Components of FS

1-2. Balance Sheet/Statement Financial Position (Earliest Comparative Period)

3. Income Statement/Statement of Financial Performance
4. Statement of Cash Flows
5. Statement of Changes in Equity
6. Notes to FS

Lecture 2- Statement of Cash Flows

Cash is one of the most important resources of an organization. Without cash, it would be very
hard for a business to survive, because cash is essential for its operation and growth. There are many
ways in which a business earns and spends its cash.

1. A business earns cash through: (INFLOWS)

• Sales of products or service

• Loan or credit card proceeds
• Asset sales
• Owner investments

2. A business spends cash through: (OUTFLOWS)

• Business expenditures
• Owner withdrawals
• Loan or credit card principal payments
• Asset purchases

In the case of an Inflow, it means more cash is added to the business, therefore, the effect of the
transaction is positive in terms of increasing the amount of cash on hand of the company.

Example: Service Business

1. Cash received for service rendered

TRANSACTION ACTIVITY EFFECT- Operating (+) *Reason *It is under the normal income
generating activity of a business *More cash is added into the business.
In the case of an Outflow, cash
on hand is dispensed out of the
business,
therefore, the effect of the
transaction is negative in terms
of the decrease in the
amount of cash held by the
company.
Example: Service Business
TRANSACTION
ACTIVITY
EFFECT
1. Purchase of
Equipment
Investing
(-)

*Reason

*Purchase was made to support

the
operation of the business/to make
service more efficient.
*Cash was decreased
due to payment for the
equipment.
In the case of an Outflow, cash on hand is dispensed out of the business; therefore, the effect of
the transaction is negative in terms of the decrease in the amount of cash held by the company.

Example: Service Business

1. Purchase of Equipment

TRANSACTION ACTIVITY EFFECT - Investing (-) *Reason *Purchase was made to support the
operation of the business/to make service more efficient. *Cash was decreased due to payment for the
equipment.
 3 Activities in Cash Flow

A. Operating Activities (CA & CL)

These are transactions that relate to how a business earns money on a day-to-day basis.
Primarily, cash inflows are made every time customers buy their products or avail of their services; cash
outflows are made when the business pay employees, utilities, suppliers, taxes, and other sales and
business expenditure activities.

B. Investing Activities (NCA)

Investing activities come from the sale (receipts) and purchase (payments) of non-current
assets, businesses, and securities used for the maintenance of and additions to support/expand
the company’s operation and competitiveness in the future.

C. Financing Activities (NCL & E)

The cash inflows (receipts) and outflows (payments) from financing activities come from
entering into loans to avail more cash or to pay long-term debts; owner’s additional investments and
withdrawals; issuing stocks and paying out dividends and similar transactions.

In the case of an Inflow, it

means more cash is added to
the business, therefore,
the effect of the transaction
is positive in terms of
increasing the amount of
cash on
hand of the company.

Example: Service Business

TRANSACTION
ACTIVITY
EFFECT
1.Cash received for
service rendered
Operating
(+)

*Reason

*It is under the normal income

generating activity of a business
*More cash is added
into the busine
Cash Flow Statement Defined

The SCF reports cash flow transactions during an accounting period classified by operating,
investing and financing activities. It shows how much cash enter (inflows) and how much cash is spent
(outflows) by the company. It reflects how the amount of cash a business has at present and how it
changes over time. All that matters in the preparation of a cash flow statement is the movement of cash
within the business. This includes all cash earnings or payments, and cash received as proceeds from
loans and cash used to pay loans within a specific time.

Structure of the Cash Flow

Statement
The CFS is mainly comprised
of three core components
based on activity and
other supplemental sections:

⎭ Operating Activities Investing

Activities Financing Activities
⎭Heading- It lists the name of
a particular company, the
cash flow statement
and the date/accounting period.
Specifically, For the (period)
ended (date).

⎭Net increase/decrease in Cash

– The amount of change in
cash whether it is an
increase or decrease for the
current period. It is the total
change brought by the
result of operating, investing
and financing activities. (TG)
⎭Beginning Cash Balance –
The balance of the cash
account at the beginning of
the accounting period. (TG)
This is the amount of cash in
the previous year’s
Statement of Financial Position
or the ending cash balance of
the preceding cash
flow statement.

⎭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.
(TG)
Structure of the Cash Flow Statement

The CFS is mainly comprised of three core components based on activity and other supplemental
sections: Operating Activities Investing Activities Financing Activities

⮚ Heading- It lists the name of a particular company, the cash flow statement and the
date/accounting period. Specifically, for the (period) ended (date).

⮚ Net increase/decrease in Cash – The amount of change in cash whether it is an increase or

decrease for the current period. It is the total change brought by the result of operating,
investing and financing activities.

⮚ Beginning Cash Balance – The balance of the cash account at the beginning of the accounting
period. This is the amount of cash in the previous year’s Statement of Financial Position or the
ending cash balance of the preceding cash flow statement.

⮚ 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.

Approaches in Statement of Cash Flows Presentation

There are two ways to prepare

a CFS, the direct and indirect
approach. The direct
approach focuses on gross
cash inflow and outflow that
arises naturally through the
business activities, thus,
providing a much transparent
view on how cash moves
through the business.

The indirect approach

reconciles the net income/loss
of the company with the
total cash flows generated/used
in operating activities by
adjusting the net income/loss
for the effects of non-cash
transactions. (DGSL, 2015).
There are two ways to prepare a CFS, the direct and indirect approach.

The direct approach focuses on gross cash inflow and outflow that arises naturally through the
business activities, thus, providing a much transparent view on how cash moves through the
business.

Steps in the Preparation of Cash Flow Statement (Direct Approach)

1. Classify available business transactions into the three main components of operating, investing and
financing.
2. Add all inflows and subtract all outflows to arrive with the amount of net cash flow per
component/activity.
3. Add the net cash flow balances per component/activity to get the net increase/decrease in cash any
given time period.
4. Add the amount of cash beginning to arrive with the amount of cash end.

The

indirect approach reconciles the net income/loss of the company with the total cash flows
generated/used in operating activities by adjusting the net income/loss for the effects of non-cash
transactions.
Increase in AR 20,000 Operating (20,000)

Decrease in AR 15,000 Operating +15,000

Increase in Inv. 30,000 Operating (30,000)

Decrease in Inv. 10,000 Operating +10,000

Increase in AP 20,000 Operating 20,000

Decrease in AP 15,000 Operating (15,000)

*All CA- Reversed

*All CL- Direct

*Depreciation, Amortization etc. must be added back to cash under operating activities
 Seatwork:

I. True or False: Read the statements and determine whether they are TRUE or FALSE.
_______1. Salary and utility payments are classified under operating activities.
_______ 2. Payments for the purchase of inventory goods are reported under investing
activities.
_______ 3. Business activities are classified into operating investing and funding activities.
_______ 4. The ending cash balance of the Cash Flow Statement is equivalent to the cash
balance reported on the Statement of Financial Position.
_______ 5. Payments for bank loans are classified under operating activities.

II. COMPONENTS OF CFS. Classify the following as to the 3 main business activities. Write
OPERATING, INVESTING, FINANCING or NON-CASH on the blanks.
________1. Payment of Bank Loan
________2. Collection from Customers
________3. Purchase of Supplies
________4. Proceeds from Sale of truck
________5. Payment of Worker’s salaries
________6. Owner’s Drawings
________7.Payment of Accounts’ payable
________8. Estimated Doubtful Accounts
________9. Payment of Tax
________10.Purchase of Building

III. Prepare a Statement of Cash Flows

The books of Mondi’s Kitchen showed the following transactions for the month of February.
Purchase of Equipment P65, 000.
Cash paid to suppliers P18,000
Cash received from customers P105,000
Obtained loan P150,000
Paid rent and utilities P8,700
Sold and equipment P3,300
Paid Taxes P1,770
Partial Payment for Loan P45,000