PAS 7 - Statement of Cash Flows
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Questions and Answers

What is the main purpose of the statement of cash flows?

  • To detail the entity's total assets and liabilities.
  • To disclose information about the entity's revenue streams.
  • To provide information about the entity's profitability.
  • To show the sources and utilization of cash and cash equivalents during a period. (correct)

    • Which of the following can qualify as cash equivalents?

  • A 6-month time deposit. (correct)
  • A 9-month money market instrument.
  • A 5-year treasury bill acquired 6 months before maturity date.
  • An investment in the stock market.

    • How do cash flows impact an entity's operations?

  • Cash flows have no impact on an entity's operations.
  • Cash flows help assess an entity's ability to generate cash and its needs to utilize those cash flows. (correct)
  • Cash flows only impact an entity's financing activities.
  • Positive cash flows indicate inefficiency in operations.

    • Which of the following best describes cash equivalents?

    <p>&quot;Short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to minimal risk of value change.&quot;</p> Signup and view all the answers

    How does the statement of cash flows contribute to users' assessment?

    <p>By helping assess the timing and certainty of cash flow generation.</p> Signup and view all the answers

    What does a negative cash flow from operating activities despite reported profits suggest?

    <p>&quot;A mismatch between profit recognition under accrual basis and actual cash movements.&quot;</p> Signup and view all the answers

    What are the three classifications of cash flows presented in the statement of cash flows?

    <p>Operating Activities, Investing Activities, Financing Activities</p> Signup and view all the answers

    Which activities are primarily considered when determining cash flows from operating activities?

    <p>Revenue-producing activities</p> Signup and view all the answers

    Why are cash flows from buying and selling held for trading securities classified as operating activities?

    <p>Because they are similar to inventories</p> Signup and view all the answers

    What entities consider cash flows from acquisition, rentals, and subsequent sale of property, plant, and equipment as operating activities?

    <p>Entities involved in renting out such assets</p> Signup and view all the answers

    Why are loan transactions of financial institutions considered operating activities?

    <p>Because they relate to the main revenue-producing activity of financial institutions</p> Signup and view all the answers

    Study Notes

    Statement of Cash Flows

    • Provides information about the sources and utilization of cash and cash equivalents during the period.

    Definitions

    • Cash: comprises cash on hand and cash in bank.
    • Cash Equivalents: short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.
    • Only debt instruments acquired within 3 months or less before their maturity date can qualify as cash equivalents.
    • Examples of Cash Equivalents: 1-year treasury bill acquired 3 months before maturity date, 90-day money market instrument or commercial paper, 3-month time deposit.

    Purpose of Statement of Cash Flows

    • Helps users assess:
      • The ability of the entity to generate cash and cash equivalents.
      • The timing and certainty of the generation of cash flows.
      • The needs of the entity to utilize those cash flows.
    • Provides information on the quality of earnings of an entity.
    • Enhances inter-comparability among different accounting treatments for the same transactions and events.

    Classification of Cash Flows

    • The statement of cash flows presents cash flows according to the following classifications:
      • Operating Activities
      • Investing Activities
      • Financing Activities

    Operating Activities

    • Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity.
    • Includes cash inflows and outflows on items of income and expenses, or those that enter into the determination of profit or loss.
    • Examples of cash flows from operating activities:
      • Cash receipts from the sale of goods, rendering of services, or other forms of income.
      • Cash payments for purchases of goods and services.
      • Cash payments for operating expenses, such as employee benefits, insurance, and the like, and payments or refunds of income taxes.
      • Cash receipts and payments from contracts held for dealing or trading purposes.
    • Special items included in operating activities:
      • Cash flows from buying and selling held for trading securities.
      • Cash flows from the acquisition, rentals, and subsequent sale of items of property, plant, and equipment to be held for rental to others.
      • Loan transactions of financial institutions.

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    Description

    Learn about the requirements prescribed by Pas 7 for presenting the statement of cash flows. Understand the sources and utilization of cash and cash equivalents during a period, including the definitions of cash and cash equivalents.

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