Question

The following statements are related to the cash flow statement:
i. Cash payments for interest expenses can be classified into operating or investing activities
ii. Cash payments for dividends can be classified into operating or financing activities.
iii. Cash receipts from dividends can be classified into operating or financing activities
iv. Cash receipts from interest income can be grouped into operating or investing activities

The correct statement is ....
A. i, ii, iii, and iv
B. i, ii, and iii
C. i and iii
D. ii and iv

Answer 1

Answer: Option D: ii and iv

Explanation for correct statements:

ii. Cash payments for dividends can be classified into operating or financing activities.

It is added back to net profit to find out cash generated from operating activities. It will be later shown as outflow under financing activity,

iv. Cash receipts from interest income can be grouped into operating or investing activities

Receipt of Interest are deducted from net profit because they are non operating activity & they are shown as inflow of cash under investing activities.

For other 2 statements are not valid due to below reason:

i. Cash payments for interest expenses can be classified into operating or investing activities

Interest on long term borrowing such as debenture interest & interest on bank overdraft or cash credit is added back to net profit because it is an expense related to financing activities. It is shown as outflow of cash under financing activity not in operating or investing activities.

iii. Cash receipts from dividends can be classified into operating or financing activities

Cash receipt from dividend are receipt from non operating activities hence they are deducted from their net profit & shown as in-flow of cash under investing activity not in operating or financing activities