(a) Purchase of marketable securities or short term investments are not considered for the preparation of cash flow statement because :
(A) These are current assets
(B) These constitute cash equivalents
(C) These are intangible assets
(D) These are tangible assets
OR
(b) Which of the following will not amount to cash outflow from operating activities ?
(A) Purchase of marketable securities
(B) Cash payment to suppliers of goods
(C) Payment of employee benefit expenses
(D) Payment of insurance premium
(a) Purchase of marketable securities or short term investments are not considered for the preparation of cash flow statement because :
(A) These are current assets
(B) These constitute cash equivalents
(C) These are intangible assets
(D) These are tangible assets
OR
(b) Which of the following will not amount to cash outflow from operating activities ?
(A) Purchase of marketable securities
(B) Cash payment to suppliers of goods
(C) Payment of employee benefit expenses
(D) Payment of insurance premium
(a) Correct option: (B) These constitute cash equivalents.
Marketable securities/short-term investments are 'Cash Equivalents' under AS-3 — buying them merely moves money from 'Cash' to another form of cash equivalent within the same total, so it is not a real cash inflow/outflow and is excluded from the Cash Flow Statement.
(b) Correct option: (A) Purchase of marketable securities.
For the same reason as (a), purchase of marketable securities is a movement between cash equivalents, not a cash outflow from operating (or any) activity — unlike payments to suppliers, employee benefits, or insurance, which are genuine operating cash outflows.
Marking Scheme
- 11 mark: correct option — (B) for part (a) OR (A) for part (b), whichever part is attempted.
Hint
Cash equivalents are highly liquid, near-cash investments — buying them isn't a real cash flow at all.
Quick Oral Answer
Marketable securities are cash equivalents themselves, so buying them is just moving money from one 'cash' form to another — not a real cash inflow or outflow, and hence not counted as an operating outflow either.
Analysis & Explanation
Concept: Under AS-3/Ind AS-7, Cash Equivalents are short-term, highly liquid investments (like marketable securities) readily convertible into known amounts of cash, with insignificant risk of value change — typically maturing within 3 months.
(a): Since marketable securities ARE cash equivalents, buying them is merely reshuffling within 'Cash and Cash Equivalents' — no net cash flow to record.
(b): Because purchasing marketable securities doesn't even qualify as a cash flow (per (a)'s logic), it cannot be an operating cash outflow — unlike payments to suppliers (B), employee benefits (C), and insurance premium (D), all genuine operating expenses paid in cash.
Exam trap: Students often confuse 'cash equivalents' with 'current assets' generally — the distinguishing feature tested is convertibility into a KNOWN amount of cash almost immediately.
Common Mistakes
- 1Treating marketable securities purchase as an investing cash outflow instead of recognising it as a non-cash-flow movement between cash equivalents.
- 2Confusing 'current assets' generally with the specific AS-3 definition of 'cash equivalents'.
- 3In part (b), wrongly selecting a genuine operating expense (supplier payment, wages, insurance) instead of recognising marketable securities purchase as the odd one out.
Interesting Facts
AS-3 (Cash Flow Statements) requires investments to have an original maturity of three months or less to qualify as cash equivalents.
Excluding cash-equivalent movements from the Cash Flow Statement prevents double-counting the same 'cash resource' twice under different heads.
This exact distinction (cash vs cash equivalents) is one of the most frequently tested CBSE MCQ themes in the Cash Flow Statement chapter.
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Frequently Asked Questions
What qualifies as a 'cash equivalent' under AS-3?
Short-term, highly liquid investments readily convertible into a known amount of cash, with insignificant risk of change in value — typically with an original maturity of three months or less, such as treasury bills or marketable securities.
Is payment of insurance premium an operating cash outflow?
Yes — insurance premium is a routine business expense paid in cash and is classified as a cash outflow from operating activities.