NCERT Solutions for Class 12 Accountancy Part II Chapter 6 Cash Flow Statement

Q. If the net profits earned during the year is ₹50,000 and the amount of debtors in the beginning and the end of the year is ₹10,000 and ₹20,000 respectively, then the cash from operating activities will be equal to__________(₹40,000/₹60,000).

Ans. ₹40,000

Q. If the net profits made during the year are ₹50,000 and the bills receivables have decreased by ₹10,000 during the year then the cash flow from operating activities will be equal to __________(₹40,000/₹60,000)

Ans. ₹60,000

Q. An increase in accrued income during the particular year is__________the net profit. (added to/deducted from)

Ans. deducted from

Q. For calculating cash flow from operating activities, provision for doubtful debts is__________the profit made during the year (added to/deducted from)

Ans. added to

Q. Goodwill amortised is_________the profit made during the year for calculating the cash flow from operating activities. (added to/deducted from).

Ans. added to

Q. How the various activities are classified (as per AS-3 revised) while preparing Cash Flow Statement.

Ans. As per Accounting Standard-3 various activities of Cash Flow Statement are classified into three categories as follows:

  • (i) Operating Activities : These are the principal revenue producing activities of the enterprise and other activities. The Cash Flow Statement begins with the operating activities section. Operating activities generally reflect cash generated and/or paid as a result of the firm’s core business functions. This category incorporates the cash received from customers, paid to suppliers, paid for operating costs, paid for income taxes, received from interest or dividends, and paid for periodic interest costs.
  • (ii) Investing Activities : These are the acquisition and disposal of long-term assets, other investments not included in cash equivalents. Cash flows from investing activities are those involving non-current capital assets used in the firm’s operations, such as Property, Plant, Equipment (P & E) and intangible assets. When a company invests in new long-term capacity by acquiring either P& E or another company, the investment is a cash outflow from investing activities. Disposals of these types of assets for cash generate inflows.
  • (iii) Financing Activities: These are the activities that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise. Cash flows from financing activities are those that take place between a firm and its investors. These include both the equity investments of stockholders (owners) and the loans from bondholders and other creditors. When the company issues new shares, it records a cash inflow from financing, and when it repurchase shares pays dividends or pays off debt, it records a cash outflow.

Q. State the uses of Cash Flow Statement.

Ans. The various uses of Cash Flow Statement are as follows:

  • (i) First of all a Cash Flow Statement along with other financial statements provides information that enables users to evaluate changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timings of cash flows in order to adapt to changing circumstances and opportunities.
  • (ii) Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises.
  • (iii) It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.
  • (iv) Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also helpful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and impact of changing prices.

Q. What are the objectives of preparing Cash Flow Statement?

Ans. The various objectives of preparing Cash Flow Statement are as follows:

  • (i) The first and most important objective of Cash Flow Statement is that it helps to ascertain the gross inflows and outflows of cash and cash equivalents from operating, investing and financial activities.
  • (ii) A Cash Flow Statement helps in determining the various causes for change in the cash balances during and accounting period.
  • (iii) A Cash Flow Statement is also prepared to determine the liquidity position of the organisation.
  • (iv) Moreover a Cash Flow Statement is prepared to know about the requirement of cash in future.

Q. Now that you know the meaning of operating activities, state clearly what would constitute the operating activities for the following types of enterprises:

  • (i) Hotel
  • (ii) Film production house
  • (iii) Financial enterprise
  • (iv) Media enterprise
  • (v) Steel manufacturing unit
  • (vi) Software business unit.

Ans. Operating Activities : As we know that these are the principal revenue producing activities of the enterprise and other activities. Operating activities generally reflect cash generated and/or paid as a result of the firm’s core business functions. Hence, the following will be the operating activities in the above mentioned enterprises respectively.

  • (i) In Case of a Hotel : Receipts from sale of goods and services to the customer will be operating activity related to revenue generation. And payment of wages and salaries, electricity, food items and other items used in accommodation and stay of customer will be operating activities related to expenditure.
  • (ii) Film Production House: In case of film production house, revenue generating operating activity would be its receipts from selling film rights of a film to the distributors and its operating activity related to expenditure would be payment made to the staff members, unit, actors, actresses, directors location rent and air fare, etc.
  • (iii) Financial Enterprise: In case of a financial enterprise like bank the receipts from repayment of loans, interest incomes from investments, etc. will be considered as revenue generating operating activity and repayment of loans, recovery expenditure for recover of loans, etc., salaries of employees will be considered as operating activity related to the expenditure.
  • (iv) Media Enterprise: A media enterprise is involved in service industry and its revenue generating operating activity would be receipts from advertisements. Expenditure related operating activity would be payments to staff, reporters, photographers, etc.
  • (v) Steel Manufacturing Unit: The main source of revenue for a steel manufacturing unit would be its receipts from sale of steel sheets, steel castings, steel rods, etc. Expenditure related operating activity would be payment for raw material (iron, coal), salaries to staff, etc.
  • (vi) Software Business Unit: A software business unit is basically a service providing unit which get its revenue through receipts from sale of software and renewal of licenses as an operating activity and various payment made by it in the form of salaries to its employees, etc., is the part of operating activity as expenditure.