CAF-1 · Chapter 14

IAS 7 Statement of Cash Flows MCQs with Answers

15 multiple-choice questions on IAS 7 Statement of Cash Flows for CAF-1 Financial Accounting and Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   Under IAS 7, how are 'cash equivalents' defined?

   • A) Equity investments held for long-term capital appreciation.
   • B) Short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.
   • C) Inventory items that can be sold quickly.
   • D) Accounts receivable due within 30 days.
   Show answer & explanation

   Answer: B) Short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.

   IAS 7 defines cash equivalents strictly as short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.

2. Question 2

   Which of the following activities is classified as an 'Operating Activity' under IAS 7?

   • A) Cash proceeds from issuing shares.
   • B) Cash payments to acquire property, plant, and equipment.
   • C) Cash receipts from the sale of goods and rendering of services.
   • D) Cash repayments of long-term borrowings.
   Show answer & explanation

   Answer: C) Cash receipts from the sale of goods and rendering of services.

   Operating activities are the principal revenue-producing activities of the entity, such as cash receipts from the sale of goods and services.

3. Question 3

   How should a company present cash flows arising from taxes on income, unless they can be specifically identified with financing and investing activities?

   • A) Exclusively as financing activities.
   • B) Exclusively as investing activities.
   • C) Separately disclosed and classified as operating activities.
   • D) They are excluded from the statement of cash flows.
   Show answer & explanation

   Answer: C) Separately disclosed and classified as operating activities.

   Cash flows arising from taxes on income shall be separately disclosed and classified as operating activities unless specifically identified with financing/investing activities.

4. Question 4

   When using the indirect method to calculate cash generated from operations, how is a 'Gain on disposal of equipment' treated?

   • A) It is added to profit before tax.
   • B) It is deducted from profit before tax.
   • C) It is ignored entirely.
   • D) It is added to the financing activities section.
   Show answer & explanation

   Answer: B) It is deducted from profit before tax.

   A gain on disposal is included in the profit before tax figure but relates to an investing activity. Therefore, it is deducted from profit before tax in the operating section to avoid double counting.

5. Question 5

   Which of the following represents a non-cash transaction that must be EXCLUDED from the statement of cash flows?

   • A) The purchase of a machine for cash.
   • B) The conversion of debt to equity.
   • C) The payment of a cash dividend.
   • D) The receipt of a bank loan.
   Show answer & explanation

   Answer: B) The conversion of debt to equity.

   Investing and financing transactions that do not require the use of cash (like a debt-to-equity conversion or bonus share issue) are excluded from the cash flow statement but disclosed in the notes.

6. Question 6

   Under the direct method of reporting operating cash flows, how is 'cash received from customers' determined?

   • A) By taking net profit and adjusting for depreciation only.
   • B) By reporting major classes of gross cash receipts, typically calculated by adjusting revenue for the change in trade receivables.
   • C) By ignoring working capital changes completely.
   • D) By adding interest paid to sales revenue.
   Show answer & explanation

   Answer: B) By reporting major classes of gross cash receipts, typically calculated by adjusting revenue for the change in trade receivables.

   The direct method discloses major classes of gross cash receipts. Cash received from customers is found by adjusting sales revenue for changes in trade receivables.

7. Question 7

   A bank overdraft that is repayable on demand and forms an integral part of an entity's cash management is classified as:

   • A) A financing cash inflow.
   • B) An operating cash outflow.
   • C) A component of cash and cash equivalents.
   • D) An investing activity.
   Show answer & explanation

   Answer: C) A component of cash and cash equivalents.

   Bank overdrafts repayable on demand that form an integral part of cash management are included as a component of cash and cash equivalents.

8. Question 8

   In the statement of cash flows, how should an increase in inventory during the year be treated when calculating operating cash flows via the indirect method?

   • A) Added to profit before tax.
   • B) Deducted from profit before tax.
   • C) Included as an investing outflow.
   • D) Ignored.
   Show answer & explanation

   Answer: B) Deducted from profit before tax.

   An increase in an operating asset (like inventory) represents cash tied up in the business, so it is treated as a cash outflow and deducted from profit before tax.

9. Question 9

   Where should the cash proceeds from issuing new shares be classified in the statement of cash flows?

   • A) Operating activities.
   • B) Investing activities.
   • C) Financing activities.
   • D) Non-cash transactions.
   Show answer & explanation

   Answer: C) Financing activities.

   Financing activities result in changes in the size and composition of the contributed equity and borrowings, such as proceeds from issuing shares.

10. Question 10

    According to IAS 7, what is the classification for cash payments to acquire property, plant, and equipment?

    • A) Operating activities.
    • B) Investing activities.
    • C) Financing activities.
    • D) Cash equivalents.
    Show answer & explanation

    Answer: B) Investing activities.

    Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

11. Question 11

    How are interest paid and interest received typically classified in a statement of cash flows?

    • A) Both must strictly be operating activities.
    • B) Both must strictly be financing activities.
    • C) They must be disclosed separately and classified consistently (e.g., interest paid as operating/financing, interest received as operating/investing).
    • D) They are netted against each other as a single line item.
    Show answer & explanation

    Answer: C) They must be disclosed separately and classified consistently (e.g., interest paid as operating/financing, interest received as operating/investing).

    IAS 7 requires interest paid and received to be disclosed separately. They can be classified as operating, investing, or financing depending on the entity's policy, applied consistently.

12. Question 12

    Which of the following is a primary advantage of providing a statement of cash flows?

    • A) It completely replaces the need for a statement of profit or loss.
    • B) It perfectly measures the profitability of the entity.
    • C) It enhances the comparability of operating performance by eliminating the effects of different accounting treatments for the same transactions.
    • D) It shows the exact market value of the company's equity.
    Show answer & explanation

    Answer: C) It enhances the comparability of operating performance by eliminating the effects of different accounting treatments for the same transactions.

    Cash flow information is less vulnerable to manipulation through accounting policies/estimates, making operating performance more comparable across different entities.

13. Question 13

    A company pays a dividend to its shareholders. Under IAS 7, this cash outflow is typically classified as:

    • A) An investing activity.
    • B) A financing activity (or alternatively, an operating activity).
    • C) A non-cash transaction.
    • D) It is excluded from the cash flow statement.
    Show answer & explanation

    Answer: B) A financing activity (or alternatively, an operating activity).

    Dividends paid are a cost of obtaining financial resources and are typically classified as financing activities, though classifying them as operating to show the ability to pay dividends from operations is allowed.

14. Question 14

    Under the indirect method, how is depreciation expense treated when calculating cash generated from operations?

    • A) It is deducted from profit before tax.
    • B) It is added to profit before tax.
    • C) It is shown as an investing outflow.
    • D) It is ignored.
    Show answer & explanation

    Answer: B) It is added to profit before tax.

    Because depreciation is a non-cash expense that reduced profit before tax, it must be added back to profit before tax to arrive at the actual cash generated from operations.

15. Question 15

    When preparing a cash flow statement, an entity discovers it has a 45-day treasury bill. How should this be classified?

    • A) As an investing cash outflow.
    • B) As a financing cash inflow.
    • C) As a cash equivalent.
    • D) As an operating cash inflow.
    Show answer & explanation

    Answer: C) As a cash equivalent.

    Treasury bills with a short maturity (typically 3 months or less from acquisition) are highly liquid and subject to insignificant risk of value change, so they are classified as cash equivalents.