Wesleyan University-Philippines

Cabanatuan City
GRADUATE SCHOOL DEPARTMENT

RAUL S. CABANTING
MBA

MBA 105
FINANCIAL MANAGEMENT

Illustration # 1 Cash Flow under Direct Method

ABC Co.’s cash balance on January 1, 2017 was 20,000. The following were the transactions that
affected cash during the period.

a. Collections from customers for the sale of goods, 580,000.

b. Cash receipt from loan obtained from a bank, 180,000.
c. Cash receipt from additional investment by owner, 20,000.
d. Payments to supplier for the purchase of inventory, 120,000.
e. Payments for employee salaries, 140,000.
f. Payments for rent expense, 70,000.
g. Payments for utilities expense, 20,000.
h. Payment for the acquisition of equipment, 200,000.
i. Cash disbursements for drawings by owner, 60,000.

Prepare a statement of cash flow under direct method

ABC Co.
Statement of Cash Flows
For the period ended December 31, 2016

Cash flows from operating activities

Cash receipts from sale of goods 580,000
Cash paid for purchase of inventory (120,000)
Cash paid for salaries expense (140,000)
Cash paid for rent expense (70,000)
Cash paid for utilities expense (20,000)
Net Cash from investing activities 230,000

Cash flows from investing activities

Cash paid for the acquisition of equipment (200,000)
Net Cash used from investing activities (200,000)

Cash flows from financing activities

Cash proceeds from loan borrowed 180,000
Cash proceeds from investment of owner 20,000
Cash payments to owner (60,000)
Net Cash used from financing activities 140,000

Net increase in cash 170,000

Cash, beginning balance 20,000
Cash, ending balance 190,000
Illustration 2: Statement of Cash Flows under Indirect Method

The comparative balance sheet and statement of comprehensive income of ABC Co. on December
31, 2016 are shown below:

ASSETS 2016 2015

Cash and cash equivalents 220,000 100,000
Trade and other receivables 65,000 60,000
Inventory 60,000 240,000
Prepaid assets 20,000 80,000
Total current assets 365,000 480,000
Property, plant & equipment 380,000 220,000
Total Non-current assets 380,000 220,000
TOTAL ASSETS 745,000 700,000
LIABILITIES
Trade and other payables 310,000 280,000

EQUITY
Owner’s capital 435,000 420,000
TOTAL LIABILITIES & EQUITY 745,000 700,000

ABC Company
Statement of Comprehensive Income
For the year ended December 2016

Sales 500,000
Cost of Sales (300,000)
Gross Profit 200,000
Rent income 70,000
Depreciation expense (120,000)
Insurance expense (60,000)
Bad debts expense (15,000)
Loss on sale of equipment (20,000)
PROFIT FOR THE YEAR 60,000
Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YEAR 60,000

Additional information:

 Equipment with crrying amount of P120,000 was sold for100,000 resulting to a loss on sale
of 20,000.
 Equipment was acquired on cash basis for 400,000.
 The owner made total drawings of 45,000.

Requirement

Prepare the statement of cash flows. Use the indirect method presenting cash flows from operating
activities
Solution:

ABC Co.
Statement of Cash Flows
For the period ended December 31, 2016

Cash flows from operating activities

PROFIT FOR THE YEAR 60,000

Non-cash items
Depreciation 120,000
Loss on sale of equipment 20,000
Total 200,000

Changes in operating assets &liabilities

Increase in Trade and other receivables (5,000)
Decrease in Inventory 180,000
Decrease in prepaid assets 60,000
Increase in Trade and other payables 30,000
Net Cash used from investing activities (465,000)

Cash flows from investing activities

Cash proceeds from sale of equipment 100,000
Cash paid for the acquisition of equipment (400,000)
Net Cash used from Investing activities (300,000)

Cash flows from financing activities

Cash payments to owner (45,000)
Net Cash used from financing activities (45,000)

Net increase in cash and cash equivalents 120,000

Cash and cash equivalents, beginning 100,000
Cash and cash equivalents, ending 220,000