Match List-I with List-II: Choose the correct answer from the options given below:List-I
(Items of cash flow)List-II
(Type of activity)(A) Purchase of tangible assets (I) Operating activity (B) Issue of shares (II) Cash and cash equivalents (C) Increase in current assets (III) Investing activity (D) Marketable securities (IV) Financing activity
(A) - (III), (B) - (IV), (C) - (I), (D) - (II)
Matching Cash Flow Items with Activities
Understanding the statement of cash flows is crucial for analyzing a company's financial health. This statement classifies cash inflows and outflows into three main categories: operating, investing, and financing activities, along with changes in cash and cash equivalents.
Let's examine each item from List-I and determine which type of activity it falls under from List-II.
- (A) Purchase of tangible assets: Tangible assets are long-term assets used in the business operations (like property, plant, and equipment). The purchase or sale of such long-term assets are considered part of a company's investment decisions aimed at future growth. Therefore, this is an Investing activity.
- (B) Issue of shares: Issuing shares involves raising capital by selling ownership stakes in the company. Activities related to changing the size and composition of the owner's capital and borrowed capital are classified as financing activities. Therefore, this is a Financing activity.
- (C) Increase in current assets: Changes in current assets (like accounts receivable, inventory, prepaid expenses) and current liabilities (like accounts payable, accrued expenses) are generally related to the normal day-to-day operations of the business. An increase in current assets (other than cash) typically represents a use of cash (e.g., buying more inventory) or cash not yet received (e.g., increase in accounts receivable). These are part of determining cash flow from Operating activity using the indirect method, or direct cash flows from operations.
- (D) Marketable securities: Marketable securities are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. They are often held as part of a company's cash management strategy and are included in or considered akin to Cash and cash equivalents.
Based on this analysis, we can create the following matching:
| List-I (Items of cash flow) | List-II (Type of activity) | Matching |
|---|---|---|
| (A) Purchase of tangible assets | (III) Investing activity | (A) - (III) |
| (B) Issue of shares | (IV) Financing activity | (B) - (IV) |
| (C) Increase in current assets | (I) Operating activity | (C) - (I) |
| (D) Marketable securities | (II) Cash and cash equivalents | (D) - (II) |
Comparing this matching with the given options, the correct combination is (A) - (III), (B) - (IV), (C) - (I), (D) - (II).
Revision Table: Cash Flow Activities
| Activity Type | Description | Examples (Cash Inflows) | Examples (Cash Outflows) |
|---|---|---|---|
| Operating Activities | Principal revenue-producing activities and other activities that are not investing or financing activities. Generally involves current assets and current liabilities. | Cash receipts from sale of goods/services; Cash receipts from interest and dividends received (for non-financial firms). | Cash payments to suppliers and employees; Cash payments for interest and taxes; Cash payments for operating expenses. |
| Investing Activities | Acquisition and disposal of long-term assets and other investments not included in cash equivalents. Involves non-current assets. | Cash receipts from sale of property, plant & equipment; Cash receipts from sale of investments (stocks, bonds of other companies); Collection of loans made to others. | Cash payments to acquire property, plant & equipment; Cash payments to acquire investments (stocks, bonds of other companies); Making loans to others. |
| Financing Activities | Activities that result in changes in the size and composition of the owner's capital and borrowed capital of the entity. Involves non-current liabilities and equity. | Cash receipts from issuing shares; Cash receipts from issuing bonds, loans, notes, mortgages. | Cash payments to owners (dividends); Cash payments to repay principal amounts of bonds, loans, notes, mortgages; Cash payments to acquire company's own shares (treasury stock). |
| Cash and Cash Equivalents | Cash on hand and demand deposits; Short-term, highly liquid investments readily convertible to cash with insignificant risk of value change (usually maturity < 3 months). |
Additional Information on Cash Flow Classification
The classification of cash flows helps users of financial statements understand how the entity generates and uses cash. It provides insights into the company's liquidity, solvency, and ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities.
The statement of cash flows reconciles the beginning and ending balances of cash and cash equivalents. While operating activities focus on the core business operations, investing activities show cash used for assets that will generate future income, and financing activities show how the company raises and repays capital.
Marketable securities are usually included with cash for reporting purposes if they meet the criteria of cash equivalents. This is because they are so liquid that their value is considered stable, and they are essentially a substitute for holding cash directly.
Understanding these classifications is fundamental for financial analysis and decision-making.
Important Questions from Reconstitution of a Partnership: Change in Profit Sharing Ratio
What are the matters that need adjustments at the time of Reconstitution of partnership?
(A) Preparation of Realisation A/c
(B) Calculation of Sacrificing ratio
(C) Distribution of accumulated profits
(D) Valuation of goodwill
(E) Preparation of partner’s loan A/c
Choose the correct answer from the options given below:
Match List I with List II:
List – I List – II A. Sacrificing Ratio I. New Ratio – Old Ratio B. New Ratio II. Old Ratio – New Ratio C. Gaining Ratio III. Old Ratio + Gaining Ratio D. Value of Goodwill IV. Average profit × No. of years purchase Choose the correct answer from the options given below:
An extract of Balance Sheet as on 31 March 2023:
Liabilities ₹ Assets ₹ Provision for legal damages 4,800 Furniture 41,000 Premises 85,000 Additional Information:
Premises found under-valued by 15% and provision for legal damages to be created up to ₹6,000.
On the basis of above information, the journal entry at the time of reconstitution of firm is:
Book debts were ₹1,00,000 as given in the balance sheet as on 31st March, 2022. On 1st April, 2022 the partners decided to share profits equally instead of distributing the profits in their capital ratio. On the date, bad debts for ₹40,000 were written off and a new provision for doubtful debt is to be maintained @5%. How will you treat their adjustment in revaluation account of the firm?
Which of the following will affect the Revaluation Gain or Loss at the time of reconstitution?
A. Undervaluation of Building
B. Overvaluation of Stock
C. Valuation of Goodwill
D. Reserve appearing in Books
E. Unrecorded Assets
Choose the correct answer from the options given below:
