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Chapter 23: Q4ISTQ (page 1399)

For purposes of the statement of cash flows, under IFRS interest paid is treated as:

  1. an operating activity in all cases.
  2. an investing or operating activity, depending on use of the borrowed funds.
  3. either a financing or investing activity.
  4. either an operating or financing activity, but treated consistently from period to period.

Short Answer

Expert verified

The correct option is 鈥渄鈥�.

Step by step solution

01

Meaning of IFRS

A set of internationally standardized accounting and financial reporting guidelines known as IFRS are used to prepare and display financial statements. Ensures that accounting procedures are uniform, producing comparable financial records among different reporting entities worldwide.

02

Explaining the correct option

Interest and dividends are either financing or operational cash operations. A financial institution will frequently incorporate interest payments, instalments, and profit payments in operating cash flows.

03

Explaining the incorrect option

Option a) Many businesses report cash flows incorporating paid interest and collected. Others classify interest paid as financing cash flow and interest received as cash flow for investing.

Option b) It cannot be reported under investing activities, as it is not related to the sale or purchase of fixed assets or investments. .

Option c) Interest paid is either reported as operating activity or the financing activity, depending upon the nature of the business.

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Most popular questions from this chapter

Question: . Classify the following items as (1) operating, (2) investing, (3) financing, or (4) significant noncash investing and financing activities, using the direct method.

(a) Cash payments to employees.

(b) Redemption of bonds payable.

(c) Sale of building at book value.

(d) Cash payments to suppliers.

(e) Exchange of equipment for furniture.

(f) Issuance of preferred stock.

(g) Cash received from customers.

(h) Purchase of treasury stock.

(i) Issuance of bonds for land.

(j) Payment of dividends.

(k) Purchase of equipment.

(l) Cash payments for operating expenses.

Data for Anita Baker Company are presented in E23-18.

Instructions

Prepare entries in journal form for all adjustments that should be made on a worksheet for a statement of cash flows.

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures American-made teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company鈥檚 primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company.

Current Year

Prior Year

Cash flows from operating activities:

Net income

\( 17,523

\) 838,955

Adjustments to reconcile net income to net cash provided by operating activities

Deferred income taxes

(69,524)

(146,590)

Depreciation and amortization

316,416

181,348

Changes in assets and liabilities:

Accounts receivable, trade

(38,267)

(25,947)

Inventories

(1,599,014)

(1,289,293)

Prepaid and other current assets

(444,794)

(113,205)

Deposits and other assets

(24,240)

(83,044)

Accounts payable

2,017,059

(284,567)

Accrued expenses

61,321

170,755

Accrued interest payable, debentures

-

(58,219)

Other

-

(8,960)

Income taxes payable

-

117,810

Net cash provided by (used for) operating activities

236,480

(700,957)

Net cash used for investing activities

(2,102,892)

(4,422,953)

Net cash (used for) provided by financing activities

(315,353)

9,685,435

Net change in cash and cash equivalents

(2,181,765)

4,561,525

Other information:

Current liabilities

\( 4,055,465

\) 1,995,600

Total liabilities

4,620,085

2,184,386

Net sales

20,560,566

17,025,856

Instructions

  1. Note that net income in the current year was only \(17,523 compared to prior-year income of \)838,955, but net cash flow from operating activities was \(236,480 in the current year and a negative \)700,957 in the prior year. Explain the causes of this apparent paradox.
  2. Evaluate Vermont Teddy Bear鈥檚 liquidity, solvency, and profitability for the current year using cash flow-based ratios.

Where can authoritative IFRS related to the statement of cash flows be found?

Identify the following items as (1) operating, (2) investing, or (3) financing activities: purchase of land, payment of dividends, cash sales, and purchase of treasury stock.
See all solutions

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