QUARTER I: MILITARY SCIENCE

LESSONS 2: Cash Flow Statement

OBJECTIVES:
In the previous lesson we learned so much about cash which is an important element of
Statement of Financial Position, its relationship to Income and Revenue and so with the
Statement of Changes in Equity. In this module we will discuss the nature of cash as it plays
a pivotal role in the preparation of a Cash Flow Statement. So, take a leap and be ready
because Cash Flow Statement is here on next!

CASH FLOW STATEMENT DEFINED

Cash Flow Statement provides an analysis of inflows and/or outflows of cash from/to
operating, investing and financing activities (Deloitte Global Services Limited, 2015). This
statement shows cash transactions only as compared to SCI which follows the accrual
principle. NOTA BENE: 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

WHAT ARE THE TWO APPROACHES IN PREPARING Cash Flow Statement? The two
approaches to preparing Cash Flow Statement are:

1. Direct – The operating cash flow section of the CFS under the direct method will show
each major class of gross cash receipts and gross cash payments (Deloitte Global Services
Limited, 2015).

2. Indirect – The operating cash flow section of the CFS under the indirect method will
reconcile with the net income/loss of the company with the total cash flows generated/used
in operating activities by adjusting the net income/loss for effects of non-cash transactions
(Deloitte Global Services Limited, 2015). Both approach will yield the same amount of cash
flows from Operating activities. Investing and Financing sections of the CFS will yield the
same results under both approach.

WHAT ARE THE DIFFERENT PARTS OF CASH FLOW STATEMENT?

The five major different parts of Cash Flow Statement are;

1. Operating Activities – Activities that are directly related to the main revenueproducing
activities of the company such as cash from customers and cash paid to
suppliers/employees (Deloitte Global Services Limited, 2015).

2. Investing Activities – Cash transactions related to purchase or sale of noncurrent assets

(Deloitte Global Services Limited, 2015).

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3. Financing Activities – Cash transactions related to changes in equity and borrowings. Net
change in cash or net cash flow (increase/decrease) – 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.

4. Beginning Cash Balance – The balance of the cash account at the beginning of the
accounting period. 5. Ending Cash Balance – The balance of the cash account at the end of
the accounting period computed using the beginning balance plus the net change in cash for
the current period. Below is an illustration of Direct Method of preparing cash flow
statement. Major activities were presented in bold fonts to remind you of their distinctive
classification. The first two syllables on the third row title part was written in bold font to
remind your attention about its importance.

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Under Indirect approach, the operating activity starts with Net Income and it will be
adjusted with its non-cash items such as depreciation. Any gain or loss accounts i.e. Loss on
sale of equipment as the case maybe and other adjustments of account under accrual
concept of income and expense recognition shall also be adjusted against net income. Take
note that whatever approach you are using you will still arrive at the same answer in both
approaches.

TIPS TO SOLVING CASH FLOW – INDIRECT APPROACH

Here are important notes for you to remember in solving indirect approach to cash flow
problems. 1. First part is operating activities

• Non-cash expenses are added back while non-cash revenues are deducted. Gain/loss on
sale of non-current assets are deducted/added back because the cash transaction is
recorded under investing activities.

• Changes in current assets and current liabilities are either added or deducted Depending
on whether they increased or decreased during the year.

• Accounts Receivable – increases revenue which increases net income but is not a cash
transaction

• Prepaid Expense – decreases cash but does not change the net income • Decrease in
current assets – added to net income

• Accounts Receivable – increases cash but does not change the net income

• Prepaid Expense – increases expenses which decreases net income but is not a cash
transaction

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 • Accounts Payable – increases expenses which decreases net income but is not a cash
transaction

• Unearned Income – increases cash but does not change the net income

• Accounts Payable – decreases cash but does not change the net income

• Unearned Income – increases revenue which increases net income but is not a cash
transaction

2. Second part is investing activities

3. Third part is financing activities

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Activity
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Direction: True or False. Read each sentence carefully and determine whether the
statement is True or False. Write your answer on the space provided before each number.

________ 1. The statement of Cash Flows show the amount of cash received and used in
the business organized according to operating, investing, and financing activities

_________2. Cash payment for bank loans are reported under cash flows from operating
activities. _________3. If the company has no accounts receivable balance at the beginning
and 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 customer reported in the
Statement of Cash Flows.

_________4. Payments for the acquisition of merchandise inventory are reported as

investing activities.

_________5. Statement of Cash Flows 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 Statement of Cash Flows.

_________7. Salaries and utility payment are reported as operating activities.

_________8. Non-Cash expenses such as depreciation and amortization are deducted from
net income to arrive at the cash flows 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 bottom line of the SCF is equivalent to the cash balance presented in the
Statement of Financial Position.

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