Read the following information to answer.
Rathi Udyog, made a profit of 72,000 after charging depreciation of Rs. 17,000 on fixed assets and paid Rs. 10,000 as interim dividend. The goodwill amortized was Rs. 12,000 and profit (Gain) on sale of furniture was Rs. 2,500.
The other informations were :
Trade Payable showed an increase of Rs. 7,000.
Outstanding expenses showed a decrease of Rs. 5,000.
Accrued Income showed an increase of Rs. 8,000.
Trade payable showed a decrease of Rs. 10,000.
Inventories showed a decrease of Rs. 3,000.
On the basis of above information answer the following questions.
In the above case study if amount of Goodwill is increasing in current year, then it will be classified in :
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Investing Activity
Goodwill is an intangible fixed asset. If its amount goes up during the year, the firm has bought (paid for) more goodwill. Cash paid to acquire a fixed asset, intangibles included, is an outflow from investing activities.
Option (1) Operating Activity — Incorrect. Operating activities are the main revenue-earning activities, such as buying and selling goods. Buying a long-term asset like goodwill is not part of day-to-day trading.
Option (2) Investing Activity — Correct. Investing activities are the purchase and sale of long-term assets, so payment for goodwill falls here.
Option (3) Financing Activity — Incorrect. Financing activities change the owners’ capital and borrowings, such as issue of shares or debentures. Buying goodwill uses funds; it does not raise them.
Option (4) Cash and Cash Equivalents — Incorrect. Cash equivalents are short-term, highly liquid investments that are readily convertible into cash. Goodwill is a long-term intangible asset, not cash.
NCERT (2026-27 edition): |