Learning Activities

To deepen your understanding and discovery of the concept and principles of CFS, you must
read and analyze the discussion that follows and study the given examples for you to be ready
for your next task. God bless!

Reading Materials/Concept Notes

The Cash Flows Statement (CFS)
A statement of cash flows is a formal statement that provides information about the cash receipts
(inflows) and cash payments (outflows) of an entity from operating, investing, and financing activities
during the period. Unlike the SCI, this statement shows cash transactions only, while the latter follows the
accrual principle.
This statement is prepared based on information from the income statement and balance sheet. It also
portrays how the company has spent its cash. As per Phil. Accounting Standards (PAS) No. 7, enterprises are
encouraged to report cash flows from operating activities using the direct method, but the indirect method is
acceptable. The Three Major parts of CFS
INVESTING 1. Operating Activities are generally the cash effects of
transactions and other events that enter into the
determination of profit or loss. It usually involves
OPERATING CFS FINANCING
day – to – day transactions, providing service and
delivering goods. These operating activities might include:

Its Effects
Operating Activities + (increases cash) inflow
 (decreases cash) outflow
Receipts from sales of goods and services +
Cash receipts from royalties, fees, commission, and other revenues +
Interest payments 
Payments made to suppliers of goods and services used in production 
Income tax payments 
Salary and wage payments to employees 
Rent payments 
Interest received +
Dividend received +
In the case of a trading portfolio or an investment company, receipts from the sale of loans, debt, or
equity instruments are also included. When preparing a cash flow statement under the indirect method,
depreciation, amortization, deferred tax, gains or losses associated with a noncurrent asset, and dividends
or revenue received from certain investing activities are also included. However, purchases or sales
of  long-term assets are not included in the operating activities.
2. Investing Activities include making and collecting loans, activities like acquiring and disposing
investments in debt or equity securities and obtaining and selling of property and equipment. Usually,
cash changes from investing are a "cash out" item, because cash is used to buy new equipment, buildings,
or short-term assets such as marketable securities. However, when a company divests an asset, the
transaction is considered "cash in" for calculating cash from investing.
 EFFECTS
ACTIVITIES + (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 +

3. Financing Activities are the net amount of funding a company generates in a given period of time to
finance its business. Usually, this includes obtaining resources from owners and creditors. Hence, cash
activities under this section are dealt with as debt and equity. Cash from financing activities includes the
sources of cash from investors or banks, as well as the uses of cash paid to shareholders. Payment
of dividends, payments for stock repurchases, and the repayment of debt principal (loans) are included in
this category. Changes in cash from financing are "cash in" when capital is raised, and they're "cash out"
when dividends are paid. Thus, if a company issues a bond to the public, the company receives cash
financing; however, when interest is paid to bondholders, the company is reducing its cash.
EFFECTS
ACTIVITIES + (increases cash) inflow
- (decreases cash) outflow
Cash investment from owners +
Cash proceeds from bank loans +
Cash distribution from owners 
Repayment of bank loans 

Direct vs. Indirect Approach of CFS

Cash flows from operating activities can be presented using either direct or indirect methods. If the
entity’s net cash used in operating activities is obtained by adding individual operating cash inflows and then
subtracting the individual operating cash outflows, then the method used by the entity is the direct method.
However, if the net cash provided by operating activities was not resulting from cash transactions but by
adjusting profit for income and expenses items, then the method used by the entity is an indirect method.

DIRECT METHOD KIDDIE FUN LEARNING

COMPANY CASH FLOW
STATEMENT FOR THE YEAR
HEADING ENDED DECEMBER 31, 2019

Cash flows from Operating Activities Operating Activities

Receipts from customers P 1,000,000
Payments to suppliers (600,000)
Net Cash generated by Operating Activities P 400,000
Cash flows from Investing Activities Investing Activities
Purchases of Property and Equipment P (250,000)
Net Cash used in Investing Activities P (250,000)
Cash flows from Financing Activities Financing Activities
Long term loan from a bank P 400,000
 Additional investment from owner 100,000
Withdrawal by owner (80,000)
Net Cash used in Financing Activities P 420,000
Net increase in cash and cash equivalents = [400,000+(250,000)+420,000]= 570,000
Cash, January 1, 2019 100,000
Cash, December 31, 2019 P 670,000
Note that the method used in this example is direct method.

Net change in cash or net cash flow (increase/decrease) is the net amount of change in cash either it is
an increase or decrease for the current period brought by operating, investing and financing activities.
Beginning balance is the balance of the cash account at the beginning of the accounting period.
Ending balance - is the balance of the cash account at the end of the accounting period computed using
the beginning balance + the net change in cash for the current period.
From this CFS, we can see that the cash flow for the fiscal year 2019 was 670,000. The bulk of the
positive cash flow stems from cash earned from operations, which is a good sign for investors. It means that
core operations are generating business and that there is enough money to buy new inventory.
The purchasing of new equipment shows that the company has the cash to invest in inventory for growth.
Finally, the amount of cash available to the company should ease investors' minds regarding the notes
payable, as cash is plentiful to cover that future loan expense.
Cash flow statement should only include cash transactions and that the net income/loss of the company
can contain non – cash transactions such as depreciation. Changes in current assets and liabilities are
included if they are related to revenues and expenses which were included in the net income/loss even if they
were non-cash transactions or they affected cash but was not part of the net income/loss (accrual, prepaid,
unearned).
INDIRECT METHOD
KIDDIE FUN LEARNING COMPANY
CASH FLOW STATEMENT FOR THE
HEADING YEAR ENDED DECEMBER 31, 2019

Cash from Operating Activities Operating Activities

Net Income P 250,000
Add back: Depreciation 20,000
Loss on sale of property and equipment 10,000
280,000
(Increase)/Decrease in Trade & Other Receivables – Net (40,000)
Increase /(Decrease) in Trade & Other Payables 60,000
Net Cash generated by Operating Activities P 300,000
Cash from Investing Activities Investing Activities
Purchase of Property and Equipment P (120,000)
Net Cash generated by Investing Activities P (120,000)
Cash from Financing Activities Financing Activities
Long term loan from a bank P 300,000
Additional investment from owner 100,000
Withdrawals by owner (80,000)
Net Cash generated by Financing Activities P 320,000
Net increase in cash and cash equivalents P 500,000
Cash, January 1, 2019 100,000
Cash, December 31, 2019 600,000