Cash flows and activities: the definitions

Learning objectives

• Identify the definitions of cash flows and of operating, investing and financing activities.L1, L2
• Distinguish an investing activity (long-term assets, investments not included in cash equivalents) from a financing activity (contributed equity and borrowings).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.

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

14 questions

• Under the standard, cash comprises cash on hand and demand deposits.L1
• Operating activities are defined residually: besides the principal revenue-producing activities, they include everything that is neither investing nor financing.L1
• Kertara buys another company's bonds, held for the long term, paying for them with a bank loan drawn the same day. The payment for the bonds is a financing cash flow.L2
• What does the term “cash flows” mean in the standard?L1
• Under the definition, what characterises investing activities?L1
• Which transaction matches the definition of financing activities?L1
• Fenvora receives an insurance settlement after the theft of goods held in inventory. With no other link to investing or financing, how do the definitions classify this flow?L2
• Rosvenne issues new shares for cash and, the following month, uses the funds to buy a factory. How should the two flows be classified?L2
• Which of the following flows are operating activities under the definitions?L1
• Which of the following flows of Nalline, a manufacturing company, are investing activities?L2
• Which of the following flows of Kerline are financing activities?L2
• Ostdane buys an office building for its headquarters, paying for it with a mortgage loan disbursed through its bank, and presents the payment for the building as a financing cash flow. What is the error?L1
• To classify its cash flows, the controller of Tormira uses this rule: “only flows linked to income recognised in profit or loss are operating; any other flow is investing”. What is the error?L2
• Peltis grants an 18-month loan to its joint venture and presents the payment as a financing activity, on the ground that it is a “financing transaction”. What is the error?L2