Investing activities

Learning objectives

• Determine whether an expenditure may be classified as investing (recognition of an asset).L1, L2, L3
• Calculate cash paid for acquisitions and cash received from disposals of non-current assets from the balances, depreciation, disposals and non-cash acquisitions.L2, L3
• Relate the journal entry for the disposal or acquisition of a non-current asset to the cash flow presented.L1, L2

Normative references

• IAS 7 §6Definitions: cash comprises cash on hand and demand deposits; cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value; cash flows are inflows and outflows of cash and cash equivalents; operating activities are the principal revenue-producing activities and other activities that are not investing or financing activities; investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents; financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.
• IAS 7 §14Operating cash flows are primarily derived from the principal revenue-producing activities and generally result from the transactions that enter into the determination of profit or loss. Examples: cash receipts from the sale of goods and the rendering of services; cash receipts from royalties, fees, commissions and other revenue; cash payments to suppliers for goods and services; cash payments to and on behalf of employees; cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; cash receipts and payments from contracts held for dealing or trading purposes. Some transactions, such as the sale of an item of plant, give rise to a gain or loss included in profit or loss, but the related cash flows are investing cash flows. However, cash payments to manufacture or acquire assets held for rental to others and subsequently held for sale (IAS 16 para. 68A), as well as rentals and the proceeds from the subsequent sale of those assets, are operating cash flows.
• IAS 7 §16Investing cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows; only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities. Examples: cash payments to acquire property, plant and equipment, intangibles and other long-term assets (including capitalised development costs and self-constructed property, plant and equipment) and cash receipts from their sale; cash payments and receipts relating to the acquisition and sale of equity or debt instruments of other entities, including interests in associates and joint ventures, other than instruments considered to be cash equivalents or held for dealing or trading purposes; cash advances and loans made to other parties and their repayment, other than those made by a financial institution; cash payments and receipts for futures, forward, option and swap contracts, except when the contracts are held for dealing or trading purposes or the cash flows are classified as financing. When a contract is accounted for as a hedge of an identifiable position, its cash flows are classified in the same manner as the cash flows of the position being hedged.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

22 questions

• Only spending that leads to an asset recognised in the statement of financial position can be classified as investing activities.L1
• Payments relating to capitalised development costs and to self-constructed property, plant and equipment can be classified as investing activities.L2
• Which of these flows is an investing cash flow?L1
• How are cash flows on futures, forwards, options and swaps that are neither held for trading nor classified as financing classified?L2
• Velquine sells a machine: cost 300,000, accumulated depreciation 220,000, price received 95,000. What amount appears in investing cash flows?L2
• Which of the following payments by Brabane can be classified as investing activities?L2
• In Sormont's statement, which of these investing lines are correctly prepared?L3
• Ervane sold a kiln: cost {cost}, accumulated depreciation {accumulated_depreciation}, gain on disposal recognised {gain} (case data). Compute the carrying amount derecognised and the price received presented in investing.L2
• On selling a batch of vans, Ostvenne derecognised assets with a cost of {cost}, depreciated by {accumulated_depreciation}, and recognised a loss on disposal of {loss} (case data). What is the carrying amount derecognised and what cash receipt appears in investing?L2
• At Lirquine, net property, plant and equipment moves from {opening_net} to {closing_net}. The depreciation charge is {depreciation} and the carrying amount of assets sold is {disposals_carrying}. All acquisitions were paid in cash (case data). Compute the investing outflow for acquisitions.L2
• Morzane's equipment fleet had a net value of {opening_net} at the start of the year and {closing_net} at the end. The year bore {depreciation} of depreciation, and equipment with a net value of {disposals_carrying} was sold. No purchase remains unpaid (case data). What amount of equipment purchases appears as an investing outflow?L2
• Selmont acquired {gross_acquisitions} of property, plant and equipment. The amount owed to suppliers of fixed assets moves from {opening_payable} to {closing_payable}. It also capitalised {development_costs} of development costs, paid during the year (case data). Compute the related investing outflows.L3
• To improve its operating cash flows, Ulvio presents as investing 420,000 of research spending recognised as an expense, on the ground that it prepares its future products. What is the error?L2
• Ulmont acquired a press for 650,000, of which 200,000 is still owed to the supplier at year-end, and presents an investing outflow of 650,000. What is the error?L3
• In Kerdine's statement, the line “disposals of PPE” of 130,000 corresponds to the carrying amount of the assets sold, whereas the price received was 175,000. What is the error?L3
• Gelmont sells an item of equipment for cash: cost {cost}, accumulated depreciation {accumulated_depreciation}, price received {proceeds} (case data). Record the disposal entry; the amount debited to cash is the investing cash flow.L2
• Isbane buys and pays cash for a bottling line costing {price} (case data). Record the acquisition entry, whose credit to cash is an investing outflow.L1
• Dalmont sells an office building: cost {cost}, accumulated depreciation {accumulated_depreciation}, price received by transfer {proceeds} (case data). Record the disposal entry and identify the cash flow presented.L2
• Tormont spends 240,000 on new software: 180,000 of development meeting the capitalisation criteria and 60,000 of user training, recognised as an expense (case data). How should the payments be classified?L2
• Halmont, a manufacturer, subscribes 2 million of debt securities of a listed company, maturing in 4 years, which it will hold until redemption (case data). How should the payment be classified?L3
• Isquine acquires a machine for 500,000: 150,000 paid in cash, the balance settled through a 3-year supplier credit, of which it repays 50,000 before year-end (case data). What investing outflow should be presented for the acquisition?L3
• Selquine's controller is preparing the investing section: (1) machines bought for cash; (2) equipment received under a lease; (3) sale of a warehouse at a gain; (4) study costs for an abandoned project, expensed. Write a memo supporting the treatment of each item in the statement.L3