Canada: IFRS Quiz: Statement Of Cash Flows

Last Updated: September 12 2012
Article by Geoff M. Leverton

The preparation of the statement of cash flows sounds easy, but it is always the last of the primary statements to be prepared and can give rise to the most questions from users. Test yourself against PwC's statement of cash flows specialist, Tak Yano, with this IFRS quiz. You might also want to read our topic summary on statement of cash flows to improve your chances of a better score.

Q1: What is the principle in IAS 7 for the classification of cash flows?

(a) Cash flows should be classified according to the nature of the activity in a manner that is most appropriate to the business; or

(b) Cash flows in IAS 7 should be classified consistently with the classification of the related item in the statement of financial position.

Q2: : Which criterion is not included in the definition of cash equivalents under IAS 7?

(a) subject to an insignificant change in value;

(b) short-term, highly liquid investments;

(c) investment in high-quality instruments; or

(d) readily convertible to known amounts of cash.

Q3: Which of the following should be shown as cash and cash equivalents within the consolidated statement of cash flows?

(a) a deposit in an escrow account, access to which requires a third party's signature;

(b) restricted funds that are not available for use in the short-term and can be used only for specific capital payments; or

(c) cash balance held by a subsidiary that cannot be transferred to other parts of the group because of exchange controls.

Q4: Where can interest paid be classified?

(a) financing activities;

(b) operating activities;

(c) operating or financing activities; or

(d) operating, investing or financing activities.

Q5: Which of the following expenditures should not be classified as cash flows from investing activities?

(a) payments to acquire property, plant and equipment;

(b) payments to acquire intangible assets; Or

(c) payments for research or exploration.

Q6: Which of the following statements is false?

(a) Cash flows from derivatives held for dealing or trading purposes are classified as operating activities;

(b) Cash flows from derivatives that are accounted for as hedges under IAS 39 are classified in the same manner as the hedged transactions; or

(c) Cash flows from commodity derivatives held as economic hedges that do not meet the criteria for hedge accounting in IAS 39 are classified under financing activities.

Q7: Where is cash acquired in a business combination classified?

(a) operating activities;

(b) investing activities; or

(c) financing activities.

Q8: How should the subsequent settlement of deferred consideration for a business combination be classified?

(a) as investing activities;

(b) as financing activities; or

(c) as either of the above, depending on the facts and circumstances.

Q9: Entity A acquired an additional 20% interest in a subsidiary. How should management classify the transaction in A's consolidated statement of cash flows?

(a) as investing activities;

(b) as financing activities; or

(c) there is an accounting policy choice: investing or financing activities.

Q10: Which of the following is not an acceptable presentation of cash flows from discontinued operations?

(a) nothing in the statement of cash flows and a detailed breakdown of the cash flows from discontinued operations between the three categories is in the notes;

(b) one line for discontinued operations within each category in the statement of cash flows;

(c) each line item analyzed between continuing and discontinued operations in the statement of cash flows; or

(d) total of cash flows from discontinued operations presented separately from operating, investing and financing activities in the statement of cash flows.

Answers

Question 1: (a) - The main principle behind the classification of cash flows in IAS 7 is that cash flows should be classified according to the nature of the activity in a manner that is most appropriate to the business of the entity and in accordance with the definitions of operating, investing and financing activities. The IFRS IC noted that it will use this as a guiding principle when analyzing future requests on the classification of cash flows.

Question 2: (c) - Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. High-quality instruments might be needed to meet this definition, but they are not a part of the definition.

Question 3: (c) - The definition of cash and cash equivalents in IAS 7 requires the funds to either be on hand or available on demand if cash; or, if a cash equivalent, liquid, readily convertible and subject to insignificant changes in value. The restrictions in fact patterns (a) and (b) are so severe that the balances are unlikely to meet the definition of cash and cash equivalents. The cash in fact (c) is freely available for use within the subsidiary and is included in cash and cash equivalents in the consolidated statement of cash flows. The exchange controls might be disclosed in a note to the consolidated statement of cash flows if the matter is deemed significant.

Question 4: (d) - IAS 7 does not mandate the presentation of interest cash flows, but it allows an entity to determine the classification most appropriate to its business. IAS 7 permits interest paid to be classified in operating or financing activities, provided the presentation is applied on a consistent basis from period to period. Interest paid is classified as an investing activity when it is capitalized. The IASB has proposed an annual improvement to IAS 7 (in the 2010-2012 cycle) to clarify that interest capitalized should be classified as investing.

Question 5: (c) - Only expenditures that result in a recognized asset in the balance sheet are eligible for classification as cash flows from investing activities under IAS 7. Expenditures, such as exploration activities and internal research activities that might be considered by management to be investing for the future but do not result in a recognized asset, are not classified as cash flows from investing activities. This is following an amendment to IAS 7 as part of the 2009 annual improvements project.

Question 6: (c) - IAS 7 provides examples of cash flows arising from investing activities, which include cash flows related to derivatives that do not qualify for hedge accounting, are not held for trading purposes or do not relate to financing activities. Commodity derivatives do not relate to the financing of the business and should not be presented as financing activities.

Question 7: (b) - IAS 7 requires the amounts of cash and cash equivalents paid or received in respect of consideration to be shown under investing activities net of any cash and cash equivalent balances transferred as part of the purchase. It requires disclosure of the amount of cash and cash equivalents in the subsidiary transferred as a result of the acquisition.

Question 8: (c) - Cash subsequently paid for deferred consideration recognized at the acquisition date or any adjustment arising during the measurement period should be classified as investing activities, as these cash flows arise from the recognition of the acquiree's net assets in a business combination. However, if there is clear evidence that the arrangement is in substance a financing transaction (for example, a long-term loan note), settlement of the deferred consideration could be classified as a financing cash flow.

Question 9: (b) - Changes in ownership interests in a subsidiary that do not result in a loss of control, such as the purchase or sale by a parent of a subsidiary's equity instruments, are accounted for as equity transactions under IAS 27. The resulting cash flows are classified in the same way as other transactions with owners, as cash flows from financing activities.

Question 10: (d) - IFRS 5 requires disclosure of the net cash flows attributable to the operating, investing and financing activities of discontinued operations (except for newly-acquired subsidiaries classified as held for sale on acquisition). Disclosing a total of cash flows from discontinued operations on the face of the statement of cash flows does not meet this requirement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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