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FINANCIAL ACCOUNTING AND REPORTING

STATEMENT OF CASH FLOWS – PAS 7

Key Terms and Definitions

a. Cash - comprises cash on hand and demand deposits.

b. 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 changes in value.
c. Cash flows - are inflows and outflows of cash and cash equivalents.
d. Operating activities - are the principal revenue-producing activities of the entity and other activities that are not investing or
financing activities.
e. Investing activities - are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
f. Financing activities - are activities that result in changes in the size and composition of the contributed equity and borrowings of
the entity.

Cash Equivalents

a. An investment normally qualifies as a cash equivalent only when it has a short maturity of three months or less from the date of
acquisition.
b. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents like redeemable
preference shares.
c. Bank overdrafts which are repayable on demand and which form an integral part of an enterprise's cash management are also
included as a component of cash and cash equivalents
d. Movements between items that constitute cash or cash equivalents are excluded from cash flows because these components are
part of the cash management of an entity rather than part of its operating, investing and financing activities.

Presentation of Statement of Cash Flows

a. Cash flows must be analyzed between operating, investing and financing activities.
b. Interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that they are
classified consistently from period to period
c. Cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with
financing or investing activities
d. For operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable
➢ The direct method shows each major class of gross cash receipts and gross cash payments.
➢ The indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or
accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or
financing cash flows

Determining Major Classes of Gross Cash Receipts and Gross Cash Payments Under the Direct Method

a. From the accounting records of the entity

b. By adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial institution)
and other items in the income statement for:
➢ Changes during the period in inventories and operating receivables and payables
➢ Other non-cash items
➢ Other items for which the cash effects are investing or financing cash flows.

Determining Net Cash Flow from Operating Activities By Adjusting Profit or Loss Under the Indirect Method

a. Changes during the period in inventories and operating receivables and payables
b. Non-cash items such as depreciation, provisions, deferred taxes, unrealized foreign currency gains and losses, undistributed
profits of associates, and minority interests
c. All other items for which the cash effects are investing or financing cash flows.

A simple formula for the reconciliation under the indirect method can be applied as follows:

Net income x
Non cash revenues recognized (x)
Non cash expenses recognized x
Gains recognized in profit or loss (x)
Losses recognized in profit or loss x
Increases in trade current assets (x)
Decreases in trade current assets x
Increases in trade current liabilities (x)
Decreases in trade current liabilities x
Cash paid for trading security investments (x)
Cash proceeds from the sale of trading security investments x
Cash provided by or (used) in operating activities x

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Example of cash flows from operating activities

a. Cash receipts from the sale of goods and the rendering of services
b. Cash receipts from royalties, fees, commissions and other revenue
c. Cash payments to suppliers for goods and services
d. Cash payments to and on behalf of employees
e. Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits
f. Cash payments or refunds of income taxes unless they can be specifically identified with financing activities and investing activities
g. Cash receipts and payments from contracts held for dealing or trading purposes.

➢ Similar to inventory acquired specifically for resale.

➢ Classified as operating activities.
➢ Similarly, cash advances and loans made by financial institutions are usually classified as operating activities since they relate
to the main revenue-producing activity of that entity

Example of cash flows from investing activities

a. Cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those
relating to capitalized development costs and self-constructed property, plant and equipment.
b. Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets.
c. Cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those
instruments considered to be cash equivalents or those held for dealing or trading purposes).
d. Cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those
instruments considered to be cash equivalents and those held for dealing or trading purposes).
e. Cash advances and loans made to other parties (other than advances and loans made by a financial institution).
f. Cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial
institution).
g. Cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held
for dealing or trading purposes, or the payments are classified as financing activities.
h. Cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held
for dealing or trading purposes, or the receipts are classified as financing activities.

Example of cash flows from financing activities

a. Cash proceeds from issuing shares or other equity instruments.

b. Cash payments to owners to acquire or redeem the entity’s shares.
c. Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings.
d. Cash repayments of amounts borrowed.
e. Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

Presentation of cash flows from investing and financing activities

a. Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of
cash flows.
b. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about
these investing and financing activities.
c. Examples of non-cash investing and financing activities.
• The acquisition of assets either by assuming directly related liabilities or by means of a finance lease
• The acquisition of an entity by means of an equity issue
• The conversion of debt to equity

PROBLEMS

1. Blixen Company reported net income of P1,800,000 for the year ended December 31, 2019. Depreciation for the year totaled
P600,000. Net changes in working capital accounts for the year were:
Debit Credit
Cash 200,000
Trade accounts receivable 500,000
Inventory 100,000
Prepaid expenses 20,000
Accrued expenses 30,000
Income tax payable 50,000
Trade accounts payable 140,000
What was the cash provided by operating activities?
a. 2,400,000 c. 2,100,000
b. 1,200,000 d. 1,500,000

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2. The income statement and relevant additional information about the operations of Minsk Corporation is shown below

Sales 10,000,000
Cost of goods sold:
Beginning inventory 2,000,000
Purchases 5,000,000
Goods available for sale 7,000,000
Less: Ending inventory 1,700,000 5,300,000
Operating expenses 4,800,000
Selling expenses 1,000,000
Administrative expenses 1,800,000 2,800,000
Income before taxes 2,000,000
Less: Income tax expense 700,000
Net income 1,300,000

Additional information:
• Accounts receivable increased P1,500,000 during the year.
• Prepaid expenses increased P200,000 during the year.
• Accounts payable increased P600,000 during the year.
• Notes payable-bank increased P1,000,000 during the year.
• Accrued expenses increased P100,000 during the year.
• Taxes payable increased P250,000 during the year.
• Administrative expenses include depreciation expense of P400,000 and doubtful accounts expense of P150,000.

How much is the net cash flow from operating activities to be reported in Minks’ 2019 statement of cash flows?
a. 1,100,000
b. 1,400,000
c. 2,100,000
d. 1,550,000

3. Olive Company provides the following information for 2019:

Cash received from customers 8,000,000

Rent received 500,000
Interest received 300,000
Cash paid to suppliers and employees 3,000,000
Taxes paid 400,000
Interest paid on long term debt 600,000
Cash dividends paid 1,000,000

Under the direct method, cash provided by operating activities was

a. 3,800,000 c. 4,800,000
b. 5,400,000 d. 5,100,000

4. Oakwood Company provided the following data for the year 2019:

Cash balance, beginning of the year 320,000

Cash flow from financing activities 1,000,000
Total shareholders’ equity, end of the year 2,300,000
Cash flow from operating activities 430,000
Cash flow from investing activities (1,500,000)
Total shareholders’ equity, beginning of the year 2,000,000

What is the cash balance at the end of the year?

a. 250,000 c. 390,000
b. 550,000 d. 300,000

5. Labor Company reported net income of P10,000,000 for 2019. Changes occurred in several balance accounts during 2019 as follows:

Investment in stock, carried at equity, net of cash dividend

received of P1,500,000 2,500,000 increase
Premium on bonds payable 500,000 decrease
Accumulated depreciation, caused by major
repair to equipment 1,000,000 decrease
Deferred tax liability 400,000 increase

How much is cash provided by operating activities?

a. 7,400,000 c. 9,400,000
b. 6,400,000 d. 7,000,000

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6. Katrina Company had the following activities during 2019:

• Acquired 5,000 shares of stock of XYZ Company for P8,000,000 cash.

• Sold an investment in ABC Company for P5,000,000 when the carrying value was P3,500,000.
• Acquired a P6,000,000, 5-year Eurobond from a bank. During the year, interest of P500,000
was paid to Katrina.
• Collected dividends of P1,000,000 on stock investments.

How much is cash used in investing activities?

a. 10,500,000 c. 9,000,000
b. 10,000,000 d. 8,500,000

7. During 2019, Camry Company has the following activities relate to its financial operations:

Payment for the early retirement of long-term bonds payable

(carrying amount of bonds payable P5,000,000) 5,500,000
Distribution in 2019 of cash dividend, declared in 2018 3,000,000
Carrying amount of convertible preferred stock converted into
common shares 2,000,000
Proceeds from the sale of treasury stock (cost, P2,000,000) 2,500,000

How much is cash used in financing activities?

a. 6,000,000 c 8,500,000
b. 3,000,000 d. 6,500,000

8. Milano Company entered into the following cash transactions during the year.

Purchase of trading securities 2,000,000

Sale of trading securities 900,000
Purchase of available for sale securities 3,000,000
Sale of available for sale securities 1,000,000

Milano had no investment securities at the beginning of the year. The cost of the trading securities sold was P1,200,000. The cost of the
available for sale securities sold was P750,000. The market value of the remaining securities on December 31 was as follows: Trading
securities, P1,000,000 and available for sale securities, P2,500,000. The net income for the year was P4,000,000. Assume that net
income does not include any noncash items except for those related to investment securities. Milano Company shall report net cash
flow from operating activities at
a. 3,850,000
b. 2,750,000
c. 3,000,000
d. 2,950,000

9 Tallinn Company provided the following for the preparation of cash statement:
2018 2019
Retained earnings 3,000,000 2,500,000
Contributed capital 5,000,000 4,800,000
Dividends payable 1,800,000 1,200,000
Net income 2,000,000 1,600,000
How much cash was paid for dividends in 2019?
a. 2,100,000
b. 900,000
c. 1,900,000
d. 2,500,000

10. The following information has been compiled from the accounting records of Mathew Company for the year ended December 31, 2019:
Purchase of inventory 1,950,000
Purchase of land, with the vendor financing P1,000,000 for 2 years 3,500,000
Purchase of plant for cash 2,500,000
Sale of plant:
Book value 500,000
Cash value 400,000
Buyback of ordinary shares on issue (treasury shares) 700,000
What amount of investing net cash outflows that would be reported in the 2019 cash flow statement?
a. 5,600,000
b. 4,600,000
c. 6,550,000
d. 5,300,000

- - END - -

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