Important Questions and Answers for Class 12 Accountancy Chapter 6 Cash Flow Statement 2025-26

1. Multiple choice questions.

1. Cash Flow Statement is prepared in accordance with which Accounting Standard?

• (a) AS-1
• (b) AS-2
• (c) AS-3
• (d) AS-4

Answer: (c) AS-3

2. Which of the following is an example of cash flow from operating activities for a non-financial enterprise?

• (a) Issue of shares for cash
• (b) Dividend received on investments
• (c) Cash received from sale of goods
• (d) Purchase of machinery

Answer: (c) Cash received from sale of goods

3. For a non-financial enterprise, interest paid is classified in the Cash Flow Statement as:

• (a) Operating activity
• (b) Investing activity
• (c) Financing activity
• (d) Extraordinary activity

Answer: (c) Financing activity

4. Which of the following will be treated as a cash equivalent as per AS-3?

• (a) Long-term bank deposits for 5 years
• (b) Investment in debentures maturing in 3 months
• (c) Trade receivables
• (d) Inventory

Answer: (b) Investment in debentures maturing in 3 months

5. Profit on sale of a fixed asset, for preparing Cash Flow from Operating Activities (indirect method), is:

• (a) Added to net profit
• (b) Deducted from net profit
• (c) Ignored altogether
• (d) Treated as extraordinary item

Answer: (b) Deducted from net profit

6. Issue of shares to purchase a fixed asset will be treated in the Cash Flow Statement as:

• (a) Cash inflow from financing activity
• (b) Cash outflow from investing activity
• (c) Non-cash transaction, disclosed separately
• (d) Operating activity

Answer: (c) Non-cash transaction, disclosed separately

7. Tax on dividend paid by a company is classified as cash flow from:

• (a) Operating activity
• (b) Investing activity
• (c) Financing activity
• (d) Extraordinary activity

Answer: (c) Financing activity

8. Which of the following is NOT included in Cash and Cash Equivalents?

• (a) Cash in hand
• (b) Demand deposits with bank
• (c) Treasury bills maturing in two months
• (d) Trade receivables

Answer: (d) Trade receivables

2. Very Short Answer (VSA).

1. Define a Cash Flow Statement as per the Companies Act and AS-3.

Answer: Cash Flow Statement is a statement that shows inflows and outflows of cash and cash equivalents from operating, investing and financing activities of an enterprise during an accounting period.

2. What is meant by cash and cash equivalents?

Answer: Cash includes cash in hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and carry insignificant risk of change in value.

3. State any two primary objectives of preparing a Cash Flow Statement.

Answer: (i) To provide information about cash inflows and outflows from operating, investing and financing activities. (ii) To help assess the enterprise’s ability to generate cash and cash equivalents and its liquidity and solvency.

4. What are operating activities as per AS-3?

Answer: Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities, such as cash received from customers and cash paid to suppliers and employees.

5. Give one example each of cash flows from investing and financing activities.

Answer: Investing activity: cash paid to purchase machinery. Financing activity: cash received from issue of equity shares or debentures.

6. Why are non-cash transactions excluded from the Cash Flow Statement?

Answer: Non-cash transactions do not involve movement of cash or cash equivalents, so they are excluded from the Cash Flow Statement but disclosed separately as they affect capital and asset structure.

7. What is meant by extraordinary items in Cash Flow Statement?

Answer: Extraordinary items are receipts or payments arising from events outside the ordinary activities of the enterprise. Their cash flows are classified as operating, investing or financing depending on the underlying nature.

8. Name the two methods of reporting cash flows from operating activities.

Answer: The two methods are: (i) Direct Method, which reports major classes of gross cash receipts and payments, and (ii) Indirect Method, which adjusts net profit for non-cash and non-operating items and changes in working capital.

9. How is dividend received by a non-financial enterprise classified in Cash Flow Statement?

Answer: For a non-financial enterprise, dividend received is classified as cash flow from investing activities, since it represents return on investments.

10. State any one benefit of Cash Flow Statement to external users.

Answer: Cash Flow Statement helps external users, such as investors and creditors, to evaluate the firm’s ability to generate future cash flows and meet its obligations regarding dividends, interest, and repayment of loans.

3. Short Answer Questions.

1. Distinguish between operating, investing and financing activities with suitable examples.

Answer: Operating activities relate to principal revenue operations, e.g., cash from sale of goods or payment to suppliers. Investing activities involve acquisition or disposal of long-term assets and investments, e.g., purchase of machinery. Financing activities relate to changes in equity and borrowings, e.g., issue of shares or repayment of loans.

2. Explain how Cash Flow Statement helps in assessing liquidity and solvency of an enterprise.

Answer: Cash Flow Statement shows actual cash generated and used under operating, investing and financing activities. Regular positive cash from operations and balanced investing/financing flows indicate the firm’s capacity to meet short-term obligations (liquidity) and long-term commitments like repayment of borrowings (solvency) in a timely manner.

3. Under the indirect method, how is Cash Flow from Operating Activities computed starting from net profit before tax?

Answer: Begin with net profit before tax and extraordinary items. Add non-cash and non-operating expenses like depreciation and interest. Deduct non-operating incomes like profit on sale of assets. Adjust for changes in working capital: increase in current assets is deducted, increase in current liabilities added. Deduct income tax paid to get net cash from operations.

4. Briefly explain the treatment of interest and dividends in Cash Flow Statement for financial and non-financial enterprises.

Answer: For financial enterprises, interest received, interest paid and dividends received are classified as operating activities. For non-financial enterprises, interest paid and dividends paid are financing activities, while interest and dividends received are investing activities. Classification follows the nature of the enterprise and AS-3 guidelines.

5. State any three benefits of preparing a Cash Flow Statement for management decision-making.

Answer: Cash Flow Statement helps management to: (i) evaluate changes in financial structure, liquidity and solvency; (ii) plan and control cash by matching cash inflows with outflows; and (iii) assess the ability to generate future cash flows, supporting decisions on investing, financing and dividend policies.

6. Why does AS-3 require separate reporting of cash flows from operating, investing and financing activities?

Answer: Separate reporting highlights the impact of each activity on the enterprise’s cash position. Users can see whether cash is mainly generated from operations or from external finance, and how much is invested in long-term assets. This enhances comparability, analysis of performance and assessment of sustainability of cash flows.

4. True or False Questions.

1. Cash Flow Statement is a mandatory financial statement for companies under the Companies Act, 2013.

Answer: True

2. Cash received from issue of debentures is classified as cash flow from investing activities.

Answer: False

3. Increase in trade receivables is deducted while computing Cash Flow from Operating Activities under indirect method.

Answer: True

4. Non-cash transactions such as issue of shares to acquire assets are included in the Cash Flow Statement.

Answer: False

5. For non-financial enterprises, dividend paid is treated as cash flow from financing activities.

Answer: True

6. Cash Flow Statement helps in verifying the accuracy of cash balance shown in the Balance Sheet.

Answer: True

7. Purchase of inventory is an investing activity.

Answer: False

8. Cash equivalents normally have a maturity of more than one year from the date of acquisition.

Answer: False

3. Fill in the Blanks Questions.

1. Cash Flow Statement is prepared in accordance with Accounting Standard ________.

Answer: AS-3

2. Cash includes cash in hand and ________ deposits with banks.

Answer: demand

3. Cash equivalents are short-term, highly liquid investments normally having maturity of ________ months or less.

Answer: three

4. Operating activities are the principal ________ producing activities of the enterprise.

Answer: revenue

5. Cash flows from investing activities relate to acquisition and disposal of ________ assets and investments.

Answer: long-term

6. Cash received from issue of shares is an inflow from ________ activities.

Answer: financing

7. In indirect method, non-cash expenses such as ________ are added back to net profit.

Answer: depreciation

8. Tax on dividend is classified as cash flow from ________ activities.

Answer: financing

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