STATEMENT OF CASH FLOWS

Question 63-1
Define a statement of cash flows.

ANSWER 63-1
A statement of cash flows is a basic component of the financial statements which summarizes the operating,
investing and financing activities of an entity.

The primary purpose of a statement of cash flows is to provide relevant information about cash receipts and cash
payments of an entity during a period.

Question 63-2
What are cash equivalents?

ANSWER 63-2
Cash equivalents are 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.

PAS7, paragraph 7, provides that an investment normally qualifies as a cash equivalent only when it has a short
maturity of three months or less from the date of acquisition.

In other words, the investment must be acquired three months or less before the date of maturity.

Question 63-3
What are operating activities?

ANSWER 63-3
Operating activities are the cash flows derived primarily from the principal revenue producing activities of the
entity.

Operating activities generally result from the cash effects of transactions and other events that enter into the
determination of net income or loss.

Examples of cash flows from operating activities

a) Cash receipts form 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 for 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 they can be specifically identified with financing and
investing activities.

PAS7, paragraph 15, provides that entity may hold securities and loans for dealing or trading purposes. These are
similar to inventory acquired specifically for resale.

Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating
activities.
QUESTION 63-4
What are investing activities?

ANSWER 63-4
Investing activities are the cash flows derived from the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
As simple guide, investing activities are the cash effects if transactions involving non-operating assets, such as
investments, property, plant and equipment, intangible assets and other noncurrent assets.
Examples of cash flows from investing activities
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 and interest in joint venture
d Cash receipts from sales of equity or debt instruments of other entities and interest in joint venture
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

QUESTION 63-5
What are financing activities?

ANSWER 63-5
Financing activities are the cash flows derived from equity capital and borrowings of the entity.
Financing activities are the cash flows that results from transactions between the entity and its owners (equity
financing) and between the entity and its creditors (debt financing).
As a simple guide, financing activities include the cash flows from transactions involving "non-trade liabilities" and
"equity".
Examples of cash flows from financing activities
a. Cash receipts from issuing ordinary and preference shares or other equity instruments
b. Cash payments to owners to acquire or redeem the entity's shares, for example, payment for 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 a lessee for the reduction of the outstanding liability relating to a finance lease

QUESTION 63-6
What is the treatment of interest paid and interest received?

ANSWER 63-6
PAS 7, paragraph 33, provides that interest paid and interest received are classified as operating cash flow because
they enter into the determination of net income.
Alternatively, interest paid may be classified as financing cash flow because it is a cost of obtaining financial
resources.
Interest received may be classified as investing cash flow because it is a return on investment.
For financial institution, interest paid and interest received are usually classified as operating cash flows.
Cash flows from interest paid and interest received shall be classified in a consistent manner from period to period
as either operating, investing or financing activities.

QUESTION 63-7
What is the treatment of dividend paid and dividend received?

ANSWER 63-7
PAS 7, paragraph 34, provides that dividend paid is classified as financing cash flows because it is a cost obtaining
financial resources.
Alternatively, 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 flow.
PAS 7, paragraph 33 provides that dividend received is 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.
The classification of dividend received and dividend paid as either operating, investing or financing activity shall be
made on a consistent basis from period to period.

QUESTION 63-8
How are the significant noncash transactions reported in the statement of cash flows?

ANSWER 63-8
PAS 7, paragraph 43, provides that investing and financing transactions that do not require use of cash or cash
equivalents shall be excluded from the statement of cash flows.
Such transactions shall be disclosed elsewhere in the financial statements either in the notes to financial statements
or in a separate schedule.
Examples of noncash transactions
a. Acquisition of noncurrent asset either by assuming directly related liability or by means of a finance lease
b. Acquisition of non-current assets by means of issuing share capital or bonds payable
c. Conversion of debt to equity, for example conversion of bonds payable to share capital
d. Conversion of preference share to ordinary share

QUESTION 63-9
Explain the direct method of determining the net cash flow from operating activities.

ANSWER 63-9
An entity shall report cash flows from operating activities using either the direct method or indirect method.
The direct method shows in detail or itemizes the major classes of gross cash receipts and gross cash payments.
The cash receipts are listed one by one, the cash payments are listed one by one, and the difference represents the net
cash flow from operating activities.
In essence, the direct method is the "cash basis" income statement.

QUESTIONS 63-10
Explain the "indirect method" of determining the net cash flow from operating activities.

ANSWER 63-10
The indirect method means that net income or loss is adjusted for the following:
a. The effects of transactions of noncash nature.
b. Any deferrals or accruals of past or future operating cash receipts and payments.
c. The items of income and expense associated with investing and financing.
The guidelines that may be used in adjusting the accrual basis net income to cash basis net income under the indirect
method are:
1. All increases in trade noncash assets are deducted from net income.
2. All decreases in trade noncash current assets are added back to net income.
3. All increases in trade current liabilities are added back to net income.
4. All decreases in trade current liabilities are deducted back to net income.
5. Depreciation, amortization and other noncash expenses are added back to net income.
6. Any gain of disposal of property is deducted from net income because it is a non-operating item.
7. Any loss on disposal of property is added back to net income because it is a non-operating item.

QUESTION 63-11 Multiple choice ( PAS 7 )

1. The primary purpose of a statement of cash flows is to provide relevant information about
a. Difference between net income and associated cash receipts and disbursements
b. An entity's ability to generate positive net cash flows
c. The cash receipts and cash disbursements of an entity during a period
d. An entity's ability to meet cash operating needs

ANSWER: c

2. Cash receipts from royalties and commissions are

a. Cash outflows for operating activities
b. Cash inflows from operating activities
c. Cash inflows from investing activities
d. Cash outflows for financing activities

ANSWER: b

3. Cash flows arising from trading securities are

a. Classified as operating activities
b. Classified as investing activities
c. Classified as financing activities
d. Not reported in the cash flow statement

ANSWER: a

4. Cash payments to acquire equity instruments are

a. Cash outflows for financing activities
b. Cash inflows from investing activities
c. Cash outflows for investing activities
d. Cash inflows for financing activities

ANSWER: c

5. 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

ANSWER: c

6. Interest payments to lenders are classified as

a. Operating activities
b. Borrowing activities
c. Lending activities
d. Financing activities

ANSWER: a

7. Dividend payments to shareholders are classified as

a. Cash outflows for investing activities
b. Cash inflows from investing activities
c. Cash inflows from financing activities
d. Cash outflows for financing activities
ANSWER: d

8. Interest received and dividend received may be classified alternatively as cash flow from
a. Operating activities
b. Investing activities
c. Financing activities
d. Revenue activities

ANSWER: b

9. 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 equivalents

ANSWER: d

10. 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

ANSWER: a

QUESTION 63-12 Multiple choice (IFRS)

1. Which of the following shall be presented under cash flows from investing activities?
a. Employee costs
b. Property revaluation
c. Redemption of debentures
d. Development costs capitalized in the period

ANSWER: d

2. All of the following can be classified as cash and cash equivalents, except
a. Redeemable preference shares acquired and due in 60 days
b. Treasury bills due for repayment in 90 days
c. Equity investments d. A bank overdraft

ANSWER: c

3. Which classification of the cash flow arising from the proceeds from an earthquake disaster settlement would be
most appropriate?
a. Cash flows from operating activities
b. Cash flows from investing activities
c. Cash flows from financing activities
d. Does not appear in the statement of cash flows

ANSWER: a
4. An entity purchased a building and the seller accepted payment partly in equity shares and partly in debentures of
the entity. The transaction shall be treated in the statement of cash flows as which of the following?
a. The purchase of the building is investing cash outflow and the issuance of shares and debentures are financing
cash inflows.
b. The purchase of the building is investing cash outflow and the issuance of debentures is financing cash inflow
while the issuance of shares is investing cash inflow.
c. The transaction does not belong in a statement of cash flows and shall be disclosed inly in the notes to financial
statements.
d. The transaction should be ignored totally since it is a noncash transaction.

ANSWER: c

5. Under IFRS, an entity can report finance costs 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

ANSWER: b

6. Under IFRS, the dividend received from share investments can be classified as
a. Either an operating activity or a financing activity
b. Either an operating activity or investing activity
c. Only as an investing activity
d. Only an operating activity

ANSWER: b

7. Cash advances and loans from bank overdraft should reported in the statement of cash flows as
a. Operating activities
b. Investing activities
c. Financing activities
d. Other significant noncash activities

ANSWER: a

8. How should repayment of a long-term loan comprising repayment of the principal amount and interest due to date
be treated in a statement of cash flows?
a. The repayment of the principal loan is an investing cash flow and the interest payment is either an operating cash
flow or a financing cash flow.
b. The repayment of the principal loan is a financing cash flow and the interest payment is either an operating cash
flow or a financing cash flow.
c. The repayment of the principal loan is financing cash flow and the interest payment is either an operating cash
flow or a investing cash flow.
d. The repayment of the principal loan is a financing cash flow and the interest payment is netted against interest
received on bank deposits and the net amount of interest o shown as operating cash flow.

ANSWER: b
QUESTION 63-13 Multiple choice (AICPA Adapted)

1. How should a gain from sale of equipment for cash be reported in a statement of cash flow using the indirect
method?
a. In investing activities as a reduction of the cash inflow from the sale
b. In investing activities as a cash flow
c. In operating activities as a deduction from income
d. In operating activities as an addition to income

ANSWER: c

2. How should a loss on sale of machinery be presented in a statement of cash flows using direct method?
a. A deduction from net income
b. An addition to net income
c. An inflow and outflow of cash
d. An outflow of cash

ANSWER: b

3. In a statement of cash flows using indirect approach for operating activities, an increase in inventory is presented
as
a. Outflow of cash
b. Inflow and outflow of cash
c. Addition to net income
d. Deduction from net income

ANSWER: d

4. Supplemental disclosures required only when the statement of cash flows is prepared using the indirect method
include
a. A schedule reconciling net income with net cash flows from operating activities
b. Amounts paid for interest and taxes
c. Amounts deducted for depreciation and amortization
d. Significant noncash investing and financing activities

ANSWER: b

5. Which of the following should not be disclosed in the statement of cash flows using the indirect method?
a. Interest paid
b. Income taxes paid
c. Cash flow per share
d. Dividends paid on preference shares

ANSWER: c

6. At the beginning of the current year, an entity sold used equipment for a cash amount equaling its carrying
amount for both look and tax purposes. During the year, the entity replaced the equipment by paying cash and
signing a note payable for new equipment. The cash paid for the new equipment exceeded the cash received for the
old equipment. How should these equipment transactions be reported in the entity’s statement of cash flows?
a. Cash outflow equal to the cash paid less the cash received
b. Cash outflow equal to the cash paid and note payable less the cash received
c. Cash inflow equal to the cash received and a cash outflow equal to the cash paid and note payable
d. Cash inflow equal to the cash received and a cash outflow equal to the cash paid

ANSWER: d

7. In a statement of cash flows, which of the following should be reported as a cash flow from financing activities?
a. Payment to retire mortgage note
b. Interest payment on mortgage note
c. Dividend payment
d. Payment to retire mortgage note and dividend payment

ANSWER: d

8. At the beginning of the current year, an entity signed a building lease that it reported as a finance lease. The entity
paid the monthly lease payment when due. How should the entity report the effect of the lease payment in the
financing activities section of the statement of cash flows?
a. An inflow equal to the present value of future lease payment at the beginning of the year less principal and
interest payment
b. An outflow equal to the principal and interest payment on the lease
c. An outflow equal to the principal payment only
d. The lease payment should not be reported in the financing activities section.

ANSWER: c

QUESTION 63-14 Multiple choice (AICPA Adapted)

1. When an entity purchased a three-month treasury bill, how would the purchase be treated in preparing the
statement of cash flows?

a. Not reported
b. An outflow for financing activities
c. An outflow for lending activities
d. An outflow for investing activities

2. In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash flow from investing
activities equals the carrying amount of the equipment.

a. Plus the gain

b. Plus the gain and less the amount of tax attributable to the gain
c. Plus both the gain and the amount of tax attributable to the gain
d. With no addition or subtraction

3. In a statement of cash flows, if used equipment is loss at a gain, the amount shown as a cash flow from investing
activities equals the carrying amount of the equipment.

a. Less the loss and the amount of tax attributable to the loss
b. Less both the loss and the amount of tax attributable to the loss
c. Less the loss
d. With no addition or subtraction

4. In a statement of cash flow, which of the following would increase reported cash flows from operating activities
using the direct method?
a. Dividends received from investments
b. Gain on sale of equipment
c. Gain on early retirement of bonds
d. Change from straight line to accelerated depreciation

5. Dividends received from an equity investee shall be presented in the statement of cash flows as

a. Deduction from cash flows from operating activities

b. Addition to cash flows from investing activities
c. Addition to cash flows from operating activities
d. Deduction from cash flows from investing activities

6. An entity’s wages payable increased from the beginning to the end of the year. In the statement of cash flows in
which the operating activities section is prepared under the direct method, the cash paid of wages would be

a. Salary expense plus wages payable at the beginning of the year

b. Salary expense plus the increase in wages payable
c. Salary expense less the increase in wages payable
d. The same as salary expense

7. An entity’s accounts receivable decreased from the beginning to the end of the year. In the statement of cash
flows, the cash collected from customers would be

a. Sales revenue plus accounts receivable at the beginning of the year

b. Sales revenue plus the decreased in accounts receivable
c. Sales revenue less the decrease in accounts receivable
d. The same as sales revenue

8. In a statement of cash flows using direct method, a decreased in prepaid expense is

a. Reported as an outflow and inflow of cash

b. Reported as an outflow of cash
c. Deducted from the net income
d. Added to net income

9. In a statement of cash flows, depreciation is treated as an adjustment to reported net earnings because
depreciation

a. Is a direct source of cash

b. Reduces reported net earnings but does not involve an outflow of cash
c. Reduces reported net earnings and involves an inflow of cash
d. Is an inflow of cash to a reserve account for replacement of assets

10. The preparation of the statement of cash flows using the indirect method involves all of the following except
determining

a. Cash provided by operation

b. Cash flows in investing and financing activities
c. Change in cash and cash equivalents during the period
d. Cash collections from customers during the period
ANSWER 63-14

1. a 6. c
2. a 7. b
3. c 8. d
4. a 9. b
5. c 10. d
QUESTION 63-15 Multiple Choice (IAA)

1. When preparing a statement of cash flow using the indirect method, the amortization of patent is reported
as

a. Increase in cash flows from investing activities.

b. Reduction of cash flows from investing activities
c. Increase of cash flows from operating activities.
d. Reduction of cash flows from operating activities.

2. When preparing a statement of cash flows using direct method, the amortization of goodwill is

a. Shown as an increase in cash flows from operating activities.

b. Shown as reduction in cash flows from operating activities.
c. Included with supplemental disclosure of noncash transactions.
d. Not reported in the statement of cash flows or related disclosure.

3. The amortization of a bond discount related to long-term debt is presented in the statement of cash flows
as

a. Inflow and outflow of cash

b. Outflow of cash
c. Deduction from net income
d. Addition to net income

4. The amortization of a bond premium related to long-term debt is presented in the statement of cash flows
as
a. A positive adjustment to net income in determining cash flows from operating activities.
b. A use of cash is determining cash flows from investing activities.
c. A source of cash in determining cash flows from investing activities.
d. A negative adjustment to net income in determining cash flows from operating activities.

5. Which statement about the method of preparing the statement of cash flows is true?

a. The indirect method starts with income before income tax.

b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement of cash flows.
d. All of these statements are true.

6. Which of the following is not disclosed in the statement of cash flows prepared under the direct method?
a. The major classes of gross cash receipts and gross cash payments.
b. The amount of income taxes paid.
c. A reconciliation of net income to net cash flow from operations.
d. A reconciliation of ending retained earnings to net cash flow from operations.

7. The statement of cash flows reports all of the following, except

a. The net change in cash for the period.
b. The cash flows from operations during the period.
c. The free cash flows generated during the period.
d. Investing transactions.

8. Free cash flow is calculated as net cash provided by operating activities less
a. Capital expenditures
b. Dividends and depreciation
c. Capital expenditures and dividends
d. Capital expenditures and depreciation

ANSWER 63-15
1. c 5. c
2. d 6. d
3. d 7. c
4. d 8. c

QUESTION 63-16 Multiple choice (IAA)

1. Cash equivalents are

a. Treasury bills and money market funds.

b. Investments with original maturities of three months or less.
c. Readily convertible to known amount of cash.
d. All of these are features of cash equivalents.

2. All of the following could potentially be classified as either operating or investing cash flow, except

a. Interest received
b. Dividend received
c. Taxes paid specifically identified with investing
d. Dividend paid
3. Making and collecting loans are

a. Operating activities
b. Investing activities
c. Financing activities
d. Liquidity activities

4. The statements of cash flows typically would not disclose the effects of

a. Ordinary shares issued for cash.

b. Share dividends declared.
c. Cash dividends paid.
d. The purchase for cash immediate retirement of treasury shares.

5. A cash dividend that is declared during an accounting period, to be paid in the next accounting period, is
presented in the statement of cash flows for the current period as

a. A use of cash from operating activities

b. A noncash transaction presented in a separate schedule
c. A use of cash from financing activities
d. A use of cash from investing activities

6. Sale of treasury shares would be classified as

a. Transfer activity
b. Operating activity
c. Investing activity
d. Financing activity

7. Which is not added to net income under the indirect method of preparing the statements of cash flows?

a. Increase in an accrued liability

b. Amortization of discount on bond payable
c. Loss on sale of operational asset
d. Increase in deferred tax asset
8. A change in unearned revenue would be classified into which of the following in the statement of cash
flows?

a. Operating cash flow

b. Investing cash flow
c. Financing cash flow
d. As an item reconciling earnings and operating cash flow

9. Deferred tax expense should be presented in a statement of cash flows using indirect approach as

a. Financing activity
b. Deduction from net income
c. Noncash financing and investing activity reported in separate schedule
d. Addition to net income

10. Noncash investing and financing activities are

a. Reported in the statement of cash flows only if the direct method is used.
b. Reported in the statement of cash flows only if the indirect method is used.
c. Disclosed in a note or separate schedule accompanying the statements of cash flows.
d. Not reported.

ANSWER 63-16

1. d 6. d
2. d 7. d
3. b 8. d
4. b 9. d
5. b 10. c