STATEMENT OF CASH FLOWS

• To understand the nature and purpose of statement of cash flows.

• To understand the classifications of cash flows as operating, investing
and financing.
• To be able to prepare a statement of cash flows using the direct
method.
• To be able to prepare a statement of cash flows using the direct
method.
• To be able to prepare a statement of cash flows using the indirect
method.
• A statement of cash flows is a component of financial statements
summarizing the operating, investing, and financing activities of an entity.
• In simple language, the statement of cash flows provides information
about the cash receipts and cash payments of an entity during a period.
• An entity shall prepare a statement of cash flows and present it as an
integral part of the financial statements for each period for which financial
statements are presented.
• The primary purpose of a statement of cash flows is to provide relevant
information about cash receipts and cash payments of an entity during a
period.
• The statement of cash flows is designed to provide information about the
change in an entity’s cash and cash equivalents.
• Cash flows are the inflows and outflows of cash and cash equivalents.
 CLASSIFICATION OF Cash provided from or used by
CASH FLOWS Operating Activities
• Operating activities- are the • Accounts • Salaries Payable
cash flows derived primarily Receivable • Payroll taxes
from the principal revenue
• Inventory payable
producing activities of the
entity. • Supplies • Interest Payable
• Prepaid Insurance • Income taxes
• In other words, operating
• Other current payable
activities generally result from
transactions and other events Assets • Unearned
that enter into the • Notes payable Revenue
determination of net income or • Accounts payable • Other Current
loss. Liabilities
EXAMPLES OF CASH FLOWS FROM OPERATING ACTIVITIES
• Cash receipts from sale of goods
and rendering services.
• Cash receipts from royalties,
rental fees, commission and
other revenue.
• Cash payments to suppliers for
goods and services.
• Cash payments for selling,
administrative and other
expenses
• Cash receipts and cash payments of
an insurance enterprise for premiums
and claims, annuities and other policy
benefits.
• Cash payments or refunds of income
taxes unless they can be specifically
identified with financing and
investing activities.
• Cash receipts and payments for
securities held for dealing or trading
purposes.
CLASSIFICATION OF CASH
FLOWS
• Investing activities – are the
cash flows derived from the
acquisition and disposal of long
term assets and other
investments not included in
cash equivalent.
• A simple guide, investing
activities include cash flows
from transactions involving
non-operating assets.
Cash provided from or used by
Investing Activities
• Long-term investments
• Land
• Buildings
• Equipment
• Furniture and fixture
• Vehicles
• In short, investing activities involve
the purchase and/or sale of long
term investments and PPE.
 EXAMPLES OF CASH FLOWS FROM INVESTING ACTIVITIES
• Cash payments to acquire property and
equipment, intangibles and other long
term assets.
• Cash receipts from sales of property,
plant and equipment, intangible and
other long term assets.
• Cash payment to acquire equity or debt
instruments of other entities and
interests in joint ventures (current and
long term investments).
• Cash receipts from sale of equity or debt
of other entities and interest in joint
venture.
• Cash advances and loans to other
parties ( other than advances and
loans made by financial institution)
• Cash receipts from repayment of
advances and loans made to other
parties.
• Cash payments for future contract,
forward contracts, option contract
and swap contract.
• Cash receipts for future contract,
forward contracts, option contract
and swap contract.
 CLASSIFICATION OF CASH Cash provided from or used
FLOWS by Financing Activities
• Financing activities – are the cash • Notes payable
flows derived from the equity capital
• Bonds payable
borrowings of the entity.
• Deferred Income Taxes
• Cash flows that result from
transactions between the entity and • Cash investment by the owner
the owners( equity financing). • Cash withdrawal by the owner
Between entity and the creditors
(debt financing).
• In short financing activities involve the
• As a simple guide, Financing activities
short term and long term borrowings
include cash flows from transactions
and repayments including investment
involving nontrade liabilities and
and withdrawals by the owner.
equity of an entity.
EXAMPLES OF CASH FLOWS FROM FINANCING ACTIVITIES

• Cash receipt from issuing shares or

other equity instruments for • Cash payment for amounts
example, issuance of ordinary and borrowed.
preference shares.
• Cash payment by a lessee for
• Cash payments to owners to
acquire or redeem the enterprises the reduction of the
shares, for example, payment for outstanding principal lease
treasury shares. liability.
• Cash receipt from issuing loans,
notes, bonds, mortgages and other
short term or long term borrowings
 Direct Method
• PAS 7, paragraph 18, provides that an entity shall report cash
flows from operating activities using either the direct method or
indirect method.
• The direct method shows in detail or itemizes the major classes of
gross cash receipts and gross cash payments.
• The cash receipt are listed one by one, the cash payments are
listed one by one, and the difference represents the net cash
flow from operating activities.
• In essence, the direct method is the cash basis income statement.
• Actually, the statement of cash flow is the conversion from the
accrual basis to the cash basis of accounting.
Some formulas for determining cash receipts and cash payments

Cash received from customer 5,910,000

Sales 6,500,00
Increase in Account Receivable (590,000)
Collection from customers 5,910,000

Rent received 50,000

Rent income 80,000
Decrease in Unearned Rent Income (30,000)
Rent Received 50,000

Cash payment to merchandise creditors (3,180,000)

Purchases 3,200,000
Increase in Accounts Payable (20,000)
3,180,000
Salaries paid 935,000
Salaries 950,000
Increase in Accrued salaries payable (15,000)
935,000
Insurance paid (35,000)
Insurance 40,000
Decrease in Prepaid Insurance (5,000)
35,000

Interest paid (60,000)

Interest expense 55,000
Decrease in Accrued Interest Pay 5,000
Interest paid 60,000

Income tax paid (250,000)

Income tax 350,000
Increase in income tax payable (100,000)
Income tax paid 250,000
 Indirect Method
• The indirect method means that the net income or loss is adjusted
for the effects of transactions of a non-cash nature, any deferrals or
accruals of past or future operating cash receipts and payments, and
items of income or expense associated with investing and financing
activities.
• The indirect method of presenting the cash flow from operation
begins with the accrual basis net income and applies a series of
adjustments to convert the income to a cash basis.
• The direct method and indirect method are applicable only to
operating activities.
• PAS 7, paragraph 21, provided that an entity shall report separately
major classes of gross cash receipts and gross cash payments arising
from investing and financing activities using the direct method.
 Indirect Method
The following general guidelines are offered for adjustments of net income to cash basis:
• All increases in trade noncash current assets are deducted from net income
• All decreases in trade noncash current assets are added to net income.
• All increases in trade current liabilities are added to the net income.
• All decreases in trade current liabilities are deducted to the net income.
• Depreciation, Amortization and other noncash expenses are added back to the net
income to eliminate the effect they had on net income.
• Any gain on disposal of property or gain on early retirement of nontrade liabilities is
included in net income but it is a non-operating item. Thus, it is deducted from net
income.
• Any loss on disposal of property or gain on early retirement of nontrade liabilities is
included in net income but it is a non-operating item. Thus, it is added from net
income.
• Other noncash income or gain is deducted from net income and other noncash
expense or loss is added to net income to eliminate the effect on net income.