CHAPTER 11 – STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS

• Component of financial statements summarizing the operating, investing and financing activities
of an entity.
• Provides information about the cash receipts and cash payments of an entity during a period.
• Primary purpose is to provide relevant information about cash receipts and cash payments of an
entity during a period.

CASH AND CASH EQUIVALENTS

• Cash comprises cash on hand and demand deposits.
• Cash equivalents are short-term highly liquid investments that are readily convertible to known
amount of cash and which are subject to an insignificant risk of change in value.
• Investment normally qualifies as cash equivalent only when it has short maturity of three months
or less from date of acquisition.
• Examples of cash equivalents
o 3-month BSP treasury bill
o 3-year BSP treasury bill purchased 3 months before date of maturity
o 3-month time deposit
o 3-month money market instrument or commercial paper

CLASSIFICATION OF CASH FLOWS

• Cash flows are inflows and outflows of cash and cash equivalents
• Operating activities
o Cash flows derived primarily from the principal revenue producing activities of the entity.
o Generally result from transactions and other events that enter into the determination of
net income or loss
o Cash flows arising from the purchase and sale of dealing or trading securities are classified
as operating activities
o Cash advances and loans made by a financial institution are usually classified as operating
activities since they relate to the main revenue producing activity of that entity.

• Investing activities
o Cash flows derived from the acquisition and disposal of long-term assets and other
investments not included in cash equivalent
o Include cash flows from transactions involving nonoperating assets

• Financing activities
o Cash flows derived from the equity capital and borrowings of the entity.
o Cash flows that result from transactions
▪ Equity financing –between the entity and the owners
▪ Debt financing – between the entity and the creditors
o Include the cash flows from transactions involving nontrade liabilities and equity of an
entity.
o Cash payments to settle obligations such as accounts payable, notes payable, income tax
payable, accrued expenses are operating activities, not financing activities.
NONCASH TRANSACTIONS
• Investing and financing transactions that do not require use of cash or cash equivalents shall be
excluded from the statement of cash flows
• These transactions shall be disclosed elsewhere in the financial statements either in the notes or
in a separate schedule or in a way that provides all relevant information about these transactions.
• The statement of cash flow is strictly a cash concept.

INTEREST
• Interest paid and interest received shall be classified as operating cash flows because they enter
into the determination of net income or loss.
• Alternatively, interest paid may be classified as financing cash flow because it is a cost of
obtaining financial resources.
• Alternatively, interest received may be classified as investing cash flow because it is a return on
investment.
• For financial institution, interest paid and interest received are usually classified as operating cash
flows.

DIVIDENDS
• Dividend received shall be classified as operating cash flow because it enters into the
determination of net income.
• Alternatively, dividend received may be classified as investing cash flow because it is a return on
investment,
• Dividend paid shall be classified as financing cash flow because it is a cost of obtaining financial
resources.
• Alternatively, dividend paid may be classified as operating cash flow in order to assist users to
determine the ability of the entity to pay dividends out of operating cash flows.

INCOME TAXES
• Cash flows arising from income taxes shall be separately disclosed as cash flows from operating
activities unless they can be specifically identified with investing and financing activities.

Cash flows from / for Option 1 Option 2

Interest income received Operating activity Investing activity
Interest expense paid Operating activity Financing activity
Dividend income received Operating activity Investing activity
Dividend paid to owners Financing activity Operating activity

Direct method for computing cash flows from operating activities

Cash flows from operating activities
Cash receipts from customers xx
Cash paid to suppliers and employees (xx)
Cash generated from operations xx
Interest paid (xx)
Income taxes paid (xx)
Net cash from operating activities xx