Chapter 16: Cash Flow And Funds Flow (JAIIB – Paper 3)

1. Which of the following is not a part of Cash Flow Statement as per AS-3?

  • A. Cash flow from operating activities
  • B. Cash flow from investing activities
  • C. Cash flow from financing activities
  • D. Cash flow from production activities
AS-3 classifies cash flow into three categories: operating, investing, and financing. "Production activities" are not separately shown in cash flow statement.

2. A company’s net profit is ₹5,00,000. Depreciation charged is ₹50,000 and there is an increase in debtors of ₹30,000. What is the cash flow from operations?

  • A. ₹5,20,000
  • B. ₹4,70,000
  • C. ₹5,80,000
  • D. ₹5,50,000
Net profit (₹5,00,000) + Depreciation (₹50,000) – Increase in debtors (₹30,000) = ₹5,20,000 cash flow from operations.

3. Which of the following would be classified as an investing activity in a cash flow statement?

  • A. Payment of dividends
  • B. Purchase of machinery
  • C. Issue of shares
  • D. Repayment of bank loan
Purchase and sale of fixed assets like machinery are considered investing activities. Dividend payments and loan repayments are financing activities.

4. Cash flow from financing activities includes which of the following?

  • A. Cash sales
  • B. Interest received on investments
  • C. Issue of debentures
  • D. Purchase of land
Financing activities include raising or repaying funds (e.g., equity, debentures, loans). Issue of debentures is a financing activity.

5. If cash from operating activities is negative while investing and financing activities show positive cash inflow, what does this indicate?

  • A. Core operations are weak, but the company is surviving on asset sales or borrowings
  • B. The company is highly profitable
  • C. The company has no debt
  • D. The company has strong operating cash flows
Negative operating cash flow means business activities are not generating cash. Positive cash from investing or financing may mean survival through loans or selling assets.

6. Funds Flow Statement primarily shows:

  • A. Inflows and outflows of cash only
  • B. Sources and applications of funds between two balance sheet dates
  • C. Only non-cash transactions
  • D. Profit earned during the year
A Funds Flow Statement explains where funds came from (sources) and how they were used (applications) between two balance sheet dates, not just cash movement.

7. Increase in working capital in a funds flow statement is treated as:

  • A. Source of funds
  • B. Both source and application
  • C. Application of funds
  • D. Not considered
Increase in working capital means funds are blocked in current assets, so it is shown as an application of funds.

8. Which of the following transactions will be a source of funds in a Funds Flow Statement?

  • A. Purchase of fixed assets
  • B. Redemption of debentures
  • C. Payment of dividends
  • D. Issue of shares
Issue of shares brings fresh funds into the business, so it is a source. Purchase of assets, dividend, and redemption are applications of funds.

9. If current assets increase by ₹40,000 and current liabilities increase by ₹10,000, the net change in working capital is:

  • A. ₹30,000 increase
  • B. ₹50,000 increase
  • C. ₹30,000 decrease
  • D. ₹10,000 increase
Net change in working capital = Increase in CA (₹40,000) – Increase in CL (₹10,000) = ₹30,000 increase.

10. Funds Flow Statement is different from Cash Flow Statement because:

  • A. Both show only cash transactions
  • B. Both are mandatory under AS-3
  • C. Funds Flow covers changes in working capital, while Cash Flow shows actual cash movement
  • D. Funds Flow is a part of trial balance
Cash Flow Statement deals with inflow and outflow of cash only, whereas Funds Flow Statement focuses on sources and uses of funds, including changes in working capital.

11. Cash received from sale of fixed assets should be shown under which activity in a Cash Flow Statement?

  • A. Operating activity
  • B. Investing activity
  • C. Financing activity
  • D. Non-cash adjustment
Sale or purchase of fixed assets is part of investing activities in the Cash Flow Statement as per AS-3.

12. Net profit before tax is ₹8,00,000. Depreciation is ₹1,20,000 and there is an increase in creditors of ₹80,000. What is the cash flow from operating activities (before tax)?

  • A. ₹9,00,000
  • B. ₹7,20,000
  • C. ₹8,80,000
  • D. ₹10,00,000
Cash from operations = Net profit (₹8,00,000) + Depreciation (₹1,20,000) + Increase in creditors (₹80,000) = ₹10,00,000.

13. Which of the following is a non-cash transaction and hence excluded from Cash Flow Statement?

  • A. Conversion of debentures into equity shares
  • B. Issue of shares for cash
  • C. Purchase of asset by paying cash
  • D. Repayment of bank loan
Non-cash transactions like conversion of debentures into shares do not involve actual cash flow and are excluded from the statement.

14. Payment of dividend is shown under which section in the Cash Flow Statement (as per AS-3 for companies)?

  • A. Operating activity
  • B. Investing activity
  • C. Financing activity
  • D. Extraordinary item
Dividend payment is considered a financing activity, as it relates to return of funds to shareholders.

15. If net cash from operating activities is consistently negative but cash from financing is positive, it usually indicates:

  • A. Company has strong operating performance
  • B. Company is debt free
  • C. Company is investing heavily in fixed assets
  • D. Company is funding operations through borrowings
Negative operating cash flow but positive financing cash inflow means the company is unable to generate cash from business and is surviving mainly on borrowings or equity inflows.

16. Which of the following statements is true about Cash Flow and Fund Flow analysis?

  • A. Cash Flow shows actual cash movement, Fund Flow shows sources and applications of funds
  • B. Cash Flow ignores operating activities
  • C. Fund Flow includes only cash transactions
  • D. Both Cash and Fund Flow Statements are prepared using trial balance only
Cash Flow Statement focuses on inflow and outflow of cash, while Fund Flow Statement highlights sources and applications of funds, including changes in working capital.

17. If current liabilities decrease by ₹20,000 and current assets increase by ₹30,000, what is the effect on working capital?

  • A. Decrease by ₹10,000
  • B. Increase by ₹50,000
  • C. Decrease by ₹50,000
  • D. Increase by ₹10,000
Change in working capital = Increase in CA (₹30,000) – Decrease in CL (₹20,000) = ₹50,000 increase.

18. Which of the following is considered a source of funds in Fund Flow Statement?

  • A. Purchase of machinery
  • B. Payment of dividend
  • C. Sale of investments
  • D. Increase in stock
Sale of investments brings in funds to the business and is shown as a source in Fund Flow Statement. Purchases and increases in stock are applications.

19. Why is Cash Flow Statement more useful for short-term financial analysis than Fund Flow Statement?

  • A. Because it shows working capital changes only
  • B. Because it includes only long-term funds
  • C. Because it ignores operating activities
  • D. Because it shows actual cash available for immediate needs
Cash Flow Statement indicates the actual cash inflows and outflows, helping management and investors assess liquidity for short-term obligations.

20. A company had net profit of ₹6,00,000. Depreciation ₹1,00,000, decrease in creditors ₹50,000, and increase in debtors ₹30,000. What is net cash from operating activities?

  • A. ₹5,20,000
  • B. ₹6,80,000
  • C. ₹7,00,000
  • D. ₹5,80,000
Cash from operations = Net profit (₹6,00,000) + Depreciation (₹1,00,000) – Decrease in creditors (₹50,000) – Increase in debtors (₹30,000) = ₹5,20,000.

21. A bank gives a long-term loan of ₹50 lakh to a corporate client. In the Cash Flow Statement, this transaction will be classified under:

  • A. Operating activities
  • B. Investing activities
  • C. Financing activities
  • D. Extraordinary activities
Providing loans is considered an investing activity for a bank because it represents an outflow of funds for asset creation.

22. If a bank collects ₹10 lakh from a previously written-off NPA account, it will be recorded as:

  • A. Operating inflow
  • B. Financing inflow
  • C. Investing inflow
  • D. Non-cash adjustment
Recovery of written-off loans is treated as an investing cash inflow because it involves funds from long-term assets.

23. During the year, a bank’s short-term deposits increased by ₹5 crore, and long-term deposits decreased by ₹2 crore. The net cash impact will be classified under:

  • A. Operating activities
  • B. Investing activities
  • C. Non-cash activities
  • D. Financing activities
Changes in deposits (sources of funds) are financing activities because they represent funds borrowed or repaid.

24. A bank pays ₹1 crore as interest to its depositors. In the Cash Flow Statement, this will appear as:

  • A. Investing outflow
  • B. Operating outflow
  • C. Financing outflow
  • D. Non-cash adjustment
Interest paid is considered an operating activity outflow as it relates to the cost of business operations.

25. If a bank’s cash balance decreases during the year, but net profit is positive, what could be the reason?

  • A. The bank is making losses in operations
  • B. Cash inflows from operations exceed outflows
  • C. Cash is used in investing or financing activities despite profit
  • D. Cash balance is unrelated to profit
A decrease in cash despite profit occurs if cash is utilized for investments, loan disbursements, or financing activities exceeding operational cash inflows.

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