FUNDAMENTALS OF

ACCOUNTANCY,
BUSINESS &
MANAGEMENT 2

Lesson 6
Prepared by: Aprilyn A. Pascual MBA
At the end of the lesson the students
should be able to;

1.Discuss the components and structures

of CFS.
2.Prepare a CFS.
 BOARD WORK TIME
Define the following terms based on your understanding of
the word.

1.Cash Flow Statement

2. Direct Approach
3. Indirect Approach
4. Operating Activities
5. Investing Activities
6. Financing Activities
 CHECK TIME!
In a ¼ sheet of paper, write you’re the following:
1.Monthly allowance (daily allowance x no. of days in school)
2. Monthly expenses ( daily expenses x no. of days in school)
3. Deduct monthly expenses from monthly allowance.
 ANALYSIS
-Associate allowance with inflows and spending
with outflows
-this is different from the SCI as the SCI will
include non-cash items (accruals,
depreciation) while the CFS will only include
cash items
 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).

This statement shows cash transactions only

compared to the SCI which follows the
accrual principle.
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).
This statement shows cash transactions only
compared to the SCI which follows the
accrual principle.
Differentiate the Direct and Indirect Approach of the CFS

Direct – The operating cash flow section of the CFS under the
direct method would show each major class of gross cash receipts
and gross cash payments (Deloitte Global Services Limited, 2015).

Indirect – The operating cash flow section of the CFS under the
indirect method will reconcile the net income/loss of the company
with the total cash flows generated/used in operating activities by
adjusting the net income/loss for effects of non-cash transactions
(Deloitte Global Services Limited,
2015).
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 (Deloitte Global Services Limited, 2015).

Investing Activities – Cash transactions related to purchase or sale of non-current assets

(Deloitte Global Services Limited, 2015).

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.
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
PRACTICE TIME
Easy:

1.Gain on sale of property and

equipment is part of what activity
in the CFS? (5 POINTS)
Easy:

1. Answer: noncash transaction but part of operating

activity if indirect
Easy:

2. Changes in long term liabilities is part of

what activity in the CFS? (5 POINTS)
Easy:

Answer: 2. financing
AVERAGE

Net income is part of which Approach in

1.

preparing the CFS? (10 POINTS)

AVERAGE

Answer: 2. indirect
DIFFICULT: (15 POINTS)
The company presented the following in order to aid
the accountant in preparing the CFS:
a. Net income: P200,000
b. Depreciation expense : P 25,000
c. Gain on sale of property and equipment: P100,000
d. Decrease in trade and other receivables: P 70,000
e. Purchase of property and equipment: P200,000
f. Payment of loan from bank: P150,000

Compute for the cash generated/used in financing

activities.
DIFFICULT:

Answer: P150,000 net cash used in financing activities

EVALUATION:

Identify which of the following transactions fall under operating,

investing and financing activities:

a. Cash received from customers

b. Cash paid to suppliers
c. Cash paid to employees
d. Cash paid to purchase equipment (company does not sell
equipment)
e. Cash received from sale of furniture (company’s main line of
business is not related to furniture)
f. Depreciation expense
g. Sale of goods on credit
h. Purchase of goods on credit
i. Cash received from getting a loan from a bank
j. Cash paid to owners
Answers:
a. Cash received from customers - Operating
b. Cash paid to suppliers - Operating
c. Cash paid to employees - Operating
d. Cash paid to purchase equipment (company does not sell equipment) -
Investing
e. Cash received from sale of furniture (company’s main line of business is
not related to furniture) - Investing
f. Depreciation expense - Non-cash
g. Sale of goods on credit - Non-cash
h. Purchase of goods on credit - Non-cash
i. Cash received from getting a loan from a bank = Financing
j. Cash paid to owners - Financing