38 Lecture - Cash Flow Statement IAS-7

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38 Lecture

MGT401

Midterm & Final Term Short Notes

Cash Flow Statement IAS-7

IAS 7, or International Accounting Standard 7, requires companies to prepare a cash flow statement that shows how the company generated and used cash during a specific period. The cash flow statement categorizes cash flows into three categories:


Important Mcq's
Midterm & Finalterm Prepration
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  1. Which of the following is not a component of cash and cash equivalents in a cash flow statement under IAS 7? A) Cash on hand B) Bank overdrafts C) Cash at bank D) Short-term bank loans Answer: D

  2. Which of the following is not a method of presenting the operating section in a cash flow statement under IAS 7? A) Direct method B) Indirect method C) Statement of changes in equity method D) None of the above Answer: C

  3. Which of the following activities would be classified as a cash inflow from investing activities in a cash flow statement under IAS 7? A) Payment for property, plant and equipment B) Proceeds from sale of property, plant and equipment C) Payment for long-term investments D) All of the above Answer: B

  4. Which of the following is a cash outflow from financing activities in a cash flow statement under IAS 7? A) Payment of dividends B) Proceeds from sale of long-term investments C) Payment for property, plant and equipment D) None of the above Answer: A

  5. Under IAS 7, cash inflows from interest received and dividends received should be classified as: A) Operating activities B) Investing activities C) Financing activities D) None of the above Answer: A

  6. Which of the following adjustments would not be made when preparing a cash flow statement under the indirect method? A) Depreciation and amortization B) Changes in current assets and liabilities C) Gain or loss on sale of assets D) All of the above are adjustments made under the indirect method Answer: D

  7. Which of the following items is excluded from the definition of cash equivalents under IAS 7? A) Bank overdrafts B) Short-term, highly liquid investments C) Money market funds D) Commercial paper with a maturity of less than three months Answer: A

  8. A company reports a net loss on its income statement. Which of the following could be a reason why its cash flow from operations is still positive? A) The company received a large loan from a bank B) The company sold a significant amount of inventory C) The company made large capital expenditures D) None of the above Answer: B

  9. Under IAS 7, which of the following items would not be disclosed in a cash flow statement? A) The opening and closing balances of cash and cash equivalents B) Significant non-cash transactions C) Details of dividends paid to shareholders D) None of the above Answer: C

  10. In a cash flow statement under IAS 7, which section would the purchase of a long-term investment be classified under? A) Operating activities B) Investing activities C) Financing activities D) It depends on the nature of the investment Answer: B



Subjective Short Notes
Midterm & Finalterm Prepration
Past papers included

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  1. What is the purpose of the cash flow statement? Answer: The purpose of the cash flow statement is to provide information about an entity's cash inflows and outflows for a specific period.

  2. What are the three categories of cash flows presented in the cash flow statement? Answer: The three categories of cash flows presented in the cash flow statement are operating activities, investing activities, and financing activities.

  3. How are non-cash transactions reported in the cash flow statement? Answer: Non-cash transactions are not reported in the cash flow statement. However, they may be disclosed in the notes to the financial statements.

  4. What is the direct method of preparing the cash flow statement? Answer: The direct method of preparing the cash flow statement involves calculating cash inflows and outflows directly from operating activities.

  5. What is the indirect method of preparing the cash flow statement? Answer: The indirect method of preparing the cash flow statement involves adjusting net income for non-cash items and changes in working capital to arrive at cash flows from operating activities.

  6. How are cash and cash equivalents defined in the cash flow statement? Answer: Cash and cash equivalents are defined as short-term, highly liquid investments that are readily convertible into cash.

  7. What is the purpose of presenting the cash flow statement alongside the income statement and balance sheet? Answer: The purpose of presenting the cash flow statement alongside the income statement and balance sheet is to provide users of the financial statements with a complete picture of an entity's financial performance, financial position, and cash flows.

  8. How can the cash flow statement be used by investors and creditors? Answer: Investors and creditors can use the cash flow statement to assess an entity's ability to generate cash flows and its liquidity position.

  9. What are the limitations of the cash flow statement? Answer: The limitations of the cash flow statement include the fact that it only presents cash flows for a specific period and does not provide information about an entity's long-term solvency.

  10. What is the importance of preparing the cash flow statement in accordance with IAS 7? Answer: Preparing the cash flow statement in accordance with IAS 7 ensures that the information presented is reliable, relevant, and comparable across different entities.

International Accounting Standard 7 (IAS 7) sets out the rules and guidance on the preparation and presentation of cash flow statements. A cash flow statement presents an entity's inflows and outflows of cash and cash equivalents during a particular accounting period. This statement provides useful information to the users of the financial statements in assessing an entity's liquidity, solvency, and its ability to generate future cash flows. The cash flow statement has three sections: operating activities, investing activities, and financing activities. The operating activities section includes cash inflows and outflows from the primary operations of the entity. The investing activities section includes cash inflows and outflows related to the acquisition and disposal of long-term assets and investments. The financing activities section includes cash inflows and outflows related to the financing of the entity, such as the issuance of shares and the repayment of loans. IAS 7 requires entities to present their cash flow statement using either the direct method or indirect method. The direct method reports actual cash receipts and payments, while the indirect method starts with net income and then adjusts for non-cash items and changes in working capital. Entities are also required to disclose significant non-cash transactions and the effects of changes in exchange rates on cash and cash equivalents. Additionally, entities are required to disclose the amount of their cash and cash equivalents at the beginning and end of the period. Overall, the cash flow statement provides valuable information to financial statement users, allowing them to evaluate an entity's ability to generate cash and cash equivalents and assess its overall liquidity and financial health.

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