Question

Assertion (A): Non-cash transactions are considered in preparing the Cash Flow Statement.

Reason (R): Non-cash transactions do not affect Cash and Cash Equivalents.

In the context of the above two statements, which option is correct?

Options

• Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation of Assertion (A).

• Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation of Assertion (A).

• Assertion (A) is correct, but Reason (R) is not correct.

• Assertion (A) is not correct, but Reason (R) is correct.

Answer 1

Assertion (A) is not correct, but Reason (R) is correct.

Explanation:

Assertion (A) is incorrect because the statement of cash flows strictly records the historical inflows and outflows of cash and cash equivalents; therefore, non-cash transactions are ignored and excluded from the main body of the Cash Flow Statement. Reason (R) is correct because, by definition, non-cash transactions (such as depreciation or acquiring assets by issuing shares) do not involve any actual movement of cash, meaning they have zero effect on the company’s cash and cash equivalents balance.