Statement of Cash Flows

Prepared by M.A.E. Calso

• Operating Activities → income statement items that have made an impact on cash (i.e., revenue and
expenses adjusted for changes in current assets and current liabilities)
• Investing Activities → purchase & sale of long-term assets for cash
• Financing Activities → issuance & repayment of debt in cash; issuance & repurchase of shares in
cash; cash dividends paid

For each section, the net cash provided (if inflows > outflows) or the net cash used (if inflows < outflows)
must be presented.

The operating activities section shows the cash provided by the company’s operations, which is why it is
the best measure of the company’s ability to continue as a going concern (i.e., to remain in business for
the foreseeable future).

A statement of cash flows prepared using indirect method is identical to a statement of cash flows prepared
using direct method except for the operating activities section.

For the indirect method of reporting operating cash flows:

1. Start with profit before tax (net income + income tax expense)
2. Add back all non-cash expenses like depreciation, amortization, and bad debt expenses
3. Add back loss on sale of assets or deduct gain on sale of assets
4. Account for changes in current assets and current liabilities (excluding change in income taxes
payable)
5. Deduct income taxes paid (income tax expense + decrease in income taxes payable OR income
tax expense – increase in income taxes payable)
6. Compute for net cash provided / used by operating activities

For the direct method of reporting operating cash flows, take note of the following:
• Computing for cash received from customers: Use data on cash sales, credit sales (sales on
account), and change in accounts receivable
• Computing for cash paid to suppliers: Use data on cost of goods sold and change in inventory to
compute for total purchases. Use data on total purchases and change in accounts payable to
compute for cash paid during the year
• Computing for cash paid for operating expenses: Use data on operating expenses (excluding non-
cash expenses like depreciation, amortization, and bad debt expense), prepaid expenses, and
accrued liabilities
• Computing for income taxes paid: income tax expense + decrease in income taxes payable OR
income tax expense – increase in income taxes payable

Exercises

1. The company recorded total sales revenue of ₱800,000 in its income statement. 70% of the
company’s sales revenue pertained to credit sales. The accounts receivable balance decreased
₱50,000 during the year. How much cash was received by the company from its customers during
the year?

2. The company recorded cost of goods sold of ₱300,000 during the year. Other information:
Beginning Balance Ending Balance
Accounts Payable 30,000 50,000
Inventory 35,000 25,000
How much cash was paid by the company to its suppliers during the year?

Course Notes BA 99.2 - Midyear 2019 mbmagana

 3. The company has other operating expenses of ₱100,000. Prepaid expenses decreased ₱20,000
while accrued liabilities increased ₱10,000 during the year. How much cash was paid by the
company for operating expenses?

4. Prepare the statement of cash flows using indirect method and direct method:

Wescott Company
Statements of Financial Position
December 31
2015 2014
Assets
Cash.......................................................... $ 85,600 $ 65,200
Accounts receivable….......................... 72,850 56,750
Merchandise inventory.......................... 163,830 157,530
Equipment.............................................. 280,600 245,600
Accumulated depreciation-Equipment .. (80,600) (97,600)
Total assets................ $522,280 $427,480
Liabilities
Accounts payable..................................... $ 52,850 $ 45,450
Income tax payable.............................. 15,240 12,240
Long-term notes payable....................... 59,200 79,200
Total liabilities................ $127,290 $136,890
Equity
Share Capital………………….............. 253,000 190,000
Retained earnings.................................... 141,990 100,590
Total equity................ $394,990 $290,590
Total liabilities and equity................ $522,280 $427,480

Wescott Company
Income Statement
For Year Ended December 31, 2015
Sales................................................................ $488,000
Cost of goods sold......................................... $ 212,540
Depreciation expense.................................... 43,000
Other operating expenses.............................. 112,660 (368,200)

Gain on sale of equipment.................................... 4,700

Profit before tax................ 124,500
Income tax expense................ (41,100)
Net profit............... $ 83,400

Additional Information:
a. A $20,000 note payable was repaid in cash
b. Cash dividends of $42,000 were paid by the company
c. New equipment was acquired for $120,000 cash
d. Equipment that had original cost of $85,000 and accumulated depreciation of $60,000 was sold for
$29,700 cash

Course Notes BA 99.2 - Midyear 2019 mbmagana

Indirect Method

Wescott Company
Statement of Cash Flows
For the Year Ended December 31, 2015

Cash flows from operating activities

Profit before tax.................................................. $124,500
Adjustments:
Depreciation expense.................................. 43,000
Gain on sale of equipment .......................... (4,700)
Increase in accounts receivable ................. (16,100)
Increase in inventory ................................... (6,300)
Increase in accounts payable ..................... 7,400
Income taxes paid ....................................... (38,100) *
Net cash provided by operating activities 109,700

Cash flows from investing activities

Sale of equipment ........................................ 29,700
Purchase of equipment ............................... (120,000)
Net cash used by investing activities (90,300)

Cash flows from financing activities

Issuance of ordinary shares ....................... 63,000
Repayment of notes .................................... (20,000)
Payment of dividends.................................. (42,000)
Net cash provided by financing activities ........... 1,000

Net increase in cash ................................................ 20,400

Cash at beginning of period .................................... 65,200
Cash at end of period .............................................. $85,600

Direct Method

Course Notes BA 99.2 - Midyear 2019 mbmagana

 Wescott Company
Statement of Cash Flows
For the Year Ended December 31, 2015

Cash flows from operating activities

Cash receipts from customers ..... $471,900
Less cash payments:
To suppliers............................ (211,440)
For operating expenses ......... (112,660)
For income taxes.................... (38,100)
Net cash provided by operating activities 109,700

Cash flows from investing activities

Sale of equipment .............................................. 29,700
Purchase of equipment ...................................... (120,000)
Net cash used by investing activities (90,300)

Cash flows from financing activities

Issuance of ordinary shares .............................. 63,000
Repayment of notes ........................................... (20,000)
Payment of dividends ....................................... (42,000)
Net cash provided by financing activities ................. 1,000

Net increase in cash ................................................ 20,400

Cash at beginning of period .................................... 65,200
Cash at end of period .............................................. $85,600

Course Notes BA 99.2 - Midyear 2019 mbmagana