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Week 5

The statement of cash flows summarizes the cash inflows and outflows of a business over an accounting period and classifies them into operating, investing, and financing activities. It shows the net change in cash for the period and the ending cash balance. The document then provides examples of transactions that would be classified as operating, investing, or financing activities for a company called Ren Ren Merchandising. Based on the classified transactions, a statement of cash flows is presented for Ren Ren Merchandising for the year ended December 31, 2016.

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267 views3 pages

Week 5

The statement of cash flows summarizes the cash inflows and outflows of a business over an accounting period and classifies them into operating, investing, and financing activities. It shows the net change in cash for the period and the ending cash balance. The document then provides examples of transactions that would be classified as operating, investing, or financing activities for a company called Ren Ren Merchandising. Based on the classified transactions, a statement of cash flows is presented for Ren Ren Merchandising for the year ended December 31, 2016.

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STATEMENT OF CASH FLOWS

The Statement of Cash Flows summarizes the cash receipts and cash disbursements from the accounting
period. It summarizes the cash activities of the business by classifying cash inflows (receipts) and cash
outflows (payments) into operating, investing, and financing activities. It shows the net increase or
decrease of cash in a given period and cash balance at the end of the period. This allows management to
assess the ability of the business to generate cash and project future cash flows.

COMPONENTS OF THE STATEMENT OF CASH FLOWS CLASSIFIED ACCORDING TO


ACTIVITIES

Operating activities – the cash inflows (receipts) and the cash outflows (payments) arising from the
normal operations of the business.

Receipts of Cash

 Collections from customers from the performance of services or sale of goods.


 Royalties, fees, commissions received
 Interests, dividends, and other income received.

Payment of Cash

 To suppliers for services and goods acquired


 Employees’ salaries
 Government licenses and taxes
 Interest expense
 Other operating expenses

Investing activities – the cash inflows and the cash outflows from the purchase and sale of property and
equipment, investment in debt or trading securities, lending money and collection of the principal amount
of the money loaned.

Financing activities – the cash inflows and cash outflows from the owners and creditors of the business.

Receipts of Cash

 Original and additional investments by owner


 Proceeds of loan

Payments of Cash

 Cash withdrawal of owner


 Payment for the principal balance of loan

Ren Ren Merchandising started business last October. The following are its transactions. Classify
each transaction as an operating, investing or financing activity.
TRANSACTION ACTIVITY
a. Additional investment in the business, 22, Financing
200
b. Proceeds of sale of equipment, 15, 000 Investing
c. Collection of interest, 9, 000 Operating
d. Collection from customers, 315, 800 Operating
e. Proceeds of bank loan, 200, 000 Financing
f. Proceeds from sale of furniture, 8, 000 Investing
g. Payment of operating expenses, 145, 000 Operating
h. Collection of dividend, 12, 000 Operating
i. Cash withdrawal of owner, 30, 000 Financing
j. Payment of interest, 6, 000 Operating
k. Collection of rent, 30, 000 Operating
l. Purchase of furniture, 31, 000 Investing
m. Payment of bank loan, 150, 000 Financing

Based on the classification of activities above, the following is the statement of cash flow for Ren
Ren Merchandising for the year ended December 31, 2016.
Ren Ren Merchandising
Statement of Cash Flows
For Year Ended December 31, 2016

Cash flow from operating activities


Receipts
Collections from customers 315, 800
Rent income 30, 000
Dividends income 12, 000
Interest income 9, 000
Payments
Operating expenses (145, 000)
Interest expense (6, 000)
Net cash from operating activities 215, 800
Cash flows from investing activities
Receipts
Proceeds from sale of equipment 15, 000
Proceeds from sale furniture 8, 000
Payments
For purchase of furniture (31, 000)
Net cash from investing activities (8, 000)
Cash flows from financing activities
Receipts
Additional investment of owner 22, 200
Proceeds of bank loan 200, 000
Payments
Cash withdrawal of owner (30, 000)
Payment of bank loan (150, 000)
Net cash from financing activities 42, 200
Net increase/decrease in cash 250, 000
Cash balance, January 1 200, 000
Cash balance, December 31 450, 000

The beginning balance of cash is added to the net increase or decrease in cash resulting from the
operating, investing, and financing activities in order to get the ending cash balance which is the same
as the amount of the cash account is presented in the statement of financial position. Notice that the
450, 000 cash balance as of December 31 is the balance of the cash account in the statement of
financial position.

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