PAS 7: Statement of cash flows

Financial Statements
- Income Statement/Statement of Financial Performance/Statement of Comprehensive
Income
- Balance Sheet/Statement of Financial Position
- Statement of Cash Flows
- Statement of Changes in Owner’s Equity
- Notes to Financial Statements

Are we allowed to apply on a cash basis?

- It is allowed to apply cash basis in the statement of cash flows as long as it should be
converted to accrual at the end of the year
- However, the accrual method should be used in the 4 FS except for SCF

Statement of Cash Flows Include and monitor two movements:

- Cash Receipts
- Cash Disbursements

Accrual Basis
- Income is recognized when earned regardless of whether cash is received
- It comprises with the matching principle

Cash Basis
- Income is recognized when cash is received regardless of when it is earned.
- It will be challenging to audit on a cash basis.
- It is prone to misstatements, and the records can be easily flawed.
- Unlike accrual accounting, which is easier to review because the records are more
detailed.

Seller
- obligation is to deliver the goods and services

Illustration: Sold goods for 20,000 on account

Accrual Basis:

Date Particulars Debit Credit

Accounts Receivable 20,000

Sales 20,000
Note: earned when goods are delivered or rendered

Under cash basis: If it is paid

Cash 20,000

Sales 20,000

Note: earned when cash is received, Nag record ng income nung nakareceive ng cash

Illustration 2: Deferred - Received payment in advance, the obligation is not yet

performed

Accrual Basis:

Cash 10,000

Unearned Income/Deferred Income 10,000

Unearned income 10,000

Sales 10,000

To record services rendered to a customer

Cash Basis

Cash 10,000

Sales 10,000

Note: At the end of the day - they have the same journal entry in substance, but accrual is more
comprehensive
Describing the sources of cash movement in different areas of a company.

Operating Activities (CA and CL) :

● The main operation of the company occurs on a daily basis.
● It pertains to changes in the current assets (e.g., cash, accounts receivable) and current
liabilities (e.g., accounts payable).

Investing (NCA):
● This involves changes in non-current assets (e.g., property, plant, equipment) of the
company.
● NCA

Financing (NCL):
This includes two aspects:
● Issue debt instruments (borrowing) - interest: This refers to taking on debt, such as
issuing bonds, and the interest payments associated with them.
● Equity instruments (selling stocks) - dividend: This relates to equity financing, such as
selling shares of stock, and any dividend payments made to shareholders.
● Movement in non-current liability and issuance of stocks for cash: This refers to changes
in non-current liabilities (e.g., long-term debt) and issuing stocks in exchange for cash.
● Note: only CASH transactions, All the non-cash transactions cannot form part of SCF

Summary:
Operating - changes in current assets and current liabilities
Investing - changes in Non-current assets
Financing - changes in Non-current liabilities (interest and dividend)

TAKE NOTE!:
● Promissory Note: When a company borrows money and issues a promissory note, it is
considered part of financing activities in the cash flow statement.(EXEMPTION)
● Notes Payable: Notes payable are also considered a financing activity in the cash flow
statement and are exempted from operating activities.
● Net Income Before Tax: In the cash flow statement, when calculating cash flows from
operating activities, if the net income before tax includes a deduction for taxes, that
deduction will be added back to arrive at the cash flow from operating activities.
● Statement of Cash Flows (SCF): The statement of cash flows presents cash flows
under three categories: operating, investing, and financing activities. It is prepared on a
cash basis because it tracks actual cash movements.
● Accrual to Cash Basis Conversion: If the financial statements are prepared on an
accrual basis (where revenue and expenses are recognized when earned or incurred,
not when cash is received or paid), the cash flow from operating activities can be derived
by converting the accrual basis amounts to cash basis amounts. This is done by
adjusting for changes in current assets and current liabilities to convert operating income
to cash flow from operating activities.
INDIRECT - MAS MADALING METHOD
Net income before tax xxx
Depreciation Expense xxx
Amortization xxx
Depletion xxx
Loss xxx
Gain (xxx)
Operating income before changes in working capital xxx

NOTE!: All the DEDUCTED entries in the accrual that did not affect cash are added back: Any
negative adjustments made in the accrual accounting, which didn't impact actual cash flow, are
reversed by adding them back.

Working capital.
- Capital being circulated in the business

Working Capital = Current Assets - Current Liabilities

Balance sheet
⬆Current assets —--------------- (xxx)
⬇Current Asset —----------------- xxx
⬆Current Liabilities—--------------xxx
⬇Current Liabilities—-------------(xxx)
Net cash from operating —----xxx

⬆Inventory - Cash ⬇
⬆ A/R - Cash ⬇ - there is cash delay, as if decrease
⬆ prepaid expense - ⬇ Cash
⬇ Prepaid expense - cash ⬆ - as if increase, there is savings

Interest received
- 1st choice if the problem is silent: Operating
- 2nd choice: Investing NCA
- Pag financing hindi na aligned sa standard

Interest Paid
- Problem is silent: Operating
- 2nd choice: Financing

Dividends received
- Problem is silent: Operating
 - 2nd choice: Investing

Dividends Paid
- Problem is silent: Financing
- 2nd choice: Operating
 Managerial Accounting

Managerial Accounting
- For internal use
- Prepares financial statements because it was requested by the Board of Directors (BOD)
- Does not comply with the standards
- Timeliness
- Involves asking questions about which individuals were paid and analyzing the reasons
for hiring decisions
- Focused on providing information and analysis for internal decision-making and planning
purposes
- futuristic

​Financial Accounting:
- Interim 1-3: is required by government regulations
- External use
- Accuracy
- Required to comply with accounting standards. (GAAP)
- Holistic approach
- No concern whether it's for the whole month or the whole year - for example, in salary
expense
- Historical (focused on past transactions and events)

Planning ➡ Directing & motivating ➡ controlling ➡ decision making

Planning
- Providing alternatives
- You will strategize - what should be done
- You will only provide options but you will not choose between those options
- When you provide options - it's in the “planning stage"

Directing and Motivating:

- Hiring people and building a team.
- Focusing on the mission and vision of the company to guide actions and decisions.

Controlling:
- Comparing targets or goals with actual achievements or results. (targets vs actual)
- Comparing budgeted figures with actual financial performance. (budgeted vs actual)
- The target is to become the number one company, but the actual result shows that it
ranks second in comparison.
- Regularly conducting comparisons and analysis is an integral part of the control process.
Decision making
- Example: Whether you will continue your program or not.
- choosing between different alternatives to make a choice or take action.

Cost Accounting
● Examine the ingredients or components of your product in detail.
● The manner of understanding the product is through managerial accounting (MA), which
provides insights for internal decision-making and planning.
● Products that were not sold are accounted for in financial accounting (FA).
● PAS 2 (Philippine Accounting Standards 2) pertains to inventory accounting, which is a
part of cost accounting.

Line Function:
● Involves roles or positions that are directly related to the main operations or core
business activities of the organization.
● Expose to operation
● These roles are directly responsible for producing goods or providing services that
contribute to the organization's primary objectives.
● Examples include professors, deans, program chairs, production workers, salespeople,
and customer service representatives.

Staff Function:
● Encompasses roles that support the line functions and the overall organization.
● Support or back office
● These roles provide assistance, guidance, and support to the line functions and other
departments to help them function effectively.
● Examples include human resources (HR), finance, information technology (IT), legal,
and administrative staff.
*DISREGARD NYO NALANG TO*

- Require to apply - Accrual basis

The cash basis of accounting should be converted to accrual at the end of the year

Accrual method in 4 statements except SCF

Cash basis -

Seller - deliver the goods

Buyer/ customer - Pay the goods and services

Cash basis - journal entry pag nareceive mo na yung cash

Nag record ng income nung nakareceive ng cash - cash basis

Accrual basis - it complies with the matching principle

Cash basis
- Mahihirapan mag audit with cash basis
- Prone sa mis-statement
- Pwede mamali yung record
- Unlike accrual na madali mababalikan kasi detailed yung record
- Hindi pa napeperform yung obligation
- liability - unearned income
At the end of the day - they have the same journal entry in substance
- Mas comprehensive lang si accrual

San makkuha yung movement ng cash mo

Operating
- The main operation of the company
- Araw araw na ginagawa
- Pertains to changes in the current assets and current liabilities

Investing
- Changes in non-current assets

Financing
- Issue debt instruments (uutang) - interest
- Equity instrument (Magbenta ng stocks) - dividend
- Movement in non-current liability and issuance of stocks for cash
- Dapat kapalit ng stocks ay cash
All non cash transactions cannot form part of SCF - in general journal

Kapag umutang tas kapalit ay promissory note kahit current liability forms part of financing

Notes payable - financing - exemption in operating

Net income before tax

- If naka minus na yung tax - iaadd back
- Pag SCF - cash basis kasi you are motoring cash movements
What if accrual yung inaappply - icoconvert yung accrual to cash basis

Cash basis
- Iaadd back yung depreciation
- Convert yung accrual to a cash basis
- Lahat ng miinus sa accrual na hindi naman naaffect na cash ay inaaff back
- Amortization
- Tangible non-current assets
- Intangible assets - amortization - add back
- Depletion - add back
- Loss - add back
- Gain - minus
Working Capital = Current Assets - Current Liabilities

Pondo na pinapaikot sa negosyo - working capital

As if decrease - cash - nagkaka cash delay sa part ni cash pag may AR

Pag nag credit ang prepaid expence as if increase sa cash kasi nakatipid sa cash

Nagkakaroon ng cash delay - so increase cash

 - Lahat is indirect

Cash flow - PAS 7

Interest
- Received
- 1st choice - If the problem is silent - operating
- 2nd choice - investing - NCA
- Pag financing hindi na aligned sa standard

- Paid
- Silent - operating
- 2nd choice - financing - kaya nagpapayad nginterest dahil umutang - NCL

Dividends
- Received
- Operating - the problem is silent
- Investing - kaya nagrereceive ng dividends kasi nag invest ka

- Paid
- Financing
- Operating
Managerial Accounting
- For internal use - kaya gumawa ng fs because it was requested by the BOD
- Does not comply with the standards

Financial Accounting
- Interm 1-3 - is required by the government regulation - upload to sec
- complies with the standards

Planning to decision making

Planning
- Providing alternatives
- Mag sstrategize ka - ano dapat gawin
- You will only provide options but you will not choose between those options
- When you provide options - the planning stage

Directing and motivating

- Hire people
 - Mission vision

Controlling
- Compare targets vs actual
- Or budgeted vs actual
- Target - maging no.1 company
- Actual no2 lang sa nacompare
- There is always a comparison

Decision making
- Whether you will continue your program or not.
- CHOOSING AMONG ALTERNATIVES

Paulit ulit na process

Financial accounting
- Holistic approach
- Walang paki kung whole month or whol year - ex, sa salaries expense
- Historical

Managerial acc
- Segmented
- Magtatanong kung sino sino pinaswelduhan and iaannalyze bakit nag hire
- Mas marami iniisip kaysa financial
- futuristic
Cost accounting
- Pinag Aaralan ang ingredients ng product mo
- Manner ng paguundertsand ng product is sa MA
- While yung product na hindi nabenta isa sa FA
- Pas 2 inventory- cost accounting

LINE FUNCTION
- Expose to the main operation
- Ex. professors, dean, program chair
- HINDI MAKIKITA SA MAIN OPERATIOONS

STAf FUNCTION
- Support or back office
- HR,

Long quiz after break

Coverage exam: simula hanggang dulo