Chapter 4- PAS 7 Statement of Cash Flows SUMMARY KEY POINTS Entities are required to prepare a statement of cash flows and shall present it as an integral part of its financial statements for each period for whi i : ch financial statements are presented. * Cash flows are classified and presented into operati i i financing activities. ing activities, investing activities or . eee ee een liquid investments that are readily convertible to Sear which are subject to an insignificant risk of changes in value © Enti sh flows from operating activities using either the direct method or indirect method. + Entities shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities. * 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 flows from interest and dividends received arid paid shall each be disclosed separately. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities. ‘* 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. Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. © Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities: © Aneentity shall disclose the components of cash and cash equivalents and shall present 2 reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position. Exercise 4-1. Identification. 1. These are the principal revenue-prod not investing or financing activities. events that enter into the determination of profit or loss. Ogerahng Arve Jucing activities of the entity and. other activities that are They generally result from the transactions and other 108Chapter 4 ~ PAS 7 ~ Statement of Cash Flows 2. These are the activities related to the acquisition and disposal of long-term assets and other Investments not included In cash equivalents. (Yiu HN AcAivittes 3. These are activities that result in changes In the size and composition of the contributed equity and borrowings of the entity. —% agaciag Wc Caw 4 These are short-term, highly liquid A A ter readily convertible to known qywoluMS amounts of cash and which are subject to an Insignificant risk of changes in value 5. It is a financial statement that report cash flows during the period classified by operating, investing and financing activitles. yg), flows Exercise 4-2. Multiple Cholce Questions Choose the best answer. 1. Which of the following statements is false? : 7 aba. Bank borrowings are generally considered to be financing activities Xu, Bank overdrafts can be included as a component of cash and cash equivalents a Cash flows include movements between items that constitute cash or cash SGuivalents because these components are part of its operating, investing and financing activities yg. The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities ‘e. _Asingle transaction may include cash flows that are classified differently. 2. Which of the following statements is false? a Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity b, Cash flows from operating activities generally result from the transactions and other events that enter into the determination of profit or loss. C. 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 etween the functional currency and the foreign currency at the date of the cash flow © The cash flows of a foreign subsidiary shall be translated at the exchange rates reen the functional currency and the foreign currency at the end of the reporting perio ye. Unrealized gains and losses arising from changes in foreign currency exchange rates are not cash flows 3. . Which of the following statements is false? The aggregate cash flows arisin, 109Chapter 4 ~ PAS 7 Statement of Cash Flows . Cash f i we 4 - — Beet changes in ownership interests in a subsidiary that do not result eee e classified as cash flows from financing activities y "sting and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows 2 4. Which of the foll ir See rowing does Not pertain to a Statement of Cash Flows? een nt ce users to evaluate the changes in net assets of an entity, ne ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different entities. . comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and events © presents the results of a company’s operations for a given reporting period and provides Yrformation regarding risk, financial flexibility, return on investment and operating capabilities involved in a business die. useful in checking the accuracy of past assessments of future cash flows and in examining ‘the relationship between profitability and net cash flow and the impact of changing prices. 5. Which of the following is not correct concerning cash equivalents? a. short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value 4b. held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. cash equivalents generally include equity investments 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 6. Which of the following is not considered as a cash flow from operating activities? 2. cash receipts from the sale of goods and the rendering of services b. cash receipts from royalties, fees, commissions and other revenue c. _ cash payments to suppliers for goods and services 4. cash payments to and on behalf of employees §) Cosh flows relating to the sale of an item of plant that gives rise to a gain of loss that is luded in recognized profit or loss e Which of the following is not considered as a cash flow from operating activities? a) cash receipts from sales of property, plant and equipment, intangibles and other long- ferm assets (anu ‘ 4) 110Chapter 4 = PAS 7 ~ Statement of Cash Flows b. Cash payments to manufacture or acquire assets held for rental to others ang subsequently held for sale Cash receipts from rents and subsequent sales of assets held for rental to others d. cash flows arising from the purchase and sale of dealing or trading securities e. cash advances and loans made by financial institutions 8. Which of the following is not considered as a cash flow from investing activities? a cash payments to acquire property, plant and equipment, intangibles and other long-term assets b. payments relating to capitalized development costs and self-constructed property, plant and equipment © cash payments or refunds of income taxes (1 Ay cash payments to acquire equity or debt instruments of other entities and interests in joint ventures e. cash advances and loans made to other parties 9. Which is not true? aQi¥a.__ When a contract's accounted for as a hedge of an identifiable postion the cash flows of © contract are classified in the same manner as the cash flows of the position being hedged (* Entities are required to report cash flows from operating activities using the direct thod a c. Cash flows from investing and financing activities are to be generally reported at gross {vw ‘amounts. kd. Cash flows arising from transactions in a foreign currency shall be recorded in an entitys 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 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 10. Which is not true? Ra. Unrealized gains and losses arising from changes in foreign currency exchange rates are not cash flows The effect of exchange rate changes on cash and cash equivalents held or due ina foreign irrency is not reported in the statement of cash flows Interest paid and interest and dividends received are usually classified as operating cash ie for a financial institution. \td_ Interest paid can be classified alternatively as operating and financing cash flows yl Interest and dividends received can be classified alternatively as operating and investing sh flows. qtChapter 4 — PAS 7~ Statement of Cash Flows 411, Which of the following transactions affects cash and cash equivalents? a the ai ae quisition of assets either by assuming directly related liabilities or by means of a b: the acquisition of an entity by means of an equity issue the conversion of debt to equity recognition of depreciation and amortization none of the above 12. Which is not among the required disclosures of PAS 7? > 3, __disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes, b. components of cash and cash equivalents and shall present _ areconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position. d. the amount of significant cash and cash equivalent balances held by the entity that ¢ not available for use by the group. i The aggregate amount of cash flows that represent increases in operating capacity (W fparately from those cash flows that are required to maintain operating capacity pc nattih repayment of a long-term loan comprising repayment of the principal amount and interest due to the date on the loan be treated in a statement of cash flows? 4 Geonong a, The repayment of the principal portion of the loan is a cash flow belonging in the investing attivities section; the interest payment belongs either in the operating activities section or the "F financing activities section peer 14) b. The repayment of the principal portion of the loan is a cash flow belongingin the investing (* activities section; the interest payment belongs either in the operating activities section or the investing activities section ¢._ The repayment of the principal portion of the loan is a cash flow belonging in the investing activities section; the interest payment belongs either in the operating activities section (PAS 7 does not permit any alternatives incase of interest payments) dq. The repayment of the principal portion of the loan is a cash flow belonging in the investing activities section; the interest payment should be netted against interest received on bank deposits, and the net amount should be disclosed in the operating activities section wok gong He choices 14, Which of the following information should be disclosed in the summary of significant accounting policies?‘ a. Refinancing of debt subsequent to the balance sheet date. Guarantees of indebtedness of others. Criteria for determining which investments are treated as cash equivalents ‘Adequacy of pension plan assets relative to vested benefits 112Chapter 4 — PAS 7~ Statement of Cash Flows 15. For IFRS purposes, cash advances and loans from bank overdrafts should be reported on the statement of cash flows as Operating activities. Investing activities. c. Financing activities. d. Other significant noncash activities. 16. Under IFRS, the statement of cash flows may be presented on the Direct Basis Indirect Basis Yes ust Yes Yes No a No Yes d. No No epts payment partly in equity shares and 17. An entity purchases a building and the seller acc should be treated in the statement of cash partly in debentures of the entity. This transaction flows as follows: a The purchase of the building should be investing cash out and the debentures as financing cash outflows. b The purchase of the building should be investing cash outflow and the issuance of i as financing cash outflows while the issuance of shares as investing cash outflow. itflow and the issuance of shares This does not belong in a cash flow statement and should be disclosed only in the notes 6 the financial statements. d. Ignore the transaction totally since it is a noncash transaction. No mention is required in either the cash flow statement or anywhere else in the financial statements. 18. An entity (other than a financial institution) receives dividends from its investment in shares. How should it disclose the dividends received in the statement of cash flows prepared under PAS 7? Operating cash inflow 6) Either as operating cash inflow or as investing cash inflow Either as operating cash inflow or as financing cash inflow d. _ Asanadjustment in the operating activities section of the cash flow because it is included in thé net income for the year and as a cash inflow in the fi inancing acti ch ee 8 activities section of the cas! 19, How should gain on the sale of an office buildin ig owned if statement of cash flows? by the entity be presented in 2 113Chapter 4 ~ PAS 7~ Statement of Cash Flows a. AS an inflow in the investing activities s, S peemanes ‘ction of the cash flow because it pertains to a es ici As _ inflow in the financing activities section of the statement of cash flows because the building was constructed with a long-term loan from a bank that needs to be repaid from the sale proceeds. As an adjustment to the net income in the operating activities section of the statement cash flows prepared under the indirect method, 4. _ Added to the sale proceeds and presented in the investing activities of the statement of cash flows 20. How should an unrealized on foreign currency translation be presented ina statement of cash flows? | a. Asan iriflow in the financing activities section of the statement of cash flows because it arises from a foreign currency translation. b. _Itshould be ignored for the purposes of the statement of cash flows as it is an unrealized gain. ¢. __Ittshould be ignored for the purposes of the statement of cash flows as it is an unrealized gain but it should be disclosed in the notes to the financial statements by way of abundant precaution ‘As an adjustment to the net income in the operating activities section of the statement of cash Is 21. To achieve a reasonably objective basis, financial fore- casts and projections should be prepared i . In accordance with GAAP. \ M. Using information that is in accordance with the plans of the entity. Mm. With due professional care. land Ill Mand Il. 1,11, and IL land Il. Bee 22. Which of the following is false?“ [) Prospective financial information may be prepared for general or limited users The responsible party is the only limited user. The financial projection may contain assumptions not necessarily expected to occur. The financial projection may be expressed as a range of dollars. ©» ao 23. Prospective financial information is defined as a. Any financial information about the past, present, or future: b. Any financial information about the present or future. 114Chapter 4 = PAS 7~ Statement of Cash Flows Any financial Information about the future related to the day-to-day operations, Any financial information about the future. Exercise 4-3, Identification, Identify whether the following transactions result in Operating Inflow (Ol), Operating Outflow (00), Investing Inflow (11), Investing Outflow (10), Financing Inflow (Fi), Financing Outflow (Fo), or Non-Cash Activity (NCA), NUA3. 104. rs 6. 10. 11. 12, oa. 0014. 1015. Olis. 17 18, 19, 20. 21, \\ 22. FL23. 124. (Os. Returns on loans (interest) Ol | (l Sale of equity instruments (not!held for trading) of other entities and from returns of investment in those instruments | Exchange of noncash assets or liabilities for other noncash assets or liabilities Loans made and acquisition of other entities’ debt instruments Not-for-profits’ donor-restricted cash that is limited to long-term purposes Payment of dividends FO Payments of interest OO lro Sale of loans, debt, or equity instruments carried in trading portfolio Ol Sale of plant and equipment || Acquiring an asset through a finance lease (WUA Conversion of debt to equity (1A Payments of taxes ()O Payments to or on behalf of employees Purchase of loans, debt, or equity instruments carried in trading portfolio Purchase of plant and equipment Receipts from sale of goods or rendering of services Repayment of debt principal, including capital lease obligations F () . Repurchase of company’s shares FO |. Returns on equity securities (dividends) Q1 \n Issuance of stock to acquire assets y\(JA Payments to suppliers for goods and services OO Principal collections from loans and sales of other entities’ debt instruments Proceeds from issuing debt (short-term or long-term) Proceeds from issuing share capital Purchase of equity instruments (not held for trading) of other entities. 115