Question

Increase in fixed assets due to cash purchase is

• A. Application of fund
• B. Sources of fund
• C. Inflow of fund
• D. None of these

Hint:

Whenever cash is used to buy long-term assets, it’s recorded as an application of fund because working capital decreases.

Answer 1

The Correct Option is A

Step 1: Understanding 'application of fund'.
An application of fund refers to the use or outflow of financial resources for various business purposes.
Whenever money is spent on acquiring assets, paying liabilities, or meeting expenses, it is considered an application of funds.
Step 2: Nature of the transaction.
When a business purchases fixed assets such as machinery, equipment, or land by paying cash, the transaction results in an increase in assets.
At the same time, there is a reduction in cash balance, which means money has been utilized or applied.
Step 3: Explanation with example.
For example, if a company buys machinery worth ₹2,00,000 in cash, then:
- Fixed assets increase by ₹2,00,000.
- Cash (a current asset) decreases by ₹2,00,000.
This represents a movement of funds from one form to another — from liquid assets (cash) to fixed assets.
Step 4: Reasoning.
Since cash has been used to acquire the fixed asset, it is treated as an application of fund.
It indicates a decrease in working capital because current assets (cash) have reduced while non-current assets have increased.
Step 5: Analysis of options.
- (1) Application of fund: Correct — cash used for purchasing assets is an outflow of funds.
- (2) Source of fund: Incorrect — it would mean generation of cash.
- (3) Inflow of fund: Incorrect — no inflow occurs here.
- (4) None of these: Incorrect.
Step 6: Conclusion.
Thus, an increase in fixed assets due to a cash purchase is an application of fund.