IAS 7 Case Study 1 Facts XYZ Inc., as part of its cash management activities, invested $10 million in redeemable preference shares (within three months from the date of their redemption). To do so, XYZ instructed its bank to use a maturing time deposit (a two-month fixed deposit) with the bank. Required Determine how XYZ Inc. would treat in its cash flow statement the cash outflows resulting from the in- vestment of funds in redeemable preferred shares and the cash inflows resulting from the withdrawal of funds from the bank by using a maturing time deposit. Case Study 2 Facts On January 1, 2004, Dramatic Inc. issued convertible bonds with conversion to take place on or before the expiry of two years from the date of issuance of the debt. On December 15, 2005, the board of di- rectors of Dramatic Inc. decided to convert the bonds at year-end and issue equity shares. Required How would Dramatic Inc. treat this transaction in its cash flow preparation? Case Study 3 Facts XYZ Inc. is preparing its cash flow statement under the direct method and has provided this information: Net credit sales $5,000,000 Accounts receivable, end of the year 1,500,000 Accounts receivable, beginning of the year 2,500,000 Purchases (on account) 4,000,000 Trade payable, end of the year 1,900,000 Trade payable, beginning of the year 2,000,000 Operating expenses 3,000,000 Accrued expenses, beginning of the year 500,000 Accrued expenses, end of the year 400,000 Depreciation on property, plant, and equipment 600,000 Required For the purposes of the cash flow statement under the direct method, you are required to compute the cash collections from customers, payments to suppliers, and cash paid for operating expenses. Case Study 4 Facts Excellent Inc. has provided the following information and requests you to prepare the operating activities of the cash flow statement under the indirect method: Net income before taxes $400,000 Depreciation on property, plant, and equipment 200,000 Loss on sale of building 100,000 Interest expense 150,000 Interest payable, beginning of the year 100,000 Interest payable, end of the year 50,000 Income taxes paid 100,000 Accounts receivable, beginning of the year 500,000 Accounts receivable, end of the year 850,000 Inventory, beginning of the year 500,000 1 Inventory, end of the year 400,000 Accounts payable, beginning of the year 200,000 Accounts payable, end of the year 500,000 Required Please prepare the operating activities section of the cash flow statement using the indirect method. MULTIPLE-CHOICE QUESTIONS 1. An entity purchases a building and the seller accepts payment partly in equity shares and partly in debentures of the entity. This transaction should be treated in the cash flow statement as follows: (a) The purchase of the building should be in-vesting cash outflow and the issuance of shares and the debentures financing cash outflows. (b) The purchase of the building should be in-vesting cash outflow and the issuance of de-bentures financing cash outflows while the issuance of shares investing cash outflow. (c) This does not belong in a cash flow state-ment and should be disclosed only in the footnotes to the financial statements. (d) Ignore the transaction totally since it is a noncash transaction. No mention is required in either the cash flow statement or any-where else in the financial statements. 2. An entity (other than a financial institution) re-ceives dividends from its investment in shares. How should it disclose the dividends received in the cash flow statement prepared under IAS 7? (a) Operating cash inflow. (b) Either as operating cash inflow or as invest-ing cash inflow. (c) Either as operating cash inflow or as financ-ing cash inflow. (d) As an adjustment in the “operating activi-ties” section of the cash flow because it is included in the net income for the year and as a cash inflow in the “financing activities” section of the cash flow statement. 3. How should gain on sale of an office building owned by the entity be presented in a cash flow statement? (a) As an inflow in the investing activities sec-tion of the cash flow because it pertains to a long-term asset. (b) As an inflow in the “financing activities” section of the cash flow statement because the building was constructed with a long-term loan from a bank that needs to be re-paid from the sale proceeds. (c) As an adjustment to the net income in the “operating activities” section of the cash flow statement prepared under the indirect method. (d) Added to the sale proceeds and presented in the “investing activities” section of the cash flow statement. 4. How should an unrealized gain on foreign cur-rency translation be presented in a cash flow state-ment? (a) As an inflow in the “financing activities” section of the cash flow statement because it arises from a foreign currency translation. (b) It should be ignored for the purposes of the cash flow statement as it is an unrealized gain. (c) It should be ignored for the purposes of the cash flow statement as it is an unrealized gain but it should be disclosed in the foot-notes to the financial statements by way of abundant precaution. (d) As an adjustment to the net income in the “operating activities” section of the state-ment of cash flows. 2 5. How should repayment of a long-term loan com-prising repayment of the principal amount and interest due to date on the loan be treated in a cash flow statement? (a) The repayment of the principal portion of the loan is a cash flow belonging in the “in-vesting activities” section; the interest pay-ment belongs either in the “operating activi-ties” section or the “financing activities” section. (b) The repayment of the principal portion of the loan is a cash flow belonging in the “in-vesting activities” section; the interest pay-ment belongs either in the “operating activi-ties” section or the “investing activities” section. (c) The repayment of the principal portion of the loan is a cash flow belonging in the “in-vesting activities” section; the interest pay-ment belongs in the “operating activities” section (because IAS 7 does not permit any alternatives in case of interest payments). (d) The repayment of the principal portion of the loan is a cash flow belonging in the “in-vesting activities” section; the interest pay-ment should be netted against interest re-ceived on bank deposits, and the net amount of interest should be disclosed in the “oper-ating activities” section. 3 . IAS 7 Case Study 1 Facts XYZ Inc., as part of its cash management activities, invested $10 million. shares. How should it disclose the dividends received in the cash flow statement prepared under IAS 7? (a) Operating cash inflow. (b) Either as operating cash inflow or as invest-ing cash inflow “in-vesting activities” section; the interest pay-ment belongs in the “operating activities” section (because IAS 7 does not permit any alternatives in case of interest payments). (d) The repayment of the principal