OPERATING ACTIVITIES

The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise
have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans, and make new
investments without recourse to external sources of financing. (Information about the specific components of historical operating cash
flows is useful, in conjunction with other information, in forecasting future operating cash flows.
Cash flows from operating activities are primarily derived from the principal revenue producing activities of the enterprise. Therefore,
they generally result from the transactions and other events that enter into the determination of net profit or loss.
Examples of cash flows from operating activities are:
a. Cash Receipts from Sale of Goods and Rendered Services.
b. Cash Receipts from royalties, Rental, Fees, Commissions and other revenue.
c. Cash Payments to suppliers for goods and services.
d. Cash Payments to and on behalf of employees.
e. Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits.
f. Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities.
g. Cash receipts and payments from contracts held for dealing or trading purposes (e.g., cash payments for purchases of and cash
receipts from sale of financial assets and financial liabilities that are held for trading).
Treatment for Interest Received, Interest Paid, Dividends Received and Dividends Paid
In PAS7 paragraph 33 provides that Interest Received, Interest Paid and Dividends Received are primarily classified as Operating
Cash flow because it enters into the determination of net income. Alternatively, Interest Received and Dividends Received are
secondarily classified as and Investing Cash flow because it is a return on investment. While the Interest Paid is alternatively
classified as Financing Cash flows because it is a cost of obtaining financial resources.
PAS7 paragraph 34 provides that Dividends Paid is classified as Financing Cash Flows because it is a cost obtaining financial
resources. Alternatively, may classified as operating cash flow in order to assist users to determine the ability of the entity to pay
dividends out of cash flows.

GAINS AND LOSSES:

1. Gains and Losses from sale of Non - Current Asset.
2. Gains and Losses recognized in profit or loss
3. Gains and Losses in amortization of premium or discount on financial instruments and Depreciation and Amortization expenses
enter into the determination of profit or loss.
(Those three types of gains and losses does not affect the cash flows so it was excluded in the operating activities.)
Reporting Cash flows from Operating Activities Presented using either:
1. Direct Method
2. Indirect Method
Direct Method
The direct method provides information which may be useful in estimating future cash flows and which is not available under the
indirect method. (and is, therefore, considered more appropriate than the indirect method. Under the Direct method, information about
major classes of gross cash receipts and gross cash payments may be obtained either:
a) From the accounting record of the enterprise; or
b) By adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for financial enterprise)
and other items in the statement of profit or loss for:
1) Changes during period in inventories and operating receivables and payables;
2) Other non – cash items; and
3) Other items for which the cash effects are investing or financing cash flows.
Indirect Method
By this approach, the net cash increase or decrease from operating activities would be derived indirectly by starting with
the reported net profit/loss and working backward to convert that amount to a cash basis.
Two types of adjustments to net profit/loss to compute the Operating Activities of net Cash Flows are needed
 The Current Assets adjustments have a indirect effect in the profit/loss.
 While the Contra Assets and Current Liabilities adjustments have a direct effect in the profit/loss.