Consider the following facts related to Cash Flow Statement and select the correct facts.

(A) Extra ordinary items are non-recurring in nature.
(B) Rent paid is always an operating activity.
(C) Bank overdraft is an investing activity.
(D) Rent received by a Real Estate based business unit is an operating activity.
(E) In case of a Financial Enterprise, dividend paid is an operating activity.

Choose the correct answer from the options given below :

(A), (B) and (D) only

The correct answer is Option (4) - (A), (B) and (D) only.

(A) Extra ordinary items are non-recurring in nature.- This statement is true. Extraordinary items are exceptional occurrences that deviate from the usual business operations, such as losses resulting from theft, earthquakes, or floods. These items are unique and non-repetitive in nature, leading to the need for distinct classification and separate disclosure of their associated cash flows within operating, investing, or financing activities. This separation aims to facilitate a clear comprehension of their impact on the current and future cash flows of the enterprise.

(B) Rent paid is always an operating activity. This statement is true. Operating activities are the activities that constitute the primary or main activities of an enterprise. For example, for a company manufacturing garments, operating activities are procurement of raw material, incurrence of manufacturing expenses, sale of garments, etc. These are the principal revenue generating activities (or the main activities) of the enterprise and these activities are not investing or financing activities. Rent expenses is cash outflow.

(C) Bank overdraft is an investing activity.- This statement is false. A bank overdraft is a financing activity in the cash flow statement. An increase in this will make inflow of cash to the company.

(D) Rent received by a Real Estate based business unit is an operating activity. This statement is true. Rent received by a company whose business is of property- Operating activities are the activities that constitute the primary or main activities of an enterprise. For example, for a company manufacturing garments, operating activities are procurement of raw material, incurrence of manufacturing expenses, sale of garments, etc. These are the principal revenue generating activities (or the main activities) of the enterprise and these activities are not investing or financing activities. The amount of cash from operations’ indicates the internal solvency level of the company, and is regarded as the key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, paying dividends, making of new investments and repaying of loans without recourse to external source of financing. Cash flows from operating activities are primarily derived from the main activities of the enterprise. They generally result from the transactions and other events that enter into the determination of net profit or loss. If any company is engaged in the business of property then rent received from the property is operating activity as it is daily basis activity.

(E) In case of a Financial Enterprise, dividend paid is an operating activity. This statement is false. 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. Dividend paid by the company is a financing activity.