BALIUAG UNIVERSITY

CPA Review Program

Financial Accounting and Reporting
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Module: Financial Statements: Statement of Cash Flows LVC
I. Statement of Cash Flows (IAS 7)
 Definition of terms
 Operating activities – The principal revenue-producing activities of the entity and other activities that are
not investing or financing activities.
 Investing activities – The acquisition and disposal of long-term assets and other investments not included
in cash equivalents.
 Financing activities – Activities that result in changes in the size and composition of the contributed equity
and borrowings of the entity.
 Presentation of the statement of cash flows
 An entity shall prepare a statement of cash flows in accordance with IAS 7 and shall present it as an
integral part of its financial statements for each period for which financial statements are presented.
 A statement of cash flows, when used in conjunction with the rest of the financial statements, provides
information that enables users to evaluate the changes in net assets of an entity, its financial structure
(including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order
to adapt to changing circumstances and opportunities.
 The statement of cash flows shall report cash flows during the period classified by operating, investing
and financing activities.
 Operating activities
 Cash flows from operating activities are primarily derived from the principal revenue-producing activities
of the entity. Therefore, they generally result from the transactions and other events that enter into the
determination of profit or loss.
 Examples of cash flows from operating activities are (IAS 7.14):
a. Cash receipts from the sale of goods and the rendering of services
b. Cash receipts from royalties, fees, commissions and other revenue
c. Cash payments to suppliers for goods and services
d. Cash payments to and on behalf of employees
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 they can be specifically identified with financing and
investing activities
g. Cash receipts and payments from contracts held for dealing or trading purposes.
 An entity shall report cash flows from operating activities using either:
1. Direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed;
or
2. Indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash
nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of
income or expense associated with investing or financing cash flows.
 Entities are encouraged to report cash flows from operating activities using the direct method. The direct
method provides information which may be useful in estimating future cash flows and which is not
available under the indirect method (IAS 7.19).
 Example of direct method:
Cash receipts from customers xx
Cash paid to suppliers (xx)
Cash paid to employees (xx)
Cash paid for other operating expenses (xx)
Interest paid (xx)
Income taxes paid (xx)
Net cash from operating activities xx

 Example of indirect method:

Net Income xx
Depreciation /impairment/amortization xx
Loss on property disposal xx
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Module: Financial Statements: Statement of Cash Flows LVC
Gain on property disposal (xx)
Increase in trade noncash current assets (xx)
Decrease in trade noncash current assets xx
Increase in trade current liabilities xx
Decrease in trade current liabilities (xx)
Net cash from operating activities xx

 Investing activities
 The separate disclosure of cash flows arising from investing activities is important because the cash flows
represent the extent to which expenditures have been made for resources intended to generate future
income and cash flows.
 Only expenditures that result in a recognized asset in the statement of financial position are eligible for
classification as investing activities.
 Examples of cash flows arising from investing activities are (IAS 7.16):
a. Cash payments to acquire property, plant and equipment, intangibles and other long-term assets.
These payments include those relating to capitalized development costs and self-constructed
property, plant and equipment
b. Cash receipts from 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 interests in joint ventures
(other than payments for those instruments considered to be cash equivalents or those held for
dealing or trading purposes)
d. Cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures
(other than receipts for those instruments considered to be cash equivalents and those held for
dealing or trading purposes)
e. Cash advances and loans made to other parties (other than advances and loans made by a financial
institution)
f. Cash receipts from the repayment of advances and loans made to other parties (other than advances
and loans of a financial institution)
g. Cash payments for futures contracts, forward contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading purposes, or the payments are classified as
financing activities
h. Cash receipts from futures contracts, forward contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading purposes, or the receipts are classified as financing
activities.

 Financing activities
 The separate disclosure of cash flows arising from financing activities is important because it is useful in
predicting claims on future cash flows by providers of capital to the entity.
Examples of cash flows arising from financing activities are (IAS 7.17:
a. Cash proceeds from issuing shares or other equity instruments
b. Cash payments to owners to acquire or redeem the entity’s shares
c. Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-
term borrowing
d. Cash repayments of amounts borrowed
e. Cash payments by a lessee for the reduction of the outstanding liability relating to a lease.
 Reporting cash flows on a net basis
 Cash flows arising from the following operating, investing or financing activities may be reported on a net
basis:
a. Cash receipts and payments on behalf of customers when the cash flows reflect the activities of the
customer rather than those of the entity
b. Cash receipts and payments for items in which the turnover is quick, the amounts are large, and the
maturities are short.
 Cash flows arising from each of the following activities of a financial institution may be reported on a net
basis:
a. Cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date
b. The placement of deposits with and withdrawal of deposits from other financial institutions
c. Cash advances and loans made to customers and the repayment of those advances and loans

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Module: Financial Statements: Statement of Cash Flows LVC

 Foreign currency cash flows

 Cash flows arising from transactions in a foreign currency shall be recorded in an entity’s functional
currency by applying to the foreign currency amount the exchange rate between the functional currency
and the foreign currency at the date of the cash flow.
 The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional
currency and the foreign currency at the dates of the cash flows.
 Cash flows denominated in a foreign currency are reported in a manner consistent with IAS 21 (The
Effects of Changes in Foreign Exchange Rates.)
 Interest and dividends
 Interest paid and interest and dividends received are usually classified as operating cash flows for a
financial institution. Interest paid and interest and dividends received may be classified as operating cash
flows because they enter into the determination of profit or loss.
 Alternatively, interest paid and interest and dividends received may be classified as financing cash flows
and investing cash flows respectively, because they are costs of obtaining financial resources or returns on
investments.
 Dividends paid may be classified as a financing cash flow because they are a cost of obtaining financial
resources.
 Alternatively, dividends paid may be classified as a component of cash flows from operating activities in
order to assist users to determine the ability of an entity to pay dividends out of operating cash flows.
 Cash flows from interest and dividends received and paid shall each be disclosed separately. Each shall be
classified in a consistent manner from period to period as either operating, investing or financing
activities.
 Taxes on income
 Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows
from operating activities unless they can be specifically identified with financing and investing activities.

 Non-cash transactions
 Investing and financing transactions that do not require the use of cash or cash equivalents shall be
excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial
statements in a way that provides all the relevant information about these investing and financing
activities.
 Examples of non-cash transactions are (IAS 7.44):
a. The acquisition of assets either by assuming directly related liabilities or by means of a lease
b. The acquisition of an entity by means of an equity issue
c. The conversion of debt to equity
 Disclosures
 An entity shall disclose, together with a commentary by management, the amount of significant cash and
cash equivalent balances held by the entity that are not available for use by the group.
 Additional information may be relevant to users in understanding the financial position and liquidity of an
entity. Disclosure of this information, together with a commentary by management, is encouraged and
may include:
a. The amount of undrawn borrowing facilities that may be available for future operating activities and
to settle capital commitments, indicating any restrictions on the use of these facilities.
b. The aggregate amount of cash flows that represent increases in operating capacity separately from
those cash flows that are required to maintain operating capacity.
c. The amount of the cash flows arising from the operating, investing and financing activities of each
reportable segment (IFRS 8).
 Illustration of Statement of cash flows
Requirement: Classify the following transactions as cash inflow, cash outflow, or noncash transaction. Also,
indicate the following cash flow activities as operating, investing or financing.
 Accrual of expenses already incurred
 Accrual of income already earned
 Acquisition of 60-day commercial papers
 Acquisition of financial asset at amortized cost for cash
 Acquisition of previously issued ordinary shares for cash
 Acquisition of trading securities for cash
 Advanced payment made to lessor for operating lease

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Module: Financial Statements: Statement of Cash Flows LVC
 Advanced payment of customers for future services to be performed.
 Advanced rental income received from tenants
 Amortization of intangible assets
 Bad debts recognized for the period
 Callable preference shares redeemed for a fixed price
 Cash advances made to employees
 Cash collected from customers on account
 Cash deposited to banks
 Cash dividends declared for the period
 Cash receipts from issuance of debt securities
 Cash receipts from issuance of ordinary shares
 Cash withdrawn from the bank to increase the petty cash fund balance
 Collection of interest income on investment in debt securities
 Conversion of convertible preference shares into ordinary shares
 Depreciation recognized for the period
 Dividend income received on investment in equity securities
 Payment for acquisition of patents and trademarks
 Payment for acquisition of land
 Payment for cash purchases
 Payment for repairs and maintenance of property and equipment
 Payment for the first installment on bonds issued
 Payment of cash dividends to shareholders
 Payment of interest on bonds issued
 Payment of mortgage payable
 Payment of prepaid expenses
 Payment of property dividends to shareholders
 Payment of salaries and wages
 Payment of stock dividends
 Payment of taxes
 Payment to trade suppliers on account
 Proceeds from bank loans
 Proceeds from deferred service revenue
 Proceeds from disposal of old machineries
 Proceeds from sale of exclusive rights derived from the government
 Proceeds from sale of long-term investments
 Proceeds from sale of treasury shares
 Purchase of 90-day treasury bills
 Purchase of equipment on account
 Purchase of merchandise on account
 Receipts from cash sales
 Recognition of loss on sale of equipment
 Refinancing of currently maturing long-term debt
 Reissuance of treasury shares for issue price above cost
 Sale of merchandise to customers on credit
 Withdrawal of cash from the bank for transfer to revolving fund
 Write-off of trade receivables

 Multiple Choice Questions

A COMPANY provided the following information:

20X7 20X6
Cash 6,600,000 5,500,000
Financial asset held for trading 2,500,000 -
Accounts receivable 4,800,000 3,200,000
Allowance for doubtful accounts (800,000) (200,000)
Inventories 5,200,000 7,000,000
Investment in associate 5,400,000 5,000,000
Property, plant and equipment 13,000,000 9,000,000
Accumulated depreciation (3,700,000) (3,200,000)
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Module: Financial Statements: Statement of Cash Flows LVC
Patent, Net 1,000,000 1,700,000
Accounts payable 4,800,000 4,500,000
Note payable – bank 2,000,000 3,500,000
Deferred tax liability 700,000 500,000
Bonds payable 3,000,000 -
Share capital, P10 par value 18,000,000 15,000,000
Share premium 1,500,000 1,000,000
Treasury shares at cost (500,000) -
Retained earnings 4,500,000 3,500,000

 The net income for the current year is P6,000,000. The entity paid a cash dividend of P5,000,000 on October
1, 20X7.
 During the current year, the entity purchased financial asset held for trading for P3,000,000 cash and sold
financial asset held for trading costing P1,000,000 for P1,400,000 cash. On December 31, 20X7, the market
value of the remaining financial asset increased by P500,000.
 On January 1, 20X7, the entity sold equipment costing P1,000,000, with a carrying amount of P600,000, for
P500,000
 On July 1, 20X7, the entity purchased equipment for P2,000,000 cash.
 On December 31, 20X7, the entity purchased land by issuing bonds payable at face value of P3,000,000.
 On December 31, 20X6, the entity acquired 20% of another entity’s share capital for P5,000,000. The
associate reported income of P3,000,000 for 20X7 and paid cash dividend of P1,000,000 on December 31,
20X7.
1. What is the net cash provided by operating activities?
a. 6,500,000 c. 9,000,000
b. 6,100,000 d. 8,600,000
2. What is the net cash used in investing activities?
a. 1,900,000 c. 3,500,000
b. 1,500,000 d. 4,000,000
3. What is the net cash used in financing activities?
a. 3,500,000 c. 1,000,000
b. 3,100,000 d. 4,000,000

B COMPANY reported net income of P7,500,000 for the current year.

Investment in shares of stock carried on the equity basis 550,000 increase
Accumulated depreciation, caused by major repair to equipment 210,000 decrease
Premium on bonds payable 140,000 decrease
Deferred tax liability 180,000 increase
4. What is the net cash provided by operating activities?
a. 7,540,000 c. 6,990,000
b. 7,270,000 d. 6,780,000

C COMPANY reported net income of P7,500,000 for the current year. The following account balances are provided
for the preparation of the statement of cash flows:
January 1 December 31
Accounts receivable 1,150,000 1,450,000
Allowance for doubtful accounts 40,000 50,000
Prepaid rent expense 620,000 410,000
Accounts payable 970,000 1,120,000
5. What is the net cash provided by operating activities?
a. 7,270,000 c. 7,550,000
b. 7,430,000 d. 7,570,000

D COMPANY reported net income of P3,000,000 for the current year. Changes occurred in certain accounts as
follows:
Equipment 250,000 increase
Accumulated depreciation 400,000 increase
Note payable 300,000 increase

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Module: Financial Statements: Statement of Cash Flows LVC
During the year, the entity sold equipment costing P250,000 with accumulated depreciation of P150,000 for a gain
of P50,000. In December of the current year, the entity purchased equipment costing P500,000 with P200,000
cash and 12% note payable of P300,000.
6. What amount should be reported as net cash provided by operating activities?
a. 3,400,000 c. 3,550,000
b. 3,500,000 d. 3,600,000

E COMPANY provided the following information for the current year:

Dividend received 500,000
Dividend paid 1,000,000
Cash received from customers 9,000,000
Cash paid to suppliers and employees 6,000,000
Interest received 200,000
Interest paid on long-term debt 400,000
Proceeds from issuing share capital 1,500,000
Proceeds from sale of long-term investments 2,000,000
Income taxes paid 300,000
7. What is the net cash provided by operating activities?
a. 3,300,000 c. 2,700,000
b. 3,000,000 d. 2,000,000

F COMPANY reported the following information in the year-end financial statements:

Capital expenditures 1,000,000
Capital lease payments 125,000
Income taxes paid 325,000
Dividends paid 200,000
Net interest payment 220,000
8. What total amount should be reported as supplemental disclosures in the statement of cash flows prepared
using the indirect method?
a. 545,000 c. 1,125,000
b. 745,000 d. 1,870,000

During 20X7, G COMPANY had the following activities related to financial operations:
Payment for the early retirement of long-term bonds payable (carrying
amount of bonds payable, P5,000,000) 4,000,000
Payment in 20X7 of cash dividend declared in 20X6 2,000,000
Preference share capital converted into ordinary share capital 1,000,000
Proceeds from sale of treasury shares (cost of treasury shares P1,000,000) 1,500,000
9. What amount should be reported as net cash used in financing activities?
a. 4,500,000 c. 2,500,000
b. 3,500,000 d. 5,500,000

H COMPANY provided the following data for the current year:

Purchase of real estate for cash (cash was borrowed from bank) 5,500,000
Sale of investment securities for cash 5,000,000
Purchase of patent for cash 1,250,000
Dividends paid 6,000,000
Issuance of ordinary shares for cash 2,500,000
Payment of bank loan 1,500,000
Issuance of bonds payable for cash 3,000,000
Increase in customers’ deposit 200,000
10. What is the net cash used in investing activities?
a. 6,750,000 c. 1,750,000
b. 3,750,000 d. 500,000

I COMPANY had the following activities during the current year:

 Acquired share capital of another entity for P2,000,000
 Sold an investment with carrying amount of P2,000,000 for P1,500,000

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Module: Financial Statements: Statement of Cash Flows LVC
 Acquired a P5,000,000 one-year certificate of deposit from a bank. During the year, interest of P5,000,000
was received from the bank
 Collected dividends of P300,000 on share investments

11. What amount should be reported as net cash used in investing activities?
a. 5,500,000 c. 4,700,000
b. 5,000,000 d. 6,300,000

J COMPANY provided the following data for the current year:

Gain on sale of equipment 60,000
Proceeds from sale of equipment 100,000
Purchase of bonds with face value of P2,000,000 1,800,000
Amortization of bond discount 20,000
Dividends declared 450,000
Dividends paid 380,000
Proceeds from sale of treasury shares (carrying amount of treasury 750,000
P650,000)
12. What amount should be reported as net cash used in investing activities?
a. 1,700,000 c. 1,880,000
b. 1,760,000 d. 1,940,000

K COMPANY used the direct method to prepare the statement of cash flows.
20X7 20X6
Cash 35,000 32,000
Accounts receivable 33,000 30,000
Inventory 31,000 47,000
Property, plant and equipment 100,000 95,000
Unamortized bond discount 4,500 5,000
Cost of goods sold 250,000 380,000
Selling expenses 141,500 172,000
General and administrative expenses 137,000 151,300
Interest expense 4,300 2,600
Income tax expense 20,400 61,200
756,700 976,100

Allowance for doubtful account 1,300 1,100

Accumulated depreciation 16,500 15,000
Trade accounts payable 25,000 17,500
Income taxes payable 21,000 27,100
Deferred income taxes 5,300 4,600
8% callable bonds payable 45,000 20,000
Share capital 50,000 40,000
Share premium 9,100 7,500
Retained earnings 44,700 64,600
Sales 538,800 778,700
746,700 976,100

The entity purchased P5,000 in equipment during 20X7. The entity allocated one-third of the depreciation
expense to selling expenses and the remainder to general and administrative expenses. There was no writeoff of
accounts receivable during 20X7. What amount should be reported in the statement of cash flows for the
following:
13. Cash collected from customers
a. 541,800 c. 536,000
b. 541,600 d. 535,800
14. Cash paid for goods to be sold?
a. 258,500 c. 242,500
b. 257,500 d. 226,500
15. Cash paid for interest?
a. 4,800 c. 3,800

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Module: Financial Statements: Statement of Cash Flows LVC
b. 4,300 d. 1,700
16. Cash paid for income taxes?
a. 25,800 c. 19,700
b. 20,400 d. 15,000
17. Cash paid for selling expenses
a. 142,000 c. 141,000
b. 141,500 d. 140,000

L COMPANY provided the following data:

20X7 20X6
Cash 350,000 150,000
Accounts receivable, net 840,000 580,000
Merchandise inventory 660,000 420,000
Prepaid expenses 50,000 100,000
Long term investment 80,000 -
Property, plant and equipment 1,130,000 600,000
Accumulated depreciation 110,000 50,000
Accounts payable 530,000 440,000
Accrued expenses 140,000 130,000
Dividend payable 70,000 -
Note payable – long term debt 500,000 -
Share capital 1,200,000 900,000
Retained earnings 560,000 330,000
Net credit sales 6,400,000 4,000,000
Cost of goods sold 5,000,000 3,200,000
Expenses 1,000,000 520,000
Net income 400,000 280,000
All accounts receivable and accounts payable related to trade merchandise. Accounts payable are recorded net
and always paid to take all of the discounts allowed. The allowance for doubtful accounts at the end of 20X7 was
the same as at the end of 20X6. No receivable were charged against the allowance during 20X7.
The proceeds from the note payable were used to finance a new store building. Share capital was sold to provide
additional working capital.
18. What is the net cash provided by operating activities for the current year?
a. 400,000 c. 200,000
b. 100,000 d. 110,000
19. What is the net cash used in investing activities for the current year?
a. 80,000 c. 610,000
b. 530,000 d. 660,000
20. What is the net cash provided by financing activities for the current year?
a. 140,000 c. 500,000
b. 300,000 d. 700,000

“True wisdom comes to each of us when we realize how little we understand about life, ourselves, and the
world around us.” Socrates

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