Question 1

What is the primary objective of Ind AS 7, and how does it enhance the usefulness of financial statements?

Accepted Answer

The primary objective of Ind AS 7 is to provide information about the historical changes in cash and cash equivalents, enhancing the usefulness of financial statements by giving stakeholders insight into a company's liquidity and financial flexibility, thereby aiding in better decision-making.

Question 2

Which entities or transactions are excluded from the scope of Ind AS 7, and why?

Accepted Answer

Ind AS 7 excludes certain entities such as small and medium-sized enterprises (SMEs) that meet specific criteria, as well as transactions like those involving non-controlling interests and certain financial instruments. The rationale behind these exclusions is to simplify reporting requirements for smaller entities and to focus on transactions that significantly impact cash flow. This helps ensure that the standard remains relevant and manageable for various types of organizations.

Question 3

What are the three main categories of cash flows under Ind AS 7, and how are they defined?

Accepted Answer

Under Ind AS 7, the three main categories of cash flows are: Operating activities, which include cash flows from the core business operations; Investing activities, which involve cash flows related to the acquisition and disposal of long-term assets; and Financing activities, which pertain to cash flows from transactions with the company's owners and creditors.

Question 4

How do you determine whether an item qualifies as a cash equivalent under Ind AS 7?

Accepted Answer

An item qualifies as a cash equivalent under Ind AS 7 if it is readily convertible to a known amount of cash and has an insignificant risk of changes in value. Typically, this includes investments with maturities of three months or less from the date of acquisition. It’s essential to assess both liquidity and the time frame to ensure the item meets the criteria.

Question 5

Under what circumstances can a bank overdraft be treated as a cash equivalent?

Accepted Answer

A bank overdraft can be treated as a cash equivalent when it is short-term in nature, readily available for use, and falls within the company's accounting policies that allow for such treatment, typically when it is expected to be settled quickly.

Question 6

Compare and contrast the direct and indirect methods for presenting cash flows from operating activities.

Accepted Answer

The direct method presents cash flows by listing all cash receipts and payments, providing a clear view of cash transactions. In contrast, the indirect method starts with net income and adjusts for changes in working capital and non-cash expenses, making it easier for many companies to prepare. Both methods yield the same cash flow from operating activities, but the direct method offers more transparency.

Question 7

How is depreciation treated under the indirect method of presenting operating cash flows?

Accepted Answer

Under the indirect method, depreciation is added back to net income in the operating activities section because it is a non-cash expense that reduces net income but does not affect cash flow.

Question 8

How should interest and dividends received and paid be classified in the cash flow statement for a non-financial entity?

Accepted Answer

For a non-financial entity, interest and dividends received are typically classified under operating activities, while interest paid can be classified under either operating or financing activities, depending on the entity's accounting policy. Dividends paid are usually classified under financing activities.

Question 9

How are unrealized foreign exchange differences presented in the statement of cash flows?

Accepted Answer

Unrealized foreign exchange differences are typically presented in the operating activities section of the statement of cash flows as adjustments for non-cash items. They are included in the reconciliation of net income to cash flows from operating activities to reflect their impact on the overall cash flow position.

Question 10

How should cash flows related to income taxes be presented when they are clearly identifiable with investing or financing activities?

Accepted Answer

Cash flows related to income taxes that are clearly identifiable with investing or financing activities should be presented as part of those respective sections in the cash flow statement. This ensures clarity and compliance with accounting standards, such as IAS 7, which allows for this presentation when the cash flows can be directly linked to specific activities.

Question 11

How does Ind AS 7 treat non-cash transactions like asset acquisitions through equity issuance?

Accepted Answer

Ind AS 7 requires that non-cash transactions, such as asset acquisitions through equity issuance, are not included in the cash flow statement. Instead, they should be disclosed in the notes to the financial statements to provide clarity on the entity's financing and investing activities.

Question 12

How should a non-cash acquisition of a subsidiary be disclosed in financial statements?

Accepted Answer

A non-cash acquisition of a subsidiary should be disclosed in the notes to the financial statements, detailing the nature of the acquisition and the fair value of the consideration transferred. Additionally, the impact on the financial position and performance of the acquiring entity should be outlined to provide transparency to stakeholders.

Question 13

A company acquires an additional stake in a subsidiary without losing control—how should the cash flow be presented?

Accepted Answer

The cash flow from acquiring an additional stake in a subsidiary should be presented under investing activities, reflecting the cash outflow. Additionally, any adjustments for non-controlling interest should be noted to ensure accurate consolidation of financial statements.

Question 14

A company groups miscellaneous income and expense items under a single line in operating activities—what’s the issue with this presentation?

Accepted Answer

Grouping miscellaneous income and expense items under a single line in operating activities can obscure important details and mislead stakeholders regarding the company's financial performance. This lack of clarity violates the principle of transparency and can hinder the analysis of operating efficiency, as it masks the individual contributions of various income and expense items.

Question 15

If a company changes from indirect to direct method for operating activities, what disclosures are required?

Accepted Answer

When a company shifts to the direct method, it must disclose detailed cash receipts and payments from operating activities, provide a reconciliation of net income to cash flows from operating activities, and enhance financial reporting transparency.

Question 16

What additional disclosures are needed in the first year of Ind AS 7 adoption?

Accepted Answer

In the first year of Ind AS 7 adoption, additional disclosures include a reconciliation of cash flows from operating, investing, and financing activities, the impact of adopting Ind AS on the financial statements, and comparative information for prior periods, ensuring transparency in the transition process.

Question 17

How are intercompany cash flows treated in consolidated cash flow statements?

Accepted Answer

Intercompany cash flows are eliminated in the consolidated cash flow statement to avoid double counting. This ensures that only cash flows with external parties are reflected, maintaining the integrity of the financial statements.

Question 18

What presentation choices in the cash flow statement might raise concerns about aggressive accounting?

Accepted Answer

Aggressive accounting may be indicated by classifying cash inflows from sales of assets as operating cash flows, which inflates operating cash flow metrics. Additionally, presenting cash flows from financing activities as operating can mislead stakeholders about the company's core operational performance.

Question 19

If management insists on classifying interest paid as operating cash flow contrary to Ind AS 7, how should you respond?

Accepted Answer

I would respectfully explain that according to Ind AS 7, interest paid should typically be classified as financing cash flow. I would emphasize the importance of compliance for accurate financial reporting and suggest discussing the implications of non-compliance.

Question 20

Given a trial balance and year-end adjustments, how would you construct the cash flow from operating activities section using the indirect method?

Accepted Answer

To construct the cash flow from operating activities section using the indirect method, I would start with the net income from the trial balance, then adjust for non-cash items like depreciation and amortization. Next, I would account for changes in working capital by analyzing increases or decreases in accounts receivable, inventory, and accounts payable, ensuring all adjustments reflect the true cash position.

Ind AS 7 - Cash Flow Statements Interview Q&A

A. Objective & Scope

Q1: What is the primary objective of Ind AS 7, and how does it enhance the usefulness of financial statements?

Q2: Which entities or transactions are excluded from the scope of Ind AS 7, and why?

B. Components & Classifications

Q3: What are the three main categories of cash flows under Ind AS 7, and how are they defined?

Q4: How do you determine whether an item qualifies as a cash equivalent under Ind AS 7?

Q5: Under what circumstances can a bank overdraft be treated as a cash equivalent?

C. Presentation Methods

Q6: Compare and contrast the direct and indirect methods for presenting cash flows from operating activities.

Q7: How is depreciation treated under the indirect method of presenting operating cash flows?

D. Special Items & Classifications

Q8: How should interest and dividends received and paid be classified in the cash flow statement for a non-financial entity?

Q9: How are unrealized foreign exchange differences presented in the statement of cash flows?

E. Non-Cash Items & Disclosure

Q11: How does Ind AS 7 treat non-cash transactions like asset acquisitions through equity issuance?

Q12: How should a non-cash acquisition of a subsidiary be disclosed in financial statements?

F. Practical Scenarios & Application

Q13: A company acquires an additional stake in a subsidiary without losing control—how should the cash flow be presented?

Q14: A company groups miscellaneous income and expense items under a single line in operating activities—what’s the issue with this presentation?

Q15: If a company changes from indirect to direct method for operating activities, what disclosures are required?

G. First-Time Adoption & Group Reporting

Q16: What additional disclosures are needed in the first year of Ind AS 7 adoption?

Q17: How are intercompany cash flows treated in consolidated cash flow statements?

H. Ethics, Judgment & Review

Q18: What presentation choices in the cash flow statement might raise concerns about aggressive accounting?

Q19: If management insists on classifying interest paid as operating cash flow contrary to Ind AS 7, how should you respond?

I. Applied Test

Q20: Given a trial balance and year-end adjustments, how would you construct the cash flow from operating activities section using the indirect method?