Reading 27: Understanding Cash Flow Statements - The Cash Flow Statement: Components and Format

Which of the following is least likely an investing activity under IFRS? A manufacturing company receiving an interest payment on a loan A manufacturing firm investing in held‐for‐trading securities A manufacturing firm investing in property, plant, and equipment

-Investment in securities classified as held‐for‐trading is represented as an operating activity. -Receipt of interest on a loan may either be classified as an operating or an investing activity. - Investment in property, plant, and equipment is classified as an investing activity.

Which of the following is most likely a source of cash for a company? An increase in accounts receivable A decrease in accounts payable An increase in wages payable

An increase in wages payable (liability) is a source of cash. Opened up credit for Co. ( is this why?)

Classification of Cash Flows under IFRS and US GAAP

IFRS offers more flexibility regarding the classification of certain cash flows.

Direct Method

Income statement items that are reported on an accrual basis are all converted to cash basis. - All cash receipts are reported as inflows, - Cash payments are reported as outflows.

Sparta Inc. is a manufacturer of heavy machinery, but frequently invests in securities that it classifies as held to maturity. The outflow of cash for these investments is most likely classified as a(n): Operating activity. Investing activity. Financing activity.

Investments in securities classified as held to maturity are represented as an investing activity.

Aquamarine Inc. is a manufacturer of perfumes and has several retail outlets throughout Europe. The company uses IFRS to report its financial statements and it recently entered into the following transactions: Transaction 1: Borrowed money from a bank for the purchase of inventory worth $180,000. Transaction 2: Made sales amounting to $990,000, of which $38,000 were made on credit. Transaction 3: Invested excess cash amounting to $12,000 in securities classified as held for trading and $8,000 in securities classified as held to maturity. Transaction 4: Paid dividends amounting to $130,000. Which of the following statements is most accurate regarding Transaction 3? It will increase cash flow from investing activities by $8,000. It will decrease cash flow from operating activities by $12,000. It will decrease cash flow from investing activities by $20,000.

It will decrease cash flow from operating activities by $12,000 ( Buy = Reduction in Cash) Investments in held‐for‐trading securities are classified as an operating activity, while investments in held‐to‐maturity securities are classified as an investing activity.

Capital One Bank provided $2.5 million to Pharma One Pvt. Ltd. (a pharmaceutical company) as a loan to be repaid in 5 years. Which of the following is the most accurate classification of this transaction by both the parties? Capital One Pharma One A Financing activity Financing activity B Financing activity Investing activity C Operating activity Financing activity Row A Row B Row C

Lending is a normal business activity for a bank and is therefore classified as an operating activity. Pharma One classifies the loan as a financing activity.

Proceeds from sale of securities held for trading are classified as: CFO. CFI. CFF.

Proceeds from sale of securities held for trading are classified as CFO.

Howard Inc. (a manufacturing concern) uses U.S. GAAP to report its financial statement. Which of the following is most likely to be classified as an investing activity by this firm? Sale of securities classified as available for sale. Receipt of dividends on investments. Payment of interest on a loan.

Sale of securities classified as available‐for‐sale is represented as an investing activity. Dividends received and interest paid are both operating activities under U.S. GAAP.

Aquamarine Inc. is a manufacturer of perfumes and has several retail outlets throughout Europe. The company uses IFRS to report its financial statements and it recently entered into the following transactions: Transaction 1: Borrowed money from a bank for the purchase of inventory worth $180,000. Transaction 2: Made sales amounting to $990,000, of which $38,000 were made on credit. Transaction 3: Invested excess cash amounting to $12,000 in securities classified as held for trading and $8,000 in securities classified as held to maturity. Transaction 4: Paid dividends amounting to $130,000. Which of the following is the least likely effect on Aquamarine's financial statements due to Transaction 2? An increase in cash flow from operating activities of $990,000. An increase in receivables of $38,000. An increase in cash flow from operating activities of $952,000.

The company made cash sales of $952,000 (990,000 - 38,000). Sales made on credit will increase the company's receivables by $38,000.

Under IFRS, dividends received may be classified as: CFO or CFI. CFI or CFF. CFO or CFF.

Under IFRS, dividends received may be classified as CFO or CFI.

Under IFRS, interest paid may be classified as: CFI or CFF. CFO or CFF. CFO only.

Under IFRS, interest paid may be classified as CFO or CFF

Green Inc. operates a chain of supermarkets in Europe. Assuming IFRS, which of the following is least likely classified as a financing activity by Green? Cash payments to repurchase stock Interest received Dividends paid

Under IFRS, interest received may either be classified as an operating or an investing activity.

Assuming U.S. GAAP, which of the following is most likely classified as a financing activity by a trading company? Dividends paid Dividends received Interest received

Under U.S. GAAP, dividends paid are classified as financing activity, while dividends and interest received are classified as operating activities.

Under U.S. GAAP, interest and dividends received may be classified as: CFF only. CFO only. CFF or CFO

Under U.S. GAAP, interest and dividends received can only be classified as CFO.

Which of the following is least likely classified as a financing activity under U.S. GAAP? A manufacturing firm paying dividends A bank issuing common stock A bank receiving interest payments on a loan

Under U.S. GAAP, interest paid and interest received are both classified as operating activities for all companies

Gamma Corporation is involved in the manufacture of parts for the aerospace industry. Assuming U.S. GAAP applies, which of the following is least likely classified as an investing activity by the firm? Investing in securities classified as held for trading Acquisition of a subsidiary Cash paid to purchase intangible assets

Under U.S. GAAP, investing in securities classified as held for trading is classified as an operating activity

Format of Statement (IFRS v. GAAP)

for both - Direct or Indirect: direct is preferred But with GAap, A reconciliation of net income of CF from Oper. Act. must be provided regardless of method ( which is basically ind method) Note: regardless of direct or Indirect method, CFF and CFI are exactly the same way, and will not be affected.

Noncash investing and financing activities are not reported on the cash flow statement, but would go in a supplemental note

• Barter transactions where one nonmonetary asset is exchanged for another. • Issuance of common stock for dividends or when holders of convertible bonds or convertible preferred stock convert their holdings into ordinary shares of the company. • Acquisition of real estate with financing provided by the seller.