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FAQs on Class 12 DK Goel Solutions Volume 2 Chapter 6 - Cash Flow Statement
1. What is Cash From Operating Activities?
Cash from operating activities falls in the first section of the cash flow statement. It focuses on operating activities regarding the cash inflows and outflows from a company’s main business activities. A company spends money on activities like buying or selling assets, merchandise, offering services, etc.
A company’s operating activities include the activities like Issue of share capital, equity shares, the dividend paid and interest paid on debentures, the redemption of debentures and preference shares and repayment of a long-term loan. While activities like an investment in buying and selling property, equipment, long-term investments, borrowing and repaying short-term and long-term debt, buying back shares of stock and paying dividends don’t fall under it.
2. What are Financial Activities?
Financing activities refers to the cash flow from the financing activities of a company. It falls under one of the central sections in the cash flow statement where the cash inflow and outflow are calculated. It includes borrowing and repayment of long-term loans, standard or preferred stock, issuing a company shares, paying cash dividends on capital stocks, etc.
When a company borrows cash for a period and a corporation issues bonds of its common stock and receives money, the proceeds are reported as a positive amount in the statement. This will make sure that the readers get a positive image of the company, thereby increasing its cash and cash equivalents. At the same time, when a company repays the amount and redeems any bonds or purchases its share of treasury stock, the amount of cash is reported as a negative amount.
3. What is Included in Cash and Cash Equivalents?
Cash equivalents are the high liquid investments which are short term with a maturity date of three months or less at the time of purchase. There is little or no risk of collecting the full amount of being reported in cash equivalents. Usually, a combined amount of cash and cash equivalent is added in the balance sheet as the current assets. The cash is the total sum invested or rolled by the company for the smooth functioning of the company.
Cash equivalents usually include commercial papers, money market amount, treasury bills, etc. In contrast, cash includes checks received from a client which isn’t deposited, checking accounts, petty cash and coins and currency.
4. What is the difference between the nature of Interest and Dividend received by a Non- financing and a Financing Company?
If the Company is a non- financing one, then the interest and dividend received by it are Investing Activities. The simple logic being if the Company is not into financing business then it must have invested in some shares or debentures of some other Company and not merely lent the money. The return on that investment will be counted as an investing activity.
If the Company is into a Financing Business, then the interest and dividend received will not be counted as an Investing Activity, because its primary business is financing or providing finances for other businesses.
5. What do you mean by cash flow and free cash flow?
In most simple terms, cash flow means the amount of cash that a business usually generates by undertaking certain activities, such as cash flow from operating activity, financing activity, investing activity etc. Whereas Free Cash Flow as the name suggests is the cash left after deducting Capital Expenditures from Cash flow from operating activities i.e. Cash from Operations - Capital Expenditures = Free Cash Flow.
Let us take an example of a Start-up whose cash from operations was Rs 3,00,000 and Capital Expenditure during the year was Rs 2,00,000, the start-up’s free cash flow is Rs 1,00,000. Vedantu provides free study material to students in PDF format for free! From solutions to the detailed syllabus everything is available.