FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

WEEK 5:

CASH FLOW STATEMENT

Cash is an important asset. It is an account affected by many transactions. The debit and credit
side of the cash account generally represent cash receipts and cash disbursements
respectively. Cash receipts may come from (1) cash sales to customers, (2) collection of
customer accounts, (3) loans and other borrowings and (4) owner’s contribution. On the other
hand, cash disbursements may be for payments of (1) business expenses, (2) purchases of
inventories and other assets (3) liabilities to creditors and (4) dividends to owners.

Objectives
By the end of this lesson, the student should be able to:

1. discuss the components and structures of a CFS (ABM_FABM12-lf-10)

2. prepare a CFS (ABM_FABM12_lf-11)

Activity No.1

Pre-Assessment

Classify the following situations if belong to operating, investing and financing activities.

Cash received from customers Salaries paid

Interest paid Utilities paid

Cash drawings of owners Payment for acquisition of equipment

Cash contributions from owners Depreciation

Payments to suppliers Amortization

Principal payments for bank loans Cash received from sale of land

Operating Investing Financing

_________ __________ ___________

_________ __________ ___________
_________ __________ ___________
_________ __________ ___________

Discussion:
Cash Flow Statement

Cash Flow Statement- Provides an analysis of inflows and/or outflows of cash from/to
operating, investing and financing activities. This statement shows cash transactions only
compared to the Statement of Comprehensive Income (SCI) which follows the accrual principle.

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The CFS provides the net change in the cash balance of a company for a period. This helps
owners see if their revenues are actually translated to cash collections or if they have enough
cash inflows in order to pay any maturing liabilities.
Operating Activities- Activities that are directly related to the main revenue producing activities
such as cash received from customers, cash received from fees, commissions and other income,
cash payments to suppliers, cash payments to employees, cash payments for other operating
expenses and interest payments.
Investing Activities- Cash transactions related to cash payments to acquire property, plant and
equipment, intangible assets and other long term assets, cash receipts from sale of property, plant
and equipment, intangible assets and other long term assets, cash loans made to other parties
(long term note receivable) and cash collection on lone term note receivable.
Financing Activities-Cash transactions related to changes in equity and borrowings such as cash
received from issuing common shares, cash received from issuing notes or getting loan from a
bank, cash dividends distributed to shareholders, cash withdrawals of owners and cash payment
for principal of long term loan.

Example of Direct Approach Cash Flow Statement

ABC COMPANY
CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2019

Cash flows from Operating Activities

Receipts from Customers P 119,700
Payments to Suppliers (38,700)
Payment to employees (35,000)
Rent Payments (25,000)
Utility Payments (7,890)
Interest Payments (7,500)
Net Cash generated by Operating Activities 5,610
______________________________________________________________________________
Cash flows from Investing Activities
Acquisition of computers (P 60,000)
Net Cash used in Investing Activities (60,000)
______________________________________________________________________________
Cash flows from Financing Activities
Additional contribution from owner P 75,000
Owner’s drawings 4,000
Proceeds from bank borrowing 150,000
Loan payment (18,760)
Net cash generated by Financing Activities 202,240
______________________________________________________________________________
Net change in cash 147,850
Cash, January 1, 2019 120,000
Cash, December 31, 2019 P 267,850

Example No.1 Collection from Customer

The information below are taken from the Statement of Financial Position of ABC Company

December 31,2019 December 31, 2018

Accounts Receivable P18,400 P10,000

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December 31, 2019 Statement of Comprehensive income revealed the following:

Credit Sales 120,000
Cash Sales 8,100

Determine the (1) collection from credit sales and (2) total collection from customers

Let us begin with analysis of the AR account. Recall that credit sales increases AR because credit
sales represent right to collect from the customers. On the other hand, the right to collect (AR) is
extinguished when customers pay their accounts. Therefore, collections of receivables decrease
AR. Following this, the accounts receivable ending balance will be computed as follows.
AR, Beg. Balance + Credit Sales – Customer payments = AR, End Balance
P10,000 + P120,000 - ? = P18,400

We get the beginning balance of AR from the December 31, 2018 SFP. The December 31, 2019
SFP gives us the ending balance of AR. Moreover, we look at the current year SCI to determine
credit sales. Using Algebra, we determined that customer payments amount to P111,600.
However, this amount represents only the collections on credit sales. The company also
generated cash sales. Therefore, total collection is computed as follows

Collection from credit sales P111,600

Add: Receipts from cash sales 8,100
Receipts from customers 119,700

The analysis implies that when collection from customer is less than credit sales, then the
uncollected portion of credit sales increases AR. On the other hand, when collection from
customers is greater than credit sales, then the excess must mean some of the beginning AR were
collected leading to a decrease in AR at the end of the year.

Example No.2 Payment to Suppliers

The following are excerpts from the SFP of ABC Company

December 31, 2019 December 31, 2018

Inventory 4,800 5,000
Accounts payable 1,090 2,300

December 31, 2019 Income Statement revealed the following:

Cost of Good Sold 37,690

Let us begin with the analysis of the Inventory Account. Recall that purchases increase the
inventory account. On the other hand, inventory is decreased when goods are sold. We refer to
this as Cost of Goods Sold. Following this, inventory ending balance is computed as follows:

Inventory Beg. Balance + Purchases – Cost of goods sold = Inventory End balance
P5,000 + ? - P37,690 = P4,800
We get the beginning balance of inventory from the December 31, 2018 SFP. The December 31,
2019 SFP gives us and ending balance of inventory. Moreover, we look at the current year SCI to
determine Cost of goods sold. Using algebra, we determine that Purchases amount to P36,490.
However, this is not necessarily the payment to supplier. So far,we know how much we have
purchased from the suppliers during the year. To determine the amount we have paid to the
suppliers, we need to looks at Accounts Payable.

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Purchases made during the year increase AP. On the other, the suppliers claim is extinguished
when payment is made. Therefore, payments to suppliers decrease AP. Following this, AP ending
balance is computed as follows:
AP, Beg. Balance + Purchases – Payments = AP, End Balance
P2,300 + P37,490 - ? = P1,090

We get the beginning balance of AP from the December 31, 2018 SFP. The December 31, 2019
SFP gives us the ending balance of AP. We will use the amount of inventory purchases computed
above.
Using algebra, we determine that payments to suppliers amount to P38,700.

From this analysis, it is deduced that AP increases when there are unpaid portions of current year
purchases such that payment to suppliers is less than purchases. On the other hand, payment to
supplier is greater than purchases when AP decreases which implies that some of the beginning
AP must have been paid.

Indirect Method
The indirect method shows the reconciliation from accrual net income to net cash flows from
operations. Adjustments to net income include the following:

a. Non-cash expenses such as depreciation and amortization are added back to net income. Recall
that depreciation decreases the net book value of property, plant and equipment and increases
expense. This is an expense that does not have a cash counterpart. We refer to these as “non-
cash” expense.
b. Changes in current assets and current liabilities

Example No.3 CFO- Indirect Method

December 31, 2019 Statement of Comprehensive Income are given below

Sales P128,100
Cost of goods sold 37,690
Gross Profit 90,410
Less: Operating Expenses
Salaries expense 35,000
Rent expense 25,000
Utilities expense 7,890
Depreciation 2,500
Interest expense 7,500
Net Income P12,520

December 31, 2018 December 31, 2019

Accounts Receivable P18,400 P10,000
Inventory 4,800 5,000
Accounts payable 1,090 2,300
Determine cash flows from operation.
Answer:
Net income P12,520
Add: Depreciation 2,500
Changes in current assets and current liabilities

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Increase in accounts receivable (8,400)

Decrease in inventory 200
Decrease in accounts payable (1,210)
Net cash flows provided by operating activities P5,610
Let us analyze the adjustments for the changes in current assets and current liabilities.
Recall our Account Receivable analysis from Example No.1
AR, Beg. Balance + Credit sales – Customer payments = AR, End Balance
Using algebra, we move the variables around to determine customer payments

Credit Sales – (AR, End Balance – AR, Beg. Balance) = Customer payments

Our Starting point is the Net Income. Our goal is to arrive at customer payments (as part of cash
flows from operations). Recall that net income is computed as Sales-Expenses. Credit sales is
already included in net income. The second component of the computation is ending balance of
AR less beginning balance of AR. We refer to this as change in AR. From the equation, we see
than an increase in AR is deducted from net income. On the other hand, a decrease in AR is a
positive adjustment to net income.
Moving on, recall our inventory analysis from example 2.
Inventory, Beg. Balance + Purchases – Cost of Goods Sold = Inventory, End Balance

AP, Beg. Balance + Purchases – Payments = AP, End Balance

Using variables around to determine inventory purchased during the year.

Cost of goods sold + (Inventory, End Balance – Inventory, Beg. Balance)=Purchases

To determine the payments, plug in purchases in the AP analysis

AP + Cost of goods sold + (Inventory End Bal – Inventory Beg. Bal) – Payments = AP, End Bal

Using algebra, move around the variables to compute for payments.

Cost of goods sold + (Inventory End bal-Inventory Beg. Bal) + (AP Beg bal – AP End bal)
=Payments

Finally, recall the net cash flows from operations is collections less payments. Since we are
computing for the payments, we need to get negative of the equation.

-Cost of goods sold- (Inventory End-Inventory Beg. Bal) + (AP End balance-AP Beg. Bal) = -
payments

Our starting point is net income. Our goal is to arrive at payments to suppliers (as part of the
CFO). Recall that cost of goods sold is deducted from sales to determine net income. Hence, in
our equation, cost of goods sold is a negative number.

The second component of the computation is ending balance less beginning balance of inventory.
We refer to this as change in inventory. From the equation, we see that increase in inventory is
deducted from net income. A decrease in inventory is positive adjustment to net income.

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The third component of the computation is the ending balance less beginning balance of AP. We
refer to this as change in AP. We see that an increase in AP is added to net income. On the other
hand, a decrease in AP is deducted from net income.
Based on the above analysis, we summarize the adjustments for current assets and current
liabilities as follows:

Change in current assets/current liabilities Adjustment to net income

Increase in current assets Deduct from net income
Decrease in current assets Add to net income
Increase in liabilities Add to net income
Decrease in current liabilities Deduct from net income

Comprehensive Illustrative Problems: Mira’s Store

On February 1, 2004, Mira Delamer opened a store that sells school supplies. She asked for your
help to prepare a Cash Flow Statement for her store. The following information were provided to
you

Mira’s Store
Statement of Financial Position
As of December, 2004

ASSETS
Current Assets
Cash P44,535.00
Accounts Receivable 575.00
Inventories 15,345.00
Prepaid Rent 5,000.00
Total current assets 65,455.00

Non-Current Assets
Property, plant, and equipment 30,000.00
Accumulated depreciation (500.00)
Net book Value 29,500.00
Total Assets P94,955.00
LIABILITIES AND OWNER’S EQUITY
Current Liabilities
Accounts payable P8,110.00
Salaries payable 1,000.00
Utilities payable 4,000.00
Unearned income 1,395.00
Total current liabilities 14,505.00

Non-Current Liabilities
Long-term note payable 23,000.00
Total Liabilities 37,505.00

Owner’s Equity
Mira, capital 57,450.00
Total Liabilities and Equity 94,955.00

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Mira’s Store
Statement of Comprehensive Income
For the period ended December 31, 2004
Net Sales P111,348.00
Cost of goods sold (45,398.00)
Gross Profit 65,950.00
Less: expenses
Salaries expense 14,000.00
Rent expense 10,000.00
Utilities expense 4,000.00
Depreciation 500.00
28,500.00
Net Income P37,450.00

Below is the cash ledger account for Mira’s Store

CASH
PARTICULARS DEBIT CREDIT
Owner’s contribution 30,000.00
Rent payment 15,000.00
Purchase of fixtures 30,000.00
Collection from credit sales 110,773.00
Payment of salaries 13,000.00
Owner’s contribution 5,000.00
Payment to suppliers 52,633.00
Owner’s withdrawals 15,000.00
Proceeds from bank loan 23,000.00
Customer deposit 1,395.00
170,168.00 125,633.00
P44,535.00
Note: Customer deposit was received at the end of the year. Delivery will be made on January
2005
Required:
1. Prepare the Statement of Cash Flows by re-arranging and classifying the transactions in the
cash T-account
2. Using the Statements of Financial Position and Statement of Comprehensive Income show the
computation of the components of the direct method operating section of the Statement of Cash
Flows. Hint: This is the first year of operations for Mira’s Store. This means that the beginning
balances of all SFP account is zero.
3. Prepare the operating section of the Statement of Cash Flow using the indirect method.

Solution:
1. Prepare the cash flow statement by re-arranging and classifying the transactions in the cash T-
account.
Mira’s Store

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Statement of Cash Flows

For the year ended December 31,2004

Operating Activities
Collection from credit sales P110,773.00
Customer deposit 1,395.00
Payment to suppliers (52,633.00)
Rent payment (15,000.00)
Payment of salaries (13,000.00)
Net Cash Flows from Operating Activities P31,535.00

Investing activities
Purchase of fixtures (30,000)
Net Cash Flows from Investing P(30,000.00

Financing Activities
Owner’s contribution 35,000.00
Proceeds from bank loan 23,000.00
Owner’s withdrawal (15,000.00)
Net Cash Flows from Financing Activities P43,000.00
Net Change in Cash 44,535.00
Cash, Beginning ____0____
Cash, End 44,535.00

2. Using the SFP and the SCI, show the computation of the components of the direct method
operating section of the Cash Flow statements

Collection from credit sales

AR,beg 0
Net sales 111,348.00
Less: Collection ?
AR, end 575.00

Collection: AR,beg + Net Sales – AR,end = 110,773.00

Customer deposit
Unearned income, beg 0
Deposit received from customer ?
Less: deliveries made pertaining to customer deposit 0
Unearned Income, end 1,395.00

Customer deposit: Unearned Income,end + deliveries – unearned income, beg = 1,395.00

Payment to Suppliers

Inventory beg 0
Net purchase ?
Less: Cost of sales 45,398.00
Inventory, end 15,345.00

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Net Purchase= Inventory end + Cost of Sales –Inventory beg =60,743.00

AP beg, 0
Net purchase 60,743.00
Less: Payments ?
AP end 8,110.00
Payments: AP beg + Net Purchase-AP, end = (52,633.00)

Rent payments
Prepaid rent beg 0
Rent payments ?
Less: rent expense 10,000
Prepaid Rent, End 5,000

Rent Payments: Prepaid rent,end + rent expense – Prepaid rent, beg = 15,000

Payment of Salaries

Salaries payable, beg 0

Salaries expense 14,000
Less: Payments ?
Salaries payable end 1,000

Payments: Salary payable beg + salary expense-salary payable end = 13,000

Payment of Utilities

Utilities Payable, beg 0

Utilities expense 4,000
Less: Payments ?
Utilities Payable, end 4,000
Payments: Utilities payable beg + Utilities Expense – Utilities Payable end = 4,000

3. Prepare the operating section of the SCF using indirect method.

Net Income 37,450.00

Add: Depreciation 500.00
37,950.00
Changes in working capital
Increase in Accounts Receivable (575.00)
Increase in inventory (15,345.00)
Increase in Prepaid rent (5,000.00)
Increase in Accounts Payable 8,110.00
Increase in Salaries Payable 1,000.00
Increase in Utilities Payable 4,000.00
Increase in Unearned Income 1,395.00
Net Cash Flows from Operating Activities 31,535.00
Note: Net Cash Flows from Operating Activities computed using the direct method is always
equal to that derived from the indirect method.

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Activity No. 2
True or False
Read each sentence carefully and determine whether the statement is True or False. Write your
answers in the space provided before the number.

_________ 1. The Cash Flow Statement shows the amount of cash received and used in the
business organized according to operating, investing, and financing activities.
activities.
_________3. If the company has no accounts receivable balance at the beginning an at the end of
the year, then net Sales reported in the Statement of Comprehensive income will most likely be
equal to the cash received from customers reported in the cash Flow Statement
_________4. Payments for acquisition of merchandise inventory are reported as investing
activities.
_________5. Cash Flow Statement explains the observed difference in the cash balance from the
beginning to the end of the period.
_________6. Business activities are classified into operating, investing and funding activities in
the Cash Flow Statement.
_________7. Salary and utility payments are reported as operating activities.
_________8.Non-cash expenses such as depreciation and amortization are deducted from net
income to arrive at the cash flow from operating activities.
_________9. A negative cash flow from investing activities is a bad indicator of the company’s
ability to generate cash.
_________10. The bottomline of the Cash Flow Statement is equivalent to the cash balance
presented on the Statement of Financial Position.

Activity No. 3
Problem Solving

1. The cash account of XYZ Company has a beginning balance of P129, 937.50. Its year end
balance stands at P254,925.00. The table below show the summarized transactions from the cash
account of XYZ Company.

Cash received from customers 725,175.00

Payments to Suppliers 300,547.50
Payments for other operating expenses 58, 850.00
Salaries paid 19,992.50
Purchase of equipment 253,000.00
Sale of Delivery equipment(motorcycle) 6,875.00
Proceeds from sale of computer equipment 42,762.50
Withdrawals of owners 229,350.00
Proceeds from bank loan 82,500.00
Contributions of owners 137,500.00
Interest Paid 8,085.00

Required:
1. Prepare the operating, financing and investing section of XYZ’s Cash Flow Statement.
2. Is XYZ’s Cash Flow Statement reconciled with the balance of the cash account as of the end
of the year? Show your computation

Activity No.4

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1. The information on the table below are taken from the financial statements of XYZ
Corporation. Based on these information, compute for the amount of cash that the company had
received from the customers. Does your answer tie up with the summarized date from the cash
account given in the table in activity no. 3

Accounts receivable, beginning of the year P156,750.00

Accounts receivable, end of the year 249,700.00
Sales
2. The information on the table below are taken from the financial statements of XYZ
Corporation. Based on these information, compute for the amount of cash that the company paid
to suppliers. Did your answer tie up with the summarized data from the cash account in the
activity no. 3.

Inventory, beginning of the year P282,287.50

Inventory, end of the year 335,225.00
Accounts payable, beginning of the year 132,770.00
Accounts payable, end of the year 158,675.00
Cost of goods sold 273,515.00

Activity No.5

The Statement of Comprehensive Income for the year ended December 31, 2004 of ABC
Company is given below:
Sales revenue P1,212,500.00
Cost of goods sold 780,000.00
Operating expenses, excluding depreciation 70,000.00
Depreciation 75,000.00
Net income P287,500.00
The following were also taken from ABC Company’s comparative balance sheet as of December
31.
2004 2003
Accounts receivable P93,750.00 P75,000.00
Inventory 13,750.00 8,750.00
Accounts payable 51,250.00 35,000.00

Required:
1. Prepare the operating section of the Cash flow statement of ABC Company using indirect
method.
2. Determine the amount of cash collected from ABC’s customer? Assume that all ABC’s sales
are made on credit.
3. Determine how much inventory was purchased by ABC during the year?
4. Determine the amount of cash paid to ABC’s suppliers? Assume that all ABC’s inventory
purchases were made on credit.

Remember:

 Cash Flow Statement is the financial statement that explains the net change in cash for
the year.

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 The cash flow statement summarized the cash transactions that occurred during the year.
 The Cash Flow Statement shows cash transactions organized based on the three major
activities of the business-operating, investing and financing.
 Operating Activities- Activities that are directly related to the main revenue producing
activities such as cash received from customers, cash received from fees, commissions
and other income, cash payments to suppliers, cash payments to employees, cash
payments for other operating expenses and interest payments.
 Investing Activities- Cash transactions related to cash payments to acquire property,
plant and equipment, intangible assets and other long term assets, cash receipts from sale
of property, plant and equipment, intangible assets and other long term assets, cash loans
made to other parties (long term note receivable) and cash collection on lone term note
receivable.
 Financing Activities-Cash transactions related to changes in equity and borrowings such
as cash received from issuing common shares, cash received from issuing notes or getting
loan from a bank, cash dividends distributed to shareholders, cash withdrawals of owners
and cash payment for principal of long term loan.

Reference:

Salazar, Dani Rose C., Fundamentals of Accountancy, Business and Management 2, Rex
Bookstore, 2017.

De Guzman Angeles A., Fundamentals of Accountancy, Business and Management 2, Lorimar

Publishing Inc., 2018.

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