Consider the following facts with regard to Cash Flow Statement and i…

Consider the following facts with regard to Cash Flow Statement and identify the correct statements.

A. Proceeds from sale of land will appear under Investing Activities
B. Decrease in value of Inventory is added to the net profit to compute cash flow from Operating Activities.
C. Conversion of Debentures into Equity Shares involve issue of Equity Shares and shown under Financing Activities
D. Issue of Debentures as collateral securities are shown under Investing Activities.
E. Income tax paid is subtracted from Cash generated From operations to compute cash flow from Operating Activities.

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → A, B and E only

A. Proceeds from sale of land will appear under Investing Activities — True. Land is a long-term asset; cash from its disposal is an investing inflow.

B. Decrease in value of Inventory is added to the net profit — True. A fall in a current asset releases cash, so it is added to the operating profit.

C. Conversion of Debentures into Equity Shares is shown under Financing Activities — False. No cash moves; it is a non-cash transaction and is left out of the cash flow statement.

D. Issue of Debentures as collateral securities is shown under Investing Activities — False. Such debentures bring in no cash and create no liability; only the bank loan they secure is a financing inflow.

E. Income tax paid is subtracted from Cash generated from operations — True. Tax on operating profit is an operating cash outflow, deducted to reach the net cash from operating activities.

NCERT (2026-27 edition):
Cash from Investing Activities

Extract from the NCERT textbook

NCERT (2026-27 edition):
Ascertaining Cash Flow 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.”

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. Such transactions should be disclosed elsewhere in the financial statements in a way that provide all the relevant information about these investing and financing activities.”

NCERT (2026-27 edition):
First Method – “No entry is made in the books of accounts since no liability is created by such issue.”

NCERT (2026-27 edition):
Taxes on Income and Gains – “… Taxes may be income tax (tax on normal profit), capital gains tax (tax on capital profits), dividend tax (tax on the amount distributed as dividend to shareholders). AS-3 requires that cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.”