STATEMENT OF CASH FLOWS

CASH FLOWS STATEMENT

➢ a statement summarizing the operating, investing and financing activities of an entity.

PURPOSES: to provide information

1. about cash receipts and cash payments for the period
2. useful in assessing the ability of an entity to generate future cash flows (cash and cash
equivalents)
3. that helps the users of FS to evaluate changes in net assets, as well as financial structure,
liquidity and solvency.
➢ Example: ability to meet obligations and pay dividends
4. useful in explaining the difference between ACCRUAL Basis Income (Net Income) and
CASH Basis income (Net cash flows from OPERATING Activities)
5. that enhances the comparability of operating performance of different entities
6. Cash and non-cash investing and financing activities during the period.

PRO FORMA Cash Flow Statement

A. OPERATING Activities:
* INDIRECT Method: involves current assets (CA) and current liabilities (CL).
NET INCOME (ACCRUAL Basis) Pxx
Operating activities :
1. Noncash expenses (Bad debts, depreciation, amortization) xx
2. Working Capital (CA- CL) Adjustments DEBIT = CREDIT
CASH + CA = CL
a. Increase in current assets (CA) + = 0 (xx)
b. Decrease in current assets (CA) + = 0 xx
c. Increase in current liabilities (CL) + 0 = xx
d. Decrease in current liabilities (CL) + 0 = (xx)

Investing related activities:

1. (Gain) Loss on sale of noncurrent assets xx
2. Accrued DIVIDENDS income and INTEREST income (xx)

Financing related activities:

1. Premium (discount) amortization on bonds payable/notes payable
2. INTEREST expense accrued on bonds/notes/loans payable xx
3. (Gain) Loss on redemption (retirement) of bonds/notes payable xx
NET CASH FLOW from OPERATING Activities (CASH Basis Net Income) A Pxx
B. INVESTING Activities – involves NONCURRENT assets (NCA)
Sales Proceeds (NET) Pxx Pxx
Book Value xx
Gain (Loss) on Sale Pxx to OPERATING activities (xx)

Purchase of STI and NCA (at Acquisition Cost) (xx)

NET CASH FLOW from INVESTING Activities B Pxx

C. FINANCING Activities - involves NONCURRENT Liabilities and Shareholders’ Equity

DEBT Financing : Proceeds from Issuance of bonds, notes, loans Pxx
: Payment (redemption) of bonds, notes, loans (xx)
: Payment of interest to OPERATING Activities (xx)

EQUITY Financing : Proceeds from Issuance of shares (PS, OS) xx

: Reacquisition of shares issued (Acquisition of Treasury Shares) (xx)
: DIVIDENDS paid (xx)
NET CASH FLOW from FINANCING Activities C Pxx

NET Increase (decrease) in Cash (A + B + C) Pxx

Add: Cash – beg (Balance Sheet) xx
Cash balance – end (to balance sheet) Pxx

NOTES:
1. INTEREST expense and interest income shall be classified as OPERATING cash flows since it entered
into determination of net income (PAS 7). Under INDIRECT Method, accrued interest expense or
income must be the one included since the starting point is ACCRUAL Net income to be adjusted
to CASH basis income. Under DIRECT Method, the actual interest paid or received is the one
reflected.
ALTERNATIVELY: Interest paid may be classified under FINANCING activity because it is a cost of
obtaining financial resources. Interest received may be classified under INVESTING activity
because it is a return on investment.

2. DIVIDENDS income shall be classified as OPERATING cash flows since it entered into
determination of net income (PAS 7). Under INDIRECT Method, accrued income must be the
one included since the starting point is ACCRUAL Net income to be adjusted to CASH basis
income. Under DIRECT Method, the actual dividends received is the one reflected.
ALTERNATIVELY: DIVIDENDS received may be classified under INVESTING activity because it is a
return on investment.

DIVIDENDS paid is under FINANCING activity because it is a cost of obtaining financial resources.
ALTERNATIVELY: Dividends received may be classified under OPERATING activity to reflect the
ability to pay dividends.
OPERATING Activities: DIRECT Method *
Collections from customers A Pxx
Collections from Income (other than sales) realized B xx
Payments to trade creditors C (xx)
Payments for operating expenses D (xx)
Cash generated from Operations Pxx
Interest expense paid (xx)
Income taxes paid E (xx)
NET CASH FLOW from OPERATING Activities (CASH Basis Net Income) Pxx

SUPPORTING COMPUTATIONS
A Trade A/R & N/R – beg Pxx C Trade A/P & N/P – beg Pxx
NET Sales xx NET Purchases xx
Trade A/R & N/R – end (xx) Trade A/P & N/P – end (xx)
COLLECTIONS from Customers Pxx PAYMENTS to trade creditors Pxx

B INCOME other than sales Pxx D OPERATING EXPENSES Pxx

Accrued income – beg xx Accrued expense – beg Pxx
Accrued income – end (xx) Accrued expense – end (xx)
Precollected income – beg (xx) Prepaid expense – beg (xx)
Precollected income – end xx Prepaid expense – end xx
NONCASH operating expenses (xx)
COLLECTIONS during the period Pxx PAYMENTS during the period Pxx

E Income tax payable - beg Pxx

Income tax expense xx
Income tax payable - end (xx)
PAYMENT for Income Tax Pxx

NOTES: A/R = Accounts Receivable A/P = Accounts Payable

N/R = Notes Receivable N/P = Notes Payable

ILLUSTRATIVE PROBLEM (in addition to p. 499 – 512)

Presented below are the Statement of Financial Position of ABC Corporation as of December 31,
2018 and 2019 and the related income statement for the year ended December 31, 2019:
ABC Corporation
Statements of Financial Position
As of December 31, 2018 and 2019

ASSETS 2019 2018

Cash and Cash Equivalents P44,825 P15,000
Accounts receivable, net 47,000 55,000
Inventory 144,000 110,000
Prepaid expenses 1,000 5,000
Total Current Assets P236,825 P185,000

Fixed assets, net P612,000 P437,000

Investment in Equity Securities 115,000 127,000
Total Non-Current Assets P727,000 P564,000

Total Assets P963,825 P749,000

 LIABILITIES and SHAREHOLDERS’ EQUITY
Accounts payable P50,000 P43,000
Accrued liabilities 12,000 9,000
Income taxes payable (4th quarter) 1,725 5,000
Total current liabilities P63,725 P57,000
Bonds payable 295,000 245,000
Total Liabilities P358,725 P302,000

Ordinary share, P5 par P276,000 P200,000

Reserves 189,000 115,000
Accumulated profits 140,100 132,000
Shareholders’ Equity P605,100 P447,000

Total Liabilities and Shareholders’ P963,825 P749,000

Equity

ABC Corporation
Income Statement
year ended December 31, 2019

Net sales P698,000

Cost of goods sold (520,000)
Gross profit P178,000
Interest income 6,000
Gain on sale of securities 12,000
Total income P196,000
Operating expenses (150,000)
Income before interest and tax P 46,000
Interest expense (23,000)
Income before tax P23,000
Income tax (30%) (6,900)
Net income P16,100

ADDITIONAL information for 2019 operations are as follows:

a. Operating expenses include depreciation of P37,000 and loss on sale of fixed assets of
P3,000.
b. Investments amounting to P78,000 were purchased during the year.
c. Investments that cost P90,000 were sold for P102,000.
d. Fixed assets costing P120,000 were purchased.
e. Plant assets which cost P10,000 with accumulated depreciation of P2,000 were sold for
P5,000.
f. ABC Corporation issued P100,000 face value bonds in exchange for plant assets.
g. ABC Corporation retired P50,000 face value bonds at maturity date.
h. ABC Corporation issued 15,200 shares of P5 par value ordinary shares for P 150,000.
i. ABC Corporation paid P8,000 dividends.
j. Interest income of P6,000 was received during the year. The interest expense of P23,000 was
paid during the year.
REQUIRED: Prepare the Statement of Cash Flows of ABC Corporation for the year 2019.

SUGGESTED ANSWER:
ABC CORPORATION
Statement of Cash Flows
For the Year ended December 31, 2019

INDIRECT Method
NET INCOME P16,100
Decrease in accounts receivable 8,000
Increase in inventory (34,000)
Decrease in prepaid expenses 4,000
Increase in accounts payable 7,000
Increase in accrued liabilities 3,000
Decrease in income tax payable (3,275)
Depreciation 37,000
Gain on sale of investments (12,000)
Loss on sale of fixed assets 3,000
NET CASH FLOWS from OPERATING Activities P28,825

Purchase of fixed assets (P120,000)

Sale of fixed assets 5,000
Purchase of investments (78,000)
Sale of investments 102,000
NET CASH FLOWS from INVESTING Activities (P91,000)

Retirement of bonds (P50,000)

Issuance of ordinary shares 150,000
Dividend payment (8,000)
NET CASH FLOWS from FINANCING Activities P92,000

Net increase (decrease) in cash and cash equivalents P29,825

Cash and cash equivalents – Jan. 1, 2019 15,000
Cash and cash equivalents – Dec. 31, 2019 P44,825

DIRECT Method
Cash collections from customers for sales [A] P706,000
Cash payment to suppliers for purchases [B] (547,000)
Cash payment for operating expenses [C] (103,000)
Interest received 6,000
Cash generated from operations P62,000
Interest paid (23,000)
Income taxes paid [D] (10,175)
Net Cash Flows from Operating Activities P28,825
Supporting Computations for DIRECT Method
A A/R Jan. 1, 2019 P55,000 C. Operating expenses P150,000
Net Sales 698,000 Accrued liabilities Jan. 1, 2019 9,000
Total A/R during 2019 753,000 Accrued liabilities, Dec. 31, 2019 (12,000)
A/R De. 31, 2019 (47,000) Prepaid expenses Dec. 31, 2019 1,000
COLLECTIONS customers P706,000 Prepaid expenses Jan. 1, 2019 (5,000)
Depreciation expense (37,000)
B A/P Jan. 1, 2019 P43,000 Loss on sale of fixed assets (3,000)
**PURCHASES 554,000 PAYMENT for operating expenses P103,000
Total A/P during 2019 P597,000
A/P Dec. 31, 2019 (50,000) D. Income tax expense 2019 P 6,900
PAYMENTS to suppliers P547,000 Income tax payable Jan. 1, 2019 5,000
Income tax payable Dec. 31, 2019 (1,725)
(P6,900/4)
Cost of goods sold P520,000 PAYMENT for income taxes P10,175
Inventory, Dec. 31, 2019 144,000
TGAS P664,000
Inventory January 2019 (110,000)
**PURCHASES P554,000