Financial Accounting Cash Flow Statements Solved MCQs

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Financial Accounting Cash Flow Statements Solved MCQs

A cash flow statement displays inflows (receipts) and outflows (payments) of cash during a specific period. In other words, it is a summary of sources and applications of cash during a specific span of time.

It analyses the reasons for changes in the balance of cash between the two consecutive balance sheet dates. This statement includes only those items that affect cash and cash equivalents.

Multiple Choice Questions (MCQs)

1. Which of the following statements is incorrect about the cash flow statement?

  1. It displays cash receipts and cash payments of an entity.
  2. It reconciles the closing cash balance with the balance as per bank statement.
  3. It provides information about the operating, investing, and financing activities.
  4. None of the above

Ans. 2) It reconciles the closing cash balance with the balance as per bank statement.

Explanation: A cash flow statement reconciles the ending cash balance with the balance as per books of accounts and not as per bank statement.

 

2. The cash flow statement categorises cash flows as per:-

  1. Operating and non-operating cash flows
  2. Investing and non-operating cash flows
  3. Inflows and outflows
  4. Operating, investing, and financing activities

Ans. 4) Operating, investing, and financing activities

Explanation: Cash flow is generated from the following 3 activities:-

A. Operating activities
B. Investing activities
C. Financing activities

 

3. Which of the following is an instance of cash flow from financing activity?

  1. Payment of dividend
  2. Receipt of dividend on investment
  3. Cash received from the customer
  4. Purchase of a fixed asset

Ans. 1) Payment of dividend

Explanation: Payment of dividends is an instance of financing activities as it changes the capital structure and borrowings of an entity. No other option does that.

 

4. Which of the following is an instance of cash flow from investing activity?

  1. Issue of debenture
  2. Repayment of long-term loan
  3. Purchase of raw materials for cash
  4. Sale of investment by non-financial organisation

Ans. 4) Sale of investment by non-financial organisation

Explanation:  It is an instance of investing activities as it leads to the reduction in resources, and expenditure on which was incurred to generate future income and cash flows.

 

5. Which of the following is an instance of cash flow from operating activities?

  1. Purchase of own debentures
  2. Sale of fixed assets
  3. Interest received on term deposits with a bank
  4. Issue of equity shares

Ans. 3) Interest received on term deposits with a bank

Explanation: It is an instance of investing activities as it constitutes a cash flow arising from the main revenue-generating activities of an entity.

 

6. What should be the common maturity period for a marketable security to be qualified as cash equivalents from the date of its acquisition?

  1. One month or less
  2. Three months or less
  3. 30 days or less
  4. None of the above

Ans. 2) Three months or less

Explanation: The short term investments that have its maturity date within 3 months from the date of acquisition qualify to be classified as a cash equivalent.

 

7. Which of the following items account for cash and cash equivalents?

  1. Cash in hand or cash at the bank
  2. Cheques in hand
  3. Marketable securities
  4. All of the above

Ans. 4) All of the above

Explanation:  Cash & cash equivalents include cash in hand or at a bank, cheques in hand, and marketable securities (short-term investments).

 

8. Cash outflows are the costs incurred on some projects which are represented by:-

  1. Negative numbers
  2. Positive numbers
  3. Relative numbers
  4. No effect

Ans. 1) Negative numbers

Explanation: Cash outflows are meant to be deducted, therefore it is represented as a negative number in the cash flow statement.

 

9. Which of the following transactions will result in cash inflow? 

  1. Cash withdrawn from the bank 
  2. Issue of 10% debentures of Rs. 5,00,000 to furniture suppliers
  3. Cash received from debtors of Rs. 2,00,000
  4. Redeemed 9% preference shares by converting them into equity shares

Ans. 3) Cash received from debtors of Rs. 2,00,000

Explanation: Cash received from debtors is the only event that will result in cash inflow as cash withdrawal from banks is a cash management activity whereas the issue of debentures to suppliers and the issue of equity shares to preference shareholders will result only in the change in capital structure not in the cash flow.

 

10. Cash received from debtors come under:-

  1. Source of funds
  2. Source of cash
  3. Application of fund
  4. No flow of fund

Ans. 4) No flow of fund

Explanation: When a cash payment is received from the debtor, the amount of cash is increased and the amount of accounts receivable is decreased. While recording this transaction in books of accounts, cash will be debited and accounts receivable will be credited.

 

11. Purchase of building by issue of debentures is:-

  1. overlooked in the preparation of cash flow statement
  2. Operating activities
  3. Investing activities
  4. Financing activities

Ans. 1) overlooked in the preparation of cash flow statement

Explanation: Any transaction that does not result either in inflow or outflow of cash is overlooked in the preparation of cash flow statement of any entity.

 

12. Which of the following is not added to the net profit while computing the amount of funds from operating activities?

  1. Depreciation charged on machinery
  2. Profit on sale of machinery
  3. Goodwill written off
  4. Loss on sale of furniture

Ans. 2) Profit on sale of machinery

Explanation: Profit on sale of machinery is not added to net profit while calculating the amount of funds from operating activities because it does not include income or expense through financing activities. Funds from operations do not include gains or losses from non-recurring activities such as the sale of machinery.

 

13. Depreciation is a __________.

  1. Cash expenditure
  2. Cash operating expense
  3. Non- cash non-operating expense
  4. Non-cash operating expense

Ans. 4) Non- cash operating expense

Explanation: Depreciation is a gradual decline in the book value of a fixed asset. It is based on the cost of the asset and not on its market value. It does not constitute a cash outflow as it is the process of writing off the capital expenditure already incurred.

 

14. Which of the following is included in cash from operating activities? 

  1. Sale of fixed assets
  2. Cash flow from business activities
  3. Cash flow from business activities and changes in current assets and current liabilities
  4. Borrowing from external sources

Ans. 3) Cash flow from business activities and changes in current assets and current liabilities

Explanation: Cash flow from operating activities indicates the cash inflow in the entity from its ongoing regular course of business. It does not constitute the long-term capital expenditure or investment revenue and expense.

 

15. Which of the following is the result of the decline in the value of creditors?

  1. Increase in cash
  2. Decrease in cash
  3. Increase in liabilities
  4. No change in assets

Ans. 2) Decrease in cash

Explanation: As per the double-entry system of accounting, for every debit, there is a credit. Hence in case, an amount has been paid to a creditor, it will decrease the number of creditors on the liabilities side and decrease the amount of cash on the assets side.

 

16. Cash flow generated from operating activities is calculated as:-

  1. Net profit plus rise in outstanding expenses
  2. Net profit minus increase in outstanding expenses
  3. Net profit is same as outstanding expenses
  4. None of the above

Ans. 1) Net profit plus rise in outstanding expenses

Explanation: 

Cash flow from operating activities = Net profit + increase in outstanding expenses

 

17. _________ shows the details of cash generation and utilization of an entity during a given period of time.

  1. Profit & Loss Account
  2. Balance Sheet
  3. Cash Flow Statement
  4. Notes to Accounts

Ans. 3) Cash Flow Statement

Explanation: Cash Flow Statement that shows how changes in balance sheet accounts and income affect cash & cash equivalents, and breaks the analysis down to operating investing, and financing activities. It shows the details of cash generation and utilization of an entity.

 

18. Incomes/expenses that arise from transactions that are clearly different from the ordinary business activities and therefore are not expected to incur frequently are called:- 

  1. Prior period items
  2. Extraordinary items
  3. Abnormal items
  4. Non-ordinary items

Ans. 2) Extraordinary items

Explanation: Extraordinary items in accounting are the income statement events that are unusual and infrequent at the same time. They do not relate to the principal business activities and are unpredictable.

 

19. Which of the following statements states the difference between a cash flow statement and a cash budget?

  1. The cash flow statement shows the movement of cash whereas the cash budget shows no cash movement
  2. The cash flow statement is a part of the cash budget
  3. Both 1) & 2)
  4. The cash flow statement shows the cash movement of the historical period whereas the cash budget shows the cash movement of the future period

Ans. 4) The cash flow statement shows the cash movement of the historical period whereas the cash budget shows the cash movement of the future period

Explanation: The cash flow statement analyzes cash transactions that have already been incurred whereas the cash budget forecasts the cash movement of the forecasted period (i.e. future perio4).

 

20. As per AS-3, the Cash Flow Statement is binding for 

  1. All entities
  2. Companies listed on stock exchanges
  3. Companies having turnover exceeding Rs. 50 crores
  4. Both 2) & 3)

Ans. 4) Both 2) & 3)

Explanation: A Pvt. Ltd. Company with a paid-up share capital of less than Rs. 50 lakhs (or such higher amount as may be prescribed- not more than Rs. 5 crores) or with a turnover of less than Rs. 2 crores (or such higher amount as may be prescribed- not more than Rs. 20 crores) is not required to prepare cash flow statements.

Financial Accounting Solved MCQs | Part One

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