Question

• Case 7-7 Alternative Treatments of Items of the Statement of Cash Flows The statement of cash fl ows is intended to provide information about the investing, fi nancing, and operating activities of an enterprise during an accounting period. In a statement of cash fl ows, cash infl ows and outfl ows for interest expense, interest revenue, and dividend revenue and payments to the government are considered operating activities.

Required:

a. Do you believe that cash infl ows and outfl ows associated with nonoperating items, such as interest expense, interest revenue, and dividend revenue, should be separated from operating cash fl ows? Explain.

b. Do you believe that the cash fl ows from investing activities should include not only the return of investment but also the return on investment—that is, the interest and dividend revenue? Explain.

c. Do you believe that the cash fl ows from the sale of an investment should also include the tax effect of the sale? Explain. Do you believe that cash fl ows from sales of investments should be net of their tax effects, or do you believe that the tax effect should remain an operating activity because it is a part of “payments to the government”? Explain.

Answer 1

a. Operating cash flows represent the cash flows generated from the day-to-day activities of the business. Thus, to get a true image of how much the operating activities of the company benefit the company, non-operating activities should be separated.

b. Interest and dividend revenue should also be reported in the investing activities section of the cash flow statement as the source of this income is the investing activity . For example, purchase of bonds or shares.

c. The cash flows from the sale of investment should be reported net of tax as it will result in a more precise presentation of the actual cash flow resulting from the sale. Besides, tax rates for sale of investment and that for operating actvities are also different.