STATEMENT OF CASH FLOWS

This lesson discusses the components and the

structure of a Cash Flow
Statement (CFS) that will equip you in preparing the
said financial report.
Furthermore, this lesson aims to discuss the three
major sections of Cash Flow Statement:

1. Operating,
refers to activities related to a company's core
business operations, such as generating revenue and
managing expenses from regular business activities.

a. Revenue Generation:

 Sales of products or services.

 Collecting payments from customers.

b. Expense Management:

 Paying for raw materials or inventory.

 Salaries and wages of employees.
 Utility bills like electricity or water.

c. Day-to-Day Operations:

 Rent for office or retail space.

 Advertising and marketing expenses.
 Maintenance and repair costs.

2. Financing,
refers to activities involving raising funds for the
business or repaying obligations, such as issuing
equity, borrowing loans, or paying dividends.

a. Raising Funds:

 Issuing shares or stocks to investors.

 Borrowing money through loans or bonds.

b. Repaying Obligations:

 Repaying the principal amount of a loan.

  Redeeming bonds issued earlier.

c. Distributing Earnings:

 Paying dividends to shareholders.

 Buying back company shares (share
repurchases).

These transactions are typically reflected in the

Financing Activities section of the cash flow
statement.
3. Investing Activities
refers to transactions involving the purchase or sale
of long-term assets and investments, such as
property, equipment, or securities, that are not part
of regular operations.

a. Acquiring Assets:

 Purchasing property, plant, and equipment (e.g.,

buildings, machinery).
 Buying intangible assets like patents or
copyrights.

b. Selling Assets:

 Selling land, equipment, or other fixed assets.

 Disposing of unused or obsolete assets.

c. Investing in Securities:

 Buying stocks, bonds, or other long-term

investments.
  Selling or liquidating investment securities.

These are all reflected in the cash flow statement and

are essential to assessing a business's financial
health.

At the end of this lesson, you are expected to discuss

the components,
structures, and prepare a Cash Flow Statement
(CFS).
The end product or output of accounting (financial
accounting, to be specific)
is useful financial information. This useful financial
information is the “story” that
accounting tells to the interested users. Useful
financial information helps the owner
to answer the question, “Should I invest more cash in
the business?

Creditors are also guided by this information in

answering the question,
“Should we lend more money to the business?”
Financial information is contained and
communicated through the financial
statements. Financial statements are like chapters of
a novel, telling different stories
of an interrelated subject. Specifically, financial
statements are organized depictions
of the events that happened in a business. A complete
set of financial statements
are composed of the following (IASB 2011):

1. Statement of Financial Position or Balance Sheet

2. Statement of Comprehensive Income or Income
Statement
3. Statement of Changes in Equity
4. Statement of Cash Flow

To achieve the objectives of this lesson, you must

remember to do the following:
 Read the lessons carefully.
 Follow all directions and given instructions.
 Answer all given tests and activities.
 Learn to familiarize the following terms:
1. CASH FLOW STATEMENT - According to
the definition of Deloitte Global Services
Limited (2015), this provides an analysis of
inflows and/or outflows of cash from/to
operating, investing and financing activities. This
statement shows cash transactions only when we
compared it to the SCI which follows the accrual
principle.

2. Direct Method - According to the definition of

Deloitte Global Services Limited (2015), this is
the operating cash flow section of the CFS.
 Under this method, it would show each major
class of the gross cash receipts and the gross cash
payments.

This method provides a detailed breakdown of actual

cash inflows and outflows, making it more
transparent and easier to analyze the cash generated
or used in day-to-day operations.

Examples of Cash Flows Shown in the Direct

Method:
a. Gross Cash Receipts:
o Cash received from customers.
o Cash received from other operating income
sources.

b. Gross Cash Payment:

o Cash paid to suppliers for goods or services.
o Cash paid for wages, salaries, and other
employee benefits.
o Cash paid for utilities, rent, or interest.
3. Indirect Method - According to the definition of
Deloitte Global Services Limited (2015), the
operating cash flow section of the CFS under the
indirect method will reconcile the net income or
loss of the company with the total cash flows
generated or used in operating activities by
adjusting the net income or loss for effects of
non-cash transactions.
This method helps show how net income is
converted into cash flows from daily business
operations by removing the effects of non-cash
 items and accounting for changes in working
capital.

4. Operating Activities - According to the

definition of Deloitte Global Services Limited
(2015), these are activities that are directly
related to the main revenue-producing activities
of the company such as cash from customers and
cash paid to suppliers/employees.
Cash Received from Customers:
 Payments for goods sold or services rendered.
 Advances or deposits received from customers.
Cash Paid to Suppliers:
 Payments for inventory purchases.
 Payments for raw materials or services used in
production.

Cash Paid to Employees:

 Salaries, wages, and employee benefits.
 Payroll taxes and other employee-related costs.

These activities form the core operations of the

business and are included in the operating activities
5. Investing Activities - According to the definition
of Deloitte Global Services Limited (2015), these
are Cash transactions related to the purchase or
sale of non-current assets.
- Refers to transactions involving the purchase or
sale of long-term assets and investments that are
not part of the company’s regular operations.
These activities are reflected in the Investing
Activities section of the cash flow statement and
help show how a company is investing its
resources for future growth.
Examples of Investing Activities:

Cash Outflows (Expenditures):

 Purchasing property, plant, and equipment (e.g.,

buildings, machinery).
 Buying intangible assets like patents or
software.
 Investing in other companies (e.g., acquiring
stocks or bonds).
Cash Inflows (Proceeds):

 Selling property, plant, and equipment.

 Selling shares or other investments.
 Receiving dividends or interest from
investments (if classified as investing activities).

6. Financing Activities - These are Cash

transactions related to the changes in equity and
borrowings.
It mainly involved transactions where a company
raises funds or repays money to support its
 operations, such as borrowing loans, issuing
shares, or paying dividends.

Net change in cash - This is the net amount of

change in cash whether it is an increase or decrease
for the current period. The total change brought by
operating, investing and financing activities. It is
the total increase or decrease in a company's cash
balance over a specific period, calculated as the
sum of cash flows from operating, investing, and
financing activities.
Directions:
1. Get a piece of paper and write your monthly
allowance (computed by daily allowance x number
of days in a month)
2. Determine any liabilities that you’ve got from
classmates, friends, family members.
3. Write the amount you spend on food,
transportation, etc. (make it monthly to match your
allowance)
4. Deduct the amount you spend from the amount
of your allowance.
Processing Questions:
1. How much is your accumulated monthly
allowance? From what sources are they from?

2. How much is your total monthly expenses? What

are these expenses? Associate the sources of your
monthly allowance as your cash inflows and
your monthly expenses as your cash outflows.

2. How would you differentiate a personal

statement of comprehensive income from that of
your personal cash flow statement?
 3. Reflect on the importance of knowing your cash
inflows and cash outflows.

Statement of Cash Flows: An Introduction

This statement of cash flows generally presents

the sources and utilization of an organization’s cash
and cash equivalents. Although the statement of cash
flow is horizontal in nature, the information
contained in such statements is useful in
predicting future cash outflows and inflows of the
organization.

A statement of cash flow has three major sections

namely operating, financing and investing activities.
Each section represents classification of an
organization’s cash related activities.
This is a formal statement that classifies cash
receipts (inflows) and cash payments (outflows) into
operating, financing and investing activities. It will
show the net increase or decrease in cash during the
period and the cash balance at the end of the period
Three Major Sections of the Statement of Cash
Flows

Operating Activities
Operating activities are the base-line cash of
activities of the entity related to
its normal operating cycle. Furthermore, such
activities are related to the primary
revenue-producing activity or profit
determination of the entity. IAS (IASB, 2001) lists
the following transactions as examples of operating
activities:
Investing Activities
Investing activities generally result from acquisition
and disposal of noncurrent assets. IAS 7 (IASB
2001) lists the following activities as investing
activities:
 Financing Activities
Financing activities arise from changes in non-
current liabilities and owner’s
equity of a business organization. IAS (IASB 2001)
lists the following items as financing activities.

Approaches of the Statement of Cash Flows

According to IAS 7 (IASB 2001), entities are given
an option to present the
statement of cash flow whether to use the direct or
indirect method.

1. Direct Method
The direct method presents each major classification
of gross receipts
and gross payments for operating activities. This is
in line with the
items presented in the table below. IAS (IASB, 2001)
encourages the use of the direct method. Below is an
example of a direct method.

2. Indirect method
The indirect method however, presents the operating
activities starting with the pre-tax income. It then
reconciles the pre-tax for non-cash income and
expenditures. After which, the movement in current
assets and liabilities are adjusted to the resulting
figure. Below is an example of a statement of cash
flows presented using the indirect method:
For the purpose of this text, the direct method will be
used; it is more preferred by IAS 7 (IASB 2001).
Furthermore, beginners in preparing the statement
of cash flow will appreciate the said format.
Preparing the Statement of Cash Flows

1. Determine the heading

The heading of the statement includes the company
name, title of the statement, and the period covered
by the statement. Below is the heading of the
statement of the cash flow for the illustrative case:
2. Analyze the Cash Transaction
Every cash transaction should be carefully analyzed
to determine its nature, the effect and the
classification or section where it belongs.

3. Prepare the Operating Activities Section

All cash transactions that will affect net income of
profit and loss will be classified as operating
activities. See examples of transactions under
operating activities in the previous discussion.
4. Prepare the Investing Activities Section
All cash transactions that will affect the noncurrent
assets are classified under this section. See examples
of transactions under investing activities on the
previous discussion.

5. Prepare the Financing Activities Section

All cash transactions affecting noncurrent liabilities
and equity will be classified as financing. See
examples of transactions under this section in the
previous discussion.

6. Determine the Net Change in Cash

This is the Cash at the beginning of the period and
the Cash at the end of the period.
Activity 4.2 Classify Me
Direction: Classify each transaction whether they are
operating, financing or
investing. After which, indicate the reason for such
classification.
Activity 4.3 Organize Me
Instruction: Create a graphic organizer illustrating
the major components of
Statement of Cash Flows.
Activity 4.4. Solving the Problem
Case #1. Lopez General Services
Below are the cash transactions of Lopez General
Services for December 31, 2019

Cash receipts from rendering of services

35,000.00 OPERATING / +
Cash payment to suppliers of goods and services
(12,500.00) OPERATING / -
Proceeds from bank loan 12,000.00 FINANCING
/+
 Payment of interest (5,000.00) OPERATING / -
Payment of rent (8,000.00) OPERATING / -
Proceeds from sale of equipment 10,000.00
INVESTING / +
Purchase of equipment (9,500.00) INVESTING/-
Withdrawal of owner (6,500.00) FINANCING-
Cash at the beginning of the year 25,500.00 (+)

1. How much is the cash flow from operating

activities?
2. How much is the cash flow from investing
activities?
3. How much is the cash flow from financing
activities?
4. How much is the net increase or decrease in cash
for the year?
5. How much is the cash as of December 31, 2019?
6. Prepare the Statement of Cash Flows using direct
method.
Case #2. Mercado Trading Below are the cash
transactions of Mercado Trading for December 31,
2019:

a. Purchase of goods. Paid cash. 100,000

b. Sale of goods. Received cash. 150,000
c. Paid utilities 30,000
d. Paid rent 10,000
e. Sold equipment for cash 100,000
f. Owner withdraws investment 10,000
1. How much is the cash flow from operating
activities?
2. How much is the cash flow from investing
activities?
3. How much is the cash flow from financing
activities?
4. How much is the net increase or decrease in cash
for the year?
5. How much is the cash as of December 31, 2019?
6. Prepare the Statement of Cash Flows using direct
method.