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FAQs on Cash Flow Statement: DK Goel Class 12 Chapter 6 Solutions
1. How are operating activities specifically handled when preparing a Cash Flow Statement using the indirect method in DK Goel solutions?
In DK Goel Class 12 solutions for the Cash Flow Statement using the indirect method, operating activities start with the Net Profit Before Tax and Extraordinary Items. Adjustments are then made for non-cash and non-operating items. Common adjustments include:
- Add backs: Depreciation, amortization, interest paid, loss on sale of assets, changes in working capital that decrease cash.
- Deductions: Interest received, dividend received, profit on sale of assets, changes in working capital that increase cash.
Finally, adjustments are made for changes in current assets and current liabilities to arrive at Cash Flow from Operating Activities before tax, and then less income tax paid.
2. What are the key financing activities to identify when solving Cash Flow Statement problems in Accountancy Class 12?
When solving Cash Flow Statement problems, key financing activities involve changes in the size and composition of the owner’s capital and borrowings of the enterprise. These include:
- Proceeds from issuing shares and debentures.
- Repayment of long-term loans.
- Redemption of debentures or preference shares.
- Buyback of shares.
- Payment of dividends and interest on borrowings.
3. How are cash and cash equivalents represented and calculated at the end of a Cash Flow Statement for Class 12?
In a Cash Flow Statement for Class 12 Accountancy, the net increase or decrease in cash from all activities (operating, investing, and financing) is added to the opening balance of cash and cash equivalents. The resulting figure is the closing balance of cash and cash equivalents, which must match the corresponding figure in the balance sheet for that period. Cash equivalents are highly liquid short-term investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, typically maturing within three months.
4. How does the treatment of interest and dividends received differ for financing versus non-financing companies in Cash Flow Statement solutions?
The treatment of interest and dividends received in a Cash Flow Statement depends on the company's primary activity, as per CBSE/NCERT guidelines for 2025-26:
- For a non-financing company, these are considered investing activities, as they arise from investments made by the company.
- For a financing company, whose main business is lending and investing, interest and dividends received are treated as operating activities, as they are part of its core revenue-generating operations.
5. What is the fundamental distinction between cash flow and free cash flow as observed in DK Goel Accountancy solutions?
In Accountancy, cash flow broadly refers to the movement of cash in and out of a business from its operating, investing, and financing activities. Free cash flow, on the other hand, is the cash generated by a company's operations after accounting for capital expenditures (investments in assets). It represents the cash available to a company after paying for its day-to-day operations and maintaining its asset base.
6. What is the correct methodology for solving practical questions on Cash Flow Statement for Class 12 Accountancy from DK Goel?
When solving practical questions on Cash Flow Statement from DK Goel, start by identifying the nature of each transaction as operating, investing, or financing. Prepare the statement using the indirect method for operating activities, focusing on adjustments for non-cash and non-operating items. Ensure proper working notes for provisions and assets. Always verify that the net change in cash matches the change in cash and cash equivalents as per the balance sheet.
7. What are the key adjustments for non-cash items required when preparing a Cash Flow Statement solution?
When preparing a Cash Flow Statement solution using the indirect method, key adjustments for non-cash items are crucial. These include:
- Depreciation and Amortization: Added back to net profit as they reduce profit but not cash.
- Goodwill/Patents written off: Added back.
- Profit/Loss on sale of fixed assets/investments: Adjusted to remove their non-operating impact from operating profit. A loss is added back, and a profit is deducted.
- Provision for Doubtful Debts: Changes in this provision are typically adjusted.
8. Why is it crucial to prepare a Cash Flow Statement using the indirect method for operating activities in Class 12 Accountancy?
It is crucial to use the indirect method for preparing cash flow from operating activities in Class 12 Accountancy because it reconciles net profit with net cash flow by adjusting for non-cash items and changes in working capital. This method helps students understand how accrual-based profit translates into actual cash generation and aligns with AS-3 (Revised) as prescribed by CBSE for 2025-26, linking the Cash Flow Statement with the Income Statement and Balance Sheet.
9. What are the **common errors** students make when classifying activities into operating, investing, and financing in Cash Flow Statement problems?
Common errors when classifying activities in a Cash Flow Statement include:
- Interest and Dividends: Incorrectly categorizing these as operating, investing, or financing activities, especially when dealing with financing versus non-financing companies.
- Sale/Purchase of assets: Confusing the gain or loss on sale (which is a non-operating adjustment) with the actual cash proceeds or payments (which are investing activities).
- Issuance/Redemption of shares/debentures: Misclassifying the interest paid or received on these instruments.
- Changes in Working Capital: Incorrectly adding or subtracting increases or decreases in current assets and liabilities.
A clear understanding of the core nature of each activity is essential to avoid these mistakes.
10. How does solving DK Goel Class 12 Chapter 6 solutions help in understanding the application of accounting standards (AS-3)?
Solving DK Goel Class 12 Chapter 6 solutions on Cash Flow Statement directly helps students understand the application of Accounting Standard 3 (AS-3) (Revised), which is part of the CBSE syllabus for 2025-26. These solutions demonstrate the prescribed format, the correct classification of various transactions into operating, investing, and financing activities, and the specific treatment of items like tax paid, extraordinary items, and non-cash adjustments, all in accordance with AS-3. Practicing these problems reinforces the practical implementation of the standard.
11. What is the significance of the opening and closing balances of cash and cash equivalents in a Cash Flow Statement solution?
The opening and closing balances of cash and cash equivalents are vital checkpoints in a Cash Flow Statement solution. The net cash flow from operating, investing, and financing activities, when added to the opening balance of cash and cash equivalents, *must* equal the closing balance of cash and cash equivalents. This acts as a self-balancing mechanism, ensuring the accuracy of the entire statement. It highlights the net change in a company's cash position over the accounting period, a crucial metric for financial analysis.
12. Why are certain items like depreciation added back to net profit in the operating activities section of a Cash Flow Statement?
Items like depreciation are added back to net profit in the operating activities section (indirect method) because they are non-cash expenses. While depreciation reduces the company's profit as shown in the income statement, it does not involve an actual outflow of cash. To convert the accrual-based net profit into a cash-based operating figure, such non-cash expenses must be added back, reflecting that no cash was spent on them during the period. This adjustment ensures that the operating cash flow accurately reflects the cash generated from core business operations.
