PAS 7 Statement of Cash Flows

Statement of cash flows

 A component of the financial statements which summarizes the operating, investing and financing activities of an
entity
 Provides information about the cash receipts and cash payments of an entity during a period.
 An entity shall prepare a statement of cash flows and present it an integral part of the financial statements are
presented.

Classification of cash flows

Cash flows are inflows and outflows of cash and cash equivalents
1. Operating Activities
2. Investing Activities
3. Financing Activities

Operating Activities are the cash flows derived primarily from the principal revenue producing activities of the entity. It
results from transactions and other events that enter into the determination of net income or loss.
a) Cash receipts from sale of goods and rendering of services
b) Cash receipts from royalties, rental, fees, commissions and other revenue
c) Cash payments to suppliers for goods and services
d) Cash payments to selling, administrative and other expenses
e) Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy
benefits
f) Cash payments or refunds of income taxes unless specifically identified with financing and investing activities
g) Cash receipts and payments for securities held for trading

Trading securities
 Cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities
 Cash advances and loans made by a financial institution are usually classifies as operating activities since they
relate to the main revenue producing activity of that entity

Investing Activities are the cash flows derived from the acquisition and disposal of long-term assets and other
investments not included in cash equivalents. It includes cash flow from transactions involving non-operating assets.
a) Cash payments to acquire property, plant and equipment, intangibles and other long-term assets
b) Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets
c) Cash payments to acquire equity or debt instruments of other entities (current and long-term investments)
d) Cash receipts from sales of equity or debt instruments of other entities
e) Cash advances and loans to other parties other than advances and loans made by financial institution
f) Cash receipts from repayment of advances and loans made to other parties
g) Cash payments for future contract, forward contract, option contract and swap contract
h) Cash receipts from future contract, forward contract, option contract and swap contract

Financing Activities are the cash flows derived from the equity capital and borrowings of the entity. It includes the cash
flows from transactions involving nontrade liabilities and equity of an entity.
a) Cash receipts from issuance of ordinary and preference shares
b) Cash payments to acquire treasury shares
c) Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other short or long term borrowings
d) Cash payments for amounts borrowed
e) Cash payments by lease for the reduction of the outstanding principal lease liability.
Cash flows that result from transactions:
 Between the entity and the owners – equity financing
 Between the entity and the creditors – debt financing
Cash payments to settle such obligations as trade accounts and notes payable, income tax payable, accrued expenses
are operating activities, not financing activities.
Noncash transactions
The statement of cash flows is strictly a cash concept. Noncash transactions are disclosed separately:
 Acquisition of asset by assuming directly related liability
 Acquisition of asset by issuing share capital
 Acquisition of asset by issuing bonds payable
 Conversion of bonds payable into share capital
 Conversion of preference shares into ordinary shares

Interest
 Interest paid and interest received shall be classified as operating cash flows because they enter into the
determination of net income or loss.
 Alternatively, interest paid may be classified as financing cash flow because it is a cost of obtaining financial
resources.
 Alternatively, interest received may be classified as investing cash flows because it is a return on investment.
 For a financial institution, interest paid and interest received are usually classified as operating cash flows.

Dividends
 Dividend received shall be classified as operating cash flow because it enters into the determination of net
income.
 Alternatively, dividend received may be classified as investing cash flow because it is a return on investment.
 Dividend paid shall be classified as financing cash flow because it is a cost of obtaining financial resources.
 Dividend paid may be classified as operating cash flow in order to assist users to determine the ability of the
entity to pay dividends out of operating cash flows.

Income taxes
 Cash flows arising from income taxes shall be separately disclosed as cash flows from operating activities unless
they can be specifically identified with investing and financing activities.
 Tax cash flows are often difficult to match to the originating underlying transaction, so most of the time all tax
cash flows are classified as arising from operating activities.

Problem 1
Lace Company provided the following information during the current year:

Dividend received 500,000

Dividend paid 1,000,000
Cash received from customers 9,000,000
Proceeds from issuing share capital 1,500,000
Interest received 200,000
Proceeds from sale of long term investments 2,000,000
Cash paid to suppliers and employees 6,000,000
Interest paid on long term debt 400,000
Income taxes paid 300,000
Cash balance, January 1 1,800,000

What is the net cash provided by operating activities?

Cash received from customers 9,000,000

Dividend received 500,000
Interest received 200,000
Cash paid to suppliers and employees (6,000,000)
Income taxes paid (300,000)
Interest paid on long term debt (400,000)
3,000,000
What is the net cash provided by investing activities?

Proceeds from sale of long term investments 2,000,000

What is the net asset provided by financing activities?

Proceeds from issuing share capital 1,500,000

Dividend paid (1,000,000)
500,000

What is the cash balance on December 31?

Net cash flow from operating activities 3,000,000

Net cash flow from investing activities 2,000,000
Net cash flow from financing activities 500,000
Cash balance, January 1 1,800,000
7,300,000

Problem 2
Star Company provided the following data for the preparation of statement of cash flows for the current year:

Cash balance, beginning 1,500,000

Cash paid to purchase inventory 7,800,000
Cash received from sale of trading securities 2,500,000
Cash paid for interest on bank loan 450,000
Cash paid to repay principal amount of bank loan 1,000,000
Cash collected from customers 10,000,000
Cash received from issuance of ordinary shares 1,200,000
Cash paid for dividend 2,000,000
Cash paid for income taxes 1,350,000
Cash paid to purchase trading securities 1,000,000

What is the net cash provided by operating activities?

What is the net cash used in financing activities?
What is the cash balance at year-end?

Problem 3
Fraulein Company had the following cash flows during the current year:

Cash receipts from insurance of ordinary shares 4,000,000

Cash receipts from customers 2,000,000
Cash receipts from dividends on long-term investments 300,000
Cash receipts rom repayment of loan made to another entity 2,200,000
Cash payments for wages and other operating expenses 1,200,000
Cash payments for insurance 100,000
Cash payments for dividends 200,000
Cash payments for taxes 400,000
Cash payment to purchase land 800,000
Cash balance – beginning 3,500,000

What is the net cash provided by operating activities?

Cash receipts from customers 2,000,000

Cash receipts from dividends on long-term investments 300,000
Cash payments for wages and other operating expenses (1,200,000)
Cash payments for insurance (100,000)
Cash payments for taxes (400,000)
600,000
What is the net cash provided by investing activities?
Cash receipts rom repayment of loan made to another entity 2,200,000
Cash payment to purchase land (800,000)
1,400,000

What is the net cash provided by financing activities?

Cash receipts from insurance of ordinary shares 4,000,000

Cash payments for dividends 200,000
3,800,000
What is the cash balance at year-end?

Cash balance – beginning 3,500,000

Net cash flow from operating activities 3600,000
Net cash flow from investing activities 1,400,000
Net cash flow from financing activities 3,800,000
9,300,000
Problem 4
On December 31, 2019, Kale Company had the following balances in the accounts maintained at First Bank:

Checking account #101 1,750,000

Checking account #201 (100,000)
Time deposit 250,000
Money market placement 1,000,000
90-day treasury bill, due February 28,2020 500,000
180-day treasury bill, due March 15, 2020 800,000

On December 31, 2019, what amount should be reported as cash and cash equivalents?

Time deposit 250,000

90-day treasury bill, due February 28,2020 500,000
Checking account #101 1,750,000
Checking account #201 (100,000)
2,400,000
Problem 5
Oakwood Company provided the following data for the year:

Cash balance, beginning of year 1,300,000

Cash flow from financing activities 1,000,000
Cash flow from operating activities 400,000
Cash flow from investing activities (1,500,000)
Total shareholders’ equity, beginning of year 2,000,000

What is the cash balance at the end of current year?

Cash flows from operating activities $400,000

Less: Cash used from investing activities ($1,500,000)

Add: Cash flows from financing activities $1,000,000

Add: Cash balance, beginning of the year $1,300,000

Cash balance at the end of the year $1,200,000

Problem 6
Alpha Company had the following activities during the current year:
  Acquired 2,000 shares as investment for P2,600,000
 Sold an investment for P3,500,000 when the carrying amount was P3,300,000
 Acquired a P5,000,000, 4-year certificate of deposit from a bank. During the year, interest of P375,000 was
paid to Alpha.
 Collected dividends of P120,000 on share investments.

In the statement of cash flows, what amount should be reported as net cash used in investing activities?
Purchase of investment (2600000)

sale of investment 3500000

Purchase of certificate of deposit (5000000)

Net cash used by investing activity -4100000

Problem 7
During the current year, Beta Company had the following activities related to financial operations:

Payment for the early extinguishment of long-term bonds payable 7,500,000

with carrying amount of P7,400,000
Payment in the current year of cash dividend declared in prior year 620,000
Carrying amount of convertible preference shares converted into ordinary shares 1,200,000
Proceeds from sale of treasury shares with carrying amount at cost P860,000 950,000

In the statement of cash flows for the current year, what amount should be reported as net cash used in financing
activities?

Payment on early extinguishment of bonds (7500000)

Dividend paid (620000)

Sale of treasury stock 950000

Cash used for financing activity -7170000

Problem 8
Faye Company provided the following data for the current year:

Proceeds from sale of equipment 100,000

Purchase of bond investment 1,800,000
Dividend declared 450,000
Dividend paid 380,000
Proceeds from sale of treasury shares 750,000

What is the net cash provided by financing activities?

Proceeds from sale of treasury shares 750,000

Dividend paid (380,000)
370,000

Problem 9
Kollar Company provided the following data for the current year:

Purchase of real estate for cash 5,500,000

Cash was borrowed from ban to purchase real estate 5,500,000
Sale of investment for cash 5,000,000
Dividend paid 6,000,000
Issuance of ordinary shares for cash 2,500,000
Purchase of patent for cash 1,250,000
Payment of bank loan 1,500,000
Issuance of bonds payable for cash 3,000,000

What is the net cash provided by financing activities?

Cash was borrowed from ban to purchase real estate 5,500,000

Dividend paid (6,000,000)
Issuance of ordinary shares for cash 2,500,000
Payment of bank loan (1,500,000)
Issuance of bonds payable for cash 3,000,000
3,500,000

What is the net cash used in investing activities?

Purchase of real estate for cash 5,500,000

Sale of investment for cash (5,000,000)
Purchase of patent for cash 1,250,000
1,750,000
Theories:
1. Cash payments to acquire equity investment are
a. Cash outflows for financing activities
b. Cash inflows from investing activities
c. Cash outflows for investing activities
d. Cash inflows from financing activities
2. Cash receipts from issuing shares are
a. Cash inflows from investing activities
b. Cash outflows for investing activities
c. Cash inflows from financing activities
d. Cash outflows for financing activities
3. Interest payments to lenders are classified as
a. Operating activities
b. Borrowing activities
c. Lending activities
d. Financing activities
4. Interest received is classified as cash flow from:
a. Operating activities 
b. Investing activities
c. Financing activities
d. Revenue activities
5. Bank overdrafts that are repayable on demand and the bank balance often fluctuates from positive to overdrawn shall be
classified as
a. Operating activities
b. Investing activities
c. Financing activities
d. Component of cash and cash equivalent
6. Cash advances and loans made by a financial institution are usually classified as
a. Operating activities
b. Investing activities
c. Financing activities
d. Component of cash and cash equivalent
7. Under IFRS, an entity can report interest paid on bank loan in the statement of cash flows
a. In operating activities
b. Either in operating activities or financing activities
c. In financing activities
d. In investing activities or financing activities
8. Under IFRS, the dividend received from shares investments can be classified as
 a. Either an operating activities or financing activities
b. Either an operating activities or investing activities
c. Only as an investing activity
d. Only an operating activity
9. Under IFRS, dividend paid can be classified as
a. Either an operating activities or financing activities
b. Either an operating activities or investing activities
c. Only as an investing activity
d. Only an operating activity
10. Which classification of the cash flow arising from the proceeds from an earthquake disaster settlement would be most
appropriate?
a. Cash flow from operating activities
b. Cash flow from investing activities
c. Cash flow from financing activities
d. Does not appear in the statement of cash flows