Question

Which of the following is a financing activity for the purpose of preparing a Cash Flow Statement?

• A. Interest received
• B. Dividend received
• C. Royalties received
• D. Interest paid on debentures

Hint:

Classification in Cash Flow Statement:

• Operating Activities: Principal revenue-generating activities
• Investing Activities: Purchase/sale of assets, interest/dividend received
• Financing Activities: Changes in capital and borrowings, interest/dividend paid

Remember: Received \(\Rightarrow\) Usually Investing; Paid \(\Rightarrow\) Usually Financing (for non-financial companies)

Answer 1

The Correct Option is D

We need to identify which item is classified as a financing activity in the Cash Flow Statement as per Accounting Standard-3 (AS-3).
Step 1: Recall the classification of activities in Cash Flow Statement.
Cash Flow Statement classifies cash flows into three categories:

• Operating Activities: Principal revenue-generating activities. Examples: Cash receipts from sale of goods, cash payments to suppliers, salaries, etc.
• Investing Activities: Acquisition and disposal of long-term assets and other investments. Examples: Purchase/sale of fixed assets, interest received, dividend received, etc.
• Financing Activities: Activities that result in changes in the size and composition of the owner's capital and borrowings. Examples: Issue of shares, redemption of debentures, dividend paid, interest paid on borrowings, etc.

Step 2: Classify each option.

• (A) Interest received:
  • Interest received is generally classified as an Investing Activity because it arises from investments made by the company.
  • However, for financial enterprises, it may be operating activity.
• (B) Dividend received:
  • Dividend received is classified as an Investing Activity as it represents return on investments.
• (C) Royalties received:
  • Royalties received are generally classified as Operating Activities as they arise from the principal revenue-generating activities (if related to core business) or sometimes as investing activities if from investments.
  • Typically, for non-financial enterprises, royalties are operating income.
• (D) Interest paid on debentures:
  • Interest paid on debentures (borrowings) is classified as a Financing Activity.
  • It represents cost of funds raised through debt.
  • As per AS-3, interest paid is usually classified as financing activity for non-financial enterprises.

Step 3: Confirm with AS-3.
According to AS-3 (Revised):

• Cash flows from interest and dividends received and paid should each be disclosed separately.
• For a non-financial enterprise, interest paid is classified as financing activity.
• Interest and dividends received are classified as investing activities.

Therefore, among the given options, only "Interest paid on debentures" is a financing activity. Final Answer: (D) Interest paid on debentures