Question

Read the following statements carefully and choose the correct alternative from the following:

Statement 1: Net proceeds from sale of machinery is shown as an inflow of Cash under Operating Activity.

Statement 2: Premium on redemption of debentures is subtracted from current year’s profit to calculate Operating Profit.

Options

• Both the statements are true.

• Both the statements are false.

• Statement 1 is true and Statement 2 is false.

• Statement 1 is false and Statement 2 is true.

Answer 1

Both the statements are true.

Explanation:

Statement 1 is false because the net proceeds from the sale of machinery involve a fixed asset, which means it must be classified as an inflow under Investing Activities rather than Operating Activities. Statement 2 is false because the premium on the redemption of debentures is a capital nature item linked to a Financing Activity; it is not a normal operating expense, so it is adjusted against the Securities Premium Account or Capital Reserve rather than being subtracted from the current year’s profit to find Operating Profit.