22.2: Classification of Cash Flows

Question 1

What are the three main classifications of cash flows on a statement of cash flows?

Answer 1

Operating activities
Investing activities
Financing activities

Question 2

What do operating activities include in the statement of cash flows?

Answer 2

Operating activities include cash inflows from principal revenue-generating activities like sales and cash outflows related to expenses such as wages, taxes, and supplier payments.

Question 3

Why are operating cash inflows and outflows important for financial statement users?

Answer 3

They provide key information about whether the company is generating enough cash to cover its operational costs, pay off debt, and invest in future opportunities without relying on external financing.

Question 4

What are investing activities in the context of the statement of cash flows?

Answer 4

Investing activities include the acquisition and disposal of long-term assets and investments, such as property, plant, equipment, and debt or equity securities of other entities.

Question 5

How do investing activities provide insight to financial statement users?

Answer 5

They indicate whether the company is reinvesting its profits into long-term assets to generate future growth or if it’s reducing its asset base by selling assets for cash.

Question 6

What are financing activities in the statement of cash flows?

Answer 6

Financing activities relate to changes in the company’s equity capital and borrowings, such as issuing or repaying debt, paying dividends, and issuing shares.

Question 7

How do financing activities help investors assess a company?

Answer 7

Financing activities allow investors to evaluate how a company funds its operations—whether through debt or equity—and assess the company’s financial structure and capital management.

Question 8

How are cash flows from operating activities typically related to the balance sheet?

Answer 8

Operating cash flows are generally related to changes in current assets and current liabilities (working capital accounts).

Question 9

How are cash flows from investing activities typically related to the balance sheet?

Answer 9

Investing cash flows are related to changes in long-term asset accounts.

Question 10

How are cash flows from financing activities typically related to the balance sheet?

Answer 10

Financing cash flows are related to changes in long-term liabilities and equity accounts.

Question 11

Under ASPE, where are cash dividends and interest received classified in the cash flow statement?

Answer 11

Under ASPE, cash dividends and interest received, and cash dividends and interest paid that are included in net income are classified as operating activities.

Question 12

What classification choices does IFRS allow for interest and dividends in the cash flow statement?

Answer 12

Under IFRS, interest and dividends received may be classified as operating or investing activities, while interest and dividends paid may be classified as operating or financing activities.

Question 13

How does ASPE classify interest and dividends paid?

Answer 13

Under ASPE:

Interest and dividends paid are classified as operating activities if recognized in net income.

They are classified as financing activities if charged to retained earnings.

Question 14

How does IFRS classify interest and dividends paid?

Answer 14

Under IFRS, companies can choose to classify interest and dividends paid as either operating or financing activities.

Question 15

How does ASPE classify interest and dividends received?

Answer 15

Interest and dividends received are classified as operating activities under ASPE.

Question 16

How does IFRS classify interest and dividends received?

Answer 16

Under IFRS, companies can classify interest and dividends received as either operating or investing activities.

Question 17

What are significant non-cash transactions, and how are they treated on the statement of cash flows?

Answer 17

Significant non-cash transactions, such as the acquisition of assets by assuming liabilities, are excluded from the cash flow statement but are required to be disclosed elsewhere in the financial statements.

Question 18

What are some examples of significant non-cash transactions?

Answer 18

Examples include:

Acquisition of assets by assuming liabilities,

Exchange of non-monetary assets,

Conversion of debt or preferred shares to common shares,

Issuance of equity securities to retire debt.

Question 19

What does “What Do the Numbers Mean? 22.1” suggest about cash flow patterns throughout a company’s life cycle?

Answer 19

It suggests that during the introductory phase, operating and investing cash flows are negative, while financing cash flows are positive.

As the company progresses through the growth, maturity, and decline phases, these relationships change, with operating cash flows becoming positive, investing flows decreasing, and financing flows declining.

Question 20

Why might a company have negative operating cash flow in the introductory phase?

Answer 20

In the introductory phase, the company is likely spending significant cash to build up inventories and get the product off the ground, which leads to negative operating cash flows.

Question 21

How do cash flows typically change as a company moves from the growth to the maturity phase?

Answer 21

As the company moves into the growth and maturity phases, operating cash flows become positive, as the company generates more cash from operations to cover investments and other expenditures, while financing cash flows tend to decrease.