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PAS 7 CASH FLOW STATEMENTS

IAS 7, the international standard on cash flow statements, was issued in 1992 and last amended in 2004,
replacing an earlier standard with the same number that had been issued in 1977. This standard explains
the requirements and the presentation of a statement of changes in cash.

Cash flows are inflows and outflows of cash and cash equivalents; cash comprises cash on hand and
demand deposits; and cash equivalents are short-term, highly liquid investments that are both readily
convertible to known amounts of cash and subject to an insignificant risk of changes in value.
a. Operating activities are the principal revenue-producing activities of the entity and other activities
that are not investing or financing activities.
b. Investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.
c. Financing activities are activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity.
Entities are required to disclose what their policy is for determining what falls within the definition of cash
and cash equivalents. The particular issue is to decide how to distinguish what should be regarded as a
cash equivalent from what should be regarded as an investment. This is important because purchases and
sales of investments for cash should appear in the investing section of the cash flow statement, but if the
investment is regarded as a cash equivalent, it should not appear at all, being simply a rearrangement of
cash resources.

Investments must not be subject to a significant risk of changes in value, IAS 7 says that an investment
normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from
the date of acquisition.
a. Equity shares are excluded unless (rarely) they are, in substance, cash equivalents, such as
redeemable preference shares acquired within a short period of their maturity.
b. In addition, any investment must be liquid so that it can be readily converted to known amounts of
cash.
Although bank borrowings are generally considered to be financing activities, IAS 7 specifies that bank
overdrafts repayable on demand are included as a component of cash and cash equivalents. This is
because under this kind of banking arrangement, the bank balance often fluctuates from being positive to
overdrawn.

there are two ways of presenting the operating activities section of the cash flow statement:
a. the direct and the
b. indirect methods.
IAS 7 encourages the use of the direct method, but in practice, most entities use the indirect method,
which is easier to produce.

When using the direct method, you shall disclose major classes of gross cash receipts and gross cash
payments—for example,
a. receipts from customers, or
b. payments to suppliers—which could be determined by aggregating all such cash payments as
recorded in the accounting records of the entity.
Alternatively, it could be worked out by adjusting the recorded figures for purchases by the increase or
decrease in trade creditors, or perhaps by adjusting cost of sales by more complex movements in other
elements of working capital.

The indirect method adopts a similar process of adjusting profit and loss for the effects of movements in
working capital and other items that do not involve operating cash flows. However, the difference is that
this reconciliation is published, not the major classes of receipts and payments disclosed under the direct
method.
a. Net profit or loss must be adjusted for non-cash entries and other elements that do not affect
operating cash flows for the period; for example, depreciation, provisions, and changes in working
capital items.
b. It is important to make sure that all the adjustments relate to the correct items in the cash flow
statement.
For example, when adjusting profits by the change in creditors, it is necessary to leave out any creditors
that do not relate to operating items, such as the suppliers of fixed assets. The change in such balances
should instead be used in preparing the investing activities section of the statement, to convert capital
expenditure to a cash basis.

Although the term direct is not used in this context, the investing and financing activities sections are also
presented on a direct basis, meaning the information published is the gross cash payments and the gross
cash receipts classified under various headings. However, some of the figures will generally be calculated
indirectly, by adjusting amounts calculated on an accruals basis for non-cash movements to bring them
back to a cash basis. some examples of investing activities?
a. Cash receipts and cash payments from the sale / purchase of property, plant and equipments,
intangibles or other non-current assets.
examples of financing activities?
a. Cash payments to owners to acquire or redeem entity’s shares and cash repayments of amounts
borrowed.

in order to present on the cash flow statement. operating activities d. financing activities. Cash and Cash equivalents 5. . Cash equivalents c. Cash flows 4. _________ Are short-term. b. operating activities. Cash in bank 2. Investing activities c. an investment normally qualifies as a cash equivalent only when it has a short maturity of. Investing activities c. c. Cash on hand d. d. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purpose. Cash equivalents c. Operating activities b. operating activities or financing activities c. Bank borrowings are generally considered to be financing activities c. b. if the cash flows relate to items whose turnover is quick. highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Cash b. Operating activities b. Are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities? a. the standard requires that any cash flows made in a foreign currency must be translated at the actual exchange rate ruling at the date of the cash flow. Operating activities b. The standard applies to cash flows conducted directly by the entity and those arising on the consolidation of foreign entities. three months or less from the date of acquisition. Financing activitiesd.operating activities. operating activities or investing activities b. selling activities. financing activities. Financing activitiesd. Cash on hand d. Cash equivalents c. b. Therefore. Cash and Cash equivalents 7. Are the activities that result in changes in the size and composition of the contributed equity and borrowings of the entity a.1. investing activities. Cash flows include movements between items that constitute cash or cash equivalents because these components are part of the cash management or an entity rather than part of its operating.operating activities. investing and financing activities. say. In a statement of cash flows. d. payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for a. 8. Cash b. receipts from sales of property. 12. the major classes of gross cash receipts and payments attributable to investing and financing activities must be reported separately. lending activities. Equity investments are included from cash equivalents. In a statement of cash flows. The following statements are true about Cash and Cash equivalents except? a. b. Preferred shares acquired within a short period of their maturity and with a specified redemption date. The following statements are true about Cash and Cash equivalents except? a. In principle. and the maturities are short.lending activities. d. a. Cash management includes the investment of excess cash in cash equivalents 9. IAS 7 allows some netting of cash flows in limited circumstances. . investing activities. Financing activitiesd. _________ Comprises cash on hand and demand deposits a. proceeds from issuing equity instruments should be classified as cash inflows from a. Are the acquisition and disposal of long-term assets and other investments not included in cash equivalents a. c. 1. d. for example. financing activities. financing activities. 10. In a statement of cash flows. _________ are inflows and outflows of cash and cash equivalents a. Cash and Cash equivalents 6. the amounts are large. d. investing activities. 2. and equipment and other productive assets should generally be classified as cash inflows from a. interest payments to lenders and other creditors should be classified as cash outflows for a. Cash b. b. Investing activities c. c. Cash in bank 3. plant. In a statement of cash flows. 11. Cash on hand d. c.

II and III only c. The total amount of interest paid during a period is disclosed in the cash flow statement whether it has been recognized as an expense in the income statement or capitalized in accordance with the allowed alternative treatment in IAS 23. The following statements about interest and dividends in the statements of cash flows are correct. To disclose separately noncash investing and financing activities d. Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities II. b. cash receipts and payments from contracts held for dealing or trading purposes 14. Unrealised gains and losses arising from changes in foreign currency exchange rates are cash flows. I and II only b. a combination of the two d. Interest paid and interest and dividends received are usually classified as investing or financing activities cash flows for a financial institution. To provide relevant information about cash receipts and cash payments of an entity during a period b. plant and equipment. d. none 16. to assess the ability of the entity to pay dividends to stockholders 21. Cash inflows in the cash flow statement are a. III and IV only d. When accounting for an investment in an associate or a subsidiary accounted for by use of the equity or cost method. Both I and II d. Inflows of cash and cash equivalents b. an investor restricts its reporting in the cash flow statements to the cash flows between itself and the investor. IV. Cash flows from interest and dividends received and paid shall each be disclosed separately. the indirect method a. II only c. I only b. cash advances and loans made to other parties c. except a. cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date II. c. the direct method II. III. 19. An entity shall prepare a cash flow statements and shall present it as a. II and IV only c. The primary purpose of the cash flow statement is a. Outflows of cash and cash equivalents c. IAS 7 encouraged to report cash flows from operating activities using the a. Cash receipts from sales of property. Which of the following is considered as cash flows from operating activities a. None of these 17. intangibles and other long-term assets b. The following statements about foreign currency cash flows is correct. To help investors. except a. The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows c. b. Either I or II 15. Supporting schedule for amount appearing as cash and cash equivalents d. Interest paid and interest and dividends received may be classified as operating cash flows because they enter into the determination of profit or loss. Note to financial statements c. I and II only b. Inflows and outflows of cash and cash equivalents . 18. Integral part of the enterprise’s basic financial statements 22. Inflows and outflows of cash d. An entity shall report cash flows from operating activities using I.13. The placement of deposits with and withdrawal of deposits from other financial institution III. I and IV only 20. An entity shall not disclose the components of cash and cash equivalents a. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units shall be presented separately and classified as investing activities or financing activities. Cash advances and loans made to customers and the repayment of those advances and loans a. Cash flows arising from transactions in a foreign currency shall be recorded in an entity’ s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow. cash receipts from the repayment of advances and loans made to other parties d. creditors and other users to assess the entity’s ability to generate positive future net cash flows c. Supplementary financial statements b. indirect method c. Cash flows denominated in a foreign currency are reported in a manner consistent with IAS 21 The effects of Changes in Foreign Exchange Rates d. Which of the following cash flows arising from activities of a financial institution may be reported on a net basis I. Which of the following statements is/are incorrect about the statement of cash flows I. the direct method b. All of these d.

Preferred shares with specified redemption date and acquired three months before redemption 24. fees. An enterprise should prepare a cash flow statement and should present it as a. Cash payments to acquire equity instruments of other entities and interest in joint ventures are a. Cash inflows from financing activities c. Dividend payments to owners should be classified as cash outflows for a. 38. Cash outflows for financing activities d. Cash outflows for investing activities b. Financing activities 34. Extraordinary activities 36. Equity securities d. Be classified as financing activities b. Operating activities c. Operating activities c. Cash received from customers d. Investing activities b. Cash inflows from investing activities b. Cash inflows from financing activities c. Cash inflows from operating activities d. One-year BSP treasury bill b. Which can qualify as cash equivalents? a. Preferred shares with specified redemption date and acquired three months before redemption date d. Inflows and outflows of cash and cash equivalents c. Cash inflows from investing activities d. Integral part of the enterprise’s basic financial statements. d. Cash inflow from sale of equipment b. Cash inflows from financing activities d. Cash payments to acquire equity or debt instruments of other enterprises are a. Cash outflows for investing activities b. Cash flows arising from income taxes should be separately disclosed and should be classified as a. Outflows of cash and cash equivalents 28. Net cash flow from operating activities c. 27. Be classified as operating activities c. Cash inflows from investing activities b. As an outflow from operating activities c. An entity may hold securities for dealing or trading purposes. Cash inflows from financing activities 26. Investing activities d. Supplementary financial statement. Cash receipts from issuing shares and other equity instruments are a. Six-month certificate of deposit c. The company’s policy is to treat as cash equivalents all highly liquid investments with an original maturity of three months or less when purchased. Six-month money market placements c. XYZ Company purchased a three-month Treasury bill. Ordinary activities 35. Cash inflows from investing activities 31. As an outflow from financing activities d. Note to financial statements. Cash receipts from royalties.23. Which can qualify as cash equivalent? a. Cash flows in the cash flow statement are a. Cash payments to owners to acquire or redeem the enterprise’s shares are a. Classified as operating activities c. Borrowing activities b. Financing activities b. Cash outflow for dividend payment . Classified as investing activities d. Cash outflows for investing activities 30. b. Cash outflows for operating activities c. One-year treasury bills maturing in three months from balance sheet date. Inflows and outflows of cash b. Cash outflows for financing activities 32. Cash outflows for investing activities 33. As an outflow from investing activities b. The aggregate cash flows from acquisition and disposal of a subsidiary should a. Cash flows arising from the purchase and sale of dealing or trading securities are a. Inflows of cash and cash equivalents d. Which of the following cash flows does not appear in a cash flow statement using indirect method? a. Be classified as investing activities d. Lending activities d. Not be reported 37. c. Supporting schedule for the amount appearing as cash and cash equivalent. Cash outflows for financing activities c. Not reported in the cash flow statement 25. commissions and other revenue are a. Cash outflows from investing activities b. Cash inflows from investing activities d. Operating activities c. Equity securities b. Not reported 29. Interest payments to lenders and other creditors should be classified as cash outflows for a. Cash outflows for financing activities c. Financing activities d. How should this purchase be reported in the cash flow statement? a. Classified as financing activities b.

Under the direct method. An enterprise’s accounts receivable decreased from beginning to the end of the year. b. As an outflow equal to the 2005 principal and interest payments c. b. In investing activities as a reduction of the cash inflow from the sale b. As an inflow equal to the present value of future lease payments at July 1. Salary expense less the increase in wages payable d. if used equipment is sold at a gain. Salary expense plus the increase in wages payable c. Plus both the gain and the amount of tax attributable to the gain d. A company’s wages payable increased from the beginning to the end of the year. Sales revenue minus the decrease in accounts receivable d. How should a gain from the sale of used equipment for cash be reported in a cash flow statement using the indirect method? a. Sales revenue plus the decrease in accounts receivable c. In a cash flow statement. Operating activities d. In the cash flow statement using the direct method. The same as salary expense 48. Which of the following information would be added back to the net income when reporting cash flow from operating activities using the indirect method? a. Bank overdrafts are a. On July 1. the amount shown as a cash flow from investing activities equals the carrying amount of the equipment a. Acquisition and disposal of long-term assets and other investments not included in cash equivalents. How should ABC report the effect of the lease payments in the financing activities section of its 2005 cash flow statement? a. the cash collected from customers would be a. Activities that result in changes in the size and composition of equity capital and borrowings of the enterprise. ABC paid the monthly lease payments when due. In operating activities as an addition to income 42. the amount shown as a cash flow from investing activities equals the carrying amount of the equipment a. Plus the gain and less the amount of tax attributable to the gain c. In a cash flow statement using the indirect approach for operating activities. With no addition or subtraction 44. The same as sales revenue 49. Investing activities c. Cash flow per share d. 2005 ABC Company signed a 20-year building lease that it reported as a finance lease. 46. Sales revenue plus accounts receivable at the beginning b. Deduction from net income 40. Dividends paid on preferred stock 41. Addition to net income d. Financing activities 47. Component of cash and cash equivalents if they are repayable on demand and the bank balance often fluctuates from positive to negative. Outflow of cash c. Less both the loss and the amount of tax attributable to the loss c. Bond discount amortization . 2005 less the 2005 principal and interest payments b. In investment activities as a cash outflow c. Interest paid. Excess of treasury stock acquisition cost over sales proceeds b. Financing activities are the a. Principal revenue-producing activities of the enterprise. Which should not be disclosed in the cash flow statement using the indirect method? a. Less the loss d. d. With no addition or subtraction 43. c. Borrowings and subsequent payments of the borrowings only. Less the loss and plus the amount of tax attributable to the loss b. cash paid for wages would be a. Inflow and outflow of cash b. In operating activities as a deduction from income d. Salary expense plus beginning wages payable b. Income taxes paid c. an increase in inventory should be presented as a. if used equipment is sold at loss. Plus the gain b. In a cash flow statement. As an outflow equal to the 2005 principal payments only d.39. net of amounts capitalized b. The lease payments should not be reported in the financing activities section 45.

The American standard requires dividends paid to be classified as an operating activity.c. B 30. c. Salary expense plus wages payable at the beginning of the year. P. 16c) 13. C 31. C 19. B 6. Issue of common stock for cash d. Salary expense plus the increase in wages payable from the beginning to the end of the year d. A 34. D 24. A (PAS 7. A 36.33) 11. Cash equivalents would not include short-term investments in a. B 33. A 16. D 15. 16a) 10. Which of the following information should be disclosed as supplemental information in the cash flow statement? a. Which of the following is true? a. D 29. END ANSWER KEY: 1. A 5. Cash outflows on the maintenance of the asset 52. the cash paid for wages would be a. B . if wages payable increased during the year. C 26. Cash flow per share b. P. C 20. D 8. C 35. A 32. B 3. B 28. The same as salary expense b. D (PAS 7. Extraordinary gain 50. The American standard requires interest paid to be classified as financing activity. A 21. Salary expense less the increase in wages payable from the beginning to the end of the year. P. When calculating the estimates of future cash flows for impairment. 53. A 27. Certificates of deposit 54. Cash flows from the sale of assets produced by the assets b. D 23. In cash flow statement prepared using the direct method. 17a) 12. Available for sale securities c. P. Money market funds b. D 4. Cash flows from disposal c. D 14. The American standard allows dividends paid to be classified as an operating activity or as a financing activity d. The international accounting standard allows dividends paid to be classified as an operating activity or as a financing activity. A 25. b. C 9. which of the following cash flows should not be included? a. Purchase of treasury stock for cash at more than par value 51. Income tax payments d. C 7. D 18. Commercial paper d. D 22. C 17. A 2. B (PAS 7. Bond premium amortization d. Conversion of debt to equity c. c. C (PAS 7.

B 50. B 52. C 44. B 39. A 43. B 51. C 48.37. B 49. C 45. END . C 42. D 55. B 54. A 46. D 40. C 41. A 47. C 38. D 53.