Question

Which of the following is an extraordinary item in Cash Flow Statement?

• A. Sale of Goods
• B. Salary Paid
• C. Compensation received from earthquake loss
• D. Interest Paid

Hint:

Extraordinary items are rare and unusual events not related to regular business operations.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
In financial accounting, extraordinary items are cash inflows or outflows stemming from events or transactions that are clearly distinct from the ordinary day-to-day trade operations of an enterprise. For an item to be classified as extraordinary, it must meet two strict criteria: it must be highly unusual in nature (unrelated to standard business tasks) and infrequent in occurrence (not expected to happen regularly in the foreseeable future). These items are disclosed separately in the Cash Flow Statement to help users see the true underlying performance of regular business activities.
Step 2: Detailed Explanation:
Let's evaluate each option to see if it qualifies as an everyday ordinary item or an extraordinary event: - (A) Sale of Goods: This is the primary revenue-producing operational task for a trading or manufacturing company. It is a standard, frequent Operating Activity. - (B) Salary Paid: An everyday operational expense necessary to pay staff for running the business. It is a standard Operating Activity. - (C) Compensation received from earthquake loss: An earthquake is an unpredictable natural disaster. Receiving insurance or state settlement cash to cover the damage is a rare event that is completely separate from regular commercial operations. Therefore, it satisfies both the unusual and infrequent criteria, classifying it as an Extraordinary Item. - (D) Interest Paid: A routine, regular cost associated with servicing long-term loans or corporate debentures. It is classified as a standard Financing Activity. Thus, compensation received from earthquake loss is the only extraordinary item listed. This matches option (C).
Step 3: Final Answer:
The extraordinary item in the Cash Flow Statement is compensation received from earthquake loss.