CUET UG Accountancy Booster Test 2 Special Items Treatment -

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CUET UG Accountancy Booster Test 1 Special Items Treatment

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 1 Special Items Treatment

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QUESTION 1 OF 20

Extraordinary items are strictly defined as items that are:

Answer Review

1 Extraordinary items are strictly defined as items that are:

A Occurring every financial year

B Non-recurring in nature

C Cash equivalents

D Only related to tax payments

💡 Short Explanation

Extraordinary items are unusual. They do not occur regularly. They are separate from ordinary business activities.

✅ Correct Answer Explanation

Extraordinary items arise from events that are clearly distinct from the ordinary activities of the enterprise and are not expected to recur frequently. Therefore, they are non-recurring in nature.

❓ Why Other Options Are Incorrect

Option A → Extraordinary items are not regular.
Option C → Cash equivalents are unrelated.
Option D → Extraordinary items are not limited to taxes.

🎯 Strategy

Used: Definition Matching

Application: Identify the defining feature of extraordinary items.

Final Logic: Extraordinary items are non-recurring.

🧠 Memory Trick

Extraordinary = Exceptional & Rare

📚 Class XII – Accountancy Part II – Cash Flow Statement – Extraordinary Items

2 Which statements are true regarding the disclosure of extraordinary items?
I. They are merged with general operating expenses.
II. They can be classified as arising from operating, investing, or financing activities.
III. Their separate disclosure helps users understand their effect on future cash flows.

A I and II only

B I and III only

C II and III only

D I, II and III

💡 Short Explanation

Extraordinary items are separately disclosed. They may relate to any activity category. Disclosure improves understanding.

✅ Correct Answer Explanation

AS-3 requires separate disclosure of extraordinary items. Such items may arise from operating, investing, or financing activities, and separate reporting helps users assess future cash flow effects.

❓ Why Other Options Are Incorrect

Statement I is incorrect because extraordinary items are not merged with normal operating expenses.

🎯 Strategy

Used: Statement Evaluation

Application: Verify each statement separately.

Final Logic: Only II and III are correct.

🧠 Memory Trick

Extraordinary Items = Separate Disclosure

📚 Class XII – Accountancy Part II – Cash Flow Statement – Separate Disclosure

3 Assertion (A): A bank paying interest on customer deposits classifies this cash outflow as a financing activity.
Reason (R): For financial enterprises, interest paid relates to their main revenue-generating operations.

A Both A and R are true, and R explains A.

B Both A and R are true, but R does not explain A.

C A is true, but R is false.

D A is false, but R is true.

💡 Short Explanation

Interest paid by banks is an operating activity. Lending and borrowing are core operations. Reason is correct.

✅ Correct Answer Explanation

For financial enterprises, interest paid forms part of normal operating activities. Therefore, the assertion is false, while the reason is true.

❓ Why Other Options Are Incorrect

Assertion is not true.
Interest paid is not classified as financing for banks.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Distinguish financial enterprise treatment.

Final Logic: Operating activity for banks.

🧠 Memory Trick

Bank Interest = Operating Activity

📚 Class XII – Accountancy Part II – Cash Flow Statement – Financial Enterprise Treatment

4 X Ltd. (a garment manufacturer) pays ₹50,000 as interest on a long-term bank loan. Under which activity will this be shown?

A Cash Outflow from Financing Activities

B Cash Outflow from Operating Activities

C Cash Inflow from Investing Activities

D Cash Outflow from Investing Activities

💡 Short Explanation

Garment manufacturer is a non-financial enterprise. Interest paid relates to financing. Therefore financing outflow.

✅ Correct Answer Explanation

For non-financial enterprises, interest paid is classified as a financing activity because it represents the cost of obtaining borrowed funds.

❓ Why Other Options Are Incorrect

Not operating activity under AS-3.
Not an investing transaction.

🎯 Strategy

Used: Classification Rule

Application: Apply non-financial enterprise treatment.

Final Logic: Financing outflow.

🧠 Memory Trick

Interest Paid = Financing Cost

📚 Class XII – Accountancy Part II – Cash Flow Statement – Non-financial Enterprise Treatment

5 A mutual fund company receives ₹20,000 as dividend on its investments in shares. How is this recorded?

A Investing Inflow

B Operating Inflow

C Financing Inflow

D Excluded from Cash Flow

💡 Short Explanation

Mutual fund is a financial enterprise. Dividend income arises from normal operations. Classified as operating inflow.

✅ Correct Answer Explanation

For financial enterprises such as mutual funds, dividend received is considered part of operating activities because investment income forms part of normal business operations.

❓ Why Other Options Are Incorrect

Investing classification applies to non-financial enterprises.
Not financing or excluded.

🎯 Strategy

Used: Industry-Specific Classification

Application: Identify enterprise type first.

Final Logic: Operating inflow.

🧠 Memory Trick

Financial Enterprise + Dividend = Operating

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

6 Arrange the following steps for treatment of Proposed Dividend under the indirect method:
1. Show as an outflow under financing activities.
2. Identify the previous year's proposed dividend.
3. Add back to Net Profit to find Operating Profit before Working Capital Changes.

A 3, 1, 2

B 1, 2, 3

C 2, 3, 1

D 3, 2, 1

💡 Short Explanation

Identify dividend. Add back in operating section. Show payment in financing section.

✅ Correct Answer Explanation

The previous year's proposed dividend is first identified, then added back while computing operating cash flows, and finally reported as a financing outflow when paid.

❓ Why Other Options Are Incorrect

Sequence is incorrect.

🎯 Strategy

Used: Sequence Analysis

Application: Follow indirect method procedure.

Final Logic: Identify → Add Back → Financing Outflow.

🧠 Memory Trick

Find → Add → Finance

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

7 Net Profit before Tax = ₹1,00,000. Total Tax Paid = ₹25,000, including ₹5,000 Capital Gains Tax. What amount is deducted to arrive at Cash from Operating Activities?

A ₹25,000

B ₹5,000

C ₹30,000

D ₹20,000

💡 Short Explanation

Capital gains tax belongs to investing activity. Only operating tax is deducted. ��25,000 − ₹5,000 = ₹20,000.

✅ Correct Answer Explanation

Operating Tax = Total Tax Paid − Capital Gains Tax = ₹25,000 − ₹5,000 = ₹20,000

❓ Why Other Options Are Incorrect

They either include or ignore capital gains tax incorrectly.

🎯 Strategy

Used: Classification + Calculation

Application: Separate investing tax from operating tax.

Final Logic: ₹20,000.

🧠 Memory Trick

Capital Gains Tax = Investing Tax

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

8 The net cash inflow from the sale of fixed assets is calculated as:

A Sale Proceeds − Capital Gains Tax Paid

B Sale Proceeds + Capital Gains Tax Paid

C Book Value − Capital Gains Tax Paid

D Book Value + Profit on Sale

💡 Short Explanation

Capital gains tax reduces actual inflow. Net inflow is what remains after tax.

✅ Correct Answer Explanation

The actual net cash benefit from selling a fixed asset equals the sale proceeds received less the capital gains tax paid on the transaction.

❓ Why Other Options Are Incorrect

Tax cannot increase inflow.
Book value is irrelevant for cash flow.

🎯 Strategy

Used: Cash Flow Logic

Application: Determine actual cash retained.

Final Logic: Sale proceeds minus related tax.

🧠 Memory Trick

Net Sale Cash = Sale Proceeds − Tax

📚 Class XII – Accountancy Part II – Cash Flow Statement – Capital Gains Tax

9 As per AS-3, dividend tax paid is treated similarly to:

A Operating Income

B Capital Gains Tax

C Dividend Paid

D Dividend Received

💡 Short Explanation

Dividend tax arises from dividend distribution. Follows the same classification. Financing activity.

✅ Correct Answer Explanation

Dividend tax paid is classified in the same manner as dividend paid because both relate to distributions to shareholders.

❓ Why Other Options Are Incorrect

Capital gains tax is investing.
Dividend received is classified differently.

🎯 Strategy

Used: Related Transaction Rule

Application: Follow the underlying transaction.

Final Logic: Dividend tax follows dividend payment.

🧠 Memory Trick

Dividend Tax Follows Dividend

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

10 Match the Following

List 1	List 2
1. Tax on normal operating profit	a. Investing Activity
2. Capital gains tax on sale of land	b. Financing Activity
3. Dividend distribution tax	c. Operating Activity (Inflow)
4. Income tax refund	d. Operating Activity (Outflow)

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

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

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

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

💡 Short Explanation

Normal tax → Operating outflow. Capital gains tax → Investing. Dividend tax → Financing. Tax refund → Operating inflow.

✅ Correct Answer Explanation

Each tax item follows the classification of the activity to which it relates.

❓ Why Other Options Are Incorrect

They contain incorrect classifications.

🎯 Strategy

Used: Option Grouping

Application: Match taxes to related activities.

Final Logic: Option D is correct.

🧠 Memory Trick

Operating Tax–Operate, Capital Gains–Invest, Dividend Tax–Finance

📚 Class XII – Accountancy Part II – Cash Flow Statement – Tax Disclosure

📄 Passage

In case of a financial enterprise, interest paid, interest received and dividend received are classified as operating activities while dividend paid is a financing activity. In case of a non-financial enterprise, payment of interest and dividends are classified as financing activities whereas receipt of interest and dividends are classified as investing activities.

Based on the passage principles of classification, if a non-financial company issues shares to pay for an asset, how is the dividend subsequently paid on those shares classified?

A Financing Activity

B Investing Activity

C Operating Activity

D Non-cash Transaction

💡 Short Explanation

Dividend paid relates to shareholders. For non-financial enterprises, dividend payment is financing. Source of shares does not change classification.

✅ Correct Answer Explanation

Even though the shares were issued in exchange for an asset, any future dividend paid on those shares represents a distribution to shareholders and is classified as a financing activity.

❓ Why Other Options Are Incorrect

Option B → Not related to investments.
Option C → Not a revenue-generating activity.
Option D → Dividend payment involves cash.

🎯 Strategy

Used: Passage-Based Classification

Application: Follow the dividend classification rule.

Final Logic: Dividend paid = Financing activity.

🧠 Memory Trick

Dividend Paid → Finance

📚 Class XII – Accountancy Part II – Cash Flow Statement – Dividend Paid Classification

📄 Passage

In case of a financial enterprise (whose main business is lending and borrowing), interest paid, interest received and dividend received are classified as operating activities while dividend paid is a financing activity. In case of a non-financial enterprise, as per AS-3, it is considered more appropriate that payment of interest and dividends are classified as financing activities whereas receipt of interest and dividends are classified as investing activities

.
According to the passage, if a non-financial company pays interest on its debentures before they are converted into shares, this interest payment is an example of:

A Operating Activity

B Financing Activity

C Investing Activity

D Extraordinary Item

💡 Short Explanation

Interest paid by non-financial enterprises is financing. Debenture conversion later does not affect classification. Payment remains financing outflow.

✅ Correct Answer Explanation

AS-3 classifies interest paid by a non-financial enterprise as a financing activity because it represents the cost of borrowed funds.

❓ Why Other Options Are Incorrect

Option A → Applies to financial enterprises.
Option C → Not related to investment.
Option D → Not extraordinary.

🎯 Strategy

Used: Classification Rule

Application: Apply non-financial enterprise treatment.

Final Logic: Financing activity.

🧠 Memory Trick

Interest Paid = Finance Cost

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

13 Which of the following transactions has a cash impact and should be included in the Cash Flow Statement?

A Conversion of debt to equity

B Bonus shares issued

C Depreciation on machinery

D Repayment of long-term bank loan

💡 Short Explanation

Repayment involves actual cash outflow. Other options are non-cash transactions.

✅ Correct Answer Explanation

Repayment of a long-term bank loan requires cash payment and is therefore included as a financing cash outflow in the Cash Flow Statement.

❓ Why Other Options Are Incorrect

Option A → Non-cash conversion.
Option B → Non-cash issue of shares.
Option C → Non-cash expense.

🎯 Strategy

Used: Elimination

Application: Identify actual cash movement.

Final Logic: Loan repayment affects cash.

🧠 Memory Trick

Cash Paid = Cash Flow Statement Entry

📚 Class XII – Accountancy Part II – Cash Flow Statement – Exclusion Principle

14 Evaluate the following concerning non-cash transactions:
I. They affect the net assets of the enterprise.
II. They are reported in the Cash Flow Statement under investing activities.

A I is true, II is false

B I is false, II is true

C Both are true

D Both are false

💡 Short Explanation

Non-cash transactions affect assets and liabilities. They are excluded from the Cash Flow Statement.

✅ Correct Answer Explanation

Non-cash transactions may significantly alter the financial position of the enterprise, but because they do not involve cash, they are not reported in the Cash Flow Statement.

❓ Why Other Options Are Incorrect

Statement II is incorrect.
Non-cash items are disclosed separately.

🎯 Strategy

Used: Statement Evaluation

Application: Distinguish cash effects from accounting effects.

Final Logic: Only Statement I is true.

🧠 Memory Trick

No Cash = Separate Disclosure

📚 Class XII – Accountancy Part II – Cash Flow Statement – Non-cash Transactions

15 A non-financial company pays an instalment of ₹1,00,000 for machinery purchased on deferred credit. The instalment includes ₹20,000 as interest. The amount shown under financing activities is:

A ₹1,00,000 (Outflow)

B ₹20,000 (Outflow)

C ₹80,000 (Outflow)

D ₹1,20,000 (Outflow)

💡 Short Explanation

Interest component is financing. Principal component belongs elsewhere.

✅ Correct Answer Explanation

For a non-financial enterprise, interest paid is classified as a financing activity. Therefore, the ₹20,000 interest component is shown as a financing cash outflow.

❓ Why Other Options Are Incorrect

They incorrectly include the principal component.

🎯 Strategy

Used: Component Analysis

Application: Separate principal and interest.

Final Logic: Financing outflow = ₹20,000.

🧠 Memory Trick

Interest = Finance

📚 Class XII – Accountancy Part II – Cash Flow Statement – Mixed Transactions

16 Following the data from the previous question, what amount will be recorded as a cash outflow under investing activities?

A ₹1,00,000

B ₹20,000

C ₹80,000

D ₹0

💡 Short Explanation

Principal relates to acquisition of machinery. Machinery is a fixed asset. Therefore investing outflow.

✅ Correct Answer Explanation

Principal Component = ₹1,00,000 − ₹20,000 = ₹80,000 The principal payment relates to acquisition of machinery and is classified as an investing cash outflow.

❓ Why Other Options Are Incorrect

Option B is the interest component.
Option A includes both components.
Option D ignores the principal payment.

🎯 Strategy

Used: Substitution

Application: Separate principal from interest.

Final Logic: Investing outflow = ₹80,000.

🧠 Memory Trick

Principal = Invest, Interest = Finance

📚 Class XII – Accountancy Part II – Cash Flow Statement – Principal Component

17 For a share brokerage firm, the purchase of shares for dealing purposes is classified as:

A Operating Activity

B Investing Activity

C Financing Activity

D Extraordinary Item

💡 Short Explanation

Share trading is the firm's main business. Transactions form part of normal operations.

✅ Correct Answer Explanation

For a share brokerage firm, buying and selling shares is a principal revenue-generating activity and therefore classified as an operating activity.

❓ Why Other Options Are Incorrect

Investing classification applies to ordinary investors.
Not financing or extraordinary.

🎯 Strategy

Used: Industry-Specific Classification

Application: Consider nature of business.

Final Logic: Core business activity = Operating.

🧠 Memory Trick

Broker Buys Shares = Operating Activity

📚 Class XII – Accountancy Part II – Cash Flow Statement – Financial Enterprise Cases

18 Cash advances and loans made to third parties (other than by a financial enterprise) are:

A Operating Outflows

B Investing Outflows

C Financing Outflows

D Cash Equivalents

💡 Short Explanation

Loans granted are investments. Not part of normal operations.

✅ Correct Answer Explanation

For non-financial enterprises, advances and loans made to third parties represent investments of funds and are classified as investing cash outflows.

❓ Why Other Options Are Incorrect

Not operating activity.
Financing relates to raising capital.
Not cash equivalents.

🎯 Strategy

Used: Classification Rule

Application: Identify purpose of cash outflow.

Final Logic: Lending = Investing.

🧠 Memory Trick

Loan Given = Investment

📚 Class XII – Accountancy Part II – Cash Flow Statement – Non-financial Cases

19 Assertion (A): A single transaction may include cash flows that are classified differently.
Reason (R): Non-cash transactions are included in the Cash Flow Statement to maintain transparency.

A Both A and R are true, and R explains A.

B Both A and R are true, but R does not explain A.

C A is true, but R is false.

D A is false, but R is true.

💡 Short Explanation

One transaction may contain multiple components. Example: principal and interest. Non-cash transactions are excluded.

✅ Correct Answer Explanation

A mixed transaction may contain investing and financing elements simultaneously. However, non-cash transactions are not included in the Cash Flow Statement; they are disclosed separately.

❓ Why Other Options Are Incorrect

Reason is false.
Therefore A and B are incorrect.
Assertion is true.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Check each statement separately.

Final Logic: Assertion true, Reason false.

🧠 Memory Trick

Mixed Transaction = Split Classification

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

20 Separate disclosure of cash flows from financing activities is useful primarily for:

A Calculating depreciation correctly

B Predicting future tax liabilities

C Tracking inventory changes

D Predicting claims on future cash flows by providers of funds

💡 Short Explanation

Financing activities affect investors and lenders. They indicate future obligations. Important for external users.

✅ Correct Answer Explanation

Separate disclosure of financing activities helps users assess future claims on the enterprise's cash flows by providers of capital such as lenders and shareholders.

❓ Why Other Options Are Incorrect

Depreciation, taxes, and inventory are not the primary purpose.

🎯 Strategy

Used: Concept Matching

Application: Identify the objective of financing disclosure.

Final Logic: Financing information helps assess future claims.

🧠 Memory Trick

Finance Section = Future Claims

📚 Class XII – Accountancy Part II – Cash Flow Statement – Better Understanding

CUET UG Accountancy Booster Test 1 Special Items Treatment

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