Test: Cash Flow Statement - 2

Purchase of shares or debentures are concerned with investing activities. It means a firm is investing in other firm’s shares or debentures.

Buy back of shares is concerned with financing activities. This is the situation where one company is buying its own shares form the open market.

Repayment of long term loans is concerned with financing activities. Cash is going out in the form of repayment of long term loans.

Income tax is concerned with only operating activities. Tax paid is deducted at the end while calculating Cash flow from operating activities.

Cash Equivalents are highly liquid assets which can be converted into cash in a very short period of time.

The correct option is C.

Financing activities are transactions or business events that affect long-term liabilities and equity. In other words, financing activities are transactions with creditors or investors used to fund either company operations or expansions.The general philosophy is that dividend payments are considered to be Financing Activities because these are payments to the investors (shareholders) who actually are co-financing the company. These dividend payments may be interpreted as "variable interests" to the investors of equity for their risk taken in the company .

Following are the cash inflows except goods purchased in cash: Goods sold in cash Interest received on investment Sale of asset at loss

The various activities operating, investing and financing classified as per Accounting Standard – 3 (AS- 3 Revised) related to cash flow statement

Short term investments which can be converted into cash in a very short period of time is treated as cash equivalents.

Cash and Cash Equivalents do not include inventories but following items are part of cash and cash equivalents:
•Cheques in hand
•Cash in hand
•Cash at bank

Internal movement in cash and cash equivalents will not make any effect. Cash credit is not part of cash and cash equivalents. It is part of financing activities.

Cash Flow statement cannot help in judging the profitability of the enterprise because it just tell about the cash inflows and outflows.

The main revenue generating activity is the operating activities.

Decrease in current assets (inventory) will be added while calculating cash flow from operating activities.

When provision for depreciation account is maintained separately in such a case at the time of sale of asset two accounts are prepared (i) Asset Account (ii) Provision for Depreciation Account or Accumulated Depreciation Account.

Operating activities is mainly concerned with current assets and current liabilities.

Decrease in the value of Trade Receivables will be added in operating activities while preparing cash flow statement.

Purchase and Sales of Shares by a manufacturing company comes under Investing activities.