Question 351 markSection Analysis of Financial Statements

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 :

Cash Flow Statement
Cash Flow Statement — Classification of Interest & Dividend

Options

(A)Both the Statements are true.
(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 false.

Official answer

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.

Answer keywords:cash flow statementfinancial enterprisenon-financial enterpriseinterest receiveddividend receivedinvesting activitiesoperating activitiesfinancing activities

Marking scheme

  1. 1.1 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.

Common mistakes

  1. 1.Assuming interest/dividend received is always classified the same way regardless of the type of enterprise.
  2. 2.Confusing 'financing activities' with 'investing activities' when classifying receipts (as opposed to payments).
  3. 3.Forgetting that for financial enterprises like banks, interest/dividend transactions are their core Operating Activity, not Investing Activity.

Analysis and 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.

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.

Question details

Q35 of 39 questions

Board
CBSE
Class
Class 12
Subject
Accountancy
Year
2026
Section
Section Analysis of Financial Statements
Marks
1
Chapter
Cash Flow Statement
Topic
Cash Flow Statement — Classification of Interest & Dividend
Bloom's level
analyze
Syllabus topic
Unit 5: Cash Flow Statement — Classification of Interest and Dividend for Financial vs Non-Financial Enterprises
Author
CBSE
Reviewed by
Padhantu Academic Team

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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.