FINANCIAL ACCOUNTING FOR IE

JOSIE B. AGUILA, MBMBA

STATEMENT OF CASH FLOW

Learning Objectives
After studying this chapter, the student should be able to:
1. Explain the statement of cash flow.
2. Identify the different activities in the statement of cash flow.
3. Compute for the cash flow provided by (used in) operating activities using the indirect method.
4. Analyze the effects of cash flow in the business.

This financial report shows information that provide users a basis to assess the ability of the entity to generate cash and
cash equivalents and the needs of the entity to utilize those cash flows.

The Statement of Cash Flow is designed to provide information about the change in enterprise’s cash and cash
equivalents.

Cash is composed of cash on hand and demand deposits.

Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of change of value.

These investments qualify as cash equivalents when they have a short maturity of 3 months or less from the date of
acquisition.

An enterprise should disclose the components of cash and cash equivalents and present a reconciliation of the amounts in
the statement of cash flow with the equivalent items reported in the statement of financial position.

This statement should report the cash flows during the period classified as follows:
a. Operating activities
b. Investing activities
c. Financing activities

Classification by activity provides information that allows users to assess the impact of those activities on the financial
position of the enterprise and the amount of its cash and cash equivalents.

Operating activities are the cash flows derived primarily from the principal revenue producing activities of the
enterprise.

Investing activities are cash flows derived from the acquisition and disposal of long-term assets and other
investments not included in cash equivalent.

Financing activities are the cash flows derived from equity capital and borrowings of the enterprise.

Page 1 of 5
Illustration:

VAL ROX CORPORATION

Comparative Statement of Financial Position As
of December 31, 200B and 200A

ASSETS
200B 200A
Current Assets:
Cash P300,000 P200,000
Accounts Receivable, trade 840,000 580,000
Inventory 660,000 420,000
Prepaid expenses 100,000 50,000
Total current assets P1,900,000 P1,250,000

Noncurrent Assets:
Long-term investment P80,000
Property, plant and equipment 1,130,000 P600,000
Accumulated depreciation (110,000) (50,000)
Total noncurrent assets P1,100,000 P550,000
Total Assets P3,000,000 P1,800,000

LIABILITIES AND SHAREHOLDER'S EQUITY

Current Liabilities:
Accounts payable – trade P530,000 P440,000
Accrued expenses 140,000 130,000
Dividend payable 70,000
Total current liabilities P740,000 P570,000

Noncurrent Liability:
Mortgage loan payable P500,000

Shareholder's equity
Ordinary shares P1,200,000 P900,000
Accumulated profits 560,000 330,000
Total stockholder's equity P1,760,000 P1,230,000
Total Liabilities and Shareholder's Equity P3,000,000 P1,800,000

Additional information:

1. Included in the P400,000 income reported in the income statement is the P20,000 loss from sale of an
equipment with carrying cost of P40,000 at end of the year, net of P10,000 accumulated depreciation.
2. Part of total dividends declared was already paid.
 The Cash Flow Statement would be presented as follows (using indirect method):

VAL ROX CORPORATION

Statement of Cash Flow Year
Ended December 31, 200B

Cash flows from operating activities:

Net income reported in the income statement (accrual basis) Add P400,000
(deduct) adjustments:
Loss on sale of equipment P20,000
Depreciation reported in the income statement 70,000
Increase in accounts payable 90,000
Increase in accrued expenses payable 10,000
Increase in accounts receivable (260,000)
Increase in inventory (240,000)
Increase in prepayments (50,000) (360,000)
Net cash provided by operating activities P40,000

Cash flows from investing activities:

Proceeds from sale of equipment P20,000
Acquisition of long-term investment (80,000)
Acquisition of property plant and equipment (580,000)
Net cash provided by investing activities P(640,000)

Cash flows from financing activities:

Cash proceeds from long-term loan P500,000
Cash from issuance of ordinary shares 300,000
Payment of dividends (100,000)
Net cash provided by financing activities P700,000

Increase in cash and cash equivalents P100,000

Add: Cash and cash equivalents, January 1, 200B 200,000
Cash and cash equivalents, December 31, 200B P300,000

Notes:
1. The cash flow from operating activities may be determined using the direct method or indirect method.
2. Under the direct method, the cash receipts and payments are listed item by item (Cash Basis Accounting) in the cash
flow statement.
3. Under the indirect method, the net income reported under accrual basis serves as the starting point. The net income s
then adjusted to convert it to cash basis of reporting.
General Format of Statement of Cash

flows DIRECT METHOD

Corporate Name Statement

of Cash Flows Date

Cash flows from operating activities:

Cash received from customers Pxx
Cash received for interest/dividends xx
Cash paid to suppliers of inventory (xx)
 Cash paid to workers/employees (xx)
Cash paid to other operating expenses (xx)
Cash paid for interest (xx)
Cash paid for income taxes (xx)
Net cash provided by operating activities P xx
Cash flow from investing activities:
Cash paid for purchase of land P(xx)
Cash received from sale of investments xx
Net cash used in investing activities P(xx)
Cash flows from financing activities:
Cash received from issuance of stock Pxx
Cash paid for dividends (xx)
Net cash provided in financing activities Pxx
Net increase (decrease) in cash and cash equivalents Pxx
Cash and cash equivalents at the beginning of year xx
Cash and cash equivalents at the end of year Pxx

INDIRECT METHOD (Operating Activities Section only)

Cash flows from operating activities:

Net income Pxx
Adjustments to reconcile net income to net cash provided
By operating activities:
Depreciation and amortization Pxx
Loss on sale of plant assets and investments xx
Loss on early extinguishment of debt xx
Decrease in current operating assets xx
Increase in current operating liabilities xx
Gain on early extinguishment of debt (xx)
Gain on sale of plant assets and investments (xx)
Increase in current operating assets (xx)
Decrease in current operating liabilities (xx) xx
Net cash provided by operating activities Pxx
Summary of Common Adjustment to Net Income

Items that appear as Explanation of cash vs. Adjustments

adjustments to net income statement effect
income before tax

Depreciation and Amortization of Expenses items that decrease net Add to net income
Intangibles income but have no cash effect

Gain (or loss) on Sale of Assets The gain increases (loss Deduct gain from (add loss to)
decreases) net income but the net income
cash effect of the transaction is
shown in investing activities
section

Increase in Trade and Other Net income increase but cash is not Deduct to net income
Receivables affected

Decrease in Trade and Other Represents cash receipts but not Add to net income
Receivables income recognition

Increase in Inventory Portion of purchase for the period Deduct to net income
does not form part of cost of sales;
hence net income is increased

Decrease in Inventory Cost of sales includes goods Add to net income

purchased and paid in prior years

Increase in Prepaid Expenses Payments for expenses exceed Deduct to net income
related expenses shown in the net
income statement

Decrease in Prepaid Expenses Expenses on the income Add to net income

statement exceed related
payments this period for goods
and services

Increase in Trade Payables and Expenses exceed related Add to net income
Accrued Expenses payments to suppliers and
others.

Decrease in Trade Payables and Cash payments to suppliers and Deduct to net income
Accrued Expenses others exceed related expenses