Cash Flow Statement

Statement of Cash Flows

 Statement of Cash Flows is the financial statement that
explains the net change in cash for the year.
 The Statement of Cash Flows summarized the cash
transactions that occurred during the year.
 The Statement shows cash transactions organized based
on the three major activities of the business – operating,
investing and financing.
Parts of the Cash Flow Statement
 Operating Activities – Activities that are directly related to the main
revenue-producing activities of the company such as cash from customers and
cash paid to suppliers/employees
 Investing Activities – Cash transactions related to purchase or sale of non-
current assets
 Financing Activities – Cash transactions related to changes in equity and
borrowings.
 Net change in cash or net cash flow (increase/decrease) – The net amount
of change in cash whether it is an increase or decrease for the current period.
The total change brought by operating, investing and financing activities.
 Beginning Cash Balance – The balance of the cash account at the beginning of
the accounting period.
 Ending Cash Balance – The balance of the cash account at the end of the
accounting period computed using the beginning balance plus the net change
in cash for the current period.
Cash Flows from operating activities maybe presented using the Direct
Method or the Indirect Method.
 Direct Method of presenting the cash flows from operating activities shows
summarized cash transactions. The following are example of line items
presented in the direct method of cash flows from operations.
i. Cash received from customers (cash receipts from sale of goods and
rendering of services)
ii. Cash received from fees, commissions and other income
iii. Cash payments to suppliers
iv. Cash payments to employees
v. Cash payments for other operating expenses
vi. Interest payments
 Indirect Method of presenting the cash flows from operations reconciles the
accrual net income (from the Statement of Comprehensive Income) to net cash
flows from operations. The following are examples of reconciling adjustments
for the indirect method of presentation:
i. Non-cash expenses such as depreciation and amortization are added back to
net income.
ii. Increases in current assets and decrease in current liabilities are deducted
from net income. On the other hand, decrease in current assets and increase
in current liabilities are added back to net income. The change is computed as
the difference in the ending and beginning balances of the accounts.
a. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date of preparation (emphasis on
the wording – “for the”)

b. Sample of the Direct Method

i. First part is operating activities
ii. Second part is investing activities
iii. Third part is financing activities
c. Sample of the Indirect Method
c.i. First part is operating activities
c.i.i. Non-cash expenses are added back while non-cash revenues are
deducted. Gain/loss on sale of non-current assets are deducted/added back
because the cash transaction is recorded under investing activities.

c.i.ii. Changes in current assets and current liabilities are either added or
deducted depending on whether they increased or decreased during the year.
Increase in current assets – deducted to net income
Accounts Receivable
– increases revenue which increases net income but is not a cash transaction

Prepaid Expense – decreases cash but does not change the net income

Decrease in current assets – added to net income

Accounts Receivable – increases cash but does not change the net income
Prepaid Expense – increases expenses which decreases net income but is not a
cash transaction
Increase in current liabilities – added to net income
Accounts Payable – increases expenses which decreases net income but is not a
cash transaction
Unearned Income – increases cash but does not change the net income
Decrease in current liabilities – deducted to net income
Accounts Payable – decreases cash but does not change the net income
Unearned Income – increases revenue which increases net income but is not a
cash transaction

c.ii. Second part is investing activities

c.iii. Third part is financing activities