Financial Statements

End product of the accounting cycle

Bridge between the users and the accountants
Comprises the nature of the business, summary of significant
accounting policies and other explanatory notes

Statement of Cash Flows
Is a component of the financial statements that summarizes the
cash inflows and outflows from an entitys operating, investing and
financing activities.
Cash flow information is useful in assessing the ability of an entity to
generate cash and cash equivalents.

Purpose of the Statement
To provide relevant information about the cash receipts and cash
payments of an enterprise during a period.
The statement provides answers to the following questions:
1. Where did the cash come from?
2. What was the cash used for?
3. What was the change in the cash balance?

Classifications of Cash Flows
Operating activities are the cash flows derived from the principal
revenue producing activities of an entity; Cash inflows and outflows
from operations.
Investing activities are the cash flows derived from the acquisition
and disposal of long-term assets and long term investments; Cash
inflows and outflows from non-current assets.
Financing activities are the cash flows derived from capital
investments and capital borrowings of an entity; Cash inflows and
outflows that take place between a company and its investors.
(owner & creditors)

1. of an organization that is useful to a wide range of users in making
important economic decisions
2. Shows how the mgt handled the resources of the entity
Frequency of reporting in practice done monthly
Calendar year end Dec 31 (trimesters)
Fiscal year end any month end (semesters)

Examples of Cash Flows from Operating Activities
Cash receipts from sale of goods and rendering of services
Cash receipts from royalties, rentals, fees, commissions and other
income
Cash payments to suppliers for goods and services
Cash payments for selling, administrative and other expenses
Cash receipts and payments for trading securities

Cash flows from operating activities
Cash Receipts from:
1. customers/ clients for performance of service
2. Interest and other revenue.
Cash Payments to:
1. Employees for services (Salaries & Wages)
2. Suppliers of goods & services
3. Lenders for interest expense
4. Others for other expenses (Utilities, Rent, advertising, etc.)

Examples of Cash Flows from Investing Activities
Cash payments to acquire property, plant and equipment and
other long term assets
Cash receipts from sales of property, plant and equipment and
other long term assets

Cash Receipts from:
1. sale of property & equipment
2. sale of long term investment
Cash Payments to:
1. purchase property & equipment
2. purchase of long term investment

Examples of Cash Flows form Financing Activities
Cash receipts from initial and additional investments
Cash from loan proceeds and other borrowings
Cash payments for withdrawal
Cash disbursement for loan repayments

Cash Receipts from:
1. investment by owners
2. Borrowings (notes, mortgage, bonds)
Cash Payments to:
1. owners in the form of withdrawals
2. settle debts.

Methods of Determining Cash Flows
Direct method shows in detail the major classes of gross receipts
and gross cash payment. In essence, this is the cash basis income
statement; shows the items that affect cash flows. Cash received
and cash paid are presented, as oppose to converting accrual
basis income. Companies are required to report type of operating
cash receipts & payments as:
Cash collected from customer/clients
Interest received
Cash paid to employees & other suppliers.

Indirect method begins with the accrual basis net income and
applies a series of adjustments as follows; which begins with the net
income as reported in the income statement and adjust this
amount for any items that do not affect cash.
Deduct all increases in trade non cash current assets
Add all decreases in trade non cash current assets

Methods of Determining Cash Flows
Add all increases in trade current liabilities
deduct all decreases in trade current liabilities
Add depreciation, amortization and non cash expenses

Income Statement
Income statement is a formal statement showing the financial
performance of an entitys profit-directed activities for a given
period of time.
Sources of income
Sale of merchandise
Rendering of services
Other income
Disposal of resources
Components of expense
Cost of Sales/ Cost of goods sold
Distribution costs or selling expenses
Administrative expenses
Income tax expense
Other expenses

Formats of Income Statements