STATEMENT OF CASH FLOW

The Statement of cash flows provide information about the sources and utilization (historical
changes) of cash and cash equivalents during the period.
CASH – comprises cash on hand and cash in bank
CASH EQUIVALENT – are short term, highly liquid investment that are readily convertible to cash
and which are subject to an insignificant risk of changes in value.
 Only Debt instruments acquired within 3 months or less before their maturity date can qualify
as cash equivalents.
 1 year treasury bill acquired within 3 months before maturity date.
 90-day money markets instruments or commercial paper
 3-month time deposit
CASH FLOWS – include inflows (sources) and outflows (uses) of cash equivalents.
 When used in conjunction with the rest of the financial statements, the statement of cash flows
helps user asses:
1. the ability of the entity to generate cash and cash equivalents.
2. the timing and certainty of the generation of cash flows, and
3. the needs of the entity to utilize those cash flows
 The statement of cash flows may also provide information on the quality of earnings of an
entity. An entity may report profit under the accrual basis but suffers negative cash flows from
its operating activities. This may provide the indicators of among other things, difficulty in
collecting accounts receivables.
CLASSIFICATION OF CASH FLOWS
The statement of cash flows presents cash flows according to the following classifications:
1. Operating activities
2. Investing Activities
3. Financing Activities
OPERATING ACTIVITIES – Cash flows from operating activities are primarily derived from the
principal revenue-producing activities of the entity(PAS14) Operating activities usually include cash
inflows and outflows on items of income and expenses or those that enter into the determination
of profit or loss.
Examples of an operating activity:
 cash receipts from goods sold
 payments to employees
 payments to taxes
 payments to suppliers
INVESTING ACTIVITIES – involves the acquisition and disposal of noncurrent assets and other
investments.
Examples of an investing activity:
 cash receipts from collection of loans
 sales of other agencies’ debt instruments
 cash receipts from sales of equity instruments
 returns from investments
FINANCING ACTIVITIES – are those that affect the entity’s equity capital and financial and
borrowing structure.
Examples of a financing activity:
 Proceeds from issuing shares or debt instruments

 Repayment of borrowings
  Payment of dividends

 Repurchase of the entity’s own shares=

Classification of Cash Flows

Activity Type Description Examples
• Cash from sales
 Day-to-day activities related to income generation • Payments to
Operating and expense payments. employees
Activities  Affect profit or loss • Taxes
• Supplier
payments
• Sale of property
 Related to the acquisition and disposal of long-term • Collection of
Investing
assets and investments. loans
Activities
 Affect noncurrent assets and other investments • Investment
income
• Issuing shares
 Cash flows involving the entity’s equity or
Financing • Repayment of
borrowings.
Activities loans
 Affect borrowings and equity
• Paying dividends

CASH FLOWS EXCLUDED FROM THE ACTIVITIES SECTIONS

1. Cash flows on movements between cash and cash equivalents are not presented separately
because these are part of the entity’s cash management rather than its operating, investing
and financing activities.
2. Bank overdrafts that cannot be offset to cash forms part of the balance of cash and cash
equivalents and therefore not presented separately in the activities section.
3. Cash flows denominated in a foreign currency are translated using the spot exchange rate at
the date of the cash flow. Exchange differences are not cash flows. However, the effect of
exchange rate changes in cash and cash equivalents held or due in a foreign currency is
reported in the statement of cash flows in order to reconcile cash and cash equivalents at the
beginning and the end of the period.
INTEREST AND DIVIDENDS
Entities (except financial institution) may classify cash flows on interests and dividends as follows:
CASH FLOW OPTION 1 OPTION 2
1. Interest Income Operating Activity Investing Activity
Received
2. Interest Expense Paid Operating Activity Financing Activity
3. Dividend Income Operating Activity Investing Activity
Received
4. Dividend paid to Financing Activity Operating Activity
owners

OPTION 1 OPTION 2
 Interest Income, Interest expense  Interest income and dividend
and dividend as operating income are classified as
activities because they enter into investing activities because they
the determination of profit or result from investments.
loss  Interest expense is classified as
 Dividends paid is classified as financing activity because it
financing activity because it is a results from borrowing
transaction with the owners and  Dividend paid is classified as
alters the equity structure operating activity in order to
assist users in assessing the
entity’s ability to pay dividends
out of operating cash flows.
PRESENTATION
OPERATING ACTIVITIES
 Cash flows from operating activities may be presented using either:
a. DIRECT METHOD – Shows each major class of gross cash receipts and gross cash payments
b. INDIRECT METHOD – profit or loss is adjusted for the effects of non-cash items and changes in
operating assets and liabilities.

 DIRECT METHOD shows each major class of gross cash receipts and gross cash payments.
Such gross cash flows may be obtained either:
1. From the accounting records, for example, by analyzing each debit and credit in the cash
accounts.
2. By adjusting income statement accounts for changes in related operating assets and
liabilities during the period excluding the effects of non-cash items.
 INDIRECT METHOD – adjust accrual basis profit or loss for the effects of non-cash items.
PROBLEM 1: PREPARE STATEMENT OF CASH FLOWS USING DIRECT AND INDIRECT METHOD
FROM OPERATING ACTIVITIES.
Given:
 Revenue: ₱100,000
 Cost of Goods Sold: ₱60,000
 Operating Expenses: ₱20,000
 Depreciation (included in expenses): ₱5,000
 Net Income: ₱20,000
 Increase in Accounts Receivable: ₱10,000
 Increase in Accounts Payable: ₱4,000
SOLUTION: DIRECT METHOD
Step1. Calculate actual cash receipts and payments
Revenue 100,000
Less: increase in A/R (10,000)
Cash received 90,000
Step 2. Calculate cash paid to suppliers
Cost of goods sold 60,000
Less: Increase in A/P (4,000)
Cash Paid 56,000
Step 3. Calculate Cash paid for operating expenses
Total Operating expenses 20,000
 Less: Depreciation (5,000)
Cash paid 15,000
Net Cash from Operating Activities:
90,000 – 56,000 -15,000 = 19,000
SOLUTION FOR INDIRECT METHOD
Net Income 20,000
Add back: Depreciation 5,000
Less: increase in A/R (10,000)
Add: Increase in A/P 4,000
Net Cash from operating activities 19,000
PROBLEM 2: Statement of Cash Flows (Direct Method)
During the year, ABC Corporation engaged in the following cash transactions:
 The company received ₱120,000 in cash from its customers for goods sold.
 It paid ₱70,000 in cash to suppliers for inventory purchases.
 It paid ₱20,000 in salaries to employees and ₱10,000 for utilities and other operating
expenses.
 The company also paid ₱5,000 in income taxes.
In terms of investing activities, ABC Corporation purchased new equipment for ₱30,000 and sold old
equipment for ₱8,000. It also received ₱2,000 in interest income.
For financing activities, ABC received a loan from a bank amounting to ₱25,000. It repaid ₱10,000 of
the loan principal and paid ₱4,000 in dividends to shareholders. The company started the year with
₱5,000 in cash.
Required: Prepare a Statement of Cash Flows using the Direct and Indirect Method, showing cash
flows from:
1. Operating activities
2. Investing activities
3. Financing activities
4. Also, determine the ending cash balance.
ABC Corporation
STATEMENT OF CASH FLOWS
SOLUTION 1: 7 points
 Cash received from customers 120,000
 Cash paid to suppliers (₱70,000)
 Cash paid to employees (₱20,000)
 Cash paid for utilities and other expenses (₱10,000)
 Cash paid for taxes (₱5,000)
Net Cash Provided by Operating Activities ₱15,000
SOLUTION 2: 5 points
 Proceeds from sale of equipment ₱8,000
 Interest income received ₱2,000
 Purchase of equipment (₱30,000)
Net Cash Used in Investing Activities (₱20,000)
SOLUTION 3: 5 points
 Loan received from bank ₱25,000
 Loan principal repaid (₱10,000)
 Dividends paid (₱4,000)
Net Cash Provided by Financing Activities ₱11,000
SOLUTION 4: 4 points
 Operating Activities ₱15,000
 Investing Activities (₱20,000)
 Financing Activities ₱11,000
Net Increase in Cash ₱6,000
Add: Cash at beginning of the period ₱5,000
Cash at end of the period ₱11,000