Cash Flow Statement

Module 4
The Cash Flow Statement and Its Components

• The Cash Flow Statement (CFS) is a summary of the cash inflows and
outflows that brought cash to its ending balance.
• This financial statement shows the net increase or decrease in cash during the
period and the cash balance at the end of the period.
• It also helps project the future net cash flows of the entity.
Business activities that affect cash balance are categorized into three
components, namely, operating activities, financing activities and
investing activities.
Operating Activities
Are activities intended to generate income for the business.
They affect net income.
Increase in Cash
Cash receipts from
• Sale of good or services
• Sale of trading securities
• Interest income
• Dividend income
Decrease in Cash
Cash payments for
• Purchases of Inventory
• Operating Expense
• Taxes
• Interest Expense
• Purchase of Trading securities
Financing Activities

Pertain to transactions between the business and its owner(s) and creditors
(lenders)
These activities affect nonoperating current liabilities, noncurrent liabilities,
and owner’s equity.
Increase in Cash Decrease in Cash
Cash receipts from Cash payments for
• Owner’s investments • Owner’s drawings
• borrowings Payment for borrowings
Investing Activities
• Are activities that fill affect nonoperating current assets and noncurrent assets.
• The investing activities arise from business transactions involving acquisition and
disposal of assets other than inventory, which are needed in the operation of the
business.
Increase in Cash Decrease in Cash
Cash receipts from Cash payments for
• Sale of plant assets • Purchase of plant assets
• Sale of nontrading securities • Purchase of nontrading securities
• Sale of business segment • Making loans to other entities.
• Collection of loans
In preparing the CFS, you may refer to the following guidelines:

a. Cash transactions that will result in generating income and incurring of

expense will be shown under the caption “Operating Activities”
b. Cash transactions that will affect the nonoperating current assets as well as
the acquisition or sale of noncurrent assets will be shown under the caption
“Investing Activities”
c. Cash transactions that will affect noncurrent liabilities, nonoperating
current liabilities, and owner’s equity (additional investment or withdrawal)
will be shown under the caption “Financing Activities”
Direct and Indirect Methods of the Cash Flow
Statement
• The Cash flow from operating activities ca be presented using either the
direct or the indirect method.
• Using the direct method, the entity’s net cash provided by operating
activities is obtained by adding the individual operating cash inflows and then
subtracting the individual operating cash outflows.
Cash flows from operating activities:
receipts from cash services P x xxx
collections on accounts receivable P x xxx
Payments on salaries, rent, utilities and other expense (P x xxx)
net cash inflow from operating activities P x xxx
Cash flows from financing activities:
additional investment by proprietor P x xxx
cash withdrawal by proprietor (P x xxx)
net cash inflow from financing activities P x xxx
Cash flows from investing activities
purchase of delivery equipment P x xxx
redemption of mature placement in commercial paper (P x xxx)
net cash inflow from investing activities P x xxx
Net cash inflow P x xxx
Net Cash Inflow
• The indirect method derives the net cash provided by operating activities by
adjusting profit for income and expense items not resulting from cash
transactions.
DIRECT METHOD INDIRECT METHOD
Fundamental Relationship among SFP, SCI,
SCE, and CFS
• Aside from the general ledger, the SFP of the preceding period can also
provide the beginning cash balance that is listed in the CFS.
• The operating activities on the other hand, can be lifted from the SCI, but
the data should be modified based on noncash transactions carried in the
SFP.
Fundamental Relationship among SFP, SCI,
SCE, and CFS
• Financing activities and investing activities are obtained from the
SFP and SCE. In turn, the end result of the CFS, which is the
ending balance of cash, is reflected in the SFP of the current
reporting period.