CUET UG Accountancy Booster Test 3 Introduction and Fundamentals -

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CUET UG Accountancy Booster Test 2 Introduction and Fundamentals

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 2 Introduction and Fundamentals

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QUESTION 1 OF 20

While the Cash Flow Statement shows inflows and outflows of cash over a period, the Position Statement is uniquely defined by which characteristic?

Answer Review

1 While the Cash Flow Statement shows inflows and outflows of cash over a period, the Position Statement is uniquely defined by which characteristic?

A It shows operational outcomes over a fiscal year.

B It focuses strictly on non-cash items.

C It records the historical generation of cash equivalents.

D It shows the financial position of an enterprise as on a particular date.

💡 Short Explanation

The Position Statement (Balance Sheet) presents assets, liabilities, and equity on a specific date. It reflects the financial position of the enterprise. It does not show cash flows over a period.

✅ Correct Answer Explanation

The Position Statement provides a snapshot of the financial position of an enterprise on a particular date. Unlike the Cash Flow Statement, which reports cash inflows and outflows during a period, the Position Statement shows what the enterprise owns and owes at a specific point in time.

❓ Why Other Options Are Incorrect

Option A: Describes the Income Statement.
Option B: The Position Statement includes both cash and non-cash items.
Option C: Describes the function of a Cash Flow Statement.

🎯 Strategy

Used: Concept Differentiation

Application: Distinguish between Position Statement and Cash Flow Statement.

Final Logic: Position Statement = Financial Position on a Specific Date.

🧠 Memory Trick

Position = Particular Date

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Position Statement Meaning

2 Assertion (A): The Income Statement is prepared on an accrual basis, hence its net profit must be adjusted to find operating cash flows.
Reason (R): The Income Statement excludes non-operating items like interest paid and profit on sale of fixed assets.

A Both A and R are true

B A is false but R is true

C A is true but R is false

D Both A and R are false

💡 Short Explanation

Net profit is prepared on an accrual basis. Adjustments are required to derive cash flows. The Income Statement does not exclude non-operating items.

✅ Correct Answer Explanation

The assertion is correct because net profit includes accruals and non-cash items, requiring adjustments to determine operating cash flows. The reason is false because items such as interest paid and profit on sale of fixed assets are generally included in the Income Statement and later adjusted while preparing the Cash Flow Statement.

❓ Why Other Options Are Incorrect

Option A: Reason is false.
Option B: Assertion is true.
Option D: Assertion is not false.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Verify each statement independently.

Final Logic: Assertion True; Reason False.

🧠 Memory Trick

Accrual Profit ≠ Cash Profit

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Income Statement Meaning

3 Which of the following defines "Cash Equivalents" in the context of the Cash Flow Statement?
(I) Long-term investments with high maturity dates.
(II) Short-term highly liquid investments readily convertible into known amounts of cash.
(III) Investments subject to an insignificant risk of changes in value.

A I and II only

B II and III only

C I and III only

D I, II and III

💡 Short Explanation

Cash equivalents are short-term. They are highly liquid. They carry insignificant risk.

✅ Correct Answer Explanation

Cash equivalents are short-term highly liquid investments that are readily convertible into known amounts of cash and are subject to insignificant risk of changes in value. Long-term investments do not qualify as cash equivalents.

❓ Why Other Options Are Incorrect

Statement I is incorrect because long-term investments are excluded.

🎯 Strategy

Used: Statement Evaluation

Application: Compare each statement with the AS-3 definition.

Final Logic: Only II and III satisfy the definition.

🧠 Memory Trick

Cash Equivalent = Liquid + Safe + Short-Term

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Meaning of Cash Equivalents

4 The practical utility and importance of the Cash Flow Statement to users lies in its ability to:

A Show the timing and certainty of the generation of cash and cash equivalents

B Replace the accrual system of accounting

C Display the exact depreciation method used

D Act as a substitute for the Position Statement

💡 Short Explanation

Users need information about cash availability. Timing and certainty are important for decisions.

✅ Correct Answer Explanation

The Cash Flow Statement helps users assess the timing and certainty of future cash generation, enabling better economic decisions and evaluation of liquidity.

❓ Why Other Options Are Incorrect

It does not replace accounting systems or other statements.

🎯 Strategy

Used: Purpose Identification

🧠 Memory Trick

Cash + Timing + Certainty = Decision Making

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Importance of Cash Flow Statement

5 Under the Companies Act, 2013, if accounting standards are not followed in preparing the Cash Flow Statement, the financial statements:

A Become invalid for 10 years

B Are converted to non-cash statements

C Will not be considered true and fair

D Must be approved by external creditors immediately

💡 Short Explanation

Compliance with Accounting Standards is mandatory. Non-compliance affects reliability.

✅ Correct Answer Explanation

The Companies Act, 2013 requires compliance with Accounting Standards. Failure to comply means financial statements may not present a true and fair view.

❓ Why Other Options Are Incorrect

The Act does not prescribe any of the consequences mentioned in the other options.

🎯 Strategy

Used: Legal Framework Analysis

🧠 Memory Trick

Standards Followed = True & Fair View

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Companies Act 2013 Provisions

6 Arrange the steps to calculate Cash Flows from Operating Activities under the Indirect Method as per AS-3:
(1) Add non-cash items like depreciation
(2) Start with Net Profit/Loss before Tax and Extraordinary Items
(3) Adjust for working capital changes (Current Assets/Liabilities)
(4) Subtract non-operating incomes like dividend received

A 2, 1, 4, 3

B 1, 2, 3, 4

C 2, 4, 1, 3

D 3, 2, 1, 4

💡 Short Explanation

Begin with profit. Add non-cash expenses. Remove non-operating income. Adjust working capital.

✅ Correct Answer Explanation

The correct sequence under the Indirect Method is: 1. Start with Net Profit before Tax. 2. Add non-cash expenses. 3. Deduct non-operating incomes. 4. Adjust for working capital changes. Thus, Option A is correct.

❓ Why Other Options Are Incorrect

The order of adjustments is incorrect.

🎯 Strategy

Used: Sequence Analysis

🧠 Memory Trick

Profit → Add Back → Remove Income → Working Capital

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: AS-3 Indirect Method

7 A company receives ₹50,000 from the issue of equity shares, ₹10,000 dividend from investments, and ₹30,000 cash from trade receivables. What is the total cash inflow classified under financing and investing activities combined?

A ₹90,000

B ₹40,000

C ₹80,000

D ₹60,000

💡 Short Explanation

Issue of shares = Financing inflow. Dividend received = Investing inflow. Trade receivables = Operating inflow.

✅ Correct Answer Explanation

Financing Inflow = ₹50,000 Investing Inflow = ₹10,000 Total = ₹60,000 Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

They incorrectly include operating cash receipts.

🎯 Strategy

Used: Classification + Calculation

🧠 Memory Trick

Finance + Invest Only

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Inflows of Cash

8 Match the Following

List 1	List 2
1. Payment to suppliers	a. Financing Outflow
2. Purchase of fixed assets	b. Operating Outflow
3. Repayment of long-term borrowings	c. Investing Outflow
4. Income tax paid (normal)	d. Operating Outflow (deducted at the end)

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

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

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

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

💡 Short Explanation

Suppliers → Operating. Fixed Assets → Investing. Borrowings → Financing. Income Tax → Operating.

✅ Correct Answer Explanation

Each item is matched with the appropriate activity classification under AS-3. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Incorrect activity classifications.

🎯 Strategy

Used: Matching Analysis

🧠 Memory Trick

Suppliers–Operate, Assets–Invest, Loans–Finance

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Outflows of Cash

9 The primary objective of providing information about cash flows during a period helps users to:

A Assess the enterprise's needs to utilize those cash flows

B Discard the Position Statement entirely

C Calculate gross profit margin exactly

D Exclude non-financial indicators from reports

💡 Short Explanation

Users evaluate cash generation and usage. Helps in planning and decision-making.

✅ Correct Answer Explanation

The objective of the Cash Flow Statement is to provide information about cash generation and utilization, enabling users to assess liquidity and financial flexibility.

❓ Why Other Options Are Incorrect

The Cash Flow Statement complements, not replaces, other statements.

🎯 Strategy

Used: Objective Identification

🧠 Memory Trick

Cash Flow = Generate + Utilize

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Purpose of Cash Flow Statement

10 Economic decisions taken by users evaluating the Cash Flow Statement heavily rely on assessing:

A Only past non-cash expenditures

B The geographical expansion plans of the firm

C The timing and certainty of generating cash and cash equivalents

D The personal net worth of the company's board members

💡 Short Explanation

Decision-makers focus on future cash availability. Timing and certainty are critical.

✅ Correct Answer Explanation

The usefulness of the Cash Flow Statement lies in helping users evaluate the timing and certainty of cash generation, which supports informed economic decisions.

❓ Why Other Options Are Incorrect

They do not relate to the objective of cash flow reporting.

🎯 Strategy

Used: Decision Usefulness Analysis

🧠 Memory Trick

Timing + Certainty = Better Decisions

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Decision Usefulness

11 If Operating Activities (A) = ₹10,000, Investing Activities (B) = (₹5,000), and Financing Activities (C) = ₹2,000, what is the net increase/decrease in cash and cash equivalents?

A Decrease of ₹3,000

B Increase of ₹7,000

C Increase of ₹17,000

D Decrease of ₹7,000

💡 Short Explanation

Net Cash Flow = Operating + Investing + Financing. Positive result indicates increase in cash.

✅ Correct Answer Explanation

Net Increase in Cash and Cash Equivalents = ₹10,000 + (−₹5,000) + ₹2,000 = ₹7,000 Therefore, cash and cash equivalents increase by ₹7,000.

❓ Why Other Options Are Incorrect

Option A: Incorrect sign and amount.
Option C: Adds all values without considering investing outflow.
Option D: Indicates decrease instead of increase.

🎯 Strategy

Used: Substitution Method

Application: Apply the formula for net cash flow.

Final Logic: ₹10,000 − ₹5,000 + ₹2,000 = ₹7,000.

🧠 Memory Trick

Operating + Investing + Financing = Net Cash Flow

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Coverage of Activities

12 AS-3 requires an enterprise to prepare and present a Cash Flow Statement for:

A Each month internally

B Randomly selected periods

C Only when new shares are issued

D Each accounting period for which financial statements are presented

💡 Short Explanation

Cash Flow Statement accompanies financial statements. Prepared for every accounting period.

✅ Correct Answer Explanation

AS-3 mandates that a Cash Flow Statement be presented for each accounting period for which financial statements are prepared. This ensures consistency and comparability.

❓ Why Other Options Are Incorrect

No requirement exists for monthly preparation.
Preparation is not conditional on share issues.
Random periods are not permitted.

🎯 Strategy

Used: Standard Requirement Recall

🧠 Memory Trick

Every Financial Year = Cash Flow Statement

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Time Period Consideration

13 If management assesses that "cash from operations" is insufficient to maintain the operating capability, paying dividends, and making new investments without external financing, this indicates poor:

A Internal solvency level

B Tax planning

C Non-cash accounting

D Historical asset valuation

💡 Short Explanation

Internal solvency measures self-sufficiency. Insufficient operating cash indicates weak solvency.

✅ Correct Answer Explanation

Internal solvency refers to the ability of a business to generate sufficient cash from operations to maintain operations, pay dividends, and finance investments without relying on external sources.

❓ Why Other Options Are Incorrect

Tax planning is unrelated.
Non-cash accounting does not measure solvency.
Historical asset valuation is unrelated.

🎯 Strategy

Used: Concept Application

🧠 Memory Trick

Operations Fund Operations = Internal Solvency

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Internal Users

14 External users like capital providers analyze the financing activities section primarily because it is useful in:

A Finding operational inefficiencies

B Predicting claims on future cash flows by providers of funds

C Ascertaining the depreciation written off

D Knowing the exact cost of raw materials

💡 Short Explanation

Investors and lenders provide funds. Financing activities affect future claims on cash.

✅ Correct Answer Explanation

Financing activities provide information regarding borrowings, share capital, and repayments. This helps capital providers predict future claims on the enterprise's cash flows.

❓ Why Other Options Are Incorrect

Operational inefficiencies belong to operating analysis.
Depreciation and raw material costs are unrelated.

🎯 Strategy

Used: User Perspective Analysis

🧠 Memory Trick

Finance Section = Future Claims

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: External Users

15 Regarding liquidity assessment:
(I) Cash management includes the investment of excess cash in cash equivalents.
(II) Purchase of short-term marketable securities constituting cash equivalents is NOT considered an outflow while preparing the Cash Flow Statement.

A Only I

B Only II

C Neither I nor II

D Both I and II

💡 Short Explanation

Excess cash is invested in cash equivalents. Movement between cash and cash equivalents is excluded.

✅ Correct Answer Explanation

Cash management involves investing surplus cash into cash equivalents. Since cash equivalents are part of cash management, purchasing them does not constitute a reportable cash outflow in the Cash Flow Statement.

❓ Why Other Options Are Incorrect

Both statements are correct.

🎯 Strategy

Used: Statement Evaluation

🧠 Memory Trick

Cash ↔ Cash Equivalent = No Cash Flow

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Liquidity Assessment

16 A Cash Flow Statement aids in evaluating a company's financial structure, particularly its solvency, by revealing its ability to:

A Increase total liabilities indefinitely

B Hide operational losses using depreciation

C Affect the amounts and timings of cash flows to adapt to changing circumstances

D Exclude interest paid from its financial activities

💡 Short Explanation

Financial flexibility is a component of solvency. Ability to manage cash flow timing is important.

✅ Correct Answer Explanation

Cash Flow Statements help evaluate financial flexibility and solvency by showing whether an enterprise can adapt cash flows according to changing circumstances and obligations.

❓ Why Other Options Are Incorrect

Solvency is not measured by increasing liabilities.
Losses cannot be hidden through depreciation.
Interest treatment does not define solvency.

🎯 Strategy

Used: Financial Analysis Interpretation

🧠 Memory Trick

Flexibility = Strong Solvency

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Solvency Evaluation

17 Assertion (A): Cash Flow Statement enhances inter-firm comparability.
Reason (R): It completely replaces the need for an Income Statement.

A Both A and R are true

B A is true but R is false

C A is false but R is true

D Both A and R are false

💡 Short Explanation

Cash Flow Statements improve comparability. They do not replace Income Statements.

✅ Correct Answer Explanation

Cash Flow Statements improve inter-firm comparison because cash information is less affected by differing accounting policies. However, the Income Statement remains essential and cannot be replaced.

❓ Why Other Options Are Incorrect

Reason is incorrect.
Assertion is correct.

🎯 Strategy

Used: Assertion–Reason Analysis

🧠 Memory Trick

Cash Flow Complements, Not Replaces

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Inter-firm Comparison

18 Performance evaluation via Cash Flow Statement is helpful in examining the relationship between:

A Profitability and net cash flow

B Total assets and total liabilities

C Authorized capital and issued capital

D Statutory reserves and general reserves

💡 Short Explanation

Profit does not always equal cash. Cash Flow Statement bridges the gap.

✅ Correct Answer Explanation

The Cash Flow Statement helps evaluate how reported profitability translates into actual cash generation, enabling better performance assessment.

❓ Why Other Options Are Incorrect

They are balance sheet relationships, not cash flow performance measures.

🎯 Strategy

Used: Performance Evaluation Analysis

🧠 Memory Trick

Profit vs Cash = Key Evaluation

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Performance Evaluation

📄 Passage

According to AS-3, extraordinary items are non-recurring in nature (e.g., loss due to earthquake) and cash flows associated with them should be classified separately. Similarly, non-cash items like depreciation or issuance of bonus shares do not affect the historical cash movement and are excluded or adjusted. The Cash Flow Statement fundamentally deals with historical cash inflows and outflows, meaning its utility is inherently tied to past transactions rather than acting as a definitive forward-looking budget.

Based on the passage, why are items like depreciation or issuance of bonus shares adjusted or excluded from the final cash flow amount?

A Because they are extraordinary items

B Because they generate heavy cash inflows

C Because they do not affect the historical cash movement

D Because they represent future cash outflows

💡 Short Explanation

Depreciation and bonus shares are non-cash items. They do not involve actual cash flow.

✅ Correct Answer Explanation

The Cash Flow Statement records only actual cash inflows and outflows. Since depreciation and issuance of bonus shares do not involve cash movement, they are adjusted or excluded.

❓ Why Other Options Are Incorrect

They are not necessarily extraordinary.
They do not generate cash inflows.
They are not future cash outflows.

🎯 Strategy

Used: Passage-Based Analysis

🧠 Memory Trick

No Cash Movement = Exclude

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Non-cash Exclusion

📄 Passage

The passage suggests that the utility of the Cash Flow Statement is tied to:

A Forward-looking budgets solely

B Real-time stock market valuations

C Revaluation of non-cash fixed assets

D Historical cash inflows and outflows from past transactions

💡 Short Explanation

Cash Flow Statement is historical in nature. It records past cash transactions.

✅ Correct Answer Explanation

The passage emphasizes that the Cash Flow Statement reports historical cash inflows and outflows. Therefore, its usefulness is based on past transactions rather than future budgets or forecasts.

❓ Why Other Options Are Incorrect

Cash Flow Statements are not primarily forward-looking.
Market valuations and asset revaluations are outside its scope.

🎯 Strategy

Used: Passage-Based Analysis

🧠 Memory Trick

Cash Flow Statement = History of Cash

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Historical Nature

CUET UG Accountancy Booster Test 2 Introduction and Fundamentals

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