The Statement of Cash Flows (SCF) reports the cash receipts, cash payments and

net change in cash resulting from operating, investing and financing activities during a
period.

The information in an SCF helps investors, creditors, and other users of this in many
ways:

1. For the business owners and other stakeholders, the statement can help in
forecasting future cash flows.
2. For the management, employees and creditors, the statement gives information
about the company's capacity to pay current and future debts.
3. For most users, the statement can help explain the difference between net cash
and net income by looking at operating activities; the statement can also make
users understand changes in assets and liabilities by looking at investing and
financing activities.

Classification of Cash Flows

Receipt and disbursement of cash are classified according to three major activities by
the company:

1. Operating Activities - shows the cash effects of revenue and expense transactions.
2. Investing Activities - cash effects of transactions involving acquisition and
disposal of plant assets, intangible assets and other investments
3. Financing Activities - includes items that result from changes in long-term debt
and equity financing transactions.

The table below summarizes examples of these cash flows:

ACTIVITY INFLOWS OUTFLOWS

➢ collections from ➢ payments to suppliers of

customers for services
rendered or merchandise
sold
➢ sales of trading securities
➢ dividends and interests
Operating received
➢ other cash receipts such
as proceeds from
settlement of court case
under litigation
merchandise and
supplies
➢ payment for salaries and
other operating expenses
➢ purchase of trading
securities
➢ payments for interest
expenses and
government taxes and
licenses
➢ payment for other
expenditures such as
payment for settlement
 of court case under
litigation

➢ sale of property and ➢ purchase of property and

plant assets plant assets
Investing
➢ collection of principal on ➢ loans granted to other
loans extended entities

➢ proceeds from short ➢ payment of short-term

term and long-term and long term
borrowings (e.g. bank borrowings
Financing
loan) ➢ cash withdrawals by the
➢ cash investment of owner
owner

Types of Statement of Cash Flows

There are two formats in the preparation of SCF:

1. Direct – The operating cash flow section of the CFS under the direct method
would show each major class of gross cash receipts and gross cash payments
2. Indirect – The operating cash flow section of the CFS under the indirect method
will reconcile 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

The advantage of the direct method over the indirect method is that it reveals operating
cash receipts and payments.

The standard-setting bodies (Philippine Accounting Standards) encourage the use of the
direct method, but it is rarely used, for the excellent reason that the information in it is
difficult to assemble; companies simply do not collect and store information in the
manner required for this format. Using the direct method may require that the chart of
accounts be restructured in order to collect different types of information. Instead, they
use the indirect method, which can be more easily derived from existing accounting
reports.