Lesson Components and Structures

5 of Cash Flow Statement

(CFS)
We all know that each and every one is now experiencing and facing hard times due
to the impact of Covid19 pandemic. In fact, our economy is the most affected as the
pandemic led business establishments of cutting off their expenses proportion to
their declining sales and income.

In the business world, small businesses rarely produce a cash flow report, as profit
and loss report is sufficient for their needs. It is unlikely that small- scale businesses
will involve complex non – cash transactions that would warrant such information
because they considered it as a waste of time and money to have an accountant
prepare a report that would be of little use to anyone. On the other hand, for large
entities such as Nike, Toyota, and Microsoft, having a cash flow report is imperative.
Such companies will often have a significant amount of non – cash transaction,
sometimes even billions of dollars in revenue that is simply owed to them but hasn’t
been received in cash yet. In this situation, a profit and loss statement is not always
sufficient, and a cash flow report is valuable to many users, such as banks and
shareholders.

What’s In

In your Fundamentals of Accounting, Business and Management 1, you have learned

the meaning of the accrual and depreciation. As you go further with your study of
accounting, you should bear in mind that preparation of financial statements is
guided by concepts and assumptions which are very foundations of the generally
accepted accounting principles governing its preparation. One of these assumptions
is the “accrual basis assumption” in this assumption, income is recognized when
earned regardless when received and expense is recognized when incurred regardless
when paid. In the long run, when an enterprise purchased building, furniture and
equipment for its operation, keep in mind that the value of such assets are subject
to depreciation.

Accounting provides business owners and management with information essential

to the efficient conduct and evaluation of its activities. Financial statements are
communicated to different users such as investors, lenders, suppliers, creditors,
customers and government that analyzed and interpreted by accountants who are
professional and knowledgeable in this field where accounting justifies its importance
in the global business world. Financial statements are vital to its users in making a
sound economic decision. Thus, it serves its purpose when it is communicated and
prepared on time.

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 What’s New

Activity 1: My Personal Cash Flow Statement

Directions:
1. Compute your monthly allowance (Formula: daily allowance x number of days
in a month) and write it on the allotted column/section on the table below.
2. Compute for any liabilities that you got from your classmates, friends, and
family members on its column section.
3. Compute for and write your expenses on food, transportation etc. on its column
section. (Formula: daily expenses x no. of days in a month).
4. Deduct the amount you spent from the amount of your allowance to get the
amount of your remaining cash then write your answer on its column.

Month Monthly Liabilities Expenses Remaining

Allowance Cash
Food Transpo Other
rtation
June
July
August
September
October
TOTAL
How do your allowance, liabilities and expenses are associated with the statement of
cash flows? Answer the given question in the space provided.

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 What is It

The Cash Flows Statement (CFS)

The statement of cash flows is a formal statement that provides information about
the cash receipts (inflows) and cash payments (outflows) of an entity from operating,
investing, and financing activities during the period. Unlike the SCI, this statement
shows cash transaction only while the latter follows accrual principle. This statement
is prepared based on information from the income statement and balance sheet. It
also portrays how company has spent its cash. As per Phil. Accounting Standards
(PAS) No. 7, enterprises are encourage to report cash flows from operating activities
using direct method but the indirect method is acceptable.

The Three Major parts of CFS

1. Operating Activities are generally the cash effects of transactions and other
events that enter into the determination of profit or loss. It usually involves
day – to – day transaction, providing service and delivering goods.
2. Investing Activities include making and collecting loans, activities like
acquiring and disposing investments in debt or equity securities and obtaining
and selling of property and equipment.
3. Financing Activities are the net amount of funding a company generates in
a given period of time to finance its business usually include obtaining
resources from owners and creditors. Hence, cash activities under this section
are deal with debt and equity.

Direct vs. Indirect Approach of CFS

Cash flows from operating activities can be presented using either direct or indirect
method. If the entity’s net cash used in operating activities is obtained by adding
individual operating cash inflows and then subtracting the individual operating cash
outflows, then the method used by the entity is direct method. However, if the net
cash provided by operating activities was not resulting from cash transactions but
by adjusting profit for income and expenses items, then the method used by the
entity is indirect method.

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 ACE COMPANY
HEADING CASH FLOW STATMENT
FOR THE YEAR ENDED DECEMBER 31, 2019

Cash flows from Operating Activities OPERATING ACTIVITIES

Receipts from customers P 1, 000, 000

Payments to suppliers (600, 000)

Net Cash generated by Operating Activities P 400, 000

Cash flows from Investing Activities INVESTING ACTIVITIES

Purchases of Property and Equipment P (250, 000)

P (250, 000)
Net Cash used in Investing Activities

Cash flows from Financing Activities FINANCING ACTIVITES

Long term loan from a bank P 400, 000
Additional investment from owner 100, 000
Withdrawal by owner (80, 000)
Net Cash used in Financing Activities P 420, 000

Net increase in cash and cash equivalents P 570, 000

Cash, January 1, 2019 100, 000
V
Cash, December 31, 2019 P 670, 000

Note that the method used in this example is direct method.

Net change in cash or net cash flow (increase/decrease) is the net amount of
change in cash either it is an increase or decrease for the current period brought by
operating, investing and financing activities.
Beginning balance is the balance of the cash account at the beginning of the
accounting period.
Ending balance is the balance of the cash account at the end of the accounting
period computed using the beginning balance + the net change in cash for the
current period.
Cash flow statement should only include cash transactions and that the net
income/loss of the company can contain non – cash transactions such as
depreciation. Changes in current assets and liabilities are included if they are related
to revenues and expenses which were included in the net income/loss even if they
were non-cash transactions or they affected cash but was not part of the net
income/loss (accrual, prepaid, unearned).

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INDIRECT METHOD
LEARNING IS FUN COMPANY
CASH FLOW STATMENT
HEADING
FOR THE YEAR ENDED DECEMBER 31, 2019

Cash from Operating Activities OPERATING ACTIVITIES

Net Income P 250, 000
Add back: Depreciation 20, 000
Loss on sale of property and 10, 000
equipment P 280, 000

(Increase)/Decrease in Trade & Other (40, 000)

Receivables – Net

Increase /(Decrease) in Trade & Other 60, 000

Payables
P 300, 000
Net Cash generated by Operating Activities

Cash from Investing Activities INVESTING ACTIVITIES

Purchase of Property and Equipment P (120, 000)

Net Cash generated by Investing Activities P(120, 000)

Cash from Financing Activities FINANCING ACTIVITIES

Long term loan from a bank P 300, 000

Additional investment from owner 100, 000

Withdrawals by owner (80, 000)

Net Cash generated by Financing Activities P320, 000

Net increase in cash and cash equivalents P500, 000

Cash, January 1, 2019 P100, 000

Cash, December 31, 2019 P600, 000

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 What’s More

Activity 2: Classifying Cash Transactions

Directions: Categorize each cash flow as (O) for operating, (I) for investing, (F) for
financing. Write your answer on the space provided below.

1. Cash received from sale of building. _____________

2. Cash paid for salaries. ____________
3. Cash received for interest on a note receivable.
4. Cash paid to acquire a new truck.
5. Cash loaned out to a customer in the form of long-term note
6. Cash received for a service rendered.
7. Cash paid for interest.
8. Cash paid for insurance on equipment.
9. Cash received from a debtor representing payments
of principal.
10. Cash paid out to acquire a building.
11. Cash paid for taxes.
12. Cash received from borrowings.
13. Cash paid to acquire equity securities.
14. Cash paid for utilities.
15. Cash received from investments by owner.

Activity 3: Compute Me!

Direction: Study the given data below and compute for (1) the cash generated/used
in financing activities, (2) the net change in cash for the year, and (3) prepare the
CFS for the year. Write your answer on a separate worksheet.

ACE Company has presented the following in order to aid the account in
preparing CFS during the month.
a. Net income: P200, 000
b. Depreciation expense: P25, 000
c. Gain on sale on property and equipment: P100. 000
d. Decrease in trade and other receivables: P 70, 000
e. Purchase of property and equipment: P200, 000
f. Payment of loan from bank: P150, 000

1. Compute for the cash generated/used in financing activities. (5 pts)

2. Based on the given above, compute for the net change in cash for the year. ( 5
pts)

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3. If the ending balance of cash account is P700, 000, prepare the CFS for the
year. ( 15 pts)

What I Have Learned

ACTIVITY 4: Fill in the Blanks

Direction: Complete the sentences below by filling in the blanks with the correct
word/s or phrase/s.

1. The cash flows statement has three components, namely: ,

, and .
2. The element of financial statement that provides information about cash
transactions of an entity during the period of time is called .
3. Under PAS No. 7, the enterprises are encouraged to report cash flows from
using but indirect method is acceptable.
4. This activity involves providing services, and producing and delivering goods is
known as .
5. Investing activity includes making and , activities like acquiring and
in debt or equity securities and obtaining and selling of
.
6. Cash activity under this section includes obtaining resources from owners and
creditor. This component of cash flows statement is called .
7. The net amount of change in cash either it is an increase or decrease for the
period brought by cash transactions activities is known as .
8. The balance of the account at the beginning of the accounting period is called
.
9. Ending balance of the cash account is the balance at the of
accounting period.
10. Unlike statement of comprehensive income, cash flows statement shows
while the latter follows accrual principle.

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 What I Can Do

Activity 5: Problem Solving

Directions: Read and analyze the problem below then do the following
requirements.
Assuming, you owned a sari-sari store and had a beginning cash amounting of
P50, 000 and the following transactions occurred during the month.
a. Purchase of goods. Paid in cash. 100, 000
b. Sales of goods. Received cash. 150, 000
c. Paid utilities 30, 000
d. Paid rent 10, 000
e. Sold equipment for cash 100, 000
f. Owner withdraws investment 10, 000
Required:
a. Compute for your net cash flow generated/used in operating activities. (5
pts)
b. Compute for your net cash flow generated/used in investing activities. (5 pts)
c. Compute for your net cash flow used in financing activities. (5 pts)
d. Prepare a cash flows statement using direct method. ( 15 pts)

Activity 6: Answer Me
Direction: Answer the following questions on a separate sheet of paper.

1. What is statement of cash flows? Briefly explain.

2. Explain the three activities under cash flows statement.

3. Discuss the differences between the direct and indirect method of presenting
cash flows from operating activities.

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 Assessment

Directions: Choose the letter of the best answer. Write the chosen letter on a
separate sheet of paper.

1. All are example of operating activity EXCEPT:

a. Receipts from sales of goods c. Payments for taxes
b. Payments to acquire debt securities d. Receipts from customers

2. As per Philippine Accounting Standards (PAS) No. 7, enterprises are encouraged

to report cash flows from operating activities using which method?
a. Direct method c. both a and b
b. Indirect method d. none of the above

3. What do you call the element of financial statement prepared based on

information from the income statement and the balance sheet?
a. Statement of financial position
b. Statement of comprehensive income
c. Statement of changes in equity
d. Statement of cash flows

4. Which of the following is an example of an investing activity?

a. Obtaining bank loan c. Producing goods and services
b. Paying taxes to the government d. Purchasing a building

5. Which of the following is cash outflow from operating activities?

a. Payment for interest expense
b. Payment to acquire property and equipment
c. Payment to settle notes payable
d. Payment to owners in the form of withdrawals

6. This activity includes cash transactions related to obtaining and selling of

property and equipment and other non - current assets.
a. Operating activity c. Financing activity
b. Investing activity d. Cash flow activity

7. This financial statement shows the net increase/decrease in cash during the
period and the cash balance at the end of the period.
a. Statement of financial position
b. Statement of comprehensive income
c. Statement of changes in equity
d. Statement of cash flows

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8. What do you call an amount owed to others for unpaid expenses?
a. Accrued liabilities c. Unearned revenues
b. Depreciation expense d. Accounts payable

9. The decrease in the value of tangible assets such as building, furniture and
equipment is called what?
a. Accrued expense c. Amortization
b. Depreciation d. Mortgage

10. Payment of insurance premiums in advance would increase the amount of

which account?
a. Prepaid expense c. Accrued income
b. Unearned income d. Accrued expense

11. What would be the effect of Payment to Settle Note Payable to the company’s
cash flow under financing activities?
a. Decrease c. No effect
b. Increase d. None of the Above

12. What is the element of financial statements that provides information about the
cash receipts and cash payments of an entity during a period?
a. Statement of financial position c. Statement of changes in equity
b. Statement of comprehensive income d. Statement of cash flows

13. Which of the following is an example of a financing activity?

a. Acquiring land c. Paying off a loan
b. Employing workers d. Selling equipment

14. Which component of cash flow statement involves providing services, producing
and delivering goods and the cash effects of transactions directly related to the
main revenue – producing activities of the company?
a. Operating activities c. Financing activities
b. Investing activities d. All of the above

15. The following are categorized under of Operating Activities, EXCEPT:

a. Cash received from clients
b. Payments to suppliers
c. Payments to acquire office equipment

Reference:

Ballada, W., Basic Accounting Made Easy 20th Edition. Philippines: WIN BALLADA
and SUSAN BALLADA, 2015
Florendo, J.C. et. al,Teaching Guide for Senior High School FUNDAMENTALS OF
ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2.Quezon City, Philippines:
Commission on Higher Education, 2016
https://courses.lumenlearning.com Date Retrieved: June 19, 2020
https://scalefactor.com/ask-the-experts/cash-flows Date Retrieved: June 22, 2020
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