Operating activities

Learning objectives

• Identify operating cash flows (sales, suppliers, employees, royalties, taxes, contracts held for dealing or trading purposes) and the exception for assets held for rental and subsequently sold.L1, L2
• Distinguish the gain on disposal included in profit or loss from the disposal cash flow, which is classified as investing.L1, L2, L3
• Justify the classification of an ambiguous cash flow by reference to the definitions and the entity's principal activity.L2, L3

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 §13The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain its operating capability, pay dividends and make new investments without recourse to external sources of financing; information about their components is useful in forecasting future operating cash flows.
• 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 §15Securities and loans held for dealing or trading purposes are similar to inventory acquired specifically for resale: the cash flows arising from their purchase and sale are operating; similarly, cash advances and loans made by financial institutions are usually classified as operating activities, since they relate to their main revenue-producing activity.

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

18 questions

• Payments to suppliers for goods and services and payments to employees are operating cash flows.L1
• Because the gain on the sale of an item of plant is included in profit or loss, the receipt of the sale price is an operating cash flow.L1
• For a securities dealer, purchases and sales of securities held for dealing or trading are classified as investing activities.L2
• Which of these flows is an example of an operating cash flow?L1
• Brislane rents out vehicles short term and then sells them after two years in the ordinary course of business (IAS 16 para. 68A, context data). How should the payment to buy the vehicles be classified?L2
• Which classification does the standard give to receipts and payments on contracts held for dealing or trading purposes?L1
• Why is the amount of operating cash flows regarded as a key indicator?L1
• Which of these flows of Zelquine are operating cash flows?L2
• Which of these flows of Velmira, an investment bank, are operating?L2
• Saltara, a wholesaler, is considering the following classifications. Which are compliant?L3
• Orlisse sells a machine for 70,000 (gain of 25,000) and presents 70,000 in its operating cash flows, on the ground that the gain is in its operating profit. What is the error?L2
• Calquine manufactures equipment that it rents out for three years and then sells in the ordinary course of business (IAS 16 para. 68A, context data). It presents manufacturing costs as investing and resale proceeds as investing. What is the error?L3
• Fiorquine, a securities broker-dealer, classifies as investing the purchases of securities in its trading book, which are resold within a few days. What is the error?L2
• Rosmira, a haulier, receives 180,000 from its insurer for a truck destroyed in an accident; the truck was an item of property, plant and equipment used for deliveries (case data). Which classification is most defensible for this settlement?L2
• Ostlisse rents forklifts to its customers for four years and then systematically sells them on the second-hand market, which is part of its ordinary activities (IAS 16 para. 68A, context data). How should the price received on reselling a batch of forklifts be classified?L3
• Sortara, an industrial group, holds two bond portfolios: the first is actively managed to make short-term trading gains, the second is held to maturity to invest lasting surpluses (case data). How should purchases in each portfolio be classified?L3
• Kermont, a software publisher, receives during the year: (1) customer subscriptions; (2) the sale price of its old servers; (3) a government operating grant; (4) the repayment of a loan it had granted to a distributor. Write an analysis classifying these receipts.L3
• Ralvenne's management wants to present the proceeds from selling an industrial site (2.4 million) as operating, to show positive operating cash flows and reassure its lenders. Write a memo to the audit committee on this plan.L3