Department of Education ● Republic of the Philippines

4 Statement of Cash Flows (SCF)

Less
on

What I Need To Know

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, 2. Financing, 3. Investing Activity.

At the end of this lesson, you are expected to solve exercises and problems
that require the preparation of a Cash Flow Statement (CFS).

What I Know

Before starting with this module, let us see what you already know about
Statement of Cash Flow. Answer the questions below.
Directions. Read and analyze each item carefully. Write the letter corresponding to the best
answer on your answer sheet. 1 point each.

1. Which of the following events increases cash balance?

A. Bank not granting loan
B. Debtors paying to the company
C. Loan repayment to creditors
D. Sale of stock on account

2. Which of the following events reduce cash balances?

A. Purchase of fixed assets
B. Acquired assets on credit
C. Purchase of stock on account
D. Creditors grant loans

3. What is the effect of paying loan principal on cash flow and profits?
A. On profit – Decrease; On cash - Decrease
B. On profit – Decrease; On cash - None
C. On profit – Increase; On cash - Decrease
D. On profit – None; On cash - Decrease

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4. Which of the following is false?
A. A profitable business will never run out of cash.
B. Companies undergoing expansion can sometimes face a cash shortage.
C. In case cash outflows exceed cash inflows on an on-going basis, the
business will eventually run out of cash,
D. Cash is the lifeblood of a business and without it the business will eventually
die.

5. Which of the following is not a category of cash flows required to be shown on

the statement of cash flows?
A. Cash flows from operating activities
B. Cash flows from financing activities
C. Cash flows from taxation
D. Cash flows from investing activities

6. Which of the following is categorized as a cash flow from investing activities?

A. Increase in inventory
B. Proceeds of a loan
C. Proceeds from sale of PPE
D. Dividends paid

7. Which of the following would reduce the cash balances of a business and not
reduce the profit? A. Distribution costs
B. Dividends paid
C. Interest paid
D. Wages paid

8. Which of the following reduces the cash balances of a business?

A. Cash inflow from interest income
B. Cash inflow from dividends income
C. Cash outflow to acquire fixed assets
D. All of the above

9. Which of the following is a cash flow from a financing activity?

A. Cash payments to acquire intangible assets
B. Cash receipts from sale of tangible assets
C. Cash proceeds from bank loans
D. Cash payments to acquire PPE

10. Which of the following is not a cash outflow for the business?
A. Depreciation
B. Dividends
C. Interest payment
D. Taxes

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 What’s In

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. Specially, 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

What’s New

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:

TERM DEFINITION

CASH FLOW STATEMENT Provides an analysis of inflows and/or

outflows of cash from/to operating, investing
and financing activities (Deloitte Global
Services Limited, 2015). This statement
shows cash transactions only compared to
the SCI which follows the accrual principle.

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Direct Method The operating cash flow section of the CFS
under the direct method would show each
major class of gross cash receipts and
gross cash payments (Deloitte Global Services
Limited, 2015).

Indirect Method The operating cash flow section of the CFS

under the indirect method will reconcile the
net income/loss of the company with the total
cash flows generated/used in operating
activities by adjusting the net income/loss for
effects of non-cash transactions (Deloitte
Global Services Limited, 2015).
Operating Activities 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 (Deloitte Global
Services Limited, 2015).

Investing Activities Cash transactions related to purchase or

sale of non-current assets (Deloitte Global
Services Limited, 2015).

Financing Activities Cash transactions related to changes in

equity and borrowings.

Net change in cash 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.

Activity 1.4.1. Prepare a Personal Cash Flow Statement

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?

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 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.
3. How would you differentiate a personal statement of comprehensive income
from that of your personal cash flow statement?
4. Reflect on the importance of knowing your cash inflows and cash outflows.

What Is It

Lesson 4.1 Statement of Cash Flows: An Introduction

A 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 the classification of the 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 shows the net increase
or decrease in cash during the period and the cash balance at the end of the period.

Lesson 4.2. 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 of the entity. Incidentally such transactions will be related to profit
determination. IAS (IASB, 2001) lists the following transactions as examples of
operating activities.

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Investing Activities

Investing activities generally result from acquisition and disposal of noncurrent assets.
IAS 7 (IASB 2001) lists the following activities as investing activities:

ACTIVITIES EFFECTS
+ (increases cash) inflow
- (decreases cash) outflow
Cash payments to acquire property, plant and -
equipment
Cash payment to acquire intangible assets -
Cash receipts from sales of property, plant and +
equipment
Cash receipts from sales of intangible assets +
Cash receipts from sale of long-term assets +

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.

ACTIVITIES EFFECTS
+ (increases cash) inflow
- (decreases cash) outflow
Cash investment from owners +
Cash proceeds from bank loans +
Cash distribution from owners -
Repayment of bank loans -

Lesson 4.3 Approaches of the Statement of Cash Flows

According to IAS 7 (IASB 2001), entities are given an option whether to present the
statement of cash flow using 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.

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 Soriano Trading
Statement of Cash Flows
For the Period Ended December 31, 2019
Cash Flow from Operating Activities:
Cash receipts from rendering of services 200,000.00
Cash payment to suppliers of goods and services ( 50,000.00 )
Net cash flow from Operating Activities 150,000.00
Cash Flow from Investing Activities:
Proceeds from sale of equipment 100,000.00
Net cash flow from Investing Activities 100,000.00
Cash Flow from Financing Activities:
Proceeds from cash investment from owners 250,000.00
Proceeds from bank loan 30,000.00
Payment to owners ( 15,000.00 )
Net cash flow from Financing Activities 265,000.00
Net Change in Cash 515,000.00
Cash, beginning of the period 300,000.00
Cash , end of the period 815,000.00
Sample of Statement of Cash Flows using 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:

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Sample of Statement of Cash Flows using 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.

Lesson 4.4 Preparing the Statement of Cash Flow

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:

SORIANO TRADING
Statement of Cash Flows
For the Period Ended December 31, 2019

2. Analyse the Cash Transaction

Every cash transaction should be carefully analysed 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, Cash at the beginning of the period and
Cash at the end of the period.

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Illustrative Example of Statement of Cash Flows:

HEADING
Soriano Trading
Statement of Cash Flows
For the Period Ended December 31, 2019 OPERATING
Cash Flow from Operating Activities: ACTIVITIES SECTION
Cash receipts from rendering of services 200,000.00
Cash payment to suppliers of goods and services ( 50,000.00 )
INVESTING
Net cash flow from Operating Activities 150,000.00
ACTIVITIES SECTION
Cash Flow from Investing Activities:
Proceeds from sale of equipment 100,000.00
Net cash flow from Investing Activities 100,000.00
FINANCING
Cash Flow from Financing Activities: ACTIVITIES SECTION
Proceeds from cash investment from owners 250,000.00
Proceeds from bank loan 30,000.00
Net Change in cash
Payment to owners
Cash beginning
Net cash flow from Financing Activities Cash ending

Net Change in Cash 515,000.00

Cash, beginning of the period 300,000.00
Cash , end of the period 815,000.00

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 What I Have Learned

Activity 1.4.3 Organize Me

Instruction: Create a graphic organizer illustrating the major components of Statement

of Cash Flows.

What I Can Do

Activity 1.4.4. 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

Cash payment to suppliers of goods and services (12,500.00)
Proceeds from bank loan 12,000.00
Payment of interest ( 5,000.00)
Payment of rent ( 8,000.00)
Proceeds from sale of equipment 10,000.00
Purchase of equipment ( 9,500.00)
Withdrawal of owner (6,500.00)
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.

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Activity 1.4.5. Solving the Problem

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.

Activity 1.4.6 Choosing the Right One

Directions. Read and analyze each item carefully. Write the letter corresponding the best
answer on your answer sheet

1. Which of the following events increases cash balance?

A. Bank not granting loan
B. Debtors paying to the company
C. Loan repayment to creditors
D. Sale of stock on account

2. Which of the following events reduce cash balances?

A. Purchase of fixed assets
B. Acquired assets on credit
C. Purchase of stock on account
D. Creditors grant loans

3. What is the effect of paying loan principal on cash flow and profits?
A. On profit – Decrease; On cash - Decrease
B. On profit – Decrease; On cash - None
C. On profit – Increase; On cash - Decrease
D. On profit – None; On cash – Decrease

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4. Which of the following is false?
A. A profitable business will never run out of cash.
B. Companies undergoing expansion can sometimes face a cash shortage.
C. In case cash outflows exceed cash inflows on an on-going basis, the
business will eventually run out of cash,
D. Cash is the lifeblood of a business and without it the business will eventually
die.

5. Which of the following is not a category of cash flows required to be shown on

the statement of cash flows?
A. Cash flows from operating activities
B. Cash flows from financing activities
C. Cash flows from taxation
D. Cash flows from investing activities

6. Which of the following is categorized as a cash flow from investing activities?

A. Increase in inventory
B. Proceeds of a loan
C. Proceeds from sale of PPE
D. Dividends paid

7. Which of the following would reduce the cash balances of a business and not
reduce the profit? A. Distribution costs
B. Dividends paid
C. Interest paid
D. Wages paid

8. Which of the following reduces the cash balances of a business?

A. Cash inflow from interest income
B. Cash inflow from dividends income
C. Cash outflow to acquire fixed assets
D. All of the above

9. Which of the following is a cash flow from a financing activity?

A. Cash payments to acquire intangible assets
B. Cash receipts from sale of tangible assets
C. Cash proceeds from bank loans
D. Cash payments to acquire PPE

10. Which of the following is not a cash outflow for the business?
A. Depreciation
B. Dividends
C. Interest payment
D. Taxes

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 Additional Activity

Activity 1.4.7 Tell Me the Truth

Now, that you are finished accomplishing the module, let us check what you
have learned. Answer the questions given below by writing letter “T” if the statement
is true and “F” if the statement is false.

___ 1. There is an outflow of funds in depreciation.

___ 2.The statement of cash flow is divided into three required categories: operating,
investing, and financing.
___ 3.The purchase of land is classified in the statement of cash flows of operating
activities.
___ 4. Selling a piece of equipment below cost is an example of investing activity.
___ 5. Paying dividends to investors creates a cash outflow from financing activities.
___ 6. The primary purpose of the statement of cash flows is to provide cash-basis
information about the company’s operating, investing, and financing activities. ___ 7.
The first step in the preparation of the statement of cash flows is to determine the net
cash flow from operating activities.
___ 8. The direct method or reconciliation method reports cash receipts and cash
disbursements from operating activities.
___ 9. The IAS 7 (IASB, 2001) encourages the use of the indirect method over the
direct method.
___10. Financing activities generally result from acquisition and disposal of noncurrent
assets.

Congratulations! You have just finished Lesson 4 of this module.

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References

Arganda, A. M. (2016). Fundamentals of Accounting Bookkeeping 1. Anvil Publishing,

Inc.
Josefina L. Beticon, J. C. (2017). Fundamentals of Accountancy, Business and
Management 2 - Teacher's Manual. Vibal Group. Inc.
Reyes, V. D. (2017). Fundamentals of Accountancy, Business and Management 2.
GIC Enterprises & Co., Inc.
Salazar, D. R. (2017). Fundamentals of Accountancy, Business and Management 2.
Rex Bookstore.

Additional References:

Teacher’s Guide in Fundamentals of Accountancy, Business and Management 2

https://edge.pse.com.ph/openDiscViewer.do?edge_no=5b3feb584ad68ec41db82e3
77ee70f3b)

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