STATEMENT OF CASH FLOWS

Definition
- It is a component of financial statements summarizing the operating, investing and financing Commented [JVG1]: Statement of Cash Flows (SCF) is one
activities of an entity. of the basic component of Financial Statements together
with Statement of Financial Position (SFP), Statement of
Financial Performance (Income Statement and Statement of
Purpose Comprehensive Income), Statement of Changes in Equity,
- To provide relevant information about cash receipt and cash payments of an entity during a and Notes to Financial Statements.
period.
Commented [JVG2]: SCF is actually the statement which
summarize your cash receipts (debit) and cash payments
CASH/CASH EQUIVALENTS (credit) and must equal to the Cash and Cash Equivalents
balance in the SFP.

CASH RECEIPTS CASH PAYMENTS

Examples of Cash Receipts:

- Sale of merchandise inventory for cash
- Sale of property, plant and equipment for cash
- Cash receipt from loan
- Collection of receivables

Examples of Cash Payments:

- Payment of rent for cash
- Purchase of property, plant and equipment for cash
- Payment of loan
- Payment of payables

CASH
- Cash on hand and demand deposit (cash in bank)

Cash on hand - this includes undeposited cash collections and other cash items awaiting deposit.

Cash in bank - this includes demand deposit or checking account and saving deposit which are
unrestricted as to withdrawal.

Cash fund - set aside for current purposes such as petty cash fund, payroll fund, and dividend
fund.

CASH EQUIVALENTS
- Short-term highly liquid investments that are readily convertible to known amounts of cash and Commented [JVG3]: This means that the cash equivalent
which are subject to an insignificant risk of changes in value. is nearly cash, that is why the maturity should 3 months or
- PAS 7, paragraph 7 investments normally qualifies as a cash equivalent only when it has a short 90 days or less because within this period we expect that
there will be insignificant change in value of the investments.
maturity of three months or less from the date of acquisition.
Commented [JVG4]: Even if the investment original term
Examples of Cash Equivalents: is more than 3 months, if the entity acquire the investment 3
months before maturity it qualifies as cash equivalents.
1. Three-month BSP treasury bill
2. Three-year BSP treasury bill purchased three month before date of maturity
3. Three-month time deposit
4. Three-month money market instrument or commercial paper

CLASSIFICATION OF CASH FLOWS

1. Operating Activities
2. Investing Activities
3. Financing Activities
1. OPERATING ACTIVITIES
- The cash flows derived primarily from the principal revenue producing activities of the entity. Commented [JVG5]: Usually these are transaction
- Generally result from the cash effects of transactions and other events that enter into the affecting the profit or loss (income statement)
determination net income or loss.
- Cash flow arising from the purchase and sale of dealing or trading securities are classified as
operating activities.
- Cash advances and loans made by financial institution are usually classified as operating Commented [JVG6]: Example: Banks
activities since they relate to the main revenue producing activity of that entity.

Examples of cash flows from operating activities:

a. Cash receipts from sale of goods and rendering of services
b. Cash receipts from royalties, rental, fess, commissions and other revenue
c. Cash payments to suppliers for goods and services
d. Cash payments for selling, administrative and other expenses
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 specifically identified with financing
and investing activities

2. INVESTING ACTIVITIES
- The cash flows derived from the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
- The cash effects of transactions involving nonoperating assets, such as investments, property,
plant and equipment, intangible assets and other noncurrent assets.

Examples of cash flows from investing activities:

a. Cash payments to acquire property, plant and equipment, intangibles and other long-
term assets
b. Cash payments to 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 interest in
joint venture
d. Cash receipts from sales of equity or debt instruments of other entities and interest in
joint venture
e. Cash advances and loans to other parties other than advances and loans made by
financial institution
f. Cash receipts from repayment of advances and loans made to other parties
g. Cash payments for futures contract, forward contract, option contract and swap
contract
h. Cash receipts from futures contract, forward contract, option contract and swap
contract

3. FINANCING ACTIVITIES
- The cash flows derived from equity capital and borrowings of the entity.
- The cash flows that result from transactions:
o between the entity and its owners (equity financing)
o between the entity and its creditors (debt financing)
- include the cash flows from transactions involving nontrade liabilities and equity

Examples of cash flows from financing activities:

a. Cash receipt from issuance of ordinary and preference shares or other equity
instruments
b. Cash payments to owners to acquire or redeem the entity’s shares, for example,
payment of treasury shares.
c. Cash receipt for issuing debentures, loans, notes, bonds, mortgages, and other short or
long term borrowings.
d. Cash payments for amounts borrowed.
e. Cash payments by a lessee for the reduction of the outstanding principal lease liability.
SUMMARY:

Transactions in STATEMENT OF FINANCIAL POSITION (SFP)/ BALANCE SHEET (BS)

CURRENT LIABILITIES
CURRENT ASSETS (Operating Activities)
(Operating Activities)
NON CURRENT LIABILITIES
(Financing Activities)
NON CURRENT ASSETS
(Investing Activities) EQUITY
(Financing Activities)

Transactions in INCOME STATEMENT – Operating Activities

TREATMENT OF THE FOLLOWING ACCOUNTS:

INTEREST
- Generally, classified as operating cash flow because they enter into the determination of net
income.
- Alternatively, interest paid may be classified as financing cash flow because it is a cost of
obtaining financial resources. Interest received may be classified as investing cash flow because Commented [JVG7]: Since the principal of the loan is
it is a return on investment. classified as financing activity, interest paid can also be
classified as financing activity
DIVIDEND Commented [JVG8]: Since the principal of the investment
- Generally, dividend paid is classified as financing cash flow because it is a cost of obtaining is classified as investing activity, interest received can also be
financial resources. Alternatively, dividend paid may be classified as operating cash flow in classified as investing activity
order to assist users to determine the ability of the entity to pay dividends out of operating cash Commented [JVG9]: Since dividends is given to Ordinary
flows. or Preference shareholders, and Ordinary shares and
Preference shares are classified as financing activity,
- Generally, dividend received is classified as operating cash flow because it enters into the
dividend paid is also classified as financing activity
determination of income. Alternatively, dividend received may be classified as investing cash
flow because it is a return on investment.

NOTE: The classification of dividend received and dividend paid as either operating, investing or
financing activity shall be made on a consistent basis from period to period.

SUMMARY:

Paid Received
General OA OA
Interest
Alternative FA IA
General FA OA
Dividend
Alternative OA IA
Taxes General OA OA

NONCASH TRANSACTIONS
- PAS 7, par 43 provides that investing and financing transactions that do not require use of cash
or cash equivalents shall be excluded from the statement of cash flows
- Such transactions shall be disclosed elsewhere in the financial statements either in the notes to
financial statements or in a separate schedule.

Examples of noncash transactions:

a. Acquisition of noncurrent asset by assuming directly related liability.
b. Acquisition of noncurrent asset by means of issuing share capital or bonds payable.
c. Conversion of bonds payable into share capital.
 d. Conversion of preference share into ordinary share.

METHODS OF DETERMINING THE NET CASH FLOW FROM OPERATING ACTIVITY

1. DIRECT METHOD
2. INDIRECT METHOD

DIRECT METHOD
- Shows in detail or itemized the major classes of gross receipts and gross cash payments
- The cash receipts are listed one by one, the cash payments are listed one by one, and the
difference represents the net cash flow from operating activities. Commented [JVG10]: Ignoring the investing and financing
- It is the “cash basis” income statement. activities, you can use the T-account for cash and cash
equivalent
INDIRECT METHOD
- Net income or loss is adjusted for the following:
o The effect of transactions of a noncash nature.
o Any deferrals or accruals of past or future operating cash receipts and payments.
o The items of income and expense associated with investing and financing.

GUIDELINES that may be used in adjusting the accrual basis and net income to cash basis net
income under the indirect method
1. All increases in trade noncash current assets are deducted from net income.
2. All decreases in trade noncash current assets are added back to net income.
3. All increases in trade current liabilities are added back to net income.
4. All decreases in trade current liabilities are deducted from net income.
5. Depreciation, amortization and other noncash expenses are added back to net income.
6. Any loss on disposal of property is added back to net income because it is a nonoperating
item.
7. Any gain on disposal of property is deducted from net income because it is a nonoperating
item.

Note: In preparing operating activities using indirect method the starting point is the net income or loss
and it will be adjusted using the guidelines above.

SUMMARY:
Net Income/Loss xx / (xx)
Increase/(decrease) in current noncash assets (xx) / xx
Increase/(decrease) in current liabilities xx / (xx)
Depreciation, amortization xx
Gain/Loss on disposal (xx) / xx
Net cash flows from operating xx
***increase or decrease is determine by deducting the prior year amounts from current year amounts in
the Statement of Financial Position (SFP).

Note: Direct and Indirect method is applicable only to Cash Flows from Operating Activities.

-End-
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