STATEMENT OF

CASH FLOWS
 STATEMENT OF CASH
FLOWS

▰ or the cash flow statement, is a financial statement that

summarizes the amount of cash and cash equivalents
entering and leaving a company.

▰ is a basic financial statement. It provides information about

cash receipts and cash payments of an entity during a
period.
 IT PROVIDES THE USERS:

1.A basis to evaluate the ability of the entity to generate cash.

2. An information on how the entity generates cash from some or
all of the following:
a. From operations
b. From borrowings
c. From investors
d. From sales of noncurrent assets
3. An information on how the entity uses cash which may be
for some or all of the following:
a. For operations
b. For payment of borrowed money
c. For income to investors
d. Purchases of noncurrent assets
4. An information to determine the liquidity and solvency of
the entity.
5. An information for estimating future cash inflow and cash
outflow;
6.An information for evaluating the relationship between cash
flow and profitability.
LIQUIDITY
• is the ability to pay current obligations.
SOLVENCY
• is the ability of a company to survive over a
long term.
PROFITABILITY
• is the ability to generate reasonable return on
investment.
ELEMENTS OF
CASH FLOWS
 OPERATING ACTIVITIES

1. Cash flows from operating activities -These are cash

flows that are directly related to earning the net income
or suffering the net loss.
▰ Operating Activities are the principal revenue -
producing activities of the entity and other activities
that are neither investing nor financing activities.
 INVESTING ACTIVITIES

2. Cash flows from investing activities -These are cash

flows for the acquisition or disposal of plant,
equipment, and investments.
▰ Investing Activities are the acquisition and disposal of
long-term assets and other investments.
 FINANCING ACTIVITIES

3. Cash flow from financing activities- These are cash flows for
financing the entity through cash receipts from and cash
payments to inventory or creditors other than to, or from
suppliers.
Financing activities- are activities that result in changes in the
size and composition of the equity investments of owners
and long term liabilities of the entity. Financing activities
include cash flows relating to liability and owners’ equity.
 INFLOWS AND OUTFLOWS

Cash inflow
▰ Money received by an organization as a result of its
operating activities, investment activities, and
financing activities.
Cash outflow
• The total outgoing funds from a company in a
given period of time. Cash outflows include
expenses such as salaries, supplies, and
maintenance, as well as paying dividends or
servicing any debt held by the company.
FORMS OF CASH FLOW
STATEMENTS
• DIRECT METHOD
• INDIRECT METHOD
DIRECT
METHOD CASH
FLOW
STATEMENT
 DIRECT METHOD

▰ A list of all cash receipts and all cash payments are

made.
▰ Total cash receipts less total cash payments is the net
cash increase ( receipts more than payments)or the
net cash decrease (less than payments).
Preparing statement of cash flows under the direct method normally
requires four steps:
Identify the activities of either increased or
decreased the asset cash

Properly classify these increases or decreases

per category: operating , investing or financing.

Identify whether the effect is a net increase or

net decrease in the asset cash.

Compute the ending cash balance by

adding/deducting the net increased/decreased
from the beginning balance
 ILLUSTRATION OF THE DIRECT METHOD

A. Cash for operating activities

Cash receipts
Cash received from customers P 2,500,000
Cash received from other income 100,000
2,600,600
Cash payments
Cash paid to supplier P 900,000
Cash paid for salaries 600,000
Cash paid for utilities 360,000
Cash paid for various expenses 150,000 2,010,000

Net cash received from operating activities + 590,000

B. Cash for investing activities
Cash paid for office computer - 120,000

C. Cash from financing activities

Additional investment of proprietor + 200,000
Net increase in cash for the year 670,000
Add: cash balance beginning 120,000
Cash balance ending P 790,000
 John Lee Company
18 Income Statement
For the Year Ended December 31, 20X2
Revenue P 5,400,000
Cost of Sales P 300,000
Operating Expenses (excluding depreciation) 900,000
Depreciation Expense 200,000 4,100,000
Net Income P 1,300,000

The following balances are reported on December 31:

20X1 20X2
Cash P 450,000 P1,170,000
Accounts Receivable 1,010,000 1,300,000
Inventories 250,000 320,000
Accounts Payable 720,000 700,000

Additional cash transactions for 20X2 are as follows:

1. The company bought a delivery truck for P200,000 cash.
2. A long-term loan for P1,800,000 was obtained from the bank.
3. The proprietor John Lee withdrew P200,000.
 John Lee Company
Statement of Cash Flows

19
For the Year Ended December 31, 20X2
Cash from Operating Activities
Cash collections from customers
Total Revenue P 5,400,000
Less: Increase in Accounts Receivable -290,000 P 5,110,000

Payment for Cost of Sales

Cost of Sales 3,000,000
Add: Increase in Inventories 70,000
Decrease in Accounts Payable 20,000 -3,090,000
Payment of Operating Expenses -900,000
Net cash from Operating Activities 1,120,000

Cash for Investing Activities

Bought delivery truck for cash -2,000,000

Cash From Financing Activities

Obtained loan from bank P 1,800,000
Proprietor John Lee withdrew cash -200,000
Net cash from financing activities 1,600,000
Net change in cash-Increase 720,000
Add: Cash balance, December 31, 20X1 450,000
Cash balance, December 31, 20X2 P 1,170,000
INDIRECT METHOD
CASH FLOW
STATEMENT
 INDIRECT METHOD
▰ The indirect method is normally used by companies that employ
the accrual method rather than cash method in their accounting
system.
▰ Short cut method by starting with the net income or net loss
amount and reconciles to operating activities cash flow.
▰ Indirect method does not report individual cash inflows and
outflows.
▰ Indirect method adjust net income for three types of
adjustment.
1. CHANGES THAT OCCUR IN THE NON CASH CURRENT
ASSETS AND CURRENT LIABILITIES.
- Increase or decrease in trade and other receivables.
- Increase or decrease in rapid expense.
- Increase or decrease in merchandise inventory.
- Increase or decrease in trade and other payable.
2. INCOME STATEMENT ITEMS INVOLVING OPERATIONS
THAT DO NOT REQUIRE CASH OUTFLOW OR CASH INFLOW
IN THE PERIOD.
3. ELIMINATING GAINS AND LOSSES RESULTING FROM
INVESTING AND FINANCING ACTIVITIES.
 John Lee Company
23 Income Statement
For the Year Ended December 31, 20X2
Revenue P 5,400,000
Cost of Sales P 300,000
Operating Expenses (excluding depreciation) 900,000
Depreciation Expense 200,000 4,100,000
Net Income P 1,300,000

The following balances are reported on December 31:

20X1 20X2
Cash P 450,000 P1,170,000
Accounts Receivable 1,010,000 1,300,000
Inventories 250,000 320,000
Accounts Payable 720,000 700,000

Additional cash transactions for 20X2 are as follows:

1. The company bought a delivery truck for P200,000 cash.
2. A long-term loan for P1,800,000 was obtained from the bank.
3. The proprietor John Lee withdrew P200,000.
 John Lee Company
Statement of Cash Flows
24
Cash flows from operating activities
For the Year Ended December 31, 20X2

Net income P 1,300,000

Adjustment to reconcile net income to net cash
providing from operating activities
Depreciation 200,000
Increase in accounts receivable -290,000
Increase in inventories -70,000
Decrease in accounts payable -20,000
Net cash provided from operating activities P1,120,000

Cash flows from investing activities

Purchased delivery truck for cash -2,000,000

Cash from financing activities

Loan obtained from bank P 1,800,000
Cash withdrawal from proprietor John Lee -200,000
Net cash from financing activities 1,600,000
Net change in cash -increase 720,000
Cash balance, December 31, 20x1 450,000
Cash balance, December 31, 20x2 P 1,170,000