Cash Flow Statement – Types, Examples, and Exam MCQs Explained
The cash flow statement is a major financial tool summarizing a business's cash inflows and outflows. Understanding this statement is vital for exams like Class 12 Accountancy, CA Foundation, and commerce entrance tests. Mastery of cash flow statement MCQs helps in school, board, and competitive examinations, as well as practical business scenarios.
| Activity Type | Main Examples | Description |
|---|---|---|
| Operating Activities | Cash received from customers, cash paid to suppliers, salary payments | Core business operations, day-to-day transactions |
| Investing Activities | Purchase/sale of machinery, investment in shares, income from investments | Purchase and sale of long-term assets and investments |
| Financing Activities | Issue/redemption of shares/debentures, loan receipts/repayments, dividend payments | Raising or repaying capital for business |
MCQ on Cash Flow Statement – Key Concepts
A cash flow statement displays all cash movements in a business. It divides these flows into operating, investing, and financing activities. Cash flow MCQs check your ability to classify activities, interpret information, and understand how cash impacts business decisions. Practicing these questions improves exam confidence and conceptual clarity.
MCQs on Cash Flow Statement with Answers and Explanations
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Cash from operating activities will decrease due to ______.
- (a) Increase in Current Assets
- (b) Decrease in Current Liabilities
- (c) Neither of the two
- (d) Both (a) and (b)
Answer: (d) Both (a) and (b) – Because both changes reduce available cash.
-
While calculating operating profit, which will be added to net profit?
- (a) Interest Received
- (b) Profit on Sale of Asset
- (c) Increase in General Reserve
- (d) Refund of Tax
Answer: (c) Increase in General Reserve – It's a non-cash appropriation added back to net profit.
-
Which is added while calculating cash flow from operating activities?
- (a) Increase in Stock
- (b) Increase in Creditors
- (c) Decrease in Bills Payable
- (d) Increase in Debtors
Answer: (b) Increase in Creditors – This increases cash flow as payment is delayed.
-
Payment of interest on debentures is classified as:
- (a) Cash Flow from Operating Activities
- (b) Cash Flow from Investing Activities
- (c) Cash Flow from Financing Activities
- (d) Cash Equivalents
Answer: (c) Cash Flow from Financing Activities
-
Interest received by a finance company is classified under:
- (a) Operating Activities
- (b) Investing Activities
- (c) Financing Activities
- (d) Cash Equivalents
Answer: (a) Operating Activities – For a finance company, interest is main business income.
-
Cash from operation is equal to ______.
- (a) Net Profit + Increase in Current Assets
- (b) Net Profit + Decrease in Current Liabilities
- (c) Operating Profit + Adjustment of Current Assets and Current Liabilities
- (d) All of the above
Answer: (c) Operating Profit + Adjustment of Current Assets and Current Liabilities
-
Which is included in Cash Flow from Operating Activities?
- (a) Royalties, Fees, Commission
- (b) Purchase of Debentures
- (c) Purchase of Machinery
- (d) Issue of Shares
Answer: (a) Royalties, Fees, Commission
-
Claims received from Insurance Companies are treated as ______.
- (a) Operating Cash Flow
- (b) Investing Cash Flow
- (c) Financing Cash Flow
- (d) None of the above
Answer: (b) Investing Cash Flow – As it relates to assets or investments.
-
As per AS-3, cash flow statement is mandatory for:
- (a) All enterprises
- (b) Companies listed on stock exchange
- (c) Enterprises with turnover above a limit
- (d) Both (b) and (c)
Answer: (b) Companies listed on stock exchange
-
Which adjustment is added to net profit for cash flow from operating activities?
- (a) Increase in Stock
- (b) Decrease in Stock
- (c) Increase in Debtors
- (d) Decrease in Creditors
Answer: (b) Decrease in Stock
For more MCQs and answers with explanations, see DK Goel Solutions Chapter 4 or TS Grewal Solutions Chapter 9.
Key Points and Tips for Cash Flow Statement MCQs
- Understand the difference between cash flow and fund flow statement.
- Non-cash items like depreciation are adjusted in operating activities.
- Classify each activity accurately (operating, investing, financing).
- Cash equivalents are highly liquid, short-term investments.
- Practising with detailed solutions builds exam confidence.
- Revise the format and steps of cash flow statement preparation.
PDF and Downloadable Resources
Access and practice more cash flow statement MCQs by downloading worksheets and solved PDFs from trusted sites. Visit Vedantu’s Cash Flow Statement page for free resources, including printable formats and sample questions for Class 12 Accountancy.
How Cash Flow Statement MCQs Help Students
Solving MCQs on the cash flow statement boosts understanding for board exams and commerce entrance tests. It strengthens your ability to analyze financial statements and prepares you for practical business scenarios. Mastering these concepts also aids in various career paths related to finance, banking, and entrepreneurship.
The cash flow statement is a vital part of financial analysis. Learning its structure, classification, and logic helps in exams and builds lifelong business skills. For more in-depth study, examples, and doubts, use Vedantu’s guided materials and related internal links on financial statements and analysis.
FAQs on Multiple Choice Questions on Cash Flow Statement (MCQ)
1. What is a cash flow statement?
A cash flow statement is a financial statement that shows the movement of cash into and out of a business over a specific period. It's crucial for understanding a company's liquidity and financial health.
2. What are the three types of cash flows?
The three main types of cash flows are: operating activities (day-to-day business), investing activities (buying/selling assets), and financing activities (raising capital).
3. What is included in the cash flow statement?
The cash flow statement includes cash inflows and outflows from operating, investing, and financing activities. This includes cash from sales, purchases, investments, loans, and dividends.
4. Are cash flow statement MCQs important for CBSE/ICSE Class 12?
Yes, cash flow statement MCQs are very important for CBSE/ICSE Class 12 commerce exams. They test your understanding of key concepts and are frequently included in the exam.
5. How does cash flow differ from a fund flow statement?
A cash flow statement only tracks cash movements, while a fund flow statement tracks all financial resources, including non-cash items. Cash flow is a subset of fund flow.
6. What is included in operating activities in a cash flow statement?
Operating activities in a cash flow statement include cash flows from the main business operations. This includes cash received from sales and cash paid for expenses like salaries, rent, and utilities.
7. What is included in investing activities in a cash flow statement?
Investing activities show cash flows related to long-term assets. This includes cash from the sale of fixed assets and cash used to purchase property, plant, and equipment.
8. What is included in financing activities in a cash flow statement?
Financing activities reflect how a company raises and repays capital. This includes cash from issuing shares or taking out loans, and cash used to repay debt or pay dividends.
9. How are non-cash items treated in cash flow statements?
Non-cash items, such as depreciation, are not directly included in the cash flow statement but are considered when calculating cash flow from operating activities. They are added back to net profit in the indirect method.
10. What is the significance of AS-3 in cash flow statements?
AS-3 (Accounting Standard 3) in India dictates the standards and guidelines for preparing cash flow statements. Following AS-3 ensures consistency and comparability of financial statements.
11. What is the importance of cash flow statement analysis?
Analyzing the cash flow statement helps assess a company's liquidity, solvency, and overall financial health. It's crucial for investors and creditors to make informed decisions.
12. Can negative cash flow from operations be a positive sign?
Sometimes, a negative cash flow from operations can be positive, especially for rapidly growing companies that reinvest heavily in inventory or other assets for future growth.
13. Why are cash equivalents included in the cash flow statement?
Cash equivalents, which are short-term, highly liquid investments easily convertible to cash, are included because they represent readily available funds.
14. What is the purpose of preparing a cash flow statement?
The main purpose is to provide information about the cash inflows and outflows of an entity during a period. This helps assess its liquidity and solvency.
