LESSON 4: STATEMENT OF CASH FLOWS

- A statement of cash flows is a component of financial statements summarizing the operating,

investments, and financing activities of an entity.
- Provides information about the cash receipts and cash payments of an entity during a period
- The primary purpose of a statement of cash flows is to provide relevant information about cash
receipts and cash payments of an entity during a period
CASH AND CASH EQUIVALENTS
CASH- comprises cash on hand and demand deposits
CASH AND CASH EQUIVALENTS- are short-term highly liquid investments that are readily
convertible to known amount of cash and which are subject to an insignificant risk of change in
value.
PAS 7, par 7, provides that an investment normally qualifies as cash equivalent only when it
has a short maturity of three months or less from the date of acquisition.
EXAMPLES OF CASH EQUIVALENTS

 Three-month BSP treasury bill

 Three-year BSP treasury bill purchased three months before date of maturity
 Three-month time deposit
 Three-month money market instrument or commercial paper
CLASSIFICATION OF CASH FLOWS

 Cash flows are inflows and outflows of cash and cash equivalents
 The statement of cash flows shall report cash flows during the period classified as operating,
investing, and financing activities
OPERATING ACTIVITIES
- Are cash flows derived primarily from the principal revenue producing activities of the
entity
a) Cash receipts from sale of goods and rendering of services
b) Cash receipts from royalties, rental, fees, commissions, and other revenue
c) Cash payments to suppliers for goods and services
d) Cash payments for selling, administrative, and other expenses
e) Cash receipts and cash payments of an insurance entity for premiums and claims,
annuities, and other policy benefits
f) Cash payments or refund of income taxes unless specifically identified with financing
and investing activities
g) Cash receipts and payments for securities held for trading

INVESTING ACTIVITIES
- Cash flows derived from the acquisition and disposal of long term assets and other
investments not included in cash equivalent

a) Cash payments to acquire property, plant, and equipment, intagibles, and other long-term
assets
 b) Cash receipts from sales of property, plant, and equipment, intangibles and other long-
term assets
c) Cash payments to acquire equity or debt instruments of other entities (current and long-
term investments)
d) Cash receipts from sales of equity or debt instruments of other entities
e) Cash advances and loans to other parties other than advances and loans made by financial
institution
f) Cash receipts from repayment of advances and loans made to other parties
g) Cash payments for future contract, forward contract, option contract and swap contract
h) Cash receipts from future contract, forward contract, option contract and swap contract

FINANCING ACTIVITIES

- Cash flows derived from the equity capital and borrowings of the entity
a) Cash receipts from issuance of ordinary and preference shares
b) Cash payments to acquire treasury shares
c) Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other
short or long term borrowings
d) Cash payments for amount borrowed
e) Cash payments by a lessee for the reduction of the outstanding principal lease
liability
NONCASH TRANSACTIONS
PAS 7, par 43, provides that investing and financing transactions that do not require use of the cash or
cash equivalents shall be excluded from the statement of cash flows.
Noncash investing and financing transactions shall be disclosed elsewhere in the financial statements or
in a separate schedule or in a way that provides all relevant information about these transactions.
Examples are:
a) Acquisition of asset by assuming directly related liability
b) Acquisition of asset by issuing share capital
c) Acquisition of asset by issuing bonds payable
d) Conversion of bonds payable into share capital
e) Conversion of preference shares into ordinary shares
Interest
PAS 7, par 33, provides that interest paid and interest received shall be classified as operating cash flows
because such items enter into the determination of net income or loss:
Alternatively, interest paid may be classified as financing cash flow because it is a cost of obtaining
financial resources.
Alternatively, interest received may be classified as investing cash flow because it is a return on
investment.
For financial institution, interest paid and interest received are usually classified as operating cash flows.
DIVIDENDS
PAS 7, par 33, provides that dividend received shall be classified as operating cash flow because it enters
into the determination of net income.
Alternatively, dividend received maybe classified as investing cash flow because it is a return on
investment.
PAS 7, par 34, provides that dividend paid shall be classified as financing cash flow because it is a cost of
obtaining financial resources.
Alternatively, dividend paid may be classified as operating cash flow in order to assist users to determine
the ability of the entity to pay dividends out of operating cash flows.

INCOME TAXES
PAS 7, par 35, provides that cash flows arising from income taxes shall be separately disclosed as cash
flows from operating activities unless they can be specifically identified with investing and financing
activities.
Tax cash flows are often difficult to match to the originating underlying transaction, so most of the time
all tax cash flows are classified as arising from operating activities.

1. Cash advances and loans made by a financial institution are usually classified as
a. Operating activities
b. Investing activities
c. Financing activities
d. Component of cash and cash equivalents
2. Bank overdrafts that are repayable on demand and the bank balance often fluctuates from
positive to overdrawn shall be classified as
a. Operating activities
b. Investing activities
c. Financing activities
d. Component of cash and cash equivalents
3. Interest received is classified as cash flow from
a. Operating activities
b. Investing activities
c. Financing activities
d. Revenue activities
4. Dividend payments to shareholders are classified as
a. Cash outflows for investing activities
b. Cash inflows from investing activities
c. Cash inflows from financing activities
d. Cash outflows for financing activities
5. Interest payments to lenders are classified as
a. Operating activities
b. Borrowing activities
c. Lending activities
d. Financing activities
6. The primary purpose of a statement of cash flows is to provide relevant information about
a. Differences between net income and associated cash receipts and disbursements
b. An entity’s ability to generate positive net cash flows
c. The cash receipts and cash disbursements of an entity during a period
d. An entity’s ability to meet cash operating needs
7. Cash receipts from royalties and commissions are
a. cash outflows for operating activities
b. cash inflows from operating activities
c. cash inflows from investing activities
d. cash outflows for financing activities
8. cash flows arising from trading securities are
a. classified as operating activities
b. classified as investing activities
c. classified as financing activities
d. not reported in the cash flow statement

9. Cash payments to acquire equity investments are

a. Cash outflows for financing activities
b. Cash inflows from investing activities
c. Cash outflows for investing activities
d. Cash inflows from financing activities
10. Cash receipts from issuing shares are
a. Cash inflows from investing activities
b. Cash outflows for investing activities
c. Cash inflows from financing activities
d. Cash outflows for financing activities

Activity: Answer these. Show your solution.

A. Chang’ge Company provided the following information during the current year:
 Dividend received 500,000
Dividend paid 1,000,000
Cash received from customers 9,000,000
Proceeds from issuing share capital 1,500,000
Interest received 200,000
Proceeds from sale of long term investments 2,000,000
Cash paid to suppliers and employees 6,000,000
Interest paid on long term debt 400,000
Income taxes paid 300,000
Cash balance, January 1 1,800,000

1. What is the net cash provided by operating activities?

a. 3,000,000
b. 3,300,000
c. 2,700,000
d. 2,000,000
2. What is the net cash provided by investing activities?
a. 2,500,000
b. 2,000,000
c. 2,200,000
d. 0
3. What is the net cash provided by financing activities?
a. 1,500,000
b. 1,000,000
c. 500,000
d. 0
4. What is the cash balance on December 31?
a. 6,300,000
b. 5,500,000
c. 4,800,000
d. 7,300,000

B. Roger Company provided the following data for the preparation of statement of cash flows
for the current year:

Cash balance, beginning 1,500,000

Cash paid to purchase inventory 7,800,000
Cash received from sale of trading securities 2,500,000
Cash paid for interest on bank loan 450,000
Cash paid to repay principal amount of bank loan 1,000,000
cash collected from customers 10,000,000
Cash received from issuance of ordinary shares 1,200,000
Cash paid for dividend 2,000,000
Cash paid income taxes 1,350,000
 Cash paid to purchase trading securities 1,000,000

5. What is the net cash provided by operating activities?

a. 1,900,000
b. 2,900,000
c. 2,350,000
d. 400,000
6. What is the net cash used in financing activities?
a. 3,000,000
b. 2,000,000
c. 1,800,000
d. 4,200,000
7. What is the cash balance at year-end?
a. 3,400,000
b. 1,600,000
c. 1,400,000
d. 2,400,000

C. Franco Company had the following cash flows during the current year:

Cash receipts from issuance of ordinary shares 4,000,000

Cash receipt from customers 2,000,000
Cash receipts from dividends on long-term investments 300,000
Cash receipts from repayment of loan made to another entity 2,200,000
Cash payments for wages and other operating expenses 1,200,000
Cash payments for insurance 100,000
Cash payment for dividends 200,000
Cash payments for taxes 400,000
Cash payments to purchase land 800,000
Cash balance- beginning 3,500,000

8. What is the net cash provided by operating activities?

a. 600,000
b. 400,000
c. 300,000
d. 200,000
9. What is the net cash provided by investing activities?
a. 2,200,000
b. 1,400,000
c. 3,000,000
d. 800,000
10. What is the net cash provided by financing activities?
a. 4,000,000
b. 6,000,000
c. 3,800,000
d. 6,200,000