Statement of

Cash Flows
Ferdinand L. Timbang
CPA, REB, MSCF, DBA
 STATEMENT OF CASH FLOW
• It is an essential component within the set of
basic financial statements.

• It provides information about the cash

receipts (inflows) and cash disbursements
(outflows) of an entity during a period
Significance

A way to assess the ability of the

enterprise to remain solvent, that is
Pay its operating expenses;
Repay its debts; and
Provide higher returns to its
investors and creditors.
 Benefits to Users of the
Statement

Provide information on historical changes

in cash and cash equivalents

Provide information as to how cash and

cash equivalents were generated and
used in the business.
 Cash Equivalents

Short-term, highly liquid

investment with the
following criteria:

Readily convertible to cash

Are subject to an insignificant risk of
changes in value.
Has a short maturity of three months or
less from date of acquisition.
Examples of Cash Equivalents

Treasury bills

Commercial papers

Negotiable certificates of
deposits
 Presentation of a Statement of Cash Flows

The statement of cash

flows should report
cash flows during the
period classified into:
1.Operating activities;
2.Investing activities;
and
3.Financing activities
 Presentation of a Statement
of Cash Flows

Cash flows from

Operating activities P xxx
Investing activities xxx
Financing activities xxx
Net increase (decrease) in cash
and cash equivalents P xxx
Cash & cash equivalents, beg xxx
Cash & cash equivalents, end P xxx
 CASH FLOWS from OPERATING ACTIVITIES

The amount of cash flow arising from operations is a key indicator

of how the enterprise generated sufficient cash flows from its
business operations to:
• Cash receipts from the sale of goods and the rendering of
services.
• Cash receipts from royalties, fees, commissions and other
revenue.
• Cash payments to suppliers for goods and services.
• Cash payments to and on behalf of the employees.
• Cash receipts and cash payments of an insurance enterprise for
premiums and claims, annuities and other policy benefits.
• Cash payments or refunds of income taxes unless they can be
specifically identified with financing and investing activities.
• Cash receipts and payments from contracts held for dealing or
trading purposes
CASH FLOWS from OPERATING ACTIVITIES

Cash Flows from operating activities may

be presented using either:
a.Direct method. It shows each major class
of gross cash receipts and gross
payments; or
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 cash receipts & payments
Provides information useful in estimating future cash flows

Cash flows from operating activities:

Cash receipts from customers P xx
Cash paid to suppliers & employees (xx)
Cash paid for other expenses (xx)
Cash generated from operations P xx
Interest paid (xx)
Income taxes paid (xx)
Net cash from operations P (xx)
 ADJUSTMENTS

ACCRUAL CASH
BASIS BASIS

Net A/R, beg Cash

Sales A/R, end receipts
Customer advances, beg
Customer advances, end
from
customers
 ADJUSTMENTS

ACCRUAL CASH
BASIS BASIS

Cost of Inventory, end Cash paid

Sales A/P, beg to
Inventory, beg suppliers
A/P, end
 ADJUSTMENTS

ACCRUAL CASH
BASIS BASIS

Operating Prepayment, end Cash paid

expense Accrued exp, beg for
Prepayment, beg operating
Accrued exp, end expense
 ADJUSTMENTS

ACCRUAL CASH
BASIS BASIS

Other Unearned Inc, end Cash

income Accrued Inc, beg received
Unearned Inc, beg from
Accrued Inc, end other
income
 ADJUSTMENTS

ACCRUAL
BASIS

Interest Interest payable, beg

expense Amort. of premium on bonds payable
Interest payable, end
Amort. Of discount on bonds payable

CASH Cash paid

BASIS for
interest
 ADJUSTMENTS

ACCRUAL CASH
BASIS BASIS

Income Income tax payable, beg Cash paid

tax Income tax payable, end for
Deferred tax asset, beg
expense Deferred tax asset, end
income
Deferred tax liability, beg tax
Deferred tax liability, end
Direct Method
 
Direct Method
(a) Cash receipts from customers
Sales + Decrease in Accounts Receivable
P2,000,000 + P15,000 = P2,015,000
 
(b)Cash payments to suppliers
First calculate the amount of purchases:
Beginning inventory P 205,000
Add: Purchases 1,735,000
Total goods available for sale P 1,940,000
Less: Ending Inventory 240,000
  Cost of goods sold P1,700,000
Purchases = Cost of goods sold + increase in inventory
= P1,700,000 + P35,000
  = P1,735,000
Amount of cash payments to suppliers:
Purchases + Decrease in accounts payable
P1,735,000 + P25,000 = P1,760,000
 INDIRECT METHOD

The net cash flow from operating activities

is determined by adjusting the profit or loss
for the effects of the following:
Changes in current assets (other than cash &
cash equivalents) and current liabilities that
affected cash flows differently than profit.
Non-cash items e.g. depreciation,
unrealized foreign currency gains and
losses, undistributed earnings of associates.
All other items for which the cash effects
are investing or financing cash flows.
 Proforma Report : INDIRECT METHOD

Cash flows from operating activities:

Earnings before income tax

P xx
Adjustment for
Depreciation P xx
Income from associates (xx)
Increase in trade & other receivable (xx)
Decrease in inventories xx
Decrease in trade payables (xx) (xx)
Cash generated from operations xx
Interest paid (xx)
Income taxes paid (xx)
Net cash from operations P xx
 Proforma Report : INDIRECT METHOD

Given the following selected information on Goya, Inc., calculate Cash

Flow from Operating Activities for 2020.
Last Year This Year
EBIT P 600,000 P 750,000
Depreciation Exp. 100,000 150,000
Dividends 400,000 550,000
Accounts Receivable 1,500,000 2,000,000
Inventory 3,500,000 2,000,000
Accts. Payable/Accr. 350,000 500,000
Long-Term Debt 2,300,000 3,000,000
Common Stock 2,200,000 2,500,000
Retained Earnings 6,150,000 6,350,000

Tax paid is at 40% of EBIT for 2020.

 Proforma Report : INDIRECT METHOD

Cash Flow from Operating Activities

Earnings before interest and taxes P 750,000

Adjustment for:
Depreciation 150,000
Accounts receivable (500,000)
Inventory 1,500,000
Accounts payable/Accruals 150,000
Cash generated from operations P2,050,000
Less: Income tax paid 300,000
Net cash from operating activities P1,750,000
 CASH FLOWS from INVESTING ACTIVITIES
It represents the extent to which expenditures have been made
for resources intended to generate future income and cashflows.
• Cash payments to acquire PPE, intangibles and other long-
term assets including those relating to capitalized
development costs and self-constructed PPE.
• Cash receipts from sales of PPE, intangibles and other non-
current assets.
• Cash payments to acquire investments in equity or debt
instruments of other enterprises.
• Cash advances and loans made to other parties (other than
made by financial institutions)
• Cash receipts from the repayment of advances and loans to
other parties.
• Cash payments for future contracts, forward contracts, option
contracts and swap contracts, except if these contracts are
held for dealing or trading purposes.
 CASH FLOWS from INVESTING ACTIVITIES

Use the following information to perform the calculations below. Clearly label the
amount of each answer as positive or negative and show all your calculations.
 
Net income P369,000 Beginning accounts payable P119,000
Depreciation expense 97,000 Ending accounts payable 146,000
Beg. accounts receivable 420,000 Purchase of long-term assets 612,000
Ending accounts receivable 439,000 Issuance of long-term debt 200,000
Beginning inventory 516,000 Issuance of stock for cash 160,000
Ending inventory 560,000 Issuance of stock for
long-term assets 110,000
Beginning prepaid expenses 42,000 Purchase of treasury stock 64,000
Ending prepaid expenses 48,000 Sale of long-term investment
at cost 39,000
 
 Required:
Using indirect method. Calculate the amount of cash flows from investing
activities.  
 CASH FLOWS from INVESTING ACTIVITIES

Answer

Cash flows used in investing activities

Purchase of long-term assets P(612,000)
Sale of long-term investments 39,000
Cash flows used in investing activities P(573,000)
CASH FLOWS from FINANCING ACTIVITIES
Cash flow information arising from this activity is useful to
users in predicting claims on future cash flows by providers of
capital to the enterprise. These are transactions with non-trade
creditors and shareholders
• Cash proceeds from issuing shares or equity instruments.

• Cash payments to owners to acquire or redeem the

enterprise’s shares.

• Cash proceeds from issuing debentures, loans, notes, bonds,

mortgages and other short or long-term borrowings.

• Cash repayments of amounts borrowed.

• Cash payments by a lessee for the reduction of the

outstanding liability relating to a finance lease.
 Cash Flows from Financing Activities
Use the following information to perform the calculations below. Clearly label the
amount of each answer as positive or negative and show all your calculations.
 
Net income P369,000 Beginning accounts payable P119,000
Depreciation expense 97,000 Ending accounts payable 146,000
Beg. accounts receivable 420,000 Purchase of long-term assets 612,000
Ending accounts receivable 439,000 Issuance of long-term debt 200,000
Beginning inventory 516,000 Issuance of stock for cash 160,000
Ending inventory 560,000 Issuance of stock for
long-term assets 110,000
Beginning prepaid expenses 42,000 Purchase of treasury stock 64,000
Ending prepaid expenses 48,000 Sale of long-term investment
at cost 39,000
 
 
Required:
Using indirect method. Calculate the amount of cash flows from financing
activities.  
 Cash Flows from Financing Activities

Answer:

Cash flows from financing activities

Issue of long-term debt P200,000
Issue of stock for cash 160,000
Purchase of treasury stock (64,000)
Cash flows from financing activities P296,000
 Interest and Dividends

Interest and dividends received and paid shall be disclosed

separately and classified consistently as either operating,
investing or financing activities (par. 31, IAS 7)

Interest paid and interest and dividend received enter the

determination of profit or loss and therefore, generally
classified as operating activities. However, Interest paid is
considered a burden of financing hence alternatively shown
under financing activities.

Interest and dividends received are considered as fruits of

investment, therefore classified as investing activities.
 Taxes on Income

This transaction should be separately

disclosed and generally classified under
cash flows from operating activities.
However, if it is practicable to identify
the tax cash flow with either of the
investing or financing activities, then it can
be classified as such.
 Foreign Currency Cash Flows

Cash flow transactions – foreign currency

and foreign subsidiary should be translated
in an enterprise’s reporting currency,
applying the exchange rate at the date of
the cash flow.
Unrealized gains or losses resulting from this
currency exchange rates are not cash flows.
 Non-Cash Transactions

Transactions that do not result to cash

receipts or cash payments are not reported
in the statement of cash flows.
Acquisition of assets either by
assuming directly related liabilities or
by means of a finance lease.

Acquisition of an enterprise by means

of an equity issue.

Conversion of debt to equity.