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IAS 7 CASH FLOW STATEMENTS

 Cash Flow Statements

The members of the project team were contributed by

PricewaterhouseCoopers, ACCA, FBK and Agriconsulting.

Answers to Self Test Questions

Self Test Questions – Multiple choice and Exercises
Moscow, Russia, February 2007 (updated) Information with examples

Fax. + 7 495- 967-6001 Each workbook is a combination of:

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e-mail that practicing accountants can use to upgrade their knowledge, understanding and
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The project team would like to express thanks to those who have in the Russian Federation.
contributed their time and thoughts to the content of the workbooks. Implementation of the Accounting ReformThis series of workbooks has
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PREFACE
The copyright of the material contained in each workbook belongs to the
European Union and, according to its policy, may be used free of charge CONTENTS
for any non-commercial purpose.

The Workbook Series consists of a range of titles listed on our website.

1. Introduction 3

2. Definitions 3

3. Presentation of a Cash Flow Statement 4

4. Reporting Cash Flows from Operating Activities 7

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 Cash Flow Statements

5. Foreign Currency Cash Flows 8

6. Components of Cash (and Cash Equivalents) 11

7. Cash Flow Statement for a Financial Institution 15

8. Multiple Choice Questions 16

9. Answers to Multiple Choice Questions 19

9. Answers to Multiple Choice Questions

1. Introduction
AIM
The aim of this workbook is to assist the individual in understanding Cash Flow
Statements according to IFRS.

OBJECTIVE
Cash Flow Statements are the subject of IAS 7.

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.

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.

Scope

An undertaking should prepare a cash flow statement in accordance with

IAS 7, and should present it as an integral part of its financial statements, for
each period for which financial statements are presented.

Users are interested in how the undertaking generates, and uses, cash (and
cash equivalents). Businesses need cash to conduct their operations, to pay
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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.
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.
2. Definitions
Cash comprises cash on hand, and deposits that can be repaid on demand.
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.
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.
Cash Flow Statements
Cash flows are inflows and outflows of cash (and cash equivalents).
Operating activities are the principal revenue-producing activities of the
undertaking, and other activities that are not investing, or financing activities.
EXAMPLE- Operating activities
Daily sales and purchases, employee costs and general overheads comprise
the operating activities.
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.
Cash and cash equivalents
Cash equivalents are held for the purpose of meeting short-term cash
commitments, rather than for investment.
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.
An investment normally qualifies as a cash equivalent only when it has a
maturity of three months (or less), from the date of acquisition.
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.
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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.
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
Cash Flow Statements
element may be classified as an operating activity, and the capital element is
classified as a financing activity.
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 super markets. 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:
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(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. However, these cash flows are cash flows
from investing activities.
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.
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 Flow Statements
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.
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
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) 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));
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 Cash Flow Statements

EXAMPLE- Payments to acquire shares

You buy a competitors business, and acquire all of its shares. This is an (i) proceeds from issuing shares, or other equity instruments;
investment activity.
(ii) payments to owners to acquire, or redeem the undertaking's shares;
(iv) receipts from sales of shares (or debt) instruments of other undertakings
and interests in joint ventures (other than for instruments that are cash (iii) proceeds from issuing debentures, loans, notes, bonds, mortgages and
equivalents, or held for trading purposes); other short or long-term borrowings;

(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);
(vii) 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
(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.

(viii) receipts from futures contracts, forward contracts, option contracts and
swap contracts (except when the contracts are held for dealing or
trading purposes, or the receipts are classified as financing activities).

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.

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.

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:

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4. Reporting Cash Flows From Operating
Activities
An undertaking should report cash flows from operating activities using either:
(i) the direct method, whereby major classes of gross receipts and gross
payments are disclosed; or
(ii) 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.
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.
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.
Under the direct method, information about major classes of gross receipts, and
gross payments, may be obtained either:
(1) from the accounting records; or
(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
(i) changes in inventories, operating receivables, and payables;
(ii) other non-cash items; and
(iii) other items, for which the cash effects are investing, or financing cash
flows.
Cash Flow Statements
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;
(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.
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
An undertaking should report separately major classes of gross receipts, and
gross payments, arising from investing 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.
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 Cash Flow Statements

(ii) receipts and payments for items in which the turnover is quick, the Cash flows, arising from transactions in a foreign currency, should be recorded
amounts are large, and the maturities are short. 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.

Examples of these receipts and payments are:

(i) the acceptance (and repayment) of demand deposits of a bank; EXAMPLE-Reporting foreign currency, at the date of the cash flow.
You receive $600.000 on March 12. Your functional currency is Euros. The
(ii) funds held for clients by an investment undertaking; and exchange rate on March 12 is Euro1= $1.20. The transaction is reported as
Euros 500.000 (600.000/1.2).
(iii) rents collected on behalf of (and paid over to) the owners of properties.
The cash flows of a foreign subsidiary should be translated at the exchange
Examples of these receipts and payments are advances made for (and the rates between the functional currency, and the foreign currency, at the dates of
repayment of): the cash flows.
(i) principal amounts relating to credit card clients; Cash flows denominated in a foreign currency are reported in a manner
consistent with IAS 21 Foreign Currency.
(ii) the purchase and sale of investments; and
This permits the use of approximate exchange rates. For example, a weighted-
(iii) other short-term borrowings, for example, those which have a maturity average exchange rate for a period may be used for recording foreign currency
period of three months or less. transactions, or the translation of the cash flows of a foreign subsidiary.
Cash flows arising from each of the following activities of a financial institution
EXAMPLE-Reporting foreign currency, at weighted-average rate.
may be reported on a net basis:
You receive $600.000 on March 12. Your functional currency is Euros. The
(i) receipts, and payments, for the acceptance (and repayment) of deposits exchange rate on March 12 is Euro1= $1.20. The weighted-average rate for
with a fixed maturity date; 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).
(ii) the placement of deposits with (and withdrawal of deposits from) other
financial institutions; and Unrealised gains (and losses) arising from changes in foreign currency
exchange rates are not cash flows.
(iii) advances, and loans made to clients (and the repayment of those
advances and loans). EXAMPLE- Unrealised gain arising from changes in foreign currency.
You have a foreign investment worth $1,2m. Your functional currency is
5. Foreign Currency Cash Flows 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
(see IAS 21 workbook)
flow.

9

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 (600.000-100.000), if no interest is accrued at
either the start or the end of the period.
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.
Interest paid, and interest and dividends received, may be classified as
operating cash flows, as they enter contribute to net profit.
Cash Flow Statements
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.
Alternatively, dividends paid may be cash flows from operating, to assist users
to determine the ability to pay dividends out of operating cash flows.
Taxes on Income
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.
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.
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.
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.
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.
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.
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Investments in Associates and Joint Ventures
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-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.
An undertaking, which reports its interest in a jointly-controlled entity (see IAS
31 Joint Ventures) using proportionate consolidation, includes its proportionate
share of the jointly-controlled entity's cash flows.
EXAMPLE- Joint venture
You own 60% of a joint venture. Using proportionate consolidation, you
consolidate 60% of all its cash flows into your accounts.
For an undertaking, which reports such an interest using the equity method (an
alternative allowed under IAS 31), the cash flows in respect of its investments in
the jointly-controlled entity, and distributions (and other payments or receipts
between it and the jointly controlled entity). 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.
Cash Flow Statements
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:
(i) the total purchase (or disposal) consideration
(ii) the portion of the purchase (or disposal) consideration, discharged by
cash and cash equivalents;
(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) 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.
Non-cash Transactions
Investing and financing transactions that do not require the use of cash, should
be excluded from a cash flow statement.
EXAMPLE- Non-cash transaction: conversion of debt to equity
You redeem $100m of company bonds by issuing shares of the same value.
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 Cash Flow Statements

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 The effective interest rate on short-term bank deposits was 5.9% (2003:
bonds. 5.6%); these deposits have an average maturity of 20 days.
Cash and bank overdrafts include the following for the purposes of the cash
Such transactions should be disclosed elsewhere in the financial statements, in flow statement:
a way that provides all the relevant information about these investing, and
financing activities. 2004 2003
Cash and cash equivalents 22,228 36,212
Many investing and financing activities do not have a direct impact on current
cash flows, although they do affect the capital and asset structure. Bank overdrafts (2,650) (6,464)
19,578 29,748
Examples of non-cash transactions are: An undertaking discloses the policy that it adopts in determining the composition
(i) the acquisition of assets, either by assuming directly related liabilities, or of cash (and cash equivalents).
by means of a finance lease;
The effect of any change in the policy for determining components of cash (and
(ii) the acquisition of an undertaking, by means of an equity issue, and cash equivalents), for example, a change in the classification of financial
instruments previously considered to be part of an undertaking's investment
(iii) the conversion of debt to equity. portfolio, is reported in accordance with IAS 8 Changes in Accounting Policies.

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:
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.

2004 2003 There are various circumstances in which cash (and cash equivalent) balances
are not available for use by the group.
Cash at bank and in hand 12,698 30,798
Short-term bank deposits 9,530 5,414 Examples include cash (and cash equivalent) balances held by a subsidiary,
22,228 36,212 that operates where exchange controls (or other restrictions) apply, when the
balances are not available for general use by the parent, or other subsidiaries
12
 Cash Flow Statements

The separate disclosure of cash flows that represent increases in operating

Additional information may be relevant to users in understanding the financial capacity, and cash flows which are required to maintain operating, enables the
position, and liquidity of an undertaking. Disclosure of this information, together user to determine whether the undertaking is investing adequately in the
with a commentary by management, is encouraged and may include: maintenance of its operating capacity.

(i) the amount of undrawn borrowing facilities that may be available for An undertaking that does not invest adequately in the maintenance of its
future operating activities, and to settle capital commitments, indicating operating capacity may be prejudicing future profitability, for the sake of current
any restrictions on the use of these facilities; liquidity, and distributions to owners.

EXAMPLE-Facilities The disclosure of segmental cash flows enables users to obtain a better
You have a line of credit for $250m, of which you are only currently using understanding of the relationship between the cash flows of the business as a
$35m. The line of credit is available for 5 years, at a cost of 1% above the whole, and those of its component parts, and the availability (and variability) of
national bank rate. This information helps users know what finance is segmental cash flows.
available for your expansion plans.
(ii) the aggregate amounts of the cash flows from each of operating,
investing and financing activities, related to interests in joint ventures, reported Cash Flow Statement for an Undertaking other than a
using proportionate consolidation; Financial Institution
EXAMPLE- Joint venture The examples show only current period amounts. Corresponding amounts, for
You own 60% of a joint venture. Using proportionate consolidation, you the preceding period, are required to be presented in accordance with IAS 1
consolidate 60% of all its cash flows into your accounts. You also show the Presentation of Financial Statements.
aggregate amounts included in the operating, investing and financing activities
totals. 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
(iii) the aggregate amount of cash flows that represent increases in have been derived.
operating capacity, separately from those cash flows that are required
to maintain operating capacity; and The following additional information is also relevant for the preparation of the
statements of cash flows:
EXAMPLE- Increases in operating capacity
Your only factory has reached full capacity. Your investing activities from your All of the shares of a subsidiary were acquired for 590. The fair values of assets
business have generated $75m. At the very end of the year, you buy some acquired and liabilities assumed were as follows:
land for $10m, on which you will build a new factory. Showing this amount
separately enhances the information provided to users. Inventories 100
Accounts receivable 100
Cash 40
(iv) the amount of the cash flows arising from the operating, investing and
Property, plant and equipment 650
financing activities of each reported industry and geographical segment
Trade payables 100
(see IFRS 8 Operating Segments).
Long-term debt 200

13
 Cash Flow Statements

250 was raised from the issue of share capital, and a further 250 was raised
from long-term borrowings. Consolidated balance sheet 2XX2
2XX1
Interest expense was 400, of which 170 was paid during the period. 100 relating Assets
to interest expense of the prior- period was also paid during the period. Cash (and cash equivalents) 230 160

Dividends paid were 1.200. Accounts receivable 1.900 1.200

Inventory 1.000 1.950
The liability for tax at the beginning and end of the period was 1.000 and 400 Portfolio investments 2.500 2.500
respectively. During the period, a further 200 tax was provided for. Property, plant and equipment at 3.730 1.910
Withholding tax on dividends received amounted to 100. cost
Accumulated depreciation (1.450) (1.060)
During the period, the group acquired property, plant and equipment with an Property, plant and equipment net 2.280 850
aggregate cost of 1.250 of which 900 was acquired by means of finance leases. Total assets 7.910 6.600
Cash payments of 350 were made to purchase property, plant and equipment.
Liabilities
Plant, with original cost of 80 and accumulated depreciation of 60, was sold for Trade payables 250 1.890
20. Interest payable 230 100
Income taxes payable 400 1.000
Accounts receivable as at end of 2XX2 include 100 of interest receivable. Long term debt 2.300 1.040
Total liabilities 3.180 4.030

Shareholders' Equity
Share Capital 1.500 1.250
Retained earnings 3.410 1.380
Total shareholders equity 4.730 2.630
Total liabilities and shareholders equity 7.910 6.660
Consolidated Income Statement for the period ended 2XX2
Sales 30.650 Direct Method Cash Flow Statement 2XX2
Cost of sales (26.000)
Gross Profit 4.650 Cash flows from operating activities
Depreciation (450) Cash receipts from clients 30.150
Administrative and selling expense (910) Cash paid to suppliers and employees (27.600)
Interest expense (400) Cash generated from operations 2.550
Investment income 500 Interest paid (270)
Foreign exchange loss (40) Income taxes paid (900)
Net profit before taxation 3.350 Net cash from operating activities 1.380
Taxes on income (300) Cash flows from investing activities
Net profit 3.050
14
 Cash Flow Statements

Acquisition of subsidiary X net of cash acquired (550) Interest paid (270)

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

Indirect Method Cash Flow Statement

2XX2
Cash flows from operating activities
Net profit before taxation 3.350
Adjustments for:
Depreciation 450
Foreign exchange loss 40
Investment income (500)
Interest expense 400
3.740
Increase in trade and other receivables (500)
Decrease in inventories 1.050
Decrease in trade payables (1.740)
Cash generated from operations 2.550
15
 Cash Flow Statements

Notes to the Cash Flow Statement (direct method and indirect Cash (and cash equivalents) at the end of the period include deposits with
method) banks of 100 held by a subsidiary which are not freely remissible to the holding
company because of currency exchange restrictions.
A. Acquisition of Subsidiary The Group has undrawn borrowing facilities of 2.000 of which 700 may be used
only for future expansion.
During the period the group acquired subsidiary X. The fair value of assets
acquired and liabilities assumed were as follows: D. Segment Information
Cash 40 Segment Segment Total
Inventories 100 A B
Accounts receivable 100 Cash flows from:
Property, plant and equipment 650 Operating activities 1,520 (140) 1,380
Trade payables (100) Investing activities (640) 160 (480)
Long-term debt (200) Financing activities (570) (220) (790)
Total purchase price 590 310 (200) 110
Less: Cash of X (40)
Cash flow on acquisition net of cash acquired 550 Alternative Presentation
(indirect method)
B. Property, Plant and Equipment
As an alternative, in an indirect method cash flow statement, operating profit
During the period the Group acquired property, plant and equipment with an before working capital changes is sometimes presented as follows:
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. Revenues excluding investment income 30,650
Operating expense excluding depreciation (26,910)
C. Cash (and cash equivalents) Operating profit before working capital changes 3,740
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: 7. Cash Flow Statement for a Financial
2XX2 2XX1
Institution
Cash on hand and balances with banks 40 25
Short-term investments 190 135 1. The example shows only current period amounts. Comparative amounts
Cash (and cash equivalents) as previously reported 230 160 for the preceding period are required to be presented.
Effect of exchange rate changes - (40)
Cash (and cash equivalents) as restated 230 120 2. The example is presented using the direct method.

2XX2
Cash flows from operating activities
16
 Cash Flow Statements

Interest and commission receipts

Interest payments
28.447
(23.463)
8. Multiple Choice Questions
Recoveries on loans previously written off 237
Cash payments to employees and suppliers (997) 1. A company provides consolidated accounts, with comparative accounts
4.224 for 5 previous periods.
(Increase) decrease in operating assets: For how many periods are cash flow statements are required?
Short-term funds (650) 1. 1
Deposits held for regulatory or monetary control purposes 234 2. 5
Funds advanced to clients (288) 3. 6
Net increase in credit card receivables (360)
Other short-term negotiable securities (120) 2. Cash flow statements are required from:
Increase (decrease) in operating liabilities: 1. All companies.
Deposits from clients 600 2. Listed companies.
Negotiable certificates of deposit (200) 3. Financial institutions.
Net cash from operating activities before income tax 3.440
Income taxes paid (100) 3. A cash flow statement provides information that enables users to
Net cash from operating activities 3.340 evaluate the changes in:
Cash flows from investing activities 1. Net assets of an undertaking.
Disposal of subsidiary M 50 2. Its financial structure.
Dividends received 200 3. Its liquidity.
Interest received 300 4. Solvency.
Proceeds from sales of non-dealing securities 1.200 5. Profitability.
Purchase of non-dealing securities (600)
Purchase of property, plant and equipment (500) 4. A cash flow statement helps in examining the relationship between:
Net cash from investing activities 650 1. Profitability.
2. Net cash flow.
Cash flows from financing activities 3. The use of assets and liabilities.
Issue of loan capital 1.000 4. Staffing levels.
Issue of preference shares by subsidiary undertaking 800
Repayment of long-term borrowings (200) 1. i
Net decrease in other borrowings (1.000) 2. i-ii
Dividends paid (400) 3. i-iii
Net cash from financing activities 200 4. i-iv
Effects of exchange rate changes on cash (and cash 600
equivalents) 5. Daily sales and purchases, employee costs and general overheads
Net increase in cash (and cash equivalents) 4.790 comprise:
Cash (and cash equivalents) at beginning of period 4.050 1. Operating activities.
Cash (and cash equivalents) at end of period 8.840 2. Investing activities.
3. Financial activities.

17
 Cash Flow Statements

13. The amount of cash flows arising from operating activities is a key
6. The acquisition, and disposal, of long-term assets are: indicator of the extent to which the operations have generated sufficient
1. Operating activities. cash flows to:
2. Investing activities. 1. Repay loans.
3. Financial activities. 2. Maintain the operating capability of the undertaking.
3. Pay dividends.
7. Activities that result in changes in the size (and composition) of the 4. Make new investments.
equity capital, and borrowings are: 5. All
1. Operating activities.
2. Investing activities. 14. Examples of cash flows from operating activities are:
3. Financial activities.
(i) Receipts from the sale of goods, and the rendering of services.
8. For an investment to qualify as a cash equivalent, it must be:
1. Illiquid and low risk. (ii) Receipts from royalties, fees, commissions and other revenue.
2. Liquid and low risk.
3. Liquid and medium risk. (iii) Payments to suppliers for goods (and services).

9. The maximum maturity of a cash equivalent is: (iv) Payments to (and on behalf of) employees.
1. 3 months.
2. 6 months. (v) Receipts and payments of an insurance undertaking for premiums and
3. 1 year. claims, annuities and other policy benefits.

10. Bank borrowings are generally considered to be: (vi) Payments (or refunds) of income taxes unless they can be specifically
1. Operating activities. identified with financing and investing activities.
2. Investing activities.
3. Financial activities. (vii) Receipts (and payments) from contracts held for dealing (or trading)
4. Cash equivalents. purposes.

11. If bank overdrafts form an integral part of an undertaking's cash (viii) Sale of an item of plant, giving rise to a gain (or loss) that is included in
management, they are considered to be: net profit.
1. Operating activities.
2. Investing activities. 1. i
3. Financial activities. 2. i-ii
4. Cash equivalents. 3. i-iii
4. i-iv
12. A single transaction: 5. i-v
1. May include cash flows that are classified differently. 6. i-vi
2. Must be included in full in one of the three headings. 7. i-vii
3. May be spread over more than one period. 8. i-viii
18
 Cash Flow Statements

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.
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.

(ii) Receipts from sales of property, plant and equipment, intangibles and (iii) Proceeds from issuing debentures, loans, notes, bonds, mortgages and
other long-term assets. other short or long-term borrowings.

(iii) Payments to acquire shares or debt instruments of other undertakings, (iv) Repayments of amounts borrowed.
and interests in joint ventures (other than for instruments that are cash
equivalents, or held for dealing (or trading purposes)). (v) Payments by a lessee for the reduction of the outstanding liability
relating to a finance lease.
(iv) Receipts from sales of shares (or debt) instruments of other (vi) Receipts by a lessor for the reduction of the outstanding liability relating
undertakings and interests in joint ventures (other than for instruments to a finance lease.
that are cash equivalents, or held for trading purposes). 1. i
2. i-ii
(v) Advances (and loans) made to other parties (other than by a financial 3. i-iii
institution). 4. i-iv
5. i-v
(vi) Receipts from the repayments of advances and loans made to other 6. i-vi
parties (other than those of a financial institution).
17. Which method of cash flow reporting starts with net profit?
(vii) Payments for futures contracts, forward contracts, option contracts and 1. Direct method.
swap contracts (except when the contracts are held for dealing or 2. Indirect method.
trading purposes, or the payments are classified as financing activities). 3. Both.
4. Neither.
(viii) Receipts from futures contracts, forward contracts, option contracts and
swap contracts not held for dealing or trading purposes. 18. Which method of cash flow reporting starts with changes in
1. i inventories?
2. i-ii 1. Direct method.
3. i-iii 2. Indirect method.
4. i-iv 3. Both.
5. i-v 4. Neither.
6. i-vi
7. i-vii 19. If you start with net profit, to calculate the cash generated from
8. i-viii operating activities, you:
19
 Cash Flow Statements

adjust net profit for the effects of: 3. An undertaking's functional currency, at the rate at the end of the
period.
(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 22. When translating the cash flows of a foreign subsidiary, use the
associates, and minority interests. group's functional currency:
(i) At the rate of the start of the period.
(iii) Investing cash flows. (ii) At the rate at the end of the period.
(iii) At the dates of the transactions.
(iv) Financing cash flows.
1. (i) only.
(v) Social security costs. 2. (ii) only.
3. (iii) only.
1. i 4. (i) or (ii)
2. i-ii 5. (i) or (iii)
3. i-iii 6. (ii) or (iii)
4. i-iv 7. (i), (ii) or (iii)
5. i-v
23. Unrealised gains (and losses) arising from changes in foreign currency
exchange rates are:
20. Examples of these receipts and payments that can be netted are 1. Translated at closing rate.
advances made for (and the repayment of): 2. Translated at opening rate.
3. Not cash flows.
(i) Principal amounts relating to credit card clients.

(ii) The purchase and sale of investments. 24. Cash flows from interest and dividends received, and paid, should:
1. Each be disclosed separately.
(iii) Short-term borrowings (3 months, or less). 2. Be shown as a net figure.
3. Be excluded from the cash flow statement.
1. i
2. i-ii 25. Taxes paid are usually classified as cash flows from:
3. i-iii 1. Operating activities.
2. Investing activities.
21. Cash flows, arising from transactions in a foreign currency, should be 3. Financial activities.
recorded in:
1. Local currency. 26. When accounting for an associate, an investor reports the cash flows:
2. An undertaking's functional currency, at the rate of the date of the 1. Using proportional consolidation.
transaction. 2. Only the cash flows between itself and the investee.
3. In a separate cash flow statement.
20
 Cash Flow Statements

9. 1
27. When accounting for a joint venture, an investor reports the cash 10. 3
flows: 11. 4
1. Using proportional consolidation. 12. 1
2. Only the cash flows between itself and the investee. 13. 5
3. In a separate cash flow statement. 14. 7
15. 8
16. 5
17. 2
18. 4
19. 4
9. Answers to Multiple Choice Questions 20. 3
21. 2
Question Answer 22. 3
1. 3 23. 3
2. 1 24. 1
3. 4 25. 1
4. 3 26. 2
5. 1 27. 1
6. 2
7. 3
8. 2

21
and can in no way be taken to reflect the views of the European Union.ACCA, FBK and AgriconsultingThis publication has been produced with the assistance
of the European Union. The contents of this publication are the sole responsibility of ZAO “PricewaterhouseCoopers”