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The directors of Spinz Ltd. are entitled to incentives linked to 'Cash Generated from Operations' as defined in Ind AS 7. Because operating cash flows have turned negative, they propose to classify proceeds from sale of under-utilised equipment and non-subsidiary investments as cash from operating activities. As a CA employed by Spinz, the correct ethical response is to:
APermit the classification because Ind AS 7 leaves classification of cash flows to management judgement
BInsist that the proceeds be classified under investing activities per Ind AS 7 and escalate to the auditor if management persists
CAllow it because the cash is being deployed for operations and end use determines classification
DAllow it provided it is consistently disclosed in the notes to accounts
Answer & Solution
Correct answer: B. Insist that the proceeds be classified under investing activities per Ind AS 7 and escalate to the auditor if management persists
Ind AS 7 mandates classification of proceeds from sale of PPE and investments under investing activities — the deployment of cash does not change classification. Allowing the misclassification breaches professional competence and due care; if management persists, the CA must bring it to the auditor's attention, failing which Clause 1 of Part II of the Second Schedule is attracted.
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