QUARTER 1 – MODULE 4

Statement of Cash Flows (SCF)

Department of Education ● Republic of the Philippines

Fundamentals of Accountancy, Business and Management 2 - Senior High School
Alternative Delivery Mode
First Edition, 2020

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Introductory Message

Dear Teachers and Learners! The writer welcomes you all to this module for the
subject Fundamentals of Accountancy, Business and Management 2 in the ABM Strand of
Senior High School. The discussion focussed on the preparation components, structures
and the preparation of Cash Flow Statement of the business.
As your partner in learning, I hope that you will not miss out every detail that the
writer would like you to learn in this material. Do enjoy as there are challenging and
interesting activities inside this learning modules. Congratulations in advance for this will
make you the master of your own learning.
Ops! wait for a while, for an easy use of this material, take note of some few
reminders:
1. Take your time to read every detail that this module contains.
2. This material contains Module 4 and each of which is provided with activities/tests
that will surely lead you to learn.
3. Here are the Icons used as your guide in every part of the lesson.

Icons of this Module

What I Need to This part contains learning objectives
that are set for you to learn as you go
Know along the module.
This is an assessment as to your level
of knowledge to the subject matter at
What I know
hand, meant specifically to gauge prior
related knowledge.
This part connects previous lesson with
What’s In that of the current one.

This is an introduction of the new lesson

What’s New through various activities before it will
be presented to you
This is a discussion of the activities as a
What is It way to deepen your discovery and
understanding of the concept.
This is a follow-up activity that is
What’s More intended for you to practice further in
order to master the competencies.

What I Have This activity is designed to process

what you have learned from the lesson
Learned

This is a task that is designed to

showcase your skills and knowledge
What I can do
gained, and applied into real-life
concerns and situations.

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 This is a task which aims to
evaluate your level of mastery in
Assessment achieving the learning competency.

In this portion, another activity will

Additional be given to you to enrich your
Activities knowledge or skill of the lesson
learned. This also tends retention
of learned concepts.

Answer Key This contains answers to all

activities in the module.

At the end of this module you will also find:

References This is a list of all sources used in

developing this module.

4. Please do follow the directions given per activity so your experience to the use of
this material will be meaningful and fruitful.
5. Answer all the tests in this material.
6. As a courtesy to the future users, PLEASE DO NOT WRITE ANYTHING ON ANY
PART OF THIS MODULE. Write your answer/s on a separate sheet of paper,
notebook, workbook or whichever is specified by your teacher/facilitator

Special Reminders for you learners:

1. Answer every activity intelligently and diligently.
2. Write your answer as directed by your teacher/facilitator.
3. Feel free to approach or communicate your teacher/facilitator whenever you
need help.
4. Don’t forget to put a smiley face if you finish the activity within the allotted time.

Table of Contents

iv
 Page
What This Module is all About…………………………………………………… ii
Introductory Message………………………………………………………......... iii
Icons of this Module………………………………………………………………. iii
What I Need to Know…………………………………………………………….. 1
What I Know (Pre-Test)………………………………………………………….. 2

MODULE 4 Statement of Cash Flows…….………………………… 3

Or Class Flow Statement (CFS)

LESSON 4 Statement of Cash Flows………………………………………. 3

What’s In…………………………………………………………………….. 3
What’s New ………………………………………………………………… 3
Activity 4.1 Prepare a Personal SCF…………………………………. 4

What is it Lesson 4.1 Statement of Cash Flows: Introduction…… 5

Lesson 4.2 Three Major Sections of SCF ………………. 5

Lesson 4.3 Approaches of the SCF ……………………… 6

Lesson 4.4 Preparing the SCF…………………………… 8

What’s More
Activities
4.2 Classify Me……………………………… 9

What I Have Learned 4.3 Organize Me……………………………. 10

What I Can Do 4.4 Solving the Problem Case #1……………10

4.5 Solving the Problem Case #2………… 11
Assessment 4.6 Choosing the Right One (Post-test)…… 11

Additional Activity 4.7 Tell Me the Truth………………………… 13

Answer Key………………………………………………………………………………..14

References …………………………………………………………………………......17

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 4
Less
on Statement of Cash Flows (SCF)

What I Need To Know

This lesson discusses the components and the structure of a Cash Flow
Statement (CFS) that will equip you in preparing the said financial report.
Furthermore, this lesson aims to discuss the three major sections of Cash Flow
Statement: 1. Operating, 2. Financing, 3. Investing Activities.

At the end of this lesson, you are expected to discuss the components,
structures, and prepare a Cash Flow Statement (CFS).

What I Know

Pre-test
Before starting with this module, let us see what you already know about
Statement of Cash Flow. Answer the questions below.

Directions. Read and analyze each item carefully. Write the letter of your answer on a
separate sheet and this will correspond 1 point each.

1. Which of the following events increases cash balance?

A. Bank not granting loan
B. Debtors paying to the company
C. Loan repayment to creditors
D. Sale of stock on account

2. Which of the following events reduce cash balances?

A. Purchase of fixed assets
B. Acquired assets on credit
C. Purchase of stock on account
D. Creditors grant loans

3. What is the effect of paying loan principal on cash flow and profits?
A. On profit – Decrease; On cash - Decrease
B. On profit – Decrease; On cash - None
C. On profit – Increase; On cash - Decrease
D. On profit – None; On cash - Decrease

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4. Which of the following is false?
A. A profitable business will never run out of cash.
B. Companies undergoing expansion can sometimes face a cash shortage.
C. In case cash outflows exceed cash inflows on an on-going basis, the
business will eventually run out of cash,
D. Cash is the lifeblood of a business and without it the business will
eventually die.

5. Which of the following is not a category of cash flows required to be shown on

the statement of cash flows?
A. Cash flows from operating activities
B. Cash flows from financing activities
C. Cash flows from taxation
D. Cash flows from investing activities

6. Which of the following is categorized as a cash flow from investing activities?

A. Increase in inventory
B. Proceeds of a loan
C. Proceeds from sale of PPE
D. Dividends paid

7. Which of the following would reduce the cash balances of a business and not
reduce the profit?
A. Distribution costs
B. Dividends paid
C. Interest paid
D. Wages paid

8. Which of the following reduces the cash balances of a business?

A. Cash inflow from interest income
B. Cash inflow from dividends income
C. Cash outflow to acquire fixed assets
D. All of the above

9. Which of the following is a cash flow from a financing activity?

A. Cash payments to acquire intangible assets
B. Cash receipts from sale of tangible assets
C. Cash proceeds from bank loans
D. Cash payments to acquire PPE

10. Which of the following is not a cash outflow for the business?
A. Depreciation
B. Dividends
C. Interest payment
D. Taxes

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 What’s In

The end product or output of accounting (financial accounting, to be specific)

is useful financial information. This useful financial information is the “story” that
accounting tells to the interested users. Useful financial information helps the owner
to answer the question, “Should I invest more cash in the business?

Creditors are also guided by this information in answering the question,

“Should we lend more money to the business?”

Financial information is contained and communicated through the financial

statements. Financial statements are like chapters of a novel, telling different stories
of an interrelated subject. Specifically, financial statements are organized depictions
of the events that happened in a business. A complete set of financial statements
are composed of the following (IASB 2011):
1. Statement of Financial Position or Balance Sheet
2. Statement of Comprehensive Income or Income Statement
3. Statement of Changes in Equity
4. Statement of Cash Flow

What’s New

To achieve the objectives of this lesson, you must remember to do the following:
 Read the lessons carefully.
 Follow all directions and given instructions.
 Answer all given tests and activities.
 Learn to familiarize the following terms:

TERM DEFINITION

CASH FLOW STATEMENT According to the definition of Deloitte Global

Services Limited (2015), this provides an
analysis of inflows and/or outflows of cash
from/to operating, investing and financing
activities. This statement shows cash
transactions only when we compared it to
the SCI which follows the accrual principle.

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Direct Method According to the definition of Deloitte Global
Services Limited (2015), this is the
operating cash flow section of the CFS.
Under this method, it would show each
major class of the gross cash receipts and
the gross cash payments.

Indirect Method According to the definition of Deloitte Global

Services Limited (2015), the operating cash
flow section of the CFS under the indirect
method will reconcile the net income or loss
of the company with the total cash flows
generated or used in operating activities by
adjusting the net income or loss for effects
of non-cash transactions.

Operating Activities According to the definition of Deloitte Global

Services Limited (2015), these are activities
that are directly related to the main
revenue-producing activities of the company
such as cash from customers and cash paid
to suppliers/employees.

Investing Activities According to the definition of Deloitte Global

Services Limited (2015), these are Cash
transactions related to the purchase or sale
of non-current assets.

Financing Activities These are Cash transactions related to the

changes in equity and borrowings.

Net change in cash This is the net amount of change in cash

whether it is an increase or decrease for the
current period. The total change brought by
operating, investing and financing activities.

Directions:
1. Get a piece of paper and write your monthly allowance (computed by daily
allowance x number of days in a month)
2. Determine any liabilities that you’ve got from classmates, friends, family
members.
3. Write the amount you spend on food, transportation, etc. (make it monthly
to match your allowance)
4. Deduct the amount you spend from the amount of your allowance.

Processing Questions:
1. How much is your accumulated monthly allowance? From what sources
are they from?

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 2. How much is your total monthly expenses? What are these expenses?
Associate the sources of your monthly allowance as your cash inflows and
your monthly expenses as your cash outflows.
3. How would you differentiate a personal statement of comprehensive
income from that of your personal cash flow statement?
4. Reflect on the importance of knowing your cash inflows and cash outflows.

What Is It

Lesson 4.1 Statement of Cash Flows: An Introduction

This statement of cash flows generally presents the sources and utilization of
an organization’s cash and cash equivalents. Although the statement of cash flow is
horizontal in nature, the information contained in such statements is useful in
predicting future cash outflows and inflows of the organization.

A statement of cash flow has three major sections namely operating, financing
and investing activities. Each section represents classification of an organization’s
cash related activities.

This is a formal statement that classifies cash receipts (inflows) and cash
payments (outflows) into operating, financing and investing activities. It will show the
net increase or decrease in cash during the period and the cash balance at the end
of the period.

Lesson 4.2. Three Major Sections of the Statement of Cash Flows

Operating Activities

Operating activities are the base-line cash of activities of the entity related to
its normal operating cycle. Furthermore, such activities are related to the primary
revenue-producing activity or profit determination of the entity. IAS (IASB, 2001) lists
the following transactions as examples of operating activities.

ACTIVITIES EFFECTS
+ (increases cash) inflow
- (decreases cash) outflow
Cash receipts from sale of goods and rendering of +
services
Cash receipts from royalties, fees, commission, +
and other revenues
Cash payments to suppliers of goods and services -
Cash payments to employees -
Cash payments to income taxes -
Interest paid -

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Interest received +
Dividends received +

Investing Activities

Investing activities generally result from acquisition and disposal of non-

current assets. IAS 7 (IASB 2001) lists the following activities as investing activities:

ACTIVITIES EFFECTS
+ (increases cash) inflow
- (decreases cash) outflow
Cash payments to acquire property, plant and -
equipment
Cash payment to acquire intangible assets -
Cash receipts from sales of property, plant and +
equipment
Cash receipts from sales of intangible assets +
Cash receipts from sale of long-term assets +

Financing Activities

Financing activities arise from changes in non-current liabilities and owner’s

equity of a business organization. IAS (IASB 2001) lists the following items as
financing activities.

ACTIVITIES EFFECTS
+ (increases cash) inflow
- (decreases cash) outflow
Cash investment from owners +
Cash proceeds from bank loans +
Cash distribution from owners -
Repayment of bank loans -

Lesson 4.3 Approaches of the Statement of Cash Flows

According to IAS 7 (IASB 2001), entities are given an option to present the
statement of cash flow whether to use the direct or indirect method.

1. Direct Method

The direct method presents each major classification of gross receipts

and gross payments for operating activities. This is in line with the

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 items presented in the table below. IAS (IASB, 2001) encourages the
use of the direct method. Below is an example of a direct method.

Soriano Trading
Statement of Cash Flows
For the Period Ended December 31, 2019
Cash Flow from Operating Activities:
Cash receipts from rendering of services 200,000.00
Cash payment to suppliers of goods and services ( 50,000.00 )
Net cash flow from Operating Activities 150,000.00
Cash Flow from Investing Activities:
Proceeds from sale of equipment 100,000.00
Net cash flow from Investing Activities 100,000.00
Cash Flow from Financing Activities:
Proceeds from cash investment from owners 250,000.00
Proceeds from bank loan 30,000.00
Payment to owners ( 15,000.00 )
Net cash flow from Financing Activities 265,000.00
Net Change in Cash 515,000.00
Cash, beginning of the period 300,000.00
Cash , end of the period 815,000.00
Sample of Statement of Cash Flows using Direct Method.

2. Indirect method

The indirect method however, presents the operating activities starting

with the pre-tax income. It then reconciles the pre-tax for non-cash
income and expenditures. After which, the movement in current assets
and liabilities are adjusted to the resulting figure. Below is an example
of a statement of cash flows presented using the indirect method:

Soriano Trading
Statement of Cash Flows
For the Period Ended December 31, 2019
Cash Flow from Operating Activities:
Income before income tax 125,000.00
Adjustment for:
Depreciation 10,000.00
Amortization 20,000.00
Operating income before working capital changes 155,000.00
Increase in accounts receivable ( 10,000.00)
Decrease in inventories 15,000.00
Increase in accounts payable 5,000.00
Decrease in notes payable (15,000.00)
Net cash flow from Operating Activities 150,000.00

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Cash Flow from Investing Activities:
Proceeds from sale of equipment 100,000.00
Net cash flow from Investing Activities 100,000.00
Cash Flow from Financing Activities:
Proceeds from cash investment from owners 250,000.00
Proceeds from bank loan 30,000.00
Payment to owners ( 15,000.00 )
Net cash flow from Financing Activities 265,000.00
Net Change in Cash 515,000.00
Cash, beginning of the period 300,000.00
Cash , end of the period 815,000.00
Sample of Statement of Cash Flows using Indirect Method.

For the purpose of this text, the direct method will be used; it is more
preferred by IAS 7 (IASB 2001). Furthermore, beginners in preparing the statement
of cash flow will appreciate the said format.

Lesson 4.4 Preparing the Statement of Cash Flows

1. Determine the heading

The heading of the statement includes the company name, title of the
statement, and the period covered by the statement. Below is the
heading of the statement of the cash flow for the illustrative case:

SORIANO TRADING
Statement of Cash Flows
For the Period Ended December 31, 2019

2. Analyse the Cash Transaction

Every cash transaction should be carefully analysed to determine its
nature, the effect and the classification or section where it belongs.

3. Prepare the Operating Activities Section

All cash transactions that will affect net income of profit and loss will be
classified as operating activities. See examples of transactions under
operating activities in the previous discussion.

4. Prepare the Investing Activities Section

All cash transactions that will affect the noncurrent assets are classified
under this section. See examples of transactions under investing
activities on the previous discussion.

5. Prepare the Financing Activities Section

All cash transactions affecting noncurrent liabilities and equity will be
classified as financing. See examples of transactions under this section
in the previous discussion.

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 6. Determine the Net Change in Cash
This is the Cash at the beginning of the period and the Cash at the end
of the period.

Illustrative Example of Statement of Cash Flows:

Soriano Trading HEADING

Statement of Cash Flows
For the Period Ended December 31, 2019
Cash Flow from Operating Activities:
OPERATING
Cash receipts from rendering of services 200,000.00 ACTIVITIES SECTION
Cash payment to suppliers of goods and services ( 50,000.00 )
Net cash flow from Operating Activities 150,000.00
Cash Flow from Investing Activities: INVESTING
Proceeds from sale of equipment 100,000.00 ACTIVITIES SECTION
Net cash flow from Investing Activities 100,000.00
Cash Flow from Financing Activities:
Proceeds from cash investment from owners 250,000.00 FINANCING
Proceeds from bank loan 30,000.00 ACTIVITIES SECTION
Payment to owners ( 15,000.00 )
Net cash flow from Financing Activities 265,000.00
Net Change in Cash 515,000.00 Net Change in cash

Cash, beginning of the period 300,000.00 Cash beginning

Cash , end of the period 815,000.00 Cash ending

What’s More

Activity 4.2 Classify Me

Direction: Classify each transaction whether they are operating, financing or

investing. After which, indicate the reason for such classification.

NATURE CLASSIFICATION REASON

Ex. Cash investment of owner Financing Affects equity
Proceeds from bank loan
Collection from customers
Payment of business permit
Payment of annual rent
Purchase of office supplies
Purchase of equipment
Cash withdrawal of owner

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Payment of salaries
Payment to suppliers of goods
Payment of interest
Proceeds from interest
Receipts from goods sold

What I Have Learned

Activity 4.3 Organize Me

Instruction: Create a graphic organizer illustrating the major components of

Statement of Cash Flows.

What I Can Do

Activity 4.4. Solving the Problem

Case #1. Lopez General Services

Below are the cash transactions of Lopez General Services for December 31, 2019

Cash receipts from rendering of services 35,000.00

Cash payment to suppliers of goods and services (12,500.00)
Proceeds from bank loan 12,000.00
Payment of interest ( 5,000.00)
Payment of rent ( 8,000.00)

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Proceeds from sale of equipment 10,000.00
Purchase of equipment ( 9,500.00)
Withdrawal of owner (6,500.00)
Cash at the beginning of the year 25,500.00

1. How much is the cash flow from operating activities?

2. How much is the cash flow from investing activities?
3. How much is the cash flow from financing activities?
4. How much is the net increase or decrease in cash for the year?
5. How much is the cash as of December 31, 2019?
6. Prepare the Statement of Cash Flows using direct method.

Activity 4.5. Solving the Problem

Case #2. Mercado Trading

Below are the cash transactions of Mercado Trading for December 31, 2019:
a. Purchase of goods. Paid cash. 100,000
b. Sale 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

1. How much is the cash flow from operating activities?

2. How much is the cash flow from investing activities?
3. How much is the cash flow from financing activities?
4. How much is the net increase or decrease in cash for the year?
5. How much is the cash as of December 31, 2019?
6. Prepare the Statement of Cash Flows using direct method.

Assessment

Post-test

Activity 4.6 Choosing the Right One

Directions. Read and analyze each item carefully. Write the letter of your answer on a
separate sheet and this will correspond 1 point each.

1. Which of the following events increases cash balance?

A. Bank not granting loan
B. Debtors paying to the company
C. Loan repayment to creditors
D. Sale of stock on account

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2. Which of the following events reduce cash balances?
A. Purchase of fixed assets
B. Acquired assets on credit
C. Purchase of stock on account
D. Creditors grant loans
3. What is the effect of paying loan principal on cash flow and profits?
A. On profit – Decrease; On cash - Decrease
B. On profit – Decrease; On cash - None
C. On profit – Increase; On cash - Decrease
D. On profit – None; On cash – Decrease

4. Which of the following is false?

A. A profitable business will never run out of cash.
B. Companies undergoing expansion can sometimes face a cash shortage.
C. In case cash outflows exceed cash inflows on an on-going basis, the
business will eventually run out of cash,
D. Cash is the lifeblood of a business and without it the business will
eventually die.
5. Which of the following is not a category of cash flows required to be shown on
the statement of cash flows?
A. Cash flows from operating activities
B. Cash flows from financing activities
C. Cash flows from taxation
D. Cash flows from investing activities
6. Which of the following is categorized as a cash flow from investing activities?
A. Increase in inventory
B. Proceeds of a loan
C. Proceeds from sale of PPE
D. Dividends paid
7. Which of the following would reduce the cash balances of a business and not
reduce the profit?
A. Distribution costs
B. Dividends paid
C. Interest paid
D. Wages paid
8. Which of the following reduces the cash balances of a business?
A. Cash inflow from interest income
B. Cash inflow from dividends income
C. Cash outflow to acquire fixed assets
D. All of the above
9. Which of the following is a cash flow from a financing activity?
A. Cash payments to acquire intangible assets
B. Cash receipts from sale of tangible assets
C. Cash proceeds from bank loans
D. Cash payments to acquire PPE

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 10. Which of the following is not a cash outflow for the business?
A. Depreciation
B. Dividends
C. Interest payment
D. Taxes

Additional Activity

Activity 4.7 Tell Me the Truth

Now, that you are finished accomplishing the module, let us check what you
have learned. Answer the questions given below by writing letter “T” if the statement
is true and “F” if the statement is false.

___ 1. There is an outflow of funds in depreciation.

___ 2.The statement of cash flow is divided into three required categories: operating,
investing, and financing.
___ 3.The purchase of land is classified in the statement of cash flows of operating
activities.
___ 4. Selling a piece of equipment below cost is an example of investing activity.
___ 5. Paying dividends to investors creates a cash outflow from financing activities.
___ 6. The primary purpose of the statement of cash flows is to provide cash-basis
information about the company’s operating, investing, and financing activities.
___ 7. The first step in the preparation of the statement of cash flows is to determine
the net cash flow from operating activities.
___ 8. The direct method or reconciliation method reports cash receipts and cash
disbursements from operating activities.
___ 9. The IAS 7 (IASB, 2001) encourages the use of the indirect method over the
direct method.
___10. Financing activities generally result from acquisition and disposal of non-
current assets.

Congratulations! You have just finished Lesson 4 of this module.

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