PAS 7: Statement of Cash Flows

A statement of cash flows is a basic component of financial statements which summarizes the
operating, investing and financing activities of an entity.

Purpose:
1. It provides relevant information about cash receipts and cash payments of an entity
during a period.
2. It provides information that enables users to evaluate the changes in net assets of an
entity, its financial structure, liquidity and solvency.
3. It provides information that is useful in assessing the ability of an entity to generate cash
and cash equivalents.

Classification of cash flows:

1. Operating - cash flows derived from principal revenue producing activities. Activities that
affect the entity’s net income or loss.
a. Direct method - shows major class of gross cash receipts and gross cash
payments
b. Indirect method - profit or loss is adjusted for the effects of non-cash items and
changes in operating assets and liabilities
i. Noncash income - deducted from net income
ii. Noncash expense - added to net income
iii. Changes in currents assets/liabilities
● ASSETS: IDDA( Increase-Deduct, Decrease-Add)
● LIABILITIES: IADD(Increase-Add, Decrease-Deduct)
2. Investing - cash flows derived from the acquisition and disposal of long-term assets and
other investments not included in cash equivalents. (e.g. PPE, intangible assets)
3. Financing - cash flows derived from equity, capital and borrowings of the entity
(transactions between entity and its owners, and between the entity and its creditors)

Practice Set:
1. The primary purpose of the statement of cash flows is to
a. To provide relevant information about cash receipts and cash payments of
an entity during a period.
b. To help investors, creditors and other users to assess the entity’s ability to
generate positive future net cash flows.
c. To disclose separately noncash investing and financing activities.
d. To assess the ability of the entity to pay dividends to stockholders

2. An entity shall prepare a statement of cash flows and shall present it as

a. Supplementary financial statement
b. Note to financial statement
c. Supporting schedule for amount appearing as cash and cash equivalent
d. Integral part of the entity’s basic financial statements
3. Cash flows in the statement of cash flows are
a. Inflows of cash and cash equivalents
b. Outflows of cash and cash equivalents
c. Inflows and outflows of cash
d. Inflows and outflows of cash and cash equivalents

4. Cash equivalents are

a. Short-term highly liquid investments that are readily convertible convertible to
known amount of cash
b. Investments subject to an insignificant risk of changes in value
c. Short-term, highly liquid investments that are readily convertible
convertible to known amount of cash and which are subject to an
insignificant risk of changes in value
d. Short and long-term highly liquid investments that are readily convertible
convertible to known amount of cash and which are subject to an insignificant risk
of changes in value

5. Which can qualify as cash equivalent?

a. One-year BSP treasury bill
b. Six-month money market placement
c. Equity securities
d. Preference shares with specified redemption date and acquired three
months before redemption date

6. Cash receipts from royalties, fees, commissions and other revenue are
a. Cash outflows for operating activities
b. Cash inflows from operating activities
c. Cash inflows from investing activities
d. Cash outflows for financing activities

7. Cash flows arising from the purchase and sale of dealing or trading securities are
a. Classified as operating activities
b. Classified as investing activities
c. Classified as financing activities
d. Not reported in the cash flow statement
8. Cash payments to acquire equity instruments of other entities and interests in joint
venture are
a. Cash outflows for financing activities
b. Cash inflows from investing activities
c. Cash outflows for investing activities
d. Cash inflows from financing activities
9. Cash receipts from issuing shares and other equity instruments are
a. Cash inflows from investing activities
 b. Cash outflows for investing activities
c. Cash inflows from financing activities
d. Cash outflows for financing activities
10. Cash payments to owners to acquire or redeem the entity’s shares are
a. Cash inflows from financing activities
b. Cash outflows for financing activities
c. Cash inflows from investing activities
d. Cash outflows for investing activities
11. In a statement of cash flows, interest payments to lenders and other creditors shall be
classified as
a. Operating activities
b. Borrowing activities
c. Lending activities
d. Financing activities
12. In a statement of cash flows, dividend payments to shareholders shall be classified as
a. Cash outflows for investing activities
b. Cash inflows from investing activities
c. Cash inflows from financing activities
d. Cash outflow for financing activities
13. In a statement of cash flows, interest received and dividend received may be classified
alternatively as cash flow from
a. Operating activities
b. Investing activities
c. Financing activities
d. Revenue activities
14. Cash flows arising from income taxes shall be separately disclosed and classified as
a. Operating activities
b. Investing activities
c. Financing activities
d. Extraordinary activities
15. The aggregate cash flows arising from obtaining or losing control of subsidiaries or other
businesses shall
a. Be classified as operating activities
b. Be classified as investing activities
c. Be classified as financing activities
d. Not be reported

PROBLEM SOLVING

1. On December 31, 2021, Kazuha Company had the following balances in the accounts
maintained at Le Sserafim Bank:
Checking account #101 1,750,000
Checking account #201 (100,000)
Time deposit 250,000
 Commercial Papers 1,000,000
90-day treasury bill, due Feb 28, 2022 500,000
180-treasury bill, due Mar 15, 2022 800,000

The entity classified investments with original maturities of 3 months or less as cash
equivalents. On December 31, 2022, what amount should be reported as cash and cash
equivalents?
a. 3,400,000
b. 2,000,000
c. 2,400,000
d. 3,200,000

Solution:
Checking account #101 1,750,000
Checking account #201 (100,000)
Time deposit 250,000
Commercial Papers 1,000,000
90-day treasury bill, due Feb 28, 2022 500,000
Cash and cash equivalents 3,400,000

2. New Jeans Company provided the following data for the preparation of the statement of cash
flows for the current year:

Dividends declared and paid 800,000

Cash flow from investing activities (2,500,000)
Cash flow from financing activities (800,000)

Dec. 31 Jan. 1
Cash 2,100,000 1,200,000
Other assets 21,000,000 22,700,000
Liabilities 10,500,000 11,700,000
Share capital 2,000,000 2,000,000
Retained earnings 10,600,000 10,200,000

What is the net cash flow from operating activities?

a. 4,200,000
b. 2,400,000
c. 4,500,000
d. 5,400,000

Solution:

Statement of cash flows pro forma:

Cash, Jan. 1 1,200,000
Cash flow from operating activities ??
Cash flow from investing activities (2,500,000)
Cash flow from financing activities (800,000)
Cash, Dec. 31 2,100,000

= 2,100,000 + 800,000 + 2,500,000 - 1,200,000

= 4,200,000

3. IVE Company provided the following information during the current year.

Dividend received (O) 500,000

Dividend paid (F) 1,000,000
Cash received from customers (O) 9,000,000
Proceeds from issuing share capital (F) 1,500,000
Interest received (O) 200,000
Proceeds from sale of long term investments (I) 2,000,000
Cash paid to suppliers and employees (O) 6,000,000
Interest paid on long term debt (O) 400,000
Income taxes paid (O) 300,000
Cash balance, Jan 31 1,800,000

What is the net cash provided by operating activities for the current year using direct method
a. 2,000,000
b. 2,700,000
c. 3,000,000
d. 3,300,000

Solution:
Dividend received 500,000
Cash received from customers 9,000,000
Interest received 200,000
Cash paid to suppliers and employees (6,000,000)
Interest paid on long term debt (400,000)
Income taxes paid (300,000)
Net cash from operating activities 3,000,000

4. Kepler Company provided the following account balances for the preparation of the statement
of cash flows for the current year:
Jan. 1 Dec. 31
Accounts receivable 1,150,000 1,450,000
Allowance for doubtful accounts 40,000 50,000
Prepaid rent expense 620,000 410,000
Accounts payable 970,000 1,120,000
The net income for the year is 7,500,000. What is the net cash provided by operating activities?
a. 7,270,000
b. 7,430,000
c. 7,550,000
d. 7,570,000

Solution:

Net Income 7,500,000

Increase in AR, net (290,000)
Decrease in prepaid expenses 210,000
Increase in AP 150,000
Net cash from operating activities 7,570,000

5. NMIXX Company had the following account balances for the current year:
Dec. 31 Jan. 1
Accounts payable 500,000 650,000
Inventory 300,000 250,000
Accounts receivable 800,000 900,000
Prepaid expenses 400,000 600,000
● All purchases of inventory were on account
● Depreciation during the year was 900,000.
● Equipment was sold during the year at a gain of 300,000.

The entity provided the following cash flows for the current year:
Cash collected from customers 9,500,000
Cash paid for inventory (4,100,000)
Cash paid for other expenses (1,400,000)
Cash flow from operations 4,000,000

What is the net income for the current year?

a. 3,000,000
b. 3,300,000
c. 3,400,000
d. 3,900,000

Solution:

*Tip: Workback

Net income (??)

Noncash income:
Gain on sale of equipment (300,000)
Noncash expense:
Depreciation 900,000
Changes in current assets/liabilities:
Decrease of AP (150,000)
Increase of Inventory (50,000)
Decrease of AR 100,000
Decrease of Prepaid expense 200,000
Cash flow from operating activities 4,000,000

= 4,000,000 - 200,000 - 100,000 + 50,000 + 150,000 - 900,000 + 300,000

= 3,300,000

6. Enhypen Company had the following activities during the current year:
● Acquired 2,000 shares of HYBE Company for 2,600,000.
● Sold an investment in Rate Motors for 3,500,000 when the carrying value was
3,300,000.
● Acquired a 5,000,000, 4-year certificate of deposit from a bank. During the year, interest
of 375,000 from a bank.
● Collected dividends 120,000 on share investments.

In the statement of cash flows, what amount should be reported net cash used in investing
activities?
a. 3,725,000
b. 3,805,000
c. 3,980,000
d. 4,100,000

Solution:

Acquisition of HYBE Company shares (2,600,000)

Sale of investment in Rate Motors 3,500,000
Acquisition of 4-year certificate of deposit (5,000,000)
Net cash in investing activities 4,100,000

For items 7-8

Seventeen Company reported net income of 3,000,000 for the current year. Changes occurred
in certain accounts as follows:
Equipment 250,000 increase
Accumulated depreciation 400,000 increase
Note payable 300,000 increase
 ● During the year, the entity sold equipment costing 250,000 with accumulated
depreciation of 120,000 for a gain of 50,000.
● In December of the current year, the entity purchased equipment costing 500,000 with
200,000 cash and 12% note payable of 50,000.

7. In the statement of cash flows, what amount should be reported as net cash used in investing
activities?
a. 20,000
b. 120,000
c. 220,000
d. 350,000

Solution:

Sale of equipment (250,000 - 120,000 + 50,000) 180,000

Purchase of equipment (200,000)
Net cash used in investing activities (20,000)

8. In the statement of cash flows, what amount should be reported as net cash provided by
operating activities?
a. 3,400,000
b. 3,470,000
c. 3,520,000
d. 3,570,000

Solution:

Net income 3,000,000

Depreciation (400,000 + 120,000) 520,000
Gain on sale of equipment (50,000)
Net cash used in operating activities 3,470,000

For items 9-10,

TXT Company provided the following data for the current year:
Gain on sale of equipment 60,000
Proceeds from sale of equipment 100,000
Purchase of bond investment (Face value 2,000,000) 1,800,000
Amortization of bond discount 20,000
Dividends declared 450,000
Dividend paid 380,000
Proceeds from sale of treasury shares (cost, 650,000) 750,000

9. What is the net cash provided by financing activities?

 a. 200,000
b. 270,000
c. 300,000
d. 370,000

Solution:
Dividend paid (380,000)
Proceeds from sale of treasury shares (cost, 650,000) 750,000
Net cash used in financing activities 370,000

10. What is the net cash used in investing activities?

a. 1,700,000
b. 1,760,000
c. 1,880,000
d. 1,940,000

Solution:
Proceeds from sale of equipment 100,000
Purchase of bond investment (Face value 2,000,000) (1,800,000)
Net cash used in investing activities 1,700,000
PAS 1: PRESENTATION OF FINANCIAL STATEMENTS

Philippine Accounting Standards (PAS) 1 Presentation of Financial Statements

prescribes the basis for the presentation of general purpose financial statements, the
guidelines for their structure, and the minimum requirements for their content to ensure
comparability.

TYPES OF COMPARABILITY
● Intra-comparability (horizontal or inter-period)
○ same entity but from one period to another
● Inter-comparability (dimensional)
○ between different entities: same line of business

FINANCIAL STATEMENTS
● “the structured representation of an entity’s financial position and results of its operation”
– PAS 1.9
● End product of the financial reporting process
● Cater to the most of the common needs of a wide range of external users

PURPOSE OF FINANCIAL STATEMENTS

● Primary objective:
○ To provide information about the financial position, financial performance, and
cash flows of an entity.
● Secondary objective:
○ To show the results of management’s stewardship over the entity’s resources
MAIN COMPONENTS OF FINANCIAL STATEMENTS
● Statement of financial position
● Statement of profit and loss and other comprehensive income
● Statement of changes in equity
● Statement of cash flows
● Notes to financial statements; comparative information
● Additional statement of financial position (required only when certain instances occur)

PRACTICE SETS:

1. Who is responsible for the preparation and the fair presentation of an entity’s financial
statements in accordance with the PFRSs?
a. Any accountant
b. Certified Public Accountant
c. Auditor
d. Management

2. A complete set of financial statements includes all of the following components, except.
a. Statement of financial position, statement of comprehensive income and
statement of cash flows.
b. Statement of changes in equity.
c. Notes, comprising a summary of significant accounting policies and other
explanatory information.
d. Reports and statement such as environmental reports and value added
statements.

3. Which of the following statements is true concerning the objective of financial

statements?

I. Financial statements do not provide all the information that users may need to
make economic decisions since they largely portray the financial effects of past
events and do not necessarily provide nonfinancial information.
II. Financial statements show the results of the stewardship of management or the
accountability of management for the resources entrusted to it.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. An entity shall clearly identify each financial statement and shall display all of the
following information prominently, except.
 a. Name of the reporting entity or other means of identification, and any change in
that information from the previous year.
b. Names of major shareholders of the entity
c. The presentation currency and level of rounding used in presentation the
financial statements
d. Whether the financial statement cover the individual entity or a group of entities
and the date of the end of reporting period or the period covered by the financial
statements.

5. Which of the following statements is incorrect concerning fair preservation of financial

statements?
a. Fair presentation requires the faithful representation of the effects of transactions
and other events.
b. Financial statements shall present fairly the financial position, financial
performance and cash flows of an entity
c. In virtually all circumstances, a fair presentation is achieved by compliance with
applicable PFRS
d. An entity whose financial statements comply with PFRS shall not make an
explicit and unreserved statement of such compliance in notes

6. Which of the following cannot be considered fair presentation of financial statements?

a. To rectify inappropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory information.
b. To present information in a manner that provides relevant and faithful
representation of the effects of transactions and other events.
c. To provide additional disclosures when compliance with specific PFRS is
insufficient to understand the financial position and financial performance.
d. To select and apply accounting policies in accordance with applicable PFRS.

7. Financial statements must be prepared at least

a. Annually
b. Quarterly
c. Semiannually
d. Every two years

8. Items of dissimilar nature or function

a. Must always be presented separately in financial statements.
b. Must not be presented separately in financial statements
c. Must be presented separately in financial statements if those items are materials.
d. Must be presented separately in financial statements even if those items are
immaterial.

9. Which of the following best describes the term “financial performance”?

a. The revenue, expenses and net income or loss for a period of an entity.
 b. The assets, liabilities and equity of an entity
c. The total assets minus total liabilities
d. The total cash inflows minus total cash outflows
10. During a period when an entity is under the direction of a particular management,
financial reporting will directly provide information about.
a. Both entity performance and management performance
b. Management performance but not entity performance
c. Entity performance but not management performance
d. Neither entity performance nor management performance

11. The statement of financial position is useful for analyzing all of the following except
a. Liquidity
b. Solvency
c. Profitability
d. Financial flexibility

12. At year-end, the current assets of Hazel Company revealed cash and cash equivalents
of P700,000, accounts receivable of P1,200,000 and inventories of P600,000. The
examination of accounts receivable disclosed the following:

Trade accounts 930,000

Allowance for doubtful accounts (20,000)
Claim against shipper for goods lost in transit 30,000
Selling price of unsold goods goods sent by Hazel
On consignment at 130% of cost and not included
in ending inventory 260,000
1,200,000

What total amount should be reported as current assets at year-end?

a. 2,412,000
b. 2,440,000
c. 2,240,000
d. 2,500,000

13. Gracia Company reported the following current assets at year-end:

Cash including fund of P500,000 with trustee 1,500,000
Accounts receivable 2,500,000
Inventory, including P200,000 cost of goods in transit
Purchased FOB point of destination 2,000,000
Advances to officers collectible currently 100,000

Total current assets 6,500,000

What amount should be reported as current assets?

 a. 5,400,000
b. 5,300,000
c. 5,800,000
d. 5,900,000

14. Jewel Company reported the following current assets at year-end

Cash and cash equivalents 3,200,000

Accounts receivable 1,420,000
Allowance for doubtful accounts 130,000
Inventory 2,800,000
Deferred charges 200,000
Employees account-current 240,000
Advances to subsidiary 260,000
Claim against shipper for goods lost in transit 200,000

What total amount should be reported as current assets?

a. 7,740,000
b. 7,780,000
c. 7,940,00
d. 8,200,000

15. Peach Company prepared a draft of the year-end statement of financial position. The
draft statement reported total assets of P4,375,000 which include the following:

Treasury share of Peach Company at cost, which

Approximate market value 120,000
Unamortized patent 56,000
Deferred charges 68,000
Cumulative translation loss 42,000

What amount should be reported as total assets

a. 4,208,500
b. 4,213,000
c. 4,250,000
d. 4,500,000
LONG PROBLEM

Prepare in good form a properly classified statement of financial position in accordance with the
Philippine Financial reporting Standards
ANSWERS:
1. D
2. D
3. D
4. B
5. D
6. A
7. A
8. C
9. A
10. C
11. C
12. B
13. B
14. A
15. B

SOLUTIONS:

12.

13.

14.
15.
LONG PROBLEM