COMPREHENSIVE REVIEW ON FINANCIAL STATEMENTS

Afinancialstatementisreferredtoasthemeansinwhichfinancialinformationisaccumulatedandprocessed, or what
is so-called financial accounting. It is a structured representation of the entity’s financial position and
operating performance and are periodically communicated to different users. A financial statement is for
“general purpose” because it can be used by a broad group of users for a different set ofactivities.
A complete set of financial statement comprises the following:
 Statement of financial position at the end of the period;
 Statement of profit or loss and other comprehensive income for theperiod;
 Statement of changes in owner’s equity for theperiod;
 Statement of cash flows for the period;and
 Notes comprising significant accounting policies and other explanatoryinformation.
STATEMENT OF FINANCIALPOSITION
According to Robles & Empleo (2017), a statement of financial position is a summary of an entity’s economic
resources(assets),economicobligations(liabilities),and equityandtheirrelationshipstoeachotherattheend of the
reporting period. It is for this reason that it is generally described as a full expression of the basic accounting
equation: Assets = Liabilities +Equity.
Elements of Statement of Financial Position
 Assets - These are resources controlled by an enterprise as a result of past events. Assets are classified
as current andnoncurrent.
 Current assets- An entity shall classify an asset as currentwhen:

 It expects to realize the asset, or intends to sell or consume it, in its normal operatingcycle;
 It holds the asset primarily fortrading;
 It expects to realize the asset within 12 months after the reporting period;or
 Theassetiscashorcashequivalentunlesstheassetisrestrictedfrom beingexchangedorused to settle
a liability for at least 12 months after the reportingperiod.
 Noncurrent assets– These are assets that do not meet the definition of current assets. Examples of
this type of asset are machinery, land, equipment, andbuilding.
 Liabilities – These are the future outflow of economic benefits that an entity is required to settle as a result
ofpasteventsortransactions.Justlikeassets,liabilitiesarealsoclassifiedaseithercurrentandnoncurrent.
 Current liabilities- An entity shall classify a liability as currentwhen:

 It expects to settle the liability in its normal operatingcycle;

 It holds the liability primarily fortrading;
 The liability is due to be settled within 12 months after the reporting period;or
 It does not have an unconditional right to defer settlement of the liability for at least 12 months
after the reportingperiod.
 Noncurrent liabilities- These are assets that do not meet the definition of current liabilities. Examples
of this type of liabilities are bonds payable and mortgagepayable.
Forms of Statement of Financial Position
An entity can present its financial statement in two (2) forms: account form or report form.
 Account Form – This form provides information horizontally. It has two (2) columns; the left lists all the
assets of the company while the right column lists both liabilities andequity.

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 Assets Liabilities
Current Assets Current Liabilities
Cash xxx Accounts Payable xxx
Accounts Receivable xxx Accrued Expense xxx
Prepaid Rent xxx Unearned Revenue xxx
Inventory xxx Total Current Liabilities xxx
Long-term Liabilities xxx
Total Current Assets xxx Total Liabilities xxx
Owner’s Equity
Long-term Assets Owner’s Equity
Machinery xxx Retained Earnings xxx
Accumulated Depreciation (xxx) xxx Ordinary Share Capital xxx
Total Long-term Assets xxx Total Owner’s Equity xxx
Total Assets xxx Total Liabilities and Owner’s Equity xxx

Table 1. The Account Form of Statement of Financial Position

 Report Form – This form provides information vertically. This form starts with assets, then a list of the total
liabilities, followed by the equity, and ends with the final line totaling the liabilities and equity of anentity.

Assets
Current Assets
Cash xxx
Accounts Receivable xxx
Prepaid Rent xxx
Inventory xxx
Total Current Assets xxx

Long-term Assets
Machinery xxx
Accumulated Depreciation (xxx) xxx
Total Long-term Assets xxx
Total Assets xxx

Liabilities
Current Liabilities
Accounts Payable xxx
Accrued Expense xxx
Unearned Revenue xxx
Total Current Liabilities xxx
Long-term Liabilities xxx
Total Liabilities xxx
Owner’s Equity
Owner’s Equity
Retained Earnings xxx
Ordinary Share Capital xxx
Total Owner’s Equity xxx
Total Liabilities and Owner’s Equity xxx

Table 2. The Report Form of Statement of Financial Position

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Events after the Reporting Period
These are events, favorable and unfavorable, that occur between the end of the reporting period and the date
when the financial statements are authorized for issue. Events can be identified as:
o thosethatprovideevidenceofconditionsthatexistedattheendofthereportingperiod(adjustingevents after
the reporting period);and
o those that are indicative of conditions that arose after the reporting period (non-adjusting events after
the reportingperiod).
Adjusting and Non-Adjusting Events
An entity shall adjust the amounts recognized in its financial statements to reflect adjusting events after the
reporting period. The following are examples of adjusting events after the reporting period:
o The settlement after the reporting period of a court case that confirms that the entity had a present
obligationattheendofthereportingperiod.Theentityadjustsanypreviouslyrecognizedprovisionrelated to this
court case under PAS 37 Provisions, Contingent Liabilities, and Contingent Assets or recognizes
anewprovision.Theentitydoesnotmerelydiscloseacontingentliabilitybecausethesettlementprovides
additional evidence that would be considered.
o The receipt of information after the reporting period indicating that an asset was impaired at the end of
the reporting period, or that the amount of a previously recognized impairment loss for that asset needs
to be adjusted. Forexample:
i. The bankruptcy of a customer that occurs after the reporting period usually confirms that the
customer was credit-impaired at the end of the reportingperiod.
ii. The sale of inventories after the reporting period may give evidence about their net realizable
value at the end of the reportingperiod.
o Thedeterminationafterthereportingperiodofthecostofassetspurchased,ortheproceedsfromassets sold,
before the end of the reportingperiod.
o The determination after the reporting period of the amount of profit-sharing or bonus payments, if the
entity had a present legal or constructive obligation at the end of the reporting period to make such
payments as a result of events before thatdate.
o The discovery of fraud or errors that show that the financial statements areincorrect.
Anentityshallnotadjusttheamountsrecognizedinitsfinancialstatementstoreflectnon-adjustingeventsafter the
reportingperiod.
Anon-adjustingeventafterthereportingperiodrelatestoaconditiondifferentfromthestateasofthereporting period.
This may merely be ignored if not considered significant and will not affect the evaluation of the user. The
following are examples of non-adjusting events after the reporting period that would generally result in
disclosure (Robles & Empleo,2017):
a) a major business combination or disposing of a majorsubsidiary;
b) announcing a plan to discontinue operation, disposing of assets or settling liabilities attributable to a
discontinuing operation or entering into a bind agreement to sell such assets or settle suchliabilities;
c) major purchases and disposals of assets, or expropriation of major assets by thegovernment;
d) the destruction of a major production plant byfire;
e) announcing or commencing the implementation of, a majorrestructuring;
f) major ordinary share transactions and potential ordinary sharetransactions;
g) abnormally large changes, after the reporting date, in assets prices or foreign exchangerates;
h) changes in tax rates or tax laws enacted or announced after the reporting period that have a significant
effect on current and deferred tax assets andliabilities;
i) entering into significant commitments or contingent liabilities, for example, by issuing significant
guarantees; and
j) commencing major litigation arising solely out of events that occurred after the reportingperiod.

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NOTES TO THE FINANCIAL STATEMENTS
This is a document accompanying the numerical data listed on the financial statements. According to the
standard, the notes shall:
 presenttheinformationaboutthebasisofpreparationoffinancialstatementsandthespecificaccounting
policies;
 disclose the information required by IFRSs that is not presented elsewhere in the financial statements;
and
 provide information that is not presented elsewhere in the financial statements, but is relevant to an
understanding of any of them.
Notesareusuallypresentedinthefollowingorder,whichassistsusersinunderstandingthefinancialstatements and
comparing them with financial statements of otherentities:
 a statement of compliance with international financial reporting standards(IFRS);
 a summary of significant accounting policiesapplied;
 supportinginformationforitemspresentedonthefaceofthestatementoffinancialposition,statementof
comprehensiveincome,statementofchangesinequity,andstatementofcashflows,intheorderinwhich each
statement and each line item is presented;and
 other disclosures,including
 contingent liabilities and unrecognized contractual commitments;and
 non-financialdisclosures.

STATEMENT OF COMPREHENSIVE INCOME

IncomeStatement-Itreportstheresultsoftheoperationofthebusinessandshowstherevenuesandexpenses of a
particularperiod.
Statement of Comprehensive Income - It is a financial report detailing the change in a company’s net assets
during a specific period.
The statement of comprehensive income has two (2) basic elements:
 Profit or loss for the period- This includes all items of income and expenses that should berecognized.
 Other comprehensive income- This includes items recognized directly to equity reserves, such as
changes in revaluation surplus, gains or losses from the subsequent measurement of available-for-sale
financial assets,etc.
Other comprehensive income comprises items of income and expense (including reclassification adjustments)
that are not recognized in profit or loss as required or permitted by other PFRSs. Total comprehensive income
is the change in equity during a period resulting from transactions and other events, other than those changes
resulting from transactions of the owners.

Components of Profit or Loss – The components of profit or loss include all items that meet the definition of
income and expense as provided for in the conceptual framework, which is not explicitly identified under other
comprehensive income items as listed below.

Components of other comprehensive income – The components of other comprehensive income include:
 Changes in revaluationsurplus;
 Remeasurements of defined benefitplans;
 Gains and losses arising from translating the financial statements of a foreign operation;
 Gains and losses from investments in equity instruments designated at fair value through other
comprehensive income;
 Gains and losses on financial assets measured at fair value through other comprehensiveincome;
 Theeffectiveportionofgainsandlossesonhedginginstrumentsinacashflowhedgeandthegainsand losses on
hedging instruments that hedge investments in equity instruments measured at fair value through other
comprehensiveincome;

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  For particular liabilities designated at fair value through profit or loss, the amount of the change in fair
value that is attributable to changes in the liability’s creditrisk;
 Changes in the time value of options when separating the intrinsic value and time value of an option
contract;
 Changes in the value of the forward elements of forward contracts when separating the forwardelement
and spot element of a forward contract and designating as the hedging instrument only the changes in
the spot element;and
 Changesinthevalueoftheforeigncurrencybasisspreadofafinancialinstrumentwhenexcludingitfrom the
designation of that financial instrument as the hedginginstrument.
Line items of statement of comprehensive income
In addition to items required by other IFRSs, the profit or loss section shall include line items that present the
following amounts for the period:
a. Revenue, showing separately interest revenue calculated using the effective interestmethod;
b. Gains and losses arising from the derecognition of financial assets measured at amortizedcost;
c. Finance costs;
d. Impairment losses (including reversals of impairment losses or impairmentgains);
e. Share of the profit or loss of associates and joint ventures accounted for using the equitymethod;
f. If a financial asset is reclassified out of the amortized cost measurement category so that it is measured
at fair value through profit or loss, any gain or loss arising from a difference between the previous
amortized cost of the financial asset and its fair value at the reclassificationdate;
g. Ifafinancialassetisreclassifiedoutofthefairvaluethroughothercomprehensiveincomemeasurement
category so that it is measured at fair value through profit or loss, any cumulative gain or loss previously
recognized in other comprehensive income that is reclassified to profit orloss;
h. Tax expense;and
i. A single amount for the total of discontinuedoperations.
The other comprehensive income section shall present line items for the amounts for the period of:
a. Items of other comprehensive income (excluding amounts in paragraph [b]), classified by nature and
grouped into those that, under otherPFRSs:
i. will not be reclassified subsequently to profit or loss;and
ii. will be reclassified subsequently to profit or loss when specific conditions aremet.
b. Theshareoftheothercomprehensiveincomeofassociatesandjointventuresaccountedforusingthe equity
method, separated into the share of items following otherPFRSs:
i. will not be reclassified subsequently to profit or loss;and
ii. will be reclassified subsequently to profit or loss when specific conditions aremet.
An entity shall present additional line items, headings, and subtotals in the statement(s) showing profit or loss
and other comprehensive income when such presentation is relevant to an understanding of the entity’s
financialperformance.Anentityshallnotpresentanyitemsofincomeorexpenseasextraordinaryitems,inthe
statement(s) presenting profit or loss and other comprehensive income or in thenotes.
When items of income or expense are material, an entity shall disclose their nature and amount separately.
Forms of Presenting Income Statement
Anentityshallpresentananalysisofexpensesrecognizedinprofitorlossusingaclassificationbasedoneither
theirnatureortheirfunctionwithintheentity,whicheverprovidesinformationthatisreliableandmorerelevant.
Expenses are sub-classified to highlight components of financial performance that may differ in terms of
frequency, potential for gain or loss, and predictability. This analysis is provided in one (1) of two (2)forms.

 The first form of analysis is the nature of expense method. An entity aggregates expenses within profit or
lossaccordingtotheirnature(forexample,depreciation,purchasesofmaterials,transportcosts,employee
benefits,andadvertisingcosts).Itdoesnotreallocatethem amongfunctionswithintheentity.Thismethod may be
simple to apply because no allocations of expenses to functional classifications arenecessary.

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 ABC Company
Income Statement
For the year ended December 31, 201X
Income
Sales xxx
Service Revenue xxx
Interest Income xxx
Other Gains xxx
Total Income xxx
Expenses
Decrease in inventory xxx
Salaries Expense xxx
Utilities Expense xxx
Total Expenses xxx
Net Income xxx

Table 3. Income Statement using Nature of Expense

 The second form of analysis is the function of expense or cost of sales method. It classifies expenses
according to their function as part of the cost of sales or, for example, the costs of distribution or
administrative activities. At a minimum, an entity discloses its cost of sales under this method separately
fromotherexpenses.Thismethodcanprovidemorerelevantinformationtousersthantheclassificationof
expenses by nature, but allocating costs to functions may require arbitrary allocations and involve
considerablejudgment.

ABC Company
Income Statement
For the year ended December 31, 201X
Sales xxx
Cost of Sales (xxx)
Gross Profit xxx
Selling Expenses (xxx)
General and Administrative Expenses (xxx)
Operating Income xxx
Other Income (loss) xxx
Income Before Tax xxx
Tax Expense (xxx)
Net Income xxx
Other Comprehensive Income
Remeasurement Gain xxx
Total Comprehensive Income xxx

Table 4. Income Statement using Function of Expense

STATEMENT OF CHANGES INEQUITY

It is a financial statement that records the movement in equity over the accounting period. The standard states
that the statement of changes in equity includes the following information:
 Total comprehensive income for the period, showing separately the total amounts attributed to owners
of the parent and non-controllinginterests;
 For each component of equity, the effects of retrospective application or retrospective restatement
recognized;

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  For each component of equity, a reconciliation between the carrying amount at the beginning and the
end of the period should be disclosed, especially those changes resultingfrom:
i. profit orloss;
ii. other comprehensive income;and
iii. transactions with owners in their capacity as owners, showing their separate contributions, and
distributions to them, as well as the changes in ownership interests in subsidiaries that do not
result in a loss ofcontrol.
STATEMENT OF CASHFLOWS
From its definition, the statement of cash flows simply shows the inflow and outflow of cash arising from the
operating, financing, and investing activities of the business.
According to Weygandt, Kimmel, and Kieso (2020), the statement of cash flow helps the users assess the
following:
1. Theentity’sabilitytogeneratefuturecashflows.Byexaminingrelationshipsbetweenitemsinthestatement of
cash flows, investors can make predictions of the amounts, timing, and uncertainty of future cash flows
better than they can from accrual-basisdata.
2. The entity’s ability to pay dividends and meet obligations. If a company does not have adequate cash, it
cannot pay employees, settle debts, or pay dividends. Employees, creditors, and stockholders should be
particularly interested in this statement because it alone shows the flows of cash in abusiness.
3. The reasons for the difference between net income and net cash provided (used) by operating activities .
Netincomeincludesinformationonthesuccessorfailureofabusiness.However,somefinancialstatement users
are critical on accrual-basis net income because it requires many estimates. As a result, users often
challenge the reliability of thenumber.
4. The cash investing and financing transactions during the period. By examining a company’s investing and
financing transactions, a financial statement reader can better understand why assets and liabilities
changed during theperiod.
Three (3) Activities in the Statement of Cash Flow
 Operating Activities - These are revenues and expenses transactions arising from the normal operating
cycleofthebusiness.Examplesoftheseactivitiesarethesaleofgoodsorservices,interestanddividends
received, payment to suppliers, wages, taxes, interest for lenders, and other operatingexpenses.
 Investing Activities - These are inflows and outflows of cash generated from transactions involving fixed
assets,investments,andsaleofsecurities.Examplesoftheseactivitiesareacquisitionandsaleproperty, plant,
and equipment, purchase, and sale of investment in debt or equity securities, loan transaction to
otherentities.
 Financing Activities - These include transactions involving noncurrent liabilities and stockholders’ equity.
Examples of these activities are the sale of common stocks, issuance of bonds, payment of dividends to
stockholders, and redemption of long-termdebt.
Preparing Statement of Cash Flows
Companies prepare the statement of cash flows differently from the three (3) other basic financial statements.
First, it is not made from an adjusted trial balance. It requires detailed information concerning the changes in
account balances that occurred between two (2) points in time. An adjusted trial balance will not provide the
necessary data. Second, the statement of cash flows deals with cash receipts and payments. As a result, the
company adjusts the effects of the use of accrual accounting to determine cash flows. The information to
prepare this statement comes from three (3) sources (Weygandt, Kimmel, & Kieso, 2018):
 Comparative balance sheets - Information in the comparative balance sheets indicate the amount of the
changes in assets, liabilities, and stockholders’ equity from the beginning to the end of theperiod.
 Currentincomestatement-Informationinthisstatementhelpsdeterminetheamountofnetcashprovided or used
by operating activities during theperiod.

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 Additionalinformation-Suchinformationincludestransactiondatathatareneededtodeterminehowcash was
provided or used during the period.

Preparing the statement of cash flows from these data sources involves three (3) significant steps:
Step 1. Determine net cash provided/used by operating activities by converting net income from an
accrual basis to a cash basis. This step involves analyzing not only the current year’s income
statement but also comparative balance sheets and selected additional data.
Step 2. Analyze changes in noncurrent asset and liability accounts and stockholders’ equity accounts and
record as investing and financing activities, or disclose as non-cash transactions. This step
involves analyzing comparative balance sheet data and selected additional information for their
effects on cash.
Step 3. Compare the net change in cash on the statement of cash flows with the change in the cash
account reported on the balance sheet to make sure the amounts agree. The difference between
the beginning and ending cash balances can be easily computed from comparative balance
sheets.
Two (2) Methods in Preparing the Statement of Cash Flows
There are two (2) methods used in preparing the statement of cash flows - the direct method and the indirect
method. The only difference between the two (2) methods is on the part of operating activities.
 Indirect method - This method begins the statement of cash flows with net income. Then, net income is
adjustedforitemsthatdonotaffectcash.Ineffect,thenetincomeisconvertedfrom accrualnetincometo cash
flows from operating activities.

OPERATING ACTIVITIES

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*Typical types of adjustments

 Depreciation expense - It is a non-cash expense arising from the portion of property, plant, and
equipment’s cost that is being used up as of the specific period. In accrual accounting, it reduces net
income.Theamountofdepreciationdeductedisaddedbacktonegatetheeffectsofreductiontobring the
balance of net income to net cash provided by operating activities. This method also applies to
amortization.
For example, the DEF Company income statement reports depreciation expense amounting to
P25,000.AssumingthatthenetincomeinthatyearisP238,000.Iftherewerenoothernon-cashitems, DEF
then presents depreciation expense in the statement of financial position asfollows:

Net income P238,000

Adjustment:
Depreciation expense 25,000
Net cash provided by operating activities P263,000

 Gain or loss on disposal of plant assets - These are increases or decreases in net income brought
by the destruction or sale of plant assets. Since these transactions affect the net income, they are
added back (loss) and deducted (gain) to the net income to arrive at the adjusted balance of cash
provided by operatingactivities.

For example, the DEF Company income statement reports depreciation expense amounting to
P25,000. Assume that the net income in that year is P2,380,000. Also, the company sold two (2) of its
major equipment. Equipment AX1001 costing P1,000,000 was sold for 1,050,000, while equipment

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 AX1002withacostofP1,280,000wassoldforP1,170,000.Thecompanyrecordednoothernon-cash items.
DEF then reports the net cash provided by operating activities asfollows:

Net income P2,380,000

Adjustment provided by operating activities:
Depreciation expense 250,000
Gain on disposal of equipment (AX001) (50,000)
Loss on disposal of equipment (AX002) 110,000
Net cash provided by operating activities P2,690,000
Note: Cash received on sale or disposal of plant assets is reported under the investing activities.
Always remember that only the gain or loss is recorded under the operating activities section of the
statement of financial position in any sale transaction of plant assets.

 Changes to Non-cash Current Assets and Current Liability Accounts – Accrual accounting
recognizes revenue when earned and records expenses when it is incurred. Since these two (2)
accounts do not usually coincide with the flow of cash, and it affects the current asset and current
liabilityaccounts,anadjustmentshouldbemadetodetermineitsimpact onnetincometoarriveatthe net cash
provided by operatingactivities.

o Changes in Non-cash Current Assets - Increases in current assets are deducted from net
income,whereasthedecreasesareaddedtoarriveatnetcashprovidedbyoperatingactivities.

o Changes in Current Liabilities - Increases in current assets are added to net income, whereas
the decreases are deducted to arrive at net cash provided by operatingactivities.

SUMMARY OF ADJUSTMENTS AND ITS IMPACT ON NET INCOME

Required
Type of
Accounts Affected Adjustment in
Adjustment
Net Income
Depreciation expense Add
Non-cash charges Amortization expense Add
Loss on disposal of plant assets Add
Gains and Losses Gain on disposal of plant assets Deduct
Changes in Current Increase in current asset account Deduct
Assets Decrease in current asset account Add
Changes in Current Increase in current liability Add
Liabilities Decrease in current liability Deduct

INVESTING AND FINANCING ACTIVITIES

Asdiscussed,transactionsaffectingcurrentassetsandcurrentliabilitiesarebothreportedunderoperating
activities. These are not the only accounts that can be found in the statement of financial position as there
are other accounts such as noncurrent assets, noncurrent liabilities, and shareholders’ or stockholders’
equity. These accounts are found in the following sections of statement of cashflows:
 Cash flow from investing activities - These include transactions affecting the noncurrent assets of
the company (Refer to the examples given on Page 8 of thisHandout).

FollowingtheexampleonPage9,DEFpurchasedlandworthP1,100,000bydirectlyexchangingbonds
forland.Also,thecompanyacquiredanofficebuildingforP1,200,000cash.Theequipmentincreased by
P170,000. This increase is the result of the following transactions: (1) purchase of equipment of
P250,000, and (2) the sale of equipment AX003 for P40,000 costing P80,000. DEF would then report
the cash flow from operating and investing activities asfollows:

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 Net income P2,380,000
Adjustment provided by operating activities:
Depreciation expense 250,000
Gain on disposal of equipment (AX001) (50,000)
Loss on disposal of equipment (AX002) 110,000
Loss on sale of equipment (AX003) 40,000
Net cash provided/ (used) by operating activities P2,730,000

Cash flows from investing activities

Purchase of building (1,200,000)
Purchase of equipment (250,000)
Sale of equipment 40,000
Net cash provided/ (used) by investing activities P(1,410,000)
Note: The purchase of land is not included even though it is an investing activity because it does not
involve cash.

 Cash flow from financing activities - These include transactions affecting the noncurrent liabilities
and shareholders’ equity of thecompany.

Using the information given in the previous example, DEF also reports an increase in Common Stock
of P200,000. It is indicated that this increase was a result of an issuance of a new share of stocks.
Retained earnings is also increased by P2,090,000 during the year. This figure comes from the net
income amounting P2,380,000 and dividends of P290,000. DEF company would then report its
statement of cash flows as follows:

DEF COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2X20
Net income P2,380,000
Adjustment provided by operating activities:
Depreciation expense 250,000
Gain on disposal of equipment (AX001) (50,000)
Loss on disposal of equipment (AX002) 110,000
Loss on sale of equipment (AX003) 40,000 350,000
Net cash provided/ (used) by operating activities 2,730,000
Cash flows from investing activities
Purchase of building (1,200,000)
Purchase of equipment (250,000)
Sale of equipment 40,000
Net cash provided/ (used) by investing activities (1,410,000)
Cash flows from financing activities
Issuance of common stock 200,000
Payment of dividends (290,000)
Net cash provided/ (used) by financing activities (90,000)
Net increase in cash 1,230,000
Cash balance, beginning (assumed) 1,500,000
Cash balance, end 2,730,000
 Direct method - This method simply records the actual cash inflows and outflow of the company, such as
cash receipts and payments. These cash flows are netted to arrive at the net cash provided or used in the
operating activities, then added to the balances of both investing and financingactivities.

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 OPERATING ACTIVITIES
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 Cashreceiptsfromcustomers–Thisiscomputedbydeductingfromthesalesrevenueanyincrease in
accounts receivable for the period. On the other hand, decreases in accounts receivable should be
added, as shownbelow:

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 Cashpaymentstosuppliers-Thisiscomputedbyadjustingthereportedcostofgoodssoldwithany
increaseordecreaseofinventorytoarriveatthetotalpurchasesfortheyear.Then,thebalanceofthe purchases
account would then be adjusted by any changes in accounts payable, as shownbelow:

Cashpaymentstosuppliers=Costofgoodssold(+Increaseininventory/-Decreaseininventory)(+
Decreaseinaccountspayable/-Increaseinaccountspayable)

 Depreciation expense and loss on disposal of plant assets – These are not reported under the
direct method as it does involve actual outflow of cash. The same rule will also be applied to
amortization and bad debts expense.

 Cashpaymentsforinterest-Theinterestexpenseincludedinthestatementofcashflowsisalsothe same
with the amount included in the incomestatement.

 Cash payment for taxes – This is computed by adjusting the income tax expense with the decrease
or increase in income taxes payable, as shown below:

Cashpaymentsfortaxes=Incometaxexpense(+Decreaseinincometaxespayable/-Increasein inventory)
INVESTING AND FINANCING ACTIVITIES
The investing and financing activities are reported the same under both the direct and indirect methods.
These two (2) parts recognize only the transactions that include outflows or inflows of cash.

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