The correct answer is Option (1) - (A)-(III), (B)-(I), (C)-(IV), (D)-(II).
* Operating Activities- Payment to Suppliers.
Cash payments to suppliers for goods and services are considered operating activities because they are part of the day-to-day operations of the business. Cash flows from operating activities primarily stem from the core operations of the business. They mainly arise from transactions and events that contribute to the determination of net profit or loss.
* Investing Activities- Dividend Received.
Dividends received are commonly classified as investing activities, as they represent returns on investments made by the company in the shares of other companies. As per AS-3, investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building, etc. Transactions related to long term investment are also investing activities. Separate disclosure of cash flows from investing activities is important because they represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.
* Financing Activities- Interest on Debentures.
Payment of interest on debentures is categorized under financing activities since it involves the company's relationship with its creditors and represents a cost of obtaining financial resources. Financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from 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.
* Cash and Cash Equivalents- Current Investment.
Current investments are part of cash and cash equivalents, as they are short-term, highly liquid investments that can be quickly converted to cash. The cash flow statement presents the cash inflows and outflows, including cash and cash equivalents, from various activities of a business over a specific period. According to Accounting Standard 3 (AS-3), 'Cash' encompasses physical cash on hand and demand deposits held in banks. 'Cash equivalents' refer to short-term, highly liquid investments that can be quickly converted into known amounts of cash with minimal risk of value fluctuations. Typically, an investment qualifies as a cash equivalent when it has a short maturity period, often three months or less from the acquisition date. Investments in stocks are not considered cash equivalents, unless they meet specific criteria. For instance, preference shares that are acquired shortly before their scheduled redemption date, provided there's minimal risk of the company failing to repay the amount upon maturity, can be treated as cash equivalents. Similarly, short-term marketable securities that can be readily converted into cash without significant changes in their value are also considered cash equivalents. These investments must be highly liquid and easily convertible into cash. |
