Cash Flow Statement

A Statement of Cash Flows (or Cash

Flow Statement) shows the movement
in the Cash account of a company.
Accountants follow the accrual basis in
measuring income and expenses.
However, users will also be interested
in the cash transactions of the
company; hence the need to present a
Statement of Cash Flows.
It presents cash inflows (receipts) and
outflows (payments) in the three activities
of business: operating, investing, and
financing.
Operating activities pertain to the main
operations of the business, such as
purchasing and selling.
Investing activities involve acquisition of
assets for long-term purposes, and the
returns from them.
Financing activities pertain to sources of
funding, and includes the receipt of the
funds and the repayment thereof.
 LJC Printing Services
Statement of Cash Flows
For the Year Ended December 31, 2020

Cash Flow from Operating Activities:

Cash received from customers ₱ 146,000.00
Cash paid for expenses (81,000.00)
Cash paid to suppliers (47,500.00) ₱ 17,500.00
Cash Flow from Investing Activities:
Cash paid to acquire additional equipment (20,300.00)
Cash Flow from Financing Activities:
Cash received from investment of owner ₱ 10,000.00
Cash received from bank loan proceeds 50,000.00
Cash paid to bank for partial loan repayment (27,000.00)
Cash paid to owner for withdrawal (20,000.00) 13,000.00
Net Increase (Decrease) in Cash for the Year ₱ 10,200.00
Add: Cash – January 1, 2020 10,800.00
Cash – December 31, 2020 ₱ 21,000.00
 Explanation and Pointers

1.Statement of Cash Flows presents the inflows

and outflows of cash in the different activities of the
business, the net increase or decrease in cash, and
the resulting cash balance at the end of the
period. Cash inflows refer to receipts of cash
while cash outflows to payments or
disbursements.
2.A typical cash flow statement starts with a
heading which consists of three lines. The first line
presents the name of the company; the second
describes the title of the report; and the third states
the period covered in the report.
3. Notice that the third line is worded "For the Year
Ended..." This means that the information included in
the report covers a span of time. In the illustration
above, the report presents inflows and outflows of
cash for 1 year, i.e. from January 1 to December 31,
2020.
4.Cash inflows and outflows are classified in three
activities: operating, investing, and financing.
5.Operating activities refer to the main operations of
the company such as rendering of professional services,
acquisition of inventories and supplies, selling of
inventories for merchandising and manufacturing
concerns, collection of accounts, payment of accounts to
suppliers, and others. Generally, operating activities refer
to those that involve current assets and current
liabilities.
6. Investing activities may be summed up as: "where the
company puts its money for long-term purposes", such as
acquisition of property, plant and equipment; and investment
in long-term securities. Selling these properties are also
considered investing activities. In general, investing
activities include transactions that involve non-current
assets.
7. Financing activities refer to: "where the company gets its
funds", such as investment of the owner/s, and cash
proceeds from bank loan and other long-term payables. The
payment of such items (i.e. withdrawal of owner/s and
payment of loans) are also financing activities. Generally,
financing activities include those that affect non-current
liabilities and capital.
8. All inflows are presented in positive figures while all outflows
in negative (in parentheses).
9. After inflows and outflows are presented, the net
increase or decrease in cash is computed. Then it is
added to the beginning balance of cash to get the
balance at the end. Easy, right? In simple sense, this
report presents the cash balance at the beginning of
the period, the changes during the period, and the
resulting balance at the end of the period.
10.Notice that the cash balance at the end, ₱ 21,000, is
the same as the cash balance presented in the
company's Balance Sheet.
11.Good accounting form suggests that a single line is
drawn every time an amount is computed. It signifies
that a mathematical operation has been completed.
The computed balance at the end of the report
is double-ruled.
 What Is the Indirect Method?
The indirect method is one of two accounting
treatments used to generate a cash flow statement.
The indirect method uses increases and decreases
in balance sheet line items to modify the operating
section of the cash flow statement from the accrual
method to the cash method of accounting.
The other option for completing a cash flow
statement is the direct method, which lists actual
cash inflows and outflows made during the reporting
period. The indirect method is more commonly used
in practice, especially among larger firms.
Indirect Method vs. Direct Method
The cash flow statement is divided into three
categories—cash flows from operating activities, cash
flows from investing activities, and cash flows from
financing activities. Although total cash generated from
operating activities is the same under the direct and
indirect methods, the information is presented in a
different format.
Under the direct method, the cash flow from operating
activities is presented as actual cash inflows and
outflows on a cash basis, without starting from net
income on an accrued basis. The investing and
financing sections of the statement of cash flows are
prepared in the same way for both the indirect and direct
methods.
Many accountants prefer the indirect method
because it is simple to prepare the cash flow
statement using information from the other two
common financial statements, the income
statement and balance sheet. Most companies use
the accrual method of accounting, so the income
statement and balance sheet will have figures
consistent with this method.
However, the Financial Accounting Standards
Board (FASB) prefers companies use the direct
method as it offers a clearer picture of cash flows in
and out of a business. However, if the direct method
is used, it is still recommended to do a reconciliation
of the cash flow statement to the balance sheet.1