The chapters in this document are displayed in reversed order, with the last
chapter appearing first. This change ensures all chapters are included in the
Solutions Manual.
Vol 2 6ce - Chapter 11 to 20 Included (Complete)
Chapter 20
I. Problems Statement of Cash Flows
P20-1. Suggested solution:
The statement of cash flows (SCF) is a required financial statement that explains the reported change in
an entity’s cash and cash equivalents during the period. The SCF categorizes the sources and uses of cash
so as to assist investors, creditors, and other interested parties in assessing the company’s ability to make
payments when due and pay dividends. The SCF is also used to ascertain the firm’s quality of earnings.
Income statements are prepared on an accrual basis and consequently net income seldom equals
the change in cash during the period. Net income is an important metric as it measures the financial
performance of the company. The firm’s ability to generate cash is equally important, though, as cash—
not net income—pays bills. If a company generates insufficient cash to meet its obligations, creditors will
eventually force it into bankruptcy.
P20-2. Suggested solution:
Stakeholders may use the statement of cash flows to:
i) analyze the company’s liquidity (its ability to meet its obligations when due);
ii) prepare more accurate forecasts of future cash flows than those based solely on income statements;
and
iii) evaluate the firm’s quality of earnings.
P20-3. Suggested solution:
a. Liberty Corp. will report $43,000 as cash and cash equivalents on its balance sheet as at December
31, 20X1 as set out below.
Include Exclude Comments
Canadian dollars cash in bank $18,000 $18,000
Canadian dollar equivalent of US $3,000 dollars cash in 4,000 4,000 1
bank
Petty cash 1,000 1,000
Bank overdraft that is an integral part of Liberty’s cash (22,000) (22,000) 2
management system and the balance frequently
fluctuates between a positive balance and an overdraft
Term deposit that matures in 100 days 100,000 $100,000 3
Investment in debt securities at FVPL that are held for 24,000 24,000 4
trading purposes
Investment in debt securities at FVPL that are held for 42,000 42,000 5
the purpose of meeting short-term cash commitments
Investment in equity securities at FVPL that are held for 13,000 13,000 6
the purpose of meeting short-term cash commitments
$180,000 $43,000 $137,000
Copyright © 2026
20-1
,ISM for Lo/Fisher, Intermediate Accounting, Vol. 2, Sixth Edition
Comments
1. Report foreign currencies at their Canadian dollar equivalent.
2. The overdraft is an integral part of Liberty’s cash management system and the balance frequently
fluctuates between a positive balance and an overdraft.
3. The term deposit does not meet the highly liquid test as it matures in more than 90 days.
4. The investment is not held to meet short-term cash commitments.
5. The investment meets the liquidity and insignificant change in value tests and is held to meet short-
term cash commitments.
6. Investments in equity securities do not meet the insignificant change in value test.
b. Under ASPE, investments in securities that meet these criteria of cash equivalents may be reported as
a cash equivalent, or alternatively as a trading asset or investment. The company must establish a
policy outlining which short-term, highly liquid investments in debt securities will be classified as
cash equivalents.
P20-4. Suggested solution:
a. Cash equivalents are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value. Cash equivalents
are held for the purpose of meeting short-term cash commitments rather than investment or other
purposes. IAS 7 suggests that only short-term investments that mature in three months or less can be
classified as cash equivalents. This category typically includes treasury bills, bankers’ acceptances,
and money market funds. Equity instruments, even if readily marketable, cannot be treated as cash
equivalents because the risk of a change in value is not insignificant. Indeed, the market value of
equities fluctuates on an ongoing basis.
b. When an investment in a qualifying security is held for the purpose of meeting short-term cash
commitments it is reported as a cash equivalent. Cash inflows and outflows arising from investments
designated as cash equivalents are not reported as cash flows. Rather, they are part of the change in
cash and cash equivalents that must be explained. If, however, the qualifying investment is held for
other reasons, then the cash flows resulting from the purchase and sale of the investment are classified
as: an operating activity if the investment is held for trading purposes; or as an investing activity if the
investment is not held for trading purposes.
c. Bank borrowings, including those by way of overdraft, are generally classified as financing activities.
In Canada and some other countries, bank overdrafts frequently form an integral part of a company’s
cash management strategy. In these circumstances, and if the balance often fluctuates between a
positive balance and an overdraft, bank overdrafts are included as a component of cash and cash
equivalents, the change in which must be explained.
P20-5. Suggested solution:
C/CE 20X2 20X1
Canadian cash in bank Yes $42,500 $ 0
Bank overdraft – integral part of Arikan’s cash management system Yes 0 (31,000)
US cash in bank (Canadian $ equivalent) Yes 4,100 3,200
Petty cash Yes 300 200
Term deposit maturing April 30, 20X3 No* 75,000 75,000
Investment in retractable preferred shares maturing February 28, 20X3 Yes 20,000 0
Investment in RBC common shares held for trading purposes to be sold in No** 30,000 0
early March, 20X3
Investment in 60-day Bank of Canada treasury bills held for investment No*** 15,000 12,000
Copyright © 2026
20-2
, Chapter 20: Statement of Cash Flows
purposes
Investment in 90-day treasury bills held for the purpose of meeting short- Yes 50,000 40,000
term cash commitments
Cash and cash equivalents $116,900 $12,400
* Not a cash equivalent as the term deposit does not mature until more than 90 days after year-end
** Not a cash equivalent as investments in equity instruments are normally subject to a significant change
in value
*** Not a cash equivalent as the treasury bills are held for investment purposes
a. Arikan Corp. reported cash and cash equivalents of $116,900 on its Statement of Cash Flows for the
yearended December 31, 20X2 as detailed in the chart above.
b. Arikan Corp.’s cash and cash equivalents increased $104,500 during 20X2 ($116,900 − $12,400).
P20-6. Suggested solution:
Schmid Ltd.’s paid income taxes of $15,700 during 20X2 as determined below.
Item Cash outflow
Current income tax expense $20,400
Deferred tax expense 2,300
Increase in income taxes payable ($22,100 − (4,700)
$17,400)
Decrease in deferred tax asset (600)
Increase in deferred tax liability (1,700)
Cash paid for income taxes in 20X2 $15,700
P20-7. Suggested solution:
a. On December 31, 20X1, the only cash flow is the $20,000 payment on the lease. ASC would have
reported this as a cash outflow from investing activities on its statement of cash flow for its year
ended December 31, 20X1. The remaining $180,000 ($200,000 − $20,000 = $180,000) of the
transaction is a non-cash expense and would have been disclosed in ASC’s notes to the financial
statements.
b. ASC would have reported the $11,000 reduction of the lease liability as a cash outflow from
financing activities on its statement of cash flows for its year ended December 31, 20X2. The $9,000
interest payment would have been reported as either a cash outflow from operating activities or a cash
outflow from financing activities with the classification determined by ASC’s policy in this regard.
P20-8. Suggested solution:
a. Operating activities are the principal revenue-producing activities of the entity and other activities
that are not investing or financing activities. Cash flows from operating activities arise from the day-
to-day running of the business.
Operating activities include: cash sales; payment and collection of accounts receivable; receipt of
rents, royalties, and fees; receipt of deposits; payment of salaries and wages; payment of income tax
and other tax payments; receipt and payment of interest and dividends*; and the purchase and sale of
investments held for trading purposes. (*Alternative classifications are permitted.)
Copyright © 2026
20-3
, ISM for Lo/Fisher, Intermediate Accounting, Vol. 2, Sixth Edition
Investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents. There are two distinct components to investing activities. The first is the
acquisition and disposal of fixed assets, the second investing in the more traditional sense:
i) To establish and maintain the infrastructure necessary to run the business, companies purchase
and sell fixed assets.
ii) Investing in the more traditional sense involves buying and selling debt and equity securities,
with certain exceptions. For example, investments that are reported as cash equivalents (part of
the cash being explained), and investments held for trading purposes (recorded as an operating
activity) are not recorded as an investing activity.
Investing activities include: the sale of property, plant, and equipment; purchase and sale of
investments other than those held for trading purposes or reported as cash equivalents; the making of
loans and the collection of loans receivable; the purchase of property, plant, and equipment; and the
receipt of interest and dividends.* (*Alternative classifications are permitted.)
Financing activities are activities that result in changes in the size and composition of the contributed
equity and borrowings of the entity.
Companies raise money by issuing debt and selling equity, using the proceeds to acquire fixed assets.
Financing activities record the cash flows associated with the issuance and retirement of debt and
equity. This comment applies only to the capital flows, as there are some options available with
respect to the payment of interest and dividends. Cash flows arising from supplier-provided financing
including accounts payable are an operating activity, however.
Financing activities include: issuing and repurchasing shares; issuing debt, including bonds,
mortgages, and notes; repayment of the principal amount of lease liabilities, bonds, mortgages, and
notes; borrowing and repaying the principal of bank loans; and the payment of interest and
dividends.* (*Alternative classification options are available.)
b. Cash flows from operating activities give considerable insight into a firm’s ability to generate
sufficient cash to maintain its business, repay loans, and make new investments without having to
arrange external financing.
Cash flows related to investing summarize net expenditures for assets meant to generate future
income.
Financing-related cash flows gauge future claims on cash flows by both debt and equity holders.
c. IAS 7 permits a business entity to classify the receipt of interest and dividends as either an operating
or an investing activity. The standard also permits companies to report the payment of interest and
dividends as either an operating or a financing activity. Once the business chooses its accounting
policy it must apply it consistently to all similar transactions. ASPE does not permit a choice. The
receipt of interest and dividends and the payment of interest must normally be classified as an
operating activity; the payment of dividends a financing activity.
Copyright © 2026
20-4
chapter appearing first. This change ensures all chapters are included in the
Solutions Manual.
Vol 2 6ce - Chapter 11 to 20 Included (Complete)
Chapter 20
I. Problems Statement of Cash Flows
P20-1. Suggested solution:
The statement of cash flows (SCF) is a required financial statement that explains the reported change in
an entity’s cash and cash equivalents during the period. The SCF categorizes the sources and uses of cash
so as to assist investors, creditors, and other interested parties in assessing the company’s ability to make
payments when due and pay dividends. The SCF is also used to ascertain the firm’s quality of earnings.
Income statements are prepared on an accrual basis and consequently net income seldom equals
the change in cash during the period. Net income is an important metric as it measures the financial
performance of the company. The firm’s ability to generate cash is equally important, though, as cash—
not net income—pays bills. If a company generates insufficient cash to meet its obligations, creditors will
eventually force it into bankruptcy.
P20-2. Suggested solution:
Stakeholders may use the statement of cash flows to:
i) analyze the company’s liquidity (its ability to meet its obligations when due);
ii) prepare more accurate forecasts of future cash flows than those based solely on income statements;
and
iii) evaluate the firm’s quality of earnings.
P20-3. Suggested solution:
a. Liberty Corp. will report $43,000 as cash and cash equivalents on its balance sheet as at December
31, 20X1 as set out below.
Include Exclude Comments
Canadian dollars cash in bank $18,000 $18,000
Canadian dollar equivalent of US $3,000 dollars cash in 4,000 4,000 1
bank
Petty cash 1,000 1,000
Bank overdraft that is an integral part of Liberty’s cash (22,000) (22,000) 2
management system and the balance frequently
fluctuates between a positive balance and an overdraft
Term deposit that matures in 100 days 100,000 $100,000 3
Investment in debt securities at FVPL that are held for 24,000 24,000 4
trading purposes
Investment in debt securities at FVPL that are held for 42,000 42,000 5
the purpose of meeting short-term cash commitments
Investment in equity securities at FVPL that are held for 13,000 13,000 6
the purpose of meeting short-term cash commitments
$180,000 $43,000 $137,000
Copyright © 2026
20-1
,ISM for Lo/Fisher, Intermediate Accounting, Vol. 2, Sixth Edition
Comments
1. Report foreign currencies at their Canadian dollar equivalent.
2. The overdraft is an integral part of Liberty’s cash management system and the balance frequently
fluctuates between a positive balance and an overdraft.
3. The term deposit does not meet the highly liquid test as it matures in more than 90 days.
4. The investment is not held to meet short-term cash commitments.
5. The investment meets the liquidity and insignificant change in value tests and is held to meet short-
term cash commitments.
6. Investments in equity securities do not meet the insignificant change in value test.
b. Under ASPE, investments in securities that meet these criteria of cash equivalents may be reported as
a cash equivalent, or alternatively as a trading asset or investment. The company must establish a
policy outlining which short-term, highly liquid investments in debt securities will be classified as
cash equivalents.
P20-4. Suggested solution:
a. Cash equivalents are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value. Cash equivalents
are held for the purpose of meeting short-term cash commitments rather than investment or other
purposes. IAS 7 suggests that only short-term investments that mature in three months or less can be
classified as cash equivalents. This category typically includes treasury bills, bankers’ acceptances,
and money market funds. Equity instruments, even if readily marketable, cannot be treated as cash
equivalents because the risk of a change in value is not insignificant. Indeed, the market value of
equities fluctuates on an ongoing basis.
b. When an investment in a qualifying security is held for the purpose of meeting short-term cash
commitments it is reported as a cash equivalent. Cash inflows and outflows arising from investments
designated as cash equivalents are not reported as cash flows. Rather, they are part of the change in
cash and cash equivalents that must be explained. If, however, the qualifying investment is held for
other reasons, then the cash flows resulting from the purchase and sale of the investment are classified
as: an operating activity if the investment is held for trading purposes; or as an investing activity if the
investment is not held for trading purposes.
c. Bank borrowings, including those by way of overdraft, are generally classified as financing activities.
In Canada and some other countries, bank overdrafts frequently form an integral part of a company’s
cash management strategy. In these circumstances, and if the balance often fluctuates between a
positive balance and an overdraft, bank overdrafts are included as a component of cash and cash
equivalents, the change in which must be explained.
P20-5. Suggested solution:
C/CE 20X2 20X1
Canadian cash in bank Yes $42,500 $ 0
Bank overdraft – integral part of Arikan’s cash management system Yes 0 (31,000)
US cash in bank (Canadian $ equivalent) Yes 4,100 3,200
Petty cash Yes 300 200
Term deposit maturing April 30, 20X3 No* 75,000 75,000
Investment in retractable preferred shares maturing February 28, 20X3 Yes 20,000 0
Investment in RBC common shares held for trading purposes to be sold in No** 30,000 0
early March, 20X3
Investment in 60-day Bank of Canada treasury bills held for investment No*** 15,000 12,000
Copyright © 2026
20-2
, Chapter 20: Statement of Cash Flows
purposes
Investment in 90-day treasury bills held for the purpose of meeting short- Yes 50,000 40,000
term cash commitments
Cash and cash equivalents $116,900 $12,400
* Not a cash equivalent as the term deposit does not mature until more than 90 days after year-end
** Not a cash equivalent as investments in equity instruments are normally subject to a significant change
in value
*** Not a cash equivalent as the treasury bills are held for investment purposes
a. Arikan Corp. reported cash and cash equivalents of $116,900 on its Statement of Cash Flows for the
yearended December 31, 20X2 as detailed in the chart above.
b. Arikan Corp.’s cash and cash equivalents increased $104,500 during 20X2 ($116,900 − $12,400).
P20-6. Suggested solution:
Schmid Ltd.’s paid income taxes of $15,700 during 20X2 as determined below.
Item Cash outflow
Current income tax expense $20,400
Deferred tax expense 2,300
Increase in income taxes payable ($22,100 − (4,700)
$17,400)
Decrease in deferred tax asset (600)
Increase in deferred tax liability (1,700)
Cash paid for income taxes in 20X2 $15,700
P20-7. Suggested solution:
a. On December 31, 20X1, the only cash flow is the $20,000 payment on the lease. ASC would have
reported this as a cash outflow from investing activities on its statement of cash flow for its year
ended December 31, 20X1. The remaining $180,000 ($200,000 − $20,000 = $180,000) of the
transaction is a non-cash expense and would have been disclosed in ASC’s notes to the financial
statements.
b. ASC would have reported the $11,000 reduction of the lease liability as a cash outflow from
financing activities on its statement of cash flows for its year ended December 31, 20X2. The $9,000
interest payment would have been reported as either a cash outflow from operating activities or a cash
outflow from financing activities with the classification determined by ASC’s policy in this regard.
P20-8. Suggested solution:
a. Operating activities are the principal revenue-producing activities of the entity and other activities
that are not investing or financing activities. Cash flows from operating activities arise from the day-
to-day running of the business.
Operating activities include: cash sales; payment and collection of accounts receivable; receipt of
rents, royalties, and fees; receipt of deposits; payment of salaries and wages; payment of income tax
and other tax payments; receipt and payment of interest and dividends*; and the purchase and sale of
investments held for trading purposes. (*Alternative classifications are permitted.)
Copyright © 2026
20-3
, ISM for Lo/Fisher, Intermediate Accounting, Vol. 2, Sixth Edition
Investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents. There are two distinct components to investing activities. The first is the
acquisition and disposal of fixed assets, the second investing in the more traditional sense:
i) To establish and maintain the infrastructure necessary to run the business, companies purchase
and sell fixed assets.
ii) Investing in the more traditional sense involves buying and selling debt and equity securities,
with certain exceptions. For example, investments that are reported as cash equivalents (part of
the cash being explained), and investments held for trading purposes (recorded as an operating
activity) are not recorded as an investing activity.
Investing activities include: the sale of property, plant, and equipment; purchase and sale of
investments other than those held for trading purposes or reported as cash equivalents; the making of
loans and the collection of loans receivable; the purchase of property, plant, and equipment; and the
receipt of interest and dividends.* (*Alternative classifications are permitted.)
Financing activities are activities that result in changes in the size and composition of the contributed
equity and borrowings of the entity.
Companies raise money by issuing debt and selling equity, using the proceeds to acquire fixed assets.
Financing activities record the cash flows associated with the issuance and retirement of debt and
equity. This comment applies only to the capital flows, as there are some options available with
respect to the payment of interest and dividends. Cash flows arising from supplier-provided financing
including accounts payable are an operating activity, however.
Financing activities include: issuing and repurchasing shares; issuing debt, including bonds,
mortgages, and notes; repayment of the principal amount of lease liabilities, bonds, mortgages, and
notes; borrowing and repaying the principal of bank loans; and the payment of interest and
dividends.* (*Alternative classification options are available.)
b. Cash flows from operating activities give considerable insight into a firm’s ability to generate
sufficient cash to maintain its business, repay loans, and make new investments without having to
arrange external financing.
Cash flows related to investing summarize net expenditures for assets meant to generate future
income.
Financing-related cash flows gauge future claims on cash flows by both debt and equity holders.
c. IAS 7 permits a business entity to classify the receipt of interest and dividends as either an operating
or an investing activity. The standard also permits companies to report the payment of interest and
dividends as either an operating or a financing activity. Once the business chooses its accounting
policy it must apply it consistently to all similar transactions. ASPE does not permit a choice. The
receipt of interest and dividends and the payment of interest must normally be classified as an
operating activity; the payment of dividends a financing activity.
Copyright © 2026
20-4
