While computing cash from Operating activities following treatments a…

While computing cash from Operating activities following treatments are done :

A. Increase in value of creditors is added

B. Increase in income received in advance is added

C. Decrease in value of inventory is deducted

D. Increase in value of patent is added

E. Conversion of debentures into shares is deducted

Choose the correct answer from the options given below :

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → A and B only

Only changes in current assets and current liabilities are adjusted in cash from operating activities: increases in current liabilities and decreases in current assets are added; increases in current assets and decreases in current liabilities are deducted.

(A) Increase in value of creditors is added — True. Creditors are a current liability; an increase is added.
(B) Increase in income received in advance is added — True. Income received in advance is a current liability; an increase is added.
(C) Decrease in value of inventory is deducted — False. Inventory is a current asset; a decrease is added, not deducted.
(D) Increase in value of patent is added — False. A patent is a non-current asset; buying it is an investing activity, not an operating adjustment.
(E) Conversion of debentures into shares is deducted — False. It is a non-cash transaction, so it is left out of the cash flow statement altogether.

NCERT (2026-27 edition):
Ascertaining Cash Flow from Operating Activities – “Changes in current assets and liabilities during the period. Increase in current assets and decrease in current liabilities are to be deducted while increase in current liabilities and decrease in current assets are to be added up.”

NCERT (2026-27 edition):
Cash from Investing Activities – “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.”

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.”