ACCA FR · Chapter 14
Statements of cash flows and interpretation of financial statements MCQs with Answers
15 multiple-choice questions on Statements of cash flows and interpretation of financial statements for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under IAS 7, where may dividends paid to the entity's shareholders be presented in the statement of cash flows?
- A) Only in investing activities
- B) Only in operating activities
- C) In either operating activities or financing activities, applied consistently
- D) They are not shown, because they are an appropriation of profit
Show answer & explanation
Answer: C) In either operating activities or financing activities, applied consistently
IAS 7 allows dividends paid to be classified as financing cash flows, because they are a cost of obtaining finance, or as operating cash flows, so users can judge whether operating cash flows can cover dividends. The chosen classification must be applied consistently.
Question 2
Waterbuck Co's equity share capital rose from $1000k to $1400k during the year, and its share premium rose from $300k to $450k. During the year it made a bonus issue of $100k, funded from retained earnings. The remaining increase came from an issue of shares for cash. What is the cash inflow from issuing shares?
- A) $550k
- B) $450k
- C) $300k
- D) $650k
Show answer & explanation
Answer: B) $450k
Total increase in share capital and premium = (1400 + 450) - (1000 + 300) = $550k. The bonus issue of $100k from retained earnings is non-cash, so cash raised = 550 - 100 = $450k.
Question 3
When preparing a statement of cash flows using the indirect method, how is an increase in trade receivables during the year treated?
- A) It is deducted from profit before tax in calculating cash generated from operations
- B) It is added to profit before tax in calculating cash generated from operations
- C) It is shown as an investing cash outflow
- D) It is ignored because it is not a cash item
Show answer & explanation
Answer: A) It is deducted from profit before tax in calculating cash generated from operations
Under the indirect method, profit is adjusted for working capital movements. An increase in receivables means some revenue in profit has not yet been received in cash, so the increase is deducted. A decrease in receivables, an increase in payables and a decrease in inventory are added.
Question 4
Kudu Co's profit before tax for the year was $500k, after charging depreciation of $120k, a loss on disposal of plant of $10k and finance costs of $30k. During the year inventories increased by $40k, trade receivables decreased by $25k and trade payables decreased by $15k. What is cash generated from operations?
- A) $600k
- B) $630k
- C) $690k
- D) $610k
Show answer & explanation
Answer: B) $630k
Cash generated from operations = PBT 500 + depreciation 120 + loss on disposal 10 + finance costs 30 (added back, as interest paid is shown separately) - increase in inventories 40 + decrease in receivables 25 - decrease in payables 15 = $630k.
Question 5
Eland Co's property, plant and equipment had a carrying amount of $1200k at the start of the year and $1450k at the end. During the year depreciation was $180k, assets with a carrying amount of $70k were sold, and land was revalued upwards by $100k. All additions were paid in cash. What cash was paid to buy property, plant and equipment?
- A) $600k
- B) $250k
- C) $330k
- D) $400k
Show answer & explanation
Answer: D) $400k
Reconstruct the PPE account: opening 1200 + revaluation 100 + additions X - depreciation 180 - disposals 70 = closing 1450. So X = 1450 - 1200 - 100 + 180 + 70 = $400k. The revaluation is a non-cash increase, so it is deducted in finding cash purchases.
Question 6
Impala Co's statement of financial position shows current tax payable of $90k at the start of the year and $110k at the end, and a deferred tax liability of $40k at the start and $55k at the end. The tax charge in profit or loss for the year was $150k. What is the tax paid in the statement of cash flows?
- A) $150k
- B) $130k
- C) $115k
- D) $135k
Show answer & explanation
Answer: C) $115k
Combine current and deferred tax in one account: opening balances (90 + 40 = 130) + charge 150 - closing balances (110 + 55 = 165) = tax paid of $115k.
Question 7
Nyala Co's lease liabilities (current and non-current together) were $400k at the start of the year and $420k at the end. During the year new leases added $150k to the liabilities, and interest on lease liabilities was $30k. What were the total lease payments in the year, and how much of them reduced the lease liability (the capital part)?
- A) Total payments $160k, all of which is capital
- B) Total payments $160k, of which $130k capital
- C) Total payments $310k, of which $280k capital
- D) Total payments $130k, of which $100k capital
Show answer & explanation
Answer: B) Total payments $160k, of which $130k capital
Lease liability working: opening 400 + new leases 150 (non-cash) + interest 30 - payments X = closing 420. X = 400 + 150 + 30 - 420 = $160k. Capital repaid = 160 - interest 30 = $130k, shown in financing activities. Interest of $30k is shown according to the entity's policy for interest paid.
Question 8
Sitatunga Co's retained earnings were $800k at the start of the year and $950k at the end. Profit for the year was $300k, and $20k of excess depreciation was transferred from the revaluation surplus to retained earnings. What equity dividends were paid in the year?
- A) $150k
- B) $210k
- C) $170k
- D) $130k
Show answer & explanation
Answer: C) $170k
Retained earnings working: opening 800 + profit 300 + transfer from revaluation surplus 20 - dividends X = closing 950. X = 800 + 300 + 20 - 950 = $170k.
Question 9
Gerenuk Co has profit before interest and tax of $360,000, total equity of $1,500,000 and a long-term loan of $500,000. What is its return on capital employed (ROCE)?
- A) 24%
- B) 18%
- C) 72%
- D) 36%
Show answer & explanation
Answer: B) 18%
ROCE = profit before interest and tax / capital employed, where capital employed = equity + non-current liabilities (interest-bearing debt). ROCE = $360,000 / ($1,500,000 + $500,000) = $360,000 / $2,000,000 = 18%.
Question 10
Duiker Co has inventories of $300k, trade receivables of $250k, cash of $50k and trade payables of $400k. It has no other current assets or current liabilities. What are its current ratio and quick (acid test) ratio?
- A) Current 1.5:1; quick 0.75:1
- B) Current 1.5:1; quick 1.38:1
- C) Current 0.75:1; quick 1.5:1
- D) Current 1.38:1; quick 0.125:1
Show answer & explanation
Answer: A) Current 1.5:1; quick 0.75:1
Current ratio = current assets / current liabilities = (300 + 250 + 50) / 400 = 1.5:1. Quick ratio leaves out inventory because it is the least liquid current asset: (250 + 50) / 400 = 0.75:1.
Question 11
Klipspringer Co has closing inventory of $120,000 and cost of sales of $876,000 for the year. Using a 365-day year, what is its inventory holding period?
- A) 49.3 days
- B) 7.3 days
- C) 50 days
- D) 40 days
Show answer & explanation
Answer: C) 50 days
Inventory holding period = inventory / cost of sales x 365 = $120,000 / $876,000 x 365 = 50 days. Inventory turnover = 7.3 times a year is a related measure, but it is not expressed in days.
Question 12
Reedbuck Co has profit before interest and tax of $600,000 and finance costs of $150,000. It has interest-bearing debt of $2,000,000 and equity of $3,000,000. Using gearing defined as debt / (debt + equity), what are its interest cover and gearing?
- A) Interest cover 4 times; gearing 40%
- B) Interest cover 3 times; gearing 40%
- C) Interest cover 4 times; gearing 66.7%
- D) Interest cover 0.25 times; gearing 40%
Show answer & explanation
Answer: A) Interest cover 4 times; gearing 40%
Interest cover = PBIT / finance costs = $600,000 / $150,000 = 4 times. Gearing = debt / (debt + equity) = $2,000,000 / $5,000,000 = 40%. Debt / equity would be 66.7%, which is a different definition.
Question 13
Oribi Co revalued its property upwards at the start of the year, while a competitor carries similar property at historical cost. All else being equal, what effect does the revaluation have on Oribi Co's ratios compared with the competitor's?
- A) ROCE is higher, because the revaluation gain is included in operating profit
- B) ROCE is lower, because capital employed is higher and higher depreciation reduces profit
- C) Gearing (debt / equity) is higher, because equity is lower
- D) Asset turnover is higher, because non-current assets are higher
Show answer & explanation
Answer: B) ROCE is lower, because capital employed is higher and higher depreciation reduces profit
A revaluation increases non-current assets and equity (the revaluation surplus), so capital employed rises. Depreciation on the higher carrying amount reduces operating profit. Both effects lower ROCE. Gearing falls because equity is higher, and asset turnover falls because assets are higher. This is a key limitation when comparing entities with different accounting policies.
Question 14
Performance in a not-for-profit entity such as a charity is often assessed using 'value for money'. What are the three Es that make up value for money?
- A) Earnings, equity and expenditure
- B) Economy, equity and efficiency
- C) Economy, efficiency and effectiveness
- D) Efficiency, earnings and effectiveness
Show answer & explanation
Answer: C) Economy, efficiency and effectiveness
Value for money is assessed through economy (obtaining resources at the lowest cost for the right quality), efficiency (the relationship between inputs and outputs) and effectiveness (how well objectives are achieved). Profit-based ratios are less relevant because the primary objective of a not-for-profit entity is not profit.
Question 15
Bushbuck Co has revenue of $4,000,000, profit before interest and tax of $600,000 and capital employed of $2,500,000. Which of the following correctly shows its operating profit margin, asset turnover and ROCE?
- A) Margin 15%; asset turnover 0.625 times; ROCE 9.375%
- B) Margin 24%; asset turnover 1.6 times; ROCE 15%
- C) Margin 15%; asset turnover 1.6 times; ROCE 24%
- D) Margin 15%; asset turnover 1.6 times; ROCE 16.6%
Show answer & explanation
Answer: C) Margin 15%; asset turnover 1.6 times; ROCE 24%
Operating profit margin = $600,000 / $4,000,000 = 15%. Asset turnover = revenue / capital employed = $4,000,000 / $2,500,000 = 1.6 times. ROCE = $600,000 / $2,500,000 = 24%. As a check, ROCE = margin x asset turnover = 15% x 1.6 = 24%.