Class 12 Accountancy Part-2 Chapter 2 Cash Flow Statement [Based on Accounting Standard-3 (Revised)–Only for Non-Financing Companies]

Key Concept: Classification of Cash Flows - Operating Activities

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
According to AS-3 (Revised), cash outflows related to operating activities include payments for wages, salaries, and other operating expenses, as these are part of the principal revenue-producing activities. The assertion is true because payment of wages and salaries directly affects the cash flow from operating activities. The reason is also true because wages and salaries are indeed part of the principal revenue-producing activities of an enterprise, and it correctly explains why such payments are classified under operating activities.

Key Concept: Operating Profit Calculation, Interest Income Deduction

c) \$56,000
[Solution Description]
To calculate the Operating Profit before Working Capital Changes, we start with Profit before Tax and add back non-cash expenses (depreciation and loss on sale), then subtract non-operating income (interest received).
Step 1: Start with Profit before Tax = \$50,000.
Step 2: Add Depreciation (\$8,000) + Loss on Sale (\$1,500) = \$9,500.
Step 3: Subtract Interest Income (\$3,500).
Final Calculation: \$50,000 + \$9,500 - \$3,500 = \$56,000.
Thus, the Operating Profit before Working Capital Changes is \$56,000.

Key Concept: Cash Flow Statement vs. Cash Budget, Analysis of Differences

b) Higher-than-expected administrative expenses
[Solution Description]
The cash budget is a forward-looking document based on projections, while the cash flow statement reflects actual results. A lower actual operating cash inflow (\$180,000) compared to the projected (\$200,000) could result from unexpected expenses, lower sales revenue, or delayed collections from customers. Among the plausible reasons, higher-than-expected administrative expenses directly reduce net cash inflow from operations.

Key Concept: Written Down Value Basis

b) \$6,500
[Solution Description]
Calculate the total value before depreciation: Opening balance = \$50,000; Add purchases = \$15,000; Total before depreciation = \$65,000. The closing balance after depreciation is \$58,500. Hence, depreciation charged = \$65,000 - \$58,500 = \$6,500. Verify using the depreciation rate: If 10\% is applied to the total (\$65,000 × 10\% = \$6,500), it matches the calculated depreciation.

Key Concept: Dividend paid on shares, Preference and equity dividends

c) \$15,000
[Solution Description]
First, we calculate the dividend due to preference shareholders. The preference shares have a fixed dividend rate of 10\% on the preference share capital of \$50,000. So, the preference dividend is \$5,000 (10\% of \$50,000). The remaining dividend after paying the preference shareholders is \$15,000 (\$20,000 - \$5,000), which is paid to the equity shareholders.
Calculation steps:
1. Preference dividend: 10\% of \$50,000 = \$5,000
2. Total dividend paid: \$20,000
3. Dividend to equity shareholders: \$20,000 - \$5,000 = \$15,000
Therefore, the dividend attributable to equity shareholders is \$15,000.

Key Concept: Current Items vs Non-Current Items, Cash Flows

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that purchasing a long-term investment using cash decreases cash and cash equivalents but does not affect current assets. This is true because cash and cash equivalents are part of current assets, and their reduction due to the purchase is offset by the increase in non-current assets (long-term investments), leaving the total current assets unchanged. The reason explains that long-term investments are non-current assets and their acquisition reduces cash and cash equivalents. Both the assertion and reason are true, and the reason correctly explains why the assertion holds.

Key Concept: Bank Overdraft, Cash Credit, Financing Activities

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The assertion states that an increase in bank overdraft balance is considered a financing activity inflow because it represents additional borrowing. This is correct as per the syllabus point 2. The reason explains why bank overdraft and cash credit are not part of cash equivalents, which is also correct as mentioned in the syllabus point 1. However, the reason does not directly explain why an increase in overdraft is a financing activity; it merely states that these items are not cash equivalents. Therefore, while both statements are true, the reason does not correctly explain the assertion.

Key Concept: Assertion-Reason

c) Assertion is true, but Reason is false.
[Solution Description]
The Assertion is true because the Cash Flow Statement focuses on liquidity by tracking cash movements, whereas the Profit \& Loss Account measures profitability using the accrual concept. However, the Reason is false because it incorrectly swaps the definitions: the Cash Flow Statement records actual cash flows, not the Profit \& Loss Account. Thus, the correct answer is (c).

Key Concept: Provision for Tax Account

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
Preparing a Provision for Tax Account is a standard method to find missing figures related to tax, such as tax paid during the year. The assertion correctly states that the Provision for Tax Account can be used to calculate tax paid when additional information is given. The reason explains the purpose of this account by detailing how it incorporates opening balance, closing balance, and provisions made during the year to arrive at the tax paid. Both the assertion and reason are true, and the reason correctly explains the assertion.

Key Concept: Cash Flow Classification, Operating vs Financing Activities

d) Assertion is false, but Reason is true.
[Solution Description]
The assertion states that repayment of long-term borrowings should be classified under operating activities since it reduces liabilities. However, according to AS-3 (Revised), financing activities explicitly involve changes in borrowings, which includes repayment of long-term loans. Therefore, the assertion is false. The reason correctly states the definition of financing activities as per AS-3 (Revised).

Key Concept: Closing Cash and Cash Equivalents Calculation

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that closing cash and cash equivalents can be calculated using the given formula, which is true as per the syllabus. The reason provides the correct formula for calculating closing cash and cash equivalents. Since the reason correctly explains the assertion, both are true, and the reason is the correct explanation of the assertion.

Key Concept: Non-current investments, Cash flow calculation

c) \$35,000
[Solution Description]
First, analyze the Non-Current Investment Account:
- Opening balance: \$50,000
- Closing balance: \$70,000
- Sales proceeds: \$15,000 (cash inflow)
- Loss on sale: \$3,000 (adjustment in P\&L)
The missing figure for purchases is calculated as the balancing figure:
$\text{Purchases} = \text{Closing Balance} + \text{Sale Amount} - \text{Opening Balance}$
$\text{Purchases} = 70,000 + 15,000 - 50,000 = 35,000$
Therefore, the cash outflow for purchases was \$35,000.

Key Concept: Cash Flow from Operating Activities, Treatment in Cash Flow Statement

c) \$ 55,000
[Solution Description]
The cash paid to employees is calculated by adjusting Employee Benefit Expenses for changes in salaries payable. If salaries payable decrease, it means more cash was paid than recorded as expenses.
Step 1: Start with Employee Benefit Expenses = \$ 50,000.
Step 2: Subtract the decrease in salaries payable (\$ 5,000) because cash outflow is higher when payables decrease.
Calculation: \$ 50,000 + \$ 5,000 = \$ 55,000.
Therefore, the cash paid to employees is \$ 55,000.

Key Concept: Cash Flow from Financing Activities

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that repayment of a long-term loan is classified as a financing activity. This is correct because financing activities include transactions related to borrowing and repaying loans, issuing or redeeming shares, etc.
The reason states that financing activities involve changes in the capital and borrowings of an enterprise. This is also true and accurately explains why repayment of a long-term loan is considered a financing activity, as it directly affects the borrowings of the enterprise.
Therefore, both the Assertion and Reason are true, and the Reason is the correct explanation of the Assertion.

Key Concept: Classification of Cash Flows

c) Cash Flows from Operating Activities
[Solution Description]
According to AS-3, cash receipts from royalties are classified under operating activities because they pertain to the core revenue-generating activities of the enterprise. The cash flow statement includes such receipts in the 'Cash Flows from Operating Activities' section.
Therefore, the correct classification is 'Cash Flows from Operating Activities'.

Key Concept: Assertion-Reason

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that proceeds from the sale of inventory are classified as cash flows from operating activities, which is correct as per AS-3 since it falls under principal revenue-producing activities. The reason explains that operating activities include transactions affecting net profit or loss, which is also true. Moreover, the reason correctly justifies the assertion because revenue from selling goods directly impacts profit and thus belongs to operating activities. Therefore, both the assertion and reason are true, and the reason is the correct explanation of the assertion.

Key Concept: Indirect Method: Treatment of Income Tax

c) \$12,000
[Solution Description]
To calculate the tax paid during the year, we use the formula:
$\text{Tax Paid} = \text{Opening Provision for Tax} + \text{Current Year Provision} - \text{Closing Provision for Tax}$
Substituting the given values:
$\text{Tax Paid} = \$5,000 + \$10,000 - \$3,000 = \$12,000$
Therefore, the tax paid during the year is \$12,000.

Key Concept: Cash Flow Identification

c) Inflow of cash
[Solution Description]
The transaction involves the receipt of cash from debtors, which are current assets. Since cash is debited (received), it results in an inflow of cash.
Journal Entry:
Dr. Cash A/c \$20,000
Cr. Debtors A/c \$20,000
Analysis: Current asset (Debtors) vs. Cash.
Result: Inflow of cash.

Key Concept: Calculation of Cash Paid for Purchases

b) \$22,000
[Solution Description]
The formula to calculate cash paid for purchases is:
$\text{Cash Paid for Purchases} = \text{Credit Purchases} + \text{Opening Creditors} - \text{Closing Creditors}$
Substituting the given values:
$\text{Cash Paid for Purchases} = 20000 + 5000 - 3000 = 22000$
Therefore, the cash paid for purchases is \$22,000.

Key Concept: Non-cash financing transactions, Issue of shares for fixed assets

c) Disclosed separately as a footnote but not included in cash flows
[Solution Description]
The issuance of shares for acquiring fixed assets is a non-cash financing transaction. Here, the company issues shares directly to the vendor instead of paying cash, so no cash movement occurs. As per accounting standards, non-cash transactions are excluded from the cash flow statement because they do not involve cash flows. Hence, this transaction will not be reported in the cash flow statement.

Key Concept: Cash Flow Statement - Intangible Assets

c) \$100,000
[Solution Description]
The sale of patents is recorded under Investing Activities in the Cash Flow Statement. The cash inflow is the actual amount received from the sale, irrespective of the profit or loss. Here, the company sold the patent for \$100,000, so this amount will be recorded as inflow.

Key Concept: Cash Flow Adjustment

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that a decrease in trade receivables should be added to operating profit before working capital changes. According to the syllabus, when current assets like trade receivables decrease, it means more cash has been collected than recorded as credit sales, increasing cash inflow. Hence, it is added to operating profit. The reason correctly explains that a decrease in current assets increases cash and hence is added. Therefore, both assertion and reason are true, and the reason properly explains the assertion.

Key Concept: Operating Profit Adjustment, Working Capital Changes

c) \$139,000
[Solution Description]
Operating profit before working capital changes is \$120,000.
Decrease in Trade Receivables is \$15,000, which is added because it increases cash flow.
Increase in Inventory is \$8,000, which is subtracted because it decreases cash flow.
Increase in Trade Payables is \$12,000, which is added because it increases cash flow.
The calculation is:
$\text{Cash Generated} = 120{,}000 + 15{,}000 - 8{,}000 + 12{,}000 = 139{,}000$
So, the cash generated from operating activities is \$139,000.

Key Concept: Interest Received, Cash Flow from Investing Activities

c) \$38,000 outflow
[Solution Description]
Interest received (\$12,000) is classified under cash flows from investing activities as per AS-3. The purchase of marketable securities (\$50,000) is an outflow from investing activities. Dividend paid is part of financing activities and hence not considered here. Net cash flow from investing activities = Interest received - Purchase of investments = \$12,000 - \$50,000 = -\$38,000.

Key Concept: Financing, Operating Activities

c) Financing Activities
[Solution Description]
Issuing shares involves raising capital for the company, which is a financing activity as per AS-3. The repayment of loans is also a financing activity. Therefore, the cash inflow from issuing shares must be classified under financing activities.

Key Concept: Changes in Current Assets under Indirect Method

c) It is added to operating profit
[Solution Description]
A decrease in trade receivables indicates that cash has been collected from customers, which increases the cash flow from operating activities. Hence, the amount of decrease in trade receivables is added to operating profit before working capital changes.

Key Concept: Classification of Cash Flows

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that cash received from issuing shares is classified as a financing activity, which is correct as per AS-3. The reason explains that financing activities involve changes in the size and composition of equity capital and borrowings, which is also correct. Moreover, the reason correctly explains why issuing shares is classified as a financing activity because it directly affects the equity capital of the enterprise. Therefore, both the assertion and reason are true, and the reason is the correct explanation of the assertion.

Key Concept: Cash Flow Treatment

c) Cash Flows from Operating Activities
[Solution Description]
Salaries paid to employees constitute an expense related to normal business operations. As per AS-3, such payments are recorded under "Cash Flows from Operating Activities" because they support primary revenue-generating activities.

Key Concept: Preference Share Capital and Dividend Payments

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The Assertion states that preference shareholders received a 10\% dividend, which aligns with the example provided in the syllabus where M/s Khanduja Ltd. had a 10\% Preference Share Capital. The Reason explains that preference shares have a fixed dividend rate and priority over equity shareholders, which is also correct as per the syllabus. Moreover, the Reason correctly explains why the Assertion is true because the fixed dividend rate ensures preference shareholders receive their dividends first.

Key Concept: Investing, Financing Activities

a) \$40,000
[Solution Description]
The purchase of machinery is an investing activity. However, only the cash portion of the payment affects the cash flow statement. The issuance of shares is a financing activity and does not impact the cash flow from investing activities.
Step 1: Total cost of machinery = \$200,000
Step 2: Cash paid = 20\% of \$200,000 = \$40,000
The cash outflow under investing activities is \$40,000.

Key Concept: Flow of Cash - Inflow

d) Inflow of cash
[Solution Description]
The transaction involves receiving cash from a debtor. According to the rules, when cash is debited (\$ \text{Cash A/c Dr. } 10,000 \text{ To Debtors A/c } 10,000), it results in an inflow of cash. Thus, the cash balance increases.

Key Concept: Operating Activities, Investing Activities, Financing Activities

a) Operating: \$80,000; Investing: \$200,000; Financing: \$150,000
[Solution Description]
Step 1: Wages to employees are part of day-to-day business operations, so they fall under Operating Activities.
Step 2: Purchase of machinery is an investment in long-term assets, so it falls under Investing Activities.
Step 3: Repayment of a long-term loan (principal and interest) relates to financing activities.
Step 4: Income tax payment is also an operating activity since taxes arise from core operations.
Conclusion: The correct classification is:
1. Operating (\$50,000), 2. Investing (\$200,000), 3. Financing (\$150,000), 4. Operating (\$30,000).
Therefore, the combined outflow for Operating is \$80,000, Investing is \$200,000, and Financing is \$150,000.

Key Concept: Operating Profit before Working Capital Changes, Trade Receivables, Trade Payables

c) \$87,700
[Solution Description]
Start with the operating profit before working capital changes: \$80,000.
Add decrease in current assets:
- Decrease in Trade Receivables = +\$2,500
- Decrease in Inventory = +\$1,500
Add increase in current liabilities:
- Increase in Trade Payables = +\$4,500
Subtract increase in current assets:
- Increase in Accrued Income = -\$800
Now calculate total cash generated:
\$80,000 + \$2,500 + \$1,500 + \$4,500 - \$800 = \$87,700
Therefore, the cash generated from operating activities is \$87,700.

Key Concept: Redemption of Preference Shares

c) \$105,000
[Solution Description]
To calculate the total cash outflow:
1. Face value per share = \$100
2. Premium = 5\% of face value = 0.05 $\times$ 100 = \$5
3. Total redemption amount per share = Face value + Premium = \$100 + \$5 = \$105
4. Total cash outflow for 1,000 shares = 1,000 $\times$ 105 = \$105,000
The total cash outflow is \$105,000.

Key Concept: Cash Flow Statement, Indirect Method, Current Assets

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that an increase in accounts receivable decreases cash flow from operating activities. This is true because accounts receivable represents sales made on credit - while revenue is recognized, cash hasn't been received yet. The reason correctly explains that this situation represents earned but uncollected cash, which indeed reduces operating cash flow. Therefore, both statements are true and the reason properly explains the assertion.

Key Concept: Accounting Treatment: Short-term Borrowings

b) Negative cash flow under Financing Activities
[Solution Description]
A decrease in bank overdraft signifies repayment of short-term borrowings. As per AS-3, repayments of short-term borrowings (like bank overdrafts) are classified under **Cash Flows from Financing Activities** and recorded as a negative item (cash outflow). Thus, the entry would be: $\text{Repayment of Short-term Borrowings} = (20,000)$.

Key Concept: Treatment in Cash Flow Statement

b) Deducted by \$15,000 and the new cash flow from operations becomes \$185,000
[Solution Description]
An increase in trade receivables means less cash was collected from credit sales compared to the previous period. The difference is calculated as:
$\text{Increase in Trade Receivables} = \$45,000 - \$30,000 = \$15,000.$
Since this amount indicates less cash inflow, it is deducted from the operating profit before working capital changes:
$\text{Cash Flow Adjustment} = -\$15,000.$
Therefore, the adjusted cash flow from operating activities will be:
$\$200,000 - \$15,000 = \$185,000.$

Key Concept: Fixed Asset Account Analysis, Depreciation Calculation

c) \$1,30,000
[Solution Description]
Step 1: Calculate depreciation for the year = Closing accumulated depreciation (\$92,000) - Opening accumulated depreciation (\$72,000) = \$20,000
Step 2: Prepare Fixed Tangible Asset Account:
$\text{Opening balance} + \text{Purchases} - \text{Sales} = \text{Closing balance}$
\$2,40,000 + Purchases - \$60,000 = \$3,10,000
Therefore, Purchases = \$1,30,000
Step 3: Net cash outflow = Total purchases (\$1,30,000)
Note: The sale proceeds calculation is irrelevant to this question as it asks only about purchase outflow.

Key Concept: Cash Flow from Operating Activities - Indirect Method

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
Under the indirect method of calculating cash flows from operating activities, we start with net profit before tax and then make adjustments for non-cash items. Depreciation is a non-cash expense because it represents the wear and tear of assets over time, but no actual cash is paid out. Hence, it is added back to net profit to arrive at the correct cash flow from operating activities. The reason correctly explains why depreciation is added back.

Key Concept: Operating Activities, Financing Activities

b) \$30,000
[Solution Description]
The given transactions include:
1. Payment of wages (\$20,000) - Operating Activity
2. Redemption of debentures (\$50,000) - Financing Activity
3. Payment of income tax (\$10,000) - Operating Activity
Total cash outflow under operating activities = \$20,000 + \$10,000 = \$30,000.

Key Concept:

d) Bank Overdraft
[Solution Description]
Bank overdraft and cash credit are not part of cash and cash equivalents as per the syllabus. The other options listed (cash in hand, marketable securities, and cheques in hand) are included.

Key Concept: Investing Activities - Fixed Assets Purchase

d) Cash outflow from investing activities
[Solution Description]
The purchase of machinery is a cash outflow under investing activities as it involves acquiring a fixed asset. Hence, this transaction will be recorded as a cash outflow in the "Cash Purchase of Fixed Assets" section.

Key Concept: Depreciation and Cash Flow Statement

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
Depreciation is a non-cash expense, meaning it reduces the accounting profit without affecting cash flow. Therefore, while calculating cash from operating activities, depreciation is added back to net profit as per AS-4. The Reason correctly explains why this adjustment is made in the cash flow statement, as depreciation does not result in actual cash outflow despite reducing taxable income.

Key Concept: Operating Activities, Investing Activities

c) \$120,000 inflow in investing activities
[Solution Description]
The sale proceeds (\$120,000) will appear as a cash inflow under investing activities since it relates to disposal of fixed assets. The profit on sale (\$120,000 - (\$200,000 - \$70,000) = -\$10,000 loss) will be adjusted in operating activities as a non-cash item. However, only the actual cash received is shown under investing activities.

Key Concept: Cash Equivalents, Non-Cash Equivalents, AS-3

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion states that treasury bills with a maturity period of 4 months are classified as cash equivalents under AS-3. As per AS-3, cash equivalents include short-term, highly liquid investments that are readily convertible into known amounts of cash and have a maturity of three months or less from the date of acquisition. However, treasury bills with a maturity period of 4 months exceed the three-month threshold specified in AS-3, so they should not be classified as cash equivalents.
The Reason states that cash equivalents are short-term, highly liquid investments that are readily convertible into cash and subject to an insignificant risk of changes in value. This statement is correct as it aligns with the definition provided in AS-3.
Since the Assertion is false (as treasury bills with 4-month maturity are not cash equivalents), but the Reason is true, the correct option is (d).

Key Concept: Cash Flow Classification

b) -\$3,400
[Solution Description]
To calculate the net cash flow from investing activities:
1. Sale of non-current investments results in a cash inflow of \$3,600.
2. Purchase of non-current investments results in a cash outflow of \$7,000.
3. Net cash flow = Cash Inflow - Cash Outflow = \$3,600 - \$7,000 = -\$3,400.

Key Concept: Cash Flows from Royalties

c) Operating Activities
[Solution Description]
According to AS-3, cash receipts from royalties are classified under operating activities because they arise from the regular revenue-generating activities of the business. Therefore, royalty income is part of cash flows from operating activities.

Key Concept: Cash and Cash Equivalents, Classification of Cash Flows

c) \$50,000
[Solution Description]
The treasury bills qualify as cash equivalents because they have a total maturity period of 45 days and were acquired only 30 days ago (remaining maturity <90 days). Therefore, the full \$50,000 should be reported as cash and cash equivalents since all components meet the definition of cash/cash equivalents.

Key Concept: Cash Flow from Investing Activities

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion (A) states that the purchase of non-current investments results in a cash outflow under investing activities. This is true because cash flow from investing activities includes cash payments to acquire fixed assets, intangible assets, and other long-term assets (including non-current investments).
The reason (R) states that an increase in the balance of non-current assets indicates a purchase, which is classified as a cash outflow. This is also true, as per the principles of cash flow statement preparation. Additionally, the reason correctly explains the assertion because the purchase of non-current investments leads to an increase in their book value, thereby confirming a cash outflow.
Therefore, both Assertion and Reason are true, and Reason is the correct explanation of Assertion.

Key Concept: Concept: Adjustments for Changes in Working Capital

b) Decrease in Current Assets and Increase in Current Liabilities
[Solution Description]
Under the Indirect Method, decreases in current assets (e.g., trade receivables) and increases in current liabilities (e.g., trade payables) are added to operating profit to adjust for changes in working capital. These adjustments reflect cash inflows or reduced outflows.

Key Concept: Cash Flow from Financing Activities, Repayment of Borrowings and Dividend Paid

b) -\$180,000
[Solution Description]
To calculate the net cash used in financing activities:
1. Cash inflow from new loan = \$100,000.
2. Cash outflow from repayment of loan = \$200,000.
3. Cash outflow from dividend payment = \$50,000.
4. Cash outflow from interest payment = \$30,000.
Net cash used = \$100,000 - \$200,000 - \$50,000 - \$30,000 = -\$180,000.

Key Concept: Inventories, Trade Receivables, Cash and Bank Balances

b) 1.4
[Solution Description]
Working Capital Ratio = Current Assets / Current Liabilities.
Current Assets = Inventories + Trade Receivables + Cash and Bank Balances = \$200,000 + \$300,000 + \$60,000 = \$560,000.
Working Capital Ratio = \$560,000 / \$400,000 = 1.4.

Key Concept: Proposed Dividend and Revised AS-4

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion (A) states that under the old accounting pattern, proposed dividend was classified as a current liability and had an impact on both operating (added back to PBT) and financing activities (if paid). This is true according to the syllabus. The reason (R) explains that revised AS-4 treats proposed dividend as a contingent liability since it becomes a liability only after AGM approval, which is also correct. Moreover, the reason accurately justifies why the assertion about the old treatment is no longer applicable under the new standard. Thus, both are true, and the reason correctly explains the assertion.

Key Concept: Cash Flow from Financing Activities

d) Increase in cash outflow by \$10,000
[Solution Description]
Redemption of preference shares involves a cash outflow. If redeemed at a premium, the total cash paid will include the redemption amount plus the premium. For example, if \$2,00,000 shares are redeemed at a 5\% premium, the total cash outflow is \$2,10,000 (2,00,000 + 10,000).

Key Concept: Cash Flow Classification

c) Inflow under investing activities
[Solution Description]
Selling old machinery for cash is classified under investing activities because it involves the disposal of a non-current asset (fixed asset). The cash inflow increases the company's cash and cash equivalents. Thus, there is an inflow of cash under investing activities.

Key Concept: Cash Flow Statement vs. Cash Budget

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion (A) is false because a cash flow statement and a cash budget serve different purposes. A cash budget is a forward-looking tool prepared at the beginning of the period to plan future cash inflows and outflows, while a cash flow statement is a historical record of actual cash transactions prepared at the end of the period. However, the Reason (R) is true as both documents are indeed used for comparison to analyze variances between planned and actual cash flows and facilitate corrective measures.

Key Concept: Cash and Cash Equivalents

b) A 2-month Treasury bill
[Solution Description]
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash with minimal risk of value change. These typically include instruments like Treasury bills or commercial papers with maturities of three months or less from the date of acquisition. The correct answer should identify such an instrument.

Key Concept: Assertion-Reason

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion states that purchase of machinery by issuing shares is a cash outflow, which is false because no cash is involved in this transaction (only shares are issued). The Reason correctly states that transactions involving non-cash items do not affect the cash flow statement. Thus, Assertion is false, but Reason is true.

Key Concept: Classification of Cash Flows

c) Cash Flows from Operating Activities
[Solution Description]
As per AS-3, cash receipts from fees earned for services rendered are part of the operating activities of an enterprise. Such transactions are essential to the primary revenue generation process and must be included under 'Cash Flows from Operating Activities.'
Hence, the correct placement is 'Cash Flows from Operating Activities.'

Key Concept: Cash Flow Statement - Indirect Method

c) \$260,000
[Solution Description]
First, calculate the profit before taxation by adding the surplus for the year and the provision for taxation:
$\text{Profit before Taxation} = 150,000 + 30,000 = 180,000$.
Next, add the non-cash adjustments to the profit before taxation to arrive at the operating profit before working capital changes:
$\text{Operating Profit} = 180,000 + 80,000 = 260,000$.

Key Concept: Cash Flow Statement, Cash Equivalents

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion states that treasury bills with a maturity period of 4 months are considered cash equivalents. However, according to the definition provided in the syllabus, cash equivalents must have a maturity of three months or less from the date of acquisition. Therefore, the Assertion is false. The Reason correctly defines the criteria for cash equivalents, which includes being readily convertible into cash with insignificant risk of changes in value, making it true. Thus, the Assertion is false, but the Reason is true.

Key Concept: Ignore non-cash transactions, No replacement of other statements

c) It will not appear in the cash flow statement.
[Solution Description]
The transaction involves no cash movement, so it will not appear in the cash flow statement. This highlights the limitation that the cash flow statement ignores non-cash transactions, such as asset purchases via share issuance, which are critical to understanding the firm’s full financial position.

Key Concept: Non-cash transactions, Cash flow statement

c) The transaction will not be reflected in the cash flow statement.
[Solution Description]
Issuing shares for machinery is a non-cash transaction as it does not involve any flow of cash or cash equivalents. The cash flow statement only includes transactions that affect cash or cash equivalents. Therefore, this transaction will not appear in the cash flow statement.

Key Concept: Non-cash Items in Cash Flow Statement

a) Depreciation
[Solution Description]
Non-cash items like depreciation, amortization of intangible assets, and loss on sale of fixed assets are added back to net profit since they do not involve any cash outflow but reduce the reported profit. From the options given, "Depreciation" is a non-cash expense accounted for in the Profit and Loss Account but does not affect cash flow.

Key Concept: Fixed tangible assets on original cost basis

d) \$50,000
[Solution Description] Since no assets were sold, the entire increase in Fixed Tangible Assets represents purchases.
Opening Fixed Tangible Assets: \$200,000.
Closing Fixed Tangible Assets: \$250,000.
Increase in Fixed Tangible Assets: \$250,000 - \$200,000 = \$50,000.
The change in Accumulated Depreciation (\$20,000) represents depreciation expense for the year but does not affect cash outflow for purchases.
Therefore, cash paid for purchasing fixed tangible assets is \$50,000.

Key Concept: Treatment of Income Tax Paid

b) Deducted from cash generated from operating activities
[Solution Description]
Income tax paid is shown as a deduction from cash generated from operating activities to arrive at net cash from/(used in) operating activities. It appears after calculating the cash generated from operations and before arriving at the final net cash flow from operating activities.

Key Concept: Long-term provisions, Accounting Treatment in Cash Flow Statement

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion states that long-term provisions are always classified under financing activities in the cash flow statement. However, this is not entirely accurate because while some long-term provisions like proposed dividend payments are classified under financing activities, others such as provision for tax or employee benefits may be adjusted in operating activities if they affect net profit. Therefore, the Assertion is false.
The Reason claims that long-term provisions represent future cash outflows affecting the company's long-term financial position. While it is true that long-term provisions involve future obligations, this does not necessarily mean they are always classified under financing activities. Thus, the Reason is true but does not correctly explain the Assertion.

Key Concept: Cash flow adjustments, Current assets and liabilities

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
When trade receivables decrease (e.g., from \$50,000 to \$40,000), it implies that more cash was collected (\$10,000 extra) than the credit sales for the year. This leads to higher cash inflow, which is added to operating profit before working capital changes. The reason correctly explains the assertion as a decrease in current assets indeed increases cash flow from operations by releasing tied-up cash.

Key Concept: Loans

c) All types of loans—short, medium, and long-term—are treated the same way in cash flow statements.
[Solution Description]
Loans, whether short-term, medium-term, or long-term, are treated uniformly in the cash flow statement as per the syllabus. There is no distinction between different loan types when accounting for them under financing activities.

Key Concept: Current Assets - Trade Receivables

c) \$9,000
[Solution Description]
The net decrease in trade receivables is calculated by first adjusting the opening and closing trade receivables with their respective provisions, then finding the difference.
Step 1: Adjust opening trade receivables:
\$50,000 (opening) - \$5,000 (provision) = \$45,000.
Step 2: Adjust closing trade receivables:
\$40,000 (closing) - \$4,000 (provision) = \$36,000.
Step 3: Calculate the decrease:
\$45,000 - \$36,000 = \$9,000.
Thus, the net decrease in trade receivables is \$9,000.

Key Concept: Operating Activities, Working Capital Adjustments

c) \$180,000
[Solution Description]
Start with Profit before Tax: \$200,000.
Add non-cash expense (Depreciation): + \$30,000.
Subtract increase in current asset (Accounts Receivable): - \$15,000.
Add decrease in current asset (Inventory): + \$10,000.
Add increase in current liability (Accounts Payable): + \$5,000.
Subtract Income Tax Paid: - \$50,000.
Cash Flow from Operating Activities = \$200,000 + \$30,000 - \$15,000 + \$10,000 + \$5,000 - \$50,000 = \$180,000.

Key Concept: Cash and Cash Equivalents

b) Treasury bills with 3-month maturity
[Solution Description]
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and have an insignificant risk of changes in value. Examples include treasury bills and commercial papers with a maturity of three months or less.

Key Concept: Cash Flow from Operating Activities - Indirect Method

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
In the indirect method of preparing the cash flow statement, amortization of intangibles such as goodwill is added back to the profit before tax because it is a non-cash expense. Non-cash expenses reduce the reported profit but do not involve any actual cash outflow. Therefore, they must be added back to reconcile the net income with the cash generated from operating activities. Thus, both the assertion and reason are true, and the reason correctly explains the assertion.

Key Concept: Preference Share Capital

d) \$2,10,000
[Solution Description]
First, calculate the redemption amount including premium:
Redemption amount = Face value + Premium = \$2,00,000 + (5\% of \$2,00,000)
= \$2,00,000 + \$10,000
= \$2,10,000

Key Concept: Operating Profit, Working Capital Changes

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion states that an increase in prepaid expenses is added back while calculating cash flows from operating activities under the indirect method. This is false because, under the indirect method, an increase in current assets (like prepaid expenses) is subtracted, not added, to adjust the net profit for working capital changes. The Reason correctly states that prepaid expenses are a current asset and an increase in them reduces cash flow from operations. Thus, Assertion is false, but Reason is true.

Key Concept: Cash Flow from Financing Activities

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The assertion states that issuance of equity shares is a cash inflow from financing activities, which is true as per the syllabus. The reason states that it increases the capital base of the company, which is also true. However, the reason does not correctly explain why it is classified as a financing activity; the correct explanation would be that it involves changes in the capital structure of the enterprise.

Key Concept: Cash Flows from Investing Activities

c) -\$30,200
[Solution Description]
To find Net Cash used in Investing Activities, sum all cash inflows and outflows related to investing activities. The sale of the machine is an inflow (\$21,000), while the purchase of a new machine (\$41,200) and non-current investments (\$10,000) are outflows. The calculation is:
$21,000 - 41,200 - 10,000 = -\$30,200$

Key Concept: Cash Flow from Financing Activities

d) Proceeds from issuing shares or other similar instruments
[Solution Description]
Cash flows from financing activities include inflows and outflows related to capital and borrowings. Examples are proceeds from issuing shares or debentures, repayment of loans, and payment of dividends.

Key Concept: Trade Receivables, Cash Flow Statement

b) Added as \$10,000 to operating profit
[Solution Description]
A decrease in trade receivables (\$50,000 - \$40,000 = \$10,000) indicates more cash was received from debtors. Thus, it is added to the operating profit to calculate cash generated from operating activities.
Calculation:
$\text{Cash Generated} = \text{Operating Profit} + \text{Decrease in Trade Receivables}$
$\text{Cash Generated} = 100,000 + 10,000 = 110,000$

Key Concept: Assertion-Reason

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The assertion states that proceeds from long-term borrowings are reported under Financing Activities, which is correct as per accounting standards. The reason states that long-term borrowings result in cash inflow, which is also true. However, the reason does not explain why it is classified under Financing Activities but merely states a characteristic of long-term borrowings. Hence, both are true, but the reason does not correctly explain the assertion.

Key Concept: Operating Activities, Investing Activities

c) \$55,000
[Solution Description]
Start with Profit before Tax: \$50,000. Add back non-cash expenses: Depreciation (\$5,000) + Loss on Sale of Machinery (\$2,000). Subtract non-operating income: Dividend Income (\$3,000). Adjust for working capital changes: Decrease in Trade Receivables (\$4,000) is added, Increase in Inventory (\$6,000) is subtracted, Increase in Trade Payables (\$3,000) is added. Calculation: \$50,000 + \$5,000 + \$2,000 - \$3,000 + \$4,000 - \$6,000 + \$3,000 = \$55,000.

Key Concept: Non-current investments account format

c) Sale proceeds of non-current investments
[Solution Description]
The Non-Current Investments Account credits sale proceeds (\$2,800), loss on sale (\$200), and closing balance (\$8,000). Purchases (\$8,000) and opening balance (\$3,000) are debits.
From the given illustration:
1. Credit side includes "By Cash A/c (Sale)" and "By Closing Balance c/d."
2. Debit side includes "To Cash A/c (Purchase)" and "To Opening Balance b/d."
Thus, the correct option must be related to the credit side entries.

Key Concept: Supplementary Nature of Cash Flow Statement

c) It complements other financial statements by focusing solely on cash-related activities.
[Solution Description]
The cash flow statement is a supplementary financial statement that provides information about cash inflows and outflows but cannot replace the profit and loss account or balance sheet. It focuses only on cash transactions and ignores non-cash items like depreciation, amortization, or issuance of shares for fixed assets. Hence, it must be used alongside other financial statements to assess the overall financial health of a business.

Key Concept: Effect of Increase in Current Investments

b) \$45,000
[Solution Description]
Net Cash from Operating Activities = Operating Profit before Working Capital Changes - Increase in Current Investments. So, \$50,000 - \$5,000 = \$45,000.

Key Concept: Role in Cash Flow Statement

c) To evaluate investment decisions and future cash flows
[Solution Description]
The separate disclosure of cash flows from investing activities helps users evaluate the company's investment decisions and their impact on future income and cash flows. It highlights how resources are allocated for long-term growth.

Key Concept: Cash Flow Budget Comparison

b) To assess adherence to planned cash utilization and identify deviations
[Solution Description]
Comparing the cash budget and cash flow statement allows management to evaluate how actual cash flows align with planned cash flows. It highlights variances and enables corrective actions to be taken for better financial control and future planning.

Key Concept: Operating Activities, Non-Financial Enterprises

b) Only (i) and (iii)
[Solution Description]
For a non-financial enterprise: (i) Cash receipts from sale of goods are operating activities. (ii) Interest on investments is an investing activity. (iii) Repayment of loans to suppliers is financing if it involves borrowings or investing if it is an advance. Since suppliers are part of trade receivables, their repayment is operating. Thus, only (i) and (iii) are correct.

Key Concept: Cash Flow Statement - Indirect Method, Treatment of Interest and Dividends

d) Assertion is false, but Reason is true.
[Solution Description]
Under the indirect method, the cash flow statement starts with the net profit before tax. Since interest paid is deducted while calculating the net profit, it needs to be added back to reconcile the net profit to cash generated from operations. However, the reason states that interest paid is a financing activity, which is correct as per Accounting Standard-3 (Revised). But the assertion is false because interest paid is not added back under operating activities—it is already reflected in the profit before tax and treated separately under financing activities.
Step-by-step explanation:
1) The indirect method begins with profit before tax.
2) Interest paid reduces the net profit, but it is not an operating cash outflow—it is a financing cost.
3) Therefore, interest paid is not "added back" under operating activities; instead, it is shown under financing activities as a cash outflow.
4) Hence, the assertion is incorrect, but the reason is true.

Key Concept: Cash Flow Classification

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
According to AS-3, payment of income tax is categorized under cash outflows from operating activities because it relates to the company's principal revenue-generating activities. The reason provided correctly explains the assertion since income tax is directly linked to profits earned from core operations. Hence, both the assertion and reason are true, and the reason is the correct explanation of the assertion.

Key Concept: Cash Flow from Operating Activities - Indirect Method

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
According to the syllabus, rental income is considered part of operating activities if it is derived from the primary business operations (e.g., a real estate company). Here, the assertion correctly states the classification of rental income under operating activities when received by a real estate company. The reason provides the correct justification that rental income is part of core business operations and is adjusted in the operating profit before working capital changes. Thus, both assertion and reason are true, and the reason explains the assertion correctly.

Key Concept: Cash Flow Classification

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The Assertion states that purchasing a new machine by issuing shares results in no flow of cash, which is correct because the transaction does not involve cash or cash equivalents. The Reason states that only transactions involving cash or cash equivalents can cause a flow of cash, which is also true and correctly explains why the Assertion is valid. Therefore, both the Assertion and Reason are true, and the Reason is the correct explanation of the Assertion.

Key Concept: Cash Flow Statement: Investing Activities

b) Purchase of machinery
[Solution Description]
Investing activities involve cash flows related to the acquisition or disposal of long-term assets and investments not considered as cash equivalents. Purchase of machinery falls under this category as it involves buying a fixed asset intended for long-term use.

Key Concept: No Flow of Cash

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that purchasing land by issuing shares does not result in any cash flow, which is correct because the transaction involves only non-cash items (land and shares). The reason provided is also true as transactions involving only non-cash items do not affect cash or cash equivalents. Additionally, the reason correctly explains why there is no cash flow in this transaction. Hence, both the assertion and reason are true, and the reason is the correct explanation of the assertion.

Key Concept: Current Assets - Cash and Cash Equivalents

c) Bank overdraft facility used by the company
[Solution Description]
According to the syllabus, cash and cash equivalents include cash in hand, cash at bank, cheques, drafts, and short-term investments (if specified as marketable securities). However, bank overdraft and cash credit are explicitly excluded from cash and cash equivalents.

Key Concept: Assertion-Reason

c) Assertion is true, but Reason is false.
[Solution Description]
The Assertion is true because dividend payments, whether interim or final, are classified under "Cash Flows from Financing Activities" as they represent returns to shareholders. However, the Reason is false because while dividends reduce retained earnings, they do not represent a return of capital but rather a distribution of profits. Hence, the correct classification is (c).

Key Concept: Cash Flow Classification

b) Outflow of cash
[Solution Description]
Purchasing furniture for cash involves an outflow of cash because it reduces the cash balance. This is classified as a cash outflow transaction.

Key Concept: Classification of Cash Flows

c) \$12,500
[Solution Description]
First, calculate the dividend on preference shares: 5\% of \$50,000 = \$2,500. Next, calculate the dividend on equity shares: 10\% of \$100,000 = \$10,000. Total dividend paid is the sum of both dividends: \$2,500 + \$10,000 = \$12,500.

Key Concept: Cash Flow Statement: Basics - Non-cash Items

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
Depreciation is a non-cash expense, which means it reduces the net profit without affecting the cash balance. Therefore, it is added back to net profit to arrive at the cash flow from operating activities. The Reason correctly explains why depreciation is added back, as it clarifies that depreciation does not involve any cash outflow. Hence, both Assertion and Reason are true, and Reason is the correct explanation of Assertion.

Key Concept: Operating Cash Flow, Dividend Income

d) Assertion is false, but Reason is true.
[Solution Description]
The assertion is false because dividend income is typically classified as investing activity unless received by financial institutions where it may be operating activity. The reason is also false as dividend income doesn't necessarily represent regular income from core operations.

Key Concept: Interest paid treatment, Cash Flow from Operating Activities

b) 270,000
[Solution Description]
To find the cash flow from operating activities, we start with the net profit and adjust for non-cash expenses and changes in working capital. Here:
1. Net Profit = \$250,000.
2. Add back Depreciation (non-cash expense): \$250,000 + \$50,000 = \$300,000.
3. Subtract increase in Accounts Receivable (working capital change): \$300,000 - \$30,000 = \$270,000.
4. Interest Paid (\$20,000) is treated as financing activity, so it is excluded from operating activities.
Final Cash Flow from Operating Activities = \$270,000.

Key Concept: Financing Activities, Cash Flow Statement

b) \$1,50,000
[Solution Description]
To calculate Net Cash Flows from Financing Activities:
1. **Cash inflow from issuing debentures**: \$3,00,000.
2. **Cash outflow from redeeming debentures**: \$1,00,000.
3. **Interest paid on debentures**: \$50,000 (outflow).
Net Cash Flows = \$3,00,000 (inflow) - \$1,00,000 (outflow) - \$50,000 (outflow) = \$1,50,000.

Key Concept: Cash Flow Statement - Investing Activities

b) \$17,000
[Solution Description]
To determine the net cash used in investing activities, consider the cash outflow for purchasing the new building and the cash inflow from selling the old building.
- Cash paid for the new building: \$75,000 (outflow)
- Cash received from selling the old building: Book value (\$63,000) minus loss (\$5,000) = \$58,000 (inflow)
The net cash used in investing activities is calculated as:
$\text{Net Cash Used in Investing Activities} = 75{,}000 - 58{,}000 = 17{,}000$
Therefore, the net cash used in investing activities is \$17,000.

Key Concept: Classification of Cash Flows

c) Purchase of land for expansion
[Solution Description]
Investing activities involve the acquisition and disposal of long-term assets and investments not included in cash equivalents. Cash outflows in this category typically include purchases of property, plant, equipment, or other long-term investments.

Key Concept: Non-cash transactions

c) Issuing shares to acquire land
[Solution Description]
A non-cash transaction does not involve any inflow or outflow of cash or cash equivalents. From the syllabus, examples include issuing shares to purchase assets or converting debentures into equity shares. Therefore, purchasing land by issuing shares is a non-cash transaction as it involves no cash exchange.

Key Concept: Cash Flow Due to Changes in Non-Current Items

a) Inflow of \$100,000
[Solution Description]
The sale of fixed tangible assets results in an inflow of cash in the investing activities section of the cash flow statement. The amount of inflow is equal to the sale price of the asset, irrespective of its book value or accumulated depreciation.
Given:
- Sale Price = \$100,000
Thus, the cash inflow from the sale of machinery is \$100,000.

Key Concept: Comparison with Cash Budget

b) To assess whether financial resources were used as planned
[Solution Description]
The comparison helps in identifying discrepancies between estimated and actual cash flows. Since the actual inflows (\$450,000) are less than estimated (\$500,000), management can investigate the reasons for this variance, such as lower sales or delayed collections, and take corrective actions.

Key Concept: Cash Flow Classification of Intangible Assets Sale

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
According to AS-3, the sale of non-current intangible assets like patents qualifies as an investing activity, and the cash proceeds (\$100,000) are correctly classified as inflows under this head. The Reason states the accounting principle correctly but does not explain why the Assertion is true (i.e., it restates the classification rule rather than justifying the assertion).

Key Concept: Trade Payables Treatment in Cash Flow

b) \$10,000 is added to operating profit
[Solution Description]
To find the effect of the change in trade payables on cash flow:
1. Calculate the difference between ending and beginning trade payables:
$\$55,000 - \$45,000 = \$10,000$
2. Since trade payables increased, this amount (\$10,000) is added to operating profit as it means less cash was paid to creditors than the credit purchases for the year.

Key Concept: Trade Receivables and Cash Flow

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion states that an increase in trade receivables indicates more cash collected from customers. This is false because an increase in trade receivables means less cash has been collected from customers, as per the formula: $\text{Cash Flow Adjustment} = \text{Closing Trade Receivables} - \text{Opening Trade Receivables}$. If closing trade receivables are higher than opening, it results in a decrease in cash flow.
The Reason states that trade receivables represent amounts due from customers for credit sales, and a decrease in them signifies higher cash inflows. This is true because a decrease in trade receivables means more cash has been collected, increasing cash flow.
Therefore, the Assertion is false, but the Reason is true.

Key Concept: Investing Activities

c) Purchase of land[Solution Description]Investing activities include transactions involving the purchase or sale of long-term assets and investments. The purchase of land is a capital expenditure aimed at generating future benefits, not for immediate resale. Therefore, it falls under investing activities.

Key Concept: Classification of Cash Flows, Financing Activities

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
1. **Assertion Analysis**: The assertion states that repayment of a 5-year loan is classified as a cash outflow from financing activities. This is correct because repayments of borrowings (short-term, medium-term, or long-term) are considered cash outflows under financing activities as per AS-3.
2. **Reason Analysis**: The reason states that any repayment of borrowings, irrespective of their tenure, is a financing activity cash outflow. This is also true and directly supports the assertion, as AS-3 explicitly includes all borrowing repayments (short-term, medium-term, and long-term) as financing activities.
3. **Conclusion**: Both the Assertion and Reason are true, and the Reason correctly explains the Assertion.

Key Concept: Cash Flows from Investing and Operating Activities

b) Total cash inflow: \$28,000; Investing Activities: \$20,000
[Solution Description]
Step 1: The sale of the machine results in a loss since the selling price (\$20,000) is less than the book value (\$25,000). However, only the cash received (\$20,000) is considered as a cash inflow under **Investing Activities**.
Step 2: The royalties received (\$8,000) are classified under **Operating Activities** as they arise from the core business operations.
Step 3: Total cash inflow = Cash from sale of machine + Royalties = \$20,000 + \$8,000 = \$28,000.
Out of this, \$20,000 is from **Investing Activities**, and \$8,000 is from **Operating Activities**.

Key Concept: Supplementary Nature of Cash Flow Statement

d) Cash Flow Statement
[Solution Description]
The cash flow statement is only a supplementary statement and cannot replace other financial statements like the Profit and Loss Account or the Balance Sheet. Each of these statements serves a distinct purpose.

Key Concept: Cash Flow Statement: Cash Equivalents

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
Marketable securities are classified as cash equivalents because they are highly liquid investments with short maturities (usually three months or less). The Assertion is true as per accounting standards. The Reason correctly explains why marketable securities qualify as cash equivalents due to their liquidity and short-term nature. Therefore, both Assertion and Reason are true, and Reason is the correct explanation of Assertion.

Key Concept: Verification of closing cash and cash equivalents, Components of Cash and Cash Equivalents

b) \$33,000
[Solution Description]
To find the closing balance of cash and cash equivalents, we use the formula:
$\text{Cash and Cash Equivalents - Closing Balance} = \text{Net Increase/Decrease in Cash and Cash Equivalents} + \text{Cash and Cash Equivalents - Opening Balance}$
Here, net decrease is $-\$12,000$, opening balance is $\$45,000$. Plugging these values into the formula:
$\text{Closing Balance} = (-\$12,000) + \$45,000 = \$33,000$
The question mentions cheques in hand of \$3,000, which are part of cash and cash equivalents. Thus, the total closing balance remains \$33,000 as it already includes all components.

Key Concept: Cash Flow Statement Basics

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description] The Assertion states that a company can report a net profit yet experience a decrease in cash balance, which is correct because profit includes non-cash items (e.g., credit sales, unpaid expenses). The Reason correctly explains that non-cash expenses (like depreciation) reduce profit without impacting cash, justifying the Assertion. Thus, both are true, and Reason properly explains Assertion.

Key Concept: Assertion-Reason

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The assertion states that a decrease in inventory is added to the operating profit before working capital changes in the cash flow statement (indirect method), which is correct. According to the syllabus, a decrease in current assets like inventory is added to the operating profit as it implies that less cash was tied up in inventory, thereby increasing cash flow.
The reason states that a decrease in inventory increases the cash inflow from operating activities, which is also correct. However, while the reason provides additional information about the result of the decrease in inventory, it does not directly explain why the decrease is added to the operating profit before working capital changes. Therefore, both are true, but the reason does not correctly explain the assertion.

Key Concept: Assertion-Reason

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
According to AS-3, purchasing intangible assets like patents falls under investing activities since they are non-current assets not held for resale. The reason correctly explains that investing activities involve transactions related to non-current assets. Thus, both Assertion and Reason are true, and Reason provides the correct explanation.

Key Concept: Operating Activities Adjustment

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
In the indirect method of preparing the cash flow statement, depreciation is a non-cash expense that reduces the reported profit but does not involve any actual cash outflow. Therefore, it must be added back to the profit before tax to arrive at the correct cash flow from operating activities. The reason correctly explains why depreciation is added back as it clarifies that while depreciation affects taxable profit, there is no actual cash transaction involved.

Key Concept: Short-term loans and advances, Cash flow from financing activities

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description] The assertion states that repayment of short-term borrowings is recorded as a minus item in the cash flow statement under financing activities. This is correct because repayments represent cash outflows. The reason states that such repayments reduce the company's cash balance, which is also true. Additionally, the reason correctly explains why the repayment is recorded as a minus item, as it directly leads to a reduction in cash.
Thus, both the assertion and the reason are true, and the reason is the correct explanation of the assertion.

Key Concept: Cash Flow Classification, Non-Current Assets, Current Liabilities

a) Investing Activities: +\$300,000; Operating Activities: -\$150,000
[Solution Description]
Selling land is an investing activity since it involves disposal of a non-current asset. Paying creditors is an operating activity as it reduces trade payables (current liability). Investing in marketable securities (cash equivalent) does not affect cash flow directly as it is a movement within cash equivalents. The classifications are:
- Investing Activities: +\$300,000 (land sale)
- Operating Activities: -\$150,000 (creditors paid)
- Cash Equivalents Adjustment: -\$150,000 (not shown in cash flow statement)

Key Concept: Accounting Treatment of Proposed Dividend as per AS-4

d) Assertion is false, but Reason is true.
[Solution Description]
The assertion states that proposed dividend is shown under 'Current Liabilities' in the Balance Sheet as per the revised AS-4. According to the syllabus, the revised AS-4 (effective from April 6th, 2016) clearly mentions that proposed dividend is not shown in the Balance Sheet but disclosed in 'Notes to Accounts' as a contingent liability. Therefore, the assertion is false.
The reason states that the proposed dividend becomes a liability only when approved by shareholders in the Annual General Meeting, which occurs after the Balance Sheet date. This is accurate as per the syllabus, which explains that the proposed dividend is treated as an occurrence and event after the Balance Sheet date and hence does not qualify as a current liability until approved. Thus, the reason is true.
Since the assertion is false but the reason is true, the correct answer is option d).

Key Concept: Operating Activities

c) Cash received from debtors
[Solution Description]
Operating activities involve cash flows related to the principal revenue-generating activities of a business. This includes transactions such as receipts from customers and payments to suppliers or employees. Among the given options, cash received from debtors is directly related to the core operations of the business, making it a cash flow from operating activities.

Key Concept: Operating Profit before Working Capital Changes, Non-cash and Non-operating items

c) \$225,000
[Solution Description]
To calculate the operating profit before working capital changes, we start with the profit before tax (\$200,000) and adjust for non-cash and non-operating items:
- Add: Depreciation (\$25,000), Amortization (\$10,000), Loss on Sale of Machinery (\$5,000).
- Less: Dividend Income (\$15,000).
Operating Profit before Working Capital Changes = \$200,000 + \$25,000 + \$10,000 + \$5,000 - \$15,000 = \$225,000.

Key Concept: Key Adjustments in Cash Flow Statement

c) \$55,000
[Solution Description]
Operating profit before working capital changes is calculated by adding non-cash expenses (like depreciation) to the profit before tax. Here, \$50,000 (profit before tax) + \$5,000 (depreciation) = \$55,000.

Key Concept: Dividend payment calculation, Cash flow statement usefulness

c) \$49,000
[Solution Description]
First, calculate the dividend on preference shares: Dividend on preference shares = 50,000 \$\times\$ 8\% = \$4,000.
Next, calculate the dividend on equity shares: Dividend on equity shares = 200,000 \$\times\$ 10\% = \$20,000.
Add the interim dividend paid: Total dividend paid = \$4,000 + \$20,000 + \$25,000 = \$49,000.
This amount will be shown under cash flows from financing activities as payment of dividend.

Key Concept: Meaning of Cash in Cash Flow Statement

b) Commercial papers due within 2 months
[Solution Description]
Cash equivalents are short-term or highly liquid investments that are readily convertible into known amounts of cash and subject to insignificant risk of changes in value. Examples include treasury bills, commercial papers, and short-term deposits. An investment qualifies as a cash equivalent only if it has a maturity of three months or less from the date of acquisition.

Key Concept: Classification of Cash Flows

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
According to AS-3 (Revised), operating activities include transactions that determine the net profit or net loss of the enterprise. Income tax is paid on the profits earned from these principal revenue-producing activities, making it a cash outflow from operating activities. The reason correctly explains why income tax payments are classified under operating activities.

Key Concept: Cash Flows from Operating Activities

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that cash received from the sale of goods is classified as a cash inflow from operating activities. According to AS-3 (Revised), this is correct because it falls under Part A: Cash Flows from Operating Activities, specifically listed as "Cash sales" under cash inflows.
The reason given is that operating activities are the principal revenue-producing activities of an enterprise. This is also true as per AS-3 (Revised), which defines operating activities as those that generate revenue and affect net profit or loss.
Moreover, the reason correctly explains why cash from the sale of goods is classified as an operating activity—because selling goods is central to generating revenue for most businesses.
Therefore, both assertion and reason are true, and the reason is the correct explanation of the assertion.

Key Concept: Cash Flow Classification

c) Financing activities
[Solution Description]
Repayment of loans and advances given to employees is considered a financing activity because it involves changes in the financial structure of the company, such as dealing with borrowings or repayments. According to AS-3, financing activities include transactions that alter the equity and borrowings of the enterprise.

Key Concept: Non-current assets and cash flows

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that selling a non-current investment leads to a cash inflow under investing activities, which is accurate. Investing activities include transactions involving long-term assets like non-current investments. The reason explains that non-current investments are categorized under investing activities due to their long-term nature, which correctly justifies the assertion. Therefore, both the assertion and reason are true, and the reason properly explains the assertion.

Key Concept: Cash Flow from Financing Activities

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that interest paid on long-term borrowings is classified as a financing activity. This is correct because financing activities include transactions related to borrowing and repaying loans, which includes interest payments. The reason provided is that interest paid represents an outflow of cash related to funds borrowed for business operations. This is also true since interest is a cost incurred due to borrowing funds. Moreover, the reason correctly explains why interest payment is categorized under financing activities, as it directly relates to the use of borrowed funds. Therefore, both assertion and reason are true, and the reason is the correct explanation of the assertion.

Key Concept: Cash Flow from Investing Activities

b) Decreases cash flow from investing activities by \$50,000
[Solution Description]
The purchase of fixed assets (equipment) is considered a cash outflow under investing activities. It reduces the net cash flow from investing activities by \$50,000.

Key Concept: Assertion-Reason

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion claims that the cash flow statement can replace the profit and loss account, which is false. The cash flow statement only records cash inflows and outflows, ignoring non-cash items like depreciation or accruals. The Reason correctly states that the cash flow statement excludes non-cash transactions, which are essential for assessing profitability. Therefore, the Assertion is false, but the Reason is true.

Key Concept: Cash Flow Statement Basics

c) Profits may be tied up in receivables or inventory.
[Solution Description]
A company may report a profit but still have a low cash balance because profits include non-cash items like credit sales (receivables) or inventory buildup. The cash flow statement reveals if the profit is tied up in such assets rather than actual cash inflow.

Key Concept: Interest Received on Loans

b) Investing Activities
[Solution Description]
As per AS-3, **interest received** on loans and advances is considered part of **cash flows from investing activities**, since it arises from an investment made by the enterprise.

Key Concept: Calculation of Cash Flows from Issue of Shares

b) \$70,000
[Solution Description]
The increase in equity share capital is \$50,000 (\$350,000 - \$300,000). The increase in securities premium reserve is \$20,000 (\$70,000 - \$50,000). Total cash inflow from the issue of shares is the sum of these increases: \$50,000 + \$20,000 = \$70,000.

Key Concept: Dividend paid on shares, Cash flow from financing activities

a) Added back to operating activities and also shown under financing activities
[Solution Description]
First, we need to understand how the dividend affects the cash flow statement. The interim dividend paid (\$15,000) is added back to the current year's surplus (\$50,000) to arrive at the profit before tax (\$65,000). This adjustment is made under the heading "Cash Flows from Operating Activities". After this, the dividend payment is shown as a cash outflow under the heading "Cash Flows from Financing Activities". Therefore, the correct presentation in the cash flow statement would show the dividend payment under financing activities.
Calculation steps:
1. Surplus as per P/L: \$50,000
2. Add back dividend paid: +\$15,000
3. Profit before tax: \$65,000 (\$50,000 + \$15,000)
The dividend payment of \$15,000 is then shown as a cash outflow under financing activities.

Key Concept: Working Capital Changes - Indirect Method

b) \$87,000
[Solution Description]
To calculate the cash flow from operating activities:
Operating Profit before Working Capital Changes = \$75,000
Add: Decrease in Inventory (\$5,000)
Add: Increase in Other Current Liabilities (\$7,000)
Cash Generated from Operating Activities = \$75,000 + \$5,000 + \$7,000 = \$87,000

Key Concept: Redemption of Preference Shares, Premium on Redemption

c) \$1,050,000
[Solution Description]
Step 1: Calculate the face value to be redeemed.
$\text{Face Value} = 10,000 \times 100 = 1,000,000$.
Step 2: Compute the premium amount.
$\text{Premium} = 5\% \times 1,000,000 = 50,000$.
Step 3: Total cash outflow includes both face value and premium.
$\text{Total Cash Outflow} = 1,000,000 + 50,000 = 1,050,000$.
Thus, the correct answer is option c).

Key Concept: Cash and Cash Equivalents

d) Marketable Securities
[Solution Description]
Marketable Securities are short-term investments that can be easily converted into cash and have a maturity period of less than three months. As per the syllabus, they are considered part of Cash and Cash Equivalents if specifically mentioned as such. Other options like Raw Material and Bills Receivable are part of Current Assets but not Cash and Cash Equivalents.

Key Concept: Cash Inflows from Operating Activities

c) Cash received from debtors for credit sales
[Solution Description]
Cash inflows from operating activities include receipts from the sale of goods, services, royalties, fees, and trade receivables.

Key Concept: Opening Cash and Cash Equivalents

c) \$38,000
[Solution Description]
To find the closing balance of cash and cash equivalents:
Opening balance = \$50,000
Net decrease = -\$12,000
Closing balance = Opening balance + Net decrease
Closing balance = 50,000 + (-12,000) = \$38,000

Key Concept: Financing Activities

a) \$90,000
[Solution Description]
Net cash flow from financing activities is calculated as:
$\text{Cash Inflow from Issue of Shares} - \text{Cash Outflow for Redemption of Debentures} - \text{Dividends Paid} \\ \\ = 200,000 - 80,000 - 30,000 = 90,000$
The net cash flow is \$90,000.

Key Concept: Helpful in decision making

c) For making decisions like repayment of long-term loans or purchasing fixed assets
[Solution Description]
The cash flow statement provides information about cash inflows from operations, which is useful for internal financial management to make decisions such as repayment of long-term loans or purchase of fixed assets.

Key Concept: Non-Cash Transactions, AS-4 Adjustments

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that non-cash transactions must be excluded from the cash flow statement, which is correct as per AS-4 guidelines and accounting standards. These transactions do not involve cash flows, hence their exclusion aligns with the objective of a cash flow statement. The reason explains the primary purpose of a cash flow statement, which is to report actual cash movements, making it a correct explanation for the assertion. Thus, both are true, and the reason correctly explains the assertion.

Key Concept: Difference between Cash Flow Statement and Profit and Loss Account

a) Depreciation
[Solution Description]
The Profit and Loss Account includes non-cash items like depreciation, which are later adjusted in the Cash Flow Statement.

Key Concept: Purpose of Buy-back

b) To enhance shareholder value
[Solution Description]
A buy-back of equity shares is primarily used to return surplus cash to shareholders, improve earnings per share (EPS), or consolidate ownership structure.

Key Concept: Short-Term Borrowings Classification

c) Financing activities as proceeds from short-term borrowings
[Solution Description]
According to the syllabus, an increase in the balance of bank overdraft or cash credit is considered as proceeds from short-term borrowings. This is classified under 'Cash Flows from Financing Activities' in the cash flow statement.

Key Concept: Cash flow identification, Non-current vs Current items

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that selling a non-current asset for cash results in cash inflow, which is true because the cash account increases (inflow). The reason explains that non-current assets only affect cash flow when converted to cash or cash equivalents, which is correct and directly justifies the assertion. Hence, both statements are true, and the reason correctly explains the assertion.

Key Concept: Cash Flow Classification

c) Financing Activity
[Solution Description]
Issuing shares increases cash and results in a change in non-current liabilities (share capital). As per the syllabus, transactions that increase cash and relate to changes in borrowings or equity are classified under Financing Activity. Therefore, this transaction represents a cash inflow from Financing Activity.