PAS 7 CASH FLOW STATEMENTS

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

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

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

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

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

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

Although the term direct is not used in this context, the investing and financing activities sections are also
presented on a direct basis, meaning the information published is the gross cash payments and the gross
cash receipts classified under various headings. However, some of the figures will generally be calculated
indirectly, by adjusting amounts calculated on an accruals basis for non-cash movements to bring them
back to a cash basis. some examples of investing activities?
a. Cash receipts and cash payments from the sale / purchase of property, plant and equipments,
intangibles or other non-current assets.
examples of financing activities?
a. Cash payments to owners to acquire or redeem entitys shares and cash repayments of amounts
borrowed.
1. the major classes of gross cash receipts and payments attributable to investing and financing activities
must be reported separately.
2. IAS 7 allows some netting of cash flows in limited circumstances; for example, if the cash flows relate to
items whose turnover is quick, the amounts are large, and the maturities are short.

In principle, the standard requires that any cash flows made in a foreign currency must be translated at the
actual exchange rate ruling at the date of the cash flow, in order to present on the cash flow statement.
The standard applies to cash flows conducted directly by the entity and those arising on the consolidation
of foreign entities.

1. _________ Comprises cash on hand and demand deposits

a. Cash b. Cash equivalents c. Cash on hand d. Cash in bank

2. _________ 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.
a. Cash b. Cash equivalents c. Cash on hand d. Cash in bank

3. _________ are inflows and outflows of cash and cash equivalents

a. Cash b. Cash equivalents c. Cash on hand d. Cash flows

4. Are the principal revenue-producing activities of the entity and other activities that are not investing or
financing activities?
a. Operating activities b. Investing activities c. Financing activitiesd. Cash and Cash equivalents

5. Are the acquisition and disposal of long-term assets and other investments not included in cash
equivalents
a. Operating activities b. Investing activities c. Financing activitiesd. Cash and Cash equivalents

6. Are the activities that result in changes in the size and composition of the contributed equity and
borrowings of the entity
a. Operating activities b. Investing activities c. Financing activitiesd. Cash and Cash equivalents

7. The following statements are true about Cash and Cash equivalents except?
a. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for
investment or other purpose.
b. 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.
c. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of,
say, three months or less from the date of acquisition.
d. Equity investments are included from cash equivalents.

8. . The following statements are true about Cash and Cash equivalents except?
a. Preferred shares acquired within a short period of their maturity and with a specified redemption date.
b. Bank borrowings are generally considered to be financing activities
c. Cash flows include movements between items that constitute cash or cash equivalents because these
components are part of the cash management or an entity rather than part of its operating, investing and
financing activities.
d. Cash management includes the investment of excess cash in cash equivalents

9. In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive
assets should generally be classified as cash inflows from
a.operating activities. b. financing activities. c. investing activities.
d. selling activities.

10. In a statement of cash flows, interest payments to lenders and other creditors should be classified as
cash
outflows for
a. operating activities or financing activities c. operating activities or investing activities
b. operating activities d. financing activities.

11. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash
inflows
from
a.lending activities. b. operating activities. c. investing activities. d. financing
activities.

12. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash
equivalents) should be classified as cash outflows for
a.operating activities. b. investing activities. c. financing activities. d. lending
activities.
13. Which of the following is considered as cash flows from operating activities
a. Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets
b. cash advances and loans made to other parties
c. cash receipts from the repayment of advances and loans made to other parties
d. cash receipts and payments from contracts held for dealing or trading purposes

14. An entity shall report cash flows from operating activities using
I. the direct method
II. the indirect method
a. I only b. II only c. Both I and II d. Either I or II

15. IAS 7 encouraged to report cash flows from operating activities using the
a. the direct method b. indirect method c. a combination of the two d. none

16. Which of the following cash flows arising from activities of a financial institution may be reported on a
net basis
I. cash 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 institution
III. Cash advances and loans made to customers and the repayment of those advances and loans
a. I and II only b. II and III only c. All of these d. None of these

17. The following statements about foreign currency cash flows is correct, except
a. Cash flows arising from transactions in a foreign currency shall be recorded in an entity s functional
currency by applying to the foreign currency amount the exchange rate between the functional currency
and the foreign currency at the date of the cash flow.
b. The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional
currency and the foreign currency at the dates of the cash flows
c. Cash flows denominated in a foreign currency are reported in a manner consistent with IAS 21 The
effects of Changes in Foreign Exchange Rates
d. Unrealised gains and losses arising from changes in foreign currency exchange rates are cash flows.

18. The following statements about interest and dividends in the statements of cash flows are correct,
except
a. Cash flows from interest and dividends received and paid shall each be disclosed separately.
b. The total amount of interest paid during a period is disclosed in the cash flow statement whether it has
been recognized as an expense in the income statement or capitalized in accordance with the allowed
alternative treatment in IAS 23.
c. Interest paid and interest and dividends received are usually classified as investing or financing
activities cash flows for a financial institution.
d. Interest paid and interest and dividends received may be classified as operating cash flows because
they enter into the determination of profit or loss.

19. Which of the following statements is/are incorrect about the statement of cash flows
I. Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash
flows from operating activities unless they can be specifically identified with financing and investing
activities
II. When accounting for an investment in an associate or a subsidiary accounted for by use of the equity or
cost method, an investor restricts its reporting in the cash flow statements to the cash flows between itself
and the investor.
III. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business
units shall be presented separately and classified as investing activities or financing activities.
IV. An entity shall not disclose the components of cash and cash equivalents
a. I and II only b. II and IV only c. III and IV only d. I and IV only

20. The primary purpose of the cash flow statement is

a. To provide relevant information about cash receipts and cash payments of an entity during a period
b. To help investors, creditors and other users to assess the entitys ability to generate positive future net
cash flows
c. To disclose separately noncash investing and financing activities
d. to assess the ability of the entity to pay dividends to stockholders

21. An entity shall prepare a cash flow statements and shall present it as
a. Supplementary financial statements
b. Note to financial statements
c. Supporting schedule for amount appearing as cash and cash equivalents
d. Integral part of the enterprises basic financial statements

22. Cash inflows in the cash flow statement are

a. Inflows of cash and cash equivalents
b. Outflows of cash and cash equivalents
c. Inflows and outflows of cash
d. Inflows and outflows of cash and cash equivalents
23. Which can qualify as cash equivalents?
a. One-year BSP treasury bill
b. Six-month money market placements
c. Equity securities
d. Preferred shares with specified redemption date and acquired three months before redemption

24. An entity may hold securities for dealing or trading purposes. Cash flows arising from the purchase
and sale of dealing or trading securities are
a. Classified as operating activities c. Classified as financing activities
b. Classified as investing activities d. Not reported in the cash flow statement

25. Cash payments to acquire equity instruments of other entities and interest in joint ventures are
a. Cash outflows for financing activities c. Cash outflows from investing activities
b. Cash inflows from investing activities d. Cash inflows from financing activities

26. An enterprise should prepare a cash flow statement and should present it as
a. Integral part of the enterprises basic financial statements.
b. Supporting schedule for the amount appearing as cash and cash equivalent.
c. Note to financial statements.
d. Supplementary financial statement.

27. Cash flows in the cash flow statement are

a. Inflows and outflows of cash
b. Inflows and outflows of cash and cash equivalents
c. Inflows of cash and cash equivalents
d. Outflows of cash and cash equivalents

28. XYZ Company purchased a three-month Treasury bill. The companys policy is to treat as cash
equivalents all highly liquid investments with an original maturity of three months or less when purchased.
How should this purchase be reported in the cash flow statement?
a. As an outflow from operating activities c. As an outflow from investing activities
b. As an outflow from financing activities d. Not reported

29. Cash receipts from royalties, fees, commissions and other revenue are
a. Cash outflows for operating activities c. Cash inflows from investing activities
b. Cash inflows from operating activities d. Cash outflows for investing activities

30. Cash payments to acquire equity or debt instruments of other enterprises are
a. Cash outflows for financing activities c. Cash outflows for investing activities
b. Cash inflows from financing activities d. Cash inflows from investing activities

31. Cash receipts from issuing shares and other equity instruments are
a. Cash inflows from financing activities c. Cash outflows for investing activities
b. Cash inflows from investing activities d. Cash outflows for financing activities

32. Cash payments to owners to acquire or redeem the enterprises shares are
a. Cash inflows from financing activities c. Cash inflows from investing activities
b. Cash outflows for financing activities d. Cash outflows for investing activities

33. Interest payments to lenders and other creditors should be classified as cash outflows for
a. Operating activities c. Borrowing activities
b. Lending activities d. Financing activities

34. Dividend payments to owners should be classified as cash outflows for

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

35. Cash flows arising from income taxes should be separately disclosed and should be classified as
a. Operating activities c. Investing activities
b. Financing activities d. Extraordinary activities

36. The aggregate cash flows from acquisition and disposal of a subsidiary should
a. Be classified as operating activities c. Be classified as financing activities
b. Be classified as investing activities d. Not be reported

37. Which can qualify as cash equivalent?

a. Equity securities
b. Six-month certificate of deposit
c. Preferred shares with specified redemption date and acquired three months before redemption date
d. One-year treasury bills maturing in three months from balance sheet date.

38. Which of the following cash flows does not appear in a cash flow statement using indirect method?
a. Net cash flow from operating activities c. Cash inflow from sale of equipment
b. Cash received from customers d. Cash outflow for dividend payment
39. In a cash flow statement using the indirect approach for operating activities, an increase in inventory
should be presented as
a. Outflow of cash c. Inflow and outflow of cash
b. Addition to net income d. Deduction from net income

40. Which should not be disclosed in the cash flow statement using the indirect method?
a. Interest paid, net of amounts capitalized
b. Income taxes paid
c. Cash flow per share
d. Dividends paid on preferred stock

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

42. In a cash flow statement, 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

43. In a cash flow statement, if used equipment is sold at loss, the amount shown as a cash flow from
investing activities equals the carrying amount of the equipment
a. Less the loss and plus 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

44. On July 1, 2005 ABC Company signed a 20-year building lease that it reported as a finance lease. ABC
paid the monthly lease payments when due. How should ABC report the effect of the lease payments in
the financing activities section of its 2005 cash flow statement?
a. As an inflow equal to the present value of future lease payments at July 1, 2005 less the 2005 principal
and interest payments
b. As an outflow equal to the 2005 principal and interest payments
c. As an outflow equal to the 2005 principal payments only
d. The lease payments should not be reported in the financing activities section

45. Financing activities are the

a. Activities that result in changes in the size and composition of equity capital and borrowings of the
enterprise.
b. Acquisition and disposal of long-term assets and other investments not included in cash equivalents.
c. Principal revenue-producing activities of the enterprise.
d. Borrowings and subsequent payments of the borrowings only.

46. Bank overdrafts are

a. Component of cash and cash equivalents if they are repayable on demand and the bank balance often
fluctuates from positive to negative.
b. Investing activities
c. Operating activities
d. Financing activities

47. A companys wages payable increased from the beginning to the end of the year. Under the direct
method, cash paid for wages would be
a. Salary expense plus beginning wages payable
b. Salary expense plus the increase in wages payable
c. Salary expense less the increase in wages payable
d. The same as salary expense

48. An enterprises accounts receivable decreased from beginning to the end of the year. In the cash flow
statement using the direct method, the cash collected from customers would be
a. Sales revenue plus accounts receivable at the beginning
b. Sales revenue plus the decrease in accounts receivable
c. Sales revenue minus the decrease in accounts receivable
d. The same as sales revenue

49. Which of the following information would be added back to the net income when reporting cash flow
from operating activities using the indirect method?
a. Excess of treasury stock acquisition cost over sales proceeds
b. Bond discount amortization
c. Bond premium amortization
d. Extraordinary gain

50. Which of the following information should be disclosed as supplemental information in the cash flow
statement?
a. Cash flow per share
b. Conversion of debt to equity
c. Issue of common stock for cash
d. Purchase of treasury stock for cash at more than par value

51. When calculating the estimates of future cash flows for impairment, which of the following cash flows
should not be included?
a. Cash flows from disposal c. Cash flows from the sale of assets produced by the assets
b. Income tax payments d. Cash outflows on the maintenance of the asset

52. In cash flow statement prepared using the direct method, if wages payable increased during the year,
the cash paid for wages would be
a. The same as salary expense
b. Salary expense plus wages payable at the beginning of the year.
c. Salary expense plus the increase in wages payable from the beginning to the end of the year
d. Salary expense less the increase in wages payable from the beginning to the end of the year.

53. Cash equivalents would not include short-term investments in

a. Money market funds b. Available for sale securities
c. Commercial paper d. Certificates of deposit

54. Which of the following is true?

a. The American standard requires dividends paid to be classified as an operating activity.
b. The American standard requires interest paid to be classified as financing activity.
c. The American standard allows dividends paid to be classified as an operating activity or as a financing
activity
d. The international accounting standard allows dividends paid to be classified as an operating activity or
as a financing activity.

END

ANSWER KEY:
1. A
2. B
3. D
4. A
5. B
6. C
7. D
8. C
9. C (PAS 7, P. 16a)
10. A (PAS 7, P.33)
11. D (PAS 7, P. 17a)
12. B (PAS 7, P. 16c)
13. D
14. D
15. A
16. C
17. D
18. C
19. C
20. A
21. D
22. D
23. D
24. A
25. C
26. A
27. B
28. D
29. B
30. C
31. A
32. B
33. A
34. C
35. A
36. B
37. C
38. B
39. D
40. C
41. C
42. A
43. C
44. C
45. A
46. A
47. C
48. B
49. B
50. B
51. B
52. D
53. B
54. D
55.

END