Which of the following transactions will result into Flow of Cash?

Question

Accepted Answer

The correct option is 2:
The term 'Flow of Cash' in accounting, particularly for the preparation of the Cash Flow Statement (as per AS-3 Revised), refers to transactions that result in a change in the total balance of Cash and Cash Equivalents. The sale of any fixed asset, such as furniture, is a Cash Flow from Investing Activities because it brings actual money into the business from outside. The transaction converts a non-cash asset (furniture) into cash. The actual cash inflow from this transaction is the selling price, which is calculated as the book value minus the loss (₹7,400 - ₹900 = ₹6,500). Since this transaction increases the total cash balance of the firm by ₹6,500, it is correctly classified as a flow of cash.

The incorrect option is 1: Deposited ₹ 20,000 into bank.
This transaction represents an internal transfer of funds within 'Cash and Cash Equivalents'. Students must remember that 'Cash and Cash Equivalents' includes both cash in hand and cash at the bank. When cash is deposited into the bank, the cash in hand decreases, but the cash at the bank increases by the exact same amount, ₹20,000. Consequently, the total of the two components remains unchanged. Because there is no net inflow or outflow of cash to or from the firm, this is not considered a Flow of Cash for the purpose of the Cash Flow Statement.

The incorrect option is 3: Converted ₹ 1,00,000 9% debentures into equity shares.
This is a purely non-cash transaction known as a conversion of debt into equity. It involves swapping one type of financing security (Debentures, which is debt) for another (Equity Shares, which is equity capital). There is absolutely no movement of cash or bank balances in this process. It is merely an adjustment within the capital structure of the company, and no funds are received or paid out. Non-cash financing and investing activities like this conversion are required to be disclosed separately, but they are excluded from the body of the Cash Flow Statement.

The incorrect option is 4: Withdrew cash from bank ₹ 25,000.
Similar to Option 1, this is an intra-firm transfer of resources which are already part of 'Cash and Cash Equivalents'. When cash is withdrawn from the bank, the bank balance decreases, and the cash in hand increases by an identical amount of ₹25,000. The key concept here is that the total sum of cash and bank balances—the total 'Cash and Cash Equivalent' figure—remains the same. Thus, it does not meet the definition of a Flow of Cash, as there is no change in the aggregate cash position of the firm.