. 700 + Tax paid Rs. 1,000 + Earthquake loss Rs. 1,100 = Rs. 2,800 lakhs. Adding back tax and extraordinary item gives the pre-tax, pre-extraordinary profit.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 6

Applied Concept

A student is preparing a cash flow statement. He has included 'purchase of short-term marketable securities (cash equivalents)' as an investing cash outflow. Is this treatment correct? Explain with reference to AS-3.

The treatment is incorrect. As per AS-3, cash management includes the investment of excess cash in cash equivalents such as short-term marketable securities.
Since cash equivalents are treated as part of cash and cash equivalents, their purchase represents a conversion of cash into another form of cash equivalent, not a separate investing activity.
Therefore, purchase of short-term marketable securities that qualify as cash equivalents should not be shown in the cash flow statement at all — they are simply a component of the opening and closing cash and cash equivalents balance.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 7

Applied Concept

Charles Ltd. made a profit of Rs. 1,00,000 after charging depreciation of Rs. 20,000 and a transfer to General Reserve of Rs. 30,000. Goodwill amortised was Rs. 7,000 and gain on sale of machinery was Rs. 3,000. Ascertain the operating profit before working capital changes.

Net profit before tax: Rs. 1,00,000 + Transfer to General Reserve Rs. 30,000 = Rs. 1,30,000 (General Reserve is an appropriation of profit, not an expense).
Add non-cash items: Depreciation Rs. 20,000 + Goodwill amortised Rs. 7,000 = Rs. 27,000. Less non-operating income: Gain on sale of machinery Rs. 3,000 (investing inflow deducted from operating).
Operating Profit before Working Capital Changes = Rs. 1,30,000 + Rs. 27,000 – Rs. 3,000 = Rs. 1,54,000.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 8

Applied Concept

In preparing the cash flow statement of a non-financial company, the accountant has classified 'dividend received on investments' under operating activities. Is this correct? What is the correct treatment and the implication of misclassification?

This classification is incorrect for a non-financial enterprise. As per AS-3, dividend received on investments is classified under investing activities, since it represents a return on long-term investment decisions.
Correct treatment: Deduct dividend received from net profit while computing operating activities (remove it from operating), then show it as a cash inflow under 'Cash Flows from Investing Activities'.
Misclassification overstates operating cash flows and understates investing cash flows, misleading users about the enterprise's ability to generate cash internally from its core operations as distinct from its investment portfolio.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 9

Applied Concept

With reference to the cash flow statement, how would you treat the following items for a non-financial company: (i) redemption of preference shares for Rs. 1,00,000; (ii) rent received on a plot of land held as investment Rs. 30,000; (iii) underwriting commission paid Rs. 20,000?

Redemption of preference shares (Rs. 1,00,000): This is a financing activity cash outflow since it reduces the size of owners' capital (preference share capital), resulting in a change in the capital structure.
Rent received on a plot of land held as investment (Rs. 30,000): This is an investing activity cash inflow since it is a return on a non-current investment (investment property); it is deducted from net profit in operating activities and shown as inflow under investing.
Underwriting commission paid (Rs. 20,000): This is a financing activity cash outflow since it is a cost directly related to the issue of securities (a financing activity), not related to the main operating activities of the enterprise.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 10

Applied Concept

From the following information, determine the amount of income tax paid during the year using the Provision for Taxation Account: Opening provision Rs. 10,000; Tax charged to Profit and Loss for the year Rs. 8,000; Closing provision Rs. 13,000.

Provision for Taxation Account: Credit side — Opening balance Rs. 10,000 + Current year provision Rs. 8,000 = Rs. 18,000.
Debit side — Income tax paid (balancing figure) + Closing balance Rs. 13,000 = Rs. 18,000. Therefore, Income Tax Paid = Rs. 18,000 – Rs. 13,000 = Rs. 5,000.
This Rs. 5,000 (income tax paid) is deducted after 'Cash generated from Operations' to arrive at 'Net Cash from Operating Activities' in the indirect method cash flow statement.

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Chapter sections

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

Welprint Ltd. had long-term loans of Rs. 2,00,000 on April 1, 2016, and Rs. 2,50,000 on March 31, 2017. During the year, the company repaid a loan of Rs. 1,00,000. Calculate the new loan raised and prepare the cash flows from financing activities.

A student is preparing a cash flow statement. He has included 'purchase of short-term marketable securities (cash equivalents)' as an investing cash outflow. Is this treatment correct? Explain with reference to AS-3.

Charles Ltd. made a profit of Rs. 1,00,000 after charging depreciation of Rs. 20,000 and a transfer to General Reserve of Rs. 30,000. Goodwill amortised was Rs. 7,000 and gain on sale of machinery was Rs. 3,000. Ascertain the operating profit before working capital changes.

In preparing the cash flow statement of a non-financial company, the accountant has classified 'dividend received on investments' under operating activities. Is this correct? What is the correct treatment and the implication of misclassification?

With reference to the cash flow statement, how would you treat the following items for a non-financial company: (i) redemption of preference shares for Rs. 1,00,000; (ii) rent received on a plot of land held as investment Rs. 30,000; (iii) underwriting commission paid Rs. 20,000?

From the following information, determine the amount of income tax paid during the year using the Provision for Taxation Account: Opening provision Rs. 10,000; Tax charged to Profit and Loss for the year Rs. 8,000; Closing provision Rs. 13,000.

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