Cash Flow Statement

Step 1: Define clearly.
A Cash Flow Statement (CFS) explains the change between opening and closing cash/bank balances by grouping movements into: - \emph{Operating activities} (core business), - \emph{Investing activities} (long-term assets/investments), and - \emph{Financing activities} (owners’ funds/borrowings).
Step 2: State the key uses.
1) \emph{Liquidity & solvency assessment} — shows whether the firm can pay obligations and dividends in cash.
2) \emph{Quality of earnings} — separates accrual profit from actual cash generation.
3) \emph{Planning & control} — supports budgeting for capex, debt repayments and working-capital needs.
4) \emph{Decision-making} — timing of borrowing/repayment, dividend policy, and investment disposal/acquisition.
5) \emph{Reconciliation} — bridges Net Profit and Net Cash from Operating Activities (Direct/Indirect method).
6) \emph{Comparability} — standard classification enables inter-period and inter-firm comparison.
Step 3: Conclusion.
Thus, CFS is a period statement focused on \emph{cash}, not accruals, and is indispensable for liquidity management and financing decisions.
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Step 1: Define investing activities.
They relate to acquisition/disposal of long-term assets and investments.
Step 2: List outflows (any two).
- Cash paid to acquire fixed assets (land, buildings, plant, patents). - Cash paid to acquire shares/debentures/other securities (long-term). (Also acceptable: advances/loans to other parties.)
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Step 1: Explain the statement.
A Cash Flow Statement reconciles opening and closing cash/bank by classifying movements into Operating, Investing and Financing activities.
Step 2: Core objectives.
1) \emph{Evaluate liquidity}—ability to pay obligations and dividends. 2) \emph{Assess cash generation} from operations separate from investing/financing. 3) \emph{Facilitate decisions} on capital expenditure, financing mix and working-capital management. 4) \emph{Enable comparison} across firms/periods by focusing on cash rather than accrual profits.
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Step 1: Classification of cash flows.
- Operating activities → Day-to-day activities like sales, purchases, wages.
- Investing activities → Buying/selling fixed assets, investments.
- Financing activities → Transactions relating to capital and borrowings.
Step 2: Check each option.
- (A) Sale of goods → Operating activity.
- (B) Sale of investment → Investing activity.
- (C) Cash receipt from issue of shares → Financing activity (raising capital).
- (D) Interest received → Investing activity.
Step 3: Conclude.
Thus, “Cash receipt from issue of shares” is a cash flow from financing activities.
Final Answer:

Step 1: Application vs. source of cash.
- Application of cash = Uses of cash, i.e., where cash goes out (increase in assets or decrease in liabilities).
- Source of cash = Inflow of cash, i.e., where cash comes in (increase in liabilities or decrease in assets).
Step 2: Check each option.
- (A) Increase in Debtors → Application of cash (more credit sales = less cash).
- (B) Increase in Creditors → This is a source of cash (firm gets goods on credit, no cash outflow).
- (C) Increase in Stock → Application of cash (cash spent to buy stock).
- (D) Increase in Prepaid Expenses → Application of cash (advance payment reduces cash).
Step 3: Conclude.
Therefore, “Increase in Creditors” is not an application of cash.
Final Answer:

Step 1: Types of activities in Cash Flow Statement.
- Operating activities: Core business activities like cash from customers, payments to suppliers.
- Investing activities: Relating to purchase/sale of fixed assets or investments.
- Financing activities: Relating to raising/repaying capital or loans.
Step 2: Classification of purchase of building.
Building is a fixed asset. Its purchase is an outflow of cash for investment in assets.
Step 3: Conclude.
Therefore, cash purchase of building will be classified as an investing activity.
Final Answer:

Step 1: Sources of data for Cash Flow Statement.
- From Balance Sheet: To find changes in assets and liabilities.
- From Profit & Loss A/c: To calculate net profit and adjustments.
- From Additional Information: For non-cash transactions, dividend paid, tax paid, etc.
Step 2: Conclude.
Since all three sources are required, the answer is “All of these”.
Final Answer:

Step 1: Recall Cash Flow classification.
- Operating activities: related to day-to-day business operations.
- Financing activities: related to raising funds (equity, debentures, loans).
- Investing activities: related to purchase or sale of fixed assets and investments.
Step 2: Identify the activity.
Sale of marketable securities represents disposal of an investment. Hence, it is an “investing activity”.
Step 3: Conclude.
Thus, the sale of marketable securities is shown under Investing Activities.
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