If 6% Pref. share capital ₹2,00,000 were redeemed at a premium of 5%, while preparing the Cash Flow Statement, its effect on cash flow will be:

Cash used (Payment) in financial activities ₹2,10,000

The correct answer is option 3- Cash used (Payment) in financial activities ₹2,10,000.

6% Pref. share capital ₹2,00,000
Premium = 5%
Premium amount = 2,00,000 x 5/100
                           = 10,000
Redemption amount = 2,00,000 + 10,000
                                 = 2,10,000

Redemption of preference shares is a financing activity. It is an outflow of cash as it is a redemption.

Cash from Financing Activities- Financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from the issue of equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc. As per AS-3, financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in case of a company) and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds ( both capital and borrowings ) to the enterprise. Examples of financing activities are:

Cash Inflows from financing activities:

• Cash proceeds from issuing shares (equity or/and preference).
• Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.

Cash Outflows from financing activities:

• Cash repayments of amounts borrowed.
• Interest paid on debentures and long-term loans and advances.
• Dividends paid on equity and preference capital.