ONLINE LECTURE : 6

FINANCIAL ACCOUNTING
Cash flow statement

By: Dr.Sadia Saeed

Cash Flow Statement (Direct Method)
Formula method:
Formulas are used in direct method
Cash flows from Operating Activities
1)Cash Received from customers
Net sales + Decrease in Account Receivable
or
Net sales - Increase in Account Receivable

Accounts At the start At the end Increase/Decrease

of year of the year
A/R 10,000 7,000 3,000 decrease ! We Add 3,000 to net
have received 3,000. sales
cash is coming in
business
A/R 8,000 15,000 7,000 increase! We Deduct 7,000 from
didn’t receive any Net sales
cash.
2) Interest Received
Formula
Interest Income + Decrease in Interest Receivable
or
Interest Income - Increase in Interest Receivable
Accounts At the start At the end Increase/Decrease
of year of the year
I/R 5,000 3,000 2,000 decrease ! We Add 2,000 to
have received 2,000. Interest income
cash is coming in
business
I/R 10,000 15,000 5,000 increase! We Deduct 5,000 from
didn’t receive any Interest income
cash.
3) Dividend Received
If dividend received on cash basis there is no need to use formula
If dividend is not cash based then this formula is used
Formula
Dividend Received + Decrease in Dividend Receivable
or
Dividend Received- Increase in Dividend Receivable
Accounts At the start At the end Increase/Decrease
of year of the year
D/R 3,000 1,000 2,000 decrease ! We Add 2,000 to
have received 2,000. Dividend received
cash is coming in
business
D/R 10,000 13,000 3,000 increase! We Deduct 3,000 from
didn’t receive any dividend received
cash.
4a) Cash Paid to suppliers
CGS + Increase In Inventory + Decrease in Account Payable
or or
CGS – decrease in Inventory – Increase in Account Payable
Accounts At the start At the end of Increase/Decrease
of year the year
Inventory 5,000 7,000 2,000 increase. We are Add 2,000 to CGS
purchasing more
inventory , cash outflow
is more
Inventory 7,000 4,000 3,000 decrease! We are Deduct 3,000 from
not purchasing inventory CGS
cash payment is less.
Account 9,000 6,000 3,000 decrease! We have Add 3,000 to CGS
Payable made payment cash
outflow occur
Account 6,000 10,000 4,000 increase. We didn’t Less 4,000 t0 CGS
Payable make any payment
4b) Cash paid to employees
Operating expense -depreciation + increase in prepayments + decrease in operating liabilities
or or
Operating expense -depreciation - decrease in prepayments - Increase in operating liabilities

Accounts At the start At the end of Increase/Decrease

of year the year
Prepayments 4,000 7,000 3,000 increase. We are Add 3,000 to
doing more advance operating expenses
payments, cash outflow is
more
Prepayments 7,000 4,000 3,000 decrease! We are Deduct 3,000 from
not doing advance operating expenses
payments cash payment
is less.
Operating 9,000 6,000 3,000 decrease! We have Add 3,000 to
liabilities made payment cash operating expenses
outflow occur
Operating 6,000 10,000 4,000 increase. We didn’t Less 4,000 to
liabilities make any payment operating expenses
4) Cash paid to suppliers and employees
Cash paid to suppliers……………..xxx
Cash paid to employees…………+xxx
xxx
5)Interest Paid
Formula
Interest Expense + decrease in Interest Payable
or
Interest Expense - Increase in Interest Payable

Accounts At the start At the end Increase/Decrease

of year of the year
I/P 11,000 7,000 4,000 decrease ! We Add 4,000 to
have paid 4,000. cash I/Expense
outflow occur
I/P 8,000 14,000 6,000 increase! We Deduct 6,000 from
have not paid any I/ Expense
cash.
 6) Income Tax Paid
Formula
Income tax Expense + decrease in income tax payable
or
Income tax Expense - Increase in income tax payable

Accounts At the start At the end Increase/Decrease

of year of the year
I .Tax/P 12,000 7,000 5,000 decrease ! We Add 5,000 to
have paid 5,000. cash Income tax
outflow occur expense
I .Tax/P 9,000 14,000 5,000 increase! We Deduct 5,000 from
have not paid any Income tax
cash. expense
Cash flow from Investing activities
7 )sale of Marketable securities
Formula
Marketable securities (Cr) + capital gain
or
Marketable securities (Cr) - capital loss

8) Sale of Plant Asset

Formula
Net fixed asset (Cr) + capital gain
or
Net fixed asset (Cr) – capital loss
Net fixed asset = Cost of fixed asset – accumulated depreciation
9) Cash flow from financing Activities
Issue of Capital stock
Capital stock (Cr) + Additional Paid up capital (Cr)
 Cash flow statement (Direct
method)
Formulas
Cash flow from operating activities
1)Cash received from customers
Net sales – increase in A/receivable
3,200,000- 60,000
3,140,000
2) Interest received
Interest revenue+ decrease in interest
receivable
40,000+2,000
42,000
Dividend received
No information is given about dividend
therefore dividend received is zero.
• 4) cash paid to suppliers and employess
• 4a) cash paid to suppliers
Cost of goods sold –decrease in inventory + decrease in
A/payable
1,620,000-60,000+16,000=1,576,000
4 b) Cash paid to employees
Operating expenses- depreciation+ increase in prepaid +decrease in operating
liabilities
Operating expenses –depreciation – decrease in prepaid- increase in operating
liabilities
Operating expenses-dep+ increase in prepaid + decrease in operating liabilities
1240,000-150,000+6,000+8,000=1,104,000
• 4)Cash paid to suppliers and employees
• Cash paid to suppliers=1,576,000
• Cash paid to employees=+1,104,000
• =2,680,000
• 5) interest expense paid
Interest expense +decrease in interest payable
Interest expense –increase in interest payable
42,000-4,000=38,000
6) Income tax expense paid
Income tax expense+ decrease in income tax payable
100,000+14,000=114,000
Income tax expense –increase in income tax payable
Cash flow from investing activities
7) Sale of M/Securities
M/securities (cr) +capital gain
38,000+34,000=72,000
M/securities (cr)-capial loss
8) Sale of plant assets
Net fixed asset (cr)-capital loss
36,000-12,000=24,000
• Cash flow from financing activities
9) Issue of capital stock
capital stock (cr) + additional paid in capital
(Cr)
20,000+160,000=180,000
 21st century technologies
cash flow statement
Dec31,2009

Cash flow from operating activities

*Cash received from customers $3,140,000
* interest received 42,000
*Dividend received + zero
Cash provided by operating activities 3,182,000
*Cash paid to suppliers and employees (2,680,000)
*Interest expense paid (38,000)
*Income tax expense paid +(114,000)
Cash used in operating activities -(2,832,000)
Net cash inflow in operating activities +350,000