STATEMENT OF CASH FLOWS

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.

CASH AND CASH EQUIVALENTS

The statement of cash flows is designed to provide information about the change in an entity’s cash and
cash equivalents.

Cash comprises cash on hand and demand deposits.

Cash equivalents are short-term highly liquid investments that are readily convertible to known amount
of cash and which are subject to an insignificant risk of change in value.

PAS 7, paragraph 7, provides that an investment normally qualifies as a cash equivalent only when it has
a short maturity of three months or less from date of acquisition.

In other words, the investment must be acquired three months or less before the date of maturity.

EXAMPLES OF CASH EQUIVALENTS

a. Three months BSP treasury bill

b. Three-year BSP treasury bill purchased three months before date of maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial paper

CLASSIFICATION OF CASH FLOWS

Cash flows are inflows and outflows of cash and cash equivalents.

The statement of cash flows shall report cash flows during the period classified as operating, investing
and financing activities.

OPERATING ACTIVITIES

Operating activities are the cash flows derived primarily from the principal revenue producing activities
of the entity.

In other words, operating activities generally result from transactions and other events that enter into
the determination of net income or loss.

Examples of cash flows from operating activities are:

 a. Cash receipts from sale of goods and rendering of services
b. Cash receipts from royalties, rental, fees, commissions and other revenue
c. Cash payments to suppliers for goods and services
d. Cash payments for selling, administrative and other expenses
e. Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and
other policy benefits
f. Cash payments or refunds of income taxes unless specifically identified with financing and
investing activities
g. Cash receipts and payments for securities held for trading

TRADING SECURITIES

PAS 7, paragraph 15, provides that cash flows arising from the purchase and sale of dealing or trading
securities are classified as operating activities.

Similarly, cash advances and loans made by a financial institution are usually classified as operating
activities since they relate to the main revenue producing activity of that entity.

INVESTING ACTIVITIES

Investing activities are the cash flows derived from the acquisition and disposal of long-term assets and
other investments not included in cash equivalent.

As a simple guide, investing activities include cash flows from transactions involving nonoperating
assets.

EXAMPLES OF CASH FLOWS FROM INVESTING ACTIVITIES

a. Cash payments to acquire property, plant and equipment, intangibles and other long-term
assets.
b. Cash receipts from sales of property, plant and equipment, intangibles and other long-term
assets
c. Cash payments to acquire equity or debt instruments of other entities (current and long-term
investments)
d. Cash receipts from sales of equity or debt instruments of other entities
e. Cash advances and loans to other parties other than advances and loans made by financial
institution
f. Cash receipts from repayment of advances and loans made to other parties
g. Cash payments for futures contract, forward contract, option contract and swap contract
h. Cash receipts from futures contract, forward contract, option contract and swap contract

FINANCING ACTIVITIES

Financing activities are the cash flows derived from the equity capital and borrowings of the entity.

In other words, financing activities are the cash flows that result from transactions:

a. Between the entity and the owners - equity financing

 b. Between the entity and the creditors – debt financing

As a simple, guide, financing activities include the cash flows from transactions involving nontrade
liabilities and equity of an entity.

EXAMPLES OF CASH FLOWS FROM FINANCING ACTIVITIES

a. Cash receipts from issuance of ordinary and preference shares

b. Cash payments to acquire treasury shares
c. Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other short or long-
term borrowings
d. Cash payments for amounts borrowed
e. Cash payments by a lessee for the reduction of the outstanding principal lease liability

Cash payments to settle such obligations as trade accounts and notes payable, income tax payable,
accrued expenses are operating activities, not financing activities.

NONCASH TRANSACTIONS

PAS 7, paragraph 43, provides that investing and financing transactions that do not require use of cash
or cash equivalents shall be excluded from the statement of cash flows.

Noncash investing and financing transactions shall be disclosed elsewhere in the financial statements
either in the notes to financial statements or in a separate schedule or in a way that provides all relevant
information about these transactions.

The statement of cash flows is strictly a cash concept.

Accordingly, the following noncash transactions are disclosed separately:

a. Acquisition of asset by assuming directly related liability

b. Acquisition of asset by issuing share capital
c. Acquisition of asset by issuing bonds payable
d. Conversion of bonds payable into share capital
e. Conversion of preference shares into ordinary shares

INTEREST

PAS 7, paragraph 33, provides that interest paid and interest received shall be classified as operating
cash flows because such items enter into the determination of net income or loss

Alternatively, interest paid may be classified as financing cash flow because it is a cost of obtaining
financial resources.

Alternatively, interest received may be classified as investing cash flow because it is a return on
investment.

For a financial institution, interest paid and interest received are usually classified as operating cash
flows.

DIVIDENDS
PAS 7, paragraph 33, provides that dividend received shall be classified as operating cash flow because it
enters into the determination of net income.

Alternatively, dividend received may be classified as investing cash flow because it is a return on
investment.

PAS 7, paragraph 34, provides that dividend paid shall be classified as financing cash flow because it is a
cost of obtaining financial resources.

Alternatively, dividend paid may be classified as operating cash flow in order to assist users to determine
the ability of the entity to pay dividends out of operating cash flows.

INCOME TAXES

PAS 7, paragraph 35, provides that cash flows arising from income taxes shall be separately disclosed as
cash flows from operating activities unless they can be specifically identified with investing and financing
activities.

Tax cash flows are often difficult to math to the originating underlying transaction, so most of the time
all tax, cash flows are classified as arising from operating activities.

Cash receipts are cash provided and therefore increase cash and cash equivalents.

Cash payments are cash used and therefore decrease cash and cash equivalents.
The preparation of statement of cash flows is discussed extensively in Intermediate Accounting Volume
Three.