The three-activity principle

Learning objectives

• Explain the classification of cash flows into three activities and the presentation appropriate to the entity's business.L1, L2
• Split a single payment into its components (interest and principal) and calculate the net change in cash from the three subtotals.L1, L2

Normative references

• IAS 7 §10The statement of cash flows reports cash flows during the period classified by operating, investing and financing activities.
• IAS 7 §11An entity presents its cash flows from operating, investing and financing activities in a manner that is most appropriate to its business; classification by activity enables users to assess the impact of each activity on the financial position and on the amount of cash, and may also be used to evaluate the relationships among those activities.
• IAS 7 §12One transaction can give rise to cash flows in different classes: for a loan instalment that repays both principal and interest, the principal portion belongs to financing, while the interest portion may be presented within operating activities (wording before IFRS 18).

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

17 questions

• The statement of cash flows reports the cash flows of the period classified into three categories: operating, investing and financing activities.L1
• The entity presents its cash flows by activity in the manner most appropriate to its business, so that users can assess the impact of those activities on its financial position and on its cash.L1
• When a loan instalment includes interest and capital, the entity must present the whole instalment as a single financing line.L2
• How many categories of activities does the statement of cash flows distinguish?L1
• What is the purpose of classifying cash flows by activity?L1
• Fenmée pays a loan instalment comprising capital and interest; its policy is to classify interest paid as operating activities (case data). How should the instalment be presented?L1
• Queltis's statement shows: operating cash flows +620,000, investing cash flows −410,000, financing cash flows −95,000. What does the sum of these three subtotals represent?L2
• Which of the following statements about the structure of the statement are correct?L1
• Which of these transactions of Ostnore may give rise to flows classified in different activities within a single transaction?L2
• Galdine's draft statement shows the following possible errors. Which are genuine errors?L2
• Arquine's statement shows operating cash flows of {operating} (net inflow), investing cash flows of {investing} (net outflow) and financing cash flows of {financing} (net inflow). Opening cash was {opening}. Compute the net change and closing cash.L1
• A difficult year for Talquine: its operating activities used {operating} of cash, its asset disposals generated a net investing inflow of {investing}, and it repaid borrowings for a net financing outflow of {financing}. Its opening cash was {opening}. Determine the net change for the period and end-of-period cash.L2
• Zelrel pays a loan instalment of {instalment}, of which {interest_part} is interest. Its policy classifies interest paid as operating activities (case data). Compute the amounts to present in operating and in financing.L1
• Fenlisse owes {opening_principal} at the start of the year on a loan at an annual rate of {rate}; at year-end it pays an annuity of {instalment} covering the year’s interest and part of the capital. Interest paid is classified as operating under its policy (case data). Determine the operating and financing parts of the annuity.L2
• Peltara's accountant computes the change in cash as: operating 410,000 + investing 290,000 + financing 75,000 = 775,000, although investing is a net outflow and financing a net inflow. What is the error?L2
• Fenmira, which classifies interest paid as operating (case data), presents in financing a line “repayment of borrowings 250,000”, of which 40,000 is interest. What is the error?L2
• Tirvane's statement includes a fourth heading “miscellaneous cash flows” grouping a loan granted, a loan repayment and an insurance settlement on inventory. What is the error?L1