Q.Choose one of the two alternatives given below and fill in the blanks in the following statements:
Concept understanding — Operating Activities Classification
Operating Activities Classification — A First Look
Think of a business as a living organism. Just as your body needs to breathe, eat, and circulate blood to stay alive, a business needs to sell goods, pay suppliers, collect cash from customers, and pay salaries to keep running. These day-to-day transactions that keep the business alive are called Operating Activities.
What Exactly Are Operating Activities?
Operating activities are the principal revenue-producing activities of a business. They are the core, routine transactions that happen again and again — not one-time events like selling a building or taking a loan.
For a typical trading or manufacturing company, operating activities include:
- Cash received from customers (sales)
- Cash paid to suppliers (purchases)
- Cash paid for salaries, rent, electricity, taxes
- Cash received as interest or dividends (if the company is in the business of lending/investing)
The NCERT Class 12 Accountancy textbook (Part II, Chapter 6 — Cash Flow Statement) defines operating activities as: "The principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities."
Why Does This Classification Matter?
You might wonder: Why can't we just lump all cash flows together?
The answer is simple: A business can survive a bad investment decision, but it cannot survive a failure in its core operations. If a company stops generating cash from selling its products, it will eventually shut down — no matter how many buildings it owns or loans it takes.
The Cash Flow Statement separates activities into three buckets:
- Operating Activities — the heartbeat
- Investing Activities — buying/selling long-term assets
- Financing Activities — borrowing/repaying loans, issuing shares
This separation helps investors and managers see whether the company's core business is generating enough cash to sustain itself.
Accounting Treatment — Which Account Is Debited/Credited?
Operating activities are not a separate ledger account. They are a classification used in the Cash Flow Statement. However, the underlying journal entries for each operating transaction follow standard double-entry rules.
Here are the most common operating transactions and their journal entries:
| Transaction | Debit | Credit |
|---|---|---|
| Cash sale | Cash A/c | Sales A/c |
| Credit sale (later collected) | Cash A/c | Debtors A/c |
| Cash purchase | Purchases A/c | Cash A/c |
| Payment to supplier (credit purchase) | Creditors A/c | Cash A/c |
| Salary paid | Salary A/c | Cash A/c |
| Rent paid | Rent A/c | Cash A/c |
| Interest received (if operating) | Cash A/c | Interest Income A/c |
| Tax paid | Tax A/c | Cash A/c |
Do not confuse the classification with a separate ledger. Operating activities are not a T-account. They are a section in the Cash Flow Statement.
The Cash Flow Statement Format (Operating Activities Section)
The NCERT textbook gives a proforma for the Cash Flow Statement under the Indirect Method (which starts with Net Profit and adjusts for non-cash items). Here is the operating activities section:
| Cash Flow from Operating Activities | Amount (₹) |
|---|---|
| Net Profit before Tax and Extraordinary Items | XXX |
| Adjustments for non-cash/non-operating items: | |
| Add: Depreciation | XXX |
| Add: Goodwill amortised | XXX |
| Add: Loss on sale of asset | XXX |
| Less: Profit on sale of asset | (XXX) |
| Less: Interest income (if investing) | (XXX) |
| Operating Profit before Working Capital Changes | XXX |
| Changes in Working Capital: | |
| Add: Decrease in Current Assets (e.g., Debtors) | XXX |
| Less: Increase in Current Assets | (XXX) |
| Add: Increase in Current Liabilities (e.g., Creditors) | XXX |
| Less: Decrease in Current Liabilities | (XXX) |
| Cash Generated from Operations | XXX |
| Less: Tax Paid | (XXX) |
| Net Cash Flow from Operating Activities | XXX |
The Indirect Method is the one prescribed by NCERT for Class 12. You start with Net Profit (from the Statement of Profit & Loss) and then add back non-cash expenses (like depreciation) and adjust for changes in working capital.
A Simple Example to Tie It Together
Suppose a company has:
- Net Profit for the year: ₹1,00,000
- Depreciation charged: ₹10,000
- Debtors increased by: ₹5,000
- Creditors increased by: ₹3,000
- Tax paid: ₹20,000
Calculation:
| Item | Amount (₹) |
|---|---|
| Net Profit before Tax | 1,00,000 |
| Add: Depreciation (non-cash) | +10,000 |
| Operating Profit before WC changes | 1,10,000 |
| Less: Increase in Debtors (cash not collected) | (5,000) |
| Add: Increase in Creditors (cash not paid) | +3,000 |
| Cash Generated from Operations | 1,08,000 |
| Less: Tax Paid | (20,000) |
| Net Cash from Operating Activities | 88,000 |
Notice: Depreciation is added back because it reduced profit but did not involve any cash outflow. Increase in debtors means sales were made but cash wasn't collected yet — so we subtract it.
The One Formula You Need
For Interest on Capital (which appears in the Profit & Loss Appropriation Account, not directly in operating activities, but is a related concept):
Interest on Capital = Capital × Rate of Interest × Time (in months/12)
Example: If capital is ₹5,00,000 and rate is 10% p.a. for the full year:
Interest = 5,00,000 × 10/100 × 12/12 = ₹50,000
This is not an operating activity — it is an appropriation of profit. But understanding it helps you see the boundary: operating activities deal with revenue and expenses, not with how profits are distributed.
Final Takeaway
Operating activities are the cash flows from your business's main line of work — selling goods, paying for them, paying employees, and collecting from customers. They are the first and most important section of the Cash Flow Statement. If a company's operating cash flow is negative for long, it's a red flag — the business is not sustaining itself through its core operations.
In exams, you will be asked to:
- Classify given transactions as operating/investing/financing
- Prepare the operating activities section using the indirect method
- Adjust for non-cash items and working capital changes
Master this, and you've understood the most critical part of the Cash Flow Statement.
An increase in a current asset (debtors, accrued income, prepaid expenses) reduces cash and is deducted; a decrease in a current asset (bills receivable) increases cash and is added; non-cash charges (goodwill amortised, provision for doubtful debts) are added back.
| Blank | Answer |
|---|---|
| (a) | ₹40,000 (debtors rose ₹10,000, so deduct ₹10,000) |
| (b) | ₹60,000 (bills receivable fell ₹10,000, so add ₹10,000) |
| (c) | deducted from |
| (d) | deducted from |
| (e) | added to |
| (f) | added to |
- ₹40,000;
- ₹60,000;
- deducted from;
- deducted from; (e) added to; (f) added to.
Increases in current assets are deducted from profit and decreases added; non-cash charges like goodwill amortised and provision for doubtful debts are added back. Answers:
- ₹40,000;
- ₹60,000;
- deducted from;
- deducted from; (e) added to; (f) added to.
Reasoning
- (a) Debtors rose from ₹10,000 to ₹20,000 (a ₹10,000 increase in a current asset), so ₹10,000 is deducted from the ₹50,000 profit → ₹40,000.
- (b) Bills receivable fell by ₹10,000 (a decrease in a current asset), so ₹10,000 is added to the ₹50,000 profit → ₹60,000.
- (c) Prepaid (advance) expenses at the year-end represent an increase in a current asset — deducted from profit.
- (d) Accrued income is a current asset; an increase in it is deducted from profit.
- (e) Goodwill amortised is a non-cash charge — added back to profit.
- (f) Provision for doubtful debts is a non-cash charge — added back to profit.
Answer (as given in the textbook)
- ₹40,000;
- ₹60,000;
- deducted from;
- deducted from; (e) added to; (f) added to.
✓Final answer
- ₹40,000;
- ₹60,000;
- deducted from;
- deducted from; (e) added to; (f) added to.
Showing the 12 most recent of 16 on this concept.
- CBSE 2026Set ANNUAL1 markMCQQ.Or. For a Banking Company, the cash flow from deposits by customers are classified under(a) operating activities(b) investing activities(c) financing activities(d) None of the above
›Reveal solutionSolution
For a bank, taking deposits and lending money IS the principal business — so AS-3 makes a special exception classifying these cash flows as operating, not financing, activities.
Under AS-3, the general rule is that cash received from borrowings (like bank loans or debentures) is a Financing Activity for a typical manufacturing/trading company, because borrowing is incidental to its main line of business (manufacturing or trading goods/services).
However, AS-3 carves out a specific exception for financial enterprises such as banks, financial institutions, and similar entities: for them, activities like accepting deposits from customers, lending and borrowing money, and dealing in securities are their very own principal revenue-generating (operating) activities — this IS their core business, not merely a source of financing for some other operation.
Therefore, cash flows arising from deposits accepted from customers by a banking company are classified under Operating Activities, not Financing Activities — the same logic that also puts a bank's loans given to customers, and interest received/paid on them, under Operating Activities for such an enterprise.
✓Final answerOption (a) "operating activities" — for a banking company, deposits from customers are part of its core/principal business and so are classified as operating activities under AS-3.
- CBSE 2025Set ANNUAL1 markMCQQ.Net Profit during the year Rs. 2,45,000; Decrease in inventories Rs. 20,000 and Increase in Trade Receivables Rs. 35,000. Net cash from operating activities will be ________. (A) Rs. 2,30,000 (B) Rs. 2,60,000 (C) Rs. 2,80,000 (D) Rs. 3,00,000
›Reveal solutionSolution
Net Cash from Operating Activities = Net Profit + Decrease in Current Assets − Increase in Current Assets = 2,45,000 + 20,000 − 35,000 = Rs. 2,30,000.
Under the Indirect Method of preparing a Cash Flow Statement, Net Profit is adjusted for changes in working capital items to arrive at Net Cash from Operating Activities:
- A decrease in inventories (a current asset) is a source of cash — it is added to net profit, since less cash is tied up in stock.
- An increase in trade receivables (a current asset) is a use of cash — it is deducted from net profit, since more cash remains uncollected from debtors.
Net Cash from Operating Activities = Net Profit + Decrease in Inventories − Increase in Trade Receivables
= 2,45,000 + 20,000 − 35,000
= Rs. 2,30,000
✓Final answer(A) Rs. 2,30,000
- CBSE 2025Set ANNUAL1 markMCQQ.Which of the following "Non cash & non operating item" will be added to the Net Profit before Tax of the current year, under Operating Activity of Cash Flow Statement?(a) Purchase of Machinery(b) Goodwill written off(c) Sale of Furniture
›Reveal solutionSolution
Any non-cash expense that reduced the reported Net Profit — like goodwill, depreciation, or other intangibles written off — must be added back when computing cash flow from operating activities, since no actual cash went out for it.
Why the other two options are wrong
Item Why it is NOT added to Net Profit under Operating Activities Purchase of Machinery A cash outflow under Investing Activities, not a non-cash item added to operating profit Sale of Furniture A cash inflow under Investing Activities; any profit/loss on sale is adjusted separately, the sale itself isn't an "add-back" Goodwill written off A non-cash, non-operating expense already deducted in arriving at Net Profit — must be added back Goodwill written off reduces the Statement of Profit and Loss figure without any actual outflow of cash in the current year (the cash was spent when goodwill was originally acquired). Since the Cash Flow Statement (indirect method) starts from Net Profit and works back to cash, this non-cash charge must be added back to arrive at the true operating cash flow.
✓Final answerGoodwill written off is added back to Net Profit before Tax under Operating Activities, being a non-cash, non-operating item.
- CBSE 2024Set MARCH1 markMCQQ.Which of the following transactions is always transaction of operating activity?(a) Interest paid on loan(b) Dividend received(c) Dividend paid(d) Salary expense
›Reveal solutionSolution
Salary expense is always an operating activity, so option (d) is correct.
In this GSEB Class-12 Commerce cash-flow topic, operating activities are the principal revenue-producing activities and other activities that are not investing or financing.
-
Interest paid on loan - financing activity.
-
Dividend received - investing activity (for a non-finance company).
-
Dividend paid - financing activity.
-
Salary expense - a routine operating outflow, always operating.
✓Final answer(d) Salary expense.
-
- CBSE 2024Set ANNUAL1 markMCQQ.Which of the following is not included in Operating Activities while preparing Cash Flow Statement?(a) Increase in Current Liabilities.(b) Increase in Current Assets.(c) Sale of Fixed Assets.(d) Payment of Tax.
›Reveal solutionSolution
Sale of Fixed Assets is NOT an operating activity — it is an investing activity (option c).
Operating activities are the principal revenue-producing activities and the effects of changes in working capital. So an increase in current liabilities, an increase in current assets and payment of tax (on operating profit) all affect operating cash flow.
Sale of fixed assets, however, involves a long-term/non-current asset and is classified under Investing Activities in the Cash Flow Statement. Hence it is the item not included in operating activities.
✓Final answer(c) Sale of Fixed Assets.
- CBSE 2023Set MARCH1 markQ.What are operating activities?
›Reveal solutionSolution
Operating activities are the principal revenue-producing activities of the business and other activities that are neither investing nor financing.
As per AS-3 in the Karnataka 2nd PUC syllabus, operating activities are the day-to-day trading activities that generate the main revenue of the enterprise. Examples of operating cash flows include cash received from the sale of goods and services, cash received from customers (debtors), cash paid to suppliers (creditors), cash paid to and on behalf of employees, and payment of operating expenses. The net cash from operating activities is a key indicator of whether the business can generate enough cash from its core operations.
✓Final answerOperating activities are the principal revenue-producing (day-to-day trading) activities of the business — e.g. cash sales, receipts from customers, and payments to suppliers and employees.
- CBSE 2023Set ANNUAL1 markMCQQ.The revenue producing activities of an enterprise are called(a) Operating activities.(b) Investing activities.(c) Financing activities.(d) Cash equivalent.
›Reveal solutionSolution
The principal revenue-producing activities of a business are its operating activities — answer (a).
This WBCHSE HS Accountancy MCQ (cash flow statement, aligned with the NCERT/CBSE curriculum) tests the definition of operating activities.
As per AS-3 / Ind AS-7, operating activities are the main revenue-producing activities of the enterprise and other activities that are not investing or financing — e.g. cash from sale of goods, cash paid to suppliers and employees. Investing activities relate to long-term assets, and financing activities relate to the firm's capital and borrowings.
✓Final answer(a) Operating activities — the principal revenue-producing activities of the enterprise.
- CBSE 2023Set ANNUAL1 markQ.When is dividend received considered as operating activities?
›Reveal solutionSolution
For a financial enterprise (e.g. an investment/finance company), dividend received is part of its main business and is classified as an operating activity.
This short-answer WBCHSE HS Accountancy item tests the classification of dividend received in a cash flow statement.
The treatment depends on the nature of the business:
-
For a non-financial (ordinary trading/manufacturing) enterprise, dividend received is income from investments and is classified under investing activities.
-
For a financial enterprise — such as a bank, mutual fund, or a company whose principal business is dealing in / investing in shares and securities — dividend (and interest) received arises from its main revenue-producing operations, so it is classified as an operating activity.
✓Final answerDividend received is considered an operating activity for a financial/investment enterprise, because for such a firm earning returns on securities is its principal business.
-
- CBSE 2023Set ANNUAL1 markMCQQ.While calculating cash flow from operating activities which will be added? (A) Increase in Inventory (B) Decrease in Bills Payable (C) Increase in Creditors (D) Increase in Trade Receivables
›Reveal solutionSolution
Under the indirect method, an increase in current liabilities is a source of cash (added), while an increase in current assets is a use of cash (deducted).
While calculating cash flow from operating activities (indirect method), adjustments are made to net profit for changes in working capital:
- An increase in a current asset (like Inventory or Trade Receivables) means more cash is tied up — it is deducted.
- A decrease in a current liability (like Bills Payable) means cash was paid out to reduce it — it is deducted.
- An increase in a current liability (like Creditors) means the business has used supplier credit instead of cash — it represents cash saved/retained, so it is added.
Among the options: (A) Increase in Inventory — deducted; (B) Decrease in Bills Payable — deducted; (C) Increase in Creditors — added; (D) Increase in Trade Receivables — deducted.
✓Final answer(C) Increase in Creditors — this is added while calculating cash flow from operating activities.
- CBSE 2022Set MARCH1 markMCQQ.Which of the following is not a cash outflow from operating activities?(a) Cash payment to suppliers of goods(b) Cash payment to employees(c) Cash payment to acquire fixed assets(d) Cash payment to insurance premium
›Reveal solutionSolution
Payment to acquire fixed assets is an investing outflow, not an operating one — option (c).
✓Final answerCash outflows from operating activities relate to the day-to-day running of the business:
- cash payment to suppliers of goods — operating
- cash payment to employees — operating
- cash payment of insurance premium — operating
Cash payment to acquire fixed assets is the purchase of a long-term asset, classified under investing activities. Therefore it is not a cash outflow from operating activities.
Correct option: (c).
- CBSE 2022Set ANNUAL1 markMCQQ.Which one is not included in Operating Activities?(a) Cash received from debtor.(b) Salary paid to employees in cash.(c) Cash paid for income tax.(d) Interest received from investment.
›Reveal solutionSolution
Cash from debtors, salary paid, and income tax paid are operating cash flows; interest received on investments is an investing inflow. The item NOT in operating activities is option (d).
Operating activities are the principal revenue-producing activities and other activities that are not investing or financing. Interest earned on investments relates to assets held for returns, so it is an investing activity.
✓Final answer(d) Interest received from investment.
- CBSE 2022Set ANNUAL1 markMCQQ.Cash receipts from the sale of goods and services in which a business deals will be shown in cash flow statement under(a) operating activities(b) investing activities(c) financing activities(d) None of the above
›Reveal solutionSolution
Core trading receipts belong under Operating Activities in the Cash Flow Statement.
Operating activities are the principal revenue-generating activities of an enterprise. Cash receipts from the sale of goods and rendering of services — i.e. the business's core trading activity — are therefore classified under Operating Activities, distinct from Investing Activities (acquisition/disposal of long-term assets and investments) and Financing Activities (changes in owners'/lenders' capital).
✓Final answerCash receipts from sale of goods/services are shown under Operating Activities (option i).
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