BACKGROUND FOR LEARNERS

Statement of Cash Flow

The Statement of cash flow tells a specific story about the cash transaction of the company.

Cash is a vital resource owned and controlled by the business. This resource is also the most
susceptible to mismanagement

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 statement is useful in predicting future cash outflows and inflows of the
organization.

This information will aid the organization in their financing decisions. For example, businesses
confronted with forecasted cash shortages may opt to borrow from the bank or let the owner
infuse additional capital.

A statement of cash flow has three major sections: operating, financing, and investing.

Each section represents the classification of the organization’s cash related activities.

Cash Flow Statement

Definition of Terms :

1.Cash Inflow is the measure of the total cash coming into the business as a result various
financing ,investment and and operational activities.

2.Cash Outflow is the measure of the total cash going out of the business as a result of the
various financing, investment and operational activities.

3.Financing Activities are the cash receipts,and payments involving debt or equity transactions.

Direct Presentation

Indirect Presentation

4.Investing Activities are cash receipts and cash payments involving the sale of or purchase of
assets used to earn revenue over a period of time.

5.Non-current Assets from the term implied are those assets in the balance sheet that are not
current assets.

6.Operating Activities are the cash receipts and payments necessary to operate a business on a
day to dasy basis.
7.

Learning Competencies

The learners should be able to:

1. Discuss the components and structures of a CFS (ABM_FABM12-If-10)

2. Prepare a CFS (ABM_FABM12-If-11)

Three Major Sections of the Statement of Cash Flow

Operating Activities are 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 transaction will be related to profit determination. IAS (IASB, 2001)
lists the following transactions as example of operating activities.

Cash receipt from sale of goods and rendering of services (+)

Cash receipt from royalties, fees, commissions, and other revenues (+)

Cash payments to suppliers of goods and services (–)

Cash payments to employees (–)

Cash payments to income taxes (–)

Interest paid (–)

Interest received (+)

Dividends received (+)

Examples of Operating Activities

The information presented above is useful for financial information users. Furthermore,
such information will indicate whether the loans and interest can be repaid, dividends can be
declared, and operation can be continued without resorting to external financing.
Direct Versus Indirect Presentation
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. 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 Statement of Cash Flows:

Margaret Jane Trading

Statement of Cash Flows
For the Period Ended December 31, 2015

Cash Flow from Operating Activities

Cash receipts from rendering of services 150,000

Cash payment to suppliers of goods and services (50,000)

Net cash flow from operating activities 50,000

Cash Flow from Investing Activities

Purchase of property, plant, and equipment 100,000

Cash Flow from Financing Activites

Proceeds from cash investments of owners 230,000

Proceeds from bank loans 50,000

Payment to owners (10,000)

Net cash flow from financing activities 270,000

Net increase in cash 420,000

Cash at the beginning of the period 250,000

Cash at the end of the period 670,000

The indirect method, however, presents the operating activities starting with the pre-tax
income. It then reconciles the pre-tax income 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:
 Margaret Jane Trading
Statement of Cash Flows
For the Period Ended December 31, 2015
Cash Flow from Operating Activities

Income before income tax 100,000

Adjustment for:
Depreciation 10,000

Amortization 20,000
Operating income before working capital changes 130,000

Increase in accounts receivable (10,000)

Decrease in inventories 15,000

Increase in accounts payable 10,000

Decrease in notes payable (12,000)

Net cash flow from operating activities 263,000

Cash Flow from Investing Activities

Purchase of property, plants, and equipment 100,000

Cash Flow from Financing Activities

Proceeds from cash investment of owners 1,000,000

Proceeds from bank loans 200,000
Payment to owners (200,000)
Net cash flow from financing activities 1,000,000
Net increase in cash 1,630,000

Cash at the beginning of the period 150,000

Cash at the end of the period 1,513,000

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

Cash payments ti acquire property, plant, and equipment (–)

Cash payments 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 (+)

 Examples of Investing Activities
See Figure 6.4 Chapter 6, page 94
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.

Cash investments from owners (+)

Cash proceed from bank loans (+)

Cash distribution from owners (–)

Repayment of bank loans (–)

Examples of Financing Activities

A business organization must report major classes of gross receipts and gross cash payments
for financing activities.

Decision Rule in Determining Classification of Cash Transactions

To summarize, it’s appropriate to say that the items that will affect net income of profit or loss
will be clas-sified as operating. Items affecting noncurrent assets, on the other hand, will be
classified as investing activities. Finally, items affecting noncurrent liabilities and equity will be
classified as financing. Below is a summary of the decision rule:

Operating-Profit or Loss

Investing-Noncurrent Assets

Financing-Equity and Noncurrent Liability

Activity 1 :

1.Which of the following events increases cash balance?

c.Loan repayment to
a. Bank not granting loan creditors
b.Debtors paying to the company d. Sale of stock on account

2. Which of the following events reduce cash balances ?

a. Purchase of fixed assets c. Purchase of stock on account
b.Acquired assets on credit d.Creditors grant loans

3.   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 ongoing basis, the business
will eventually run out of cash .
d. Cash is the lifeblood of business and without it the business will eventually die .

4. 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, Oncash - Decrease
d.On profit - none, On cash - Decrease

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 cash flow from investing activities ?

a.Increase in inventory
b.Debtors paying to the company
c. Proceeds from sale of Property plant and equipment
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 the business ?

a. cash inflow from interest income
b.cash inflow from dividend income
c.cash outflow to inquire fixed assets
d. all of the above

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

a.Cash payments to acquire intangible assets
b.Cash receipts from sale of intangible assets
c. Cash proceeds from bank loans
d. Cash payments to aacquire Property plant and equipment

10. Which of the following is not a cash outflow for the business ?
a.depreciation
b. dividends
c. interest payments
d. taxes
Activity No. 2 Classification of Concepts.

Classify each transaction whether they are operating, financing or investing. After which,
indicate the reason for such classification. Finally, indicate the effect of the transactions to
cash flows.

Transaction Activity Reason Effect

Payment to suppliers of goods Operating Affects profit or less Decreases cash

Payment to suppliers of services

Receipts from goods sold

Payment to employees

Purchase of equipment

Purchase of fixtures

Purchase of patents

Purchase of copyrights

Payment of interest

Proceeds from interests

Payment to owners

Receipts from owners

Payment of income taxes

Proceeds from long-term debt

Payment of long-term debts

Proceeds from sale of vehicle

Proceeds from sale of copyrights

Proceeds from sale of trademarks

Activity 3

Direction : True or False: Write letter “T” if the statement is true and “F” if false in the space
provided before each number.

1.There’s an outflow of fund in depreciation.

2. The statement of cash flow is divided into three required categories: operating,
investing, and financing activities.

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.

Activity 4 Fact or Bluff

Direction : Write letter “F” if the statement is true and “B” if false in the space provided before
each number.

1.The primary purpose of the statement of cash flows is to provide cash-basis information
about the company’s operating, investing, and financing activities.

2. The statement of cash flow is divided into three required categories: operating,
investing, and financing activities.

3. The first step in the preparation of the statement of cash flows is to determine the net
cash flow from operating activities.

4. The direct method or reconciliation method reports cash receipts and cash
disbursements from operating activities.

5. The IAS 7 (IASB, 2001) encourages the use of the indirect method over the direct
method.

6. Companies report the cash flows from purchases and sales of trading securities as cash
flows from operating activities.

7. The issuance of stock dividends is entered on the cash flow worksheet, but is not
reported in the statement of cash flows.

8. Operating activities are 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.

9. The direct method presents each major classification of gross receipts and gross
payments for operating activities.

10. Financing activities generally result from acquisition and disposal of non-current
assets.
Sources :

Online Resources : Teaching Guide for Senior High School , Fundamentals of Accountancy
Business and Management 2

Instructional Materials: Worktext, PowerPoint, laptop, LCD projector, pictures, printouts Review

Reflection

How much your school allowance or “baon” is ?How do you spend it?
What are the things they buy with their allowance? Have they borrow
money? ever borrowed money before? Have they tried saving some of
their allowance?
Do you think people and businesses are similar in terms of managing
money.
People and businesses mind the inflow and outflow of money, its
source and utilization
Activity 1 : Answer Key
1. B 3. A 5. C 7. B 9.C
2. A 4. D 6. C 8. C 10.A
Activity 3 : Answer Key
1. F 2. T 3. F 4. T 5. T
Activity 4 : Answer Key
1. F 3. B 5. B 7. F 9. F
2. B 4. B 6. F 8. F 10. B