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Legaspi
BSA-3A
Intermediate Accounting 3 part 1
Cash Flows
b. Indirect method – starts with profit before tax and adjust it for non-cash charges and
credits to reconcile it to the net cash flow from operating activities.
Under the direct method, enterprises are encouraged to report major classes of cash
receipts and gross payments from operating activities. At a minimum, the following classes
of cash receipt and payments should be separately reported:
□ Cash receipts from sale of goods and rendering of services.
□ Cash receipts from interest and dividends.
□ Cash receipts from other operating activities, such as royalties, fees, commissions
and other revenues.
□ Cash payments to suppliers for goods and services.
□ Cash receipts and cash payments of an enterprise’s insurance premium and claims,
annuities and other policy benefits.
□ Cash payments or refunds of income taxes unless they can be identified with
financing and investing activities.
□ Cash payment for interest.
□ Cash payments and receipts from contracts held for dealing or trading purposes
The principal advantage of the direct method is that it shows operating cash receipts and
payments. Knowledge of the specific sources of cash receipts and purposes for which cash
payments were made in past periods may be useful in assessing future cash flows. The
International Accounting Standards encourages, bit does not require, the use of direct
method.
Mark Jayson B. Legaspi
BSA-3A
The principal advantage of the indirect method is that it highlights the differences between
reported profit and net cash flow from operating activities. Many users of financial
statements believe that such reconciliation is essential to give an indication of the quality of
the reporting enterprise’s earnings. Some investors and creditors assess future cash flows
by estimating future income and then allowing for accruals adjustments, thus information
about past accruals adjustments may be useful to help estimate adjustments.
The specimen cash flow statement format using the indirect method starts with the
calculation of operating cash flow from the profit before tax. Alternatively, the
statement could start with the operating profit, or any other reported profit figure.
B. Investing Activities;
Cash flows from investing activities are the cash transactions involving acquisitions and
disposal of non-operating asset which include the following:
a) Cash payment to acquire property, plant and equipment – these payment include those
relating to capitalized development cost and self-constructed property, plant and
equipment.
b) Cash receipts from sale of property, plant and equipment, intangibles and other long-term
assets.
c) Cash payments to acquire equity or debt instruments of other enterprises and interest in
joint ventures (other than payments for those instruments considered to be cash
equivalent or those held for dealing or trading purposes)
d) Cash receipts from sale of equity or debt equity or debt instruments of other enterprises
and interest in joint ventures (other than receipts for those instruments considered to be
cash equivalent or those held for dealing or trading purposes).
e) Cash advances and loans made to other parties (other than advances and loan made by
a financial institution).
f) Cash receipts from the repayment of advances or loans made to other parties (other than
advances and loan made by a financial institution).
g) Cash payments for future 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.
h) Cash receipts from future 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.
When a contract is accounted for as a hedge of an identifiable position, the cash flows of the
contract are classified in the manner as the cash flows of the position being hedged.
C. Financing Activities;
The separate disclosure of cash flows arising from financing activities is important because it
is useful in predicting claims on future cash flows by providers of capital to the enterprise.
Examples of cash flows arising from financing activities are:
Dividends paid may be classified as a financing activity because this is a cost of obtaining
financial resources (benchmark treatment). Alternatively, dividends paid may also be
classified as a component of cash flows from operating activities in order to assist user to
determine the ability of the enterprise to pay its dividends out of operating cash flows.
12.31.13 12.31.14
Accrued interest payable recognized P40,000 P50,000
Depreciation expense recognized 72,800 75,600
Prepaid expense recognized 3,100 4,940
For the year ended December 31, 2014, Darwin Company reported a net income after tax of
P648,000. What is the net cash flow from operating activities that would be shown in its cash
flow statement?
a) P637,040 c) P731,760
b) P637,080 d) P735,440
Based on the information given, what should be the net cash provided by operating activities
in the statement of cash flows for the year ended December 31, 2014?
a) P3,390,000 c) P3,540,000
b) P3,510,000 d) P3,750,000
In the 2014 statement of cash flows how much should be reported as net cash provided by
operating activities?
a) 2,600,000 c) P2,800,000
b) P2,700,000 d) P2,900,000
30,000 increase
Canary’s cost of sales was reported at P1,380,000 on its income statement and uses the
indirect method in preparing the statement of cash flows. How much was the cash payments
made to its suppliers?
a) P1,286,000 c) P1,626,000
b) P1,374,000 d) P1,680,000
Mark Jayson B. Legaspi
BSA-3A
Depreciation P 880,000
Cash paid for expenses 2,270,000
Increase in inventories 370,000
Cash paid to employees 2,820,000
Decrease in receivables 280,000
Cash paid to suppliers 4,940,000
Decrease in payables 390,000
Cash received from customers 12,800,000
Net profit before taxation 2,370,000
Question 1: What is the amount of net cash flows from operating activities using the indirect
approach?
a) P2,270,000 c) P3,250,000
b) P2,770,000 d) P3,730,000
Question 2: How much is the net cash flows from operating activities using the direct
approach?
a) P2,270,000 c) P2,775,000
b) P2,770,000 d) P3,730,000
In the statement of cash flows, how should Dynasty Company present the purchase of the
land and building?
a) an outflow of P50,000,000 in the investing activity.
b) an outflow of P50,000,000 in the financing activity.
c) an outflow of P50,000,000 in the operating activity
Mark Jayson B. Legaspi
BSA-3A
d) only a disclosure is required in the notes to financial statement
Question 1: If the leaseback is treated as an operating lease, how should Victory Company
present the sale in its cash flow statement?
a) an inflow of P15,000,000 from investing activity
b) an inflow of P15,000,000 from financing activity
c) an inflow of P15,000,000 from investing and outflow of P5,000,000 operating activity
(indirect method)
d) an inflow of P15,000,000 from financing and outflow of P5,000,000 operating activity
(indirect method)
Question 2: If the leaseback is treated as finance lease, how should Victory Company
present the sale in its cash flow statement?
a) an inflow of P15,000,000 from investing activity
b) an inflow of P15,000,000 from financing activity
Mark Jayson B. Legaspi
BSA-3A
c) an inflow of P15,000,000 from investing and outflow of P5,000,000 operating activity
(indirect method)
d) an inflow of P15,000,000 from financing and outflow of P5,000,000 operating activity
(indirect method)
Purchase of land by issuing bonds, P400,000; proceeds from issuing bonds. P800,000;
purchases of inventories, P1,520,000; purchases of treasury shares, P240,000; loans made
to affiliated corporations, P560,000; dividends paid to preference shareholders, P160,000;
proceeds from issuing preference share, P640,000; and proceeds from sale of equipment,
P80,000.
Question 1: How much would be the net cash provided (used) by investing activities during
2014?
a) (P480,000) c) (P880,000)
b) P 80,000 d) (P2,000,000)
-560,000 + 80,000
= -480,000
Question: How much would be the net cash provided by financing activities during 2014?
a) P 880,000 c) P1,280,000
b) P1,040,000 d) P1,440,000
Question 1: In its 2014 statement of cash flows, how much would Fish Company report as
net cash used in investing activities?
a) P1,700,000 c) P1,880,000
b) P1,760,000 d) P1,940,000
100,000 - 1,800,000 =
1,700,000 outflow
Question 2: In its 2014 statement of cash flows, how much should Fish Company report as
net cash provided by financing activities?
a) P1,700,000 c) P1,880,000
b) P1,760,000 d) P1,940,000
In Goldfish Corporation’s 2014 statement of cash flows, how much should be the net cash
used in investing activities?
a) P372,500 c) P398,000
b) P380,500 d) P410,000
In Brownies Company’s 2014 statement of cash flows, how much net cash used in financing
activities should be shown?
a) P803,500 c) P1,074,000
b) P895,500 d) (P1,075,500)
Question 1: How much should be the amount of net cash flows from operating activities?
a) (P275,000) c) (P296,500)
b) P275,000 d) P296,500
Question 2: How much should be the amount of net cash flows from investing activities?
a) (P88,000) c) (P121,000)
b) P88,000 d) P121,000
Question 3: How much should be the amount of net cash flows from financing activities?
a) (P105,000) c) (P185,000)
b) P105,000 d) P185,000
80,000 - 185,000
= -105,000
2014 2013
Cash 250,000 350,000
Accounts receivable, net 600,000 450,000
Merchandise inventory 700,000 450,000
Prepaid expenses 100,000 250,000
Building and equipment 900,000 750,000
Accumulated depreciation (180,000) ( 80,000)
Land 900,000 400,000
TOTALS P3,270,000 P2,570,000
2014 2013
Accounts payable 680,000 550,000
Accrued expenses 120,000 180,000
Notes payable, bank (long term) 400,000
Mortgage payable 300,000
Ordinary share capital, P10 par 2,090,000 1,590,000
Accumulated Profits/Losses (deficit) 80,000 ( 150,000)
TOTALS P3,270,000 P2,570,000
Mark Jayson B. Legaspi
BSA-3A
Land was acquired for P500,000 in exchange for ordinary share, par P500,000 during the
year. All equipment purchased was for cash. Equipment costing P50,000 was sold for
P20,000, with book value of P40,000. Cash dividends of P100,000 were changed to
Accumulated Profits and Losses and was the only entry in this account.
In the December 31, 2014, statement of cash flows of the company, how much would be the
net cash provided (used) by –
80,000+100,000-150,000=330,000
180,000+10,000-80,000=110,000
20,000+200,000=(180,000)
300,000-400,000-100,000=(200,000)
Balance Sheet
12/31/14 12/31/13
Cash P 313,600 P 160,000
Accounts receivable 300,000 180,000
Merchandise inventory 320,000 400,000
Property, plant & equipment P510,000 P800,000
Accumulated depreciation (270,000) 240,000 (250,000) 550,000
P1,177,600 P1,290,000
Income Statement
For the year ended, December 31, 2014
Mark Jayson B. Legaspi
BSA-3A
Sales P7,000,000
Cost of sales 5,960,000
Gross profit P1,040,000
Selling expenses P500,000
Administrative expenses 160,000 660,000
Income from operations P 380,000
Interest expense 60,000
Income before taxes P 320,000
Income taxes 102,400
Net income P 217,600
In the December 31, 2014 statement of the cash flows (direct method) of Stone Company,
how much should be reported as:
Question 1: Net cash provided by operating activities?
a) P170,000 c) P240,000
b) P200,000 d) P317,600
6,880,000-5770,000-142,400-430,000-160,000-60,000=317,600
180,000+7,000,000-300,000=6,880,000
Question 4: Total taxes paid?
a) P40,000 c) P80,000
b) P50,000 d) P142,400
330,000+102,400+290,000=142,400
Problem 35-31: (Operating, Investing & Financing)
Presented below are the balance sheet accounts of Corn, In, as of December 31, 2014 and
2013 and their net charges:
Additional Information:
□ On January 2, 2014, Corn sold equipment costing P45,000, with a carrying amount of
P28,000, for P18,000 cash
□ On March 31, 2014, Corn sold one of its available for sale holdings for P119,000 cash.
There were no other transactions involving its equity securities.
□ On April 15, 2014, Corn issued shares of its ordinary share for cash at P13 per share.
□ On July 1, 2014, Corn purchased equipment for P120,000 cash
□ Corn’s net income for 2014 is P290,000. Corn paid a cash dividend of P85,000 on
October 26, 2014
□ Corn acquired a 20% interest in Chips Corporation’s ordinary during 2010. There was
no goodwill attributable to the investment, which is appropriately accounted for by the
equity method. Chips reported net income of P150,000 for the year ended December
31, 2014. No dividend was paid on Chips’ ordinary shares during 2014.
Question 1: What is the amount of net cash provided (used) from operating activities?
a) P272,000 c) P302,000
b) P287,000 d) P336,000
290,000+82,000+9,000+(35,000)+80,000+(115,000)+10,000+(19,000)+(30,000)
=272,000
Question 2: What is the net cash flow provided (used) from investing activities?
a) (P17,000) c) (P102,000)
b) P17,000 d) P137,000
119,000+18,000-120,000
=17,000
Question 3: What is the net cash provided (used) from financing activities?
a) (P 40,000) c) P125,000
b) (P125,000) d) P175,000
260,000-300,000-85,000=(125,000)