Cash Flow Statement - Class 12 Commerce Accountancy - Extra Questions

Answer the following question in only 'one' sentence :
What do you mean by cash flow statement ?

A cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.


What is the difference between schedule of changes in working capital and Fund Flow Statement?

Both are used to find out increase/decrease in working capital. Fund Flow Statements find out the sources and application of working capital and net decrease or increase in working capital with the help of non-current items. Schedule of changes in working capital find out change in working capital with the help of current items. So they can be used to cross-check the answer as both calculate the change in the working capital or flow of fund.


The accountant of 'Nav Jeevan Limited' while preparing Cash Flow Statement added the proposed dividend of the current year to net profit while calculating cash flow from operating activities. Was he correct in doing so ? Give reason. 

Yes, the accountant was correct while adding proposed dividend of the current year to net profits while calculating cash flow from operating activities. This is done in order to compute the correct net profit before tax and extraordinary items. 


State the primary objective of preparing a cash flow statement. 

The primary objective of preparing a cash flow statement is to report the flow of cash and cash equivalents during the period under review (usually a financial year). 


Normally, what should be the maturity period for a short term investment from the date of its acquisition to be qualified as cash equivalents? 

The maturity period for a short term investment from the date of its acquisition should not be more than three months to be qualified as cash equivalents.


State the primary objective of preparing a Cash Flow statement.

Primary objective of preparing cash flow statement is to know net cash flow of company such as cash receipts, cash payment etc.


(A) What are the components of 'Current Ratio'?
(B) What are the different cash inflows and cash outflows of investing activities? 

(A) Current Ratio is a liquidity ratio and is also known as the working capital ratio. It measures the firm's ability to pay the short-term liabilities. It is a ratio between the firm's current assets and current liabilities. Thus, the components of current ratio are current assets like stock, debtors, bills receivable, cash, bank balance, pre-paid expenses, etc. and current liabilities like creditors, bills payable, bank overdraft, outstanding expenses, etc. The ideal current ratio is 1.
Current Ratio = Current Assets/ Current Liabilities

(B) The cash inflows from investing activities are:
1. Sale of assets
2. Sale of investments
3. Collection from loans
4. Receipt of Insurance settlements
The cash outflows are:
1. Purchase of fixed assets
2. Purchase of investments
3. Lending of loans
 


Classify the Following Activities into cash Flows under (A) Operating (B) Investing (C) Financing:
(i) Cash Sales of Goods.
(ii) Income Tax paid.
(iii) Dividend Paid.
(iv) Purchase of Fixed Assets.
(v) Redemption of Debentures.
(vi) Royalty Received.
(vii) Cash paid to the Suppliers
(viii) Rental Income.

Operating Activities : 
(i) Cash Sales of Goods.
(ii) Income Tax paid.
(vi)  Royalty Received.
(vii) Cash paid to the Suppliers.
Investing Activities : 
(iv)  Purchase of Fixed Assets.
(viii) Rental Income.
Financing Activities : 
(v) Redemption of Debentures.


(A) What are the objectives of 'ratios'?
(B) State the various sources of cash inflows from operating activities.

A) Objectives of Ratio Analysis

Interpreting the financial statements and other financial data is essential for all stakeholders of an entity. Ratio Analysis hence becomes a vital tool for financial analysis and financial management. Let us take a look at some objectives that ratio analysis fulfills.

1.Measure of profitability

Profit is the ultimate aim of every organization. So if I say that ABC firm earned a profit of 5lakhs last year, how will you determine if that is a good or bad figure? Context is required to measure profitability, which is provided by ratio analysis. Gross Profit Ratios, Net Profit Ratio, Expense ratio etc provide a measure of profitability of a firm. The management can use such ratios to find out problem areas and improve upon them.

2. Evaluation of operational efficiency

Certain ratios highlight the degree of efficiency of a company in the management of its assets and other resources. It is important that assets and financial resources be allocated and used efficiently to avoid unnecessary expenses. Turnover Ratios and Efficiency Ratios will point out any mismanagement of assets.

3.Ensure suitable liquidity

Every firm has to ensure that some of its assets are liquid, in case it requires cash immediately. So the liquidity of a firm is measured by ratios such as Current ratio and Quick Ratio. These help a firm maintain the required level of short-term solvency.

4.Overall financial strength

There are some ratios that help determine the firm’s long-term solvency. They help determine if there is a strain on the assets of a firm or if the firm is over-leveraged. The management will need to quickly rectify the situation to avoid liquidation in the future. Examples of such ratios are Debt-Equity Ratio, Leverage ratios etc.

5.Comparision

The organizations’ ratios must be compared to the industry standards to get a better understanding of its financial health and fiscal position. The management can take corrective action if the standards of the market are not met by the company. The ratios can also be compared to the previous years’ ratio’s to see the progress of the company. This is known as trend analysis.

B ) In the statement of cash flow, cash flow information is reported within three separate classifications, one of which is operating activities. Operating activities are an entity’s primary revenue-producing activities, so cash flows are generally associated with revenues and expenses.

Examples of cash inflows from operating activities are:

  • Cash receipts from the sale of goods and services
  • Cash receipts from the collection of receivable
  • Cash receipts from lawsuit settlements
  • Cash receipts from the settlement of insurance claims
  • Cash receipts from supplier refunds
  • Cash receipts from licensees

Examples of cash outflows for operating activities are:

  • Cash payments to employees
  • Cash payments to suppliers
  • Cash payments of fines
  • Cash payments to settle lawsuits
  • Cash payments of taxes
  • Cash refunds to customers
  • Cash payments to settle assets retirement obligations
  • Cash payments of interest to creditors
  • Cash payments of contributions

The other two classifications used in the statement of cash flows are Investing activities and Financing activities. The operating activities classification is the default classification, so if a cash flow does not belong in either of the other classifications, it is placed in operating activities.




State the primary objective of preparing 'Cash Flow Statement'.

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 operating, investing and financing activities.


(a) List any four items that are shown under the sub-heading 'Cash and Cash Equivalents' as per Schedule III of the Companies Act, $$2013$$.
 (b) What is meant by a 'Common Size Statement'? 

(a) Cash and Cash Equivalents include the following items. 
(i) Balances with Bank
 (ii) Cheques and drafts-on-hand
 (iii) Cash on hand 
(iv) Others, including any short term investments
 (b) Those statements in which the individual figures of components of statement are converted into percentages to a common base are termed as Common Size Statements. Percentage of each individual item reflects its relation to the respective total. This type of analysis is also known as vertical analysis These statements can be prepared for Balance Sheet as well as Statement of Profit and Loss. 


What is meant by $$'Cash Equivalents ' While preparing Cash Flow Statement?

Cash Equivalents are short-term highly liquid investments that are easily convertible into cash and which are subject to an significant risk of change in value. 

In other words, cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or any other purpose. 

An investment held for short-term maturity say three months, can be regarded as cash equivalent. For Example Treasury Bills, Commercial Papers etc. 


What items should be considered as cash inflows from operating activities?

The following items should be considered as cash inflow from operating activities:
1. Cash receipts from sale of goods and the rendering of services.
2. Cash receipts from royalties, fees, commissions and other revenues.


Give the meaning of Cash Flow Statements.

Cash flow statement is a statement showing the changes in financial position of a business concern during different intervals of time in terms of cash and cash equivalents.


Class 12 Commerce Accountancy Extra Questions