LESSON 4 (Student)

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STATEMENT OF CASH FLOWS

(4. HOURS)
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Text: Fundamental Accounting Principles, Larson, et al; Chapter 16

Reference: Financial and Managerial Accounting by Meigs et al

COVERAGE:

1. Operating activities
Direct Method
Indirect Method
2. Investing activities
3. Financing activities

Statement of Cash flows provides information about the cash receipts and cash payments of a business
entity during the accounting period. It helps investors with questions about the company’s:

- ability to generate positive cash flows

- ability to meet its obligations and to pay dividends
- need for external financing
- investing and financing transactions for the period

Statement of cash flows must include the following three sections:

1. Cash flows from operating activities

2. Cash flows from investing activities
3. Cash flows from financing activities

PREPARING STATEMENT OF CASH FLOWS

1. Compute the net increase or decrease in cash

2. Compute and report net cash provided (used) by operating activities (using either the direct and indirect
method)
3. Compute and report net cash provided (used) by investing activities
4. Compute and report net cash provided (used) by financing activities
5. Compute net cash flow by combining net cash produced (used) by operating, investing , and financing
activities
6. Prove by adding the net increase (decrease) in cash to the beginning cash balance to show that it equals
the ending cash balance

Information needed to prepare a statement of cash flow comes from:

- Comparative balance sheets at the beg. and end of each period
- Income statement
- Careful analysis of each non-cash balance sheet account in the general
ledger
- Cash account (where cash inflows & outflows are captured)

TWO DIFFFERENT APPROACHES IN PREPARING CASH FLOWS STATEMENT

1. Analyzing the Cash account

2. Analyzing non-cash accounts

Analyzing Cash Account:

- All cash receipts and cash payments are recorded in the Cash account, thus, it can provide
information about cash flows from operating, investing and financing activities.
\- Limitations: a) difficult to review b) difficult to assign cash transactions according to activity
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Analyzing Non-Cash Transactions:

- All cash transactions eventually affect non-cash balance sheet accounts, thus, cash inflows and
outflows can be determined by analyzing changes in non-cash balance sheet accounts.
- Relationship between Cash and Non-Cash Accounts

Basic Financial Statements

Balance Sheet
Income Statement
Statement of Changes in Equity
Statement of Cash Flows

MAJOR GROUP OF ACTIVITIES AFFECTING CASH

Cash includes cash equivalents (securities within three months of maturity).

1. Operating Activities (direct method)

Operating inflows
Receipts from sale of goods and services
Receipts of interest and dividends
Other receipts such as from insurance proceeds, refunds from suppliers,
etc.
Operating outflows
Payments to suppliers
Purchase and production of merchandise
Payment of salaries, wages, and other expenses
Payment of interest
Payment of lawsuits, and refunds to customers

2. Investing Activities
Investing inflows
Receipts from sale of fixed assets, such as property, plant and equipment
Receipts from sale of investments in equity and debt securities other than
cash equivalents
Receipts from debtors for the principal amount of loan
Investing outflows
Payments for acquisitions of fixed assets such as property, plant and equipment
Payment equity investment and debt securities other than cash equivalents
Payment to debtors for principal amount of loans

3. Financing Activities
Financing Inflows
Receipts from issuance of stocks, bonds, notes and other debt instruments
Receipts from creditors for principal amount of loans
Financing outflows
Payments of stock dividends, retirement of stock and purchase of treasury stocks
Payments to creditors for the principal amount of loans

Non-cash Activities (present the journal entries(not shown in the statement, but shown as a note
below the statement.
- not reported in the statement of cash flows
- conversion of bond to stock
- exchange of assets
- purchase of assets through debt or equity

METHODS OF REPORTING NET CASH FLOWS FROM OPERATING ACTIVITIS:

A. Indirect Method – begins with the net income and then adjustments (additions or subtractions) are
made to net income. The intent is to convert net income to the net cash provided by (or used in) operating
activities. The indirect method has the advantage of showing the “quality” of income by providing
information about differences between income flows and operating flows. This method provided a useful
link between the statement of cash flows, the income statement and the balance sheet.

1. Eliminate noncash expenses (such as depreciation expense) that were included in net income.

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2. Eliminate gains or losses from sales of property, plant and equipment and discontinued
operations (which relate to investing activities) and gains or losses on extinguishments of debts
(which is a financing activity).
3. Include any change in the current assets (other than cash) and current liabilities involved in the
company’s operating cycle that affected cash flows differently than net in income. The net increase
or decrease in the current assets and current liabilities are shown as an addition or deduction to the
net income:

a. Accounts Receivable:
- net increase indicates that revenue from credit sales exceeds cash
collections from customers
- net decrease implies greater cash receipts
b. Inventory:
- net increase indicates that purchases exceed cost of goods sold
- net decrease indicates that COGS sold exceeds purchases made
c. Prepaid Expenses
- net increase indicates that cash payments made exceeded the amounts recognized as expense
- net decrease indicates that cash outlays were less that the amounts deducted as expense
d. Accounts Payable
- net increase indicates that purchases is greater than cash payments made to suppliers
- net decrease indicates that cash payments to suppliers exceed the purchases made
e. Accrued Expenses Payable
- net increase indicates that expenses exceed related cash payments
- net decrease indicates that cash payments exceed related expense

Illustration: Operating (Indirect Method)

Net income XXX

Adjustments for noncash items: (income statement)
+Depreciation xxx
+Amortization xxx
+ losses on sales of assets xxx
- gains on sales of assets (xxx)
+/- other noncash items included in the net income xxx
Adjustments for changes in current operating accounts (CA/CL) (2 balance sheets)
(except cash, notes payable if not trade)
- increase in CA (xxx)
+ decrease in CA xxx
+ increase in CL xxx
- decrease in CL (xxx) XXX
Net cash provided by (used in) Operating activities XXX

B. Direct Method Operating activities

Does not begin with net income, but reports directly the total cash inflows and outflows for each major
category of operating activities. Direct Method shows operating cash receipts and cash payments, which
makes it more consistent with the primary objective of a statement of cash flows. Under this method, a
company’s operating cash inflows are listed first, followed by its operating cash outflows.
cash receipts: sale of goods/services
dividends and interest revenue
cash payments to: suppliers for inventory purchases
employees for services
taxes
lenders for interest expense
services providers for rent, utilities, insurance, etc.
converts accrual method to cash basis of accounting

ACCRUAL BASIS +/- ADJUSMENTS REQUIRED = CASH

RECEIVED/PAID
During this acctg. Period

Net sales + beg. Accounts receivable (asset)

- end. Accounts receivable = cash receipts from
customers
Other revenues: (Rent, interest, dividend, etc.)
Revenue + end. Unearned revenue (liability)
- beg. Unearned revenue = cash received

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Revenue + beg. Receivable (asset)

- end receivable = cash received

Cost of goods sold + end inventory

- beg inventory
= purchases
+ beg. Accounts payable
- end. Accounts payable = cash paid for
inventory purchased

Other operating expenses (excluding depreciation and other non-cash items – based are the expenses shown
in the income statement): i.e. insurance expense, wages expenses, income tax expense

Insurance expense + end. Prepaid insurance (asset)

- beg. Prepaid insurance = cash paid for
insurance
Wages expense + beg. Wages payable (liability)
- end. Wages payable = cash paid for wage

Short Problems: Class exercises (Please answer asynchronous 1 hr.)

1. The following information was taken from the 2020 financial statement of Planet Universal
Corp.
January 1 December 31
Accounts Receivable P 200,000 P 300,000
Sales (cash and credit) for the whole year 4,500,000
Uncollectible accounts 50,000

No accounts receivable was written off or recovered during the year. If the direct method is used
in the 2020 cash flow statement, the corporation should report cash collected from customers at:
_____________________
Accounts receivable Jan 1 200,000
Add: Sales (Cash and Credit) 4,500,000
Less: Accounts receivable (300,000)
Cash Collected from customers 4,400,000

Show computation here:

2. The net income for the year ended Dec. 31 for K. Roco Corp. was P3,520,000. Additional data
follows:
Purchase of plant assets P2,800,000
Depreciation of plant assets 1,480,000
Dividend declared and paid 970,000
Net decrease in noncash current assets 290,000
Loss on sale of equipment 130,000

Compute for the cash provided by operating activities: ________________

Show computation here:

3. In preparing its cash flow statement for the end of the current year, Reeve Super collected the
following data:
Gain on sale of equipment 60,000
Proceeds from sale of equipment 100,000
Purchase of bonds (par value, P2M) 1,800,000
Amortization of bond discount 20,000
Dividend declared 450,000
Dividend paid 380,000
Proceeds from sale of treasury stock
(carrying value) 750,000
A. compute for the net cash provided or (used) by financing activities:
Ans: Provided ___________ Used (______________)

B. Compute for the net cash provided or (used) in investing activities:

Ans: Provided _____________ Used (______________)

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4. Halimuyak Corp. reported net income of P9M for the year ended Dec. 31, 2020. Additional data
are as follows:
Depreciation on delivery equipment P5,400,000
Decrease in accounts payable 540,000
Loss on retirement of bonds 2,340,000
Dividends paid 3,150,000
Decrease in discount on bonds payable 50,000
Compute for the cash provided by operating activities: __________________

Show computation here:

5. Kissmilk Company net income is P7.5M for the year ended Dec. 31, 2020.
Additional information follows:
Jan. 1 Dec. 31 Inc (dec)
Accounts receivable 1,150,000 1,450,000 300,000
Allow. for bad debts (40,000) (50,000) (10,000)
1,110,000 1,400,000 290,000
Prepaid rent 620,000 410,000 (210,000)
Accounts payable 970,000 1,120,000 150,000
Compute for the cash provided by operating activities: ____________
Show computation here:

6. The transactions of Kool Co. for the current year ended Dec. 31 included the following:
Purchase of real estate from cash borrowed from a bank 5,500,000
Sale of investment securities for cash 5,000,000
Dividend paid 6,000,000
Issuance of common stock for cash 2,500,000
Purchase of patent for cash 1,250,000
Payment of bank loan 1,500,000
Increase in customers’ deposit 200,000
Issuance of bonds payable for cash 3,000,000

A, Compute for cash provided or (used) by financing activities:

Ans: Provided:__________ Used (_________________)

Show computation here;

C. Compute for the net cash provided or (used) by investing activities

Ans: Provided _________________ Used: (__________________)

Show computation here:

7. The Piano Society Institute, headed by Nita Abrogar-Quinto, has sought your help in constructing a
cash flow statement. Given below are the year end balances as of December 31, 2013:
- Net income for the year 2013 was P15,000.
- Accounts receivable decreased P2,000 and inventories increased P4,000
- Accounts payable decreased P7,000.
- Depreciation expense included in net income was P8,000.
- Land held for future expansion was sold for its book value of 8,000
- A new service truck was purchased for P14,000.
- The company borrowed P18,000 on a two-year note from the bank.
- Dividends of P6,000 were paid in cash.
- Preferred stock was issued to retire P7,000 of long-term notes payable.
- The beginning cash balance was P10,000 and the ending balance was P30,000.

From the data, compute for the following: Answer

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a. Cash used/provided by operating

activities

b. Cash used/provided by investing

activities

c. Cash used/provided by financing

activities

8. Phoebe Spa’s transactions for the year ended December 31, 2012 included the following:
- Purchased real estate for P550,000 cash which was borrowed from a bank
- Sold investment securities for P500,000
- Paid dividends of P600,000
- Issued 5,000 shares of common stock for P250,000 cash
- Purchased machinery and equipment for P125,000 cash
- Paid bank loan of P450,000
a. Phoebe’s net cash provided/used (indicate) by investing activities for 2012:
Provided: ___________ used ____________
b. Phoebe’s net cash provided/used (indicate) by financing activities for 2012:
Provided: ___________ used ____________

Assignments: due April 10 up to midnight; for reporting April 15.

Long Problem: AGSB

Group work: To be submitted NLT April 10, midnight

To be reported on April 15, 2024

Lone Pine Café: (A) and (B) Anthony Text and Cases, Chaps 2 and 3
Prepare the following financial statements: Income Statement,
2 balance sheets, and statement of cash flows (partners’ salaries
To be treated as their withdrawals)

Group Reporting: SW 2

Below is the latest balance sheet of Reyes, Inc. for the year ended 2020:
Assets 31-Dec 2020 1-Jan 2020
Cash 17,000 ?

Accounts receivable, net 11,000 2,000

Office Supplies Inventory 39,000 24,000

Long-term investments 23,000 9,000

Office Equipment 83,000 100,000

Accumulated depreciation (66,000) (62,000)

Total assets 107,000 85,000

Liabilities and Stockholders' Equity

PHP PHP
Accounts payable 19,000 28,000

Income taxes payable 1,000 2,000

Notes payable 16,000 10,000

Common stock 42,000 30,000

Retained earnings 29,000 15,000

Total liabilities and stockholders' equity 107,000 85,000

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Additional information:
 Reyes’ net income was P34,000. .
 No fixed assets were purchased.
 There was a gain of P3,000 on equipment which was sold. The accumulated depreciation on said
equipment was P12,000.
 Long-term investments worth P10,000 were sold at a loss of P1,000.
 Cash dividends of P20,000 were declared and paid during the year.

Required: Prepare the statement of cash flows using the indirect method for the operating activities.