Question

Match List-I with List-II

List-I (Items of cash flow)	List-II (Type of activity)
(A) Purchase of tangible assets	(I) Operating activity
(B) Issue of shares	(II) Cash and cash equivalents
(C) Increase in current assets	(III) Investing activity
(D) Marketable securities	(IV) Financing activity

Choose the correct answer from the options given below:

• (A) - (I), (B) - (II), (C) - (III), (D) - (IV)
• (A) - (III), (B) - (IV), (C) - (I), (D) - (II)
• (A) - (IV), (B) - (III), (C) - (I), (D) - (II)
• (A) - (I), (B) - (IV), (C) - (II), (D) - (III)

Answer 1

The Correct Option is D

Matching Transactions to Cash Flow Activities 

This exercise focuses on classifying various business transactions according to their respective cash flow activity type, as presented in the Statement of Cash Flows. Understanding these classifications is crucial for analyzing a company's financial performance and liquidity.

Matching Pairs

Here's the breakdown of each matched pair:

• (A) Purchase of Tangible Assets - (III) Investing Activity:
  • Explanation: The purchase of tangible assets, such as property, plant, and equipment (PP&E), is classified as an investing activity. These assets are long-term investments that a company makes to generate future income.
• (B) Issue of Shares - (IV) Financing Activity:
  • Explanation: Issuing shares (selling stock) to investors is a financing activity. This is how companies raise capital to fund their operations and investments.
• (C) Increase in Current Assets - (I) Operating Activity:
  • Explanation: An increase in current assets, such as accounts receivable (money owed by customers) or inventory, is typically linked to the core operating activities of the business. It reflects an increase in sales or production.
• (D) Marketable Securities - (II) Cash and Cash Equivalents:
  • Explanation: Marketable securities are short-term, highly liquid investments that can be easily converted into cash. Due to their liquidity, they are considered part of a company's cash and cash equivalents.

Conclusion

The correct matching sequence is:

(A) - (III), (B) - (IV), (C) - (I), (D) - (II)

Key Classifications of Cash Flow Activities

• Operating Activities: Cash flows from the normal day-to-day running of the business.
• Investing Activities: Cash flows related to the purchase and sale of long-term assets.
• Financing Activities: Cash flows related to how the company is financed (debt and equity).
• Cash and Cash Equivalents: Highly liquid assets that are readily convertible to cash.