Statement - I : In case of non-financial enterprises, receipts of interest and dividend are classified as financing activities.
Statement - II : In case of financial enterprises receipts of interest and dividend are classified as investing activities.
Choose the correct option from the following :
Statement - I : In case of non-financial enterprises, receipts of interest and dividend are classified as financing activities.
Statement - II : In case of financial enterprises receipts of interest and dividend are classified as investing activities.
Choose the correct option from the following :
Options
Correct option: (D) Both the Statements are false.
For a non-financial enterprise, interest and dividend RECEIVED are classified as Investing Activities (return on investment) — not financing activities as Statement I claims. For a financial enterprise (e.g. a bank/NBFC), interest and dividend received form part of its main business (Operating Activities) — not investing activities as Statement II claims.
Marking Scheme
- 11 mark: correct option (D) selected, i.e. recognising both statements as false.
Hint
For non-financial firms: interest/dividend received = investing. For financial firms: it's their core business = operating.
Quick Oral Answer
Both statements are false — for a non-financial company, interest/dividend received is an investing activity, while for a financial company like a bank, it's an operating activity since that's their core business.
Analysis & Explanation
Concept: Classification of interest and dividend in the Cash Flow Statement depends on whether the enterprise is financial or non-financial, and whether the item is received or paid.
Non-financial enterprise (e.g. manufacturing/trading company):
- Interest and dividend RECEIVED → Investing Activities (a return on investments made).
- Interest and dividend PAID → Financing Activities (cost of raising funds).
Financial enterprise (e.g. bank, NBFC, mutual fund):
- Interest and dividend received AND paid → Operating Activities (this is their principal revenue-generating business).
Why both statements are false: Statement I wrongly classifies receipts as financing (they are investing for non-financial firms); Statement II wrongly classifies receipts as investing (they are operating for financial firms).
Exam trap: Students often memorise only 'interest paid = financing' and forget the received/paid and financial/non-financial distinction, causing errors on assertion-type questions like this one.
Common Mistakes
- 1Assuming interest/dividend received is always classified the same way regardless of the type of enterprise.
- 2Confusing 'financing activities' with 'investing activities' when classifying receipts (as opposed to payments).
- 3Forgetting that for financial enterprises like banks, interest/dividend transactions are their core Operating Activity, not Investing Activity.
Interesting Facts
AS-3 permits enterprises like banks and financial institutions to classify interest and dividend as operating cash flows because it reflects their principal revenue-generating activity.
For manufacturing companies, dividend received from investment in another company's shares is investing, but dividend PAID to their own shareholders is financing — the same word 'dividend' appears on both sides of the statement.
This financial vs non-financial classification distinction is a recurring CBSE favourite because it tests conceptual depth rather than mechanical formula application.
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Frequently Asked Questions
How is dividend paid classified in the Cash Flow Statement for any company?
Dividend paid is always classified as a Financing Activity, for both financial and non-financial enterprises, since it represents a distribution to those who provided equity capital.
Give an example of a financial enterprise for this classification rule.
Banks, non-banking financial companies (NBFCs), mutual funds, and other institutions whose principal business is lending, investing or dealing in financial assets.