Preparing a

Cash Flow Statement

Learner's Module in
Fundamentals of Accountancy and
Business Management 2
Quarter 3 ● Module 5
 What’s In
By this time, it is expected that you can demonstrate mastery in the preparation of the first
three types of financial reports learned in the previous modules – the Statement of Financial Position
(SFP), the Statement of Comprehensive Income (SCI) and the Statement of Changes in Equity
(SCE).

In this module, you will learn how to prepare the fourth component which is the Cash Flow
Statement (CFS) of Statement of Cash Flows (SCF). As the name suggests, CFS will be dealing
with cash and its related transactions.

Recall in the previous lessons in Fundamentals of Accountancy and Business Management

1 (FABM 1) the journal entries you have been making in recording various transactions. Have you
noticed what account title is involved most of the time? It’s cash either in the form of cash on hand,
cash in bank, petty cash fund or cash equivalents. With these numerous transactions comes two
special journals dedicated in simplifying and facilitating the recording of recurring transactions. Can
you still recall these special journals? The Cash Receipt Journal and the Cash Disbursement
Journal. These will be useful in learning the CFS.

What’s New
Activity: My Personal Cash Flow?

Directions: Invite your family or household members into a short group discussion. Recall your
family’s cash sources and your spending patterns in the pre-COVID months (October 2019 –
February 2020) and during the COVID months (March – July 2020). Record your discussions on
the given templates – Table 1 and Table 2. Answer the questions at the end of the activity. Copy
the table and accomplish it on a separate sheet of paper.

Sources of cash may include income from employment, income from business, donations
and borrowings from any person or entity. Consolidate related items in one line item for brevity. For
instance, the total income from employment for five months should be one line item only.
Uses of cash may include payment for household expenses like rent and electric bills or
purchase of essentials like food. Consolidate also related items in one line item for brevity. For
instance, the total of all monthly payments of electric bills should be presented as one line item only.
Use the example provided to guide you in this activity.

Table 1: Sources and Uses of Cash in the pre-COVID period

SOURCES USES

Sourced from: Amount Used for: Amount

Ex. Income from 100,000 Ex. Daily allowance of 15,000
employment children to school
 Total Total
Table 2: Sources and Uses of Cash during the COVID period
SOURCES USES

Sourced from: Amount Used for: Amount

Ex. Income from selling 65,000 Ex. Payment for rental 12,000
food products fee (June and July only)

Total Total

Compare Table 1 with Table 2 then answer the following questions.

1. How does your total sources of cash during the COVID period compared with the pre-COVID
period? (increased, decreased, no change)
2. How does your total cash used during the COVID period compared with the pre-COVID
period? (increased, decreased, no change)
3. What is/are the cause/s of increase or decrease in the sources of cash?
4. What is/are the cause/s of increase or decrease in the uses of cash?
 What Is It
Cash Flow Statement (CFS)

The CFS is a financial report that details the cash inflows (sources of cash) and cash outflows (uses
of cash). Cash is the most used asset of a business. Almost every transaction involves cash. In fact,
there is a maxim in finance that says “Cash is the King” to describe the importance of cash in
maintaining operational efficiency. The CFS provides an insight on the liquidity of a business
entity. Liquidity refers to the availability of cash and other short-term assets to pay current or
shortterm obligations. Thus, cash is regarded as the most liquid asset.
Cash inflows are the cash receipts. The Cash Receipt Journal (CRJ) documents these inflows. In
the absence of the CRJ, the debit side of the cash ledger also corresponds to the inflows.
Cash outflows, on the other hand are the cash disbursements. The Cash Disbursement Journal
(CDJ) or Cash Payment Journal (CPJ) documents these outflows. In the absence of CDJ or CPJ,
the credit side of the cash ledger also corresponds to the outflows.
Various users will be interested in the CFS of an entity so they can make informed decisions.
Creditors like banks and lending institutions want to know if the business has sufficient cash inflows
to meet obligations as they fall due. Employees, too, maybe interested as this concerns their regular
salary payments. Internally, management will use the CFS in crafting plans, policies and strategies
to improve the business.

Components of a Cash Flow Statement

There are three classifications of cash flow activities – Operating, Investing and Financing. These
are also the referred to as the sections, components or parts of the CFS. A summary of the three
activities is illustrated below:

• Principal revenue-generating activities

OPERATING
of the firm
ACTIVITIES
• Payment of expenses

• Acquisition and disposal of fixed -

INVESTING assets or long -term assets.
ACTIVITIES Investments except cash equivalents
•

FINANCING • Changes in the owner’s equity

ACTIVITIES • Acquisition and settlement of loans

1. Operating Activities

Cash flows from operating activities involves transactions affecting the income and
expenses. They relate to the day-to-day operations of the business. Here are some
examples:
 Inflow Outflow
a. Cash receipts from the rendering a. Cash payments for expenses
of services or sale of goods b. Cash payments for purchase of
b. Cash receipts from interest inventory
income c. Cash payment for trade payables
c. Cash receipts from dividend
income
d. Cash receipts from collection of
trade receivables

2. Investing Activities

Cash flow from investing activities involves transactions relating to the acquisition and
disposal of long-term assets and investments such as Fixed Assets or Property, Plant and
Equipment (PPE). Here are some examples:

Inflow Outflow
a. Cash receipts from the sale of a. Cash payments for acquisition of
PPE (e.g. land, building, PPE
equipment) b. Cash payments for purchase of
b. Cash receipts from sale of stock stock investment
investment c. Cash payments for purchase of
c. Cash proceeds from investment in bond investment
bonds

3. Financing Activities

There are two ways of financing or providing capital for a business: equity and debt
financing. Cash flow from financing activities involves transactions relating to the owner’s
cash investment and drawings (equity financing) and business borrowings from various
sources (debt financing). Here are some examples:

Inflow Outflow
a. Cash receipts from owner’s cash a. Cash payments on owner’s
investment personal drawings/ withdrawals
b. Cash proceeds from loans b. Cash payments on settlement of
loans

Note:
Interest income results from interest-bearing notes receivable or from
investments in debt instruments (e.g. bonds) while dividend income is from investment in
stocks. The acquisition of stocks and bonds are investing activities. Meanwhile, interest
expense is an offshoot of loans or borrowings
which is a financing activity.
Although interests and dividends are products of investing or financing activities, they
are reported as part of operating activities because they are presented in the entity’s
Income Statement or Statement of Comprehensive Income.
Structure of a CFS

Study the structure of a CFS taking note of the similarities or differences from the other financial
statements you have learned in the previous lessons.

(Name of the Business)

Cash Flow Statement Heading
For the year/period ended __________

Cash Flows from Operating Activities

Cash inflows from operating ctivities xxxx (a)
Cash outflows from operating activities (xxx) (b) (c)
Net Cash Flow from operating activities xxxx

Cash Flows from Investing Activities (d)

Cash inflows from investing ctivities xxxx (e)
Cash outflows from investing activities (xxx) (f)
Net Cash Flow from investing activities xxxx

Cash Flows from Financing Activities (g)

Cash inflows from financing ctivities xxxx (h)
Cash outflows from financing activities (xxx) (i)
Net Cash Flow from financing activities xxxx
(j) (k)
Net increase (decrease) in cash xxxx (l)
Add: Cash, beginning balance xxx
Cash, ending balance xxxx

1. Heading
Just like the other financial reports, a CFS must have a heading. The first line contains
the name of the business, the second line is the title of the report, in this case Cash Flow
Statement. The third line starts with the phrase
“For the year/period ended” followed by the date when the year or the period ends.
2. Net Cash Flow from the Three Sections
The three sections are distinctly presented. For each section, the cash inflows are
presented first followed by the outflows. Cash outflows are presented as negative numbers
(enclosed in parentheses) and are deducted from the inflows. The result could be a positive
or a negative cash flow. From the pro-forma SFP above you can see these formulas to
compute for the Net Cash Flow from each section:

o Net Cash Flow from Operating Activities c = a – b

o Net Cash Flow from Investing Activities f = d – e
o Net Cash Flow from Financing Activities
i=g–h
 3. Net Increase (Decrease) in Cash
The net cash flow from each activity (c, f, and i) are then added to determine the net
increase or decrease in cash. A positive net cash flow means that there is an increase in
cash while a negative cash flow means otherwise.

4. Ending Balance of Cash

The net increase (decrease) in cash (j) is added to or deducted from the beginning
balance of cash (k) to determine the ending balance. This must be the same with the ledger
balance.

Methods of Preparing the CFS

There are two methods of preparing the CFS – direct method and indirect method. In the
two methods, only the Operating Activities section is presented differently. The Investing and
Financing Activities sections are the same. Also, the ending balances of cash between these
methods will be the same.

Direct Method Indirect Method

o utilizes the actual
transactions involving cash
o applies to business entities
having low volume of
cashrelated activities
o uses the changes in the
beginning and ending
balances of current assets
and current liabilities to
determine the changes in
cash
o applies to business entities
having high volume of
cashrelated activities

In this module, you will be learning only the direct method. The indirect method will be learned in
higher accounting subjects.

CFS Prepared using the Direct Method

Here is an example of a CFS prepared using the direct method.

Aliwana Travel and Tours

Cash Flow Statement
For the year ended December 31, 2019

Cash Flows from Operating Activities

Cash receipts from sale of goods Php 500,000
Cash receipts from collection of receivables 80,000
Cash receipts from interest income earned 10,000
Cash paid for purchase of inventories (220,000)
Cash paid for salaries expense (30,000)
Cash paid for rent expense (25,000)
Cash paid for delivery expense (5,000)
 Net Cash Flow from operating activities Php 310,000

Cash Flows from Investing Activities

Cash receipt from sale of old equipment Php 20,000
Cash paid for acquisition of equipment (300,000)
Net Cash Flow from investing activities Php (280,000)

Cash Flows from Financing Activities

Cash proceeds from bank loan Php 100,000
Cash receipt from owner’s investment 50,000
Cash withdrawal by the owner (20,000)
Net Cash Flow from financing activities Php 130,000

Net increase (decrease) in cash Php 160,000

Add: Cash, beginning balance 70,000
Cash, ending balance Php 230,000

Congratulations for going this far. I believe you are now ready to enhance your understanding of
the lesson by doing the succeeding activities.

What’s More
Activity 1: Inflow or Outflow?

Directions:
Analyze each cash-related transaction then identify whether it results to cash inflow or
outflow. On a separate sheet of paper, write I for inflow and O for Outflow.

Transaction Answer
Ex. Collection of amount owed by a customer I
1. Payments made to a local newspaper for advertisements.
2. Purchase of inventory for cash
3. Owner’s cash investment
4. Payment for water and electricity consumed during the period
5. Receipt of cash proceeds from bank loans
6. Purchase of machineries
7. Payment of advance rent for three months
8. Owner’s cash drawing
9. Receipt of cash for services rendered
10. Sale of a used laptop
Activity 2: Classify Me.

Directions:
Classify the following cash flow activities whether they are part of Operating, Investing or
Financing activities. On a separate sheet of paper, write O for Operating, I for Investing, and F for
Financing.

1. Cash receipts from sale of goods

2. Cash receipts from dividend income
3. Cash payments on the settlement of loans
4. Cash payments for the purchase of machineries
5. Cash receipts from interest income on bank deposits
6. Cash receipts from the sale of fully depreciated equipment
7. Cash receipts from owner’s cash investment
8. Cash receipts from collection of trade receivables
9. Cash payments on owner’s personal drawings
10. Cash proceeds from bank loans

Good job! You may now proceed to the next activity.

Activity 3: From Ledger to CFS

Directions:
This activity will connect your previous knowledge of posting journal entries to the ledger with
the preparation of CFS. Study the cash ledger presented below:

Account Title: CASH Account #: 1001

# Transaction Dr. Cr.
Beginning balance 350,000
1. Payment of business fees and licenses 20,000
2. Receipt of cash for services rendered 15,000
3. Sale of depreciated office tables 5,000
4. Acquisition of new office tables 50,000
5. Purchase of bond papers and printer inks 7,000
6. Collection of receivables from customer A 12,000
7. Cash withdrawn for personal use 5,000
8. Payment of principal of interest-bearing notes 200,000
9. Payment of interest on notes payable 2,500
10. Owner’s additional investment 100,000
11. Receipt of cash for services rendered 78,000
12. Payment of salaries of employees 35,000
Totals 560,000 319,500
 Balance 240,500

Classify the transactions as to which activity they belong – Operating, Investing or Financing.
The first entry on the ledger has been done for you. Copy and accomplish the tables on a separate
sheet of paper.

A. Operating B. Investing Activities C. Financing

Activities Activities
# Amount # Amount # Amount
1 (20,000)

Another kudos for your effort in finishing this activity!

What I Have Learned

Activity: Self-Assessment

Directions: Below are the statements related to the learning objectives of this module. On a scale
of 1 to 4 (4 as the highest), please rate your perception of your level of ability in each area or skill.
Use this rating guide.

Rating Description
1 Help, I honestly have little mastery of it
2 I just need more time and activity to master it
3 I am nearing mastery of it
4 I am confident that I have mastery of it

Objectives Rating
1. I can explain the purpose of a CFS
2. I can identify the cash transactions related to the operating
activities of a business entity.
3. I can identify the cash transactions related to the investing
activities of a business entity.
4. I can identify the cash transactions related to the financing
activities of a business entity.
5. I can distinguish cash inflows from cash outflows
6. I can solve for the net increase or decrease in cash
 7. I can discuss the format of a CFS
8. I can prepare the CFS in good form

In case, you have rated yourself a 1 or 2 in any of the competencies, you may want to go
back to the ‘What is it’ part for some review of the lesson.

What I Can Do
Activity 1: Preparing the CFS

Directions: Read the problem carefully taking notes of the important details needed in the
preparation of CFS. Prepare the CFS on a separate sheet of paper.

Problem:
The owner of Chuck’s Carwash asked for your assistance in preparing the Cash Flow
Statement for the month of July 2020. He provided you with the record of his Cash Receipts and
Cash Disbursements. The balance of cash on July 1, 2020, is Php 180,000.

CASH RECEIPTS

Date Particulars Amount

July 1 Interest from bank deposits Php 1,200
5 Services rendered to customers 45,000
10 Collection of trade receivables 8,000
25 Cash investment 50,000
28 Services rendered to customers 15,000

CASH DISBURSEMENTS

Date Particulars Amount

July 2 Purchase of a machine Php 20,000
7 Payment for trade payables 9,000
8 Payment for loans 150,000
24 Payment for cleaning supplies 5,000
26 Rental payment for the month 10,000

Additional Activity
Activity: Improving Cash Flows

Directions: Your neighborhood sari-sari store owner noticed that the balance of her cash has been
declining in the past months during the COVID period. She asked you to help her diagnose the
problem. You have identified two problems. Suggest a way for her to address these. Explain your
answers in no more than 4 simple sentences. Write on a separate sheet of paper.

Problem 1: Accounts receivable (pautang) is increasing due to low collection rate.

Suggestion:
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________

Problem 2: Some non-essential and luxury inventories such as chocolates and imported canned
goods are near expiry because only few buys them.
Suggestion:
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________

Your answer in each problem will be evaluated using this guide:

5 points – Suggestion is feasible and well-explained
4 points – Suggestion is feasible but with minor lacking details
3 points – Suggestion is good but may not be applicable to the given situation