AE 221 Ch.

17: CASH FLOWS Statement

Prepared by: Joseph R. Mendoza CPA, MBA

CASH FLOWS Statement is a financial statement (F/S) summarizing the operating, investing and financing activities of an entity.
PURPOSES: to provide information
1. about cash receipts and cash payments for the period
2. useful in assessing the ability of an entity to generate future cash flows (cash and cash equivalents)
3. that helps the users of FS to evaluate changes in net assets, as well as financial structure, liquidity and solvency.
 Example: ability to meet obligations and pay dividends
4. useful in explaining the difference between ACCRUAL Basis Income (Net Income) and CASH Basis income (Net cash flows from
OPERATING Activities)
5. that enhances the comparability of operating performance of different entities
6. Cash and non-cash investing and financing activities during the period.

PRO FORMA Cash Flow Statement

A. OPERATING Activities: * INDIRECT Method: involves current assets (CA) and current liabilities (CL).
NET INCOME (ACCRUAL Basis) Pxx
Operating activities :
1. Noncash expenses (Bad debts, depreciation, amortization) xx
2. Working Capital (CA- CL) Adjustments DEBIT = CREDIT
CASH + CA = CL
a. Increase in current assets (CA) + = 0 (xx)
b. Decrease in current assets (CA) + = 0 xx
c. Increase in current liabilities (CL) + 0 = xx
d. Decrease in current liabilities (CL) + 0 = (xx)
Investing related activities:
1. (Gain) Loss on sale of noncurrent assets xx
2. Accrued DIVIDENDS income and INTEREST income (xx)
Financing related activities:
1. Premium (discount) amortization on bonds payable/notes payable
2. INTEREST expense accrued on bonds/notes/loans payable xx
3. (Gain) Loss on redemption (retirement) of bonds/notes payable xx
NET CASH FLOW from OPERATING Activities (CASH Basis Net Income) A Pxx

B. INVESTING Activities – involves NONCURRENT assets (NCA)

Sales Proceeds (NET) Pxx Pxx
Book Value xx
Gain (Loss) on Sale Pxx to OPERATING activities (xx)

Purchase of STI and NCA (at Acquisition Cost) (xx)

NET CASH FLOW from INVESTING Activities B Pxx

C. FINANCING Activities - involves NONCURRENT Liabilities and Shareholders’ Equity

DEBT Financing : Proceeds from Issuance of bonds, notes, loans P xx
: Payment (redemption) of bonds, notes, loans (xx)
: Payment of interest to OPERATING Activities (xx)
EQUITY Financing : Proceeds from Issuance of shares (PS, OS) xx
: Reacquisition of shares issued (Acquisition of Treasury Shares) (xx)
: DIVIDENDS paid (xx)
NET CASH FLOW from FINANCING Activities C Pxx
NET Increase (decrease) in Cash (A + B + C) Pxx
Add: Cash – beg (Balance Sheet) xx
Cash balance – end (to balance sheet) Pxx

NOTES:
1. INTEREST expense and interest income shall be classified as OPERATING cash flows since it entered into determination of net income
(PAS 7). Under INDIRECT Method, accrued interest expense or income must be the one included since the starting point is ACCRUAL
Net income to be adjusted to CASH basis income. Under DIRECT Method, the actual interest paid or received is the one reflected.
AE 221 Ch. 17: CASH FLOWS Statement
Prepared by: Joseph R. Mendoza CPA, MBA
ALTERNATIVELY: Interest paid may be classified under FINANCING activity because it is a cost of obtaining financial resources.
Interest received may be classified under INVESTING activity because it is a return on investment.

2. DIVIDENDS income shall be classified as OPERATING cash flows since it entered into determination of net income (PAS 7). Under
INDIRECT Method, accrued income must be the one included since the starting point is ACCRUAL Net income to be adjusted to CASH
basis income. Under DIRECT Method, the actual dividends received is the one reflected.
ALTERNATIVELY: DIVIDENDS received may be classified under INVESTING activity because it is a return on investment.

DIVIDENDS paid is under FINANCING activity because it is a cost of obtaining financial resources.
ALTERNATIVELY: Dividends received may be classified under OPERATING activity to reflect the ability to pay dividends.

OPERATING Activities: DIRECT Method *

Collections from customers A Pxx
Collections from Income (other than sales) realized B xx
Payments to trade creditors C (xx)
Payments for operating expenses D (xx)
Cash generated from Operations Pxx
Interest expense paid (xx)
Income taxes paid E (xx)
NET CASH FLOW from OPERATING Activities (CASH Basis Net Income) Pxx

SUPPORTING COMPUTATIONS
A Trade A/R & N/R – beg Pxx C Trade A/P & N/P – beg Pxx E Income tax payable - beg Pxx
NET Sales xx NET Purchases xx Income tax expense xx
Trade A/R & N/R – end (xx) Trade A/P & N/P – end (xx) Income tax payable - end (xx)
COLLECTIONS from Customers Pxx PAYMENTS to trade creditors Pxx PAYMENT for Income Tax Pxx

B INCOME other than sales Pxx D OPERATING EXPENSES Pxx

Accrued income – beg xx Accrued expense – beg Pxx
Accrued income – end (xx) Accrued expense – end (xx)
Precollected income – beg (xx) Prepaid expense – beg (xx)
Precollected income – end xx Prepaid expense – end xx
NONCASH operating expenses (xx)
COLLECTIONS during the period Pxx PAYMENTS during the period Pxx

NOTES: A/R = Accounts Receivable A/P = Accounts Payable

N/R = Notes Receivable N/P = Notes Payable

ILLUSTRATIVE PROBLEM (in addition to p. 499 – 512)

Presented below are the Statement of Financial Position of ABC Corporation as of December 31, 2018 and 2019 and the related income
statement for the year ended December 31, 2019:
ABC Corporation ABC Corporation
Statements of Financial Position Income Statement
As of December 31, 2018 and 2019 For the year ended December 31, 2019

ASSETS 2019 2018 Net sales P698,000

Cash and Cash Equivalents P44,825 P15,000 Cost of goods sold (520,000)
Accounts receivable, net 47,000 55,000 Gross profit P178,000
Inventory 144,000 110,000 Interest income 6,000
Prepaid expenses 1,000 5,000 Gain on sale of securities 12,000
Total Current Assets P236,825 P185,000 Total income P196,000
Operating expenses (150,000)
Fixed assets, net P612,000 P437,000 Income before interest and tax P 46,000
Investment in Equity Securities 115,000 127,000 Interest expense (23,000)
Total Non-Current Assets P727,000 P564,000 Income before tax P23,000
Income tax (30%) (6,900)
Total Assets P963,825 P749,000 Net income P16,100
AE 221 Ch. 17: CASH FLOWS Statement
Prepared by: Joseph R. Mendoza CPA, MBA

LIABILITIES and SHAREHOLDERS’ EQUITY

Accounts payable P50,000 P43,000
Accrued liabilities 12,000 9,000
Income taxes payable (4th quarter) 1,725 5,000
Total current liabilities P63,725 P57,000
Bonds payable 295,000 245,000
Total Liabilities P358,725 P302,000 SUPPORTING Computation
Accumulated Profits - Jan. 1, 2019 P132,000
Ordinary share, P5 par P276,000 P200,000 Net Income 2019 16,100
Reserves 189,000 115,000 Dividends paid 2019 (8,000)
Accumulated profits 140,100 132,000 Accumulated Profits - Dec. 1, 2019 P140,100
Shareholders’ Equity P605,100 P447,000

Total Liabilities and Shareholders’ Equity P963,825 P749,000

ADDITIONAL information for 2019 operations are as follows:

a. The operating expenses include depreciation of P37,000 and loss on sale of fixed assets of P3,000.
b. Investments amounting to P78,000 were purchased during the year.
c. Investments that cost P90,000 were sold for P102,000.
d. Fixed assets costing P120,000 were purchased.
e. Plant assets which cost P10,000 with accumulated depreciation of P2,000 were sold for P5,000.
f. ABC Corporation issued P100,000 face value bonds in exchange for plant assets.
g. ABC Corporation retired P50,000 face value bonds at maturity date.
h. ABC Corporation issued 15,200 shares of P5 par value ordinary shares for P 150,000.
i. ABC Corporation paid P8,000 dividends.
j. Interest income of P6,000 was received during the year. The interest expense of P23,000 was paid during the year.
REQUIRED: Prepare the Statement of Cash Flows of ABC Corporation for the year 2019.

SUGGESTED ANSWER:
ABC CORPORATION
Statement of Cash Flows
For the Year ended December 31, 2019
INDIRECT Method DIRECT Method
NET INCOME P16,100 Cash collections from customers for sales [A] P706,000
Decrease in accounts receivable 8,000 Cash payment to suppliers for purchases [B] (547,000)
Increase in inventory (34,000) Cash payment for operating expenses [C] (103,000)
Decrease in prepaid expenses 4,000 Interest received 6,000
Increase in accounts payable 7,000 Cash generated from operations P62,000
Increase in accrued liabilities 3,000 Interest paid (23,000)
Decrease in income tax payable (3,275) Income taxes paid [D] (10,175)
Depreciation 37,000
Gain on sale of investments (12,000)
Loss on sale of fixed assets 3,000
NET CASH FLOWS from OPERATING Activities P28,825 Net Cash Flows from Operating Activities P28,825

Purchase of fixed assets (P120,000)

Sale of fixed assets 5,000
Purchase of investments (78,000)
Sale of investments 102,000
NET CASH FLOWS from INVESTING Activities (P91,000)

Retirement of bonds (P50,000)

Issuance of ordinary shares 150,000
Dividend payment (8,000)
NET CASH FLOWS from FINANCING Activities P92,000
Net increase (decrease) in cash and cash equivalents P29,825
Cash and cash equivalents – Jan. 1, 2019 15,000
Cash and cash equivalents – Dec. 31, 2019 P44,825
AE 221 Ch. 17: CASH FLOWS Statement
Prepared by: Joseph R. Mendoza CPA, MBA

Supporting Computations for DIRECT Method

A A/R January 1, 2019 P55,000 Operating expenses P150,000
Net Sales 698,000 Accrued liabilities January 1, 2019 9,000
Total A/R during 2019 753,000 Accrued liabilities, December 31, 2019 (12,000)
A/R December 31, 2019 (47,000) Prepaid expenses December 31, 2019 1,000
COLLECTIONS from customers P706,000 Prepaid expenses January 1, 2019 (5,000)
Depreciation expense (noncash expense) (37,000)
B A/P January 1, 2019 P43,000 Loss on sale of fixed assets (noncash loss) (3,000)
**PURCHASES 554,000 PAYMENT for operating expenses P103,000
Total A/P during 2019 P597,000
A/P December 31, 2019 (50,000) Income tax expense 2019 P 6,900
PAYMENTS to suppliers P547,000 Income tax payable January 1, 2019 5,000
Total Income tax payable during 2019 P11,900
Cost of goods sold P520,000 Income tax payable December 31, 2019 (P6,900/4) (1,725)
Inventory, December 31, 2019 144,000 PAYMENT for income taxes P10,175
TGAS P664,000
Inventory January 2019 (110,000)
**PURCHASES P554,000