Question

Statement I: In case of non-financial enterprises, payment of interest and dividend are classified as financing activities. Statement II: In case of financial enterprises, payment of interest and dividend are classified as investing activities. Choose the correct option from the following:

• A. Both the statements are true.
• B. Both the statements are false.
• C. Statement I is true, but Statement II is false.
• D. Statement I is false, but Statement II is true.

Hint:

Classification of Interest and Dividend:

• Non-financial enterprises:
  • Interest/Dividend \textbf{Paid} \(\Rightarrow\) Financing Activity
  • Interest/Dividend \textbf{Received} \(\Rightarrow\) Investing Activity
• Financial enterprises:
  • Interest/Dividend \textbf{Paid and Received} \(\Rightarrow\) Operating Activity (core business)

Dividend paid is always financing activity for all enterprises!

Answer 1

The Correct Option is C

We need to evaluate the two statements regarding classification of interest and dividend payments in Cash Flow Statement for different types of enterprises.
Step 1: Recall the classification as per Accounting Standard-3 (AS-3).
AS-3 on Cash Flow Statement provides guidance on classification of cash flows:

• For non-financial enterprises:
  • Interest paid is usually classified as financing activity
  • Dividend paid is classified as financing activity
  • Interest and dividend received are classified as investing activities
• For financial enterprises:
  • Interest paid and received, and dividend paid and received are usually classified as operating activities because these are part of their principal revenue-generating activities.
  • Financial enterprises (banks, insurance companies, etc.) deal in financial instruments, so interest and dividends are their core business activities.

Step 2: Analyze Statement I.
\textit{"In case of non-financial enterprises, payment of interest and dividend are classified as financing activities."} This is true. For non-financial companies, interest paid on borrowings and dividend paid to shareholders are both financing outflows. Step 3: Analyze Statement II.
\textit{"In case of financial enterprises, payment of interest and dividend are classified as investing activities."} This is false. For financial enterprises:

• Payment of interest is an operating activity (since interest expense is part of their main business)
• Payment of dividend is still a financing activity (dividend is distribution to shareholders, not part of operations)

Even if we consider both, they are not classified as investing activities. Investing activities relate to acquisition and disposal of long-term assets and investments. Step 4: Conclusion.
Statement I is true, Statement II is false. This matches option (C). Final Answer: (C) Statement I is true, but Statement II is false.