Accountancy Part BCash Flow Statement

If debentures are converted into equity shares, it is a/an...........…

If debentures are converted into equity shares, it is a/an.....................

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → No flow of cash

When debentures are converted into equity shares, one form of capital replaces another: debentures go down and share capital goes up by the same amount. No cash is paid or received, so it is a non-cash transaction and is left out of the cash flow statement.

Why the other options are incorrect

Option (1) Inflow of cash — Incorrect. The new shares are issued in exchange for the debentures, not for cash.
Option (3) Outflow of cash — Incorrect. The debentures are redeemed by issuing shares, not by paying cash.
Option (4) Cash & Cash equivalents — Incorrect. Cash and cash equivalents are cash and short-term investments; a conversion is a transaction, not an item of cash.

NCERT (2026-27 edition):
Non-cash Transactions – “As per AS-3, investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Examples of such transactions are – acquisition of machinery by issue of equity shares or redemption of debentures by issue of equity shares.”