IAS 7 Statement of Cash Flows 2011: For Accounting Professionals

for Accounting Professionals
IAS 7 Statement of cash flows

2011
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2011 Updated
CONTENTS
1. INTRODUCTION
2. DEFINITIONS
3. PRESENTATION OF A CASH FLOW STATEMENT 7

4. REPORTING CASH FLOWS FROM OPERATING
ACTIVITIES
5. FOREIGN CURRENCY CASH FLOWS
14
17
8. MULTIPLE CHOICE QUESTIONS
Information about the cash flows of an undertaking is useful in

providing users with a basis to assess the ability to generate cash
(and cash equivalents) and the needs to utilise those cash flows.
Also required are the timing (and certainty) of their generation.
30
Scope
31
An undertaking should prepare a cash flow statement in

accordance with
9. ANSWERS TO MULTIPLE CHOICE QUESTIONS 36
Objective
Cash Flow Statements are the subject of IAS 7.
22
7. CASH FLOW STATEMENT FOR A FINANCIAL

INSTITUTION
Aim
The aim of this workbook is to assist the individual in understanding
Cash Flow Statements according to IFRS.
The objective of IAS 7 is to require the provision of information

about the changes in cash (and cash equivalents) of an
undertaking, by means of a cash flow statement. This classifies
cash flows during the period from:
-operating,
-investing and
-financing activities.
6. COMPONENTS OF CASH (AND CASH

EQUIVALENTS)
1. Introduction
IAS 7, and should present it as an integral part of its financial

statements, for each period for which financial statements are
presented.
EXAMPLE - Wholly owned subsidiaries exempt from

presenting cash flow statements
Issue
Undertakings should prepare a cash flow statement in
accordance with IAS 7 requirements and should present it as part
of their financial statements for each period for which financial
statements are presented.
Is a wholly-owned subsidiary exempt from presenting a cash flow
statement because its parent presents a consolidated cash flow
statement?
Background
An undertaking has an overseas, wholly-owned subsidiary which
prepares its local financial statements in accordance with IFRS.
The subsidiary wants to exclude the cash flow statement from its
financial statements because the information is included in its
parents consolidated financial statements.
Solution
The subsidiary must present a cash flow statement.
The laws and national GAAP in certain countries grant
exemptions from the preparation of a cash flow statement to
small domestic subsidiaries, or to wholly-owned subsidiaries of a
parent established in the same country.
The exemption is available provided the parent prepares

consolidated financial statements that include a consolidated
cash flow statement.
IAS 7 requires all undertakings to present a cash flow statement
regardless of local law. Therefore, the subsidiary in this example
should present a cash flow statement in its own financial
statements. National GAAP does not override the requirements
of IAS 7.
Users are interested in how the undertaking generates, and uses,
cash (and cash equivalents). Businesses need cash to conduct
their operations, to pay their obligations, and to provide returns to
their investors. IAS 7 requires all undertakings to present a cash
flow statement.
Benefits of Cash Flow Information
A cash flow statement, when used in conjunction with the rest of the
financial statements, provides information that enables users to
evaluate the changes in net assets of an undertaking, its financial
structure (including its liquidity and solvency) and its ability to affect
the amounts (and timing) of cash flows, in order to adapt to
changing circumstances, and opportunities.
Cash flow information is useful in assessing the ability to generate
cash (and cash equivalents), and enables users to develop models
to compare the present value of cash flows of different
undertakings.
It also enhances the comparability of the reporting of operating
performance by different undertakings, as it eliminates the effects of
using different accounting treatments for the same transactions.
4
Historical cash flow information is often used as an indicator of the

amount, timing and certainty of future cash flows. It is also useful in
checking the accuracy of past assessments of future cash flows,
and in examining the relationship between profitability, net cash
flow, and the impact of changing prices.
Investing activities are the acquisition, and disposal, of long-term

assets (and other investments not included in cash equivalents).
Financing activities are activities that result in changes in the size
(and composition) of the equity capital, and borrowings, of the
undertaking.
2. Definitions
Cash and cash equivalents
Cash comprises cash on hand, and deposits that can be repaid on

demand.
Cash equivalents are held for the purpose of meeting short-term

cash commitments, rather than for investment.
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.
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.
EXAMPLE Cash equivalents

Holding cash earns no interest on your funds. To earn interest on
cash balances, your firm places money on short-term deposits, at
its bank. Each day, you add receipts to the deposit, and subtract
money needed to pay creditors.
An investment normally qualifies as a cash equivalent only when it

has a maturity of three months (or less), from the date of
acquisition.
Cash flows are inflows and outflows of cash (and cash

equivalents).
EXAMPLE- When can bonds be classified as cash

equivalent?
Operating activities are the principal revenue-producing activities

of the undertaking, and other activities that are not investing, or
financing activities.
Issue
Cash equivalents are short-term, highly liquid investments that
are convertible to fixed amounts of cash and subject to little risk
of changes in value.
EXAMPLE- Operating activities

Daily sales and purchases, employee costs and general overheads
comprise the operating activities.
Can management classify bonds as cash equivalents?

5

Background
An undertaking purchased a bond on 1 October 20X2. The
bonds maturity date is 28 February 20X3, and the undertakings
financial year-end is 31 December.
Management is considering whether to classify the bond as cash
equivalents.
Solution
No, the bond should not be classified as cash equivalent.
The short-term characteristic of cash equivalents is generally
taken as a maturity of three months from date of acquisition. The
maturity of the bond is 5 months from the date of acquisition.
The bond should not be classified as a cash equivalent even
though the bond matures 2 months from the balance sheet date.
Equity investments are excluded from cash equivalents, unless they
are, in substance, cash equivalents, for example in the case of
preferred shares acquired within a short period of their maturity
(and with a specified redemption date).
EXAMPLE- Preferred shares acquired within a short period of
their maturity
You buy some preferred shares of a large, listed company in
January. They will redeemed in full in March. (The company will buy
back the shares from you.) These may be considered to be cash
equivalents.
Investments with an original maturity of less than three months
should not be considered a cash equivalent if there is any doubt
that the obligated undertaking will fully redeem the security at

maturity
EXAMPLE- Classification of a short-term investment whose
collection is doubtful
Issue
An investment with a short maturity normally qualifies as a cash
equivalent. Short maturity is understood as a period of three
months or less from the date of acquisition.
Should an undertaking classify a short-term investment as a cash
equivalent when the issuer is experiencing financial problems?
Background
An undertaking holds short-term investments in a financial
institution. The bank is incurring losses due to a significant loss
arising from one of its foreign undertakings, which operates in a
country facing economic and political turbulence. There is some
doubt about whether the bank will be able to meet its obligations
in the short term.
Solution
The undertaking should not classify the investment as a cash
equivalent. Although the scheduled maturity date is less than
three months, there is doubt about whether the maturity date will
be met.
6

Bank borrowings are generally considered to be financing activities.
However, in some countries, bank overdrafts (which are repayable
on demand) form an integral part of an undertaking's cash
management.
In these circumstances, bank overdrafts are included as a
component of cash (and cash equivalents). The bank balance often
fluctuates from being positive to overdrawn.
EXAMPLE-Overdraft
You have a seasonal business. For the first half of the year you
have positive cash balances, which you place in short-term
deposits. In the second half of the year, you have negative cash
balances, which are financed by a bank overdraft. The overdraft is
treated as a cash equivalent = negative cash.
Cash flows statements do not disclose movements between items
that constitute cash (or cash equivalents) because these
components are part of cash management, rather than part of its
operating, investing and financing activities. Cash management
includes the investment of excess cash in cash equivalents.
3. Presentation of a Cash Flow Statement
The cash flow statement should report cash flows during the
period, classified by operating, investing and financing
activities.
An undertaking presents its cash flows from operating, investing
and financing activities in a manner that is most appropriate to its
business.
Classification by activity provides information that allows users to

assess the impact of those activities on the financial position of the
undertaking, and the amount of its cash (and cash equivalents).
This information may also be used to evaluate the relationships
among those activities.
A single transaction may include cash flows that are classified
differently.
EXAMPLE-Single transaction-both operating and financing
activity
A cash repayment of a loan includes both interest and capital, the
interest element may be classified as an operating activity, and the
capital element is classified as a financing activity.
EXAMPLE- Transactions that involve different cash flow
activities
Issue
Cash flows within a single transaction may be classified
differently.
How should an undertaking classify the cash flows that arise from
the issue of a zero coupon bond?
Background
Undertaking A issues a financial instrument on 1 January 20X1.
The terms of the instrument are such that undertaking A must
repay 1,331 (the face value) at the end of three years.
The proceeds on issue of the bond are 1,000, and it carries a
zero coupon. The market rate of interest is 10%.
Solution
Undertaking A's income statement and cash flow statement at 31
December each year should reflect the following:
20X1
20X2
20X3
Total
Interest accrued
(100)
(110)
(121)
(331)
Net income
(100)
(110)
(121)
(331)
(100)
(110)
(121)
(331)
100
110
121
331
Interest paid on
maturity of bonds
(331)
(331)
Cash flow from

operating activities
(331)
(331)
Cash flow from

financing activities
1000
(1000)
Total movement in
cash
1000
(1331)
(331)
Income Statement
Interest paid
Cash Flow
Statement
Net income
Adjustment for
interest accrued
Operating Activities

The amount of cash flows arising from operating activities is a key
indicator of the extent to which the operations have generated
sufficient cash flows to repay loans, maintain the operating
capability of the undertaking, pay dividends (and make new
investments) without recourse to external sources of financing.
EXAMPLE Operating activities not generating cash
Your manufacturing activities are not generating cash, as
inventories are increasing rapidly, and your clients are taking
excessive credit. Unless corrective action is taken, you will need to
obtain more cash from banks or investors.
If this is a planned expansion, the financial needs should have been
planned in advance.
Information about the specific components of operating cash flows
is useful, in conjunction with other information, in forecasting
operating cash flows.
EXAMPLES Forecasting operating cash flows
1. You run a chain of supermarkets. Every store that you open
requires $50.000 of additional inventory. This fact can be notified to
users, and monitored in future periods.
2. You are a manufacturer. Every time that you enter a new foreign
market, you have to provide $80.000 of inventory, and accounts
receivable increase by $120.000. This fact can be notifies to users,
and monitored in future periods.
Cash flows from operating activities are primarily derived from the
principal revenue-producing activities of the undertaking. Therefore,
they generally result from the transactions that enter into the
determination of net profit.
Examples of cash flows from operating activities are:

(i)
receipts from the sale of goods, and the rendering of
services;
(ii)
receipts from royalties, fees, commissions and other
revenue;
EXAMPLE- fees
You control a franchise of restaurants.
You receive an annual franchise fee from each restaurant, and a
fee for every meal served.
(iii)
payments to suppliers for goods (and services);
(iv)
payments to (and on behalf of) employees;
(v)
receipts and payments of an insurance undertaking for

premiums and claims, annuities and other policy benefits;
(vi)
payments (or refunds) of income taxes unless they can be

specifically identified with financing and investing activities;
and
(vii)
receipts (and payments) from contracts held for dealing (or

trading) purposes.
Some transactions, such as the sale of an item of plant, may give

rise to a gain (or loss) that is included in net profit., These cash
flows are cash flows from investing activities. However, cash
payments to manufacture, or acquire, assets held for rental to
others and subsequently held for sale are cash flows from operating
9

activities. The cash receipts from rents and subsequent sales of
such assets are also cash flows from operating activities.
purchase of land and buildings
EXAMPLE - sale of an item of plant: a gain that is included in

net profit
You sell a machine, and record a gain of $4.000 in your net profit.
For cash flow purposes, this gain is deducted from net profit, and
recorded in investing activities.
Cash flows during the period should be classified by operating,

investing and financing activities.
Cash payments to manufacture or acquire assets held for rental to

others and subsequently held for sale are cash flows from operating
activities.
a) a property developer; and

b) a property investment undertaking?
The cash receipts from rents and subsequent sales of such assets
are also cash flows from operating activities.
a) property developer
A specialist trading in securities will treat them as inventory

acquired specifically for resale. Cash flows arising from the
purchase and sale of dealing (or trading) securities are classified as
operating activities. For other businesses, they will either be
operating activities, or cash equivalents (see above).
Cash advances, and loans made by financial institutions, are
usually classified as operating activities, as they relate to the main
revenue-producing activity of that undertaking.
EXAMPLE- Loans made by financial institutions
You are a financial institution. Making loans, and receiving loan
repayments is your primary business. The cash flows from these
loans are shown as operating activities.
EXAMPLE- Classification of cash flows in respect of the
Issue
How should the cash flows in respect of the purchase of land and
buildings be classified by;
Background
A property developer purchases land and buildings to

redevelop and sell.
b) property investment undertaking
A property investment undertaking purchases land and
buildings for the purpose of earning rental income from the
properties.
Solution
a) property developer
The property developer should classify the cash outflows in
respect of the purchase of land and buildings as operating
cash flows. A developers purchase of property is analogous
to inventory acquired by a manufacturer.
10

b) property investment undertaking
The property investor should classify the cash outflows in
respect of the purchase of land and buildings as investing cash
flows. The purchase has the form of an investment on which a
return (rental income) will be earned.
You sell your head office. As a rare event, this will not be
considered to be an operating activity. It will be an investment
activity.
(iii)
Investing Activities
The separate disclosure of cash flows arising from investing
activities represents the extent to which expenditures have been
made for resources intended to generate future income and cash
flows.
Examples of cash flows arising from investing activities are:
(i)
payments to acquire property, plant and equipment,

intangibles and other long-term assets. These payments
include those relating to capitalised development costs and
self-constructed property, plant and equipment;
EXAMPLE- Self-constructed property

To expand your business you build a new factory. You capitalise the
construction costs. This is an investment activity, for cash flow
purposes.
(ii)
receipts from sales of property, plant and equipment,

intangibles and other long-term assets;
EXAMPLE- Receipt from sales of property

payments to acquire shares or debt instruments of other

undertakings, and interests in joint ventures (other than for
instruments that are cash equivalents, or held for dealing (or
trading purposes));
EXAMPLE- Payments to acquire shares

You buy a competitors business, and acquire all of its shares. This
is an investment activity.
(iv)
receipts from sales of shares (or debt) instruments of other

undertakings and interests in joint ventures (other than for
instruments that are cash equivalents, or held for trading
purposes);
(v)
advances (and loans) made to other parties (other than by a

financial institution);
(vi)
receipts from the repayments of advances and loans made

to other parties (other than those of a financial institution);
payments for futures contracts, forward contracts, option
contracts and swap contracts (except when the contracts
are held for dealing or trading purposes, or the payments are
classified as financing activities); and
(vii)
(viii)
receipts from futures contracts, forward contracts, option

are held for dealing or trading purposes, or the receipts are
classified as financing activities).
11

When a contract is accounted for as a hedge of an identifiable
position, the cash flows of the contract are classified in the same
manner as those of the position being hedged.
Classification of cash flows relating to hedging instruments
Cash flows relating to financial instruments such as futures and
forwards are generally classified as operating.
However, the cash flows of financial instruments that are
appropriately designated as hedges should be classified with the
cash flows of the underlying transaction being hedged.
Background
Undertaking A, based in Brazil, enters into an agreement with a
French supplier to purchase raw material. Payment for the raw
material is 1 mill and As measurement currency is Reais (R$).
The Brazilian undertaking enters into a forward exchange
contract to purchase 1 mill at a fixed exchange rate at the same
date payment is due to the supplier.
At the date the inventory is delivered undertaking A recognises a
gain of R$70,000 on the forward contract as an adjustment to the
cost of inventory.
EXAMPLE Hedging
You have purchased products from Japan on credit. This is an
operating activity. You will need to pay for them in Yen in 3 months
time. You have a forward contract to fix the purchase price of the
Yen. This will also be treated as an operating activity.
Solution
Cash payments and receipts arising from forward contracts are
generally regarded as cash flows from investing activities.
EXAMPLE - Classification of cash flows of forward contracts

used to hedge inventory purchases
The cash flows arising from the forward exchange contract (an
inflow of R$70,000) should be included in the cash flows from
operating activities as part of the movement in inventories.
Issue
Contracts cash flows in a contract accounted for as a hedge of
an identifiable position are classified in the same manner as the
cash flows of the position being hedged.
How should an undertaking classify the cash flows arising from a
forward exchange contract hedging a future purchase of raw
material?
However, As contract qualifies as the hedge of the purchase of

inventory and the classification should follow the position being
hedged.
Financing Activities
The separate disclosure of cash flows arising from financing
activities is needed to predict claims on cash flows by providers of
capital to the undertaking.
Examples of cash flows arising from financing activities are:
12
(i)
proceeds from issuing shares, or other equity instruments;
(ii)
payments to owners to acquire, or redeem the undertaking's

shares;
(iii)
proceeds from issuing debentures, loans, notes, bonds,

mortgages and other short or long-term borrowings;
(iv)
repayments of amounts borrowed; and
(v)
payments by a lessee for the reduction of the outstanding

liability relating to a finance lease.
EXAMPLE-Finance lease (see IAS 17 workbook)

You lease some machinery on a finance lease. The lease is a form
of a loan (see IAS 17). Each payment includes 2 parts: an interest
payment and a capital payment. The interest the interest element
may be classified as an operating activity, and the capital element is
classified as a financing activity.
EXAMPLE-Classification of cash inflows in respect of
acquisition of PPE financed by finance lease
Issue
Undertaking A manufactures childrens toys. Management

commissioned the construction of new premises to accommodate
the undertakings expanding operations.
The new premises cost 6 million. Management borrowed funds
from a bank to cover the construction cost in the short term, and
then replaced the bank borrowings with lease financing.
Management has questioned how the various cash flows should
be classified in the cash flow statement.
Solution
Management should classify the cash flows as follows:
Classification in cash flow
statement
Receipt of funds from bank on Financing
origination of short term bank
loan
Cash flow
Investing
Payment of cash to building
contractors for construction of
property
Financing
How should management classify cash flows related to the

acquisition of property, plant and equipment under a finance
lease?
Receipt of funds from finance

company for replacement of
bank loan with finance lease
(sale to and leaseback of
building from lessor)
Background
Repayment of bank loan
Financing
13

Lease payments to lessor
Financing - split between

capital repayment and interest
charge
Classification by financial institutions

Activities a financial institution carries out in its ordinary
course of business will be classified as operating activities,
even though for other undertakings the same activity would
likely be classified as investing or financing.
Loans and advances a financial institution makes should be
classified as operating, as should the interest paid and
received on those balances. Likewise, dividends received
should be classified as operating cash flows.
b) a manufacturing undertaking?
Background
a) a venture capital undertaking
Management has an investment of 10% in an undertaking in
which it does not have significant influence. Dividend income
of 1,000 has been received in the year.
b) a manufacturing undertaking
Management has invested some surplus cash in an
undertaking, acquiring a 10% interest, in the hope of
achieving a better return than in a bank savings account.
Dividend income of 1,000 has been received in the year.
Solution
a) a venture capital undertaking
EXAMPLE- Classification of cash inflows in respect of

dividend income
Issue
Cash flows during the period should be reported classified by
operating, investing and financing activities.
How should cash flows in respect of dividend income be
classified in respect of;
a) a venture capital undertaking; and
Management should classify the cash inflow in respect of the

dividend as an operating cash flow. A venture capital
undertakings primary objective is to invest in undertakings to
achieve a return in the form of dividend income or capital
growth.
b) a manufacturing undertaking
Management should classify the cash flow in respect of the
dividend as an investing cash flow. The purchase of shares is
not the undertakings primary business activity. The purchase
14

has been made to achieve a return on surplus funds.
(2)
by adjusting sales, cost of sales (interest and similar income,

and interest expense and similar charges, for a financial
institution) and other items in the income statement for
An undertaking should report cash flows from operating activities

using either:
(i)
changes in inventories, operating receivables, and payables;
(i)
(ii)
other non-cash items; and
(iii)
other items, for which the cash effects are investing, or

financing cash flows.
4. Reporting Cash Flows From Operating Activities
(ii)
the direct method, whereby major classes of gross receipts

and gross payments are disclosed; or
the indirect method, whereby net profit is adjusted for the
effects of transactions of a non-cash nature, any deferrals
(or accruals) of past (or future) operating cash receipts (or
payments), and items of income (or expense) associated
with investing or financing cash flows.
Under the indirect method, the net cash flow from operating
activities is determined by adjusting net profit for the effects of:
(i)
changes in inventories, operating receivables, and payables;
PRACTICAL NOTE
The indirect method can be produced from the opening and closing
balance sheets, together with some information from the income
statement. The direct method normally needs more comprehensive
information from the accounting records, to identify major classes of
gross receipts, and gross payments.
(ii)
non-cash items such as depreciation, provisions, deferred

taxes, unrealised foreign currency gains (and losses),
undistributed profits of associates, and minority interests;
and
(iii)
all other items, which are investing or financing cash flows.
Undertakings are encouraged to report cash flows from

operating activities using the direct method. The direct method
provides information that is not available under the indirect
method.
Alternatively, the net cash flow from operating activities may be

presented under the indirect method, by showing the revenues and
expenses disclosed in the income statement, and the changes
during the period in inventories, operating receivables and
payables.
Reporting Cash Flows From Investing and Financing Activities
Under the direct method, information about major classes of

gross receipts, and gross payments, may be obtained either:
(1)
from the accounting records; or
An undertaking should report separately major classes of

gross receipts, and gross payments, arising from investing
15

and financing activities, except to the extent that cash flows
are reported on a net basis.
Reporting Cash Flows on a Net Basis
Cash flows arising from the following operating, investing or
financing activities may be reported on a net basis:
(i)
receipts and payments on behalf of clients, when the cash

flows reflect the activities of the client, rather than those of
the undertaking; and
EXAMPLE Cash flows shown on a net basis.

You collect money on behalf of a client, and immediately pay it to
the client, less a commission. If you take no risk (if no money is
received, you are not liable to the client), the commissions could be
shown net, rather than showing the gross receipts and payments.
EXAMPLE- Classification of travel agencys receipts from
customers
Issue
Cash flows may be reported on a net basis when they arise from
cash receipts and payments that reflect the customers activities
rather than the undertakings.
How should a travel agency acting as agent classify cash receipts
from its customers in the cash flow statement?
Background
A travel agency provides its customers with travel services that

include arranging accommodation, flights and car rental. The
customer pays the travel agency and the agency remits cash to
the service providers. The travel agency receives commissions
from the suppliers. The suppliers are responsible for settling any
claims by the customer.
Solution
The travel agency should present the cash receipts from
customers and the cash payments to suppliers on a net basis. A
net presentation reflects the substance of the transaction.
The net cash amount shown in the cash flow statement should
represent the agents commission.
(ii)
receipts and payments for items in which the turnover is

quick, the amounts are large, and the maturities are short.
Examples of these receipts and payments are:
(i)
the acceptance (and repayment) of demand deposits of a
bank;
(ii)
funds held for clients by an investment undertaking; and
(iii)
rents collected on behalf of (and paid over to) the owners of

properties.
EXAMPLE- Classification of cash flows relating to short-term

loans
Issue
Cash receipts and payments related to items in which turnover is
16

quick, the amounts are large, and the maturities are short may be
classified on a net basis.
(ii)
the purchase and sale of investments; and
How should an undertaking classify the movements related to

short-term loans in the cash flow statement?
(iii)
other short-term borrowings, for example, those which have

a maturity period of three months or less.
Background
Undertaking A operates a chain of hotels. A seasonal demand for
hotel accommodation impacts on the business operations.
Cash flows arising from each of the following activities of a financial

institution may be reported on a net basis:
Periodically, the undertaking raises funds by issuing commercial

paper in the form of unsecured promissory notes with fixed
maturity of between seven and ninety days.
Solution
Undertaking A may present the cash flows arising from these
short-term loans as a financing activity on a net basis. Short-term
borrowings that have a maturity period of less than three months
are suitable for classification on a net basis.
The disclosure of the gross cash receipts and payments will
usually not provide the additional information necessary to
understand the undertakings financing activity.
A better understanding of As financing activities is achieved
where these potentially large inflows and outflows, for what may
in substance be a continuing source of finance, are reported on a
net basis.
Examples of these receipts and payments are advances made for
(and the repayment of):
(i)
(i)
receipts, and payments, for the acceptance (and repayment)

of deposits with a fixed maturity date;
(ii)
the placement of deposits with (and withdrawal of deposits

from) other financial institutions; and
(iii)
advances, and loans made to clients (and the repayment of

those advances and loans).
5. Foreign Currency Cash Flows
(see IAS 21 workbook)
Cash flows, arising from transactions in a foreign currency,
should be recorded in an undertaking's functional currency, by
applying the exchange rate between the functional currency,
and the foreign currency, at the date of the cash flow.
EXAMPLE-Reporting foreign currency, at the date of the cash
flow.
You receive $600.000 on March 12. Your functional currency is
Euros. The exchange rate on March 12 is Euro1= $1.20. The
transaction is reported as Euros 500.000 (600.000/1.2).
principal amounts relating to credit card clients;
17

The cash flows of a foreign subsidiary should be translated at the
exchange rates between the functional currency, and the foreign
currency, at the dates of the cash flows.
Cash flows denominated in a foreign currency are reported in a
manner consistent with IAS 21 Foreign Currency.
This permits the use of approximate exchange rates. For example,
a weighted-average exchange rate for a period may be used for
recording foreign currency transactions, or the translation of the
cash flows of a foreign subsidiary.
EXAMPLE-Reporting foreign currency, at weighted-average
rate.
You receive $600.000 on March 12. Your functional currency is
Euros. The exchange rate on March 12 is Euro1= $1.20. The
weighted-average rate for the period is Euro1= $1.25. Your policy is
to use the weighted-average rate. The transaction is reported as
Euros 480.000 (600.000/1.25).
Unrealised gains (and losses) arising from changes in foreign
currency exchange rates are not cash flows.
EXAMPLE- Unrealised gain arising from changes in foreign
currency.
You have a foreign investment worth $1,2m. Your functional
currency is Euros. The exchange rate on January 1 is Euro1=
$1.20. The exchange rate on December 31 is Euro1= $1.25. The
unrealised gain in Euros is not a cash flow.
However, the effect of exchange rate changes on cash held (or
due) in a foreign currency is reported in the cash flow statement, in
order to reconcile cash at the beginning, and the end, of the period.
This amount is presented separately from cash flows from

operating, investing and financing activities and includes the
differences, if any, had those cash
flows been reported at end of period exchange rates.
EXAMPLE- Effect of exchange rate changes on cash held
You have a cash balance worth $2,4m. Your functional currency is
Euros. The exchange rate on January 1 is Euro1= $1.20. The
exchange rate on December 31 is Euro1= $1.25. The 8.000 gain in
Euros is an exchange difference shown under operating activities.
Interest and Dividends
Cash flows from interest and dividends received, and paid,
should each be disclosed separately.
Each should be
classified consistently as operating, investing or financing
activities.
The total amount of interest paid during a period is disclosed in the
cash flow statement (whether it has been recorded as an expense
in the income statement, or capitalised in accordance with IAS 23
Borrowing Costs).
EXAMPLE Interest capitalised.
You have paid a total of $600.000 in interest of which $100.000 has
been capitalised into a building. The cash outflow will be shown as
$600.000, noting that $100.000 has been capitalised. The charge
for interest paid in the income statement will be $500.000 (600.000100.000), if no interest is accrued at either the start or the end of
the period.
18

Interest paid, and interest and dividends received, are usually
classified as operating cash flows for a financial institution. There is
no consensus on the classification of these cash flows for other
undertakings.
Cash flows arising from taxes on income should be separately

disclosed, and should be cash flows from operating activities,
unless they can be specifically identified with financing and
investing activities.
Interest paid, and interest and dividends received, may be classified

as operating cash flows, as they contribute to net profit.
While tax expense may be readily identifiable with investing or

financing activities, the related tax cash flows are often
impracticable to identify, and may arise in a different period from the
cash flows of the underlying transaction.
Alternatively, interest paid, and interest and dividends received,

may be financing and investing cash flows respectively, because
they are costs of obtaining financial resources, or returns on
investments.
Dividends paid may be classified as a financing cash flow, as they
are a cost of obtaining financial resources.
When it is practicable to identify the tax cash flow with an individual

transaction, that provides cash flows that are investing or financing
activities, the tax cash flow is classified as an investing or financing
activity, as appropriate.
Alternatively, dividends paid may be cash flows from operating, to

assist users to determine the ability to pay dividends out of
operating cash flows.
EXAMPLE- Tax on investing activity

You sell a subsidiary. The following year you have to pay capital
gains tax of $150m on the gain from that sale. This can be
classified as a tax on investing activities.
Taxes on Income
Investments in Associates and Joint Ventures
Taxes paid are usually classified as cash flows from operating

activities.
When tax cash flows are allocated over more than one class of
activity, the total amount of taxes paid is disclosed.
When accounting for an associate (see IAS 28), an investor is

restricted to the cash flows between itself and the investee, for
example, to dividends and advances.
EXAMPLE - Total amount of taxes paid is disclosed

Your cash flow reports tax payments of $10m for operating
activities, $2m for investment activities and $6m for finance
activities. The total tax paid of $18m should also be noted in the
notes to the cash flow statement.
EXAMPLE-Associate
You own 25% of another company. You provide a loan of $44m to
the associate, and receive $6m in dividends. These transactions
appear in your cash flow statement. The internal cash flows of the
associate are not consolidated into your cash flow figures.
19

An undertaking, which reports its interest in a jointly-controlled
undertaking (see IFRS 11 Joint Ventures).
For an undertaking, which reports such an interest using the equity
method, the cash flows in respect of its investments in the jointlycontrolled undertaking, and distributions (and other payments or
receipts between it and the jointly controlled undertaking),the
accounting is the same as for an associate (see above).
Acquisitions and Disposals of Subsidiaries and Other
Business Units
The aggregate cash flows arising from acquisitions and
disposals of subsidiaries (or other business units) should be
presented separately as investing activities.
EXAMPLE -Disposals
You sell a subsidiary. You show the cash flow figures as an
investing activity, including the proceeds of sale.
An undertaking should disclose, in aggregate, in respect of both
acquisitions and disposals of subsidiaries, (or other business units
during the period) each of the following:
acquired (or disposed of), summarised by each major

category.
The cash flow effects of disposals are not deducted from
those of acquisitions.
EXAMPLE-Disposals and acquisitions in the same period
You buy a company and sell another in the same period. The cash
flows of the two companies are shown separately under investing
activities. (They are not netted.)
The aggregate amount of the cash paid (or received) as purchase
(or sale) consideration is reported net of cash acquired (or disposed
of).
EXAMPLE- Buying a company which has cash
You pay $90m for a company. It holds cash balances of $60m at the
time of purchase. In your cash flow statement, you show the
purchase price as $30m.
EXAMPLE- Presentation of a major disposals cash flows
(i)
the total purchase (or disposal) consideration
Issue
Cash flows during the period should be classified by
operating, investing and financing activities.
(ii)
the portion of the purchase (or disposal) consideration,

discharged by cash and cash equivalents;
How should management present the cash flows relating to a

major disposal?
(iii)
the amount of cash (and cash equivalents) in the subsidiary

(or business unit) acquired (or disposed of); and
(iv)
the amount of the assets and liabilities other than cash (or
cash equivalents) in the subsidiary (or business unit)
Background
Undertaking J disposed of a material subsidiary, A, on 18 May
20X1. The sale proceeds were 45 million. A had cash
balances of 1 million on disposal.
20
J operates in country S where tax on capital transactions is

charged at 35%. The tax charge arising on the disposal was 5
million, payable within 30 days.
The total cash out flow during the year in respect of tax
was 27,350,000
Solution
Management should present the cash flows as follows (extract
only):
Year ended
31/12/X1
(000)
Cash flows from operating activities
Cash generated from operations
95,457
Interest paid
(4,560)
Tax paid
(22,350)
Net cash from operating activities
68,547
Cash flows from investing activities
Disposal of subsidiary, net of cash disposed 44,000
Tax paid in respect of disposal
(5,000)
Interest received
1,340
Net cash received from investing activities
40,340
Cash flows from financing activities
Dividends paid
(11,500)
Net cash used in financing activities
(11,500)
Increase in cash and cash equivalents
97,387
21
Year ended 31/12/X1 (000)

Cash flows from
operating activities
Cash generated from
operations
Interest paid
Tax paid
Net cash from operating
activities
Cash flows from
investing activities
Disposal of subsidiary,
net of cash disposed
Tax paid in respect of
disposal
Interest received
Net cash received from
investing activities
Cash flows from
Dividends paid
Net cash used in
Increase in cash and
cash equivalents
95,457
(4,560)
(22,350)
68,547
Non-cash Transactions
Investing and financing transactions that do not require the
use of cash, should be excluded from a cash flow statement.
EXAMPLE- Purchase of a business partially for cash
Issue
44,000
(5,000)
1,340
40,340
How should an undertaking present a purchase of a business

partially settled in cash in the cash flow statement?
Background
Undertaking A acquired undertaking B for 1,000. The purchase
consideration included: cash of 250; the assumption of liabilities
400; and the issue of equity securities of 350.
Solution
The cash payment of 250 should be classified in As cash flow
statement within cash flows from investing activities.
(11,500)
(11,500 )
97,387
The total cash out flow during the year in respect of tax
was 27,350,000
The non-cash elements of the transaction - the liabilities

assumed and equity securities issued-should be disclosed in the
notes to the financial statements.
Presented below is an example of such a note disclosure:
Note 20
Non-cash transactions
On 1 March 20X3 the group acquired Bs food division (Note X)

22

for 1,000. In addition to a cash payment of 250, the following noncash transactions were used to settle the acquisition:
Issue of ordinary shares 350
Assumption of liabilities
400
EXAMPLE- Non-cash transaction: conversion of debt to equity

You redeem $100m of company bonds by issuing shares of
the same value.
This transaction will not be shown in the cash flow statement,
as no cash changed hands, but it will be noted in the notes
relating to share capital and bonds.
The same applies to the non-cash element of consideration,
for example, in a barter transaction.
Such transactions should be disclosed elsewhere in the
financial statements, in a way that provides all the relevant
information about these investing, and financing activities.
Many investing and financing activities do not have a direct impact
on current cash flows, although they do affect the capital and asset
structure.
Examples of non-cash transactions are:
(i)
the acquisition of assets, either by assuming directly related
liabilities, or by means of a finance lease;
(ii)
the acquisition of an undertaking, by means of an equity
issue, and
(iii)
the conversion of debt to equity.
6. Components of Cash (and cash equivalents)

An undertaking should disclose the components of cash (and
cash equivalents), and should present a reconciliation of the
amounts in its cash flow statement with the equivalent items
reported in the balance sheet.
Cash and cash equivalents:
EXAMPLE - Cash and cash equivalents sample policy and
note
Cash and cash equivalents includes cash in hand, deposits held at
call with banks, other short-term highly liquid investments with
original maturities of three months or less, and bank overdrafts.
Bank overdrafts are shown within borrowings in current liabilities on
the balance sheet.
Cash and cash equivalents:
Cash at bank and in hand

Short-term bank deposits
2XX4
12,698
9,530
22,228
2XX3
30,798
5,414
36,212
The effective interest rate on short-term bank deposits was 5.9%

(2003: 5.6%); these deposits have an average maturity of 20 days.
Cash and bank overdrafts include the following for the purposes of
the cash flow statement:
2XX4
2XX3
23

Cash and cash equivalents
Bank overdrafts
22,228
36,212
(2,650)
(6,464)
19,578
29,748
An undertaking discloses the policy that it adopts in determining the
composition of cash (and cash equivalents).
The effect of any change in the policy for determining components
of cash (and cash equivalents), for example, a change in the
classification of financial instruments previously considered to be
part of an undertaking's investment portfolio, is reported in
accordance with IAS 8 Changes in Accounting Policies.
Other Disclosures
An undertaking should disclose, together with a commentary
by management, the amount of significant cash and cash
equivalent balances, held by the undertaking, which are not
available for use by the group.
EXAMPLE- Cash not available for use by the group.
Your foreign subsidiary has cash balances, but the local
government has frozen them, due to tax transgressions that the
subsidiary is alleged to have made. The amount of these balances
would be disclosed as cash not available for use.
There are various circumstances in which cash (and cash
equivalent) balances are not available for use by the group.
Examples include cash (and cash equivalent) balances held by a
subsidiary, that operates where exchange controls (or other
restrictions) apply, when the balances are not available for general
use by the parent, or other subsidiaries
EXAMPLE- Presentation of cash subject to restrictions over

use
Issue
An asset that satisfies any of the following criteria shall be
classified as a current asset:
a) its realisation, sale or consumption is expected to occur in the
undertakings normal operating cycle;
b) it is held for sale;
c) its realisation is expected to occur within twelve months after
the balance sheet date; or
d) it is unrestricted cash or a cash equivalent.
Should an undertaking include in its consolidated financial
statements cash and cash equivalents, held by a subsidiary,that
is not available for use by other group undertakings?
Background
A subsidiary holds cash and cash equivalent balances with
domestic banks.
It operates in a country where there are exchange controls and
the subsidiary is restricted from sending cash abroad to fellow
24

subsidiaries and to the parent.
The amount of cash held is neither excessive, nor short of the
subsidiarys operating needs.
You have a line of credit for $250m, of which you are only currently
using $35m. The line of credit is available for 5 years, at a cost of
1% above the national bank rate. This information helps users know
what finance is available for your expansion plans.
Solution
The existence of currency restrictions in a foreign jurisdiction
would not preclude the classification of the subsidiarys cash and
cash equivalent balance as a current asset in the consolidated
financial statements.
(ii)
the aggregate amounts of the cash flows from - interests in
joint ventures,;
The subsidiary needs the cash to meet its operating

requirements, and will therefore use it freely.
(iii)
The undertaking should, however, disclose the amount of cash

and cash equivalents that is not available for use by the group.
The disclosure should include a commentary that will help users
understand the impact of these restrictions in the undertakings
financial position and liquidity.
Additional information may be relevant to users in understanding
the financial position, and liquidity of an undertaking. Disclosure of
this information, together with a commentary by management, is
encouraged and may include:
(i)
the amount of undrawn borrowing facilities that may be

available for future operating activities, and to settle capital
commitments, indicating any restrictions on the use of these
facilities;
EXAMPLE- Joint venture

You own 60% of a joint venture. You show the dividends received.
the aggregate amount of cash flows that represent increases
in operating capacity, separately from those cash flows that
are required to maintain operating capacity; and
EXAMPLE- Increases in operating capacity

Your only factory has reached full capacity. Your investing activities
from your business have generated $75m. At the very end of the
year, you buy some land for $10m, on which you will build a new
factory. Showing this amount separately enhances the information
provided to users.
(iv)
the amount of the cash flows arising from the operating,

investing and financing activities of each reported segment
(see IFRS 8 Operating Segments).
The separate disclosure of cash flows that represent increases in

operating capacity, and cash flows which are required to maintain
operating, enables the user to determine whether the undertaking is
investing adequately in the maintenance of its operating capacity.
EXAMPLE-Facilities
25

An undertaking that does not invest adequately in the maintenance
of its operating capacity may be prejudicing future profitability, for
the sake of current liquidity, and distributions to owners.
The disclosure of segmental cash flows enables users to obtain a
better understanding of the relationship between the cash flows of
the business as a whole, and those of its component parts, and the
availability (and variability) of segmental cash flows.
Cash Flow Statement for an Undertaking other than a Financial
Institution
The examples show only current period amounts. Corresponding
amounts, for the preceding period, are required to be presented in
accordance with IAS 1 Presentation of Financial Statements.
Information from the income statement and balance sheet is
provided to show how the statements of cash flows under the direct
method and indirect method have been derived.
The following additional information is also relevant for the
preparation of the statements of cash flows:
Interest expense was 400, of which 170 was paid during the period.
100 relating to interest expense of the prior- period was also paid
during the period.
Dividends paid were 1.200.
The liability for tax at the beginning and end of the period was 1.000
and 400 respectively. During the period, a further 200 tax was
provided for.
Withholding tax on dividends received amounted to 100.
During the period, the group acquired property, plant and
equipment with an aggregate cost of 1.250 of which 900 was
acquired by means of finance leases. Cash payments of 350 were
made to purchase property, plant and equipment.
Plant, with original cost of 80 and accumulated depreciation of 60,
was sold for 20.
Accounts receivable as at end of 2XX2 include 100 of interest
receivable.
All of the shares of a subsidiary were acquired for 590. The fair
values of assets acquired and liabilities assumed were as follows:
Inventories
Accounts receivable
Cash
Property, plant and equipment
Trade payables
Long-term debt
250 was raised from the issue of share capital, and a further 250
was raised from long-term borrowings.
Consolidated Income Statement for the period ended 2XX2
100
100
40
650
100
200
26

Sales
Cost of sales
Gross Profit
Depreciation
Administrative and selling expense
Interest expense
Investment income
Foreign exchange loss
Net profit before taxation
Taxes on income
Net profit
30.650
(26.000
)
4.650
(450)
(910)
(400)
500
(40)
3.350
(300)
3.050
Consolidated balance sheet (SFP)

Assets
Cash (and cash equivalents)
Accounts receivable
Inventory
Portfolio investments
Property, plant and equipment 3.730
at cost
Accumulated depreciation
(1.450)
net
Total assets
2XX1
230
160
1.900
1.000
2.500
1.200
1.950
2.500
1.910
(1.060)
2.280
850
7.910
6.600
250
230
400
1.890
100
1.000
Long term debt

Total liabilities
2.300
3.180
1.040
4.030
Shareholders' Equity
Share Capital
Retained earnings
Total shareholders equity
Total liabilities and
shareholders equity
1.500
3.410
4.730
7.910
1.250
1.380
2.630
6.660
Liabilities
Trade payables
Interest payable
Income taxes payable
2XX2
27

Direct Method Cash Flow Statement
Cash receipts from clients
Cash paid to suppliers and employees
Interest paid
Income taxes paid
Acquisition of subsidiary X net of cash
acquired
(Note A)
Purchase of property, plant and
equipment (Note B)
Proceeds from sale of equipment
Interest received
Dividends received
Net cash used in investing activities
Cash Flows from financing activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Payments of finance lease liabilities
Dividends paid*
Net increase in cash (and cash
equivalents)
Cash (and cash equivalents) at
beginning of
period (Note C)
Cash (and cash equivalents) at end of
2XX2
period (Note C)
* This could also be shown as an
operating cash flow.
30.150
(27.600
)
2.550
(270)
(900)
1.380
(550)
(350)
20
200
200
(480)
250
250
(90)
(1.200)
(790)
110
120
230
28

Indirect Method Cash Flow Statement
2XX2
Net profit before taxation
Adjustments for:
Depreciation
Foreign exchange loss
Investment income
Interest expense
Increase in trade and other receivables
Decrease in inventories
Decrease in trade payables
Interest paid
Income taxes paid
Cash flow from investing activities
Acquisition of subsidiary X net of cash acquired
(Note A)
Purchase of property. plant and equipment (Note
B)
Proceeds from sale of equipment
Interest received
Dividends received
Net cash used in investing activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Payment of finance lease liabilities
Dividends paid*
Net increase in cash (and cash equivalents)
3.350
450
40
(500)
400
3.740
(500)
1.050
(1.740)
2.550
(270)
(900)
Cash (and cash equivalents) at beginning of

period (Note C)
Cash (and cash equivalents) at end of period
(Note C)
* This could also be shown as an operating cash
flow.
120
230
1.380
(550)
(350)
20
200
200
(480)
250
250
(90)
(1.200)
(790)
110
29

Notes to the Cash Flow Statement (direct method and indirect
method)
A.
Acquisition of Subsidiary
During the period the group acquired subsidiary X. The fair value of
assets acquired and liabilities assumed were as follows:
Cash
Inventories
Accounts receivable
Trade payables
Long-term debt
Total purchase price
Less: Cash of X
Cash flow on acquisition net of cash acquired
B.
40
100
100
650
(100)
(200)
590
(40)
550
2XX2
40
190
230
2XX1
25
135
160
230
(40)
120
Cash (and cash equivalents) at the end of the period include

deposits with banks of 100 held by a subsidiary which are not freely
remissible to the holding company because of currency exchange
restrictions.
The Group has undrawn borrowing facilities of 2.000 of which 700
may be used only for future expansion.
D.
Segment Information
Property, Plant and Equipment
During the period the Group acquired property, plant and equipment
with an aggregate cost of 1.250, of which 900 was acquired by
means of finance leases. Cash payments of 350 were made to
purchase property, plant and equipment.
C.
Cash on hand and balances with banks

Short-term investments
Cash (and cash equivalents) as previously
reported
Effect of exchange rate changes
Cash (and cash equivalents) as restated
Cash flows from:

Operating activities
Investing activities
Financing activities
Segment
A
Segment
B
1,520
(640)
(570)
310
(140)
160
(220)
(200)
Total
1,380
(480)
(790)
110
Cash (and cash equivalents)
Cash (and cash equivalents) consist of cash on hand and balances

with banks, and investments in money market instruments. Cash
(and cash equivalents) included in the cash flow statement
comprise the following balance sheet amounts:
Alternative Presentation
(indirect method)
As an alternative, in an indirect method cash flow statement,
operating profit before working capital changes is sometimes
presented as follows:
30

Revenues excluding investment income
Operating expense excluding depreciation
30,650
(26,910
)
Operating profit before working capital changes
2XX2
3,740

Interest and commission receipts
Interest payments
Recoveries on loans previously written off
7. Cash Flow Statement for a Financial Institution
Cash payments to employees and suppliers
1.
The example shows only current period amounts.
Comparative amounts for the preceding period are required to be
presented.
(Increase) decrease in operating assets:

Short-term funds
Deposits held for regulatory or monetary control
purposes
Funds advanced to clients
Net increase in credit card receivables
Other short-term negotiable securities
Increase (decrease) in operating liabilities:
Deposits from clients
Negotiable certificates of deposit
Net cash from operating activities before income
tax
Income taxes paid
Disposal of subsidiary M
Dividends received
Interest received
Proceeds from sales of non-dealing securities
Purchase of non-dealing securities
Purchase of property, plant and equipment
Net cash from investing activities
2.
The example is presented using the direct method.
28.447
(23.463
)
237
(997)
4.224
(650)
234
(288)
(360)
(120)
600
(200)
3.440
(100)
3.340
50
200
300
1.200
(600)
(500)
650

31

Issue of loan capital
Issue of preference shares by subsidiary
undertaking
Repayment of long-term borrowings
Net decrease in other borrowings
Dividends paid
Net cash from financing activities
1.000
800
2.
3.
4.
5.
(200)
(1.000)
(400)
Effects of exchange rate changes on cash (and

cash equivalents)
Net increase in cash (and cash equivalents)
Cash (and cash equivalents) at beginning of
period
Cash (and cash equivalents) at end of period
200
600
4.790
4.050
8.840
8. Multiple Choice Questions

1. A company provides consolidated accounts, with
comparative accounts for 5 previous periods.
For how many periods are cash flow statements are required?
1. 1
2. 5
3. 6
2. Cash flow statements are required from:
1. All companies.
2. Listed companies.
3. Financial institutions.
3. A cash flow statement provides information that enables
users to evaluate the changes in:
1. Net assets of an undertaking.
Its financial structure.

Its liquidity.
Solvency.
Profitability.
4. A cash flow statement helps in examining the relationship

between:
1.Profitability.
2. Net cash flow.
3. The use of assets and liabilities.
4. Staffing levels.
1. i
2. i-ii
3. i-iii
4. i-iv
5. Daily sales and purchases, employee costs and general
overheads comprise:
1. Operating activities.
2. Investing activities.
3. Financial activities.
6. The acquisition, and disposal, of long-term assets are:
7. Activities that result in changes in the size (and
composition) of the equity capital, and borrowings are:
32

8. For an investment to qualify as a cash equivalent, it must
be:
1. Illiquid and low risk.
2. Liquid and low risk.
3. Liquid and medium risk.
9. The maximum maturity of a cash equivalent is:
1. 3 months.
2. 6 months.
3. 1 year.
10. Bank borrowings are generally considered to be:
4. Cash equivalents.
11. If bank overdrafts form an integral part of an undertaking's
cash management, they are considered to be:
4. Cash equivalents.
12. A single transaction:
1. May include cash flows that are classified differently.
2. Must be included in full in one of the three headings.
3. May be spread over more than one period.
13. The amount of cash flows arising from operating activities
is a key indicator of the extent to which the operations have
generated sufficient cash flows to:
1. Repay loans.
2. Maintain the operating capability of the undertaking.

3. Pay dividends.
4. Make new investments.
5. All
14. Examples of cash flows from operating activities are:
(i)
Receipts from the sale of goods, and the rendering of
services.
(ii)
Receipts from royalties, fees, commissions and other
revenue.
(iii)
Payments to suppliers for goods (and services).
(iv)
Payments to (and on behalf of) employees.
(v)
Receipts and payments of an insurance undertaking for
premiums and claims, annuities and other policy benefits.
(vi)
Payments (or refunds) of income taxes unless they can be
specifically identified with financing and investing activities.
(vii)
Receipts (and payments) from contracts held for dealing (or

trading) purposes.
(viii)
Sale of an item of plant, giving rise to a gain (or loss) that is

included in net profit.
1.
2.
3.
4.
5.
6.
7.
8.
i
i-ii
i-iii
i-iv
i-v
i-vi
i-vii
i-viii
33

15. Examples of cash flows arising from investing activities
are:
(i)
Payments to acquire property, plant and equipment,

intangibles and other long-term assets. These payments
include those relating to capitalised development costs and
self-constructed property, plant and equipment.
(ii)
Receipts from sales of property, plant and equipment,

intangibles and other long-term assets.
(iii)
Payments to acquire shares or debt instruments of other

undertakings, and interests in joint ventures (other than for
instruments that are cash equivalents, or held for dealing (or
trading purposes)).
(iv)
(v)
(vi)
(vii)
Receipts from sales of shares (or debt) instruments of other

undertakings and interests in joint ventures (other than for
instruments that are cash equivalents, or held for trading
purposes).
Advances (and loans) made to other parties (other than by a
financial institution).
Receipts from the repayments of advances and loans made
to other parties (other than those of a financial institution).
Payments for futures contracts, forward contracts, option
are held for dealing or trading purposes, or the payments are
classified as financing activities).
(viii)
1.
2.
3.
4.
5.
6.
7.
8.
Receipts from futures contracts, forward contracts, option

contracts and swap contracts not held for dealing or trading
purposes.
i
i-ii
i-iii
i-iv
i-v
i-vi
i-vii
i-viii
16. Examples of cash flows arising from financing activities

are:
(i)
Proceeds from issuing shares, or other equity instruments.
(ii)
Payments to owners to acquire, or redeem the undertaking's

shares.
(iii)
Proceeds from issuing debentures, loans, notes, bonds,

mortgages and other short or long-term borrowings.
(iv)
(v)
Repayments of amounts borrowed.

Payments by a lessee for the reduction of the outstanding
Receipts by a lessor for the reduction of the outstanding
i
i-ii
i-iii
i-iv
i-v
i-vi
(vi)
1.
2.
3.
4.
5.
6.
34

17.
Which method of cash flow reporting starts with net

profit?
1. Direct method.
2. Indirect method.
3. Both.
4. Neither.
18. Which method of cash flow reporting starts with changes

in inventories?
1. Direct method.
2. Indirect method.
3. Both.
4. Neither.
19. If you start with net profit, to calculate the cash generated
from operating activities, you:
adjust net profit for the effects of:
(i)
Changes in inventories, operating receivables, and payables.
(ii)
Non-cash items such as depreciation, provisions, deferred

taxes, unrealised foreign currency gains (and losses),
undistributed profits of associates, and minority interests.
(iii)
Investing cash flows.
(iv)
Financing cash flows.
(v)
Social security costs.
4. i-iv
5. i-v
20. Examples of these receipts and payments that can be
netted are advances made for (and the repayment of):
(i)
Principal amounts relating to credit card clients.
(ii)
The purchase and sale of investments.
(iii)
Short-term borrowings (3 months, or less).

1. i
2. i-ii
3. i-iii
21. Cash flows, arising from transactions in a foreign currency,

should be recorded in:
1. Local currency.
2. An undertaking's functional currency, at the rate of the
date of the transaction.
3. An undertaking's functional currency, at the rate at the
end of the period.
1. i
2. i-ii
3. i-iii
35

22. When translating the cash flows of a foreign subsidiary,
use the group's functional currency:
(i) At the rate of the start of the period.
(ii) At the rate at the end of the period.
(iii) At the dates of the transactions.
1.
2.
3.
4.
5.
6.
7.
(i) only.
(ii) only.
(iii) only.
(i) or (ii)
(i) or (iii)
(ii) or (iii)
(i), (ii) or (iii)
26. When accounting for an associate, an investor reports the

cash flows:
1. Using proportional consolidation.
2. Only the cash flows between itself and the investee.
3. In a separate cash flow statement.
27. When accounting for a joint venture, an investor reports
the cash flows:
1. Using proportional consolidation.
2. Only the cash flows between itself and the investee.
3. In a separate cash flow statement.
23. Unrealised gains (and losses) arising from changes in

foreign currency exchange rates are:
1. Translated at closing rate.
2. Translated at opening rate.
3. Not cash flows.
24. Cash flows from interest and dividends received, and paid,
should:
1. Each be disclosed separately.
2. Be shown as a net figure.
3. Be excluded from the cash flow statement.
25. Taxes paid are usually classified as cash flows from:
36
9. Answers to Multiple Choice Questions

Question
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
Answer
3
1
4
3
1
2
3
2
1
3
4
1
5
7
8
5
2
4
4
3
2
3
3
1
1
2
2
Note: Material from the following PricewaterhouseCoopers publications has been

used in this workbook:
-Applying IFRS
-IFRS News
-Accounting Solutions
37

IAS 7 Statement of Cash Flows 2011: For Accounting Professionals

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IAS 7 Statement of cash flows

IAS 7 Statement of cash flows

3. PRESENTATION OF A CASH FLOW STATEMENT 7

8. MULTIPLE CHOICE QUESTIONS

Information about the cash flows of an undertaking is useful in

An undertaking should prepare a cash flow statement in

9. ANSWERS TO MULTIPLE CHOICE QUESTIONS 36

7. CASH FLOW STATEMENT FOR A FINANCIAL

The objective of IAS 7 is to require the provision of information

6. COMPONENTS OF CASH (AND CASH

IAS 7, and should present it as an integral part of its financial

IAS 7 Statement of cash flows

EXAMPLE - Wholly owned subsidiaries exempt from

The exemption is available provided the parent prepares

IAS 7 Statement of cash flows

Historical cash flow information is often used as an indicator of the

Investing activities are the acquisition, and disposal, of long-term

Cash and cash equivalents

Cash comprises cash on hand, and deposits that can be repaid on

Cash equivalents are held for the purpose of meeting short-term

Cash equivalents are short-term, highly-liquid investments that are

For an investment to qualify as a cash equivalent, it must be readily

EXAMPLE Cash equivalents

An investment normally qualifies as a cash equivalent only when it

Cash flows are inflows and outflows of cash (and cash

EXAMPLE- When can bonds be classified as cash

Operating activities are the principal revenue-producing activities

EXAMPLE- Operating activities

Can management classify bonds as cash equivalents?

IAS 7 Statement of cash flows

that the obligated undertaking will fully redeem the security at

IAS 7 Statement of cash flows

Classification by activity provides information that allows users to

IAS 7 Statement of cash flows

Cash flow from

Cash flow from

IAS 7 Statement of cash flows

Examples of cash flows from operating activities are:

payments to suppliers for goods (and services);

payments to (and on behalf of) employees;

receipts and payments of an insurance undertaking for

payments (or refunds) of income taxes unless they can be

receipts (and payments) from contracts held for dealing (or

Some transactions, such as the sale of an item of plant, may give

IAS 7 Statement of cash flows

purchase of land and buildings

EXAMPLE - sale of an item of plant: a gain that is included in

Cash flows during the period should be classified by operating,

Cash payments to manufacture or acquire assets held for rental to

a) a property developer; and

A specialist trading in securities will treat them as inventory

A property developer purchases land and buildings to

IAS 7 Statement of cash flows

payments to acquire property, plant and equipment,

EXAMPLE- Self-constructed property

receipts from sales of property, plant and equipment,

EXAMPLE- Receipt from sales of property

payments to acquire shares or debt instruments of other

EXAMPLE- Payments to acquire shares

receipts from sales of shares (or debt) instruments of other

advances (and loans) made to other parties (other than by a

receipts from the repayments of advances and loans made