Fair value hedge Cash flow hedge

Chapter 20 – Financial Instruments Page 302 29. The Grovemet Company acquired a financial asset at its market value of CU32. Brokers fees of CU2 were incurred in relation to the purchase. In accordance with IAS39 Financial instruments: recognition and measurement at what amount should the financial asset initially be recognised if it is classified as at fair value through profit or loss, or as available for sale? At fair value through Available profit or loss for sale A CU34 CU32 B CU32 CU32 C CU32 CU34 D CU34 CU34 30. The Redmires Company acquired an equity investment a number of years ago for CU300 and classified it as available for sale. At 31 December 20X5 the cumulative loss recognised in other comprehensive income was CU40 and the carrying amount of the investment was CU260. At 31 December 20X6 the issuer of the equity was in severe financial difficulty and the fair value of the equity investment had fallen to CU120. In accordance with IAS39 Financial instruments, recognition and measurement, what amount should be recognised in profit or loss in the year ended 31 December 20X6? A CU140 B CU180 C CU100 D Nil Chapter 21 – Statement of Cash Flows Page 303 Chapter 21 STATEMENT OF CASH FLOWS 1 Business Context Cash is essential if a business is to continue its operations. Cash, or access to cash, is needed to pay for an entity’s outlays on a continuing basis and is a fundamental part of its operating cycle. An entity’s operating cycle is the period of time that a normal operating transaction takes to complete within a business, for example the time between the receipt of the order to final payment being made by the customer. If an entity is unable to pay its debts as they fall due, then it risks insolvency. Cash and liquidity are different concepts to profit. It is possible for a highly profitable entity to have liquidity problems if it does not manage the flow of cash within its business effectively. Cash is about the liquidity of a business, and hence cash flows concern the change in that liquidity. Cash management is not just about surviving; it is about the process of utilising cash resources to their optimal effect. For an investor to be able to assess the effectiveness of a business, it is important that information is included in the financial statements not only on the entity’s performance and financial position but also on its cash flows. When used alongside a statement of financial position, for example, a statement of cash flows provides users with information on the changes in net assets of the entity. An entity may have a strong financial position and good performance during the period, but may also have suffered significant cash outflows. The financial information is therefore not complete without the cash flow information, which may tell a different story to the original assessment of an entity’s performance. 2 Chapter Objectives This chapter covers the preparation and presentation of a statement of cash flows as part of an entity’s financial statements. IAS 1 Presentation of financial statements sets out the content of an entity’s financial statements. It includes the requirement for a statement of cash flows to be presented. On completion of this chapter you should be able to:  understand the objectives and scope of IAS 7 Statement of cash flows;  identify the important terminology and definitions which relate to the presentation of the statement of cash flows in the financial statements;  distinguish between cash and cash equivalents, and other assets and liabilities;  identify the main sections of a statement of cash flows and the cash flows relating to each of them; and  apply knowledge and understanding of IAS 7 through basic calculations.