Chapter 11: Financial Statements of Companies - Test 5: answer key

Question 1 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. Sterling Garments Ltd., a non-financial manufacturing company, is preparing its cash flow statement for the year ended 31 March 2026. Its fixed-asset register shows the following gross carrying amounts for plant and machinery: opening balance on 1 April 2025, ₹480 lakh; closing balance on 31 March 2026, ₹650 lakh. During the year, machinery having original cost of ₹80 lakh was sold. Accumulated depreciation was ₹180 lakh at the beginning of the year and ₹235 lakh at year end; depreciation charged for the year was ₹75 lakh. The machinery sold generated a gain of ₹12 lakh. On 1 July 2025, the company acquired another machine costing ₹60 lakh by issuing equity shares directly to the vendor; no cash was paid for that portion of the acquisition. All other additions to plant and machinery were settled in cash. The long-term investment portfolio had a carrying amount of ₹140 lakh on 1 April 2025 and ₹95 lakh on 31 March 2026. During the year, investments costing ₹75 lakh were sold for cash, resulting in a realised profit of ₹8 lakh. Other long-term investments costing ₹30 lakh were purchased for cash. The company also received interest of ₹14 lakh on its bonds and dividend of ₹8 lakh on equity investments; both receipts related to investments and were credited to its bank account. For financing, the company received ₹110 lakh in cash from an equity issue and ₹90 lakh from a debenture issue. It repaid ₹55 lakh of bank-loan principal, paid debenture interest of ₹16 lakh and paid dividend of ₹22 lakh. There were no other asset disposals, acquisitions, financing receipts or repayments. The company has asked the accountant to determine the cash amounts for investing and financing activities without treating non-cash transactions or accounting gains as cash receipts.

What amount should Sterling Garments Ltd. report as cash paid for additions to plant and machinery during the year?

1. ₹190 lakh (correct answer)
2. ₹250 lakh
3. ₹170 lakh
4. ₹130 lakh

Answer: A — ₹190 lakh

Explanation. Total additions to gross plant and machinery are derived as closing gross carrying amount ₹650 lakh minus opening gross carrying amount ₹480 lakh plus the original cost of machinery disposed of ₹80 lakh, giving ₹250 lakh. Of these additions, ₹60 lakh was acquired through issue of shares and involved no cash payment. Cash paid for additions is therefore ₹250 lakh minus ₹60 lakh, or ₹190 lakh. The non-cash acquisition is excluded from the cash flow statement.

Where it goes wrong. The increase in gross carrying amount is not itself the cash purchase figure. Include the disposed asset's original cost in the roll-forward and then remove the non-cash acquisition.

Authority. AS 3, para 15(a); AS 3, paras 40–41

Question 2 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What cash proceeds should be reported from the sale of the machinery?

1. ₹60 lakh
2. ₹92 lakh
3. ₹72 lakh (correct answer)
4. ₹80 lakh

Answer: C — ₹72 lakh

Explanation. Accumulated depreciation attributable to the machinery sold is ₹180 lakh plus current-year depreciation of ₹75 lakh less closing accumulated depreciation of ₹235 lakh, giving ₹20 lakh. Its written-down value was ₹80 lakh less ₹20 lakh, or ₹60 lakh. Since the sale resulted in a gain of ₹12 lakh, cash proceeds were ₹60 lakh plus ₹12 lakh, or ₹72 lakh. The full cash proceeds, not merely the gain, are shown as an investing inflow.

Where it goes wrong. Do not report the gain of ₹12 lakh as the investing cash inflow. The gain is the difference between sale proceeds and carrying amount; the cash flow statement reports the actual proceeds.

Authority. AS 3, para 13; AS 3, para 15(b)

Question 3 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What is the net cash flow from investing activities based on the transactions stated in the scenario?

1. Negative ₹35 lakh
2. Negative ₹51 lakh
3. Positive ₹43 lakh
4. Negative ₹43 lakh (correct answer)

Answer: D — Negative ₹43 lakh

Explanation. Investing inflows comprise machinery sale proceeds ₹72 lakh, investment sale proceeds of ₹75 lakh carrying amount plus ₹8 lakh profit (₹83 lakh), interest received ₹14 lakh and dividend received ₹8 lakh. Investing outflows are cash paid for machinery ₹190 lakh and long-term investments ₹30 lakh. Net investing cash flow is ₹72 + ₹83 + ₹14 + ₹8 - ₹190 - ₹30 = negative ₹43 lakh. The non-cash machine acquisition is excluded.

Where it goes wrong. Using the investment's carrying amount of ₹75 lakh instead of sale proceeds of ₹83 lakh, or omitting interest and dividend receipts, produces an incorrect net investing figure.

Authority. AS 3, para 15; AS 3, para 30

Question 4 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What is the net cash flow from financing activities for Sterling Garments Ltd.?

1. Positive ₹123 lakh
2. Positive ₹107 lakh (correct answer)
3. Positive ₹91 lakh
4. Positive ₹129 lakh

Answer: B — Positive ₹107 lakh

Explanation. Financing inflows are ₹110 lakh from issue of equity shares and ₹90 lakh from issue of debentures. Financing outflows are bank-loan principal repaid ₹55 lakh, debenture interest paid ₹16 lakh and dividend paid ₹22 lakh. Net financing cash flow is ₹110 + ₹90 - ₹55 - ₹16 - ₹22 = positive ₹107 lakh. For a non-financial enterprise, interest paid and dividends paid are financing cash outflows under AS 3.

Where it goes wrong. Do not classify interest paid as an investing outflow or deduct the non-cash issue of shares for machinery from financing cash receipts.

Authority. AS 3, para 17; AS 3, para 30

Question 5 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. Zenith Technologies Pvt. Ltd., a non-financial technology company, is preparing its cash flow statement for the year ended 31 March 2026. Its debenture records show 12% debentures of ₹500 lakh outstanding on 1 April 2025. Additional debentures with a face value of ₹200 lakh were issued for cash on 1 October 2025; the company received net cash proceeds of ₹196 lakh after issue discount. On 1 January 2026, debentures with a face value of ₹100 lakh were redeemed for cash at a premium of 3%. The debenture interest expense accrued for the whole year, after considering the dates of issue and redemption, was ₹69 lakh. Interest payable on debentures was ₹6 lakh on 1 April 2025 and ₹9 lakh on 31 March 2026. The bank-loan account showed an opening principal balance of ₹300 lakh. During the year, the company drew a further ₹120 lakh and repaid principal of ₹75 lakh. There were no loan conversions, refinancing arrangements or non-cash settlements. The company also issued equity shares for cash and received ₹90 lakh. Separately, on 1 December 2025 it allotted shares having an agreed value of ₹30 lakh directly to a software vendor in settlement of the purchase price of a patent; no cash passed under this allotment. The board declared dividend of ₹40 lakh during the year. Dividend payable was ₹5 lakh at the beginning of the year and ₹8 lakh at year end. All figures are stated in lakh rupees. The finance team needs to distinguish gross financing receipts from the non-cash share allotment and calculate actual interest and dividend payments from accrual balances. For this case, assume all stated principal repayments, redemption amounts, interest and dividends were settled in cash to the extent indicated, and there were no other financing cash flows.

What amount of debenture interest was actually paid in cash during the year?

1. ₹78 lakh
2. ₹66 lakh (correct answer)
3. ₹72 lakh
4. ₹60 lakh

Answer: B — ₹66 lakh

Explanation. Cash interest paid is calculated by adding opening interest payable to current-year interest expense and deducting closing interest payable. Thus, ₹69 lakh + ₹6 lakh - ₹9 lakh = ₹66 lakh. The ₹69 lakh is the accrued expense, not necessarily the cash paid. As Zenith is a non-financial enterprise, interest paid is classified as a financing cash outflow and is disclosed separately.

Where it goes wrong. Reporting the current-year interest expense of ₹69 lakh as cash paid ignores the opening and closing interest payable balances.

Authority. AS 3, paras 30–31; AS 3, para 17

Question 6 · 2 marks · Chapter 11: Financial Statements of Companies · medium

What amount of dividend was paid in cash during the year?

1. ₹37 lakh (correct answer)
2. ₹45 lakh
3. ₹53 lakh
4. ₹29 lakh

Answer: A — ₹37 lakh

Explanation. Cash dividend paid is the dividend declared during the year plus dividend payable at the beginning, less dividend payable at the end. Therefore, ₹40 lakh + ₹5 lakh - ₹8 lakh = ₹37 lakh. The increase in dividend payable means part of the current year's declared dividend remains unpaid at year end. Dividends paid by a non-financial enterprise are classified as financing cash outflows.

Where it goes wrong. Do not report the dividend declared of ₹40 lakh as the cash paid. The opening and closing dividend payable balances must be considered.

Authority. AS 3, para 30; AS 3, para 17

Question 7 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What is the net cash flow from financing activities after considering all the financing transactions in the scenario?

1. Positive ₹115 lakh
2. Positive ₹145 lakh
3. Positive ₹125 lakh (correct answer)
4. Positive ₹135 lakh

Answer: C — Positive ₹125 lakh

Explanation. Financing inflows are cash share issue ₹90 lakh, debenture issue proceeds ₹196 lakh and bank-loan proceeds ₹120 lakh. Outflows are bank principal repaid ₹75 lakh, debenture redemption of ₹100 lakh plus 3% premium (₹103 lakh), interest paid ₹66 lakh and dividend paid ₹37 lakh. Net financing cash flow is ₹406 lakh less ₹281 lakh, or positive ₹125 lakh. The share allotment for the patent is non-cash.

Where it goes wrong. Do not include the ₹30 lakh share allotment to the patent vendor as a cash financing inflow. Also, redemption at a premium requires the full cash settlement of ₹103 lakh to be considered.

Authority. AS 3, paras 17 and 30–31; AS 3, paras 40–41

Question 8 · 2 marks · Chapter 11: Financial Statements of Companies · medium

What is the total cash inflow from financing activities before deducting financing outflows?

1. ₹436 lakh
2. ₹316 lakh
3. ₹376 lakh
4. ₹406 lakh (correct answer)

Answer: D — ₹406 lakh

Explanation. Cash financing inflows comprise ₹90 lakh received from the issue of equity shares, ₹196 lakh net cash received from the debenture issue and ₹120 lakh drawn under the bank loan. Total cash financing inflows are ₹90 + ₹196 + ₹120 = ₹406 lakh. The ₹30 lakh value of shares allotted directly to the patent vendor does not involve cash and is excluded from the cash flow statement.

Where it goes wrong. Do not add the face value of debentures issued or the non-cash share allotment automatically. The relevant amount is the actual cash received from each financing transaction.

Authority. AS 3, para 17; AS 3, paras 40–41

Question 9 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. Vardhan Chemicals Ltd., a non-financial company, is reviewing the composition of cash and cash equivalents for its cash flow statement for the year ended 31 March 2026. At 1 April 2025, it held cash in hand of ₹12 lakh, a demand deposit with its bank of ₹28 lakh and a highly liquid deposit of ₹20 lakh acquired on 1 March 2025 with an original maturity of 60 days. The deposit was readily convertible into a known amount and carried insignificant risk of changes in value. The bank also provided an overdraft of ₹10 lakh, repayable on demand and used regularly for short-term working capital; the company proposes netting it against its cash balance. At 31 March 2026, the company had cash in hand of ₹15 lakh, a positive demand-deposit balance of ₹9 lakh and a treasury bill of ₹25 lakh acquired on 1 February 2026 with an original maturity of 90 days. This treasury bill was readily convertible into a known amount and had insignificant value risk. The company also held commercial paper of ₹35 lakh acquired on 1 January 2026 with an original maturity of six months, although only three months remained at year end. Listed equity securities of ₹12 lakh were highly traded but subject to material price fluctuations. A nine-month bank deposit of ₹50 lakh was also held. The overdraft balance at 31 March 2026 was ₹18 lakh; it remained repayable on demand and was used in the company's cash management. For the year, net cash from operating activities was ₹26 lakh and net cash used in investing activities was ₹55 lakh. Financing activities included net cash inflow of ₹10 lakh from transactions other than the overdraft, together with the ₹8 lakh increase in overdraft borrowings. There were no foreign currency balances or other reconciling items. The company wants to establish which investments qualify as cash equivalents and reconcile the opening and closing balances under AS 3.

Which of the following investments qualifies as a cash equivalent at 31 March 2026, assuming the facts about convertibility and risk stated in the scenario?

1. The 90-day treasury bill acquired on 1 February (correct answer)
2. The six-month commercial paper with three months remaining
3. The listed equity securities with active market trading
4. The nine-month bank deposit with short remaining maturity

Answer: A — The 90-day treasury bill acquired on 1 February

Explanation. The treasury bill had an original maturity of 90 days from its acquisition date and is readily convertible into a known amount with insignificant risk of value changes. It therefore satisfies the normal short-maturity criterion for a cash equivalent. The commercial paper had an original six-month maturity; its remaining term at year end does not alter that original maturity. The equity securities carry price risk, while the nine-month deposit exceeds the normal short-maturity period.

Where it goes wrong. Measure the short maturity from the date of acquisition, not the reporting date. A six-month instrument does not become a cash equivalent merely because only three months remain.

Authority. AS 3, paras 5.2 and 6

Question 10 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What amount should Vardhan Chemicals Ltd. report as cash and cash equivalents at 31 March 2026 under AS 3?

1. ₹31 lakh
2. ₹60 lakh
3. ₹49 lakh (correct answer)
4. ₹84 lakh

Answer: C — ₹49 lakh

Explanation. Qualifying closing components are cash in hand ₹15 lakh, demand deposit ₹9 lakh and the qualifying 90-day treasury bill ₹25 lakh. Total cash and cash equivalents are ₹49 lakh. The commercial paper is excluded because its original maturity was six months; the listed equity securities carry material value risk; and the nine-month deposit is not short-term. The overdraft is not deducted from cash and cash equivalents under AS 3.

Where it goes wrong. Do not net the overdraft against the closing cash balance merely because it is repayable on demand. Also, do not include investments that fail the original-maturity or insignificant-risk tests.

Authority. AS 3, paras 5.1, 5.2 and 6; AS 3, para 42

Question 11 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What is the net change in cash and cash equivalents during the year, based on the operating, investing and financing cash flows stated in the scenario?

1. Increase of ₹11 lakh
2. Decrease of ₹3 lakh
3. Decrease of ₹19 lakh
4. Decrease of ₹11 lakh (correct answer)

Answer: D — Decrease of ₹11 lakh

Explanation. The total net change is operating inflow ₹26 lakh less investing outflow ₹55 lakh plus financing inflow ₹18 lakh. The financing inflow includes the ₹8 lakh increase in overdraft borrowings. Thus, the net change is ₹26 - ₹55 + ₹18 = negative ₹11 lakh. This reconciles opening cash and cash equivalents of ₹60 lakh to closing cash and cash equivalents of ₹49 lakh.

Where it goes wrong. Do not omit the overdraft increase from financing cash flows or deduct the overdraft balance again from cash and cash equivalents. Either error would break the opening-to-closing reconciliation.

Authority. AS 3, paras 8 and 17; AS 3, para 42

Question 12 · 2 marks · Chapter 11: Financial Statements of Companies · medium

The overdraft is repayable on demand and is regularly used in the company's cash management. Which treatment is appropriate for this overdraft under AS 3?

1. Deduct both opening and closing overdrafts from cash and cash equivalents
2. Exclude the overdraft from cash and cash equivalents and classify its increase as a financing inflow (correct answer)
3. Deduct only the closing overdraft from cash and cash equivalents
4. Classify the closing overdraft balance as an investing cash outflow

Answer: B — Exclude the overdraft from cash and cash equivalents and classify its increase as a financing inflow

Explanation. AS 3 defines cash as cash on hand and demand deposits with banks, and separately defines cash equivalents as qualifying short-term investments. It does not provide the special overdraft-inclusion exception associated with Ind AS 7. Under AS 3, the increase from ₹10 lakh to ₹18 lakh is an increase in borrowing and is treated as a financing cash inflow of ₹8 lakh, rather than being netted against cash and cash equivalents.

Where it goes wrong. Do not import the Ind AS 7 treatment of certain demand-repayable overdrafts into AS 3. The applicable standard for this non-Ind AS question does not permit the proposed netting.

Authority. AS 3, paras 5.1–5.2; AS 3, para 17

Question 13 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. Banyan Ltd., a non-financial company, acquires a computer software licence for ₹24 lakh. It also pays ₹2 lakh for directly attributable installation and testing necessary to bring the software to the condition required for use, and ₹3 lakh for routine maintenance services covering the next year. What amount should be treated as an investing cash outflow for acquisition of the intangible asset?

Banyan Ltd., a non-financial company, acquires a computer software licence for ₹24 lakh. It also pays ₹2 lakh for directly attributable installation and testing necessary to bring the software to the condition required for use, and ₹3 lakh for routine maintenance services covering the next year. What amount should be treated as an investing cash outflow for acquisition of the intangible asset?

1. ₹24 lakh
2. ₹29 lakh
3. ₹26 lakh (correct answer)
4. ₹27 lakh

Answer: C — ₹26 lakh

Explanation. Cash payments to acquire fixed assets, including intangible assets, are investing activities. The licence cost of ₹24 lakh and directly attributable installation and testing cost of ₹2 lakh form the acquisition outflow, giving ₹26 lakh. The ₹3 lakh routine maintenance payment does not acquire or bring the intangible asset into the condition necessary for use; it is not part of the investing acquisition outflow.

Where it goes wrong. Do not include every payment connected with software in the asset acquisition amount. Routine maintenance is different from directly attributable expenditure necessary to bring the asset into use.

Authority. AS 3, para 15(a)

Question 14 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A financial enterprise receives interest of ₹18 lakh on loans granted to customers and dividend of ₹2 lakh on investments. It pays interest of ₹11 lakh on deposits and dividend of ₹3 lakh to its shareholders. Which classification is correct under AS 3?

A financial enterprise receives interest of ₹18 lakh on loans granted to customers and dividend of ₹2 lakh on investments. It pays interest of ₹11 lakh on deposits and dividend of ₹3 lakh to its shareholders. Which classification is correct under AS 3?

1. Interest and dividend received and interest paid are operating; dividend paid is financing (correct answer)
2. Interest and dividend received are investing; interest and dividend paid are financing
3. All four cash flows are classified as operating activities
4. Interest received is operating; dividend received and both payments are financing

Answer: A — Interest and dividend received and interest paid are operating; dividend paid is financing

Explanation. For a financial enterprise, AS 3 classifies interest paid and interest and dividends received as operating cash flows. Dividends paid are classified as financing cash flows. Accordingly, interest received ₹18 lakh, dividend received ₹2 lakh and interest paid ₹11 lakh are operating items, while dividend paid ₹3 lakh is a financing outflow.

Where it goes wrong. Do not apply the classification for a non-financial enterprise to a financial enterprise. The treatment of interest and dividends received and interest paid differs according to the nature of the enterprise.

Authority. AS 3, para 30

Question 15 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A non-financial company disposes of a building that originally cost ₹200 lakh and has accumulated depreciation of ₹130 lakh on the date of sale. The sale results in a gain of ₹14 lakh. What amount should be shown as cash inflow from investing activities?

A non-financial company disposes of a building that originally cost ₹200 lakh and has accumulated depreciation of ₹130 lakh on the date of sale. The sale results in a gain of ₹14 lakh. What amount should be shown as cash inflow from investing activities?

1. ₹14 lakh
2. ₹70 lakh
3. ₹200 lakh
4. ₹84 lakh (correct answer)

Answer: D — ₹84 lakh

Explanation. The carrying amount of the building is ₹200 lakh less accumulated depreciation of ₹130 lakh, i.e. ₹70 lakh. A gain of ₹14 lakh means the actual sale proceeds were ₹70 lakh plus ₹14 lakh, or ₹84 lakh. The investing section reports the cash proceeds of ₹84 lakh. Where the indirect method is used, the gain is separately adjusted out of operating profit to avoid double counting.

Where it goes wrong. The gain of ₹14 lakh and the carrying amount of ₹70 lakh are not the cash received. Report the full sale proceeds of ₹84 lakh as the investing inflow.

Authority. AS 3, paras 13 and 15(b)

Question 16 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A company issues 80,000 equity shares of ₹10 each at a premium of 25% over face value. The entire issue consideration is received in cash. What amount should be reported as cash proceeds from issue of shares?

A company issues 80,000 equity shares of ₹10 each at a premium of 25% over face value. The entire issue consideration is received in cash. What amount should be reported as cash proceeds from issue of shares?

1. ₹8 lakh
2. ₹10 lakh (correct answer)
3. ₹2 lakh
4. ₹12 lakh

Answer: B — ₹10 lakh

Explanation. The premium is 25% of the ₹10 face value, i.e. ₹2.50 per share. The cash issue price is therefore ₹12.50 per share. For 80,000 shares, total cash proceeds are 80,000 × ₹12.50 = ₹10,00,000, or ₹10 lakh. The full cash received, including the securities premium, is a financing inflow.

Where it goes wrong. Do not report only the face value of the shares as the cash inflow. The cash proceeds include the premium actually received from shareholders.

Authority. AS 3, para 17(a)

Question 17 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A company redeems debentures having a face value of ₹300 lakh at a premium of 5%. Holders of debentures with a face value of ₹100 lakh accept equity shares worth ₹105 lakh in full settlement of that portion, including the proportionate premium. The remaining debentures are settled in cash. What amount should be shown as financing cash outflow for redemption?

A company redeems debentures having a face value of ₹300 lakh at a premium of 5%. Holders of debentures with a face value of ₹100 lakh accept equity shares worth ₹105 lakh in full settlement of that portion, including the proportionate premium. The remaining debentures are settled in cash. What amount should be shown as financing cash outflow for redemption?

1. ₹200 lakh
2. ₹205 lakh
3. ₹210 lakh (correct answer)
4. ₹315 lakh

Answer: C — ₹210 lakh

Explanation. The cash-settled portion has a face value of ₹200 lakh. Redemption premium on that portion is 5% of ₹200 lakh, or ₹10 lakh. Cash paid is therefore ₹210 lakh. The other ₹105 lakh redemption settlement is made through issue of equity shares and involves no cash; it is excluded from the cash flow statement and disclosed separately as a non-cash financing transaction.

Where it goes wrong. Do not report the full redemption value of ₹315 lakh as a cash outflow. The portion settled by issue of shares does not involve cash or cash equivalents.

Authority. AS 3, paras 17 and 40–41

Question 18 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A company declared dividends of ₹45 lakh during the year. Dividend payable was ₹7 lakh at the beginning of the year and ₹11 lakh at the end of the year. What amount of dividend should be reported as cash paid?

A company declared dividends of ₹45 lakh during the year. Dividend payable was ₹7 lakh at the beginning of the year and ₹11 lakh at the end of the year. What amount of dividend should be reported as cash paid?

1. ₹41 lakh (correct answer)
2. ₹45 lakh
3. ₹49 lakh
4. ₹37 lakh

Answer: A — ₹41 lakh

Explanation. Cash dividend paid is calculated as dividend declared during the year plus the opening dividend payable less the closing dividend payable. Therefore, ₹45 lakh + ₹7 lakh - ₹11 lakh = ₹41 lakh. The closing payable is deducted because that part of the amount declared remains unpaid at the reporting date. Dividends paid are classified as financing cash outflows.

Where it goes wrong. Do not ignore the dividend payable balances. The amount declared in the current year and the amount actually paid during the year need not be equal.

Authority. AS 3, para 30

Question 19 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. Which of the following investments meets the normal maturity criterion for a cash equivalent under AS 3, provided it is held to meet short-term cash commitments and is readily convertible into a known amount with insignificant risk of changes in value?

Which of the following investments meets the normal maturity criterion for a cash equivalent under AS 3, provided it is held to meet short-term cash commitments and is readily convertible into a known amount with insignificant risk of changes in value?

1. Six-month commercial paper acquired four months ago, with two months remaining
2. Listed equity shares with high trading volume and material price volatility
3. A four-month fixed deposit with one month remaining at the reporting date
4. A treasury bill acquired at issue with an original maturity of 90 days (correct answer)

Answer: D — A treasury bill acquired at issue with an original maturity of 90 days

Explanation. An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition, in addition to being readily convertible into a known amount and subject to insignificant risk of value changes. The 90-day treasury bill satisfies the normal maturity test. The other investments either have longer original maturities or carry material price risk.

Where it goes wrong. A short remaining maturity at the reporting date is not sufficient. The original maturity from the acquisition date is relevant.

Authority. AS 3, paras 5.2 and 6

Question 20 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A company acquires a fixed asset under a deferred payment arrangement. An instalment of ₹25 lakh paid during the year comprises ₹20 lakh towards the outstanding purchase-price principal and ₹5 lakh towards interest. How should the payment be classified under AS 3?

A company acquires a fixed asset under a deferred payment arrangement. An instalment of ₹25 lakh paid during the year comprises ₹20 lakh towards the outstanding purchase-price principal and ₹5 lakh towards interest. How should the payment be classified under AS 3?

1. ₹25 lakh as investing cash outflow
2. ₹20 lakh as investing and ₹5 lakh as financing cash outflow (correct answer)
3. ₹20 lakh as financing and ₹5 lakh as investing cash outflow
4. ₹25 lakh as financing cash outflow

Answer: B — ₹20 lakh as investing and ₹5 lakh as financing cash outflow

Explanation. AS 3 explains that a single instalment for a fixed asset acquired on deferred payment terms may contain cash flows belonging to different activities. The principal element of ₹20 lakh relates to acquisition of the fixed asset and is an investing outflow. The interest element of ₹5 lakh is a financing outflow for a non-financial enterprise. The two components must therefore be presented separately.

Where it goes wrong. Do not classify the whole instalment under investing merely because it relates to a fixed asset. Separate the principal and interest components.

Authority. AS 3, para 10

Question 21 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. An enterprise reports opening cash and cash equivalents of ₹72 lakh. During the year, it generates net cash of ₹8 lakh from operating activities, uses ₹25 lakh in investing activities and uses ₹30 lakh in financing activities. What should be the closing balance of cash and cash equivalents?

An enterprise reports opening cash and cash equivalents of ₹72 lakh. During the year, it generates net cash of ₹8 lakh from operating activities, uses ₹25 lakh in investing activities and uses ₹30 lakh in financing activities. What should be the closing balance of cash and cash equivalents?

1. ₹45 lakh
2. ₹85 lakh
3. ₹59 lakh (correct answer)
4. ₹72 lakh

Answer: C — ₹59 lakh

Explanation. Net change in cash and cash equivalents is operating inflow ₹8 lakh less investing outflow ₹25 lakh and financing outflow ₹30 lakh. This gives a net decrease of ₹47 lakh. Closing cash and cash equivalents are opening cash and cash equivalents ₹72 lakh less ₹47 lakh, or ₹25 lakh. The correct closing figure must reflect the signed total of all three activity sections.

Where it goes wrong. Do not add the absolute values of the three sections. Apply the correct inflow and outflow signs before reconciling the opening and closing balances.

Authority. AS 3, para 8; AS 3, para 42

Question 22 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A non-financial company pays total interest of ₹18 lakh during the year. Of this amount, ₹13 lakh is recognised as an expense in the statement of profit and loss and ₹5 lakh is capitalised as part of the cost of a qualifying asset. What amount of interest paid is required to be disclosed in the cash flow statement?

A non-financial company pays total interest of ₹18 lakh during the year. Of this amount, ₹13 lakh is recognised as an expense in the statement of profit and loss and ₹5 lakh is capitalised as part of the cost of a qualifying asset. What amount of interest paid is required to be disclosed in the cash flow statement?

1. ₹18 lakh (correct answer)
2. ₹13 lakh
3. ₹5 lakh
4. ₹23 lakh

Answer: A — ₹18 lakh

Explanation. AS 3 requires the total amount of interest paid during the period to be disclosed in the cash flow statement, whether the interest has been recognised as an expense or capitalised in accordance with AS 10. Therefore, the full ₹18 lakh paid is disclosed. As the company is non-financial, the interest paid is classified as a financing cash outflow.

Where it goes wrong. Do not report only the ₹13 lakh charged to profit and loss. Capitalised interest is also included in the total interest paid disclosed in the cash flow statement.

Authority. AS 3, paras 30–31

Question 23 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A non-financial company undertakes the following transactions during the year: purchases land for ₹100 lakh, pays ₹12 lakh for capitalised research and development relating to an intangible asset, sells an old plant for ₹32 lakh, purchases long-term equity shares of another company for ₹18 lakh, sells long-term debt instruments for ₹9 lakh, receives interest of ₹4 lakh on investments and receives dividend of ₹3 lakh. What is the net cash flow from investing activities?

A non-financial company undertakes the following transactions during the year: purchases land for ₹100 lakh, pays ₹12 lakh for capitalised research and development relating to an intangible asset, sells an old plant for ₹32 lakh, purchases long-term equity shares of another company for ₹18 lakh, sells long-term debt instruments for ₹9 lakh, receives interest of ₹4 lakh on investments and receives dividend of ₹3 lakh. What is the net cash flow from investing activities?

1. Negative ₹70 lakh
2. Negative ₹78 lakh
3. Negative ₹90 lakh
4. Negative ₹82 lakh (correct answer)

Answer: D — Negative ₹82 lakh

Explanation. Investing outflows are land ₹100 lakh, capitalised research and development ₹12 lakh and long-term shares ₹18 lakh, totalling ₹130 lakh. Investing inflows are plant sale ₹32 lakh, debt-instrument sale ₹9 lakh, interest received ₹4 lakh and dividend received ₹3 lakh, totalling ₹48 lakh. Net investing cash flow is ₹48 lakh less ₹130 lakh, or negative ₹82 lakh. The receipts relate to investments and are investing flows for a non-financial company.

Where it goes wrong. Do not omit capitalised research and development or the interest and dividend receipts. Also distinguish long-term investments from securities held for dealing or trading.

Authority. AS 3, para 15; AS 3, para 30

Question 24 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A company transfers ₹15 lakh from its demand deposit account into a 60-day bank deposit that is readily convertible into a known amount and subject to insignificant risk of changes in value. The deposit is acquired to meet short-term cash commitments. How should the transfer be reflected in the cash flow statement?

A company transfers ₹15 lakh from its demand deposit account into a 60-day bank deposit that is readily convertible into a known amount and subject to insignificant risk of changes in value. The deposit is acquired to meet short-term cash commitments. How should the transfer be reflected in the cash flow statement?

1. As an investing cash outflow of ₹15 lakh
2. It is excluded as a movement between components of cash and cash equivalents (correct answer)
3. As a financing cash outflow of ₹15 lakh
4. As an operating cash outflow of ₹15 lakh

Answer: B — It is excluded as a movement between components of cash and cash equivalents

Explanation. The 60-day deposit meets the stated cash-equivalent conditions: it is short-term, highly liquid, readily convertible into a known amount and subject to insignificant risk of changes in value. Moving funds from a demand deposit into a qualifying cash equivalent is a movement between components of cash and cash equivalents. AS 3 excludes such movements from operating, investing and financing cash flows.

Where it goes wrong. Do not classify every placement of a bank deposit as an investing outflow. First determine whether the deposit qualifies as a cash equivalent.

Authority. AS 3, paras 5.1–5.2, 6 and 7

Question 25 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A non-financial company sells long-term debt instruments having a carrying amount of ₹48 lakh for cash proceeds of ₹55 lakh. The resulting gain of ₹7 lakh is included in profit before tax. Under the indirect method, which treatment correctly reflects this transaction in the cash flow statement?

A non-financial company sells long-term debt instruments having a carrying amount of ₹48 lakh for cash proceeds of ₹55 lakh. The resulting gain of ₹7 lakh is included in profit before tax. Under the indirect method, which treatment correctly reflects this transaction in the cash flow statement?

1. Deduct ₹7 lakh from operating profit and show ₹55 lakh as investing inflow (correct answer)
2. Add ₹7 lakh to operating profit and show ₹48 lakh as investing inflow
3. Make no operating adjustment and show ₹55 lakh as operating inflow
4. Deduct ₹7 lakh from operating profit and show ₹48 lakh as investing inflow

Answer: A — Deduct ₹7 lakh from operating profit and show ₹55 lakh as investing inflow

Explanation. The gain of ₹7 lakh is included in profit before tax but relates to disposal of a long-term investment. Under the indirect method, it is deducted from operating profit because the related cash receipt belongs to investing activities. The investing section reports the full cash proceeds of ₹55 lakh, not the carrying amount of ₹48 lakh or merely the gain of ₹7 lakh.

Where it goes wrong. Do not confuse the gain with the sale proceeds. Remove the gain from the operating computation and report the actual amount received as the investing cash inflow.

Authority. AS 3, paras 15(d) and 20(c)