CUET UG Accountancy Booster Test 3 Cash Flow Activities Classification -

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CUET UG Accountancy Booster Test 2 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 2 Cash Flow Activities Classification

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QUESTION 1 OF 20

Net profit after tax is Rs 12,000. Provision for taxation made is Rs 8,000. Income tax refund is Rs 3,000. What is the exact Net Profit before Tax and Extraordinary Items?

Answer Review

1 Net profit after tax is Rs 12,000. Provision for taxation made is Rs 8,000. Income tax refund is Rs 3,000. What is the exact Net Profit before Tax and Extraordinary Items?

A Rs 20,000

B Rs 12,000

C Rs 17,000

D Rs 23,000

💡 Short Explanation

Net Profit after Tax is given. Tax provision must be added back. Income tax refund is already included in profit and should be deducted.

✅ Correct Answer Explanation

Net Profit Before Tax and Extraordinary Items = Net Profit After Tax + Provision for Tax − Income Tax Refund = Rs 12,000 + Rs 8,000 − Rs 3,000 = Rs 17,000 Therefore, the correct answer is Rs 17,000.

❓ Why Other Options Are Incorrect

Option A (Rs 20,000): Ignores the income tax refund adjustment.
Option B (Rs 12,000): Uses net profit after tax directly.
Option D (Rs 23,000): Incorrect addition of all amounts.

🎯 Strategy

Used: Numerical Adjustment

Application: Convert Net Profit After Tax into Net Profit Before Tax.

Final Logic: Add tax provision and remove refund effect.

🧠 Memory Trick

After Tax + Tax − Refund = Before Tax

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

2 Assertion (A): Extraordinary items like loss due to an earthquake should be classified and disclosed separately.
Reason (R): This enables users to understand their nature and effect on the present and future cash flows of an enterprise.

A A is true, R is false.

B A is false, R is true.

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

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

💡 Short Explanation

Extraordinary items are unusual and non-recurring. Separate disclosure improves analysis.

✅ Correct Answer Explanation

AS-3 requires extraordinary items to be disclosed separately because they are not part of normal business operations. Separate disclosure helps users understand their impact on current and future cash flows.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used: Assertion–Reason Analysis

🧠 Memory Trick

Extraordinary = Separate Disclosure

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

3 Cash revenue from operations is Rs 8,00,000. Credit revenue from operations is Rs 34,00,000. Less returns is Rs 2,00,000. Trade receivables at the beginning are Rs 40,00,000 and at the end are Rs 20,00,000. Using the formula (Sales + Opening TR − Closing TR), what are the cash receipts from customers?

A Rs 60,00,000

B Rs 40,00,000

C Rs 20,00,000

D Rs 58,00,000

💡 Short Explanation

Net Sales must be calculated first. Apply receivables adjustment formula.

✅ Correct Answer Explanation

Net Revenue from Operations = Rs 8,00,000 + Rs 34,00,000 − Rs 2,00,000 = Rs 40,00,000 Cash Receipts from Customers = Net Sales + Opening Trade Receivables − Closing Trade Receivables = Rs 40,00,000 + Rs 40,00,000 − Rs 20,00,000 = Rs 60,00,000 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Ignore receivable adjustments or calculate incorrectly.

🎯 Strategy

Used: Formula Application

🧠 Memory Trick

Sales + Opening TR − Closing TR

📚 Class XII – Accountancy Part II – Cash Flow Statement – Sales Receipts

4 Identify the correct statements regarding non-financial enterprises:
I. Trading commission received is an operating inflow.
II. Rent received on property held as an investment is an operating inflow.
III. Refund of income tax received is an operating inflow.

A I and II are correct

B I and III are correct

C II and III are correct

D All are correct

💡 Short Explanation

Trading commission relates to operations. Tax refund is generally operating. Rent from investment property is investing in nature.

✅ Correct Answer Explanation

Trading commission forms part of operating activities. Income tax refund is generally treated as operating cash flow unless specifically linked to investing or financing activities. Rent received from investment property is not treated as an operating inflow for a non-financial enterprise.

❓ Why Other Options Are Incorrect

Statement II is incorrect.

🎯 Strategy

Used: Statement Evaluation

🧠 Memory Trick

Commission + Tax Refund = Operating

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

5 In the indirect method, how is a decrease in prepaid expenses treated?

A Subtracted from net profit

B Ignored completely

C Added to operating profit before working capital changes

D Considered a financing outflow

💡 Short Explanation

Prepaid expenses are current assets. A decrease means less cash is tied up. Therefore, it is added.

✅ Correct Answer Explanation

A decrease in prepaid expenses indicates recovery of funds previously paid in advance. This increases operating cash flow and is therefore added while computing cash from operations.

❓ Why Other Options Are Incorrect

Not deducted.
Not ignored.
Not financing activity.

🎯 Strategy

Used: Working Capital Analysis

🧠 Memory Trick

Current Asset ↓ = Add

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

6 Which of the following is NOT an adjustment for a non-cash item when converting net profit to operating cash flows?

A Depreciation

B Goodwill amortised

C Transfer to general reserve

D Employee benefits expenses paid

💡 Short Explanation

Employee benefits paid involve actual cash. Non-cash items require adjustment.

✅ Correct Answer Explanation

Depreciation, goodwill amortisation, and transfer to general reserve are non-cash adjustments. Employee benefits expenses paid involve actual cash outflow and therefore are not adjusted as non-cash items.

❓ Why Other Options Are Incorrect

They are non-cash or appropriation adjustments.

🎯 Strategy

Used: Elimination Method

🧠 Memory Trick

Paid = Cash Item

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

7 Sequence the steps to ascertain the machinery purchase amount from a ledger:
I. Post opening and closing balances.
II. Record the depreciation and loss on sale.
III. Record the sale proceeds.
IV. Balance the account to find the cash purchase amount.

A I, II, III, IV

B I, III, IV, II

C III, I, IV, II

D IV, III, I, II

💡 Short Explanation

Start with balances. Record depreciation and sale adjustments. Find balancing figure.

✅ Correct Answer Explanation

To determine machinery purchases from the Machinery Account: 1. Record opening and closing balances. 2. Record depreciation and loss on sale. 3. Record sale proceeds. 4. Balance the account to determine purchases. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Incorrect accounting sequence.

🎯 Strategy

Used: Sequence Analysis

🧠 Memory Trick

Balance → Adjust → Sale → Balance Figure

📚 Class XII – Accountancy Part II – Cash Flow Statement – Asset Purchase

8 Gain on the sale of machinery is Rs 3,000. In the indirect method for operating activities, how is this treated?

A Added to Net Profit

B Deducted from Net Profit

C Ignored

D Added to current assets

💡 Short Explanation

Gain is a non-operating income. It belongs to investing activities.

✅ Correct Answer Explanation

Profit or gain on sale of machinery is included in net profit but does not arise from operating activities. Therefore, it is deducted while calculating cash flows from operating activities.

❓ Why Other Options Are Incorrect

Not added.
Not ignored.
Not treated as a current asset.

🎯 Strategy

Used: Classification Adjustment

🧠 Memory Trick

Profit on Asset Sale = Deduct

📚 Class XII – Accountancy Part II – Cash Flow Statement – Asset Sale

9 Match the Following

List 1	List 2
1. Loss on sale of equipment	a. Added to Net Profit (Operating)
2. Proceeds from sale of patents	b. Investing Inflow
3. Interest received on debentures	c. Investing Inflow (Interest)
4. Purchase of goodwill	d. Investing Outflow

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

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

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

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

💡 Short Explanation

Loss on sale is added back. Patent sale generates investing inflow. Interest received is investing inflow. Goodwill purchase is investing outflow.

✅ Correct Answer Explanation

Each item is classified according to AS-3 rules, making Option C correct.

❓ Why Other Options Are Incorrect

They contain incorrect classifications.

🎯 Strategy

Used: Matching Analysis

🧠 Memory Trick

Loss Add, Sale Invest, Goodwill Purchase Invest

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

10 Interest received on debentures held as investments is Rs 60,000. Dividend received on shares held as investments is Rs 10,000. How are these treated in the Cash Flow Statement for a non-financial company?

A Financing inflow of Rs 70,000

B Operating inflow of Rs 70,000

C Deducted from investing activities

D Investing inflow of Rs 70,000

💡 Short Explanation

Both arise from investments. For non-financial enterprises, both are investing inflows.

✅ Correct Answer Explanation

Interest Received = Rs 60,000 Dividend Received = Rs 10,000 Total Investing Inflow = Rs 70,000 Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Not financing.
Not operating.
Not deducted.

🎯 Strategy

Used: Classification + Calculation

🧠 Memory Trick

Interest + Dividend Received = Investing Inflow

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

11 Which of the following statements regarding Purchase of Investments is/are correct?
I. Purchase of shares by a non-financial enterprise is an investing activity.
II. Purchase of shares by a share brokerage firm is an operating activity.
III. Short-term deposits are investing activities.

A I and II are correct

B II and III are correct

C I and III are correct

D All are correct

💡 Short Explanation

Non-financial enterprises treat share purchases as investing activities. Share brokerage firms treat share purchases as operating activities. Short-term deposits qualifying as cash equivalents are not investing activities.

✅ Correct Answer Explanation

Statement I is correct because purchase of shares by a non-financial enterprise represents an investment of funds. Statement II is also correct because share brokerage firms deal in shares as part of their principal business activity. Statement III is incorrect because short-term deposits that qualify as cash equivalents are part of cash management and not investing activities.

❓ Why Other Options Are Incorrect

Option B: Statement III is incorrect.
Option C: Statement III is incorrect.
Option D: Includes incorrect Statement III.

🎯 Strategy

Used: Statement Evaluation

Application: Classify activities based on the nature of the enterprise.

Final Logic: Only Statements I and II are correct.

🧠 Memory Trick

Broker Trades = Operating; Investor Buys = Investing

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

12 Why is the separate disclosure of cash flows from investing activities important?

A To calculate exact tax liabilities

B They represent the extent expenditures have been made for resources intended to generate future income

C To determine internal solvency levels

D To predict claims by providers of funds

💡 Short Explanation

Investing activities show investment in long-term resources. These resources generate future benefits.

✅ Correct Answer Explanation

Separate disclosure of investing activities enables users to identify how much cash has been invested in assets and resources intended to generate future income and cash flows. This helps assess future growth potential.

❓ Why Other Options Are Incorrect

Option A: Tax liability is not the main purpose.
Option C: Internal solvency relates mainly to operating cash flows.
Option D: Predicting claims by providers of funds relates more to financing activities.

🎯 Strategy

Used: Purpose Identification

🧠 Memory Trick

Investing Activities = Future Income Resources

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

13 Assertion (A): The issue of shares against the purchase of machinery is excluded from the Cash Flow Statement.
Reason (R): Such transactions do not require the use of cash or cash equivalents.

A A is true, R is false

B A is false, R is true

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

D Both A and R are true, but R is not the explanation

💡 Short Explanation

No cash is paid. Shares are exchanged directly for machinery. Non-cash transactions are excluded.

✅ Correct Answer Explanation

Issue of shares against the purchase of machinery is a non-cash transaction. Since no cash or cash equivalents are involved, AS-3 excludes such transactions from the Cash Flow Statement while requiring separate disclosure. Therefore, both the assertion and reason are true, and the reason correctly explains the assertion.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used: Assertion–Reason Analysis

🧠 Memory Trick

No Cash = No Cash Flow Statement Entry

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

14 What is the purpose of classifying activities into operating, investing, and financing?

A To satisfy tax authorities

B To calculate depreciation

C To record all journal entries

D To assess the impact on the financial position and cash equivalents of an enterprise

💡 Short Explanation

Classification improves understanding. It helps evaluate cash generation and utilization.

✅ Correct Answer Explanation

Classification into operating, investing, and financing activities allows users to assess how different business activities affect the financial position, liquidity, and cash equivalents of an enterprise.

❓ Why Other Options Are Incorrect

Tax calculation is not the objective.
Depreciation calculation is unrelated.
Journal entries are not the purpose of classification.

🎯 Strategy

Used: Concept Identification

🧠 Memory Trick

Classify to Analyze

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

15 How is net cash flow from financing activities calculated regarding loans?

A Proceeds from loans − Repayment of loans

B Proceeds + Interest Received − Repayment

C Proceeds − Repayment + Dividends Received

D Only Proceeds from loans are considered

💡 Short Explanation

Financing cash flow considers borrowing and repayment. Net effect is calculated by subtraction.

✅ Correct Answer Explanation

Net Cash Flow from Financing Activities = Loan Proceeds − Loan Repayments This formula measures the net financing impact of borrowings.

❓ Why Other Options Are Incorrect

Interest received is generally investing activity.
Dividends received are not financing inflows.
Repayments must also be considered.

🎯 Strategy

Used: Formula Recall

🧠 Memory Trick

Loans In − Loans Out

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

16 A bank loan was Rs 12,50,000 at the beginning of the year and Rs 7,50,000 at the end of the year. What is the cash flow from financing activities regarding this loan?

A Inflow of Rs 5,00,000

B Outflow of Rs 5,00,000

C Outflow of Rs 20,00,000

D Inflow of Rs 7,50,000

💡 Short Explanation

Loan balance decreased. Reduction indicates repayment.

✅ Correct Answer Explanation

Loan Repaid = Opening Loan − Closing Loan = Rs 12,50,000 − Rs 7,50,000 = Rs 5,00,000 Since the loan balance decreased, it represents a financing cash outflow.

❓ Why Other Options Are Incorrect

The loan was not raised.
Rs 20,00,000 is not derived from the data.

🎯 Strategy

Used: Numerical Analysis

🧠 Memory Trick

Loan Down = Cash Out

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

17 Sequence the final steps to complete a Cash Flow Statement:
I. Calculate Cash from Operating Activities.
II. Calculate Cash from Investing Activities.
III. Calculate Cash from Financing Activities.
IV. Ascertain the Net Increase/Decrease in Cash and add Opening Cash.

A IV, I, II, III

B IV, II, I, III

C I, II, III, IV

D III, IV, I, II

💡 Short Explanation

Compute all three activity sections first. Then calculate net change and closing cash.

✅ Correct Answer Explanation

The standard Cash Flow Statement format requires: 1. Operating Activities 2. Investing Activities 3. Financing Activities 4. Net Increase/Decrease and reconciliation with opening cash balance Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Net increase cannot be calculated before activity-wise cash flows.

🎯 Strategy

Used: Sequence Analysis

🧠 Memory Trick

Operate → Invest → Finance → Reconcile

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

18 Match the Following

List 1	List 2
1. Interim dividend paid on equity shares	a. Financing Activity Outflow
2. Dividend received on shares held as investment	b. Investing Activity Inflow
3. Provision for taxation	c. Operating Activity Outflow (Tax paid)
4. Proposed dividend of previous year	d. Added to Net Profit initially

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

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

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

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

💡 Short Explanation

Interim dividend paid → Financing outflow. Dividend received → Investing inflow. Tax paid → Operating outflow. Proposed dividend → Added back initially.

✅ Correct Answer Explanation

Each item is matched according to AS-3 treatment, making Option D the correct answer.

❓ Why Other Options Are Incorrect

They contain incorrect classifications.

🎯 Strategy

Used: Matching Analysis

🧠 Memory Trick

Dividend Paid–Finance, Dividend Received–Invest

📚 Class XII – Accountancy Part II – Cash Flow Statement – Dividend Payment

📄 Passage

An enterprise should report cash flows from operating activities either by using the Direct method whereby major classes of gross cash receipts and gross cash payments are disclosed; or the Indirect method whereby net profit or loss is duly adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past/future operating cash receipts, and items of income or expenses associated with investing or financing cash flows. The direct method provides information which is useful in estimating future cash flows.

Based on the passage, what is a key advantage of the Direct Method?

A It provides information useful in estimating future cash flows

B It uses net profit as the starting point

C It is mandatory for all companies

D It automatically adjusts non-cash items

💡 Short Explanation

Direct Method reports actual cash receipts and payments. Helps predict future cash flows.

✅ Correct Answer Explanation

The passage specifically states that the Direct Method provides information useful in estimating future cash flows. This is considered its major advantage over the Indirect Method.

❓ Why Other Options Are Incorrect

Net profit starting point relates to the Indirect Method.
It is not mandatory for all companies.
Non-cash adjustments are characteristic of the Indirect Method.

🎯 Strategy

Used: Passage-Based Analysis

🧠 Memory Trick

Direct Method = Future Cash Prediction

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

📄 Passage

According to the passage, the Indirect Method adjusts net profit for which of the following?

A Only gross cash receipts

B Effects of transactions of a non-cash nature

C Only equity share issues

D Only major classes of gross cash payments

💡 Short Explanation

Indirect Method begins with net profit. Non-cash items are adjusted.

✅ Correct Answer Explanation

The passage clearly states that the Indirect Method adjusts net profit for the effects of non-cash transactions, accruals, deferrals, and items related to investing and financing activities. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Gross cash receipts and payments relate to the Direct Method.
Equity share issues are not the only adjustment.

🎯 Strategy

Used: Passage-Based Analysis

🧠 Memory Trick

Indirect Method = Profit + Adjustments

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

CUET UG Accountancy Booster Test 2 Cash Flow Activities Classification

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