CHAPTER 4

STATEMENT OF CASH FLOWS

Learning Competencies

The learners should be able to……….

1. Discuss the components and structures of CFS.
2. Prepare a CFS.
The Statement of Cash Flows
 providesinformation on cash inflows and cash outflows during
the period.

Cash flows are classified into the following activities:

1. Operating activities
2. Investing activities
3. Financing activities
Operating Activities
 Affect income and expenses

Examples include:
a) Cash receipts from the sale of goods and the rendering of services.
b) Cash receipts from interest income.
c) Cash payments for purchases of inventory.
d) Cash payments for expenses.
Investing Activities
 Acquisition and disposal of PPE

Examples include:
a) Cash payments for the acquisition of property, plant and equipment.
b) Cash receipts from sales of property, plant and equipment.
Financing Activities
 Investment and drawings by owner and loan transactions

Examples include:
a) Cash receipts from investments of owner to the business.
b) Cash payments on drawings by owner.
c) Cash receipts on loans.
d) Cash payments on repayment of loans.
Reporting cash flows from
Operating activities
A. Direct Method ~shows each major class of gross cash receipts and gross
cash payments.
Example:
Cash flows from operating activities:
Cash receipts from sale of goods ₱xx
Cash paid for purchases of inventory (xx)
Cash paid for salaries expense (xx)
Cash paid for utilities expense (xx)
Cash paid for interest expense (xx)
Net cash from operating activities ₱xx
B. Indirect Method ~adjusts accrual basis profit or loss for the effects of
changes in operating assets and liabilities and effects of
non-cash items.
Example:
Cash flows from operating activities:
Profit (loss) ₱xx
Non-cash items:
Depreciation xx
Gain on sale of equipment (xx)
Total xx
Changes in operating assets & liabilities:
Increase in accounts receivable (xx)
Decrease in inventory xx
Increase in prepaid assets (xx)
Increase in accounts payable xx
Decrease in salaries payable (xx)
Net cash from operating activities ₱xx
Under the indirect method, the “net cash flows from operating activities” is
computed by adjusting the accrual basis profit or loss as follows:
1. Non-cash expenses ~ added
2. Non-cash income ~ deducted
3. Increases in operating current assets ~ deducted (inverse relationship)
4. Increases in operating current liabilities ~ added (direct relationship)
Reference:
 Ferrer and Millan (2018). Fundamentals Of Accountancy,
Business & Management 2. Baguio, Philippines: Bandolin
Enterprise.