8.2 IAS 7 Cash Flows — Investing and Financing Activities

ACCA Applied Skills — Financial Reporting FR

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1 Chapter 1: The Conceptual Framework & Qualitative Characteristics

1.1 Purpose of Financial Reporting & The Conceptual Framework 1.2 Qualitative Characteristics, Materiality & Prudence 1.3 Elements of Financial Statements, Recognition & Measurement Bases

2 Chapter 2: Regulatory Framework, Standard Setting & IFRS 18 Foundations

2.1 The Regulatory Framework, IASB Standard Setting & Due Process 2.2 Presentation and Disclosure Foundations & IFRS 18 2.3 Concepts and Principles of Groups & Consolidated Accounts 2.4 When Consolidation Is Required, Exemptions and Uniform Group Policies 2.5 The ISSB and IFRS S1 Sustainability-Related Financial Disclosures

3 Chapter 3: Tangible Non-Current Assets

3.1 IAS 16 Property, Plant and Equipment — Recognition and Cost 3.2 IAS 16 Revaluation Model & Asset Disposals 3.3 IAS 23 Borrowing Costs & IAS 20 Government Grants 3.4 IAS 40 Investment Property

4 Chapter 4: Intangibles, Impairment & Inventories

4.1 IAS 38 Intangible Assets — Research & Development 4.2 IAS 36 Impairment of Assets — Principles and Testing 4.3 Cash-Generating Units (CGUs) and Goodwill Impairment 4.4 IAS 2 Inventories & IAS 41 Biological Assets

5 Chapter 5: Leases and Revenue from Contracts

5.1 IFRS 16 Leases — Lessee Accounting 5.2 IFRS 16 Lessor Accounting & Sale and Leaseback 5.3 IFRS 15 Revenue from Contracts with Customers — The 5-Step Model 5.4 IFRS 15 Contract Costs and Specific Revenue Transactions

6 Chapter 6: Financial Instruments, Provisions, Tax & Currency

6.1 IFRS 9 & IAS 32 Financial Instruments 6.2 IAS 37 Provisions, Contingent Liabilities & IAS 10 Events After Reporting Period 6.3 IAS 12 Income Taxes — Current and Deferred Tax 6.4 IAS 21 Foreign Currency Transactions & IAS 33 Earnings Per Share 6.5 Factoring of Receivables and Derecognition of Financial Assets

7 Chapter 7: Financial Analysis & Ratio Performance

7.1 Profitability and Efficiency Ratios 7.2 Liquidity and Working Capital Management Ratios 7.3 Gearing, Solvency and Investor Ratios 7.4 Analytical Interpretation, Context & Reporting Limitations 7.5 EPS as a Performance Indicator: Trends and Limitations 7.6 Interpreting Not-for-Profit and Public Sector Financial Statements

8 Chapter 8: Cash Flows and Group Analysis

8.1 IAS 7 Statement of Cash Flows — Operating Activities 8.2 IAS 7 Cash Flows — Investing and Financing Activities 8.3 Analysing Cash Flows & Group Financial Statements

9 Chapter 9: Preparation of Single-Entity Financial Statements

9.1 Single-Entity Statement of Profit or Loss and OCI under IFRS 18 9.2 Statement of Financial Position and Statement of Changes in Equity 9.3 Comprehensive Single-Entity Trial Balance Adjustments 9.4 IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations 9.5 IAS 8 Accounting Policies, Estimates and Errors, and Disclosing Material Items

10 Chapter 10: Consolidated Statement of Financial Position

10.1 Group Concepts, Control & The Consolidation Framework 10.2 Working 2: Net Assets of the Subsidiary & Fair Value Adjustments 10.3 Working 3 Goodwill & Working 4 Non-Controlling Interest 10.4 Working 5 Group Retained Earnings & Intra-Group Adjustments

11 Chapter 11: Consolidated Profit or Loss and Associates

11.1 Consolidated Statement of Profit or Loss & OCI 11.2 Mid-Year Acquisitions and Non-Controlling Interest Allocation 11.3 IAS 28 Investments in Associates & The Equity Method 11.4 Consolidated Statement of Changes in Equity & Group Disclosures 11.5 Disposal of a Subsidiary and Loss of Control

12 Chapter 12: ACCA FR CBE Exam Strategy and Technique

12.1 CBE Tools, Spreadsheets and Word Processing Response Technique 12.2 Section A & B Objective Test Case Strategy 12.3 Section C Constructed Response Mastery

8.2 IAS 7 Cash Flows — Investing and Financing Activities

Key Takeaways Explain This Topic AI

Investing cash flows represent capital expenditures on productive non-current assets intended to generate future cash flows, requiring ledger reconstruction to extract cash additions and disposal proceeds.

Cash additions to Property, Plant and Equipment (PPE) are determined by reconciling opening carrying amounts with revaluation gains, depreciation charges, impairments, disposals, non-cash additions (ROU assets), and closing carrying amounts.

Disposal proceeds in investing activities represent the full gross cash received (carrying amount plus gain or minus loss on disposal), rather than the accounting gain or loss reported in profit or loss.

Financing activities encompass share capital issues (split between nominal capital and share premium), debt issues and repayments, the full lease payment including its finance charge, interest paid, and equity dividends paid.

Bank overdrafts repayable on demand that fluctuate between positive and negative balances as part of cash management are included in cash and cash equivalents rather than financing activities.

Last updated: September 2026

8.2 IAS 7 Cash Flows — Investing and Financing Activities

Core Principle: While operating activities reveal the cash generated by an entity's core trading operations, Investing activities reflect capital expenditures made to sustain or expand productive infrastructure, and Financing activities reflect how that capital is funded through equity and debt. In the ACCA FR exam, mastering these sections requires rigorous T-account reconstructions of Property, Plant and Equipment (PPE), lease liabilities, and retained earnings to separate cash flows from non-cash accounting adjustments.

1. Scope and Definition of Investing Activities

Under IAS 7.6 , investing activities are defined as the acquisition and disposal of long-term assets and other investments not included in cash equivalents .

Investing cash outflows represent capital expenditures (capex) that signal management's commitment to future productive capacity. Investing cash inflows represent divestments (asset sales) and returns on external investments.

Primary Line Items in Investing Activities
Cash paid to acquire Property, Plant and Equipment (IAS 16)
Cash paid to acquire Intangible Assets (IAS 38)
Cash proceeds from the disposal of PPE and Intangible Assets
Cash paid to acquire debt or equity instruments of other entities
Cash proceeds from the sale of debt or equity instruments
Dividends received (from equity investments or associates)
Interest received (from loans or bonds held as investments)
2. Reconstructing Non-Current Asset Additions: The PPE T-Account

In ACCA FR examination questions, the cash paid to purchase property, plant and equipment is rarely stated directly on the balance sheet. Candidates must extract cash capex as the balancing figure in a PPE Carrying Amount ledger account. PPE Carrying Amount Reconstruction Ledger

─────────────────────────────────────────────────────────────────────────────────────────
Debit: Opening Carrying Amount b/f [A] │ Credit: Depreciation Charge (P&L) [D]
Debit: Revaluation Surplus (OCI) [B] │ Credit: Impairment Losses (P&L/OCI) [E]
Debit: Cash Additions (Balancing Fig) [C] │ Credit: Disposal Carrying Amount [F]
│ Credit: Closing Carrying Amount c/f [G]
─────────────────────────────────────────────────────────────────────────────────────────

Total Debits │ Total Credits Cash Additions = Closing PPE - Opening PPE - Revaluations + Depreciation + Impairments + Disposal Carrying Amount

Non-Cash Additions (IFRS 16 Leases & Government Grants)

A crucial trap in ACCA FR involves non-cash additions entering PPE:

Right-of-Use (ROU) Assets: Under IFRS 16, when an entity enters into a new lease, it capitalizes an ROU asset with an equal lease liability. No cash was paid at inception. Under IAS 7.43, non-cash investing and financing transactions must be excluded from the Statement of Cash Flows and disclosed in the financial statement notes.

Capitalized Decommissioning Provisions (IAS 37): Capitalizing future site restoration costs into PPE involves no current cash flow.

Rule: Always subtract new ROU lease assets and non-cash provisions from the total additions before recording the cash outflow under investing activities.

3. Reconstructing Disposal Proceeds

When an entity sells an item of property, plant, or equipment, the cash received is calculated by combining the asset's carrying amount at the date of sale with the resulting profit or loss: Carrying Amount at Disposal = Original Historical Cost - Accumulated Depreciation at Disposal

Cash Disposal Proceeds = Carrying Amount at Disposal + Gain on Disposal (or - Loss on Disposal) Treatment of Asset Disposals in IAS 7

┌──────────────────┐
│ Asset Disposed │
└────────┬─────────┘
│
┌──────────────────────────┴──────────────────────────┐
▼ ▼
Operating Activities (Indirect) Investing Activities
Deduct Accounting Gain on Disposal • Record FULL Gross Cash Proceeds
Add back Accounting Loss on Disposal (Carrying Amount +/- Gain/Loss)
Strips non-operating accrual from profit • Reflects physical liquid inflow
4. Scope and Definition of Financing Activities

Under IAS 7.6 , financing activities are defined as activities that result in changes in the size and composition of the contributed equity and borrowings of the entity .

Financing cash flows show how an entity raises long-term funding from lenders and equity investors, and how it repays or rewards those capital providers.

Primary Line Items in Financing Activities
Proceeds from issuing ordinary shares or preference shares
Proceeds from issuing long-term loan notes, debentures, or bank borrowings
Cash repayments of borrowings and redemption of debentures
Capital repayment element of lease liabilities (IFRS 16)

Dividends paid to equity shareholders — a financing activity in all cases under IAS 7 as amended alongside IFRS 18; the former policy choice to present them within operating activities has been withdrawn

Interest paid , including the finance charge on lease liabilities — presented in financing activities for most entities unless an exam scenario directs otherwise

5. Equity Financing: Share Issues, Share Premium & Bonus Issues

When an entity issues ordinary shares for cash, the total cash received equals the increase in nominal share capital plus the increase in the share premium account: Cash Proceeds from Share Issue = Increase in Share Capital + Increase in Share Premium

The Non-Cash Trap: Bonus Issues (Scrip Issues)

A bonus issue (capitalisation of reserves) involves issuing free additional shares to existing shareholders by converting reserves (such as share premium or retained earnings) into share capital: Debit: Share Premium / Retained Earnings

Credit: Share Capital

Crucial Rule: Zero cash is received in a bonus issue.

When calculating cash proceeds from a share issue, the nominal value of bonus shares issued during the year must be deducted from the change in share capital.

In contrast, a rights issue is an offer of new shares to existing shareholders for cash and is fully included in financing cash flows.

6. Accounting for Lease Liabilities Under IFRS 16 in IAS 7

Under IFRS 16, lease payments made during the year contain two distinct components that must be segregated in the Statement of Cash Flows:

Finance Charge (Interest): Recognized in profit or loss and presented as an Operating cash outflow (under standard ACCA FR presentation).

Capital Element (Principal Repayment): Reduces the lease liability on the Statement of Financial Position and is presented as a Financing cash outflow .

Reconstructing the Lease Liability Ledger

To determine the cash capital repayment, combine the current and non-current lease liabilities into a single ledger account: Lease Liability Ledger

─────────────────────────────────────────────────────────────────────────────────────────
Debit: Capital Repayment (Balancing Fig) [X] │ Credit: Opening Balance b/f [A]
Debit: Closing Balance c/f [B] │ Credit: New Leases Entered (Non-Cash) [C]
─────────────────────────────────────────────────────────────────────────────────────────

Total Debits │ Total Credits Capital Element Repaid = Opening Lease Liability + New Leases Entered - Closing Lease Liability

Total Cash Lease Outflow = Capital Element Repaid (Financing) + Lease Interest Paid (Financing)
7. Reconstructing Dividends Paid to Ordinary Shareholders

Cash dividends paid during the reporting period are calculated by analyzing the Retained Earnings reserve: Opening Retained Earnings + Profit for the Year - Transfers to Reserves - Dividends Paid = Closing Retained Earnings

Dividends Paid = Opening Retained Earnings + Profit for the Year - Transfers - Closing Retained Earnings

Exam Trap — Proposed Dividends (IAS 10): Dividends declared or proposed after the end of the reporting period are non-adjusting events. They are not recognized as liabilities at the reporting date and involve zero cash outflow in the current period.

8. Net Change in Cash and Cash Equivalents & The Overdraft Rule
Definition of Cash and Cash Equivalents (IAS 7.6–7.7)

Cash: Comprises cash on hand and demand deposits.

Cash Equivalents: Short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent only when it has a short maturity of three months or less from the acquisition date.

Bank Overdrafts (IAS 7.8)

Bank overdrafts present a unique classification rule in ACCA FR:

Where bank overdrafts are repayable on demand and form an integral part of an entity's cash management (i.e. the bank balance regularly fluctuates between being positive and overdrawn), they are included as a negative component of cash and cash equivalents .

Where an overdraft or revolving credit facility represents a formal long-term borrowing arrangement, it is classified within Financing activities . Cash and Cash Equivalents Reconciliation

─────────────────────────────────────────────────────────────────────────────────────────
Net increase / (decrease) in cash and cash equivalents (Operating + Investing + Financing)
Add: Cash and cash equivalents at beginning of period (Net of opening overdraft)
─────────────────────────────────────────────────────────────────────────────────────────
Equals: Cash and cash equivalents at end of period (Net of closing overdraft)
─────────────────────────────────────────────────────────────────────────────────────────
9. Comprehensive Worked Example: Investing and Financing Flows
Scenario

Triton Global plc presents the following balances and extracts for the year ended 31 December 20X1:

PPE Carrying Amount: 1 Jan 20X1: $1,200,000 ; 31 Dec 20X1: $1,480,000 .

Revaluation Reserve: Increased by $80,000 during the year following an upward revaluation of commercial land.

Depreciation Expense: Charged in the P&L for the year: $130,000 .

Disposal of Machinery: A machine with an original cost of $120,000 and accumulated depreciation of $70,000 was sold for cash at an accounting loss of $8,000 .

New Leases: On 1 April 20X1, Triton acquired a specialized production crane under a new 5-year lease, recognizing an ROU asset and lease liability of $90,000 .

Share Capital ($1 Ordinary Shares): 1 Jan 20X1: $500,000 ; 31 Dec 20X1: $700,000 .

Share Premium: 1 Jan 20X1: $100,000 ; 31 Dec 20X1: $220,000 .

Bonus Issue: On 1 June 20X1, Triton made a 1-for-10 bonus issue of ordinary shares, funded entirely from the share premium account.

Bank Loan Notes: 1 Jan 20X1: $300,000 ; 31 Dec 20X1: $200,000 .

Total Lease Liabilities (Current + Non-Current): 1 Jan 20X1: $140,000 ; 31 Dec 20X1: $185,000 .

Retained Earnings: 1 Jan 20X1: $410,000 ; 31 Dec 20X1: $525,000 . Profit for the year was $185,000 .

Bank Balance (Cash Management Overdraft): 1 Jan 20X1: $35,000 overdrawn ; 31 Dec 20X1: $48,000 in credit .

Step-by-Step Solution
Step 1: Calculate Cash Paid for PPE Additions

Carrying amount of disposed machine = Cost $120,000 - Acc Dep $70,000 = $50,000 .

Cash proceeds from disposal = Carrying amount $50,000 - Loss $8,000 = $42,000 .

Set up PPE Carrying Amount ledger:

Opening carrying amount: $1,200,000
Add: Revaluation surplus: +$80,000
Add: Non-cash ROU asset addition: +$90,000
Less: Depreciation charge: -$130,000
Less: Disposal carrying amount: -$50,000
Subtotal before cash additions: $1,190,000
Closing carrying amount: $1,480,000

Cash Additions to PPE = $1,480,000 - $1,190,000 = $290,000 .

Step 2: Calculate Cash Proceeds from Share Issue

Opening shares = 500,000 shares. A 1-for-10 bonus issue created 50,000 new $1 shares ($50,000).

Journal for bonus issue: Dr Share Premium $50,000; Cr Share Capital $50,000.

Total increase in Share Capital = $700,000 - $500,000 = $200,000.

Cash increase in Share Capital = Total increase $200,000 - Bonus issue $50,000 = $150,000 .

Share premium after bonus issue deduction = $100,000 - $50,000 = $50,000.

Cash increase in Share Premium = Closing $220,000 - Adjusted opening $50,000 = $170,000 .

Total Cash Proceeds from Share Issue = $150,000 + $170,000 = $320,000 .

Step 3: Calculate Lease Liability Capital Repayments
Opening lease liability: $140,000
Add: New lease entered during the year: +$90,000
Subtotal liability before payments: $230,000
Closing lease liability: $185,000

Capital Element Repaid (Financing Outflow) = $230,000 - $185,000 = $45,000 .

Step 4: Calculate Dividends Paid
Opening retained earnings: $410,000
Add: Profit for the year: +$185,000
Subtotal: $595,000
Less: Closing retained earnings: -$525,000

Dividends Paid in Cash = $70,000 .

Step 5: Investing and Financing Statements

Line Item Amount ($)

Cash flows from investing activities:

Purchase of property, plant and equipment (290,000)
Proceeds from disposal of machinery 42,000
Net cash used in investing activities (248,000)

Cash flows from financing activities:

Proceeds from issue of ordinary shares 320,000
Repayment of bank loan notes ($300,000 - $200,000) (100,000)
Principal repayment of lease liabilities (45,000)
Dividends paid to ordinary shareholders (70,000)
Net cash generated from financing activities 105,000
Step 6: Reconciliation to Cash and Cash Equivalents

Assuming Net Cash from Operating Activities was $226,000 :

Net increase in cash and cash equivalents = $226,000 - $248,000 + $105,000 = $83,000 .

Cash and cash equivalents at 1 January 20X1 = ($35,000) (Overdraft).

Cash and cash equivalents at 31 December 20X1 = -$35,000 + $83,000 = $48,000 (Positive bank balance).

10. Exam Traps & Examiner Guidance

ACCA Examiner Tip:

Bonus Issues vs. Cash Issues: Never mistake a bonus issue for a cash flow. Bonus issues capitalize existing equity reserves; no cash enters the business.

Right-of-Use Asset Additions: Always verify whether PPE additions include leased assets under IFRS 16. Leased additions are non-cash investing/financing transactions.

Proceeds vs. Gains: When an asset is sold at a loss, remember that cash was still received. The cash proceeds equal carrying amount minus loss on disposal.