CIMA BA3 · Chapter 12
Statement of cash flows (IAS 7) MCQs with Answers
10 multiple-choice questions on Statement of cash flows (IAS 7) for CIMA BA3 Fundamentals of Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
When cash flows from operating activities are calculated using the indirect method, which of the following is added back to profit before tax?
- A) An increase in inventory
- B) Depreciation
- C) A profit on disposal of non-current assets
- D) A decrease in trade payables
Show answer & explanation
Answer: B) Depreciation
Depreciation is a non-cash expense, so it is added back. An increase in inventory and a decrease in payables use cash and are deducted, and a profit on disposal is deducted because the proceeds are shown under investing activities.
Question 2
A company's profit before tax for the year was $54,000. Depreciation was $12,600 and there was a loss on disposal of equipment of $1,400. During the year inventory increased by $4,300, trade receivables decreased by $2,100 and trade payables increased by $1,700. Ignoring interest and tax, what is the cash generated from operations?
- A) $54,900
- B) $64,700
- C) $67,500
- D) $68,500
Show answer & explanation
Answer: C) $67,500
Profit before tax $54,000 + depreciation $12,600 + loss on disposal $1,400 = $68,000. Less increase in inventory $4,300, add decrease in receivables $2,100, add increase in payables $1,700. Cash generated = $67,500.
Question 3
The carrying amount of a company's property, plant and equipment was $140,000 at the start of the year and $178,000 at the end. Depreciation for the year was $22,000 and equipment with a carrying amount of $9,000 was sold. There were no revaluations. How much cash was spent on purchasing property, plant and equipment?
- A) $38,000
- B) $47,000
- C) $51,000
- D) $69,000
Show answer & explanation
Answer: D) $69,000
Opening $140,000 + additions - depreciation $22,000 - disposals $9,000 = closing $178,000. Additions = $178,000 - $140,000 + $22,000 + $9,000 = $69,000.
Question 4
A company's current tax liability was $8,200 at the start of the year and $9,700 at the end. The tax charge in the statement of profit or loss was $11,500. How much tax was paid during the year?
- A) $1,500
- B) $10,000
- C) $11,500
- D) $13,000
Show answer & explanation
Answer: B) $10,000
Tax paid = opening liability + charge for the year - closing liability = $8,200 + $11,500 - $9,700 = $10,000.
Question 5
Under IAS 7 Statement of Cash Flows, how is the repayment of a bank loan classified?
- A) Operating activities
- B) Investing activities
- C) Financing activities
- D) It is not shown because it does not affect profit
Show answer & explanation
Answer: C) Financing activities
Financing activities change the size and composition of the entity's equity and borrowings. Repaying a loan reduces borrowings, so it is a financing cash outflow.
Question 6
Which of the following is a cash flow from investing activities under IAS 7?
- A) Cash received from customers
- B) Proceeds from the sale of equipment
- C) Proceeds from an issue of shares
- D) Cash paid to suppliers of goods for resale
Show answer & explanation
Answer: B) Proceeds from the sale of equipment
Investing activities are the acquisition and disposal of long-term assets and other investments, so proceeds from selling equipment are investing inflows. Receipts from customers and payments to suppliers are operating, and a share issue is financing.
Question 7
A company's share capital increased from $50,000 to $80,000 during the year and its share premium from $20,000 to $28,000. During the year there was a bonus issue of $10,000 financed from share premium, and the rest of the increase came from an issue of shares for cash. What cash was received from the issue of shares?
- A) $18,000
- B) $30,000
- C) $38,000
- D) $48,000
Show answer & explanation
Answer: C) $38,000
The bonus issue moved $10,000 from share premium to share capital with no cash. Cash shares: share capital increase $30,000 - bonus $10,000 = $20,000; share premium increase $8,000 + $10,000 used for the bonus = $18,000. Cash received = $20,000 + $18,000 = $38,000. This equals the combined increase in share capital and share premium, because the bonus issue has no net effect on the two accounts together.
Question 8
A company sells a machine at a profit. How is this reflected in the statement of cash flows prepared using the indirect method?
- A) The profit is deducted from profit before tax, and the sale proceeds are shown under investing activities
- B) The profit is added back to profit before tax, and the sale proceeds are shown under financing activities
- C) The sale proceeds are added to profit before tax under operating activities
- D) Only the profit on disposal is shown, under investing activities
Show answer & explanation
Answer: A) The profit is deducted from profit before tax, and the sale proceeds are shown under investing activities
The profit on disposal is included in profit before tax but is not an operating cash flow, so it is deducted in the reconciliation. The full cash proceeds are then shown as an investing inflow.
Question 9
Using the indirect method, how does an increase in trade payables during the year affect cash generated from operations?
- A) It is deducted from profit, because the business owes more money
- B) It has no effect, because payables are not cash
- C) It is added to profit, because the business has paid less cash than the expenses charged
- D) It is shown under financing activities instead
Show answer & explanation
Answer: C) It is added to profit, because the business has paid less cash than the expenses charged
An increase in payables means some expenses charged in profit or loss have not yet been paid, so cash outflows are lower than the expense and the increase is added back.
Question 10
A company's statement of cash flows shows net cash from operating activities of $42,000, net cash used in investing activities of $31,500 and net cash used in financing activities of $6,800. Cash and cash equivalents at the start of the year were $3,200. What were cash and cash equivalents at the end of the year?
- A) $3,700
- B) $6,900
- C) $45,200
- D) $83,500
Show answer & explanation
Answer: B) $6,900
Net increase in cash = $42,000 - $31,500 - $6,800 = $3,700. Closing cash = $3,200 + $3,700 = $6,900.