Accountancy Part Ii Chapter 6 Cash Flow Statement

Flow of cash means the total amount of money being transferred into and out of a business, especially as affecting liquidity. In this question only option c amounts to cash flow. If a machinery of book value 74,000 Rs is sold at a loss of Rs 9,000, the cash inflow will be Rs 65,000. All other options do not constitute a flow of cash in any form but shows mere change in form of assets and liabilities.

In normal case dividend received on investment will be treated as an investment activity. But as this company is a financing company, which is primarily engaged in lending or borrowings of fund, the dividend received on investment is to be written under operating activity. Hence accountant is wrong.

Cash Equivalents are short-term highly liquid investments that are readily convertible into known amount of cash and which are subject to an insignificant risk of change in value. Cash equivalents are held for the purpose of meeting short term commitments rather than for investments or other purpose. For Example Treasury Bills, Commercial Papers etc.

The foremost objective to prepare a Cash Flow Statement is to ascertain the gross inflows and outflows of cash and cash equivalents from various activities of a business.

Dividend received by a financial company is classified under operating activity while preparing Cash Flow Statement.

Operating activities are the principal revenue producing activities of the enterprise. Cash flow from operating activities are derived from the principal revenue producing activities of the business. In other words, cash from Operating Activities means receipts of cash and cash equivalents in exchange of sale of produced goods and services.

The important objectives for preparing Cash Flow Statement are as follows.
i. It helps to ascertain the gross inflows and outflows of cash and cash equivalents from various activities.
ii. Secondly, Cash Flow Statement helps in analysing various reasons responsible for the changes in the cash balances during an accounting year. 

For an Investment Company, payment of cash to acquire debentures is as an operating activity. As for them it is a part of their daily business operation.

‘Cash Flows’ is the movement of cash in and out of non-cash items. Receipt of cash from a non-cash item is termed as cash inflow whereas cash payment in respect of such items as cash outflow.

Cash deposited into bank will result into a no flow of cash, as it is simply a movement between item of cash and cash equivalent.

Such a cash flow will be classified under ‘Operating Activity’.

Cash Equivalents are short-term highly liquid investments that can be readily convertible into cash and are subject to an insignificant risk of change in value. They are held for the purpose of meeting short-term cash commitments. A few of the examples of cash equivalents are treasury bills, commercial bills, call money etc.

(i) In case there is a decrease in current liability of employee benefit expenses being due, it would be treated as an item of working capital changes. Accordingly, decrease in current liability would be treated as an outflow of cash from operating activities.
(ii) Increase in Prepaid Insurance is treated as increase in current assets which is treated as decrease in cash flow (or outflow) from operating activities.

No, acquisition of machinery by issue of equity shares is not considered while preparing cash flow statement. This is because, in the above case, no flow of cash is involved, leaving the Cash Flow Statement unaffected.