CONTENTS
Module 7
PROVISIONS RELATING TO AUDIT UNDER COMPANIES ACT 7.1
Module 8
AUDITING OF DIFFERENT TYPES OF UNDERTAKING
Module-wise Solved Paper: December 2024 (Suggested Answers) P.1
A QUICK REVIEW
The statement of cash ows shall report cash ows during the period classi ed under the following three categories —
(a)Cash ow from operating activities;
(b)Cash ow from investing activities; and
(c)Cash ow from nancing activities.
Note: Sum of these three types of cash ows re ects the net change in cash and cash equivalent of the entity.
Cash and Cash Equivalents:
(
a)Cash shall consist of cash in hand and demand deposits; and
(b)Cash equivalent consist of short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insigni cant risk of changes in value.
Types of Cash ows:
(a)Cash ow from operating activities
Cash ows from operating activities are primarily derived from the principal revenue producing activities of the entity. Therefore, they generally result from the transactions and other events that enter into the determination of pro t or loss.
Examples of cash ows from operating activities are:
(i)cash receipts from the sale of goods and the rendering of services;
(ii)cash receipts from royalties, fees, commissions and other revenue;
(iii)cash payments to suppliers for goods and services;
(iv)cash payments to and on behalf of employees;
(v)cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy bene ts;
(vi)cash payments or refunds of income taxes unless they can be speci cally identi ed with nancing and investing activities; and
(vii)cash receipts and payments from contracts held for dealing or trading purposes.
(
SECTION A : CORPORATE ACCOUNTING
Note: Cash received on account of sale of an item of plant is a cash ow from investing activities.
Again, cash ows arising from the purchase and sale of dealing or trading securities are classi ed as operating activities. Similarly, cash advances and loans made by nancial institutions are usually classi ed as operating activities since they relate to the main revenue-producing activity of that entity.
b) Cash ow from investing activities
The activities of acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents are investing activities. However, only expenditures that result in a recognized asset in the balance sheet are eligible for classi cation as investing activities.
Examples of cash ows arising from investing activities are:
(i) cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalised development costs and self-constructed property, plant and equipment;
(
(
ii) cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
iii) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes);
(
iv) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
(v) cash advances and loans made to other parties (other than advances and loans made by a nancial enterprise);
(vi) cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a nancial enterprise);
(vii) cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classi ed as nancing activities; and
(viii) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classi ed as nancing activities.
(c) Cash from nancing activities
These are activities that result into change in size and composition of owner’s capital and borrowing of the organisation. Accordingly, it includes receipts from issue of shares, bonds and other instruments, borrowing and repayment of loans.
Examples of cash ows arising from nancing activities are:
(i) cash proceeds from issuing shares or other similar instruments; (ii) cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings; (iii) cash repayments of amounts borrowed.
PAST EXAMINATION QUESTIONS
OBJECTIVE QUESTIONS
Q. 1. Interest and Dividends received in the case of a manufacturing concern should be classified as cash flow from:
(A) Operating activities (B) Financing activities (C) Investing activities (D) None of the above. [June 2013, 1 Mark]
Ans. (C) Investing activities
Q. 2. Which of the following items is not a part of cash flow from operating activities?
(A) Collection from customers
(B) Payment of outstanding wages
(C) Payment to suppliers of machinery
(D) Advances to foreign suppliers for raw materials [June 2017, 1 Mark]
Ans. (C) Payment to suppliers of machinery
Q. 3. While preparing Cash Flow Statement of XY Ltd., a finance company, interest received on loans should be shown as:
(A) Cash Flow from Operating Activities
(B) Cash Flow from Investing Activities
(C) Cash Flow from Financing Activities
(D) Cash and Cash Equivalent [Dec. 2017, 1 Mark]
Ans. (A) Cash Flow from Operating Activities
Q. 4. Which of the following is not a component of Cash Flow Statement?
(A) Cash payments to suppliers for goods and services
(B) Charging of Depreciation
(C) Cash advances and loans made to third parties
(D) Cash repayments of amounts borrowed [June 2018, 1 Mark]
Ans. (B) Charging of Depreciation
SECTION A : CORPORATE ACCOUNTING
Q. 5. In case of Cash Flow Statement prepared under indirect Method, decrease in current liabilities is:
(A) Added to cash flow from operating activities
(B) Deducted to cash flow from operating activities
(C) Added to cash flow from investing activities
(D) None of the above
Ans. (B) deducted to cash ow from operating activities
[June 2019, 1 Mark]
Q. 6. How should the revaluation of Fixed Assets be treated in a Cash Flow Statement?
(A) Under cash flow from financing activities
(B) Do not appear in cash flow statement
(C) Under cash flow from operating activities
(D) Under cash flow from investing activities
Ans. (B) Do not appear in cash ow statement
[Dec. 2021, 1 Mark]
Q. 7. Cash Flow arising from which of the following Operating, Investing or Financing Activities may be reported on a net basis? Name one item.
[Dec. 2021, 1 Mark]
Ans. Cash receipts and payments on behalf of customers when the cash ow re ect the activities of the customer rather than those of the entity OR cash receipts and payments for items in which turnover is quick, the amounts are large, and the maturities are short.
Q. 8. Increase in Bank Overdraft is:
(A) Increase in Cash and Cash equivalents
(B) Decrease in Cash and Cash equivalents
(C) Inflow from Financial activities
(D) Outflow from Financial activities
Ans. (B) decrease in Cash and Cash equivalents
[Dec. 2022, 1 Mark]
Q. 9 Net profit for the year ended 31.12.2022 ` 15,000, interest received in advance on 1st January, 2022 ` 2,000 and 31st December, 2022 ` 3,000. Cash from operations will be _____.
(A) 16,000
(B) 22,000
(C) 13,000
(D) 15,000
Ans. (A) 16,000
[July 2023, 1 Mark]
Q. 10. Payment of income tax is classified under cash flow from financing activity. (True/ False) [July 2023, 1 Mark]
Ans. False
Q. 11. Cash payment to suppliers is a part of _________ under direct method.
(A) Cash ow from operating activities
(B) Cash ow from investing activities
(C) Cash ow from nancing activities
(D) Cash ow from non-operating activities [Dec. 2023, 2 Marks]
Ans. (A) cash flow from operating activities
Reason: Payment to suppliers represents payment for goods and services procured as a part of routine business activity, hence classified into operating activities.
Q. 12. Which of the following is a part of cash flow from financing activities of manufacturing company?
(A) Proceeds from sale of old machinery
(B) Collection from customers
(C) Dividend received from a foreign company
(D) Interest paid on a partly convertible debenture [Dec. 2023, 1 Mark]
Ans. (D) Interest paid on a partly convertible debenture
Q. 13. Which of the following is not treated as Cash Flow from operating activities in Cash Flow Statement?
(A) Cash Receipts from Sale of goods
(B) Cash Receipts from Royalties, Commission
(C) Cash payments for Insurance premium
(D) Cash receipts from other parties for repayment of Loans [Dec. 2024, 2 Marks]
Ans. (D) Cash receipts from other parties for repayment of Loans
DESCRIPTIVE QUESTIONS
Q. 1. What is the meaning of the expression ‘cash equivalent’? [Dec. 2013, 2 Marks]
Ans. Cash equivalent means bank balance and other risk-free short-term investments and advances which are readily encashable. Cash equivalents means short-term
SECTION A : CORPORATE ACCOUNTING
highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insigni cant risk of changes in value.
Q. 2. State the classification of cash flow activities as per AS-3. [Dec. 2014, 2 Marks]
Ans.
Cash Flow Statement explains cash movements under three different heads, namely: Cash ow from operating activities; Cash ow from investing activities; Cash ow from nancing activities.
Q. 3. Write a short note on objectives of preparing Cash Flow Statement. [June 2017, 4 Marks]
Ans.
Objectives of preparing Cash Flow Statement:
(i) To provide information about rm’s liquidity, exibility and ability to generate future cash ow.
(ii) To provide information about rm’s ability to meet future obligations.
(iii) To enhance comparability among rms.
(iv) To assess reliability of net pro t and quality of earnings.
(v) To enable the users to assess how assets and liabilities have increased or decreased.
(vi) To project future cash ow streams.
(vii) To provide information on different types of cash ow.
Q. 4. Reasons for preparation of Cash Flows. [June 2019, 4 Marks]
Ans.
Cash Flow statement is considered to be a summarized statement showing sources of Cash In ows and application of cash out ows of an enterprise during a particular period of time.
It is prepared on the basis of the published data as disclosed by the Financial Statement of two different nancial periods. It is an essential tool for managerial decision-making.
Cash Flow Statement reports the management net Cash Flow (i.e. cash in ow less cash out ow or vice versa) from each activity of the enterprise as well as of the overall business of the enterprise.
The management of the enterprise gets a picture of movement of cash resources from the Cash Flow Statement and can assess the stronger and weaker area of movement of cash for different activities of the business for drawing up the future planning.
PRACTICAL PROBLEMS
Q. 1. The following relevant items from the Balance Sheet of LM Limited are provided:
31-03-2012 (`)31-03-2013 (`)
Depreciation amounting to ` 1,42,000 and Profit on sale of Machinery amounting to ` 21,000 appeared in the Profit and Loss A/c for the year ending 31-3-2013. During the year 2012-13 ` 1,00,000 was paid as Income Tax. You are required to calculate Net Cash Flow from operating activity for the year ending 31st March, 2013. [Dec. 2013, 4 Marks]
Ans.
Statement showing cash ow from operating activities for the year ended 31st March 2013:
Particulars ` ` (A) Cash ow from Operating Activities:
Increase in balance of Pro t & loss (6,25,000 – 4,15,000) 2,10,000
Pro t on sale of machinery (21,000) Provision for tax 1,50,000 Depreciation 1,42,000
Operating pro t before working capital changes 5,46,000
Changes in working Capital:
Decrease in prepaid expenses 3,000
Decrease in provision for doubtful debts (2,250)
Q. 2. Shyama Limited has given the following information for the preparation of cash flow statement for the year 2013-14:
Ans.
(A)
(B)
Cash Flow Statement for the year ended 31st March 2014
Particulars
(C) Cash ow from Financing Activities: Receipt
Q. 3. Relevant balance sheet accounts of Arti Limited, as on 31st March, 2013 and 2014 are as follows:
Other Information:
(1) During the year 2013-14, one old machine costing ` 6,45,000 (W.D.V. ` 3,92,000) was sold for ` 3,68,000 and some investments are sold at a profit of ` 15,000.
(2) During the year 2013-14, depreciation charged ` 4,50,000, goodwill written off ` 25,000 and Income tax paid ` 8,75,000.
You are required to calculate the net cash flow from operating activities. [Dec. 2014, 8 Marks]
Ans.
Statement showing cash ow from operating activities for the year ended 31st March 2014
Particulars ` in Lakhs ` in Lakhs
(A) Cash ow from Operating Activities:
