Ind AS 7, Statement of Cash Flows, Important Questions with Solutions for CA Final FR May & Nov 2021 Exams
Question 1 –
Company A acquires 70% of the equity stake in Company B on July 20, 20X1. The consideration paid for this transaction is as below:
(a) Cash consideration of Rs.15,00,000
(b) 200,000 equity shares having face of Rs.10 and fair value of Rs.15 per share.
On the date of acquisition, Company B has cash and cash equivalent balance of Rs. 2,50,000 in its books of account.
On October 10, 20X2, Company A further acquires 10% stake in Company B for cash consideration of Rs.8,00,000.
Advise how the above transactions will be disclosed/presented in the statement of cash flows as per Ind AS 7.
Solution –
1) As per Ind AS 7, the aggregate cash flows arising from obtaining control of subsidiary shall be presented separately and classified as investing activities.
2) As per Ind AS 7, the aggregate amount of the cash paid or received as consideration for obtaining subsidiaries is reported in the statement of cash flows net of cash and cash equivalents acquired or disposed of as part of such transactions, events or changes in circ*mstances.
Further, investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.
3) As per Ind AS 7, cash flows arising from changes in ownership interests in a subsidiary that do not result in a loss of control shall be classified as cash flows from financing activities, unless the subsidiary is held by an investment entity, as defined in Ind AS 110, and is required to be measured at fair value through profit or loss.
4) Considering the above, for the financial year ended March 31, 20X2 total consideration of Rs.15,00,000 less Rs.2,50,000 will be shown under investing activities as “Acquisition of the subsidiary (net of cash acquired)”.
5) There will not be any impact of issuance of equity shares as consideration in the cash flow statement however a proper disclosure shall be given elsewhere in the financial statements in a way that provides all the relevant information about the issuance of equity shares for non-cash consideration.
Further, in the statement of cash flows for the year ended March 31, 20X3, cash consideration paid for the acquisition of additional 10% stake in Company B will be shown under financing activities.
Question 2 –
Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a bank in the USA. The balances as on 31.12.2017 and 31.12.2018 were US$ 100,000 and US$ 102,000 respectively. The exchange rate on December 31, 2017 was US$1 = Rs.45. The same on 31.12.2018 was US$1 = Rs.50. The increase in the balance was on account of interest credited on 31.12.2018. Thus, the deposit was reported at Rs.45,00,000 in the balance sheet as on December 31, 2017. It was reported at Rs.51,00,000 in the balance sheet as on 31.12.2018. How these transactions should be presented in cash flow for the year ended 31.12.2018 as per Ind AS 7?
Solution –
The profit and loss account was credited by Rs.1,00,000 (US$ 2000 × Rs.50) towards interest income. It was credited by the exchange difference of US$ 100,000 × (Rs.50 – Rs.45) that is, Rs.500,000. In preparing the cash flow statement, Rs.500,000, the exchange difference, should be deducted from the ‘net profit before taxes, and extraordinary item’. However, in order to reconcile the opening balance of the cash and cash equivalents with its closing balance, the exchange difference Rs.500,000, should be added to the opening balance in note to cash flow statement.
Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.’s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow.
Question 3 –
Following is the balance sheet of Kuber Limited for the year ended 31st March, 20X2
| 20X2 | 20X1 | |
| ASSETS | ||
| Non-current Assets | ||
| Property, plant and equipment | 13,000 | 12,500 |
| Intangible assets | 50 | 30 |
| Other financial assets | 145 | 170 |
| Deferred tax asset (net) | 855 | 750 |
| Other non-current assets | 800 | 770 |
| Total non-current assets | 14,850 | 14,220 |
| Current assets | ||
| Financial assets | ||
Investments | 2,300 | 2,500 |
Cash and cash equivalents | 220 | 460 |
Other current assets | 195 | 85 |
| Total current assets | 2,715 | 3,045 |
| Total Assets | ||
| EQUITY AND LIABILITIES | ||
| Equity | ||
| Equity share capital | 300 | 300 |
| Other equity | 12,000 | 8,000 |
| Total equity | 12,300 | 8,300 |
| Liabilities | ||
| Non-current liabilities | ||
| Long-term borrowings | 2,000 | 5,000 |
| Other non-current liabilities | 2,740 | 3,615 |
| Total non-current liabilities | 4,740 | 8,615 |
| Current liabilities | ||
| Financial liabilities | ||
Trade payables | 150 | 90 |
Bank Overdraft | 75 | 60 |
| Other current liabilities | 300 | 200 |
| Total current liabilities | 525 | 350 |
| Total liabilities | 5,265 | 8,965 |
| Total Equity and Liabilities | 17,565 | 17,265 |
Additional Information:
(1) Profit after tax for the year ended 31st March, 20X2- Rs.4,450 lacs
(2) Interim Dividend paid during the year – Rs.450 lacs
(3) Depreciation and amortisation charged in the statement of profit and loss during the current year are as under
a. Property, Plant and Equipment – Rs.500 lacs
b. Intangible Assets – Rs.20 lacs
(4) During the year ended 31st March, 20X2 two machineries were sold for Rs.10 lacs. The carrying amount of these machineries as on 31st March, 20X2 is Rs.60 lacs.
(5) Income taxes paid during the year Rs.105 lacs
Using the above information of Kuber Limited, construct a statement of cash flows under indirect method. Other non-current / current assets and liabilities are related to operations of Kuber Ltd. and do not contain any element of financing and investing activities.
Solution –
Statement of Cash Flows
| Rs. in lacs | |||
| Cash flows from Operating Activities | |||
| Net Profit after Tax | 4,450 | ||
| Add: Tax Paid | 105 | ||
| 4,555 | |||
| Add: Depreciation & Amortisation (500 + 20) | 520 | ||
| Less: Gain on Sale of Machine (70-60) | (10) | ||
| Less: Increase in Deferred Tax Asset (855-750) | (105) | ||
| 4,960 | |||
| Change in operating assets and liabilities | |||
| Add: Decrease in financial asset (170 – 145) | 25 | ||
| Less: Increase in other non-current asset (800 – 770) | (30) | ||
| Less: Increase in other current asset (195 – 85) | (110) | ||
| Less: Decrease in other non-current liabilities (3,615 – 2,740) | (875) | ||
| Add: Increase in other current liabilities (300 – 200) | 100 | ||
| Add: Increase in trade payables (150-90) | 60 | ||
| 4,130 | |||
| Less: Income Tax | (105) | ||
| Cash generated from Operating Activities | 4,025 | ||
| Cash flows from Investing Activities | |||
| Sale of Machinery | 70 | ||
| Purchase of Machinery [13,000-(12,500 – 500-60)] | (1,060) | ||
| Purchase of Intangible Asset [50-(30-20)] | (40) | ||
| Sale of Financial asset – Investment (2,500 – 2,300) | 200 | ||
| Cash outflow from Investing Activities | (830) | ||
| Cash flows from Financing Activities | |||
| Dividend Paid | (450) | ||
| Long term borrowings paid (5,000 – 2,000) | (3,000) | ||
| Cash outflow from Financing Activities | (3,450) | ||
| Net Cash outflow from all the activities | (255) | ||
| Opening cash and cash equivalents (460 – 60) | 400 | ||
| Closing cash and cash equivalents (220 – 75) | 145 | ||
Question 4 –
A Ltd., whose functional currency is Indian Rupee, had a balance of cash and cash equivalents of Rs. 2,00,000, but there are no trade receivables or trade payables balances as on 1st April, 2017. During the year 2017-2018, the entity entered into the following foreign currency transactions:
1) A Ltd. purchased goods for resale from Europe for €2,00,000 when the exchange rate was €1 = Rs. 50. This balance is still unpaid at 31st March, 2018 when the exchange rate is €1 = Rs. 45. An exchange gain on retranslation of the trade payable of Rs. 5,00,000 is recorded in profit or loss.
2) A Ltd. sold the goods to an American client for $ 1,50,000 when the exchange rate was $1 = Rs. 40. This amount was settled when the exchange rate was $1 = Rs. 42. A further exchange gain regarding the trade receivable is recorded in the statement of profit or loss.
3) A Ltd. also borrowed €1,00,000 under a long-term loan agreement when the exchange rate was €1 = Rs. 50 and immediately converted it to Rs. 50,00,000. The loan was retranslated at 31st March, 2018 @ Rs. 45, with a further exchange gain recorded in the statement of profit or loss.
4) A Ltd. therefore records a cumulative exchange gain of Rs. 18,00,000 (10,00,000 + 3,00,000 + 5,00,000) in arriving at its profit for the year.
5) In addition, A Ltd. records a gross profit of Rs. 10,00,000 (Rs. 60,00,000 – Rs. 50,00,000) on the sale of the goods.
6) Ignore taxation.
How cash flows arising from the above transactions would be reported in the statement of cash flows of A Ltd. under indirect method?
Solution –
| Statement of cash flows Particulars | Amount (Rs.) |
| Cash flows from operating activities | |
| Profit before taxation (10,00,000 + 18,00,000) | 28,00,000 |
| Adjustment for unrealised exchange gains/losses: | |
| Foreign exchange gain on long term loan [€ 1,00,000 x Rs. (50 – 45)] | (5,00,000) |
| Decrease in trade payables [2,00,000 x Rs. (50 – 45)] | (10,00,000) |
| Operating Cash flow before working capital changes | 13,00,000 |
| Changes in working capital (Due to increase in trade payables) | 50,00,000 |
| Net cash inflow from operating activities | 63,00,000 |
| Cash inflow from financing activity | 50,00,000 |
| Net increase in cash and cash equivalents | 1,13,00,000 |
| Cash and cash equivalents at the beginning of the period | 2,00,000 |
| Cash and cash equivalents at the end of the period | 1,15,00,000 |
Question 5 –
Entity A acquired a subsidiary, Entity B, during the year. Summarised information from the Consolidated Statement of Profit and Loss and Balance Sheet is provided, together with some supplementary information.
| Consolidated Statement of Profit and Loss | Amount (Rs.) |
| Revenue | 3,80,000 |
| Cost of sales | (2,20,000) |
| Gross profit | 1,60,000 |
| Depreciation | (30,000) |
| Other operating expenses | (56,000) |
| Interest cost | (4,000) |
| Profit before taxation | 70,000 |
| Taxation | (15,000) |
| Profit after taxation | 55,000 |
| Consolidated balance sheet | 20X2 | 20X1 | |
| Assets | Amount (Rs.) | Amount (Rs.) | |
| Cash and cash equivalents | 8,000 | 5,000 | |
| Trade receivables | 54,000 | 50,000 | |
| Inventories | 30,000 | 35,000 | |
| Property, plant and equipment | 1,60,000 | 80,000 | |
| Goodwill | 18,000 | — | |
| Total assets | 2,70,000 | 1,70,000 | |
| Liabilities | |||
| Trade payables | 68,000 | 60,000 | |
| Income tax payable | 12,000 | 11,000 | |
| Long term debt | 1,00,000 | 64,000 | |
| Total liabilities | 1,80,000 | 1,35,000 | |
| Shareholders’ equity | 90,000 | 35,000 | |
| Total liabilities and shareholders’ | 2,70,000 | 1,70,000 | |
Other information:
All of the shares of entity B were acquired for Rs.74,000 in cash. The fair values of assets acquired and liabilities assumed were:
| Particulars | Amount (Rs.) |
| Inventories | 4,000 |
| Trade receivables | 8,000 |
| Cash | 2,000 |
| Property, plant and equipment | 1,10,000 |
| Trade payables | (32,000) |
| Long term debt | (36,000) |
| Goodwill | 18,000 |
| Cash consideration paid | 74,000 |
Prepare the Consolidated Statement of Cash Flows for the year 20X2, as per Ind AS 7.
Solution –
This information will be incorporated into the Consolidated Statement of Cash Flows as follows:
Statement of Cash Flows for the year ended 20X2 (extract)
| Amount (Rs.) | Amount (Rs.) | |
| Cash flows from operating activities | ||
| Profit before taxation | 70,000 | |
| Adjustments for non-cash items: | ||
| Depreciation | 30,000 | |
| Decrease in inventories (W.N. 1) | 9,000 | |
| Decrease in trade receivables (W.N. 2) | 4,000 | |
| Decrease in trade payables (W.N. 3) | (24,000) | |
| Interest paid to be included in financing activities | 4,000 | |
| Taxation (11,000 + 15,000 – 12,000) | (14,000) | |
| Net cash generated from operating activities | 79,000 | |
| Cash flows from investing activities | ||
| Cash paid to acquire subsidiary (74,000 – 2,000) | (72,000) | |
| Net cash outflow from investing activities | (72,000) | |
| Cash flows from financing activities | ||
| Interest paid | (4,000) | |
| Net cash outflow from financing activities | (4,000) | |
| Increase in cash and cash equivalents during the year | 3,000 | |
| Cash and cash equivalents at the beginning of the year | 5,000 | |
| Cash and cash equivalents at the end of the year | 8,000 |
Working Notes:
1. Calculation of change in inventory during the year
| Rs. | |
| Total inventories of the Group at the end of the year | 30,000 |
| Inventories acquired during the year from subsidiary | (4,000) |
| 26,000 | |
| Opening inventories | 35,000 |
| Decrease in inventories | 9,000 |
2. Calculation of change in Trade Receivables during the year
| Rs. | |
| Total trade receivables of the Group at the end of the year | 54,000 |
| Trade receivables acquired during the year from subsidiary | (8,000) |
| 46,000 | |
| Opening trade receivables | 50,000 |
| Decrease in trade receivables | 4,000 |
3. Calculation of change in Trade Payables during the year
| Rs. | |
| Trade payables at the end of the year | 68,000 |
| Trade payables of the subsidiary assumed during the year | (32,000) |
| 36,000 | |
| Opening trade payables | 60,000 |
| Decrease in trade payables | 24,000 |
As an expert in financial reporting and accounting standards, I'll provide a comprehensive analysis of the concepts used in the provided article related to Ind AS 7, which focuses on the Statement of Cash Flows. Let's delve into the key points:
1. Acquisition of Subsidiaries:
- Ind AS 7 specifies that the aggregate cash flows arising from obtaining control of a subsidiary should be presented separately and classified as investing activities.
- The cash consideration paid for obtaining subsidiaries should be reported in the statement of cash flows net of cash and cash equivalents acquired or disposed of as part of the transaction.
- Transactions involving changes in ownership interests in a subsidiary that do not result in a loss of control are classified as cash flows from financing activities unless the subsidiary is held by an investment entity and measured at fair value through profit or loss.
2. Foreign Currency Transactions:
- Cash flows arising from transactions in a foreign currency should be recorded in the entity's functional currency using the exchange rate at the date of the cash flow.
- Exchange differences resulting from foreign currency transactions, including those related to financial assets and liabilities, are included in the cash flow statement.
- In the provided example, the exchange difference related to the deposit in a US bank is deducted from the net profit before taxes, and the reconciling item is added to the opening balance in the note to the cash flow statement.
3. Constructing a Statement of Cash Flows:
- The statement of cash flows is prepared using the indirect method, starting with net profit after tax and making adjustments for non-cash items.
- Operating activities include adjustments for items like depreciation, changes in working capital (increase or decrease in assets and liabilities), and taxes paid.
- Investing activities encompass transactions related to the acquisition and disposal of long-term assets, such as machinery and intangible assets.
- Financing activities involve cash flows related to equity and debt, including dividends paid and long-term borrowings.
- The net cash flow from all activities is calculated, and the opening and closing balances of cash and cash equivalents are presented.
4. Foreign Currency Transactions (Functional Currency - Indian Rupee):
- The cash flows arising from foreign currency transactions are reported in the cash flow statement using the exchange rates at the respective transaction dates.
- Unrealized gains and losses due to exchange rate fluctuations on trade payables and receivables are adjusted in the operating activities section.
5. Consolidated Cash Flow for Acquiring a Subsidiary:
- In the case of acquiring a subsidiary, the cash flows from investing activities include the cash paid to acquire the subsidiary.
- Operating activities involve adjustments for non-cash items, including depreciation and changes in working capital.
- Financing activities cover items such as interest paid.
By understanding and applying these principles, one can effectively prepare and interpret the statement of cash flows in accordance with Ind AS 7.
