ACCTG26 Intermediate Accounting 3

TOPIC: STATEMENT OF CASH FLOWS

Statement of Cash Flows

Authority
• PAS 7 is part of the Philippine Financial Reporting Standards (PFRS) as adopted by the Financial and
Sustainability Reporting Standards Council (FSRSC).
• It applies to all entities preparing general purpose financial statements.

To provide information about:

• Cash and cash equivalents
• Changes in cash flows during the period
• Classification of cash flows into:
1. Operating activities – Main revenue-generating activities
2. Investing activities – Acquisition/disposal of long-term assets and investments
3. Financing activities – Changes in equity and borrowings

The statement of cash flows helps users evaluate:

• Liquidity
• Solvency
• Financial adaptability

Classification of Cash Flows

A. Operating Activities
• Definition: Principal revenue-producing activities and other activities not investing or financing.
• Examples (Philippines):
o Collection of tuition fees by a private school
o Cash receipts from sales of goods in a sari-sari store
o Payment of salaries and wages to factory workers
• Methods of presentation:
o Direct method – shows cash receipts and cash payments
o Indirect method – adjusts profit or loss for non-cash and working capital changes

B. Investing Activities
• Definition: Acquisition/disposal of long-term assets and other investments not in cash equivalents.
• Examples (Philippines):
o Purchase of land in Quezon City for a new warehouse
o Sale of a delivery truck
o Acquisition of bonds issued by a listed corporation

C. Financing Activities
• Definition: Activities that result in changes in equity and borrowings.
• Examples (Philippines):
o Issuance of ordinary shares on the Philippine Stock Exchange
o Proceeds from a loan with Land Bank of the Philippines
o Payment of cash dividends

3. Cash and Cash Equivalents

• Cash – Cash on hand (e.g., petty cash fund) and demand deposits
• Cash equivalents – Short-term, highly liquid investments with maturity of three months or less, subject
to insignificant risk of changes in value
• Examples:
o Time deposits with BPI maturing in 90 days or less
o Treasury bills maturing in 60 days
o
4. Special Considerations
• Foreign currency cash flows – Translate using the exchange rate at the date of the cash flow (PAS 21)
 • Interest and dividends – May be classified as operating, investing, or financing, but classification must
be consistent
• Taxes on income – Generally classified as operating unless specifically identifiable with investing or
financing activities

References
• Philippine Accounting Standard (PAS) 7 – Statement of Cash Flows
• Conceptual Framework for Financial Reporting 2020
• FSRSC Pronouncements

Presentation Options
Flexibility is allowed in classifying certain items (especially interest and dividends), but classification must be
consistent from period to period.

Item Option 1 Option 2 Notes

Operating – if it forms part of
Choice depends on nature
entity’s main revenue-producing Investing – if it’s return on
Interest income of the business; must be
activities (e.g., bank, finance investments
consistent
company)
Operating – if received from Investing – usually treated
Dividend Most non-financial entities
subsidiaries or if part of main as return on equity
income present as investing
operations investments
IFRS (PAS 7.33) allows
Operating – if part of main Financing – if cost of choice; PFRS for SMEs
Interest expense
operations obtaining finance generally requires
financing classification
Operating – if treated like other Financing – as return of IFRS prefers financing;
Dividends paid
distributions in cash flow from ops capital to owners PFRS allows either
Dividends No cash flow until paid – only
Recognition in SCF only
declared (but disclosed as non-cash
when payment occurs
not yet paid) transaction

Standard Guidance (PAS 7 Paragraph References)

• Interest and dividends received - PAS 7.31: may be operating or investing.
• Interest and dividends paid - PAS 7.33: may be operating or financing.
• Non-cash transactions - PAS 7.43: exclude from SCF, disclose in notes.

Situational Examples
Example A – Manufacturing Entity
• Interest income from time deposits - Investing
• Dividend income from equity investments - Investing
• Interest expense on bank loans - Financing
• Dividends paid - Financing

Example B – Commercial Bank

• Interest income on loans - Operating
• Dividend income from trading portfolio - Operating
• Interest expense on deposits - Operating
• Dividends paid - Financing

REMINDER
• The key deciding factor is whether the cash flow is integral to main revenue-producing activities.
• Once you choose a classification, stick to it consistently unless operations change significantly.

Cash and Cash Equivalents (Presentation)

• Definition:
Short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to
insignificant risk of changes in value.
• Key criteria:

1. Short-term maturity – normally 3 months or less from the date of acquisition.

2. High liquidity – easily convertible into cash.
3. Insignificant risk – changes in value due to interest rate or market movements are minimal.

• Inclusions:
• Cash on hand and demand deposits.
• Short-term investments meeting the criteria (e.g., 90-day Treasury bills, 1-month time deposits).

• Exclusions:
• Equity investments (unless essentially cash equivalents, e.g., redeemable preference shares with near
maturity).
• Bank overdrafts unless repayable on demand and form part of the entity’s cash management.

• Purpose-based test:

Classification is based on substance and purpose rather than type of instrument - a 6-month T-bill
bought 1 month before maturity qualifies; a 2-month T-bill bought at issuance does not qualify if it’s
intended to be held long-term.

Instrument Cash Equivalent? Reason

Maturity ≤ 3 months, highly liquid, low
90-day T-bill bought on issuance Yes
risk
6-month T-bill bought 2 months before
Yes Remaining maturity ≤ 3 months
maturity
1-year term deposit bought 11 months ago,
No Original maturity > 3 months
maturing next month
Equity shares No Value risk is not insignificant
Yes (if value risk is
Money market fund with daily liquidity Highly liquid, stable value
insignificant)
Bank overdraft repayable on demand, part of PAS 7.8 allows inclusion if part of
Net against cash
cash pooling cash management

Presentation requirement:

Cash and cash equivalents (C&CE) must be presented as a separate line item under current assets in the
Statement of Financial Position.

If the Statement of Cash Flows is presented separately, the ending C&CE balance in PAS 7 must reconcile to
the amount in PAS 1’s Statement of Financial Position.

Disclosure:
• Policy on what the entity considers “cash equivalents” (especially if broader/narrower than PAS 7’s
definition).
• Any restrictions on the use of C&CE must be disclosed separately.

Reminder
• Test is from acquisition date: The 3-month rule applies from the date you acquire the investment, not
the balance sheet date.
• Purpose matters: If it’s held for investing/speculation, not a cash equivalent, even if short-term.
• Bank overdrafts: Only offset cash if they are repayable on demand and are part of the entity’s regular
cash management; otherwise, present as a liability.
• Measurement in FS: PAS 1 governs presentation; PFRS 9 governs recognition, measurement, and
impairment.

You are given the following balances from the records of Mindanao Traders, Inc. as of December 31, 20X5:
Item Amount (₱)
Petty cash fund 25,000
Demand deposits in Metrobank 1,200,000
Time deposit purchased Oct 1, 20X5, maturing Mar 1, 20X6 500,000
Treasury bills purchased Nov 1, 20X5, maturing Jan 30, 20X6 200,000
Treasury bills purchased Jul 1, 20X5, maturing Jan 1, 20X6 300,000
Equity shares in listed company 150,000
Customer’s postdated check (dated Jan 15, 20X6) 80,000
Money market placement purchased Dec 15, 20X5, maturing Mar 15, 20X6 400,000
Bank overdraft (repayable on demand, same bank as main account, part of cash management) 100,000
Restricted cash for building construction (completion due in 3 years) 250,000

Compute Cash and Cash Equivalents for presentation in the Statement of Financial Position

EXERCISES

Classification of cash flows and transactions.

From the selection below, choose the one that best describes the transaction.
(a) Investing activities:
(b) Financing activities:
(c) Significant non-cash transactions:/ Not shown on statement of cash flows:

1. Purchase or sale of non-current assets

2. Issuing or reacquiring shares
3. Acquiring assets by issuing shares or debt
4. Purchase or sale of equity securities of other entities
5. Issuing or redeeming debt
6. Finance leases
7. Appropriations of retained earnings
8. Paying cash dividends to shareholders
9. Exchanges of non-monetary assets
10. Share dividends
11. Loans or collection of principal on loans to other entities
12. Conversion or refinancing of debt

Effects of transactions on statement of cash flows.

Any given transaction may affect a statement of cash flows (using the indirect method) in one or more of the
following ways:

Cash flows from operating activities

a. Net income will be increased or adjusted upward.
b. Net income will be decreased or adjusted downward.

Cash flows from investing activities

c. Increase as a result of cash inflows.
d. Decrease as a result of cash outflows.

Cash flows from financing activities

e. Increase as a result of cash inflows.
f. Decrease as a result of cash outflows.

The statement of cash flows is not affected

g. Not required to be reported in the body of the statement.
Instructions
For each transaction listed below, list the letter or letters from above that describe(s) the effect of the transaction
on a statement of cash flows for the year ending December 31, 2026. (Ignore any income tax effects.)
____ 1. Preference shares with a carrying value of P44,000 was redeemed for P50,000 on January 1, 2026.
____ 2. Uncollectible accounts receivable in the amount of P3,000 were written off against the allowance for
doubtful accounts balance of P12,200 on December 31, 2026.
____ 3. Machinery which originally cost P3,000 and has a book value of P1,800 is sold for P1,400 on
December 31, 2026.
____ 4. Land is acquired through the issuance of bonds payable on July 1, 2026.
____ 5. 1,000 ordinary shares, stated value P10 per share, are issued for P25 per share in 2026.
____ 6. An appropriation of retained earnings for treasury shares in the amount of P35,000 is established in
2026.
____ 7. A cash dividend of P8,000 is paid on December 31, 2026.
____ 8. The portfolio of long-term investments (non-trading) is at an aggregate fair value higher than
aggregate cost at December 31, 2026.

Classification of cash flows.

Note that X in the following statement of cash flows identifies a peso amount and the letters (A) through (F)
identify specific items which appear in the major sections of the statement prepared using the indirect method.
Statement of Cash Flows

Cash flows from operating activities

Net income X
Adjustments to reconcile net income to net cash
provided by operating activities:
Add +X (A)
Deduct –X (B)

Net cash provided by operating activities X

Cash flows from investing activities
Inflows +X (C)
Outflows –X (D)

Net cash provided (used) by investing activities X

Cash flows from financing activities

Inflows +X (E)
Outflows –X (F)

Net cash provided (used) by financing activities X

Net increase (decrease) in cash X

Instructions: For each of the following items, indicate by letter in the blank spaces below, the section or sections
where the effect would be reported. Use the code (A through F) from above. If the item is not required to be
reported on the statement of cash flows, write the word "none" in the blank. Assume that accepted accounting
standards have been followed in determining net income and that there are no short-term securities which are
considered cash equivalents.
____ 1. Issued preference shares in exchange for equipment.
____ 2. Sales discounts lapsed and not taken by customers. (Sales recorded at net originally.)
____ 3. Accrued estimated income taxes for the period. These taxes will be paid next year.
____ 4. Amortization of premium on bonds payable.
____ 5. Premium amortized on-- investment in bonds.
____ 6. The book value of trading investments was reduced to fair value.
____ 7. Purchase of FAFVOCI investments.
____ 8. Declaration of share dividends (not yet issued).
____ 9. Decrease in Retained Earnings Appropriated for Self-insurance.
____ 10. Bad debts (under allowance method) estimated and recorded for the period (receivables classified
as current).
____ 11. Gain on disposal of old machinery.
____ 12. Payment of cash dividends (previously declared in a prior period).
____ 13. FAFVOCI investments are sold at a loss.
____ 14. Two-year notes issued at discount for a patent.
____ 15. Amortization of discount on notes receivable (long-term).

PROBLEM

The following information was extracted from the financial records of Davao Electronics Corporation for the year
ended December 31, 20X5:

Statement of Financial Position (₱ amounts in Philippine Peso)

Assets 20X5 20X4

Cash and Cash Equivalents 850,000 600,000
Accounts Receivable 1,100,000 900,000
Inventory 1,500,000 1,200,000
Prepaid Expenses 80,000 100,000
Property, Plant and Equipment 3,200,000 2,700,000
Accumulated Depreciation (1,000,000) (900,000)
Long-term Investments 500,000 700,000
Total Assets 6,230,000 5,300,000

Liabilities & Equity 20X5 20X4

Accounts Payable 950,000 800,000
Accrued Expenses 120,000 150,000
Notes Payable – Bank 1,000,000 600,000
Share Capital 2,000,000 1,800,000
Share Premium 200,000 100,000
Retained Earnings 1,960,000 1,850,000
Total Liabilities & Equity 6,230,000 5,300,000

Additional Information
1. Profit for the year per income statement was ₱1,250,000.
2. Depreciation expense was ₱250,000.
3. Land costing ₱200,000 was sold for ₱250,000.
4. New equipment costing ₱700,000 was purchased for cash.
5. Long-term investment costing ₱300,000 was sold at book value.
6. Dividends of ₱1,140,000 were declared and fully paid in cash.
7. New shares were issued at ₱300,000 par value with ₱100,000 share premium, fully paid in cash.
8. All sales and purchases were on credit.
9. A conversion of a supplier’s payable into a bank note was made during the period amounting to P150,000.

From the data above, compute for the following:

1. Investments purchased during the period.

2. Proceeds from issuance of shares
Statement of Cash Flows – Indirect Method

Davao Electronics Corporation

Statement of Cash Flows
For the Year Ended December 31, 20X5

Cash Flows from Operating Activities

Profit before tax / after tax ₱1,250,000
Adjustments:

Depreciation 250,000
– Gain on sale of land (50,000)
Operating profit before working capital changes 1,450,000

Changes in working capital:

– Increase in Accounts Receivable (200,000)
– Increase in Inventory (300,000)
– Decrease in Prepaid Expenses 20,000
Increase in Accounts Payable 150,000
– Decrease in Accrued Expenses (30,000)
Net cash from operations ₱1,090,000

Cash Flows from Investing Activities

Proceeds from sale of land ₱250,000
Proceeds from sale of long-term investment 300,000
Purchase of equipment (700,000)
Purchase of long-term investment (100,000)
Net cash from investing activities (250,000)

Cash Flows from Financing Activities

Proceeds from issuance of shares ₱300,000
Proceeds from bank loan 250,000
Payment of dividends (1,140,000)
Net cash from financing activities (590,000)

Net increase in cash and cash equivalents ₱250,000

Cash & cash equivalents at beginning of year 600,000
Cash & cash equivalents at end of year ₱850,000

1. The following information is available for ABC Company:

Receipts from customers P210,000
Dividends from share investments 3,000
Proceeds from sale of equipment 18,000
Proceeds from issuance of shares 90,000
Payments for goods 100,000
Payments for operating expenses 75,000
Interest paid 5,000
Taxes paid 4,000
Dividends paid 20,000

Based on the preceding information, compute the net cash provided by operating activities.

2. ABC Company reported net income of P160,000 for the current year. Depreciation recorded on buildings
and equipment amounted to P80,000 for the year. Balances of the current asset and current liability accounts
at the beginning and end of the year are as follows:
End of Year Beginning of Year
Prepaid expenses P 9,500 P 5,000
 Inventories 55,000 65,000
Accounts receivable 24,000 32,000
Cash 20,000 15,000
Accounts payable 12,000 18,000
Income taxes payable 1,600 1,200

Net cash provided by operating activities

3. ABC Company reported net income of P160,000. For 2027, depreciation was P40,000, and the company
reported a gain on disposal of investments of P10,000. Accounts receivable increased P25,000 and
accounts payable decreased P20,000. Compute net cash provided by operating activities using the indirect
method.

Net cash provided by operating activities

USE THE FOLLOWING INFORMATION FOR THE NEXT 3 REQUIREMENTS:

A comparative statement of financial position for ABC Corporation is presented below:
ABC CORPORATION
Comparative statement of financial position
Dec. 31, 2027 Dec 31, 2026
Assets
Land 18,000 40,000
Equipment 70,000 60,000
Accumulated depreciation (20,000) (13,000)
Prepaid insurance 25,000 17,000
Accounts receivable (net) 80,000 60,000
Cash 36,000 31,000
Total Assets P209,000 P195,000

Equity and Liabilities

Share capital-ordinary P140,000 P115,000
Retained earnings 31,000 55,000
Bonds payable 27,000 19,000
Accounts payable 11,000 6,000
Total equity and liabilities P209,000 P195,000

Additional information:
1. Net loss for 2027 is P15,000.
2. Cash dividends of P9,000 were declared and paid in 2027.
3. Land was sold for cash at a loss of P7,000. This was the only land transaction during the year.
4. Equipment with a cost of P15,000 and accumulated depreciation of P10,000 was sold for P5,000 cash.
5. P12,000 of bonds were retired during the year at carrying (book) value.
6. Equipment was acquired for ordinary shares. The fair value of the shares at the time of the exchange was
P25,000.
a. Compute the depreciation expense
b. Net cash provided by investing activities

USE THE FOLLOWING INFORMATION FOR THE NEXT 3 REQUIREMENTS:

A comparative statement of financial position for ABC Company appears below:
ABC COMPANY
Comparative Statement of Financial Position
Dec. 31, 2027 Dec. 31, 2026
Assets
Equipment P 60,000 P32,000
Accumulated depreciation—equipment (20,000) (14,000)
Long-term investments -0- 18,000
Prepaid expenses 6,000 9,000
Inventory 25,000 18,000
Accounts receivable 18,000 14,000
Cash 33,000 10,000
Total assets P122,000 P87,000
Equity and Liabilities
Share capital-ordinary P 40,000 P23,000
Retained earnings 28,000 10,000
Bonds payable 37,000 47,000
Accounts payable 17,000 7,000
Total equity and liabilities P122,000 P87,000

Additional information:
1. Net income for the year ending December 31, 2027 was P33,000.
2. Cash dividends of P15,000 were declared and paid during the year.
3. Long-term investments that had a cost of P18,000 were sold for P14,000.
4. Sales for 2027 were P120,000.

Compute the net cash provided/ used by

a. Operating activities
b. Investing activities
c. Financing Activities