PROBLEM 1: TRUE OR FALSE

1. When preparing a statement of cash flows, only those items that have affected the
amount of cash and cash equivalents are presented; non-cash items are excluded.
➢​ TRUE: Only items affecting cash and cash equivalents are presented.
2. Cash flows relating to the sale or acquisition of non-operating assets, e.g. property, plant
and equipment, are reported in the investing activities of the statement of cash flows.
➢​ TRUE: Cash flows from sale/acquisition of non-operating assets are reported under
investing activities.
3. Borrowings and transactions relating to the entity's equity capital are considered
operating activities.
➢​ FALSE: Borrowings and equity transactions are considered financing activities, not
operating activities.
4. Entities other than financial institutions may present cash flows from interest income as
either operating or financing activity.
➢​ TRUE: Non-financial institutions can present interest income as either operating or
financing activity.
5. Cash flows from operating activities may be presented using either the direct method or
the indirect method. PAS 7 encourages the use of the indirect method.
➢​ TRUE: Cash flows from operating activities can be presented using either the direct
or indirect method, although PAS 7 (now IAS 7) encourages the direct method.

PROBLEM 2: MULTIPLE CHOICE

1. As the statement of cash flows can only be prepared on a cash basis,

a. it is intended to be prepared only by entities using the cash basis of accounting, rather
than the accrual basis.
b. it is outside the scope of the PFRSs, and therefore, not a required statement.
c. it is outside the scope of the PFRSs, but nonetheless a required statement
d. it enhances inter-comparability among different entities because it eliminates the effects
of using different accounting treatments for the same transactions and events
Explanation:
The statement of cash flows is prepared on a cash basis, regardless of whether the entity
uses the cash or accrual basis of accounting. This allows for greater comparability among
different entities, as it eliminates the effects of different accounting treatments.

2. Which of the following is not one of the classifications of cash flows in the statement of
cash flows?
a. Extracurricular activities
b. Operating activities
c. Financing activities
d. Investing activities

Explanation:
The statement of cash flows classifies cash flows into three categories:
Operating activities
Investing activities
Financing activities
There is no classification for "Extracurricular activities", which seems unrelated to financial
reporting.

3. Cash inflows or outflows relating to income and expenses are generally presented under
a. Operating activities.
b. Financing activities.
c. Investing activities.
d. Not presented

Explanation:
Cash inflows and outflows related to income and expenses, such as receipts from
customers and payments to suppliers, are typically presented under operating activities in
the statement of cash flows.
Investing activities (c) typically include cash flows related to:
- Acquisition or disposal of non-current assets (e.g., property, plant, and equipment)
- Investments in other entities (e.g., shares, bonds)
- Loans made to other parties
Income and expenses are not directly related to these types of transactions.

Financing activities (b) typically include cash flows related to:

- Changes in the entity's capital structure (e.g., issuing or repaying debt, issuing or
redeeming shares)
- Dividends paid to shareholders
Again, income and expenses are not directly related to these types of transactions.
Operating activities (a) is the most appropriate category for income and expenses, as it
includes cash flows related to the entity's core business operations.

4. Which of the following is presented in the activities section of the statement of cash
flows?
a. Purchase of a treasury bill three months before its maturity date.
b, Acquisition of equipment through issuance of note payable.
c. Bank overdrafts that can be offset.
d. Exchange differences from translating foreign currency denominated cash flows

Explanation:
Exchange differences from translating foreign currency denominated cash flows are
presented in the operating, investing, or financing activities section of the statement of cash
flows, depending on the nature of the cash flow.

The other options are not presented in the activities section:

a. Purchase of a treasury bill three months before its maturity date is an investing activity,
but it's not presented as a separate line item. Instead, it's included in the net change in
investments.
b. Acquisition of equipment through issuance of note payable is a non-cash transaction and
is not presented in the activities section.
c. Bank overdrafts that can be offset are considered part of cash and cash equivalents, but
changes in bank overdrafts are presented in the financing activities section, not as a
separate line item.

5. Entity A acquires equipment by paying a 10% down payment and issuing a note payable
for the balance. How should Entity A report the transaction in the statement of cash flows?

Down payment
a. Investing activities - Financing activities
b. Financing activities - none
c. Investing activities - none
d. None - none

Explanation:
- The down payment is an outflow of cash, which should be reported as an investing activity
(acquisition of equipment).
- The issuance of a note payable is a financing activity, as it represents a borrowing.
So, Entity A should report:
- Investing activities: Cash outflow for down payment
- Financing activities: Issuance of note payable
Note: The note payable itself isn't a cash flow, but the issuance of it is a financing activity.

PROBLEM 3: FOR CLASSROOM DISCUSSION

Cash and cash equivalents
1. The Entity A had the following balances at December 31, 20x2
Cash on hand P300,000
Cash in bank 700,000
Cash in 90-day money market account 500,000
Treasury bill, purchased 12/1/x2, maturing 2/28/x3 1,600,000
Treasury bond, purchased 3/1/x2, maturing 2/28/x3 1,000,000
How much cash and cash equivalents is reported in Entity A’s December 31, 20x2
statement of financial position?
a. 3,800,000
b. 3,100,000
c. 2,800,000
d. 1,500,000

To determine the correct answer, let's analyze each item:

1. Cash on hand: P300,000 (included)

2. Cash in bank: P700,000 (included)
3. Cash in 90-day money market account: P500,000 (included)
4. Treasury bill (maturing 2/28/x3): P1,600,000 (included, since it's less than 3 months to
maturity)
5. Treasury bond (maturing 2/28/x3): P1,000,000 (not included, since it's not considered
highly liquid and has a longer maturity period)

Total cash and cash equivalents: P300,000 + P700,000 + P500,000 + P1,600,000 =

P3,100,000

Presentation
2. Which of the following is included in the investing activities section of the
statement of cash flows?
a. Acquisition and sale of investments in held for trading securities.
b. Acquisition and sale of items of property, plant and equipment that are routinely
manufactured in the entity's ordinary course of business and are to be held for rentals and
reclassified to inventories when the assets cease to be rented and become held for sale.
c. Acquisition and sale of short-term investments in cash equivalents.
d. Cash inflow from repayment of loan.
Explanation:

Investing activities include:

- Acquisition and disposal of non-current assets (e.g., property, plant, and equipment)
- Investments in other entities (e.g., shares, bonds)
- Loans made to other parties

Repayment of a loan is an investing activity, as it represents the recovery of an investment.

The other options are not correct:

a. Held-for-trading securities are typically classified as cash equivalents or current assets,
and transactions related to them are usually reported as operating activities.
b. This option describes assets that are initially classified as property, plant, and equipment
but are later reclassified to inventories. While acquisition and disposal of these assets are
investing activities, the reclassification to inventories is not.
c. Short-term investments in cash equivalents are typically reported as changes in cash and
cash equivalents, rather than as investing activities.

3. Which of the following is included in the financing activities section of the

statement of cash flows?
a. cash payments for purchases of goods and services
b. cash receipts and cash payments in the acquisition and disposal of property, plant and
equipment, investment property, intangible assets and other noncurrent assets
c. loans to other parties and collections thereof (other than loans made by a financial
institution)

The correct answer is:

None of the above options a, b, or c are correct.
However, the correct answer is not listed among the options. Financing activities typically
include:

- Proceeds from issuance of debt or equity instruments

- Repayments of amounts borrowed
- Dividends paid

Let's evaluate the given options:

a. Cash payments for purchases of goods and services are operating activities.
b. Cash receipts and payments related to property, plant, and equipment, investment
property, intangible assets, and other non-current assets are investing activities.
c. Loans to other parties and collections thereof (other than loans made by a financial
institution) are investing activities.

4. This method of presenting cash flows from (used in) operating activities involves
adjusting accrual basis profit or loss for the effects of changes in operating assets and
liabilities and effects of non-cash items.
a. Direct method
b. Indirect method
c. Inverse method
d. Reverse method

Explanation:

The indirect method of presenting cash flows from operating activities starts with the net
income (accrual basis profit or loss) and adjusts it for:
- Changes in operating assets and liabilities (e.g., accounts receivable, accounts payable)
- Non-cash items (e.g., depreciation, amortization)

This method is called "indirect" because it doesn't directly report the cash inflows and
outflows from operating activities. Instead, it adjusts the accrual basis net income to arrive
at the cash flows from operating activities.
The other options are not correct:

a. Direct method: This method directly reports the cash inflows and outflows from operating
activities, without adjusting the accrual basis net income.
c. Inverse method: There is no such method as the "inverse method" in accounting.
d. Reverse method: There is no such method as the "reverse method" in accounting.

5. Entity A, a non-financial institution, declares cash dividends in 20x1 and pays the
dividends in 20x2. How should Entity A report the dividends paid in the statement of cash
flows for
20x1
a. Operating activities - none (20x2)
b. Financing activities - none (20x2)
c. None - Financing activities (20x2)
d. None - Operating or Financing (20x2)

Explanation:

- In 20x1, Entity A declares the dividends, but doesn't pay them yet. Therefore, there is no
cash outflow in 20x1, and nothing is reported in the 20x1 statement of cash flows.
- In 20x2, Entity A pays the dividends, which is a financing activity (distribution of profits to
shareholders). The dividends paid are reported as a cash outflow under financing activities
in the 20x2 statement of cash flows.
Intermediate Accounting
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