Question : Verma Ltd. paid Rs.1,20,000 as an installment for machinery purchased on credit which included interest of Rs. 20,000. How will this payment be presented while preparing a Cash Flow Statement?
Option 1: Principal amount i.e., Rs. 1,00,000 will be classified as an investing activity whereas interest amount i.e., Rs. 20,000 will be classified as financing activity.
Option 2: Principal amount i.e., Rs. 1,200,000 will be classified as an investing activity whereas interest amount i.e., Rs. 20,000 will be classified as financing activity.
Option 3: Principal amount i.e., Rs.50,000 will be classified as an investing activity whereas interest amount i.e., Rs. 10,000 will be classified as financing activity.
Option 4: None of the above
Correct Answer: Principal amount i.e., Rs. 1,00,000 will be classified as an investing activity whereas interest amount i.e., Rs. 20,000 will be classified as financing activity.
Solution : Answer = Principal amount i.e., Rs. 1,00,000 will be classified as an investing activity whereas interest amount i.e., Rs. 20,000 will be classified as a financing activity.
While preparing the Cash Flow Statement, the payment of Rs. 1,20,000 by Verma Ltd. for machinery installment, which includes Rs. 20,000 interest, will be classified as follows: the principal amount (Rs. 1,00,000) as an investing activity and the interest amount (Rs. 20,000) as a financing activity.
Hence, the correct option is 1.
