CUET UG Accountancy Booster Test 2 Cash Flow Activities Classification -

🚀

CUET UG Accountancy Booster Test 1 Cash Flow Activities Classification

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 1 Cash Flow Activities Classification

1 / 20

QUESTION 1 OF 20

Revenue from operations = ₹60,000. Other income = ₹5,000 (including Profit on Sale of Machinery ₹2,000 and Income Tax Refund ₹3,000). While calculating Operating Profit before Working Capital Changes under the indirect method, how is Profit on Sale of Machinery treated?

Answer Review

1 Revenue from operations = ₹60,000. Other income = ₹5,000 (including Profit on Sale of Machinery ₹2,000 and Income Tax Refund ₹3,000). While calculating Operating Profit before Working Capital Changes under the indirect method, how is Profit on Sale of Machinery treated?

A Added to Net Profit

B Deducted from Net Profit before Tax

C Ignored completely

D Treated as a Cash Equivalent

💡 Short Explanation

Profit on sale of machinery is a non-operating income. It belongs to investing activities. Therefore, it is deducted while calculating operating profit.

✅ Correct Answer Explanation

Under the indirect method, Net Profit before Tax includes profit on the sale of machinery. Since this profit arises from an investing activity and not from normal business operations, it must be deducted from net profit to arrive at operating profit before working capital changes.

❓ Why Other Options Are Incorrect

Option A → Non-operating income is not added.
Option C → Adjustment is required.
Option D → It is not a cash equivalent.

🎯 Strategy

Used: Classification Adjustment

Application: Remove non-operating incomes from operating profit.

Final Logic: Profit on asset sale must be deducted.

🧠 Memory Trick

Asset Sale Profit = Deduct from Operating Profit

📚 Class XII – Accountancy Part II – Cash Flow Statement – Operating Activities

2 Net Profit before Tax = ₹17,000. Depreciation = ₹5,000, Goodwill Amortised = ₹2,000, Loss on Sale of Equipment = ₹3,000. What is the Operating Profit before Working Capital Changes?

A ₹24,000

B ₹17,000

C ₹27,000

D ₹22,000

💡 Short Explanation

Add non-cash expenses. Add loss on sale of equipment. Total operating profit = ₹27,000.

✅ Correct Answer Explanation

Operating Profit before Working Capital Changes = Net Profit before Tax + Depreciation + Goodwill Amortised + Loss on Sale of Equipment = ₹17,000 + ₹5,000 + ₹2,000 + ₹3,000 = ₹27,000

❓ Why Other Options Are Incorrect

Options A, B and D omit one or more adjustments.

🎯 Strategy

Used: Substitution

Application: Add all non-cash and non-operating losses.

Final Logic: ₹27,000 is the adjusted operating profit.

🧠 Memory Trick

Non-Cash Expenses? Add Back

📚 Class XII – Accountancy Part II – Cash Flow Statement – Operating Activities

3 Under the indirect method, how is a decrease in Trade Receivables treated while calculating cash generated from operations?

A Deducted from operating profit

B Added to investing activities

C Ignored as a non-cash item

D Added to operating profit before working capital changes

💡 Short Explanation

Decrease in receivables means cash has been collected. Cash inflow increases operating cash. Therefore added.

✅ Correct Answer Explanation

A decrease in Trade Receivables indicates collection from customers. Since cash has increased, the decrease is added to operating profit while calculating cash generated from operations.

❓ Why Other Options Are Incorrect

Option A → Used for increase in receivables.
Option B → Not an investing activity.
Option C → Working capital adjustments are required.

🎯 Strategy

Used: Working Capital Analysis

Application: Receivables decrease = Cash increase.

Final Logic: Add the decrease.

🧠 Memory Trick

Receivables ↓ = Cash ↑

📚 Class XII – Accountancy Part II – Cash Flow Statement – Operating Inflows

4 Assertion (A): Trading commission received is classified as an operating activity.
Reason (R): It constitutes the principal revenue-generating activity for the enterprise.

A Both A and R are true and R is the correct explanation of A.

B Both A and R are true but R is not the correct explanation.

C A is true, R is false.

D A is false, R is true.

💡 Short Explanation

Commission income is operational revenue. It arises from normal business activity. Reason correctly explains assertion.

✅ Correct Answer Explanation

Trading commission forms part of the enterprise's principal revenue-generating activities and therefore is classified as an operating activity.

❓ Why Other Options Are Incorrect

Reason correctly explains assertion.
Neither statement is false.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Identify the source of revenue.

Final Logic: Operating revenue = Operating activity.

🧠 Memory Trick

Commission Earned = Operating Income

📚 Class XII – Accountancy Part II – Cash Flow Statement – Service Income

5 Statements:
I. Increase in Trade Payables is added to operating profit.
II. Decrease in Trade Payables is deducted from operating profit.
III. Payments to suppliers for goods are investing outflows.

A I and III are correct

B I and II are correct

C Only II is correct

D All are correct

💡 Short Explanation

Increase in payables conserves cash. Decrease in payables uses cash. Supplier payments are operating outflows.

✅ Correct Answer Explanation

Statements I and II correctly represent working capital adjustments. Statement III is incorrect because supplier payments are operating activities, not investing activities.

❓ Why Other Options Are Incorrect

Option A → Statement III is false.
Option C → Statement I is also correct.
Option D → Statement III is incorrect.

🎯 Strategy

Used: Statement Evaluation

Application: Analyze each statement separately.

Final Logic: Only I and II are correct.

🧠 Memory Trick

Payables ↑ Add, Payables ↓ Deduct

📚 Class XII – Accountancy Part II – Cash Flow Statement – Supplier Payments

6 Outstanding Employees Benefits Expenses increased from ₹10,000 to ₹11,000. What adjustment is made?

A Deduct ₹1,000

B Add ₹10,000

C Add ₹1,000

D Deduct ₹11,000

💡 Short Explanation

Outstanding expense increased. Expense recorded but not paid. Cash outflow is lower.

✅ Correct Answer Explanation

Increase in Outstanding Employee Benefits = ₹11,000 − ₹10,000 = ₹1,000 Increase in current liabilities is added to operating profit.

❓ Why Other Options Are Incorrect

Incorrect amount or direction.

🎯 Strategy

Used: Working Capital Adjustment

Application: Current liability increase = Add.

Final Logic: Add ₹1,000.

🧠 Memory Trick

Outstanding Expense ↑ = Add

📚 Class XII – Accountancy Part II – Cash Flow Statement – Employee Payments

7 Match the Following

List 1	List 2
1. Purchase of Goodwill	b. Investing Activity (Intangible)
2. Brokerage paid on non-current investment	d. Investing Activity (Expense)
3. Under-writing commission paid	a. Financing Activity
4. Purchase of stock-in-trade	c. Operating Activity

A 1-a, 2-c, 3-b, 4-d

B 1-c, 2-b, 3-d, 4-a

C 1-d, 2-a, 3-c, 4-b

D 1-b, 2-d, 3-a, 4-c

💡 Short Explanation

Goodwill purchase → Investing. Brokerage → Investing expense. Underwriting commission → Financing. Stock-in-trade → Operating.

✅ Correct Answer Explanation

Option D correctly classifies all transactions according to AS-3.

❓ Why Other Options Are Incorrect

Incorrect activity classifications.

🎯 Strategy

Used: Option Grouping

Application: Match each item with its activity.

Final Logic: Option D is correct.

🧠 Memory Trick

Goodwill–Invest, Stock–Operate

📚 Class XII – Accountancy Part II – Cash Flow Statement – Investing Activities

8 Arrange the sequence to calculate Net Cash Flow from Investing Activities:
I. Add proceeds from sale of land and building.
II. Ascertain net cash from/used in investing activities.
III. Deduct cash payments for purchase of investments.
IV. Add dividend and interest received.

A I, III, IV, II

B IV, III, II, I

C III, I, IV, II

D I, II, III, IV

💡 Short Explanation

Identify inflows. Deduct outflows. Add investing incomes. Compute net figure.

✅ Correct Answer Explanation

The logical order is to identify proceeds, deduct investment purchases, add investment-related receipts, and then determine net investing cash flow.

❓ Why Other Options Are Incorrect

Incorrect sequence.

🎯 Strategy

Used: Sequence Analysis

Application: Follow investing activity calculation steps.

Final Logic: Option A.

🧠 Memory Trick

Inflows → Outflows → Receipts → Net

📚 Class XII – Accountancy Part II – Cash Flow Statement – Investing Activities

9 Plant purchased = ₹4,40,000. Plant sold = ₹50,000. What is the net cash flow?

A Inflow ₹4,90,000

B Outflow ₹3,90,000

C Inflow ₹50,000

D Outflow ₹4,40,000

💡 Short Explanation

Purchase creates outflow. Sale creates inflow. Net effect is outflow.

✅ Correct Answer Explanation

Net Cash Flow = Sale Proceeds − Purchase Cost = ₹50,000 − ₹4,40,000 = (₹3,90,000) Net cash outflow = ₹3,90,000.

❓ Why Other Options Are Incorrect

Ignore either purchase or sale effect.

🎯 Strategy

Used: Substitution

Application: Net inflow minus outflow.

Final Logic: Outflow ₹3,90,000.

🧠 Memory Trick

Purchase − Sale = Net Outflow

📚 Class XII – Accountancy Part II – Cash Flow Statement – Sale of Assets

10 For a non-financial enterprise, interest received on debentures held as investments is:

A Operating Inflow

B Financing Inflow

C Investing Inflow

D Cash Equivalent

💡 Short Explanation

Interest arises from investments. Represents return on invested funds. Classified as investing activity.

✅ Correct Answer Explanation

For non-financial enterprises, interest received on investments is treated as an investing cash inflow because it is a return generated from investment activities.

❓ Why Other Options Are Incorrect

Option A → Applies mainly to financial enterprises.
Option B → Not financing.
Option D → Not a cash equivalent.

🎯 Strategy

Used: Classification Rule

Application: Link interest income with investment activity.

Final Logic: Interest received = Investing Inflow.

🧠 Memory Trick

Interest Received = Investment Return

📚 Class XII – Accountancy Part II – Cash Flow Statement – Interest Received

11 If an enterprise purchases highly liquid short-term investments that mature in two months, where are they classified?

A Investing Activities

B Financing Activities

C Operating Activities

D Cash Equivalents

💡 Short Explanation

Maturity is within 3 months. Highly liquid and readily convertible. Treated as cash equivalents.

✅ Correct Answer Explanation

AS-3 defines cash equivalents as short-term highly liquid investments with a maturity of three months or less from acquisition. Therefore, investments maturing in two months are classified as cash equivalents.

❓ Why Other Options Are Incorrect

Option A → Only long-term investment purchases are investing activities.
Option B → Not related to financing.
Option C → Not an operating activity.

🎯 Strategy

Used: Definition Matching

Application: Apply the three-month maturity rule.

Final Logic: Two-month investments qualify as cash equivalents.

🧠 Memory Trick

≤ 3 Months = Cash Equivalent

📚 Class XII – Accountancy Part II – Cash Flow Statement – Purchase of Investments

12 Assertion (A): Cash advances and loans made by a financial enterprise are classified as operating activities.
Reason (R): They relate to the main activity of the financial enterprise.

A Both A and R are true and R is the correct explanation of A.

B Both A and R are true but R is not the explanation.

C A is true, R is false.

D A is false, R is true.

💡 Short Explanation

Lending is a core activity of financial enterprises. Loans generate revenue. Hence operating activity.

✅ Correct Answer Explanation

For financial enterprises such as banks and financial institutions, providing loans and advances is part of their principal revenue-generating activity. Therefore, such cash flows are classified as operating activities.

❓ Why Other Options Are Incorrect

The reason directly explains the assertion.
Neither statement is false.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Link business activity with classification.

Final Logic: Core business activity = Operating activity.

🧠 Memory Trick

Bank Gives Loans = Operating Activity

📚 Class XII – Accountancy Part II – Cash Flow Statement – Loans Given

13 Statements:
I. Cash proceeds from issuing shares are financing inflows.
II. Cash proceeds from issuing debentures are investing inflows.
III. Assets acquired by issue of shares are excluded from the Cash Flow Statement.

A Only I is correct

B I and III are correct

C II and III are correct

D All are correct

💡 Short Explanation

Share issue raises finance. Debenture issue is financing, not investing. Non-cash asset acquisition is excluded.

✅ Correct Answer Explanation

Statement I is correct because issuing shares generates financing inflows. Statement III is also correct because acquisition of assets through issue of shares is a non-cash transaction. Statement II is incorrect because issuing debentures is a financing inflow, not an investing inflow.

❓ Why Other Options Are Incorrect

Option A → Statement III is also correct.
Option C → Statement II is incorrect.
Option D → Statement II is false.

🎯 Strategy

Used: Statement Evaluation

Application: Check each statement individually.

Final Logic: Statements I and III are correct.

🧠 Memory Trick

Issue Shares = Finance, Non-Cash Asset = Excluded

📚 Class XII – Accountancy Part II – Cash Flow Statement – Capital Raising

14 Opening Long-term Loan = ₹2,00,000. Closing Long-term Loan = ₹2,50,000. Loan repaid during the year = ₹1,00,000. What is the amount of new loan raised?

A ₹50,000

B ₹1,00,000

C ₹1,50,000

D ₹2,50,000

💡 Short Explanation

Closing balance increased. Loan repayment also occurred. New borrowing must cover both.

✅ Correct Answer Explanation

New Loan Raised = Closing Loan − Opening Loan + Loan Repaid = ₹2,50,000 − ₹2,00,000 + ₹1,00,000 = ₹1,50,000

❓ Why Other Options Are Incorrect

Option A → Ignores repayment.
Option B → Only repayment amount.
Option D → Closing balance only.

🎯 Strategy

Used: Substitution

Application: Apply loan movement equation.

Final Logic: New borrowing = ₹1,50,000.

🧠 Memory Trick

Closing − Opening + Repaid = New Loan

📚 Class XII – Accountancy Part II – Cash Flow Statement – Borrowings

15 Equity Share Capital increased from ₹28,00,000 to ₹35,00,000 during the year. Assuming no other share transactions, what is the cash flow impact?

A Outflow of ₹7,00,000

B Outflow of ₹28,00,000

C Inflow of ₹63,00,000

D Financing Inflow of ₹7,00,000

💡 Short Explanation

Increase in share capital indicates issue of shares. Share issue generates financing inflow. Increase = ₹7,00,000.

✅ Correct Answer Explanation

Increase in Equity Share Capital = ₹35,00,000 − ₹28,00,000 = ₹7,00,000 Therefore, financing cash inflow = ₹7,00,000.

❓ Why Other Options Are Incorrect

Incorrect amount or direction.

🎯 Strategy

Used: Substitution

Application: Calculate increase in share capital.

Final Logic: Increase represents financing inflow.

🧠 Memory Trick

Share Capital ↑ = Financing Inflow

📚 Class XII – Accountancy Part II – Cash Flow Statement – Issue of Shares

16 Match the Following

List 1	List 2
1. Repayment of Bank Loan	a. Financing Outflow (Principal)
2. Interest paid on Long-term Loan	b. Financing Outflow (Cost of Borrowing)
3. Cash Credit	c. Cash Equivalent
4. Bank Overdraft	d. Cash Equivalent (Short-term)

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-c, 3-a, 4-d

C 1-c, 2-d, 3-b, 4-a

D 1-d, 2-a, 3-c, 4-b

💡 Short Explanation

Loan repayment = Principal outflow. Interest = Borrowing cost. Cash credit and overdraft are short-term financing arrangements.

✅ Correct Answer Explanation

Option A correctly matches each item with its respective classification.

❓ Why Other Options Are Incorrect

Incorrect mappings.

🎯 Strategy

Used: Option Grouping

Application: Match financing classifications accurately.

Final Logic: Option A is correct.

🧠 Memory Trick

Repay–Principal, Interest–Cost

📚 Class XII – Accountancy Part II – Cash Flow Statement – Loans Raised

17 How is the proposed dividend of the previous year treated while preparing a Cash Flow Statement?

A Deducted from Operating Activities

B Added to Net Profit under Operating Activities and shown as an Outflow under Financing Activities

C Added to Investing Activities

D Ignored Completely

💡 Short Explanation

Dividend relates to financing activity. Added back in operating section. Shown separately as financing outflow.

✅ Correct Answer Explanation

Under the indirect method, dividend appropriations affecting profit are adjusted in operating activities and the actual payment is shown under financing activities.

❓ Why Other Options Are Incorrect

Dividend is not an operating deduction.
It is not ignored.

🎯 Strategy

Used: Classification Analysis

Application: Separate profit adjustment from cash payment.

Final Logic: Financing outflow treatment.

🧠 Memory Trick

Dividend Paid = Financing Outflow

📚 Class XII – Accountancy Part II – Cash Flow Statement – Loan Repayment & Dividend

18 Arrange the steps of the indirect method for calculating Operating Cash Flows:
I. Deduct increase in current assets.
II. Start with Net Profit before Tax.
III. Add back non-cash expenses like depreciation.
IV. Deduct Income Tax Paid.

A I, II, III, IV

B II, I, IV, III

C II, III, I, IV

D III, II, I, IV

💡 Short Explanation

Begin with profit. Add non-cash expenses. Adjust working capital. Deduct tax paid.

✅ Correct Answer Explanation

The standard indirect method sequence is: 1. Start with Net Profit before Tax. 2. Add non-cash/non-operating adjustments. 3. Adjust working capital changes. 4. Deduct income tax paid.

❓ Why Other Options Are Incorrect

Steps are not in the correct order.

🎯 Strategy

Used: Sequence Analysis

Application: Follow the prescribed AS-3 format.

Final Logic: Profit → Adjustments → Working Capital → Tax.

🧠 Memory Trick

Profit → Add Back → Working Capital → Tax

📚 Class XII – Accountancy Part II – Cash Flow Statement – Indirect Method

📄 Passage

Category: Classification Importance Passage (Q19-Q20): Taxes may be income tax, capital gains tax, or dividend tax. AS-3 requires that cash flows arising from taxes on income should be separately disclosed and classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. Dividend tax paid should be classified as a financing activity. Capital gains tax paid on the sale of fixed assets should be classified under investing activities.

Where is the cash flow from Capital Gains Tax paid on the sale of fixed assets classified?

A Operating Activities

B Financing Activities

C Cash Equivalents

D Investing Activities

💡 Short Explanation

Tax directly relates to asset sale. Asset sale is an investing activity. Tax follows the related activity.

✅ Correct Answer Explanation

AS-3 requires that when tax payments can be specifically identified with investing activities, they should be classified accordingly. Capital gains tax on fixed asset sales is therefore an investing activity.

❓ Why Other Options Are Incorrect

Not a financing activity.
Not a cash equivalent.
Not a general operating tax.

🎯 Strategy

Used: Passage-Based Classification

Application: Follow the underlying transaction.

Final Logic: Asset sale tax = Investing activity.

🧠 Memory Trick

Asset Sale Tax = Investing Tax

📚 Class XII – Accountancy Part II – Cash Flow Statement – Financial Position Impact

📄 Passage

According to the passage, how is Dividend Tax classified in the Cash Flow Statement?

A Financing Activity

B Investing Activity

C Operating Activity

D Non-cash Transaction

💡 Short Explanation

Dividend tax arises from dividend distribution. Dividend payment is a financing activity. Tax follows the same classification.

✅ Correct Answer Explanation

AS-3 specifically states that dividend tax paid should be classified as a financing activity because it is directly associated with dividend distribution.

❓ Why Other Options Are Incorrect

Not an investing activity.
Not an operating activity.
It involves actual cash payment.

🎯 Strategy

Used: Passage-Based Classification

Application: Follow the classification of the related transaction.

Final Logic: Dividend tax = Financing activity.

🧠 Memory Trick

Dividend Tax Follows Dividend

📚 Class XII – Accountancy Part II – Cash Flow Statement – Cash Flow Analysis

CUET UG Accountancy Booster Test 1 Cash Flow Activities Classification

Test Complete!

Answer Review