Read the following information to answer.
On the basis of case study given below, answer the question which follows:
"Mikku, an alumnus of IIT Delhi, initiated his start-up "Gajanan Ltd." in the year 2016. His profit in the year 2020-21 after all appropriation was ₹6,25,000. This profit was arrived at after taking the following items into consideration (income tax paid during the year was equal to the provision for tax):
| Loss on Sale of fixed Assets | ₹5,00,000 |
| Goodwill written off | ₹3,80,000 |
| Transfer to reserve | ₹3,55,000 |
| Provision for tax | ₹2,70,000 |
| Interest on Debentures paid | ₹1,65,000 |
| Particulars | 2020(₹) | 2021(₹) |
| Prepaid Expenses | 25,000 | 10,000 |
| Accrued interest | 40,000 | 68,000 |
| Trade payables | 7,00,000 | 4,00,000 |
| Inventories | 6,50,000 | 5,50,000 |
From among the following, choose the item which would be mentioned in financing activity also:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Interest on Debenture
Interest on debentures is a cost of borrowed funds. While working out cash flow from operating activities it is added back to the net profit (it is not an operating expense), and the amount actually paid is then shown as an outflow under financing activities. So it appears in both places. Provision for tax, goodwill written off and loss on sale of fixed assets are adjusted only while working out operating cash flow; none of them is a financing item.
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