Question

Statement I : Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

Statement II : Financing transactions that do not require the use of cash or cash equivalents should be included in a 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:

Statement I is true. Non-cash financing items are left out, so Statement II is false.

Answer 1

The Correct Option is A

Step 1: Understand the question:
Two statements are given about the Cash Flow Statement. We must check each one.

Step 2: Check Statement I:
Cash flows from financing activities show how the business raised funds from owners and lenders and how it repaid them.
Showing them separately helps users predict the claims on future cash flows by providers of funds, both capital and borrowings.
This is the standard reason given in AS 3. So Statement I is TRUE.

Step 3: Check Statement II:
A Cash Flow Statement records only transactions that move cash or cash equivalents.
A financing transaction with no cash, for example issue of shares to buy machinery or conversion of debentures into shares, does not affect cash.
Such transactions are left out of the statement and disclosed elsewhere, for example in the notes. So Statement II is FALSE.

Step 4: Pick the option:
Statement I is true and Statement II is 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).