FAR 3.2 & MAS_2.2.1.

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UNIVERSITY OF LUZON
COLLEGE OF ACCOUNTANCY
CPA REVIEW CENTER

STATEMENT OF CASH FLOWS & ANALYSIS

A statement of cash flows is a basic component of the financial statements summarizing the cash receipts and cash
payments classified by operating, investing, and financing activities of an entity during a period.

An entity should prepare a statement of cash flows and should present it as an integral part of its financial statements for
each period for which financial statements are presented.

PURPOSE:
 The primary purpose of the statement of cash flows is to provide relevant information about cash receipts and cash
payments of an entity during a period.
 A statement of cash flows provides information that enables users to evaluate the changes in net assets of an entity,
its financial structure, liquidity and solvency.
 Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents.
 The statement of cash flows also enhances the comparability of operating performance by different entities.

CASH and CASH EQUIVALENTS

 The statement of cash flow is designed to provide information about the change in an entity’s cash and cash
equivalents.
 Cash comprises cash on hand and demand deposits.- Demand deposit- if an instrument is presented iin cash on
demand, that is actually CASH.
 Cash equivalents are short-term highly liquid investments that are readily convertible to known amount of cash and
which are subject to insignificant risk of change in value.
 An investment normally qualifies as cash equivalent only when it has a short maturity of three months or less from
DATE OF ACQUISITION.
 Equity securities cannot qualify as cash equivalents because shares of stock do not have maturity date. However,
preferred shares with specified redemption date and acquired three months before the redemption can qualify as
cash equivalents.
 An entity should disclose the components of cash and cash equivalents and should present a reconciliation of the
amounts in the statement cash flows with the equivalent items reported in the statement of financial position.
 The accounting policy used in deciding which items are included in determining cash and cash equivalents is also
disclosed.


CLASSIFICATION OF CASH FLOWS:

 CASH FLOWS are inflows and outflows of cash and cash equivalents.
 Classification by activity provides information that allows users to assess the impact of those activities on the
financial position of the enterprise and the amount of its cash and cash equivalents.
 OPERATING ACTIVITIES - are the cash flows derived primarily from the principal revenue producing activities of
the entity. They generally result from transactions and other events that enter into the determination of net income
or loss.
-
 INVESTING ACTIVITIES – are the cash flows derived from the acquisition and disposal of long-term assets and
other investments not included in cash equivalent (non-operating assets).
 FINANCING ACTIVITIES – are the cash flows derived from the equity capital and borrowings of the entity. They
generally result from transactions between entity and its owners (equity financing) and between the entity and its
creditors (debt financing – nontrade).
 Interest exp- can be operating or financing or investing
Investing- pas 23 borrowing cost.
 Interest Income- operating activity or investing

NONCASH TRANSACTIONS:

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 Investing and financing transactions that do not require use of cash and cash equivalents should be excluded from
the cash flow statement. Such transactions should be disclosed elsewhere in the financial statements or in a
separate schedule.
 The following noncash transactions are disclosed separately:
a. Acquisition of asset either by assuming directly related liability or by means of a capital lease.
b. Acquisition of asset by means of issuing capital stock or bonds payable.
c. Conversion of debt to equity, for example conversion of bonds payable to common stock.
d. Conversion of preferred stock to common stock.
-

INTEREST:
 Interest paid and interest received may 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. Interest received may be classified as investing cash flow because it is a
return on investment.

 For a financial institution, interest paid and interest received are usually classified as operating cash flows.
 Cash flows from interest paid and received are should be classified in a consistent manner from period to period as
either operating, investing or financing activities.

DIVIDENDS:
 Dividend received may 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 may be classified as financing cash flow because it is a cost obtaining financial resources.
Alternatively, dividend paid may be classified as operating cash flow in order to assist users to determining the
ability of the enterprise to pay dividends out of operating cash flows.
 The classification of dividend received and dividend paid as either operating, investing or financing activity should
also be made on a consistent basis from period to period.
 Dividend- cost of capital

INCOME TAXES:
 Cash flows arising from income taxes should be separately disclosed and should be classified as cash flows from
operating activities unless they can be specifically identified with investing and financing activities.
 Tax cash flows are often difficult to match to the originating underlying transaction, so most of the time all tax cash
flows are classified as arising from operating activities.

Reporting cash flows from operating activities:

An entity shall report cash flows from operating activities using either:
a. the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or
b. the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any
deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense
associated with investing or financing cash flows.
-Direct method or Gross Method
-Indirect method or Net Method or Income statement approach

Reporting cash flows from investing and financing activities:

An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing
and financing activities, except to the extent that cash flows are reported on a net basis.

Reporting cash flows on a net basis:

Cash flows arising from the following operating, investing or financing activities may be reported on a net basis:
(a) cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer
rather than those of the entity; and
(b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities
are short.

Cash flows arising from each of the following activities of a financial institution may be reported on a net basis:
(a) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date;
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(b) the placement of deposits with and withdrawal of deposits from other financial institutions; and
(c) cash advances and loans made to customers and the repayment of those advances and loans.

TEST ITEMS:
1. Which of the following is an integral part of an entity’s financial statements?
a. Statement of changes in financial position
b. Statement of cash flows-change of financial position in cash
c. Statement of assets and liabilities
d. Statement of cash receipts and cash disbursements

2. Identify the terms described.

a. comprises cash on hand and demand deposits.-cash equivalent
b. short-term, highly liquid investments that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.- -cash flow
c. inflows and outflows of cash and cash equivalents.-operating
d. the principal revenue-producing activities of the entity and other activities that are not investing or financing
activities.
e. the acquisition and disposal of long-term assets and other investments not included in cash equivalents.-
investing
f. activities that result in changes in the size and composition of the contributed equity and borrowings of the
entity.-financing

3. Classify as operating, investing or financing:

a. cash receipts from the sale of goods and the rendering of services-operating
b. cash payments to acquire property, plant and equipment, intangibles and other long-term assets- cash receipts
from royalties, fees, commissions and other revenue-investing
c. cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures-investing
d. cash payments to suppliers for goods and services-operating
e. cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease- financing
f. cash payments to and on behalf of employees-operating
g. cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy
benefits-financing
h. cash payments or refunds of income taxes unless they can be specifically identified with financing and investing
activities-operating
i. cash payments to owners to acquire or redeem the entity’s shares-financing
j. cash receipts and payments from contracts held for dealing or trading purposes.-
k. cash receipts from sales of property, plant and equipment, intangibles and other long-term assets-investing
l. cash payments to acquire equity or debt instruments of other entities and interests in joint ventures
m. cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the receipts are classified as financing activities-investing
n. cash advances and loans made to other parties (other than advances and loans made by a financial institution)-
investing
o. cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term
borrowings-financing
p. cash receipts from the repayment of advances and loans made to other parties (other than advances and loans
of a financial institution);-investing
q. cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the payments are classified as financing activities-investing
r. cash proceeds from issuing shares or other equity instruments-financing
s. cash repayments of amounts borrowed-financing

4. Which of the following is acceptable for reporting cash flows from operating activities of an entity during a period?
a. direct method-required gumawa ng reconciliation
b. indirect method
c. direct method and indirect method
d. disclosure in the notes

5. Investing and financing transactions that do not require the use of cash or cash equivalents:
a. shall be excluded from a statement of cash flows.
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b. shall be disclosed elsewhere in the financial statements.
c. shall be included in the operating activities.
d. choices a and b.

6. The following data are from the Sagesser Company:

December 31, 2015 December 31, 2014
Account receivable P20,000 P25,000
Accounts payable 15,000 18,000
Retained earnings 80,000 60,000financing-dividend paid
Net income for 2015=P60,000
Purchase of equipment for cash during 2015= 26,000
Depreciation expense for 2015 = 15,000
NI 60k + RE 60k –RE80k=40k dividends paid

What is the change in cash base on the preceding information? P11,000

7. For Kennedy Clothing Stores, cash outflow from investing was P50,000. Cash inflow from financing was P13,000.
These account balances are known:
Beginning Ending
Cash P10,000 P13,000
Account receivable 32,000 40,000
Inventory 50,000 45,000
Accounts payable 27,000 40,000
What was net income? P30,000
*increase in cash mean sum of op inv and fin is 3,000

8. Following is a list of items that occurred during 2015 in the Harrol Company.

Net income for the year P356,000-OA

Dividends paid during the year 75,000-FA
Proceeds from sale of a 10-year bond issue 200,000-FA
Amortization of patents 15,000-OA
Depreciation expense 125,000-OA
Cash received on a sale of land 130,000-IA
Decrease in inventory 44,000-OA
Increase in accounts receivable 96,000-OA
Loss on the sale of land 20,000-OA
Increase in accrued expense 18,000-OA
Cash purchase of new equipment 500,000-IA
Cash purchase of a long-term investment 158,000-IA
Decrease in income tax payable 24,000-OA
Increase in accounts payable 47,000-OA
Purchase of building by issuing 20-year notes 300,000-IA

The treasurer of the Harrol Company indicates that cash increased by P102,000. Analyze the change in cash
computed by the treasurer.
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9. The Cooper Company had net income of P20,000, an increase in accounts receivable of P2,000, depreciation
expense of P5,500, a decrease in available-for-sale securities of P750(FA), a payment of P10,000 for new
equipment(FA), and income tax expense (no taxes payable or deferred tax) of P6,000. Cooper’s net cash flow from
operating activities was:
a. P18,250.
b. P24,250.
c. P14,250.
d. P23,500.

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10. In 2015, the Hemingray Company had net income of P450,000, a decrease in income taxes payable of P30,000, an
increase in accounts payable of P15,000, and an increase in inventory of P10,000. The company purchased a new
factory building for P250,000, repaid a note for P75,000, and paid dividends of P50,000. Hemingray’s net cash flows
from operating, financing, and investing activities (in that order) were:
a. P465,000; P(280,000); P0.
b. P425,000; P(125,000); P(250,000).
c. P505,000, P125,000; P(280,000).
d. P455,000; P(50,000); P(295,000).

11. During the year, the Howard Company purchased a building for P800,000 and sold land for P500,000 (at a
P150,000 gain). An earthquake destroyed a factory with a cost of P2,700,000 and a book value of P1,000,000.
Insurance proceeds for that factory, net of tax, were P750,000. Net income reported for the year was P500,000. The
Howard Company’s net cash flows from operating and investing activities were:
a. P(150,000); P150,000.
b. P750,000; P(800,000).
c. P300,000; P1,045,000.
d. P600,000; P450,000.

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12. The Herriott Company uses the direct method to report its cash flows from operating activities. Herriott’s working
papers showed the following:
Cost of goods sold P25,000
Interest expense 400
Salaries expense 10,000
Amortization of premium on bonds payable 50
Decrease in salaries payable 150
Decrease in inventories 3,000
At what amounts should Herriott report payments to suppliers, payments to employees, and payments of interest?
a. P22,000; P10,150; P450
b. P28,000; P9,850; P450
c. P26,950; P10,000; P350
d. P22,000; P10,150; P400

13. Further information from Herriott’s working papers is shown below:

Other revenues P 4,000
Interest revenue 1,500
Sales revenue 40,000
Investment income recognized under the equity method 3,000
Decrease in accounts receivable 500
Increase in deferred revenue 400
Amortization of discount on investment in bonds 50
At what amounts should Herriott report collections from customers, interest and dividends collected, and other
operating receipts?
a. P40,500; P1,450; P1,400
b. P39,500; P1,550; P600
c. P44,500; P1,500; P(2,600)
d. P44,900; P5,450; P3,000

14. The 2015 statement of cash flows of the Tucson Company shows net cash provided by operating activities in the
amount of P1,000,000. During the year, Tucson sold a building at a net gain of P40,000. Inventory increased by
P10,000. Deferred income taxes decreased by P1,000. The company paid dividends of P30,000. Tucson’s net
income for 2015 was:
a. P1,049,000.
b. P951,000.
c. P1,051,000.
d. P951,000.

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15. Free cash flow is:

a. all cash in the bank
b. cash from operations
c. cash from financing, less cash used to purchase fixed assets to maintain productive capacity and cash used for
dividends
d. cash flow from operations, less cash used to purchase fixed assets to maintain productive capacity and cash
used for dividends

16. The Kelso Company’s accounting records show the following information:
Proceeds from collection of accounts receivable P 40,000
Proceeds from issuance of common stock 530,000 fa
Purchase of factory equipment 400,000 ia
Purchase of available-for-sale securities 100,000 ia
Proceeds from sale of building 250,000 ia
Gain on sale of building 60,000
Purchase of inventory 200,000
Payment of dividends on preferred stock 10,000 fa
Kelso’s net cash flows from investing and financing activities were:
a. P15,000; P(80,000).
b. P(200,000); P(520,000).
c. P140,000; P565,000.
d. P(250,000); P520,000.

17. Silken Corp. reported net income of P420,000 for 2015. Changes occurred in several balance sheet accounts as
follows:

Equipment ................................. P35,000 increase

Accumulated depreciation .................. 56,000 increase
Note payable .............................. 42,000 increase

Additional information:
· During 2015, Silken sold equipment costing P35,000, with accumulated depreciation
of P16,800, for a gain of P7,000.
· In December 2015, Silken purchased equipment costing P70,000 with P28,000 cash
and a 12% note payable of P42,000.
· Depreciation expense for the year was P72,800.

In Silken’s 2015 statement of cash flows, net cash used in investing activities should be
a. P30,800.
b. P16,800.
c. P2,800.
d. P49,000.

18. The following information was taken from the 2015 financial statements of Glocken Corporation:

Accounts receivable, January 1, 2015 ................. P 108,000

Accounts receivable, December 31, 2015 ............... 152,000
Sales on account...................................... 2,190,000
Uncollectible accounts ............................... 5,000

No accounts receivable were written off or recovered during the year. If Glocken prepares a statement of cash flows
using the direct method, what amount should be reported as collected from customers in 2015?
a. P2,239,000
b. P2,234,000
c. P2,146,000 inc in A/R
d. P2,141,000

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19. Daisy Corporation reported net income of P420,000 for 2015. Changes occurred in several balance sheet accounts
as follows:

Equipment ................................. P35,000 increase

Accumulated depreciation .................. 56,000 increase
Note payable .............................. 42,000 increase

Additional information:
· During 2015, Daisy sold equipment costing P35,000, with accumulated depreciation of
P16,800, for a gain of P7,000.
· In December 2015, Daisy purchased equipment costing P70,000 with P28,000 cash
and a 12% note payable of P42,000.
· Depreciation expense for the year was P72,800.

In Daisy's 2015 statement of cash flows, net cash provided by operating activities should be
a. P476,000.
b. P485,800.
c. P492,800.
d. P499,800.

20. Thomson Company's income statement for the year ended December 31, 2015, reported net income of P360,000.
The financial statements also disclosed the following information:

Amortization ......................................... P 20,000

Depreciation ......................................... 60,000
Increase in accounts receivable ...................... 140,000
Increase in inventory ................................ 48,000
Decrease in accounts payable ......................... 76,000
Increase in salaries payable ......................... 28,000
Dividends paid ....................................... 120,000
Purchase of equipment ................................ 150,000
Increase in long-term note payable ................... 300,000
financing
Net cash provided by operating activities for 2015 should be reported as
a. P84,000.
b. P204,000.
c. P234,000.
d. P324,000.

21. The following information is available from the financial statements of Barrington Corporation for the year ended
December 31, 2015:

Net income .......................................... P396,000

Depreciation expense ................................ 102,000
Decrease in accounts receivable ..................... 126,000
Increase in inventories ............................. 90,000
Increase in accounts payable ........................ 24,000
Payment of dividends ................................ 54,000
Purchase of available-for-sale securities ........... 22,000
Decrease in income taxes payable .................... 16,000

What is Barrington Corporation's net cash flow from operating activities?

a. P440,000
b. P466,000
c. P520,000
d. P542,000

22. Sapphire Company reported the following information for the year 2015: Sales revenue of P280,000; cost of goods
sold of P100,000; selling expenses of P40,000; administrative expenses of P35,000; depreciation of P25,000;
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interest expense of P8,000; and income tax expense of P28,000. All sales were made for cash and all expenses
(other than depreciation and bond premium amortization of P2,000) were paid in cash. All current assets and current
liabilities remained unchanged. How much cash was provided by operations for Sapphire Company during 2015?
a. P44,000
b. P69,000
c. P67,000
d. P71,000

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23. Rook Company had the following balances at December 31,2015:

Cash in checking account P350,000

Cash in money market account 250,000
Treasury bill purchased 12/ 1/2015
maturing 2/28/2016 800,000
Treasury bond , purchased 3/1/2015
maturing 2/28/2016 500,000

What amount should Rook report as cash and cash equivalents in its December 31,2015, balance sheet?
a. P 600,000
b. P1,150,000
c. P1,400,000
d. P1,900,000

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24. Cash debt coverage is computed by dividing net cash provided by operating activities by
a. average non-current liabilities.
b. average total liabilities.
c. ending non-current liabilities.
d. ending total liabilities.

25. Current cash debt coverage is often used to assess

a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.

26. A measure of a company’s financial flexibility is

a. cash debt coverage.
b. current cash debt coverage.
c. free cash flow.
d. cash debt coverage and free cash flow.

27. Free cash flow is calculated as net cash provided by operating activities less
a. capital expenditures.
b. dividends.
c. capital expenditures and dividends.
d. capital expenditures and depreciation.

28. One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the
following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities.
b. The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities.
c. The firm's ability to pay its debts as they mature.
d. The firm's ability to invest in a number of projects with different objectives and costs.

29. Net cash provided by operating activities divided by average total liabilities equals
a. current cash debt coverage.
b. cash debt coverage.
c. free cash flow.
d. the current ratio.

30. Packard Corporation reports the following information:

Net cash provided by operating activities P275,000
Average current liabilities 150,000
Average non-current liabilities 100,000
Dividends declared 60,000
Capital expenditures 110,000
Payments of debt 35,000
Packard’s cash debt coverage is
a. 1.10.
b. 1.83.
c. 2.75.
d. 6.11.

31. Packard Corporation reports the following information:

Net cash provided by operating activities P275,000
Average current liabilities 150,000
Average non-current liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000
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Packard’s free cash flow is
a. P70,000.
b. P105,000.
c. P165,000.
d. P215,000.

32. Pedigo Corporation reports the following information:

Net cash provided by operating activities P225,000
Average current liabilities 150,000
Average non-current liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000
Pedigo’s cash debt coverage is
a. 0.90.
b. 1.50.
c. 2.25.
d. 4.09.

33. The following are selected data for Walkin Corporation for the year ended 2015:

Net operating profit before taxes P31,250,000

Inventory 5,000,000
Long-term debt 40,000,000
Depreciation expense 9,000,000
Change in net working capital 5,000,000
Capital expenditures 8,000,000
Invested capital (net assets) 80,000,000
Weighted average cost of capital 10%
Tax rate 20%

Which of the following measures the amount of free cash flow for Walkin Corporation for the year?
a. P 7,000,000
b. P 8,000,000
c. P21,000,000
d. P25,000,000

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34. The following information is available for Armstrong Enterprises for 2015:

Net operating profit (income) after taxes P36,000,000

Depreciation expense 15,000,000
Change in networking capital 10,000,000
Capital expenditures 12,000,000
Invested capital (total assets – current liabilities) 100,000,000
Weighted average cost of capital 10%

What is the free cash flow for 2015?

a. P36,000,000
b. P30,000,000
c. P29,000,000
d. P26,000,000

*Non cash expense and non cash gain

*

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