T.S. Grewal Class 12 Vol 3 Chapter 5 Q.2 - Cash Flow Statement

Question 2

Classify the following transactions as Operating Activities for a financial company and a non-financial company: (a) Purchase of shares on a stock exchange; (b) Dividend received on shares; (c) Dividend paid on shares; (d) Loans given; (e) Loans taken; (f) Interest paid on borrowings.

Solution

OPERATING ACTIVITY

Financial Company	Non-Financial Company
a. Purchase of Shares on a Stock Exchange	None
b. Dividend Received on Shares	None
d. Loans Given	None
e. Loans Taken	None
f. Interest Paid on Borrowings	None

A financial company deals with securities like shares, bonds, and debentures on a regular basis; these securities form part of its stock, so purchase and sale of them is classified as an Operating Activity, and dividends received/interest paid in the course of this business are likewise Operating. Dividend PAID by the company, however, remains a Financing Activity for both types of company — it is not part of this list.

For a non-financial company, purchase/sale of shares, loans given, loans taken, and interest paid on borrowings are NOT Operating Activities: purchase of shares and loans given are Investing Activities, while loans taken and interest paid on borrowings are Financing Activities, since these increase or service the capital employed in the business rather than being part of its core operations.