4.

Cash Flow Statement (CFS)

CASH FLOW STATEMENT –
 Provides an analysis of inflows and/or outflows of cash from/to operating, investing and financing activities
(Deloitte Global Services Limited, 2015).
 This statement shows cash transactions only compared to the SCI which follows the accrual principle.
 It serves as a basis for evaluating the entity’s ability to generate cash and cash equivalents and the needs to
utilize these cash flow.
 It is a formal statement that classifies cash receipts and cash payments into operating, investing and financing
activities.
 It shows the net increase or decrease in cash during the period and the cash balance at the end of the period.
 It also helps project the future net cash flows of the entity.
Importance:
 The CFS provides the net change in the cash balance of a company for a period.
 This helps owners see if their revenues are actually translated to cash collections or if they have enough cash
inflows in order to pay any maturing liabilities.
 It enable users to assess the firm’s ability to generate cash in the future and predict future cash flows.
 It enable users to evaluate the firm’s financial position as to liquidity and solvency.
 It enable users to examine the relationship between the net income (which normally is under the accrual basis)
and the cash flow from operations
 It enable users to evaluate changes in the entity’s net assets (assets less Liabilities)
 It enable users to evaluate entity’s ability to adopt to pressures and changing circumstances and
 It enable users to assist management in their planning and controlling functions.
Concept of Cash
 As provided by the PAS covers not only cash but also cash equivalents. Cash includes cash on hand and demand
deposits.
 Cash equivalents include treasury and commercial bills, short-term highly liquid investments such as time
deposits readily convertible into cash within three months from acquisition date.
Major Categories of Cash Activities / Parts of the Cash Flow
 Operating Activities –
o principal income producing activities like revenues from sale of goods and services, receipt for royalties,
fees, commissions and other revenues
o payments to suppliers for goods and services (expenses) payments to employees, payments to
government, payment to others for contract services.
o Activities that are directly related to the main revenue-producing activities of the company such as cash
from customers and cash paid to suppliers/employees (Deloitte Global Services Limited, 2015)
Cash Inflows
o Receipt from sale of goods and performance of services
o Receipts from royalties, fees, commissions and other revenues

Cash Outflows
o Payments to suppliers of goods and services
o Payments to employees
o Payments for taxes
o Payments for interest expense
o Payments for other operating expenses

 Investing Activities –
o Represented by acquisition and disposal of non-current assets such as plant, property and equipment,
o Payments and receipts from acquisition and sales of bond and securities or
o Interest in joint venture; cash advances, loans of officers and employees and other parties.
o Cash transactions related to purchase or sale of non-current assets (Deloitte Global Services Limited,
2015
o Investing activities include making and collecting loans; acquiring and disposing of investments in debt
or equity securities; and obtaining and selling of property and equipment and other productive assets

Cash inflows
o Receipt from sale of property and equipment
o Receipts from sale of investments in debt or equity securities

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 o Receipts from collection on notes receivable
Cash outflows
o Payments to acquired property and equipment
o Payments to acquired debt of equity securities
o Payments to make loans to others generally in the form of notes receivable

 Financing Activities –
o Represented by the long term borrowing and repayments of loans made by the enterprise.
o Contributions and withdrawals of investors or equity participants
o Cash transactions related to changes in equity and borrowings.
o Include obtaining resources from owners and creditors.
Cash inflow
o Receipt from investments by owner.
o Receipts from issuance of notes payable
Cash outflow
o Payments to owners in the form of withdrawals
o Payments to settle notes payable
 Net change in cash or net cash flow (increase/decrease) – The net amount of change in cash whether it is an
increase or decrease for the current period. The total change brought by operating, investing and financing
activities.
 Beginning Cash Balance – The balance of the cash account at the beginning of the accounting period. Ending
 Cash Balance – The balance of the cash account at the end of the accounting period computed using the
beginning balance plus the net change in cash for the current period.
 Two methods of reporting Cash Flows
o Differentiate the Direct and Indirect Approach of the CFS
o Direct – The operating cash flow section of the CFS under the direct method would show each major
class of gross cash receipts and gross cash payments (Deloitte Global Services Limited, 2015).
 Major classes of cash receipts and cash disbursement are presented in the statement to arrive
at the cash flow from operating activities.
 The entity’s net cash provided by (used in) operating activities is obtained by adding the
individual operating cash inflows and then subtracting the individual operating cash outflows.
o Indirect – The operating cash flow section of the CFS under the indirect method will reconcile the net
income/loss of the company with the total cash flows generated/used in operating activities by
adjusting the net income/loss for effects of non-cash transactions (Deloitte Global Services Limited,
2015).
 This method is to convert net income from the accrual basis to cash basis through a series of
adjustments for the effects of non –cash transactions such as the receivables, payables,
prepayments and deferments of income and expenses.
 The adjustment begins with profit followed by the addition of expenses and charges (e.g.
depreciation) that did not entail cash payments.
 Then increase in current assets and decreases in current liabilities involved in the determination
of profit but which did not actually increase or decrease cash, are subtracted from profit.
 Finally, decreases in current assets and increases in current liabilities are added to profit to
obtain net cash provided by (used in) operating activities.

Profit Pxxxxx
Adjustment for:
Non-cash expenses (e.g. Depreciation) Pxxxxx
Increases in current assets account ( xxxxx)
Decreases in current liability accounts ( xxxxx)
Decreases in current assets accounts xxxxx
Increases in current liability accounts xxxxx
Cash flow from operating activities. Pxxxxx

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Indirect Method
 First part is operating activities
o Non-cash expenses are added back while non-cash revenues are deducted.
o Gain/loss on sale of non-current assets are deducted/added back because the cash transaction is
recorded under investing activities.
o Changes in current assets and current liabilities are either added or deducted depending on whether
they increased or decreased during the year.
o Increase in current assets – deducted to net income Accounts Receivable – increases revenue which
increases net income but is not a cash transaction Prepaid Expense – decreases cash but does not
change the net income
o Beginning Trade and Other Receivables – Ending Trade and Other Receivables = Increase/Decrease in
Trade and Other Receivables – Net
o A positive result means beginning is greater than ending and there is a decrease in the balance of the
receivables because of the cash collections while a negative result means ending is greater than
beginning and there is an increase in the balance of the receivables because of more sales on account.
o Where:
 Payments = Beginning Trade and Other Payables + Expenses – Ending Trade and Other Payables
 Expenses is already included in the Net Income
 Thus: Payments = Beginning Trade and Other Payables – Ending Trade and Other Payables
Beginning Trade and Other Payables – Ending Trade and Other Payables = Increase/Decrease in
Trade and Other Payables
o A positive result means beginning is greater than ending and there is a decrease in the balance of the
payables because of the cash payments while a negative result means ending is greater than beginning
and there is an increase in the balance of the payables because of more expenses on account.
o Decrease in current assets – added to net income
o Accounts Receivable – increases cash but does not change the net income
o Prepaid Expense – increases expenses which decreases net income but is not a cash transaction
o Increase in current liabilities – added to net income
o Accounts Payable – increases expenses which decreases net income but is not a cash transaction
o Unearned Income – increases cash but does not change the net income
o Decrease in current liabilities – deducted to net income
o Accounts Payable – decreases cash but does not change the net income
o Unearned Income – increases revenue which increases net income but is not a cash transaction c
 Second part is investing activities
 Third part is financing activities

Sample questions:
Easy:
1. Gain on sale of property and equipment is part of what activity in the CFS?
Answer: noncash transaction but part of operating activity if indirect
2. Changes in long term liabilities is part of what activity in the CFS?
Answer: financing
Average:
1. Net income is part of which Approach in preparing the CFS?
Answer: indirect
2. The company presented the following in order to aid the accountant in preparing the CFS:
a. Net income: P200,000 b. Depreciation expense : P 25,000 c. Gain on sale of property and equipment: P100,000
d. Decrease in trade and other receivables: P 70,000 e. Purchase of property and equipment: P200,000 f. Payment of
loan from bank: P150,000 Compute for the cash generated/used in financing activities.
Answer: P150,000 net cash used in financing activities
Difficult:
1. Based on the given above, compute for the net change in cash for the year.
Answer:: (P155,000) net change in cash
2. If ending balance of cash account is P700,000, prepare the CFS for the year.

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 Suggested Answer:

NAME OF COMPANY
CASH FLOW STATEMENT
FOR THE YEAR ENDED (YEAR-END)
Cash flows from Operating Activities
Net income P 200,000.00
Add back: Depreciation Expense 25,000.00
Less: Gain on sale of property and equipment (100,000)
P 125,000.00
Decrease in trade and other receivables-net 70,000.00
Net cash flow generated from operating activities P 195,000.00
Cash flow from investing activity
Purchase of property and equipment (P 200,000.00)
Net cash flow generated from investing activity (P 200,000.00)
Cash flow from financing activity
Paid loan from a bank (P 150,000.00)
Net cash flow from used in financing activity (P 150,000.00)
Net change in cash (P 155,000.00)
Cash, Beginning 855,000.00
Cash, Ending P 700,000.00

Direct Method

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 EVA CAMAYO AND COMPANY
Statement of Cash Flow
For the month ended May 31, 2017

Cash Flows from Operating Activities

Cash received from customers ₱ 604,000.00
Payments to suppliers - 100,000.00
Payments to employees - 138,000.00
Payments for offi ce rent - 80,000.00
Payment for Insurance - 140,000.00
Payments to Utilities - 30,000.00
Net Cash provided by Operating Activities # ₱ 116,000.00
Cash Flows from Investing Activities
Payments to acquire service vehichle -₱ 4,200,000.00
Payments to acquire offi ce equipment - 150,000.00
Net Cash provided by Investing Activities - 4,350,000.00 - 4,350,000.00
Cash Flow from Financing Activities
Cash received as investments by owners ₱ 2,500,000.00
Cash received from borrowings 2,100,000.00
Payments for withdrawals by owners - 140,000.00
Net Cash provided by Financing Activities 4,460,000.00 4,460,000.00
Net increase (decrease) in cash and cash equivalents ₱ 226,000.00
Cash and Cash equivalents at the beginning of the period 125,000.00
Cash and Cash equivalents at the end of the period ₱ 351,000.00

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6
 A. PracticeXThe following information are available for you to prepare the Statement of Cash Flow
for Learning is Fun Company for the year ended December 31, 2016.
Use the Direct method of preparing Cash Flow Statement

Additional investment from owner ₱100,000.00

Cash January 1, 2016 100,000.00
Long-term loan from bank 300,000.00
Payments to suppliers and employees 700,000.00
Purchases of property and equipment 150,000.00
Receipts from customers 1,000,000.00
withdrawals by owner' 80,000.00
Cash December 31, 2016 ?

B. Practice questions:
Easy:

1. Gain on sale of property and equipment is part of what activity in the CFS?
2. Changes in long term liabilities is part of what activity in the CFS?
Average:
1. Net income is part of which Approach in preparing the CFS?
2. The company presented the following in order to aid the accountant in preparing the CFS:
a. Net income: P200,000
b. Depreciation expense : P 25,000
c. Gain on sale of property and equipment: P100,000
d. Decrease in trade and other receivables: P 70,000
e. Purchase of property and equipment: P200,000
f. Payment of loan from bank: P150,000
Compute for the cash generated/used in financing activities
Difficult:
1. Based on the given above, compute for the net change in cash for the year.
2. If ending balance of cash account is P700,000, prepare the CFS for the year.

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EXERCISES

I – Classification of Concept

Required: Classify each transaction whether they are operating, financing or investing. After which, indicate the reason
for such classification. Finally, indicate the effect of the transactions to cash flows.
Transaction Activity Reason Effect
1. Payment to supplier of goods Operating Affects profit or loss Decrease cash
2. Payment to supplier of services
3. Receipts from goods sold
4. Receipts from services rendered
5. Payment to employees
6. Purchase of equipment
7. Purchase of fixtures
8. Purchase of patents
9. Purchase of copyrights
10. Purchase of trademarks
11. Payment of interest
12. Proceeds from interests
13. Payment to owners
14. Receipts from owners
15. Payment of income taxes
16. Proceeds from long-term debts
17. Payment of long-term debts
18. Proceeds from sale of vehicle
19. Proceeds from sale of patents
20. Proceeds from sale of trademarks

II – HOLAND TRADING

Below are the cash transactions of Holland Trading for December 31, 2016.

Cash payment to supplier of goods and services 6,250

Cash receipts from rendering of services 12,500
Payment to owners 1,250
Proceeds from bank loans 62,500
Proceeds from cash investment of owners 28,750
Payment for income taxes 3,000
Payment for interest 3,125
Proceeds from dividends of investment 3,750
Payment for acquisition of equipment 250,000
Cash at the beginning of the year 2,500,000

Instruction:
Prepare the statement of cash flow using the direct method. After which answer the following questions.
1. How much is cash flow from operating activities?
2. How much is cash flow from investing activities?
3. How much is cash flow from financing activities?
4. How much is the net increase or decrease in cash for the year?
5. How much is cash as of December 31, 2016.

III – Fill in the blanks with suitable word/words

1. Cash flow statement deals with flow of cash which includes cash and ....................
2. Cash flow statement is a .................... statement.
3. Cash flow statement shows cash .................... and .................... during a particular period.
4. Cash fund includes cash, demand deposit with bank and ....................
5. There are two methods for calculating cash flow from operations i.e. (i) Direct method (ii) ........................
method.
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EVALUATION (30 MINS)

1. Identify which of the following transactions fall under operating, investing and financing activities:
a. Cash received from customers
b. Cash paid to suppliers
c. Cash paid to employees
d. Cash paid to purchase equipment (company does not sell equipment)
e. Cash received from sale of furniture (company’s main line of business is not related to furniture)
f. Depreciation expense
g. Sale of goods on credit
h. Purchase of goods on credit
i. Cash received from getting a loan from a bank
j. Cash paid to owners

2. Juana’s sari-sari store had the following transactions during the year:
a. Purchase of goods. Paid cash. 100,000
b. Sale of goods. Received cash. 150,000
c. Paid utilities 30,000 d. Paid rent 10,000
e. Sold equipment for cash 100,000
f. Owner withdraws investment 10,000
Compute for the net cash flow generated by/used in operating activities

3. Using the given above, compute for the net cash flow generated by/used in investing activities.
4. Using the given above, compute for the net cash flow generated by/used in financing activities.
5. Using the given above, prepare a Cash Flow Statement.

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