Q.Statement I : Operating activities are the activities that constitute the primary or main activities of an enterprise. Statement II : Cash advances and loans made by financial enterprises are usually classified as operating activities. Choose the correct option from the following : (A) Both the Statements are false. (B) Statement I is true and Statement II is false. (C) Statement I is false and Statement II is true. (D) Both the Statements are true.
You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
Start your 14-day free trial to unlock the full solution →Both statements are true: operating activities form the core business of an enterprise, and for financial enterprises specifically, cash advances and loans are indeed classified as operating activities because they represent their primary business function.
The classification of activities in a cash flow statement rests on understanding what constitutes the "core business" of an enterprise. Operating activities are not some abstract accounting category—they represent the day-to-day transactions that generate the principal revenue for which the entity was established. For a manufacturing company, this means buying raw materials, producing goods, and selling them. For a retailer, it means purchasing inventory and selling it to customers. The key is identifying what the business fundamentally does to earn its keep.
Statement I captures this essential principle. Operating activities are indeed the primary activities of an enterprise—the ones that define its business model and generate its main revenue streams. These activities typically involve transactions that enter into the determination of net profit or loss. They include cash receipts from the sale of goods and services, cash payments to suppliers for goods and services, cash payments to and on behalf of employees, and similar day-to-day transactions. This is the heartbeat of the business, the reason it exists.
Now here's where many students stumble: they assume that because loans and advances sound "financial," they must always be classified as investing or financing activities. That's true for most non-financial enterprises. If a trading company lends money to a supplier, that's an investing activity—it's outside the company's core business. But financial enterprises operate under entirely different rules because their core business is money itself. …
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.