CASH FLOW

STATEMENT
FINANCIAL
STATEMENTS
Financial statements also show the results of the management’s stewardship of the resources entrusted to
it. To meet this objective, financial statements provide information about an entity’s:

a. Assets
b. Liabilities
c. Equity
d. Income and Expenses, including gains and losses
e. Contributions by and distributions to owners in their capacity as owners; and
f. Cash flows

This information, along with other information in the notes, assists users of financial statements in
predicting the entity’s future cash flows and, in particular, their timing and certainty,
CASH FLOW STATEMENT
– Provides an analysis of inflows and/or outflows of cash from/to operating, investing, and
financing activities (Deloitte Global Services Limited, 2015)

Importance:

o The CFS provides the net change in the cash balance of a company for a period
o This help owners see if their revenues are translated to cash collections or if they have
enough cash inflows in order to pay any maturing liabilities
Activities related to cash flow
Operating Activities
Activities of an entity related to
their main revenue generating
activities of providing goods and
services.
Investing Activities Financing Activities
Activities of an entity related to sale Activities of an entity related to
and purchase of long-term assets acquisition of funding for the use of
and other investments. entity.

Where to see in FS usually?

-Income statement,
-balance sheet Balance sheet Balance sheet
-current assets, -non current assets -noncurrent liabilities
-current liabilities
Operating Activities (Net income activities)
Cash inflows Cash outflows
• Cash received from sales and • Payment to suppliers
service revenue • Payment of operating expenses
• Collection of accounts like salaries, rent, utilities, and
receivable taxes.
• Refunds from supplies • Payment for interest expense
• Charity contributions
• Cash refund to customers
Investing Activities (Noncurrent assets activities)
Cash inflows Cash outflows
• Cash proceeds from selling productive • Payment for the purchase of productive
assets like property, plant, and equipment. assets like property, plant, and equipment.

• Cash proceeds from selling investments in • Payment to acquire investments in equity

equity securities of other companies securities.
Financing Activities (Noncurrent liabilities and equity activities)
Cash inflows Cash outflows
• Cash investments by the owner • Cash withdrawal by the owner

• Cash proceeds from issuance of share • Payment of cash dividends to shareholders

capital
• Payments of long-term borrowing
• Cash proceeds from long-term borrowing.
 Exercises
Categorize each cash flow as (O) for operating, (I) for investing, (F) for
financing.
14) Cash paid to purchase equipment (company does not sell equipment
1) Cash received from sale of a building. 15) Cash received from sale of furniture (company’s main line of business
is not related to furniture.
2) Cash paid for salaries.
16) Depreciation expense.
3) Cash received for interest on a trade notes receivable.
17) Sale of goods on credit.
4) Cash paid to acquire a new truck.
18) Purchase of goods on credit.
5) Cash loaned out to a customer in a form of a long-term one.
19) Cash received from getting a loan from a bank.
6) Cash received for services rendered.
20) Cash paid to owners.
7) Cash paid for interest.
8) Cash paid for insurance on equipment.
9) Cash received from a debtor representing payments.
10) Cash paid out to acquire a building.
11) Cash received from customers.
12) Cash paid to suppliers.
13) Cash paid to employees.
TWO METHODS IN PREPARING CASH FLOW
STATEMENT
a) Direct method
the direct method of preparing the statement of cash flows presents the specific cash flows
associated with items that affect the cash amounts.

This typically includes:

-Cash collected from customers

-Interest and dividends received
-Cash paid to employees
-Cash paid to suppliers
-Interest paid
-Income taxes paid
Example
TWO METHODS IN PREPARING CASH FLOW
STATEMENT
a) Indirect Method
the indirect method of preparing the
statement of cash flows begins with the net income
or loss, with additions to or deductions from that
amount for non- cash income and expense items,
which will result in net income provided by
operating activities.

The indirect method of presentation is very popular

because the information required for it is relatively easily
assembled from the accounts that a business normally
maintain in its chart of accounts . Sir Chua Accounting
Example
Madam Lisa Manoban established her own service company. She invested 2,000,000 to open the
business and has purchased some computer equipment worth 120,000 and office furniture 80,000.
During the year, 500,000 revenues were earned, 200,000 of which were on account. Salaries paid to
employees amounted to 150,000, office rent payment, 40,000 and utilities paid amounted to 30, 000.
Receivables collected amounted to 70,000. The owner withdrew 100,000 for a personal emergency.
At the time when the carrying value of the furniture was 70,000, Madam Lisa sold it for 75,000.

1. How much is the entity’s cash flow from operating activities?

2. How much is the entity’s cash flow from investing activities?
3. How much is the entity’s cash flow from financing activities?
4. How much is the cash balance at the end of the year?
5. Prepare the entity’s statement of cash flows.

Sir Chua Accounting

Example
Madam Lisa Manoban established her own service company. She invested 2,000,000 to open the business and has purchased some computer
equipment worth 120,000 and office furniture 80,000. During the year, 500,000 revenues were earned, 200,000 of which were on account.
Salaries paid to employees amounted to 150,000, office rent payment, 40,000 and utilities paid amounted to 30, 000. Receivables collected
amounted to 70,000. The owner withdrew 100,000 for a personal emergency. At the time when the carrying value of the furniture was 70,000,
Madam Lisa sold it for 75,000.

Cash
Investment by the owner 2,000,000 Purchase of equipment 120,000
Cash received from the customers 300,000 Purchase of furniture 80,000
Collection of receivables 70,000 Salaries Expense 150,000
Sales of office furniture 75,000 Rent Expense 40,000
Utilities Expense 30,000
Withdrawal by the owner 100,000

Total debits 2,445,000 Total Credits 520,000

Balance 1,925,000
ACTIVITY 3

Prepare the Cash Flow Statement [Indirect Method]

of Teresa’s Delivery Services using the following :

Net Income 500,000

Depreciation Expense 70,000
Gain on sale of property and equipment 10,000
Increase in trade and other receivables – net 10,000
Increase in trade and other payables 150,000
Amount of proceeds from sale of property and equipment 50,000
Paid loan from a bank 100,000
Cash, January 1, 2016 – 70,000