Fund Flow and Cash Flow Statements Questions and Answers

Answer: D

Cash payments to and on behalf of employees are not a financing activity. In a cash flow statement they are part of operating activities, because they arise from running the business. Financing activities are those that change the size and make-up of owners' capital and borrowings: redemption of debentures, cash proceeds from issuing debentures and cash proceeds from issuing shares all fall under them. So the fourth option is the one that is not financing.

Answer: A

A decrease in working capital is a source of funds in a fund flow statement. When the schedule of changes in working capital shows that working capital has fallen, funds have been released from it and are treated as a source, while an increase in working capital is an application of funds. Redemption of debentures, payment of dividends and tax, and funds lost through business operations are uses or applications of funds, since they take funds out of the business.

Answer: C

Cash flow from operating activities is ₹ 1,20,000.

Under the indirect method, start from profit, add back non-cash charges and adjust for changes in working capital. A decrease in debtors means cash was collected, so it is added.

\[ \begin{aligned} \text{CFO} &= 80{,}000 + 15{,}000 + 25{,}000 \\ &= 1{,}20{,}000 \end{aligned} \]

₹ 55,000 and ₹ 40,000 come from treating the decrease in debtors (and depreciation) as deductions; ₹ 65,000 deducts depreciation instead of adding it back.

Answer: C

A cash flow statement does not show Whether credit limit is breached.

The statement records the actual inflows and outflows of cash in the period, classified into operating, investing and financing activities. The purchase of a machine appears under investing activities, a new loan under financing activities, and the change in working capital is part of the adjustments in the operating section.

Whether a firm has exceeded the credit limit sanctioned by its bank, or allowed customers to exceed theirs, is a matter of comparing a balance with an agreed limit. That limit is not a cash flow, so nothing in the statement reveals a breach.

Answer: B

A source of funds comes from a decrease in current assets and an increase in current liabilities, so the pair (ii) and (iii) is correct. When a current asset such as stock or debtors falls, cash is released for use elsewhere. When a current liability such as creditors rises, the firm has financed itself from suppliers, which also provides funds.

An increase in current assets and a decrease in current liabilities are the reverse: they are uses of funds because cash is tied up in stock and debtors or paid out to settle creditors. Hence (i) and (iv), (i) and (iii) and (ii) and (iv) each include at least one use of funds.

Answer: A

Realisation of cash from debtors will not affect the working capital. It only turns one current asset, debtors, into another current asset, cash, so the total of current assets and the working capital stay the same. Sale of plant and machinery for cash brings in money from a fixed asset and increases current assets, so working capital rises. Issue of equity shares raises cash, which also increases working capital. Redemption of debentures pays out cash and so reduces working capital. Only the first of the four leaves working capital unchanged, so option A is right.

Answer: C

The statement of changes in working capital is the basis of the funds flow statement (c). Deferred tax is shown in the balance sheet as an asset or liability (d). The three activities of operating, investing and financing are the structure of the cash flow statement (a), and an impairment loss relates to fixed assets (b). That gives the code (c) (d) (a) (b). The impairment loss is a reduction in the carrying amount of an asset below the recoverable amount, which is why it goes with fixed assets.

Answer: C

The statement of cash flows under AS-3 includes operating and non-operating cash flow information. It reports the actual flow of cash classified into operating, investing and financing activities.

Conversion of debt to equity, acquiring an asset through a lease, and buying a building by giving a mortgage to the seller are non-cash transactions: no cash moves, so they are not shown in the statement itself and are disclosed elsewhere in the financial statements.