Q.Statement I : In case of non-financial enterprises, payment of interest and dividend are classified as financing activities. Statement II : In case of financial enterprises, payment of interest and dividend are classified as investing activities. Choose the correct option from the following : (A) Both the statements are true. (B) Both the statements are false. (C) Statement I is true, but Statement II is false. (D) Statement I is false, but Statement II is true.
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Start your 14-day free trial to unlock the full solution →Statement I is correct—non-financial enterprises treat interest and dividend payments as financing activities—but Statement II is false because financial enterprises classify these payments as operating activities, not investing activities.
The classification of cash flows in a statement of cash flows depends fundamentally on the nature of the enterprise. Indian Accounting Standard (Ind AS) 7 and the NCERT textbook on Accountancy recognize that what constitutes a core business activity for one type of company may be peripheral for another, and this distinction shapes how we report cash movements.
For non-financial enterprises—manufacturing firms, retailers, service companies—the primary business revolves around producing goods or delivering services. Their core operations generate revenue through sales. When such a company pays interest on borrowed funds or distributes dividends to shareholders, these payments relate to how the business is financed, not how it operates day-to-day. Interest represents the cost of debt capital, and dividends are the return on equity capital. Both are consequences of financing decisions—choices about capital structure—rather than the operational cycle of buying inputs, adding value, and selling output. Therefore, the textbook and accounting standards classify payment of interest and dividend by non-financial enterprises as financing activities. Statement I captures this correctly.
Now consider financial enterprises—banks, insurance companies, non-banking financial companies. For these institutions, money itself is the product. A bank's core business is accepting deposits and lending money; interest paid on deposits and interest received on loans are the very heartbeat of operations. Similarly, dividends received from investments form part of the regular business activity for many financial institutions. The textbook explicitly states that for financial enterprises, interest paid and interest and dividends received are classified as operating activities because they directly relate to the main revenue-generating functions of the business.
The key principle: classify cash flows according to the nature of the enterprise. What is financing for a manufacturer is operating for a bank. …
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