Tag: commercial studies

Questions Related to commercial studies

a) A decrease in current liabilities increases working capital
b) Funds flow refers to change in long-term funds.
Of these

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. Both (a) and (b) are true

  2. Both (a) and (b) are false

  3. (a) is true, but (b) is false

  4. (a) is false but (b) is true

Show answer
Correct Option: A
Explanation:

(a) If a transaction increases current assets and current liabilities by the same amount, there would be no change in working capital, While decrease in Current liabilities increases working capital.

(b) Fund flow statements deals with the transactions which change either the amount of current assets and current liabilities (in the form of decrease or increase in working capital) or fixed assets, long-term loans including ownership fund.

Which of the following items appears first on the statements of cash flows prepared using direct method?

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. Retained earnings

  2. Cash received from customers

  3. Net income

  4. Depreciation

Show answer
Correct Option: B
Explanation:

Under direct method of statement of cash flow, major heads of cash inflows and outflows are considered. 

Certain items are recorded on accrual basis in profit and loss account.
Hence, certain adjustments are made to convert them into cash basis such as cash receipt from customers, cash payments to suppliers, Purchases etc.

The last item on statement of cash flows prior to the schedule of non-cash investing and financing activities reports _________________.

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. The increase or decrease in cash

  2. Cash at the end of year

  3. Net cash flow from investing activities

  4. Net cash flow from financing activities

Show answer
Correct Option: B
Explanation:

Non-cash investing and financing activities are the activities that do not directly affect cash. These activities involve only long-term assets, long-term liabilities, and stockholder's equity, and they appear at the bottom of the statement of cash flows.

Cash flow per share is _________________.

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. Required to be reported on balance sheet.

  2. Required to be reported on Income statement.

  3. Required to be reported on the statement of cash flows.

  4. Not required to be reported on any statement.

Show answer
Correct Option: D
Explanation:

Cash flow per share can be calculated by dividing cash flow earned in a given reporting period by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used. Hence, it is not required to be reported on any statement.

A ten-year bond was issued at par for Rs.25,000 cash. This transaction should be shown in a statement of cash flows under ______________.

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. Investing activities

  2. Financing activities

  3. Non-cash investing and financing activities

  4. Operating activities

Show answer
Correct Option: B
Explanation:

As per AS-3, financing activities are activities that result in changes in the size and composition of the owner's capital and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds to the enterprise.

On the statement of cash flows prepared by the indirect method, the cash flows from operating activities section would include ______________________.

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. Receipt from sale of investments

  2. Amortization of premium on bonds payable

  3. Payment of cash dividends

  4. Receipt from issuance of capital stock

Show answer
Correct Option: B
Explanation:

Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. Income statement is prepared on accrual basis it also include certain non-operating items such as interest paid and non cash items. 

Therefore, it becomes necessary to adjust the amount of net profit/loss as shown by profit and loss account for arriving at cash flows from operating activities. 
Examples of such transactions are - cash receipt from royalties, fees, commissions and other revenues, cash payments for premium and claims, annuities, and other policy benefits, cash payments to suppliers for goods and services etc. 

Which of the following represents an inflow of cash and therefore would be reported on the statement of cash flows?

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. Retirement of bond payable

  2. Acquisition of treasury stock

  3. Declaration of stock dividends

  4. Issuance of long-term debt

Show answer
Correct Option: D
Explanation:

Funds received by a company due to sales, financing or investments. 

Cash inflow are used to gauge the overall financial health of a business, and a company with a large and stable cash inflow can be considered to be a good financial position. 

Examples of cash inflows are - Cash proceeds from issuing shares or other similar instruments, cash receipts from disposal of fixed assets including intangibles, cash receipts from sale of goods and rendering services.

Under indirect method, which of the following items must be deducted from reported net income to determine net cash flow from operating activities?

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. Depreciation of fixed assets

  2. Decreases in current assets

  3. Decreases in current liabilities

  4. Loss on sale of equipment

Show answer
Correct Option: C
Explanation:

Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. Some important adjustments related to changes in working capital which is necessary to convert net profit/loss which is based on accrual basis into cash flows from operating activities i.e. increase in current assets, decrease in current liabilities should be deducted, and decrease in current assets, increases in current liabilities should be added to net profit/loss.

Which of the following should be on a statement of cash flows under the financing activities section?

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. The purchase of long-term investments in the common stock of another company.

  2. The payment of cash to retire a long-term note.

  3. The proceed from the sale of building.

  4. The issuance of a long-term note to acquire land.

Show answer
Correct Option: B
Explanation:

As per AS-3, financing activities are activities that result in changes in the size and composition of the owner's capital and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds to the enterprises.   

The statement of cash flow is not useful for _________________.

commercial studies budgeting distinction between funds flow and cash flow statements preparation of cash flow statement statement of changes in financial position

  1. Planning future investing and financing activities

  2. Determining companies ability to pay its debts

  3. Determining companies ability to pay dividends

  4. Calculating the net worth of the company

Show answer
Correct Option: D
Explanation:

Cash flow statement is the financial statement that presents the cash inflows and outflows of a business during a given period of time. It is equally as important as the income statement ad balance sheet for cash flow analysis but it is not useful for checking net worthiness of the company.