STATEMENT OF CASH FLOWS

Statement of Cash Flows

• Is an essential component within the set of basic financial statements.
• It provides information about the cash receipts and cash disbursements during a period.
• It answers the questions of where the money came and where it went.

Presentation
1. Operating Activities
• Derived primarily from the principal revenue-producing activities of the enterprise.
• They generally result from the transactions and other events that enter into the
determination of profit or loss.

CASH RECEIPTS FROM CASH PAYMENTS TO

Sale of goods and rendering of services Suppliers for goods and services
Royalties, fees, commissions & other revenue Employees
Insurance enterprise for premiums, annuities Insurance enterprise for premiums, annuities
and other benefits. and other benefits.
Contracts held for dealing or trading purposes Selling, administrative and other expenses.

2. Investing Activities
• Derived from the acquisition and disposal of long-term assets and other investments not
included in cash equivalent.
• These cash flow activities affect non-trade assets.

CASH RECEIPTS FROM CASH PAYMENTS TO

Sale of property, plant and equipment, Acquire property, plant and equipment,
intangibles, and other noncurrent assets intangibles, and other noncurrent assets
Sale of investments in equity or debt Acquire investments in equity or debt
instruments of other entities & interests in instruments of other entities & interests in
joint venture joint venture
Repayment of advances & loans made to other
Future/forward/option/swap contracts
parties

3. Financing Activities
• Derived from the equity capital and borrowing of the entity.
• Cash flow transactions with non-trade creditors and shareholders.

CASH RECEIPTS FROM CASH PAYMENTS TO

Issuing shares or other equity instruments Owners to acquire or redeem the enterprise’s
shares (treasury shares)
Issuing debentures, loans, notes, bonds,
Dividends
mortgages and other long-term borrowings
Repay loans, notes, bonds, mortgages and
Reissuance of treasury shares
other long-term borrowings

Other Issues
Usually Alternatively
Interest paid Operating Financing
Interest received Operating Investing
Dividends paid Financing Operating
Dividends received Operating Investing
Income taxes Operating Investing/Financing

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Non-cash Transactions
• Do not result in cash receipts or cash payments.
• Not reported in the statement of cash flows but disclosed in the financial statement if
material.
• Examples:
o Acquisition of asset by assuming directly related liabilities.
o Acquisition of asset by means of issuing share capital or bonds payable.
o Conversion of debt to equity (e.g. bonds payable to share capital)
o Conversion of preference share to ordinary share.

I. OPERATING ACTIVITIES

a. Direct Method
• Shows each major class of cash receipts and cash payments.

Cash flows from Operating Activities

Cash receipts from customers xx
Cash receipts from sale of trading securities xx
Cash receipts from dividends xx
Cash receipts from interest xx
Cash paid to suppliers and employees (xx)
Cash paid for expenses (xx)
Cash paid for interest (xx)
Cash paid for taxes (xx)
Net cash provided (used) in operating act. xx

b. Indirect Method
• The net cash flow from operating activities is determined by adjusting the profit of loss for
the effects of:
o Changes in current assets (other than cash and cash equivalents) and current
liabilities.
o Non-cash items such as depreciation, unrealized gains/losses, etc.

Cash flows from Operating Activities

Net income xx
Adjustments for:
Depreciation expense xx
Amortization expense xx
Impairment loss xx
Unrealized loss on financial assets xx
Loss on sale of PPE xx
Foreign exchange loss xx
Income from associates (xx)
Unrealized gain on financial assets (xx)
Gain on sale of PPE (xx)
Foreign exchange gain (xx)
Increase in accounts receivable (xx)
Decrease in inventories xx
Increase in accounts payable xx
Decrease in accrued salaries expense (xx)
Net cash provided (used) in operating activities xx

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 II. INVESTING ACTIVITIES

Cash flows from Investing Activities

Proceeds from sale of property, plant, and equipment xx
Purchase of sale of property, plant, and equipment (xx)
Net cash provided (used) in operating activities xx

III. FINANCING ACTIVITIES

Cash flows from Financing Activities

Proceeds from issuance of ordinary shares xx
Proceeds from issuance of bonds xx
Payment of cash dividends (xx)
Purchase of treasury shares (xx)
Net cash provided (used) in financing activities xx

DISCUSSION EXERCISES
I. Identify each item if it is a Cash Transaction or Noncash Transaction. Then, if it is a cash transaction,
identify in which section of the statement of cash flows shall it will appear and indicate whether that
item would result to a positive (+) or negative (-) cash flow.

C/NC O I F
E.g. Cash received from customers C +
1. Issuance of ordinary shares
2. Purchase of building
3. Impairment loss on PPE
4. Payment to supplier
5. Payment for salaries and wages
6. Gain from sale of land
7. Income taxes paid
8. Purchase of trading securities
9. Distribution of stock dividends
10. Collection of trade notes receivable
11. Payment of cash dividends
12. Foreign exchange gain
13. Issuance of bonds
14. Purchase of long-term investments
15. Conversion of bonds to ordinary shares
16. Sale of land at cost
17. Receipt of dividend on investments
18. Share in profit from associate
19. Purchase of treasury shares
20. Purchase of land by issuance of ordinary shares
21. Amortization expense
22. Payment for insurance
23. Unrealized loss on financial asset at FVPL
24. Proceeds from sale of long-term investments
25. Depreciation expense

II. The following are items taken from the records of Romer Company for 2023:
a. Net income, P2,600,000.
b. Gain on sale of land, P40,000.
c. Unrealized gain on trading securities, P60,000.
d. Depreciation expense, P150,000.

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e. Foreign exchange loss, P70,000.
f. Share of profit of subsidiary, P480,000.
g. Patent amortization expense, P270,000.
h. Loss on sale of machinery, P10,000.
i. Increase in accounts receivable, P340,000.
j. Decrease in inventory, P500,000.
k. Increase in prepaid insurance, P20,000.
l. Decrease in accounts payable, P260,000.
m. Increase in interest payable, P30,000.
n. Increase in income tax payable, P60,000.

Prepare the operating activities section of Romer Company's 2023 Statement of Cash Flows
using the indirect method.

III. The profit or loss section of the statement of comprehensive income of Diana Company for the
year ended December 31, 2023 is reproduced below:

Sales P 6,100,000
Cost of goods sold 3,700,000
Gross profit 2,400,000
Gain on sale of equipment 100,000
Salaries expense (820,000)
Insurance expense (380,000)
Depreciation expense (200,000)
Unrealized loss on trading securities (20,000)
Profit before interest and income taxes 1,080,000
Interest expense 120,000
Profit before income tax 960,000
Income tax expense 288,000
Profit P 672,000

The following information is also available:

Decrease in accounts receivable 120,000

Increase in inventory 280,000
Decrease in accounts payable 160,000
Increase in salaries payable 100,000
Increase in prepaid insurance 180,000
Decrease in interest payable 30,000
Increase in income tax payable 18,000

Prepare the operating activities section of the statement of cash flows using the indirect
method.

IV. Luther Company had the following income statement for the year ended December 31, 2023:

Sales P 1,000,000
Cost of goods sold 580,000
Gross profit 420,000
Operating expenses
Depreciation expense P 80,000
Salaries expense 120,000 200,000
Profit before income taxes 220,000
Income tax expense 66,000
Profit P 154,000

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 Additional Information:
December 31 January 1
Cash P 875,000 P 838,000
Accounts receivable 290,000 340,000
Inventories 524,000 435,000
Accounts payable 330,000 376,000
Accrued salaries expense 92,000 68,000
Income tax payable 55,000 43,000

What amount should be reported as net cash provided/used by operating activities using
indirect method?

V. The following are various cash flows and other information of the Son Company for 2023:
a. Payment of interest, P82,000.
b. Proceeds from sale of land, P79,000.
c. Payment of dividends, P121,000.
d. Depreciation expense, P24,000.
e. Collections from customers, P983,000.
f. Payments of income taxes, P154,000.
g. Proceeds from issuance of ordinary share capital, P189,000.
h. Payments to suppliers and employees, P675,000.
i. Increase in inventories, P46,000.

Prepare the operating activities section of Yen Company's 2017 Statement of Cash Flows using
the direct method.

VI. Aliyah Company provided the following information for the current year:

Jan. 1 Dec. 31
Cash 790,000 510,000
Accounts receivable 580,000 650,000
Inventory 340,000 220,000
Prepaid rent 140,000 60,000
Equipment 350,000 350,000
Accounts payable 470,000 580,000
Accrued salaries expense 90,000 110,000

Other Information:
Sales (60% were sold on account) P1,900,000
Cost of sales 1,200,000
Sales discounts 16,000
Sales returns and allowances 25,200
Purchase discounts 15,600
Purchase returns and allowances 28,300
Accounts receivable that was written off 9,500
Rent expense 110,000
Depreciation expense 35,000
Salaries expense 40,000
Miscellaneous expense 20,000

The net loss for the year was P271,800.

a. Using the direct method, how much is the collections from customers?

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b. Using the direct method, how much is the payment to suppliers?
c. How much is the net cash provided (used) by operating activities?

VII. Pat Company had the following income statement for the year ended December 31, 2023:

Sales P 4,500,000
Cost of goods sold:
Inventory, January 1, 2023 P 750,000
Purchases 2,850,000
Cost of goods available for sale 3,600,000
Less: Inventory, December 31, 2023 600,000 3,000,000
Gross profit on sales 1,500,000
Operating expenses
Salaries 600,000
Rent 250,000
Insurance 20,000
Other expenses 100,000
Depreciation 50,000 1,020,000
Net income P 480,000

Additional Information:
December 31 January 1
Accounts receivable P 500,000 P 420,000
Inventory 600,000 750,000
Prepaid insurance 15,000 10,000
Accounts payable 280,000 160,000
Salaries payable 50,000 80,000
Equipment 1,200,000 1,200,000
Accumulated depreciation 290,000 240,000

Prepare the operating activities section of Pat Company’s Statement of Cash Flows for the year
2023 using direct method.

VIII. Doni Company provided the following information on selected transactions during 2023:
Purchase of land by issuing bonds 500,000
Proceeds from issuing bonds 1,000,000
Purchases of inventory 1,900,000
Purchases of treasury stocks 300,000
Purchase of bond investment 700,000
Dividends paid to preferred stockholders 200,000
Proceeds from issuing preferred stock 800,000
Proceeds from sale of equipment 100,000

a. The net cash provided (used) by investing activities during 2023.

b. The net cash provided (used) by financing activities during 2023.

IX. Roa Company provided the following account balances:

12/31/22 12/31/23
Machinery 490,000 607,000
Accumulated depreciation 290,000 301,000

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During 2023, Machine A was sold at a gain of P9,000 while Machine B was sold at a loss of P4,000.
The cost and the related accumulated depreciation of the machineries sold are the following:

Accumulated
Machinery Cost
Depreciation
A P81,000 P63,000
B 52,000 46,000

Moreover, Machine C was acquired on a cash basis during the year.

a. What is the total proceeds from sale of machineries?

b. What is the amount of machinery purchased in 2023?
c. What is the depreciation expense of the machinery for 2023?
d. What is the net cash provided (used) by investing activities during 2023?

X. Kresh Company provided the following cash flow information on selected transactions during
2021:

Cash and cash equivalents, January 1, 2023 P 1,800,000

Cash and cash equivalents, December 31, 2023 782,000
Cash received from customers 10,582,900
Dividends paid 320,000
Cash paid to suppliers and employees 9,432,530
Purchase of long-term investments 120,000
Proceeds from sale of long-term investments 203,000
Interest paid 61,770
Proceeds from issuance of ordinary shares 890,000
Proceeds from disposal of building 515,400
Income taxes paid 245,000
Proceeds from issuance of bonds payable 2,090,000
Payment of long-term bonds payable 620,000
Purchase of land 3,800,000
Purchase of treasury shares 700,000

a. How much is the net cash provided (used) by operating activities during 2023?
b. How much is the net cash provided (used) by investing activities during 2023?
c. How much is the net cash provided (used) by financing activities during 2023?
d. How much is the net increase (decrease) in cash and cash equivalents during 2023?

XI. Cess Company reported a comparative statement of financial position for the year 2022 and 2023:

2023 2022
Assets
Cash and cash equivalents 760,000 640,000
Accounts receivable, net 480,000 360,000
Inventory 250,000 290,000
Long-term investments 150,000 250,000
Property, plant and equipment 1,200,000 200,000
Accumulated depreciation (85,000) (85,000)
2,755,000 1,655,000

Liabilities and Shareholders’ Equity

Accounts payable 125,000 140,000
Accrued salaries expense 50,000 40,000
Long-term debt 230,000 120,000

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 Ordinary share capital, P10 par 600,000 500,000
Share premium 580,000 140,000
Retained earnings 1,170,000 715,000
2,755,000 1,655,000

The following additional information relates to the current year:

• Net income for the current year was P790,000.
• Cash dividend of P335,000 was declared and paid.
• Equipment costing P600,000 and having a carrying amount of P350,000 was sold for
P350,000.
• Equipment costing P110,000 was acquired through issuance of long-term debt.
• A long-term investment was sold for P135,000. There were no other transactions affecting
long-term investments.
• 10,000 ordinary shares were issued for P54 per share.

a. What is the net cash provided (used) by operating activities during 2023?
b. What is the net cash provided (used) by investing activities during 2023?
c. What is the net cash provided (used) by financing activities during 2023

MULTIPLE CHOICE QUESTIONS

1. The statement of cash flows is
a. another name for statement of financial position.
b. a financial statement showing revenues earned by business, the expenses incurred in earning the
revenues, and the resulting profit or loss.
c. a financial report showing the assets, liabilities, and equity of an enterprise on a specific date.
d. a financial statement that reports the cash inflows and outflows for an accounting period.

2. What is the primary purpose of the statement of cash flows?

a. to provide information about an entity's financial position at a point in time.
b. to provide information about an entity's financial performance for a period of time.
c. to provide information that is useful in assessing the ability of the entity to generate cash and cash
equivalents.
d. to provide information about an entity's financial structure.

3. In a statement of cash flows using indirect method of presenting cash flow from operating
activities, depreciation is treated as an adjustment to reported profit because depreciation
a. reduces the reported profit but does not involve an outflow of cash.
b. reduces the reported profit and involves an inflow of cash.
c. is an inflow of cash for asset replacement fund.
d. usually represents a significant portion of operating expenses.

4. In preparing a statement of cash flows, which of the following transactions would be considered
an investing activity?
a. Sale of a long-term investment
b. Issuance of bonds payable at a discount
c. Purchase of treasury shares
d. Sale of shares

5. In preparing a statement of cash flows, sale of treasury at an amount greater than cost would be
classified as a /an
a. transfer activity.
b. operating activity
c. investing activity
d. financing activity

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6. Magnolia, Inc has provided the following 2023 account balances for the preparation of the annual
statement of cash flows:

January 1 December 31
Accounts receivable P115,000 P145,000
Allowance for bad debts 4,000 5,000
Prepaid rent 62,000 41,000
Accounts payable 97,000 112,000

Magnolia's 2023 profit is P750,000. What is the 2023 net cash from operations?
a. P727,000
b. P743,000
c. P755,000
d. P757,000

For Numbers 7-8

Sunflower Company is preparing a statement of cash flows for the year ended December 31, 2017. It
has the following account balances:
Dec. 31, 2023 Dec. 31, 2024
Machinery P2,500,000 P3,200,000
Accumulated depreciation 1,020,000 1,200,000
Loss on sale of machinery 40,000

During 2024, Sunflower sold for P260,000, a machine that cost P400,000 and purchased several
items of machinery.

7. What is the depreciation expense for 2024?

a. P180,000
b. P240,000
c. P280,000
d. P320,000

8. Using the same information given, what is the cost of machinery purchased during 2024?
a. P340,000
b. P700,000
c. P960,000
d. P1,100,000

For Numbers 9-10

Dahlia Corporation's transactions for the year ended December 31, 2023 included the following:
• Purchased real estate for P550,000 cash which was borrowed from a bank.
• Sold investment securities for P500,000.
• Paid dividends of P600,000.
• Issued 500 ordinary shares for P250,000 cash.
• Purchased machinery and equipment for P125,000 cash.
• Paid P450,000 toward a bank loan.

9. Dahlia's net cash used in investing activities for 2023 was

a. P675,000 c. P175,000
b. P375,000 d. P 50,000

10. Using the same information given, Dahlia's net cash used in financing activities for 2023 was
a. P 50,000 c. P450,000
b. P250,000 d. P500,000

Prepared by: Bernard Rodney D. Alvarez, CTT, RCA, MRITax

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