ACCA FA · Chapter 12
Statement of cash flows (IAS 7) MCQs with Answers
10 multiple-choice questions on Statement of cash flows (IAS 7) for ACCA FA Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
When preparing a statement of cash flows using the indirect method, how is depreciation for the year treated?
- A) It is shown as a cash outflow under investing activities
- B) It is deducted from profit before tax
- C) It is excluded because it is not a cash flow
- D) It is added back to profit before tax
Show answer & explanation
Answer: D) It is added back to profit before tax
Depreciation is a non-cash expense that has reduced profit. Under the indirect method, profit is adjusted to cash generated from operations, so depreciation is added back. It is not itself a cash flow, and the cash spent on assets appears under investing activities when the assets are bought.
Question 2
A company reports the following for a year: Profit before tax $86,000 Depreciation $14,000 Profit on disposal of equipment $3,000 Finance costs $4,000 Increase in inventories $7,000 Decrease in trade receivables $5,000 Increase in trade payables $2,500 What is the cash generated from operations?
- A) $100,500
- B) $101,500
- C) $107,500
- D) $97,500
Show answer & explanation
Answer: B) $101,500
$86,000 + $14,000 depreciation - $3,000 profit on disposal + $4,000 finance costs = $101,000. Working capital: increase in inventory -$7,000, decrease in receivables +$5,000, increase in payables +$2,500, a net +$500. Cash generated from operations = $101,500. Adding the disposal profit gives $107,500, and reversing the working capital signs gives $100,500.
Question 3
A company's income tax liability was $23,000 at the start of the year and $27,000 at the end. The income tax charge in profit or loss for the year was $31,000. How much tax was paid during the year?
- A) $27,000
- B) $35,000
- C) $31,000
- D) $81,000
Show answer & explanation
Answer: A) $27,000
Tax paid = opening liability + charge for the year - closing liability = $23,000 + $31,000 - $27,000 = $27,000. Deducting the opening liability and adding the closing one gives $35,000, and the charge itself ($31,000) ignores the movement in the liability.
Question 4
The carrying amount of a company's property, plant and equipment was $240,000 at the start of the year and $286,000 at the end. During the year, depreciation was $32,000, assets with a carrying amount of $15,000 were sold, and a property was revalued upwards by $20,000. What was the cash spent on purchasing property, plant and equipment?
- A) $93,000
- B) $81,000
- C) $43,000
- D) $73,000
Show answer & explanation
Answer: D) $73,000
Opening $240,000 + revaluation $20,000 - depreciation $32,000 - disposals $15,000 + purchases = closing $286,000. Purchases = $286,000 - $240,000 - $20,000 + $32,000 + $15,000 = $73,000. Ignoring the revaluation gives $93,000, and adding the disposal instead of deducting it gives $43,000.
Question 5
Under IAS 7 Statement of Cash Flows, how are proceeds from an issue of ordinary shares classified?
- A) Operating activities
- B) They are not shown, as they are not related to trading
- C) Investing activities
- D) Financing activities
Show answer & explanation
Answer: D) Financing activities
Financing activities are those that change the size and composition of contributed equity and borrowings. Cash received from issuing shares is therefore a financing inflow. Investing activities relate to the acquisition and disposal of long-term assets.
Question 6
A company's statement of profit or loss shows finance costs of $9,800. Interest payable was $1,500 at the start of the year and $2,300 at the end. How much interest was paid during the year?
- A) $13,600
- B) $9,000
- C) $9,800
- D) $10,600
Show answer & explanation
Answer: B) $9,000
Interest paid = opening liability + charge - closing liability = $1,500 + $9,800 - $2,300 = $9,000. Reversing the opening and closing balances gives $10,600.
Question 7
A machine with a carrying amount of $15,000 was sold, giving a profit on disposal of $3,000. What amount is shown in investing activities in the statement of cash flows?
- A) Inflow of $15,000
- B) Inflow of $12,000
- C) Inflow of $18,000
- D) Inflow of $3,000
Show answer & explanation
Answer: C) Inflow of $18,000
Disposal proceeds = carrying amount + profit = $15,000 + $3,000 = $18,000, and this cash received is an investing inflow. The $3,000 profit is deducted from profit before tax in operating activities because it is non-cash; the actual cash is shown under investing activities.
Question 8
Which of the following would NOT appear in a statement of cash flows?
- A) Purchase of equipment for cash
- B) A bonus issue of shares
- C) Dividends received
- D) Repayment of a bank loan
Show answer & explanation
Answer: B) A bonus issue of shares
A bonus issue is a transfer between reserves and share capital and involves no cash, so it does not appear in the statement of cash flows. Purchase of equipment (investing), loan repayment (financing) and dividends received (investing or operating) are all cash flows.
Question 9
Which of the following items would appear in the operating activities section ONLY when the direct method is used?
- A) Depreciation
- B) Cash paid to suppliers and employees
- C) Profit on disposal of non-current assets
- D) Increase in trade receivables
Show answer & explanation
Answer: B) Cash paid to suppliers and employees
The direct method shows gross operating cash receipts and payments, such as cash received from customers and cash paid to suppliers and employees. Adjustments for depreciation, working capital movements and disposal profits are features of the indirect method, which starts with profit before tax.
Question 10
A company has the following cash flows for a year: Net cash from operating activities $58,000 Net cash used in investing activities $71,000 Net cash from financing activities $20,000 At the start of the year, the company had an overdraft of $4,000 and no other cash or cash equivalents. What is the closing balance of cash and cash equivalents?
- A) Positive balance of $3,000
- B) Overdraft of $3,000
- C) Positive balance of $11,000
- D) Positive balance of $7,000
Show answer & explanation
Answer: A) Positive balance of $3,000
Net increase in cash = $58,000 - $71,000 + $20,000 = $7,000. Closing balance = opening -$4,000 + $7,000 = $3,000 positive. Treating the opening overdraft as a positive balance gives $11,000, and $7,000 is only the movement for the year.