CUET UG Accountancy Booster Test 3 Cash and Cash Equivalents -

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CUET UG Accountancy Booster Test 2 Cash and Cash Equivalents

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 2 Cash and Cash Equivalents

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QUESTION 1 OF 20

Arrange the presentation order of the Cash Flow Statement components leading to the final Cash in Hand balance:
1. Add: Cash and cash equivalents at the beginning
2. Net increase (decrease) in cash and cash equivalents (A + B + C)
3. Calculate Cash flows from Operating, Investing, and Financing activities
4. Equals: Cash and cash equivalents at the end

Answer Review

1 Arrange the presentation order of the Cash Flow Statement components leading to the final Cash in Hand balance:
1. Add: Cash and cash equivalents at the beginning
2. Net increase (decrease) in cash and cash equivalents (A + B + C)
3. Calculate Cash flows from Operating, Investing, and Financing activities
4. Equals: Cash and cash equivalents at the end

A 1 → 2 → 3 → 4

B 3 → 1 → 2 → 4

C 3 → 2 → 1 → 4

D 2 → 3 → 1 → 4

💡 Short Explanation

First calculate cash flows from operating, investing, and financing activities. Then determine net increase/decrease in cash. Add beginning cash balance. Arrive at ending cash balance.

✅ Correct Answer Explanation

The Cash Flow Statement is prepared by first calculating cash flows from Operating Activities (A), Investing Activities (B), and Financing Activities (C). These are combined to determine the net increase or decrease in cash and cash equivalents. This amount is then added to the opening balance of cash and cash equivalents to arrive at the closing balance. Therefore, the correct sequence is: 3 → 2 → 1 → 4.

❓ Why Other Options Are Incorrect

Option A: Opening cash cannot be added before calculating net cash flow.
Option B: Net increase/decrease must be determined before adding opening balance.
Option D: Begins with net increase before calculating activity-wise cash flows.

🎯 Strategy

Used: Sequence Analysis

Application: Follow the standard Cash Flow Statement format.

Final Logic: Activities → Net Change → Opening Cash → Closing Cash.

🧠 Memory Trick

Activities → Change → Opening → Ending

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

2 A company has ₹50,000 in a bank demand deposit and a bank overdraft of ₹10,000. According to AS-3 classification principles shown in the text, what is the value of cash and cash equivalents? (Assuming overdraft is a financing activity.)

A ₹60,000

B ₹40,000

C ₹0

D ₹50,000

💡 Short Explanation

Demand deposits form part of cash. Bank overdraft is treated separately as financing. Cash balance remains ₹50,000.

✅ Correct Answer Explanation

Cash includes cash in hand and demand deposits with banks. Since the overdraft is assumed to be classified as a financing activity rather than being netted against cash, only the demand deposit of ₹50,000 is treated as cash and cash equivalents. Therefore, the correct answer is ₹50,000.

❓ Why Other Options Are Incorrect

Option A: Incorrectly adds overdraft.
Option B: Incorrectly deducts overdraft.
Option C: Ignores available cash.

🎯 Strategy

Used: Classification Rule

Application: Separate financing liabilities from cash balances.

Final Logic: Cash = Demand Deposits only.

🧠 Memory Trick

Demand Deposit = Cash

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

3 Why is a 6-month highly liquid investment strictly excluded from being a cash equivalent?

A Because its maturity from the date of acquisition exceeds the normal three-month limit.

B Because it is considered a tangible fixed asset.

C Because it represents an intangible asset.

D Because it is part of operating revenue.

💡 Short Explanation

Cash equivalents normally mature within three months. Six months exceeds the accepted limit.

✅ Correct Answer Explanation

AS-3 states that investments normally qualify as cash equivalents only when they have a short maturity of about three months or less from the date of acquisition. A six-month investment therefore does not qualify as a cash equivalent.

❓ Why Other Options Are Incorrect

Not a fixed asset.
Not an intangible asset.
Not related to operating revenue.

🎯 Strategy

Used: Definition Matching

🧠 Memory Trick

More than 3 Months = Not Cash Equivalent

📚 Class XII – Accountancy Part II – Cash Flow Statement – Three-Month Rule

4 Assertion (A): An investment must be readily convertible to known amounts of cash to be a cash equivalent.
Reason (R): This ensures there is an insignificant risk of changes in its value.

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

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

C A is true but R is false.

D Both A and R are false.

💡 Short Explanation

Readily convertible and insignificant risk are separate criteria. Both are required independently.

✅ Correct Answer Explanation

To qualify as a cash equivalent, an investment must: 1. Be readily convertible into known amounts of cash. 2. Be subject to an insignificant risk of changes in value. Both statements are true, but the second is not the explanation of the first; rather, they are separate conditions.

❓ Why Other Options Are Incorrect

Option A: Treats one criterion as the explanation of the other.
Option C: Reason is true.
Option D: Both statements are true.

🎯 Strategy

Used: Assertion–Reason Analysis

🧠 Memory Trick

Liquidity + Safety = Cash Equivalent

📚 Class XII – Accountancy Part II – Cash Flow Statement – Liquidity Criteria

5 The text describes the three-month maturity rule as a strict, unbreakable legal boundary under AS-3 for all investments.

A True, AS-3 penalizes any deviation.

B True, it is an absolute maximum limit.

C False, the text says "normally qualifies... of say, three months or less".

D False, the limit is actually six months.

💡 Short Explanation

AS-3 uses the word "normally". The three-month guideline is not expressed as an absolute legal prohibition.

✅ Correct Answer Explanation

The standard explains that investments normally qualify as cash equivalents when maturity is three months or less from acquisition. The wording indicates a practical guideline rather than a rigid legal boundary.

❓ Why Other Options Are Incorrect

AS-3 does not impose penalties.
The wording is not absolute.
Six months is incorrect.

🎯 Strategy

Used: Concept Interpretation

🧠 Memory Trick

"Normally" ≠ "Always"

📚 Class XII – Accountancy Part II – Cash Flow Statement – Maturity Period

6 Evaluating the acquisition date basis means:
1. The time remaining to maturity from the balance sheet date is irrelevant if it was a 5-year bond acquired 4 years ago.
2. The original issue date of the instrument is irrelevant if the enterprise acquires it 2 months before maturity.

A Only 1 is correct

B Only 2 is correct

C Neither 1 nor 2 is correct

D Both 1 and 2 are correct

💡 Short Explanation

Classification depends on maturity from acquisition date. Original issue date is not decisive.

✅ Correct Answer Explanation

AS-3 evaluates maturity from the date of acquisition. Thus: A long-term instrument acquired shortly before maturity may qualify. The original issue date is not relevant for classification purposes. Therefore, both statements are correct.

❓ Why Other Options Are Incorrect

Each statement correctly applies the acquisition-date principle.

🎯 Strategy

Used: Principle Application

🧠 Memory Trick

Judge from Acquisition Date

📚 Class XII – Accountancy Part II – Cash Flow Statement – Acquisition Date Basis

7 An enterprise acquires marketable securities specifically for dealing or trading purposes rather than excess cash management. How are the cash flows from their purchase and sale classified?

A Investing Activities

B Operating Activities

C Financing Activities

D Cash Equivalents

💡 Short Explanation

Trading securities form part of normal business operations. Therefore classified as operating activities.

✅ Correct Answer Explanation

When marketable securities are acquired for dealing or trading purposes, they become part of the enterprise's principal revenue-generating activities. Their purchase and sale are therefore classified as operating activities.

❓ Why Other Options Are Incorrect

Not held as investments.
Not financing activities.
Not treated as cash equivalents.

🎯 Strategy

Used: Nature of Activity Analysis

🧠 Memory Trick

Trading Purpose = Operating Activity

📚 Class XII – Accountancy Part II – Cash Flow Statement – Marketable Securities

8 Match the Following

List 1	List 2
1. Preference shares acquired 1 month before redemption	a. Cash Equivalent
2. Equity shares issued to public	b. Financing Activity (Inflow)
3. Preference shares redeemed by the company	c. Investing Activity (Outflow)
4. Purchase of equity shares in another company (not for trading)	d. Financing Activity (Outflow)

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

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

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

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

💡 Short Explanation

Near-redemption preference shares may qualify as cash equivalents. Equity issue → Financing inflow. Redemption → Financing outflow. Investment purchase → Investing outflow.

✅ Correct Answer Explanation

Each transaction is matched according to AS-3 classification principles, making Option A correct.

❓ Why Other Options Are Incorrect

They incorrectly classify one or more transactions.

🎯 Strategy

Used: Matching Analysis

🧠 Memory Trick

Issue = Finance Inflow; Redemption = Finance Outflow

📚 Class XII – Accountancy Part II – Cash Flow Statement – Investment Inclusion

9 Which logical relationship dictates the exclusion of standard equity shares from cash equivalents?

A Equity Shares = Fixed Maturity = Cash Equivalent

B Equity Shares = Fixed Return = Insignificant Risk

C Equity Shares = Readily Convertible = Known Amount of Cash

D Equity Shares = No Redemption Date = Significant Value Risk = Excluded

💡 Short Explanation

Equity shares lack fixed maturity. Their value fluctuates significantly.

✅ Correct Answer Explanation

Ordinary equity shares do not have a fixed redemption date and are subject to significant changes in value. Therefore, they generally fail the conditions required for classification as cash equivalents.

❓ Why Other Options Are Incorrect

Equity shares do not have fixed maturity or fixed return.
Their cash value is uncertain.

🎯 Strategy

Used: Concept Linking

🧠 Memory Trick

No Maturity + Risk = Not Cash Equivalent

📚 Class XII – Accountancy Part II – Cash Flow Statement – Equity Share Exclusion

📄 Passage

An investment normally qualifies as cash equivalents only when it has a short maturity, of say, three months or less from the date of acquisition. Investments in shares are excluded from cash equivalents unless they are in substantial cash equivalents. For example, preference shares of a company acquired shortly before their specific redemption date, provided there is only insignificant risk of failure of the company to repay the amount at maturity. Cash management includes the investment of excess cash in cash equivalents.

According to the passage, why might a specific preference share be included while long-term equity investments are excluded?

A Because preference shares are always risk-free.

B Because long-term investments are part of operating activities.

C Because the preference share may have a specific, short-term redemption date minimizing risk.

D Because equity shares never pay dividends.

💡 Short Explanation

Certain preference shares have a near redemption date. Repayment amount is relatively certain. Risk is insignificant.

✅ Correct Answer Explanation

A preference share acquired shortly before its redemption date may qualify as a cash equivalent because repayment is expected soon and the risk of non-payment is insignificant. Long-term equity investments do not meet these conditions.

❓ Why Other Options Are Incorrect

Preference shares are not always risk-free.
Long-term investments are not included because of operating activity classification.
Equity shares can pay dividends.

🎯 Strategy

Used: Passage Analysis

🧠 Memory Trick

Near Redemption = Possible Cash Equivalent

📚 Class XII – Accountancy Part II – Cash Flow Statement – Preference Share Conditions

📄 Passage

.
In the context of the preference shares mentioned in the passage, "insignificant risk" primarily refers to:

A The risk of general stock market collapse.

B The insignificant risk of failure of the company to repay the amount at maturity.

C The risk of inflation reducing purchasing power.

D The risk of the company being taken over.

💡 Short Explanation

The focus is on repayment certainty. Cash equivalents require near-certain conversion into cash.

✅ Correct Answer Explanation

The passage states that preference shares may qualify as cash equivalents when acquired shortly before redemption, provided there is only an insignificant risk that the company may fail to repay the amount at maturity. Thus, the risk being referred to is repayment risk.

❓ Why Other Options Are Incorrect

Option A: Market risk is not the specific risk mentioned.
Option C: Inflation is unrelated to redemption certainty.
Option D: Takeover risk is not the criterion discussed.

🎯 Strategy

Used: Passage Analysis

Application: Focus on the specific condition stated in the passage.

Final Logic: Insignificant risk refers to repayment risk.

🧠 Memory Trick

Cash Equivalent = Near-Certain Repayment

📚 Class XII – Accountancy Part II – Cash Flow Statement – Insignificant Risk

12 Arrange the logical steps to verify if an acquired asset has value stability to be a cash equivalent:
1. Check if the asset is readily convertible to a known amount of cash.
2. Confirm the maturity is three months or less from acquisition.
3. Assess if there is any significant risk of changes in value.

A 1 → 3 → 2

B 3 → 1 → 2

C 2 → 3 → 1

D 1 → 2 → 3

💡 Short Explanation

Verify convertibility. Assess risk. Confirm maturity period.

✅ Correct Answer Explanation

To evaluate whether an investment qualifies as a cash equivalent: 1. It should be readily convertible into a known amount of cash. 2. It should carry insignificant risk of value changes. 3. It should normally mature within three months from acquisition. Hence, the sequence is 1 → 3 → 2.

❓ Why Other Options Are Incorrect

They do not follow the logical evaluation process outlined in the concept.

🎯 Strategy

Used: Sequence Analysis

Application: Apply the cash equivalent qualification process.

Final Logic: Liquidity → Risk → Maturity.

🧠 Memory Trick

Convert → Check Risk → Check Time

📚 Class XII – Accountancy Part II – Cash Flow Statement – Value Stability

13 A firm has: Cash ₹10,000; 2-month Preference Shares (safe redemption) ₹20,000; Standard Equity Shares ₹30,000; 5-year Bonds ₹40,000. What is the total value of readily convertible assets qualifying as Cash and Cash Equivalents?

A ₹10,000

B ₹60,000

C ₹30,000

D ₹100,000

💡 Short Explanation

Cash qualifies. Near-redemption preference shares qualify. Equity shares and long-term bonds do not qualify.

✅ Correct Answer Explanation

Cash = ₹10,000 2-month Preference Shares = ₹20,000 Total Cash and Cash Equivalents = ₹10,000 + ₹20,000 = ₹30,000 Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A: Omits qualifying preference shares.
Option B: Includes non-qualifying equity shares.
Option D: Includes all investments regardless of eligibility.

🎯 Strategy

Used: Classification + Calculation

Application: Include only qualifying cash equivalents.

Final Logic: ₹10,000 + ₹20,000 = ₹30,000.

🧠 Memory Trick

Cash + Safe Short-Term Investment = Cash Equivalent

📚 Class XII – Accountancy Part II – Cash Flow Statement – Readily Convertible Assets

14 Why is immediate liquidity (cash and equivalents) a focal point for users evaluating financial statements?

A It dictates the amount of tax the company must pay.

B It proves the company does not need external financing ever.

C It determines the exact profit margin of the products.

D It indicates the internal solvency level and ability to adapt to changing circumstances.

💡 Short Explanation

Liquidity reflects financial flexibility. It indicates the ability to meet obligations.

✅ Correct Answer Explanation

Immediate liquidity helps users assess whether the enterprise can meet short-term obligations, adapt to changing conditions, and maintain financial stability. It is therefore an important indicator of internal solvency.

❓ Why Other Options Are Incorrect

Liquidity does not directly determine tax.
External financing may still be required.
Profit margin is a profitability measure.

🎯 Strategy

Used: Concept Application

🧠 Memory Trick

Liquidity = Flexibility + Solvency

📚 Class XII – Accountancy Part II – Cash Flow Statement – Immediate Liquidity

15 Assertion (A): Investing excess cash into a 2-month commercial paper is not reported as an investing cash outflow.
Reason (R): It is considered cash management, merely converting cash into a cash equivalent.

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

B Both A and R are false.

C A is true but R is false.

D A is false but R is true.

💡 Short Explanation

Cash converted into a cash equivalent remains within cash management. No reportable cash flow arises.

✅ Correct Answer Explanation

Investment of excess cash into a short-term commercial paper qualifying as a cash equivalent is treated as cash management. Since it merely converts one form of cash into another cash equivalent, it is not reported as an investing cash outflow.

❓ Why Other Options Are Incorrect

Both statements are correct.
The reason directly explains the assertion.

🎯 Strategy

Used: Assertion–Reason Analysis

🧠 Memory Trick

Cash ↔ Cash Equivalent = No Cash Flow

📚 Class XII – Accountancy Part II – Cash Flow Statement – Excess Cash Investment

16 Effective liquidity planning using the Cash Flow Statement allows developers of financial models to:

A Manipulate net profit artificially.

B Assess and compare the present value of the future cash flows of different enterprises.

C Ignore the timing of cash generation completely.

D Classify all cash advances as financing activities.

💡 Short Explanation

Cash flow information helps estimate future cash generation. This supports valuation and comparison.

✅ Correct Answer Explanation

Cash Flow Statements provide information useful for forecasting future cash flows. Analysts and financial model developers use this information to compare the present value of future cash flows across enterprises.

❓ Why Other Options Are Incorrect

Cash Flow Statements do not facilitate manipulation.
Timing remains highly important.
Advances are not always financing activities.

🎯 Strategy

Used: Application-Based Analysis

🧠 Memory Trick

Cash Flow Data = Better Valuation

📚 Class XII – Accountancy Part II – Cash Flow Statement – Liquidity Planning

17 Match the Following

List 1	List 2
1. Purchase of 60-day Treasury Bill (Cash Equivalent)	c. No Cash Flow (Cash Management)
2. Dividend received by a manufacturing firm	d. Investing Activity
3. Dividend paid by a manufacturing firm	a. Financing Activity
4. Cash received from trade receivables	b. Operating Activity

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

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

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

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

💡 Short Explanation

Treasury Bill qualifying as cash equivalent → Cash management. Dividend received → Investing activity. Dividend paid → Financing activity. Trade receivables collection → Operating activity.

✅ Correct Answer Explanation

Each item is classified according to AS-3 principles, making Option C the correct matching sequence.

❓ Why Other Options Are Incorrect

They incorrectly classify one or more transactions.

🎯 Strategy

Used: Matching Analysis

🧠 Memory Trick

Receivables–Operate, Dividend Received–Invest, Dividend Paid–Finance

📚 Class XII – Accountancy Part II – Cash Flow Statement – Treasury Bills

18 If short-term Commercial Papers are treated as cash equivalents, they must satisfy which criteria?
1. Readily convertible into known amounts of cash.
2. Subject to an insignificant risk of changes in value.

A Both 1 and 2 are correct

B Only 1 is correct

C Only 2 is correct

D Neither 1 nor 2 is correct

💡 Short Explanation

Both conditions are mandatory. Cash equivalents require liquidity and safety.

✅ Correct Answer Explanation

Commercial Papers qualify as cash equivalents only when they are readily convertible into known cash amounts and are subject to insignificant risk of value changes. Both statements are correct.

❓ Why Other Options Are Incorrect

Each condition is essential.

🎯 Strategy

Used: Statement Evaluation

🧠 Memory Trick

Convertible + Safe = Cash Equivalent

📚 Class XII – Accountancy Part II – Cash Flow Statement – Commercial Papers

19 A company's 'cash from operations' is highly positive, allowing it to pay dividends, make new investments, and repay loans without external financing. This specifically measures its:

A Total equity valuation

B External borrowing capacity

C Extraordinary items liability

D Internal solvency level

💡 Short Explanation

Strong operating cash flow indicates self-sufficiency. External financing is not required.

✅ Correct Answer Explanation

Internal solvency refers to the ability of an enterprise to generate enough cash from operations to meet obligations, invest, and distribute dividends without depending on external financing.

❓ Why Other Options Are Incorrect

Not a measure of equity valuation.
Not specifically borrowing capacity.
Unrelated to extraordinary items.

🎯 Strategy

Used: Concept Application

🧠 Memory Trick

Operations Fund Everything = Internal Solvency

📚 Class XII – Accountancy Part II – Cash Flow Statement – Liquidity Measurement

20 Which formula accurately represents how cash availability is ultimately reconciled at the end of the Cash Flow Statement?

A Operating Profit + Investing Profit + Financing Profit = Ending Cash

B Net Increase/Decrease in Cash & Equivalents + Beginning Cash & Equivalents = Ending Cash & Equivalents

C Total Assets − Total Liabilities = Ending Cash & Equivalents

D Cash Inflows − Taxes Paid = Ending Cash & Equivalents

💡 Short Explanation

Net cash movement is added to opening cash. This gives closing cash balance.

✅ Correct Answer Explanation

Ending Cash & Cash Equivalents = Beginning Cash & Cash Equivalents Net Increase (or − Net Decrease) in Cash & Cash Equivalents This is the fundamental reconciliation formula used in the Cash Flow Statement.

❓ Why Other Options Are Incorrect

Operating, investing, and financing profits are not used directly.
Assets minus liabilities gives owner's equity.
Taxes alone cannot determine ending cash.

🎯 Strategy

Used: Formula Recognition

🧠 Memory Trick

Opening Cash + Net Change = Closing Cash

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

CUET UG Accountancy Booster Test 2 Cash and Cash Equivalents

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