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.
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 cash equivalent only when it has short maturity of
three months or less from date of maturity.
a. Three-month 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
e. Preference shares with specified redemption date and acquired three
months before redemption date

Thus, a BSP treasury bill that was purchased three years ago cannot qualify
as cash equivalent even if the remaining maturity is three months or less.

Equity securities cannot qualify as cash equivalents because shares do not

have a maturity date.
An entity shall disclose the components of cash and
cash equivalent and shall present a reconciliation of
the amounts in the statement of cash flows with the
equivalent items reported in the statement of financial
position.

It also necessary to disclose the accounting policy

used in deciding which items are included in
determining cash and cash equivalents.
Cash flows are inflows and outflows of cash and cash
equivalents.

Classification by activity provides information that allows users

to assess the impact of those activities on the financial position
of the entity and the amount of its cash and cash equivalents.

Bank Borrowings are generally considered as financing

activities.
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
enterprises for premiums and claims, annuities and other
policy benefits.
f. Cash payments or refunds of income taxes unless they can be
specifically identified with financing and investing activities
g. Cash receipts and payments for securities held for dealing or
trading purposes.
PAS 7, paragraph 15, provides that cash flows arising from the
purchase and sale of dealing or trading securities are classified
as Operating Activities.

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 the entity.
 Are the cash flows derived from the acquisition and disposal of
long-term assets and other investments not included in cash
equivalent.
 Includes cash flows from transactions involving Non-operating
Assets.

Examples:
a. Cash payments to acquire property, plant and equipment,
intangible and other long-term assets.
b. Cash receipts from sales of property, plant, and equipment,
intangible and other long-term assets.
c. Cash payments to acquire equity or debt instruments of other
entities and interests in joint ventures (current and long-term
investments).
d. Cash receipts from sales of equity or debt
instruments of other entities and interest in joint
venture.
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 future contract, forward
contract, option contract and swap contract.
h. Cash receipts from future contract, forward
contract, option contract and swap contract.
a. Between the entity and the owners- Equity
Financing
b. Between the entity and the creditors- Debt
Financing

Therefore, financing activities include the cash

flows from transactions involving nontrade
liabilities and equity of an entity.
a. Cash receipts from issuing shares or other equity
instruments (For example, issuance of ordinary
and preference shares )
b. Cash payments to owners to acquire or redeem
the enterprise’s shares (for examples , payment
for treasury stock)
c. Cash receipts from issuing debenture, 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.
PAS 7, paragraph 43, provide that investing and financing
transactions that do not require use of cash or cash equivalents
shall be excluded from the statement of cash flows.

The following noncash transactions are disclosed separately:

a. Acquisition of asset either by assuming directly related liability
or by means of a lease.
b. Acquisition of asset by means of issuing share capital or bonds
payable.
c.Conversion of debt equity, for example conversion of bonds
payable to share capital.
d. Conversion of preference share to ordinary share.
 PAS 7, paragraph 33, provides that interest paid and
interest received shall be classified as operating
cash flows because they 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. While, interest received may be
classified as investing cash flow because it is a return
on investment.
 PAS 7, paragraph 33, provides that dividend received
shall be classified as operating cash flows because it
enters into the determination of net income.
 dividend received may be classified as investing cash
flow because it is 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.
 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.
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.
This method shows in detail or itemizes the major
classes of gross cash receipts and gross cash
payments.

In essence, the direct method is the ”cash basis”

income statement.
Cash received from customer PXX
Rent Received xx
Cash payments to merchandise creditors ( xx )
Salaries paid ( xx )
Insurance paid ( xx )
Other expense paid ( xx )
Cash generated from operations PXX
Interest paid ( xx )
Income tax paid ( xx )
Net Cash provided by operating activities PXX
This method presents the cash flow from operations begins
with the accrual basis net income and applies a series of
adjustments to convert the income to a cash basis.

General guidelines are offered for the adjustments of net

income to cash basis:
1. All increases in trade noncash current assets are deducted
from net income.
2.All decreases in trade noncash current assets are added to
net income.
3.All increases in trade current liabilities are added to net
income.
4. All decreases in trade current liabilities are deducted
from net income.
5. Depreciation, amortization, and other noncash
expense are added back to net income to eliminate the
effect they ad on net income.
6. Any gain on disposal of property or gain on early
retirement of nontrade liabilities is included in net
income but it is a nonoperating item. Thus, this is
deducted from net income.
7. Any loss on disposal of property or loss on early
retirement of nontrade liabilities is deducted from net
income but this is a nonoperating item. Thus, this
added back to net income.
Net Income PXX
Increase in accounts receivable ( xx )
Increase in Inventory ( xx )
Decrease in prepaid insurance xx
Increase in accounts payable xx
Increase in accrued salaries payable xx
Decrease in accrued interest payable ( xx )
Increase in Income tax payable xx
Decrease in unearned rent income ( xx )
Depreciation xx
Amortization of patent xx ___
Net cash provided by operating activities PXX
Cash flows from operating activities:
Net Income PXX
Decrease in accounts receivable xx
Increase in Inventory ( xx )
Decrease in prepaid expenses xx
Depreciation xx
Amortization of patent xx
Increase in accrued expenses xx
Decrease in accounts payable ( xx )
Net cash provided by operating activities PXX
Cash flows from investing activities:
Purchase of equipment ( xx )
Cash flows from financing activities:
Proceeds of 5-year bank loan xx
Issuance of share capital xx
Payment of 60-day bank loan ( xx )
Payment of cash dividend ( xx )
Purchase of treasury shares ( xx )
Net Cash provided by financing activities xx ___
Increase in cash and cash equivalents xx
Cash and Cash equivalents-January 1 xx __
Cash and Cash equivalents- December 31 PXX