Statement of Cash Flows

ASSESSMENT

Self-Test Questions
1. Explain the importance of a statement of cash flows to users of financial information.
The statement of cash flows is important to the users of financial information
because it reports how much cash the entity has generated to pay its debt
obligations and funds its operating expenses. It summarizes the amount of cash
and cash equivalents entering and leaving the company.

2. Differentiate among operating activities, investment activities, and financing activities.

The operating activities involves the principal revenue-producing activities and
normally affect income statement accounts. It also generally provides most of the
company’s cash flow and determine if it is profitable. The investing activities
reports how much cash was spent and earned from investment related activities.
It involves acquisition of non-current assets and other investments and it also
affect long-term assets and other non-operating assets. The financing activities
shows the cash flows that are used to fund the company. It includes transactions
involving debt, equity, and dividends.

3. How are significant non-cash investing and financing transactions reported in connection
with a statement of cash flows?
Non-cash investing and financing transactions are only included on a footnote or
in the notes of the financial statements. You can also disclose it in a separate
schedule or list. You cannot use the usual template of the statement of cash flow
because it is a non-cash transaction.

4. Describe the two methods of reporting cash flows from operating activities. Which
method is preferred by statement users? Statement of preparers? Why?\
The two (2) methods of reporting cash flows from operating activities are Direct
method and the Indirect method. Direct method records all cash transactions and
shows the information on the cash flow statement using cash inflows and outflows
while the indirect method begins with the net income on an accrual basis and
works backwards to achieve a cash basis figure. The method that is preferred by
the statement users is the indirect method since it is simple to prepare and so the
income statement and balance sheet will have figures consistent.
 Statement of Cash Flows

Learning Activity
Required: Compute cash flow from (a) operating activities, (b)investing activities, and (c)
financing activities:

STATEMENT OF CASH FLOWS

Cash flows from operating activities

Cash collected from customers 13,400
Cash paid for income taxes (1,850)
Cash paid for interest (600)
Net Cash provided (used) by operating activities P10,950

Cash flows from investing activities

Cash received from safe of building 4,200
Net cash provided (used) by investing activities 4,200

Cash flows from financing activities

Cash paid to acquire treasury shares (1,100)
Cash paid for dividends (930)
Net cash provided (used) by financing activities (2,030)

Net increase in cash P13,120