Chapter 4 – Statement of Cash Flows

Learning Objectives:

By the end of the chapter, the student should be able to:

1. Appreciate the significance of the information presented in the Statement of Cash Flows;
2. Identify the sections of the Statement of Cash Flows;
3. Classify cash flows into operating, investing and financing activities;
4. Understand the transactions recorded in the T-account of cash; and
5. Prepare the operating section of the Statement of Cash Flows from completed Statement of Financial
Position and Statement of Comprehensive Income.

What is a Statement of Cash Flow?

So far, we have looked at the Statement of Financial Position (SFP), Statement of Comprehensive
Income (SCI), and Statement of Changes in Equity (SoCE). In this changes we will focus on the financial
statement that explains the changes in cash – the Statement of Cash Flows (SCF).

Cash is an important asset. It is an account affected by many transactions. The debit and credit side of
the cash account generally represent cash receipts and cash disbursements, respectively. Cash receipts may
come from (1) cash sales to customers, (2) collection of customer accounts, (3) loans and other borrowings, and
(4) owner’s contributions. On the other hand, cash disbursements may be for payments of (1) business
expenses, (2) purchases of inventories and other assets (3) liabilities to creditors, and (4) dividends to owners.

SCF is the financial statement that explains the net change in cash for the year. Like the SCI and SoCE,
the SCF is dated “for the year ended”. The statement shows the transactions for the year that reconciles the
beginning balance of cash to its year-end balance. The report is presented based on the three major activities
of the business – operating, investing and financing (figure 1).

Cash Flows from Operating Activities

Cash transactions xxxx
Net cash provided by (used in) operating activities xxxx

Cash Flows from Investing Activities

Cash transactions xxxx
Net cash provided by (used in) investing activities xxxx

Cash Flows from Financing Activities

Cash transactions xxxx
Net cash provided by (used in) Financing activities xxxx
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents xxxx
Cash and Cash equivalents at the beginning of the year xxxx
--------------------------------------------------------------------------------------------------------------------------
Cash and Cash equivalents at the end of the year xxxxx
======================================================================
Figure: Statement of Cash Flows

Sections of the Statement of Cash Flows

The SCF reports cash flow transactions during the year classified by operating, investing, and financing
activities. Operating Activities are related to the main revenue-producing activities of the business. Cash
transaction related to acquisition and disposal of long-term assets such as property, plant, and equipment, and
intangible assets are classified as Investing activities. Finally, cash transactions with equity owner’s and
creditors are reported as Financing activities.

Operating Activities

Cash flows from operating activities are primarily derived from the main revenue-producing activities of
the business. This means that the transactions reported I this section represents the cash components of the
events that enter into the determination of net income in the SCI. recall our discussion in Chapter 2. Revenue
is reported on the SCI on the year when goods and services are delivered. On the other hand, collections from
customers will be reported on the SCF on the year when cash is received. The same is true for expenditures.
Expenses are reported on the SCI based on the three accrual approaches – matching principle, rational
allocation and immediate recognition. However, the cash disbursement for these expenses are reported on the
SCF on the year payments are made. The SCI shows a net income computed based on accrual. On the other
hand, SCF shows net cash flows provided by or used in operating activities.
1
 Cash flows from operations reveals the present ability of the company to generate cash from its
operations. This is an important figure to the readers of financial statement. Positive cash flows from operations
suggests that there is excess cash that can be used to purchase long-term assets, pay debts or distribute to
owners.

The following are examples of cash flow transactions reported under operating activities:

a. Cash received from customers (cash receipts from sales of goods and rendering of services).
b. Cash received from fees, commissions, and other income
c. Cash payments to suppliers
d. Cash payments to employees
e. Cash payments for other operating expenses
f. Interest payments

Investing Activities

Cash flows from investing activities is the second section of the SCF. Reported within this classification
are cash used for acquisition of property, plant, and equipment, intangible assets and other long-term assets as
well as cash proceeds from the disposals of such long-term assets. Cash flow from operations reports the current
ability of the business to generate cash from its operations. On the other hand, cash flows from investing activities
hints on the company’s ability to generate cash in the future. A negative cash flows from investing activities
implies that the company used cash to acquire long-term assets intended to generate cash and revenue in the
future. On the other hand, a positive cash flow from investing activities may indicate that the company is divesting
or downsizing.

The following are examples of cash flow transactions reported under investing activities:

a. Cash payments to acquire property, plant, and equipment, intangibles and other long-term
assets.
b. Cash receipts from sale of property, plant, ad equipment, intangibles and other long-term
assets.
c. Cash loans made to other parties (long-term note receivable).
d. Cash collection on long-term note receivable.

Financing Activities

The last section of SCF is cash flow from financing activities. This section reports cash received and cash
paid to equity owners and long-term creditors. Below are examples of cash flow transactions reported under
financing activities:

a. Cash received from issuing common shares (or capital contributions from owners).
b. Cash received from issuing notes or getting a long-term loan from a bank.
c. Cash dividends distributed to shareholders.
d. Cash withdrawals of owners.
e. Cash payment for principal of long-term loan.

Discussion Questions: before moving on to the next part, answer the following questions:

1. What is a Statement of Cash Flow (SCF)?

2. Enumerate the three section of Statement of Cash Flow.
3. Identify the transactions reported under cash flow from operating activities.
4. What are the implications of positive cash flow from operations?
5. Identify the transactions reported under cash flow from investing activities.
6. What are implications of negative cash flow from investing activities?
7. Identify the transactions reported under cash flow from financing activities.

T-account of Cash

Recall your study of T-account and normal balances in Chapter 1. Assets have normal debit balances.
Cash is an asset account. Therefore, transactions that increase cash (i.e. cash receipts or collections) are
recorded on the debit side. Credit, on the opposite side, represents deductions to cash (i.e., payments or
disbursements). Observe the T-account in table 1. Cash receipts are “debited” to cash and cash payments are
“credited” to cash.

The cash T-account in table 1 is a chronological record of all cash transactions. We can generate the
SCF by summarizing like transactions from the cash T-account and classifying these as to operating, investing,
or financing. This Statement is essentially a re-writing of the T-account of cash.

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 Table 1: T-account of Cash of ABC Company

Cash
Debit Credit
January 1, 20X1 P 120,000
1/15 Cash from cash sales 1,000 2/02 Payment to suppliers 22,000
2/18 Collection of AR* 20,000 3/16 Payment of utility bills 7,890
3/28 Cash from cash sales 1,500 4/15 Payment to employees 35,000
5/20 Collection of AR* 34,000 6/01 Acquisition of computers 60,000
6/17 Cash from cash sales 5,600 7/01 Rent payments 25,000
7/17 Additional contribution from owner 75,000 8/03 Payment to suppliers 16, 700
9/01 Proceeds from bank borrowing 150,000 12/31 Loan payment 18,760
10/15 Collection of AR* 13,000 12/31 Interest payment 7,500
11/21 Collection of AR* 44,600 12/31 Owner’s drawings 4,000
Total debits 464, 700 Total credits 196, 850
December 31, 20X1 P 267,850

Discussion Questions: before moving on to the next part, answer the following questions:

8. What are the transactions recorded on the debit side of the cash T-account?
9. What are the transactions recorded on the credit side of the cash T-account?

Refer to table 2. The transactions in the T-account in table 1 were re-arranged to bring together and sum
up similar transactions. Cash generated from sales, from both cash and credit sales, amounted to P 119,700.
Payments to suppliers amounted to P 38,700. After this, the transactions were classified into operating, investing
and financing activities. Our listing of the cash transactions is no longer in chronological order but rather
organized as to business activities. This is almost the SCF. Observe the SCF in good for table 3.

Table 2: Summarizing Like Transactions and Classifying

Debit Credit
1/15 Cash from cash sales 1,000
2/18 Collection of AR* 20,000
3/28 Cash from cash sales 1,500
5/20 Collection of AR* 34,000
6/17 Cash from cash sales 5,600
10/15 Collection of AR* 13,000
11/21 Collection of AR* 44,600
119,700

2/02 Payment to suppliers 22,000

8/03 Payment to suppliers 16,700
38,7000

4/15 Payment to employees 35,000

7/01 Rent payments 25,00

3/16 Payment of utility bills 7,890

12/31 Interest payment 7,500

6/01 Acquisition of computers 60,000

7/17 Additional contribution from owner 75,000

12/31 Owner’s drawings 4,000
9/01 Proceeds from bank borrowing 150,000
12/31 Loan payment 18,760

3
 ABC Company
Statement of Cash Flows
For the year ended December 31, 20X1

Cash flow from operating activities

Receipts from customers P 119,700
Payments to suppliers (38,700)
Payments to employees (35,000)
Rent payments (25,000)
Utility payments (7,890)
Interest payments (7,500)
Net cash flow provided by operating activities P 5,610

Cash flow from investing activities

Acquisition of computers (60,000)
Net cash flow used in investing activities (P 60,000)

Cash flow from financing activities

Additional contribution from owner 75,000
Owner’s drawings (4,000)
Proceeds from bank borrowing 150,000
Loan payment (18,760)
Net cash flow provided by financing activities P 202,240
----------------------
Net change in cash P 147,850
Cash and cash equivalents, January 1,20x1 120,000
Cash and cash equivalents, December 31,20x1 P 267,850

Preparing the Statement of Cash Flows:

In the previous section, we have shown that the SCF contains the same information as the T-account of
cash, only it is re-arranged and classified. The method we used to prepare the SCF in the previous section is
very simple but not used in real life accounting. This is because there are thousands of cash transactions per
year. It is not practical and efficient to go through the thousands of transactions for the purpose of summarizing
and classifying to prepare the SCF.

So how is the SCF prepared? Accountants need two SFP (current year and prior year) and the current
year SCI. We will analyze the SFP accounts, excluding cash, to determine cash transactions. We will limit our
scope to operating activities. You will learn the preparation of the remaining sections of the cash flows in
collegiate accounting. Refer to example 1 – Collection from Customer and Example 2 – Payment to Suppliers.

Example 1: collection from Customer

Excerpt from the 2 Statements of Financial Position:

December 31, 20x1 December 31, 20x0

Accounts Receivable (A/R) P 18,400 P 10,000

December 31, 20x1 Statement of Comprehensive Income revealed the following:

Credit sales P 120,000

Cash sales 8,100

Determine the (1) collection from credit sales and (2) total collection from customers.

Answer
Let us begin with the analysis of the A/R account. Recall that credit sales increases A/R because credit sales
represent right to collect from the customers. On the other hand, the right to collect (A/R) is extinguished when
customers pay their accounts. Therefore, collections of receivables decrease A/R. following this, the accounts
receivable ending balance will be computed as follows:

A/R, Beg. Credit Customer A/R, End

Balance Sales payments Balance

We get the beginning balance of A/R from the December 31, 20x0 SFP. The December 31, 20x1 SFP give
us the ending balance of A/R. Moreover, we look at the current year SCI to determine credit sales.

4
 A/R, Beg. Credit Sales Customer A/R, End
Balance P 120,000 payments Balance
P 10,000 ? 18,400

Using algebra, we determine that customer payments amount to P 111,600. However, this amount represents
only the collections on credit sales. The company also generated cash sales. Therefore, total collections is
computed as follows:
Compare this to the total
Collection from credit sales P 111,600 collection from sales in the
Add: Receipts from cash sales 8,100 cash T-account in the prior
example.
P 119,700
Receipts from Customers

The analysis above implies that when collection from customers is less than credit sales, then the
uncollected portion of credit sales increases A/R. on the other hand, when collection from customers is greater
than credit sales, then the excess must mean some of the beginning A/R where collected leading to a decrease
in A/R at the end of the year.

Example 2: Payments to Suppliers

The following are excerpts from the 2 SFPs:

December 31, 20x1 December 31, 20x0

Inventory P 4,800 P 5,000
Accounting payable 1,090 2,300

December 31, 20x1 Income Statement revealed the following:

Cost of Goods Sold P 37,690

Determine the amount paid to suppliers?

Answer
Let us begin with the analysis of the Inventory account. Recall that purchases increase the Inventory account.
On the other hand, Inventory is decreased when goods are sold. We refer to this as Cost of Goods Sold (Chapter
2). Following this, inventory ending balance is computed as follows:

Inventory, Beg. Purchases Costs of Inventory

Balance Goods Sold End Balance

We get the beginning balance of Inventory from the December 31, 20x0 SFP. The December 31, 20x1 SFP give
us an ending balance of Inventory. Moreover, we look at the current year SCI to determine Cost of Goods Sold.

Inventory, Beg. Purchases Costs of Inventory

Balance Goods Sold End Balance
P 5,000 ? P 37,690 P 4,800

Using algebra, we determine that Purchase amount to P 37,490. However, this is not necessarily the payment
to supplier. So far, we know how much we have purchased from the suppliers during the year. To determine
the amount we have paid to the suppliers, we need to look at Accounts Payable.

Accounts payable (A/P) is the liability account that represents the claim of the suppliers against the company.
Purchases made during the year increase A/P. on the hand, the supplier’s claim is extinguished when payment
is made. Therefore, payments to suppliers decrease A/P. following this, A/P ending balance is computed as
follows:

A/P, Beg. Purchases Payments A/P End

Balance Balance

We get the beginning balance of A/P from the December 31, 20x0 SFP. The December 31, 20x1 SFP gives us
the ending balance of A/P. we will use the amount of inventory purchases computed in the previous section.

5
 A/P, Beg. Purchases Payments A/P End
Balance Balance
P 2,300 P 37,490 ? P 1,090
Using algebra, we determine that payments to suppliers amount to P 38,700.
This was the total amount paid
P 38,700 to suppliers recorded on the
Payments to Suppliers cash T-account in the prior
example.

From the analysis, it is deducted that A/P increases when there are unpaid portions of current year
purchases such that payment to suppliers is less than purchases. On the other hand, payment to supplier is
greater than purchases when A/P decreases which implies that some of the beginning A/P must have been paid.

Examples 1 and 2 are examples of the direct method of preparing the operating section. The same
method was used in the operating section of the SCF in Table 3. An alternative presentation of the operating
section of the SCF is referred to as “indirect method”. Recall our previous comparison of net income and net
cash flows from operations. The indirect method shows the reconciliation from accrual net income to net cash
flows from operations. Adjustments to net income include the following:

a. Non-cash expenses such as depreciation and amortization are added back to net income. Recall that
depreciation decreases the net book value of property, plant and equipment and increases expenses.
This is expense that does not have a cash counterpart. We refer to these as “non-cash” expenses.
b. Changes in current assets and current liabilities.

Refer to Example 3 for the presentation of the operating section using indirect method.

Example 3: CFO – Indirect Method

December 31, 20x1 Statement of Comprehensive Income are given below:

Sales P 128,100
Cost of Goods Sold 37,690
-----------------------------------------------------------------------------------------
Gross profit 90,410
Less: Operating expenses
Salaries expense 35,000
Rent expense 25,000
Utilities expense 7,890
Depreciation 2,500
Interest expense 7,500
-----------------------------------------------------------------------------------------
Net Income P 12,520
===================================================

December 31, 20x1 December 31, 20x0

Accounts Receivable (A/R) P 18,400 P 10,000
Inventory 4,800 5,000
Account Payable 1,090 2,300

Requirement: Determine cash flow from operation.

Answer

Net income P 12,530

Add: Depreciation
Changes in current assets and current liabilities
Increase in account receivable
Decrease in inventory
---------------------------------------------------------------------------------
Net cash flows provided by operating activities P 5,610
==============================================

Let us analyse the adjustments for the changes in current assets and current liabilities.

Recall our Accounts Receivable analysis from Example 1.

6
 A/R, Beg. Credit Customer A/R, End
Balance Sales payments Balance

Using algebra, we move the variables around to determine customer payments.

Credit A/R, End A/R, Beg. Customer
Sales Balance Balance payments

Our starting point is the Net Income. Our goal is to arrive at customer payments (as part of cash flows from
operations). Recall that net income is computed as Sales – Expenses. Credit sales is already included in
net income. The second component of the computation is ending balance of A/R less beginning balance of
A/R. We refer to this as change in A/R. from the equation, we see that an increase in A/R is deducted from
net income. On the other hand, a decrease in A/R is a positive adjustment to net income.

Moving on, recall our Inventory and A/P analysis from example 2.

Inventory, Beg. Purchases Costs of Inventory

Balance Goods Sold End Balance

A/P, Beg. Purchases Payments A/P End

Balance Balance

Using algebra, we move the variable around to determine inventory purchased during the year.
Cost of Inventory, Inventory, Purchases
Goods Sold End Balance Beg. Balance

To determine the payments, plug in purchases in the A/P analysis:

A/P Beg. Cost of Inventory, Inventory,

Balance Goods End Beg. Payments Purchases
Sold Balance Balance

Using algebra, move around the variables to computer for payments.

Cost of Inventory, Inventory, A/P Beg.

End
A/P End
Goods Beg. Balance Payments
Sold Balance Balance
Balance

Finally, recall that net cash flows from operations is collections less payments. Since we are computing for
the payments, we need to get the negative of the above equation.

Cost of Inventory, Inventory, A/P End A/P Beg.

Goods End Beg. Balance Balance Payments
Sold Balance
Balance

Our starting point is net income. Our goals is to arrive at payments to suppliers (as part of CFO). Recall that
cost of goods sold is deducted from sales to determine net income. Hence, in our equation, cost of goods
sold is negative number.

The second component of the computation is ending balance less beginning balance of Invenory. We refere
to this as change in Inventory. From the equation, we see that increase in Inventory is deducted from net
income. A decrease in Inventory is positive adjustment to net income.

The third component of the computation is the ending balance less beginning balance of A/P. We refer to this
as change in A/P. We see that an increase in A/P is added to net income. On the other hand, a decrease in
A/P is deducted from net income.

Based on the above analysis, we summarize the adjustments for current assets and current liabilities as
follows:

7
 Change in current assets / current liabilities Adjustment to net income
Increase in current assets Deduct from net income
Decrease in current assets Add to net income
Increase in current liabilities Add to net income
Decrease in current liabilities Deduct from net income

Comprehensive Illustrative Problem: Mira’s Store (continuation)

Mira’s Store
Statement of Financial Position
As of December 31, 20A4

Assets
Current assets
Cash P 44,535.00
Accounts receivable 575.00
Inventories 15,345.00
Prepaid rent 5,000.00

Total current assets 65,455.00

Non-current assets
Property, plant and equipment 30,000.00
Accumulated depreciation (500.00)
Net book value 29,500.00
Total assets P 94,955.00

Liabilities and Owner’s Equity

Current liabilities P8,110.00
Accounts payable 1,000.00
Salaries payable 4,000.00
Utilities payable 1,395.00
Unearned income 14,395.00

Total current liabilities 14,505.00

Non-current liabilities
Long-term note payable 23,000.00

Total liabilities 37,505.00

Owner’s equity
Mira, capital 57,450.00

Total liabilities and equity P94,955.00

8
 Mira’s Store
Statement of Comprehensive Income
For the period-ended December 31, 20A4

Net sales P113,348.00

Cost of good sold (45,398.00)

Gross profit 65,950.00

Less: expenses:
Salaries expense 14,000.00
Rent expense 10,000.00
Utilities expense 4,000.00
Depreciation 500.00

P 94,955.00

Net income P37,450.00

Below is the cash ledger account for Mira’s store:

CASH

Particulars Dr Cr

Owner’s contribution P30,000.00

Rent payment 15,000.00
Purchase of fixtures 30,000.00
Collection from credit sales 110,773.00
Payment of salaries 13,000.00
Owner’s contribution 5,000.00
Payment to suppliers 52,633.00
Owner’s withdrawals 15,000.00
Proceeds from bank loan 23,00000
Customer deposit 1,395.00

170,168.00 125,633.00

P44,535.00

Note: customer deposit was received at the end of the year. Delivery will be made on January
20A5.
Required:
1. Prepare the Statement of Cash Flows by re-arranging and classifying the transaction
in the cash T-account.
2. Using the Statement of Financial Position and Statement of Comprehensive income,
show the computation of the components of the direct method operating section of the
statement of the Cash Flows. Hint: This is the first year of operations for Mira’s Store.
This means that the beginning balances of all SFP accounts is zero.
3. Prepare the operating section of the Statement of Cash Flows using the indirect
method.
 9

Solution:
1. Prepare SCF by re-arranging and classifying the transactions in the cash T-account.
Mira’s Store
Statement of Cash Flows
For the year ended December 31, 20A4

Operating activities
Collection from credit sales P110,773.00
Customer deposit 1,395.00
Payment to suppliers (52,633.00)
Rent payment (15,000.00)
Payment of salaries (13,000.00)

Net Cash Flows From Operating Activities P(31,535.00)

Investing activities
Purchase of fixtures 30,000.00

Net Cash Flows From Investing Activities 29,500.00

Financing activities
Owner’s contribution P8,110.00
Proceeds from bank loan 1,000.00
Owner’s withdrawals 4,000.00

Net Cash Flows From Financing Activities

Net Change In Cash 44,535.00

Cash, Beggining

Cash, End P94,955.00

2. Using the SFP and the SCI, show the computation of the components of the direct
method operating section of the Statement of Cash Flows.

Collection from credit sales

AR, beg -0-
Net sales 111,348.00
Less: Collection 7

AR, end 575.00

AR, beg + sales – collection = AR, end

AR, beg + sales – AR, end = collection 30,000.00
Collection P110,773.00

10

Customer deposit -0-

Unearned income, beg ?
Deposit received from customer -0-
Less: Deliveries made pertaining to customer deposit -0-
----------------------------------------------------------------------------------------------------------------------------------
Unearned income, end P 1,395.00
==========================================================================

Unearned income, beg + customer deposit – deliveries = Unearned income, end

Customer deposit = Unearned income, end – Unearned income, beg + deliveries
----------------------------------------------------------------------------------------------------------------------------------
Customer deposit P 1,395.00
==========================================================================

Payment to suppliers
Inventory, beg. -0-
Net purchases ?
Less: Cost of sales 45,398.00
Inventory, end 15,345.00
==========================================================================

Inventory, beg. + net purchases – cost of sales = Inventory, end

Net purchases = Inventory, end – Inventory, beg. + cost of sales
 ----------------------------------------------------------------------------------------------------------------------------------
Net purchases P 60,743.00
==========================================================================

A/P beg. -0-

Net purchases 60,743.00
Less: Payments ?
A/P, end 8,110.00
==========================================================================

A/P, beg.+ net purchases – payments = AP, end

A/P beg + net purchases – AP, end = Payments
----------------------------------------------------------------------------------------------------------------------------------
Payments (P 52,633.00)
==========================================================================

Rent payment
Prepaid rent, beg -0-
Rent payments ?
Less: rent expense 10,000.00
Prepaid rent, end 5,000.00
==========================================================================

Prepaid rent, beg + rent payments – rent expense = Prepaid rent, end
Rent payment = Prepaid rent, end – Prepaid rent, beg + - rent expense
----------------------------------------------------------------------------------------------------------------------------------
Rent payments P 15,000.00
==========================================================================

Payment of salaries
Salaries payable, beg -0-
Salaries expense 14,000.00
Less: Payments ?
----------------------------------------------------------------------------------------------------------------------------------
Salaries payable, end 1,000.00
==========================================================================

Salaries payable, beg + salaries expense – payments = Salaries payable, end

Salaries payable, beg + salaries expense – Salaries payable, end = payments
----------------------------------------------------------------------------------------------------------------------------------
Payments P 13,000.00
==========================================================================

11

Payment of utilities
Utilities payable, beg -0-
Utilities expense 4,000.00
Less: Payments ?
----------------------------------------------------------------------------------------------------------------------------------
Utilities payable, end 4,000.00
==========================================================================

Utilities payable, beg + utilities expense – payments = Utilities payable, end

Utilities payable, beg + utilities expense – Utilities payable, end = payments
----------------------------------------------------------------------------------------------------------------------------------
Payments -0-
==========================================================================

To summarize, the cash flows from operations computed using the direct method are as follows:

Collection from customers P 110,773

Customer deposits 1,395
Payments to suppliers (52,633)
Rent payments (15,000)
Payment for salaries (13,000)
Payment for utilities -0-
Net Cash Flows from Operating Activities P 31,535
 3. Prepare the operating section of the SCF using the indirect method.

Net income P 37,450.00

Add: non-cash expenses
Depreciation 500.00
------------------------------------------------------------------------------------------------------------------------------
37,950.00
------------------------------------------------------------------------------------------------------------------------------
Changes in working capital
Increase in Accounts Receivable (575.00)
Increase in Inventory (15,345.00)
Increase in Prepaid Rent (5,000.00)
Increase in Account Payable 8,110.00
Increase in Salaries Payable 1,000.00
Increase in Utilities Payable 4,000,00
Increase in Unearned Income 1,395.00
------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from Operating Activities P 31,535.00
========================================================================

Note: Net Cash Flows from Operating Activities computed using the direct method is always equal to that
derived from the indirect method..

End of Chapter Summary

1. Cash is an important asset. It is an account affected by many transactions. The debit and credit sides
of the cash account generally represent cash receipts and cash disbursements, respectively.

2. Statement of Cash Flows is the financial statement that explains the net changes in cash for the year.

3. The Statement of Cash Flows summarized the cash transactions that occurred during the year.

4. The Statement shows cash transactions organized based on the three major activities of the business –
operating, investing and financing.

5. Cash transaction primarily derived from and used for the main revenue-producing activities of the
business are reported under operating activities.
12
a. Cash flows from operating activities reveal the present ability of the company to generate cash from
its operations.
b. Cash flows from operating activities maybe presented using the direct method or the indirect
method.
c. Direct method of presenting the cash flows from operating activities shows summarized cash
transactions. The following are example of line items presented in the direct method of cash flows
from operations.

i. Cash received from customers (cash receipts from sale of goods and rendering of services)
ii. Cash received from fees, commissions and other income.
iii. Cash payments to suppliers.
iv. Cash payments to employees.
v. Cash payments for other operating expenses
vi. Interest payments.

d. Indirect method of presenting the cash flows from operatons reconciles the accrual net income
(from the Statement of Comprehensive Income) to net cash flows from operations. The following
are examples of reconciling adjustments for the indirect method of presentation:

i. Non-cash expense such as depreciation and amortization are added back to net income.
ii. Increases in current assets and decrease in current liabilities are deducted from net income. On
the other hand, decrease in current assets and increase in current liabilities are added back to
net income. The change is computed as the difference in the ending and beginning balances of
the accounts.
6. Cash transactions related to the acquisition and disposal of long-term assets such as property plant
and equipment,, intangible assets and other long-term assets are reported under investing activities.

a. The following are examples of cash flow transactions reported under investing activities

i. Cash payments to acquire property, plant and equipment, intangibles and other long-term
assets.
ii. Cash receipts from sale of property, plant and equipment, intangibles and other long-term
assets.
iii. Cash loan made to other parties (long-term note receivable).
iv. Cash collection on long-term note receivable.

b. A negative cash flows from investing activities implies that the company used cash to acquire long-
term assets intended to generate cash and revenue in the future.

7. Cash received and paid to equity owners and long-term creditors are reported under financing
activities. The following are examples of cash flow transactions reported under financing activities:

a. Cash received from issuing common shares (or capital contribution from owners).
b. Cash received from issuing notes or getting a long-term loan from a bank.
c. Cash dividends distributed to shareholders.
d. Cash withdrawals of owners.
e. Cash payment for principal of long-term loan.

8. Accountants need two Statement of Financial Position (current year and prior year balance sheet) and
the current year Statement of Comprehensive Income to prepare the Statement of Cash Flows.

9. The Statement of Cash Flows is a summary of the transactions in the T-account of cash. The
summarized transactions are then grouped as to business activities – operating, investing, and
financing activities.

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