TOPIC: CASH FLOW STATEMENT (CFS)

CASH FLOW STATEMENT

– Provides an analysis of inflows and/or outflows of cash from/to operating, investing and financing
activities. This statement shows cash transactions only compared to the SCI which follows the accrual
principle.
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.

Example of CFS:

a. Receipts from customers - derived from the following formula:

Ending Accounts Receivable = Beginning Accounts Receivable + Net Sales – Collections
Therefore: Collections (receipts from customers) = Beginning Accounts Receivable + Net Sales or Net
Revenue –Ending Accounts Receivable
 b. Payments to Suppliers and Employees – derived from the following formula:
Ending Accounts Payable and Ending Accrued Salaries Expense = Beginning Accounts Payable + Beginning
Accrued Salaries Expense + Net Purchases + Salaries Expense - Payments
Therefore: Payments = Beginning Accounts Payable + Beginning Accrued Salaries Expense + Net Purchases +
Salaries Expense – Payments

Approaches of the CFS:

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.
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.
Different parts of the Cash Flow Statement
Operating Activities – 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.
Investing Activities – Cash transactions related to purchase or sale of non-current asset.
Financing Activities – Cash transactions related to changes in equity and borrowings.
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.
a. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date of preparation (emphasis on the wording – “for the”)

b. Sample of the Direct Method

i. First part is operating activities
ii. Second part is investing activities
iii. Third part is financing activities
c. Sample of the Indirect Method
c.i. First part is operating activities
c.i.i.Non-cash expenses are added back while non-cash revenues are deducted. Gain/loss on sale of
non-current assets are deducted/added back because the cash transaction is recorded under
investing activities.
c.i.ii.Changes in current assets and current liabilities are either added or deducted depending on
whether they increased or decreased during the year.
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
Decrease in current assets – added to net income
Accounts Receivable – increases cash but does not change the net income
Prepaid Expense – increases expenses which decreases net income but is not a cash transaction
Increase in current liabilities – added to net income
Accounts Payable – increases expenses which decreases net income but is not a cash
transaction
Unearned Income – increases cash but does not change the net income
Decrease in current liabilities – deducted to net income
Accounts Payable – decreases cash but does not change the net income
Unearned Income – increases revenue which increases net income but is not a cash transaction
c.ii. Second part is investing activities
c.iii. Third part is financing activities
EXERCISES 7.
Answer the following problem:
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?
3. Net income is part of which Approach in preparing the CFS?
4. 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.
Challenge:
5. Based on the given above, compute for the net change in cash for the year.
6. If ending balance of cash account is P700,000, prepare the CFS for the year.

EXERCISES 7.
Answer the following problem:
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?
3. Net income is part of which Approach in preparing the CFS?
4. 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.
Challenge:
5. Based on the given above, compute for the net change in cash for the year.
6. If ending balance of cash account is P700,000, prepare the CFS for the year.

EXERCISES 7.
Answer the following problem:
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?
3. Net income is part of which Approach in preparing the CFS?
4. 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.
Challenge:
5. Based on the given above, compute for the net change in cash for the year.
6. If ending balance of cash account is P700,000, prepare the CFS for the year.
EXERCISES 8.
Answer the following problems:
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. (Topic: Statement Preparation - Direct)

EXERCISES 8.
Answer the following problems:
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. (Topic: Statement Preparation - Direct)