You may be asked to prepare a statement of cash flows. There are two different ways of starting the cash flow statement, as IAS 7, Statement of Cash Flows permits using either the 'direct' or 'indirect' method for operating activities. Investing activity cash flows are those that relate to non-current assets including investments . Operating activities can be presented in two different ways. Decrease in receivables 14. T 7. T . It purchased fixed assets for […] During the year the tax charged in the statement of profit or loss was $100. Solution When comparing the two cash flow statements, the financial statement of cash flows is a more appropriate measure of the company’s performance because of its treatment of interest. The indirect method is more commonly examined. Is the above statement TRUE or FALSE Answer TRUE 15. The tax charged in the profit or loss means that the entity now owes more tax. Answer D 16. Please visit our global website instead. T 9. Examples of investing cash flows include the cash outflow on buying property plant and equipment, the sale proceeds on the disposal of non-current assets and any cash returns received arising from investments. So does a cash flow statement have the relevant characteristics of useful information? Accounting policies, changes in accounting estimate and errors (IAS 8), Chapter 11. Statement of cash flows (IAS 7) ACCOUNTING STANDARDS Chapter 5. Entities are financed by a mixture of cash from borrowings from third parties (debt) and by the shareholders (equity). The double entry for depreciation is a debit to statement of profit or loss to reflect the expense and to credit the asset to reflect its consumption. Note how whichever method is used that the same cash is generated from operating activities. The operating cash out flows are payments for wages, to suppliers and for other operating expenses which are deducted. 4(b) Calculation of diluted EPS. Cash flows are either receipts (ie cash inflows and so are represented as a positive number in a statement of cash flows) or  payments (ie cash out flows and so are represented as a negative number using brackets in a statement of cash flows). C. Pays a larger than average dividend. ACTIVITY 23.3 State whether you believe, given your knowledge so far, that cash flow is understandable, relevant, reliable and complete. Question 3: Bengal. Deprecation reduces the carrying amount of the PPE without being a cash flow. Short term cash flow forecasts. Additional information Please visit our global website instead, Can't find your location listed? The second is the indirect method which reconciles profit before tax to cash generated from operating profit. This is the cash receipts from customers. T 10. (b) Using the indirect method determine the operating activities section of the statement of cash flows. At the start of the accounting period the company has retained earnings of $500 and at the reporting date retained earnings are $700. This working is in effect an extract from the statement of changes in equity. Answer will be showing it that is closing bank and cash balance. Pays no dividend at all. A vertical presentation of the numbers lends itself to noting the source of the numbers. Solution Only then are the two actual cash flows of interest paid and tax paid presented. This is the cash receipts from customers. The direct method is relatively straightforward in that all the data are cash flows so it is really just a case of listing the receipts as positive and the payments as negative. A ‘script dividend’ is where a company: A. Examples of financing cash flows include the cash received from new borrowings or the cash repayment of debt as well as the cash flows with shareholders in the form of cash receipts following a new share issue or the cash paid to them in the form of dividends. ACCA and subsidiaries ... Consolidated Cash Flow Statement For the year ended 31 March 2019 8. Finally, the payments for interest and tax are presented – usually as a further deduction. For example, an increase in the levels of inventory and receivables will have not impacted on profit before tax but will have had an adverse impact on the cash flow of the business. Objective of IAS 7 Statement of Cash Flows. Here as we start with profit before tax we have to add back all the non-cash expenses charged, deduct the non-cash income and adjust for the changes in working capital. F 3. A bank overdraft should be treated as a negative cash balance when arriving at the cash and cash equivalents. At the start of the accounting period the company has a tax liability of $50 and at the reporting date a tax liability of $90. Pays a dividend every other year. Under both of these methods the interest paid and taxation paid are then presented as cash outflows deducted from the cash generated from operations. The importance of statements of cash flow. This topic is examined in much more depth in the FR examination than it is at FA. The indirect method is more commonly examined. We will have more to say about this in a later chapter. Cap., Debenture, Bank Loan, Dividend and Interest paid etc. The accounting statement of cash flows will be: Statement of cash flows Operations Net income $95 Depreciation 90 Changes in other current assets (5) Change in accounts payable 10 Total cash flow from operations $190 Investing activities 17 Group statements of cash flows 413 Part D Performance reporting 18 Performance reporting 437 19 Current developments 495 20 Reporting for specialised entities 511 21 Reporting for small and medium-sized entities 529 Exam question and answer bank 539 Mathematical tables 627 Index 631 Review form Only then are the two actual cash flows of interest paid and tax paid presented. The balancing figure is the cash spent to buy new PPE. Non-current assets (IAS20) Chapter 5. Provisions, contingent assets and liabilities (IAS 37), Chapter 14. changes in Cash Flow from it like Equity capital, Pref. Events after the reporting date (IAS 10), Chapter 20. A statement of cash flow classifies and presents cash flows under three headings: (i) Operating activities F 4. C Financial statements C1 Cash flow statements Chapter 21 C2 Tangible non-current assets Chapter 5 C3 Intangible assets Chapter 6 C4 Inventory Chapter 12 C5 Financial assets and financial liabilities Chapter 14 C6 Leases Chapter 16 C7 Provisions, contingent liabilities and contingent assets Chapter 13 C8 Impairment of assets Chapter 7 Net cash from/used in financing activities. For example, when the opening balance of an asset, liability or equity item is reconciled to its closing balance using information from the statement of profit or loss and/or additional notes, the balancing figure is usually the cash flow. Cash Flow from Financing Activities + Decrease in notes payable + Increase in long-term debt + Changes in shareholders’ equity -Dividends paid Cash provided by fi nancing activities Net increase/decrease in cash and marketable securities Financial Statement and Ratio Analysis LO1 The Financial Statements 1.3 Statement of Cash Flows Receipts from customers, combined with cash sales, were $800,000, payments to suppliers of raw materials $400,000, other operating cash payments were $100,000 and cash paid on behalf and to employees was $126,000. Required: Answer (b) indirect method Non-current assets held for sale and discontinued operations (IFRS 5), Chapter 9. Cash Flow Statements - … Statement of cash flow are an important statement for the users of accounts because: They help users to assess liquidity and solvency – an adequate cash position is essential in the short term both to ensure the survival of the business and to enable debts and dividends to be paid. A cash flow statement is used as a Conjunction with the other Financial Statements. 1.Cash Flow Statement Cash flow statement is a statement showing the changes in financial position of a business concern during different intervals of time in terms of cash and cash equivalents. 3(a) Prepare cash flow statements. B. testing question (OTQ) format. During the year depreciation charged was $20, a revaluation surplus of $60 was recorded and PPE with a carrying amount of $15 was sold for $20. 1. Solution (iii) Financing activities. The double entry is a credit to the revaluation surplus to reflect the gain and to debit the asset to reflect its increase, The carrying amount of the PPE that has been disposed of reduces the PPE thus a credit to the asset account which is then posted as a debit in the disposals account, This sub-total represents the balance of the PPE if no PPE had been bought for cash, This is the last figure written in the reconciliation This balancing figure explains why the actual PPE at the reporting date is greater than the sub-total. The Cash Flow Statement (AS 3) provides information about the Net Assets of an Enterprise its Financial Structure and Its Ability to Affect the Amounts and timing of Cash Flows. Financing activity cash flows relate to cash flows arising from the way the entity is financed. During the same period it issued shares of Rs.2,00,000 and redeemed debentures of Rs.1,50,000. Important Questions for CBSE Class 12 Accountancy Cash Flow Statement. cash flow statement to assess the impact of these activities on the financial position of an enterprise and also on its cash and cash equivalents. 4(a) Qualitative characteristics of financial statements and IFRS disclosure requirements. ... 19 IAS 7 (Revised): Statements of Cash Flows 103 20 Interpretation of Accounts – Ratio Analysis 113 21 IAS 33 Earnings Per Share 119 ... Free ACCA notes t Free ACCA lectures t Free ACCA tests t Free tutor support t Studyuddies t ACCA forums This simple technique of taking the opening balance of an item (in this case the tax liability) and adding (or subtracting) the non-cash transactions that have caused it to change, to then reveal the actual cash flow as the balancing figure, has wide application. The debit charged as the expense in profit or loss is posted and a credit to the tax liability account reflects the effect of increase in the tax liability, This sub-total represents the amount of the tax liability that there would have been at the reporting date in the event that no tax had been paid, This is the last figure written in the reconciliation. 5. The Statement of Cash Flows describes the cash inflows and outflows for the firm based upon three categories of activities. Intangible assets (IAS 38) Chapter 7. The first is the direct method which shows the actual cash flows from operating activities – for example, the receipts from customers and the payments to suppliers and staff. More information on these question types will be available on the ACCA website. It is necessary to reconcile the opening tax liability to the closing tax liability to reveal the cash flow – the tax paid - as the balancing figure. Financial instruments (IFRS 9), Chapter 13. As explained by examiner, some students spent a disproportionate of time in cash flow statement in their SBR exam. In fact it … The cash flow statement may include data not disclosed in a funds flow statement. ADVERTISEMENTS: Here is a compilation of top nine problems on cash flow statements along with its relevant solutions. D. Pays a dividend in shares rather than cash. Problem 1: From the following summary of Cash Account of X Ltd., prepare Cash Flow Statement for the year ended 31st March 2007 in accordance with AS-3 using the direct method. At the start of the accounting period the company has PPE with a carrying amount of $100. As before, to ascertain the cash flow – in this case dividends paid - we can reconcile an opening to closing balance – in this case retained earnings. FR, however, is more likely to ask for an extract from the statement of cash flows using more complex transactions (for example, the purchase of PPE using right-of-use asset leases). The direct method is intuitive as it means the statement of cash flow starts with the source of operating cash flows. The balancing figure is the cash spent to buy new PPE. Accounting Standard AS 3 Cash Flow Statements. The article will explain how to calculate cash flows and where those cash flows are presented in the statement of cash flows. Thus, in the reconciliation process, the increases in inventory and trade receivables are deducted from profit before tax. Having a good understanding of the format of the statement of cash flows is key to a successful attempt at these questions. The following examples illustrate all three of these examples. Required: Calculate the cash paid to buy new PPE. Non-current assets (IAS23) Chapter 5. (a) Using the direct method prepare the operating activities section of the statement of cash flows. Cash flows are usually calculated as a missing figure. Common cash flow calculations include the tax paid, which is an operating activity cash out flow, the payment to buy property plant and equipment (PPE) which is an investing activity cash out flow and dividends paid, which is a financing activity cash out flow. Note that the cash proceeds ffrom the disposal of PPE ($20) would be shown separately as a cash inflow under investing activities. Extracts from the financial statements are as follows. T 2. The changes in inventory, trade receivables and trade payables (working capital) do not impact on the measurement profit but these changes will have impacted on cash and so further adjustments are made. Consolidated statement of financial position, Chapter 24. QUESTION AND ANSWER FOR JUNE 2018 PUBLIC SECTOR IN FINANCIAL MANAGEMENT PAPERS . The profit on disposal of $5 ($20–$15) would be adjusted for as a non-cash item under the operating activities (see later). This balancing figure of dividends paid explains why the actual year-end retained earnings is less. Statement of Cash Flow, p. 227 The statement of cash flow summarizes the effects on cash of the operating, investing, and financing activities of a company for a period and the year to date. There are two different ways of starting the cash flow statement, as IAS 7, Statement of Cash Flows permits using either the 'direct' or 'indirect' method for operating activities. A company can reward investors through script dividends without paying out any cash. Tom Clendon FCCA is a senior lecturer based in Singapore and he lectures for FTMS Global in their South East Asia colleges, Virtual classroom support for learning partners, Support for students in Australia and New Zealand. F 8. Presentation of Financial Statements (IAS 1) Chapter 4. It is the balancing figure and explains why the actual year-end tax liability is smaller than the sub-total, This is the closing balance of the tax liability. Market values can never be negative. The profit for the year is a credit and increases the retained earnings, This sub-total represents the balance on retained earnings in the event that no dividends have been paid, This is the last figure written in the reconciliation. This article considers the statement of cash flows of which it assumes no prior knowledge. Here is a compilation of top three accounting problems on cash flow statement with its relevant solutions. For example, in FA, an extract, or the whole statement of cash flow might be required in the multi-task questions but it could also be constructed as an OT question. At the reporting date the carrying amount of the PPE is $300. However, that does not mean that FR will never require the preparation of a complete statement of cash flows so be prepared. The direct method is intuitive as it means the statement of cash flow starts with the source of operating cash flows. 9. Group statement of profit and loss. During the year depreciation of $50,000 and amortisation of $40,000 was charged to profit. It is relevant to the FA (Financial Accounting) and FR (Financial Reporting) exams. 5) Construction contract Interest paid is $12,000 and taxation paid is $13,000. The accounting statement of cash flows explains the change in cash during the year. Consolidated Financial Statements of the Association of Chartered Certified Accountants Corporate Governance Statement Report from the Audit Committee Report of the Independent Auditor 2 3 4 41 49 53. With our 1.8 minute per 1 mark rule, you only need to spend 21.6 minutes in cash flow question in SBR exam but if under P2 exam, it’s 63 minutes! The opposite is applicable for trade payables. Here we can take the opening balance of PPE and reconcile it to the closing balance by adjusting it for the changes that have arisen in period that are not cash flows. Here as we start with profit before tax we have to add back all the non-cash expenses charged, deduct the non-cash income and adjust for the changes in working capital. This FREE practice kit is updated according to latest syllabus and questions format and serves as a large exam level question bank for preparation, practice and revision of each and every topic of the syllabus. (ii) Investing activities and Problem 1: The bank balance of a business firm has increased during the last financial year by Rs.1,50,000. ACCA F8 Audit & Assurance Full Course Workbook www.mapitaccountancy.com The form of assurance provided by the report in this case will be ‘negative assurance’ i.e. This means that the figures at the start of the cash flow statement are not cash flows at all. Conversely, decreases in inventory and trade receivables are added back to the profit before tax. Non-current assets (IAS16) Chapter 5. OTQs include a wider variety of questions types including MCQ as well as number entry, multiple response and drag and drop. In that initial reconciliation the profit before tax is adjusted for expenses that have been charged against profit that are not cash out flows; for example depreciation and losses on disposal of non-current assets, have to be added back, and non-cash income; for example, investment income and profits on disposal of non-current assets are deducted. The profit before tax is then reconciled to the cash that it has generated. IAS 7 requires an entity to present the information about changes in the cash and cash equivalents by a statement of cash flows, these cash flows will be classified under operating, investing and financing activities. Non-current assets (IAS40) Chapter 6. The statement of cash flow reports cash transactions associated with the purchase or sale of fixed assets (Investing Activities) and cash paid Cash Forecast for the Three Months Ended 31 March 20X1. Impairment loss charged in profit or loss, Increase / decrease in receivables and prepayments, Increase / decrease in trade payables and accruals, Payments to buy PPE / Intangibles / Investments, Proceeds from sale of PPE / Intangibles / Investments, Capital repayment of finance lease obligations. As before, to ascertain the cash flow – in this case dividends paid - we can reconcile an opening to closing balance – in this case retained earnings. 242 Accountancy : Company Accounts and Analysis of Financial Statements 6.5.1 Cash from Operating Activities Log in, Chapter 3. Free IAS 7 multiple choice quiz. Question 4: IASB Framework / Rebound. Financial performance (profitability), Chapter 23. 2020-21. (1 mark) Negative assurance is appropriate for a cash flow projection During the reporting period a profit for the year of $450 was reported. standard questions (and answers) to practice on. Cash is a very important asset in any entity. T 6. Let us see if you can answer the question. A vertical presentation of the numbers lends itself to noting the source of the numbers. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Alternatively, the indirect method starts with profit before tax rather than a cash receipt. Finally the payments for interest and tax are deducted. Presentation of Financial Statements (IAS 1), Chapter 4. The following is a pro forma showing the indirect method. The revaluation gain increases PPE without being a cash flow. Question 11 to 20 = Cash flows from Investing Activities Question 21 to 26 = Cash flows from Financing Activities ANSWER TO SECTION B: TRUE OR FALSE 1. OTQs will only appear in computer-based exams but these questions will still provide valuable practice for all IAS 7, Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. IAS 7 Statement of Cash Flows applied on the statements after 1 January 1994. Preparation of the statement of cash flows in accordance with IAS 7 The statement of cash flows is one of the financial statements required to be prepared by an entity in terms of IAS 1 Presentation of financial statements. The global body for professional accountants, Can't find your location/region listed? It is necessary to reconcile the opening tax liability to the closing tax liability to reveal the cash flow – the tax paid - as the balancing figure. This working is in effect an extract from the statement of changes in equity. As latest ACCA F3 past exam questions are not available anymore we recommend ACCA F3 students to use our FREE ACCA F3 Practice Kit to best prepare ACCA F3 Financial Accounting exams. Prepare a statement of cash flows for a single entity (not a group) in accordance with relevant accounting standards using the direct and the indirect method. The following exercise illustrates both the direct and indirect methods operating activities section. At last, make total of changes in all activities and added opening Bank and Cash balance on it. This is the proforma that could be produced for a big, cashflow forecast question, though there has not been one yet, it is a minor topic so far Answer (a) direct method Here we can take the opening balance of PPE and reconcile it to the closing balance by adjusting it for the changes that have arisen in period that are not cash flows. Operating Activities: Generally include transactions in the “normal” operations of the firm. 3(b) Interpret cash flow statement to assess performance and position of an entity. Statement of cash flows (IAS 7), Chapter 8. Chapter 3. T 5. Chartered Education IFRS MCQs have more than 1,100 questions like these covering all subjects. Question 5: Mocca . ACCA Financial Reporting (FR) - Statement of cash flows (IAS 7) - Practice Questions - Chapter 4 Free ACCA Financial Reporting (FR) Tests. Financial Reporting ACCA questions and solution 2002 - 2010 Having a good understanding of the format of the statement of cash flows is key to a successful attempt at these questions. (20,000 – 26,000). Imagine a … that the Auditor has found nothing to suggest that the cash flow projections are inaccurate. Chapter 14 their SBR exam year depreciation of $ 40,000 was charged profit. 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