Accountancy Part BCash Flow Statement

Which one of the following statement is false?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Cash flow statement is based upon accrual basis of accounting.

The statement of profit and loss is prepared on the accrual basis. A cash flow statement takes that profit and converts it to the cash basis, removing non-cash items and the effect of changes in current assets and liabilities, so it is not based on the accrual basis.

Option (1) Cash flow statement is based upon cash basis of accounting. — A true statement. It records only actual inflows and outflows of cash and cash equivalents.

Option (3) Increase in the amount of creditors is a source of cash in cash flow statement. — A true statement. Goods bought but not yet paid for keep cash in the business, so the increase is added.

Option (4) Increase in the amount of debtors results in decrease in cash in cash flow statements. — A true statement. Sales not collected in cash lock up cash, so the increase is deducted.

NCERT (2026-27 edition):
Indirect Method – “Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. This is so because statement of profit and loss incorporates the effects of all operating activities of an enterprise. However, Statement of Profit and Loss is prepared on accrual basis (and not on cash basis).”

NCERT (2026-27 edition):
Indirect Method – “… Other important adjustments relate to changes in working capital which are necessary (i.e., items of current assets and current liabilities) to convert net profit/loss which is based on accrual basis into cash flows from operating activities. Therefore, the increase in current assets and decrease in current liabilities are deducted from the operating profit, and the decrease in current assets and increase in current liabilities are added to the operating profit so as to arrive at the exact amount of net cash flow from operating activities.”