Teodoro M.

Luansing College of Rosario

SENIOR HIGH SCHOOL DEPARTMENT

National Rd., Brgy. Namunga, Rosario, Batangas, 4225 Philippines

Tel. No.: 0917-187-2929/ 043 781 1483
Email: luansingcollege@yahoo.com
 Teodoro M. Luansing College of Rosario

Name of Teacher: Cristine C. Bathan Reference: Fundamentals of Accountancy, Business and Management2
Subject: Fundamentals of ABM 2 Author: Rodiel C. Ferrer, Zeus Vernon B. Millan
Academic Year: 2020-2021 Topic: Statement of Cash Flow
Semester: First Quarter: 1 Pages: 69- 80
Duration: 4 days Module: 4

CONTENT STANDARD
The learners demonstrate an understanding of the components and the structure of a CFS
that will help him/her in the preparation of the said financial report.

PERFORMANCE STANDARD
The learners shall be able to solve exercises and problems that require preparation of CFS.

CODE: ABM_FABM12-If-10
ABM_FABM12-If-11

I LEARNING OBJECTIVES
1. Determine the importance of preparing the CFS.
2. Identify the components and structure of a CFS.
3. Prepare a CFS.

II INTRODUCTION

The Statement of Cash Flows (or Cash Flows Statement) provides information on the
sources and utilization of cash during the period. Simply stated, the statement of cash flows
provides information on the cash inflows and cash outflows during the period.

III DISCUSSION
Statement of Cash Flows

Cash inflows and outflows are presented in the statement of cash flows according to what
activities they have been generated or utilized. These activities are as follows:
1. Operating activities
2. Investing activities
3. Financing activities

Operating activities
Cash flows from operating activities result primarily from the transactions that affect
income and expenses. Examples include:
a) Cash receipts from the sale of goods and the rendering of services.
b) Cash receipts from interest income.
National Rd., Brgy. Namunga, Rosario, Batangas, 4225 Philippines
Tel. No.: 0917-187-2929/ 043 781 1483
Email: luansingcollege@yahoo.com
 Teodoro M. Luansing College of Rosario

c) Cash payments for purchases of inventory.

d) Cash payments for inventory.

Investing activities
Cash flows from investing activities result primarily from the acquisition and disposal of
long-term assets and other investments, like property, plant and equipment. Examples include:
a) Cash payments for the acquisition of property, plant and equipment.
b) Cash receipts from sales of property, plant and equipment.

Financing activities
Cash flows from financing activities result primarily from transactions with the owner and
from borrowings. Example include:
a) Cash receipts from investments of owner to the business.
b) Cash payments on drawings by owner.
c) Cash receipts on loans.
d) Cash payments on repayments of loans.

Reporting cash flows from Operating activities

Cash flows from operating activities may be presented using either direct method or indirect
method.

Direct Method
The direct method shows each major class of gross cash receipts and gross cash payments.
Example:
Cash flows from operating activities
Cash receipts from sale of goods ₱xx
Cash paid for purchases of inventory (xx)
Cash paid for salaries expense (xx)
Cash paid for utilities expense (xx)
cash paid for interest expense (xx)
Net cash flows from operating activities ₱xx

Indirect method
The indirect method adjusts accrual basis profit or loss for the effects of changes in
operating assets and liabilities and effects of non-cash items.
Example:
Cash flows from operating activities
Profit (loss) ₱xx
Non-cash items:
National Rd., Brgy. Namunga, Rosario, Batangas, 4225 Philippines
Tel. No.: 0917-187-2929/ 043 781 1483
Email: luansingcollege@yahoo.com
 Teodoro M. Luansing College of Rosario

Depreciation xx
Gain on sale of equipment (xx)
Total xx
Changes in operating assets and liabilities
Increase in accounts receivable (xx)
Decrease in inventory xx
Increase in prepaid assets (xx)
Increase in accounts payable xx
Decrease in salaries payable (xx)
Net cash flow from operating activities ₱xx

Guidelines: Indirect Method

1. Non-cash expenses
• Depreciation expense is added to accrual basis profit because depreciation decreases
accrual basis profit but does not affect cash.
• Losses on sale of property, plant and equipment are added to accrual basis because
losses on sale of PPE decrease accrual basis profit but they pertain to investing
activities.

2. Non- cash income

• Gains on sale of property, plant, ad equipment are deducted from accrual basis profit
because gains on sale of PPE increase accrual basis profit but they pertain to investing
activities.

3. Increases in operating current, assets except cash (e.g., trade accounts and trade notes
receivables, inventory, and prepayments) are deducted from accrual basis profit.

4. Decreases in operating current assets except cash, (e.g., trade accounts and trade notes
receivables, inventory, and prepayments) are added to accrual basis profit.

5. Increases in operating current liabilities (e.g., trade accounts and trade notes payables,
accrued expenses, and unearned income) are added to accrual basis profit.

6. Decreases in operating current liabilities (e.g., trade accounts and trade notes payables,
accrued expenses, and unearned income) are deducted to accrual basis profit.

Reporting cash flows from Investing and Financing activities

National Rd., Brgy. Namunga, Rosario, Batangas, 4225 Philippines

Tel. No.: 0917-187-2929/ 043 781 1483
Email: luansingcollege@yahoo.com
 Teodoro M. Luansing College of Rosario

Cash inflows and outflows from investing activities and financing activities are reported to
the basis of major classes of gross cash receipt and gross cash payments (similar to the direct
method of presenting cash flows from operating activities)

Example1:
ABC Co.’s cash balance on January 1, 2018 was ₱20, 000. The following were the transactions
that affected cash during the period:
a. Collections from customers for the sale of goods, ₱580, 000.
b. Cash receipts from loan obtained from a bank, ₱180, 000.
c. Cash receipt from additional investment by owner, ₱20, 000.
d. Payments to suppliers for the purchase of inventory, ₱120, 000.
e. Payments for employee salaries, ₱140, 000.
f. Payments for rent expense, ₱70, 000.
g. Payments for utilities expense, ₱20, 000.
h. Payment for the acquisition of equipment, ₱200, 000.
i. Cash disbursements for drawings by owner, ₱60, 000.
Requirement: Prepare the statement of cash flows. Use the direct method of presenting the cash
flows from operating activities.

Solution:

ABC Co.
Statement of Cash Flows
For the period ended December 31, 2018

Cash flows from operating activities

Cash receipts from sales of goods ₱580, 000
Cash paid for the purchase of inventory (120, 000)
Cash paid for salaries expenses (140, 000)
Cash paid for rent expense (70, 000)
Cash paid for utilities expense (20, 000)
Net cash from operating activities 230, 000

Cash flows from investig activities

Cash paid for the acquisition of equiment (200, 000)
Net cash used in investing activities (200, 000)

Cash flow from financing activities

National Rd., Brgy. Namunga, Rosario, Batangas, 4225 Philippines

Tel. No.: 0917-187-2929/ 043 781 1483
Email: luansingcollege@yahoo.com
 Teodoro M. Luansing College of Rosario

Cash proceeds from loan borrowed 180, 000

Cash proceeds from by owner 20, 000
Cash payment to owner (60, 000)
Net cash used in financing activities 140, 000

Net increase in cash 170, 000

Cash, beginning balance 20, 000
Cash, ending balance ₱190, 000

Example2:
The comparative balance sheet and statement of comprehensive income of ABC Co. on December
31, 2018 are shown below:

ABC Co.
Statement of Financial Position
For the period ended December 31, 2018

ASSETS 2018 2017

Cash and cash equivalents ₱220, 000 ₱100, 000
Trade and other receivables 65, 000 60, 000
Inventory 60, 000 240, 000
Prepaid assets 20, 000 80, 000
Total current assets 365, 000 480, 000

Property, plant and equipment 380, 000 220, 000

Total non-current assets 380, 000 220, 000
TOTAL ASSETS ₱745, 000 ₱700, 000

LIABILITIES
Trade and other payables ₱310, 000 280, 000

EQUITY
Owner's capital 435, 000 420, 000
TOTAL LIABILITIES AND EQUITY ₱745, 000 ₱700, 000

National Rd., Brgy. Namunga, Rosario, Batangas, 4225 Philippines

Tel. No.: 0917-187-2929/ 043 781 1483
Email: luansingcollege@yahoo.com
 Teodoro M. Luansing College of Rosario

ABC Co.
Statement of Comprehensive Income
For the period ended December 31, 2018

Sales ₱500, 000

Cost of sales (300, 000
GROSS PROFIT 200, 000
Rent income 75, 000
Depreciation expense (120, 000)
Insurance expense (60, 000)
Bad debts expense (15, 000)
Loss on sale of equipment (20, 000)
PROFIT FOR THE YEAR 60, 000
Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YEAR ₱60, 000

Additional information:
• Equipment with carrying amount of ₱120, 000 was sold for ₱100, 000 resulting to a
loss on sale of ₱20, 000.
• Equipment was acquired on cash basis for ₱400, 000.
• The owner made total drawings of ₱45, 000.
Requirement:
Prepare the statement of cash flows. Use the indirect method of presenting cash flows from
operating activities.

Solution:

ABC Co.
Statement of Cash Flows
For the period ended December 31, 2018

Cash flows from operating activities

PROFIT FOR THE YEAR ₱60, 000
Non-cash items:
Depreciation 120, 000
Loss on sale of equipment 20, 000
Total 200, 000
Changes in operating assets and liabilities:

National Rd., Brgy. Namunga, Rosario, Batangas, 4225 Philippines

Tel. No.: 0917-187-2929/ 043 781 1483
Email: luansingcollege@yahoo.com
 Teodoro M. Luansing College of Rosario

Increase in trade and other receivables (5, 000)

Decrease in inventory 180, 000
Decrease in prepaid assets 60, 000
Increase in trade and other payables 30, 000
Net cash from operating expenses 465, 000

Cash flows from investing activities

Cash proceeds from the sale of equipment 100, 000
Cash paid for the acquisition of equipment (400, 000)
Net cash used in investing activities (300, 000)

Cash flows from financing activities:

Cash payments to owner (45, 000)
Net cash used in financing activities (45, 000)

Net increase in cash and cash equivalents 120, 000

Cash and cash equivalents, beginning 100, 000
Cash and cash equivalents, ending ₱220, 000

Notes:
→ The “Changes in operating assets and liabilities” in the statement of cash flows are
computed as follows:
→
Increase
ASSETS 2018 2017 (Decrease)
Trade and other
receivables 65, 000 60, 000 5, 000
Inventory 60, 000 240, 000 (180, 000)
Prepaid assets 20, 000 80 000 (60, 000)

LIABILITIES
Trade and other payables 310, 000 280, 000 30, 000

→ Although, ‘bad debts” is also considered non-cash expense, it is not considered separately
in the statement of cash flows. This is because the effect of bad debts is automatically
accounted for in the statement of cash flows by considering only the net increase or
decrease in “Trade and other receivables”.

National Rd., Brgy. Namunga, Rosario, Batangas, 4225 Philippines

Tel. No.: 0917-187-2929/ 043 781 1483
Email: luansingcollege@yahoo.com
 Teodoro M. Luansing College of Rosario

→ The balance of “Cash and cash equivalents, ending” in the statement of cash flows tallies
with the amount shown in the statement of financial position above. If these amounts do
not tally, there is an error.
→ The “Net increase in cash and cash equivalents” in the statement of cash flows of ₱120,
000 is the difference between the beginning and ending balances of “Cash and cash
equivalents”

National Rd., Brgy. Namunga, Rosario, Batangas, 4225 Philippines

Tel. No.: 0917-187-2929/ 043 781 1483
Email: luansingcollege@yahoo.com