Question

Statement I: Quick Credit Ltd., a finance company, paid interest on borrowings amounting to Rs 80,000. This will be shown as cash outflow from operating activities in its Cash Flow Statement.

Statement II: Royal Foods Ltd., a non-financial enterprise, paid dividends amounting to Rs 2,30,000. It will be shown as cash outflow from operating activities in its Cash Flow Statement.

Choose the correct option from the following:

• A. Statement I is true and Statement II is false.
• B. Statement I is false and Statement II is true.
• C. Both the Statements are true.
• D. Both the Statements are false.

Hint:

Interest paid by a finance company is operating. Dividend paid by a non-financial company is financing.

Answer 1

The Correct Option is A

Step 1: Understand the question:
Two cases are given. In Statement I a finance company pays interest. In Statement II a non-financial company pays dividend. We must classify both.

Step 2: Check Statement I:
A finance company earns its income from lending, and it borrows to fund its lending. So interest paid on borrowings is a normal cost of its main business.
The standard shows interest paid by a financial enterprise under operating activities. Statement I is TRUE.

Step 3: Check Statement II:
For a non-financial company, dividend paid is a payment to owners for the funds they gave.
It is a financing outflow, not an operating outflow. Statement II is FALSE.

Step 4: Pick the option:
Statement I true and Statement II false. This is option (A).
Option (B) is wrong because it reverses the truth values. Option (C) is wrong because Statement II is false. Option (D) is wrong because Statement I is true.

Final Answer:
Statement I is true and Statement II is false. Option (A).