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Home Questions 9W7TCGSE6T
Target Exam

CUET

Subject

Accountancy

Chapter

Cash Flow Statement

Question:

Read the following two statements named Assertion (A) and Reason (R). Mark the correct answer.

Assertion: While working out the cash flow from operating activities, the starting point is the ‘Net profit before tax’ and not the ‘Net profit before tax and extraordinary items'.

Reason: Income tax paid is deducted as the last item to arrive at the net cash flow from operating activities.

Options:

Both Assertion (A) and reasoning (R) are correct and R is the correct explanation of A.

Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A.

Assertion (A) is true but Reasoning (R) is not correct.

Assertion (A) is not true but Reasoning (R) is correct.

Correct Answer:

Assertion (A) is not true but Reasoning (R) is correct.

Explanation:

The correct answer is option 4- Assertion (A) is not true but Reasoning (R) is correct.

Assertion: While working out the cash flow from operating activities, the starting point is the ‘Net profit before tax’ and not the ‘Net profit before tax and extraordinary items'. This is false. While working out the cash flow from operating activities, the starting point is the ‘Net profit before tax and extraordinary items’ and not the ‘Net profit before tax' only.

Reason: Income tax paid is deducted as the last item to arrive at the net cash flow from operating activities. This is true. Income tax paid is deducted as the last item to arrive at the net cash flow from operating activities.

 

Performa of calculating cash flows from operating activities as per indirect method.

  Particulars Amount
  Net Profit/Loss before Tax and Extraordinary Items  
Add Deductions already made in Statement of Profit and Loss on account of Non-cash
items such as Depreciation, Goodwill to be Written-off.		  
Add Deductions already made in Statement of Profit and Loss on Account of
Non-operating items such as Interest.		  
Less Additions (incomes) made in Statement of Profit and Loss on Account of
Non-operating items such as Dividend received, Profit on sale of Fixed Assets.		  
  Operating Profit before Working Capital changes  
Less in case of increase in current assets (other than cash and cash equivalent) and decrease in current liabilities  
Add in case of decrease in current assets (other than cash and cash equivalent) and increase in current liabilities.  
  Cash Flows from Operation Activities before Tax and Extraordinary items  
Less Income Tax Paid  
+/– Effects of Extraordinary Items  
  Net Cash from Operating Activities  

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