STATEMENT OF CASH FLOWS

A statement of cash flows is a component of financial statements summarizing the operating, investing and financing activities of an entity

The primary purpose of a statement of cash flows is to provide relevant information about cash receipts and cash payments of an entity du

Classification of Cash Flows

1 Operating Activities
Collection of Income
Payment of Expense
*Changes in Current Assets and Liabilities

2 Investing Activities
Investments (short-term and long-term) Expn: Cash Equivalent - Cash Management
PPE Trading Securities - Operating Activity
Intangible
Making and collecting loans - must be an incidental activity
*Changes in Non-current Assets

3 Financing Activities
Debt Transactions
Equity Transactions
*Changes in Non-current Liabilities and Equity

Special Considerations

Interest
PAS 7 paragraph 33, provides that interest paid and interest received shall be classified as operating cash flows
because they enter in the determination of net income or loss.

Dividends
PAS 7 paragraph 33, provides that dividend received shall be classified as operating cash flows
because they enter in the determination of net income or loss.

PAS 7 paragraph 34, provides that dividend paid shall be classified as financing cash flows
because it is a cost of obtaining financial resources.
 Income Taxes
PAS 7, paragraph 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.

Presentation of Statement of Cash Flows

A Direct method
Applicable to all activities.
Accounts for cash receipts and payments.

Cash Receipts Formulas

1 Computation of Collections from Customers

Trade accounts and notes receivable, beg xx
Add: Net credit sales xx
Total xx
Less: Trade accounts and notes receivable, end (xx)
Collections from customers xx

2 Computation of Collection from Other Income

Other income (accrual) xx
Add: Deferred income, end xx
Accrued income, beg xx
Total xx
Less: Deferred income, beg (xx)
Accrued income, end (xx)
Collections from other income xx

Cash Payments Formulas

1 Computation of Payments to Suppliers

Trade accounts and notes payable, beg xx
Add: Net credit purchases xx
Total xx
Less: Trade accounts and notes payable, end (xx)
 Payments to suppliers xx

2 Computation of Payment for Expenses

Expenses (accrual) xx
Add: Prepaid expense, end xx
Accrued expense, beg xx
Total xx
Less: Prepaid expense, beg (xx)
Accrued expense, end (xx)
Payment for expenses xx

B Indirect Method
For operating activity only.
Accrual net income is adjusted to get the net cash flow from operating activity.

General Guidelines for Adjustement of Accrual Net Income

1 Add cash inflows

Decreases in current noncash assets
Increases in current noncash liabilities

2 Deduct cash outflows

Increases in current noncash assets
Decreases in current noncash liabilities

3 Remove non-cash income and expenses. (depreciation, amortization and depletion.)

4 Remove gain/loss from investing and financing activities to avoid double counting.
cing activities of an entity.

payments of an entity during a period.

ng Activity

rating cash flows

Presented below are Peso company's statement of financial performance and comparative statement of fina

2019 2020
Assets
Cash and cash equivalents 150,000 1,355,000
Accounts receivable 210,000 370,000
Trading securities 40,000 50,000
Inventory 860,000 1,090,000
Prepaid Insurance 90,000 80,000
PPE (net) 2,900,000 3,460,000
Intangibes 50,000 40,000
Total 4,300,000 6,445,000

Liabilities and Equity

Accounts payable 345,000 400,000
Salaries payable 40,000 70,000
Income tax payable 15,000 35,000
Accrued interest payable - 5,000
Unearned rent income 90,000 120,000
Bonds payable - 600,000
Share capital, P10 par 610,000 800,000
Share premium 2,440,000 3,295,000
Retained earnings 760,000 1,120,000
Total 4,300,000 6,445,000
- -

Additional Information:

1 The change in Intangibles account is a result of the sale of an existing trademark for cash.
2 The change in trading securities was the result of additional acquisitions for cash.
3 Equipment costing P190,000 and with accumulated depreciaiton of P140,000 was sold for cash
4 The net change in PPE after considering the sale of equipment was the result of a cash acquisit
5 The share capital was issued for cash.

Computations under the direct method

1 Accounts receivable, beg 210,000

Add: Net credit sales 4,450,000
Total 4,660,000
Less: Accounts receivable, end 390,000
Collections from customers 4,270,000

Rent income 60,000

Add: Unearned rent income, end 120,000
Total 180,000
Less: Unearned rent income, beg 90,000
Rent Received 90,000

2 Accounts payable, beg 345,000

Add: Net credit purchases 2,630,000
 Total 2,975,000
Less: Accounts payable, end 400,000
Payments to suppliers 2,575,000

3 Salaries expense 640,000

Add: Accrued salaries payable, beg 40,000
Total 680,000
Less: Accrued salaries payable, end 70,000
Salaries paid 610,000

4 Insurance expense 100,000

Add: Prepaid insurance, end 80,000
Total 180,000
Less: Prepaid insurance, beg 90,000
Insurance paid 90,000

5 Rent expense 350,000

Add: Prepaid rent expense, end -
Accrued rent expense, beg - -
Total 350,000
Less: Prepaid rent expense, beg -
Accrued rent expense, end - -
Rent paid 350,000

6 Interest expense 40,000

Add: Accrued interest payable, beg -
Total 40,000
Less: Accrued interest payable, end 5,000
Interest paid 35,000

7 Income tax expense 210,000

Add: Accued income tax payable, beg 15,000
Total 225,000
Less: Accrued income tax payable, end 35,000
Income tax paid 190,000
mparative statement of financial position for the year ended December 31, 2020.

Net Sales
Cost of goods sold
Inventory, beg 860,000
Add: Net purchases 2,630,000
Goods available for sale 3,490,000
Less: Inventory, end 1,090,000
Gross income
Rent income
Gain on sale of equipment
Total income
Expenses
Salaries 640,000
Insurance 100,000
Rent 350,000
Depreciation 260,000
Bad debts 20,000
Income before interest and taxes
Interest
Income before tax
Income tax (30%)
Net income

ng trademark for cash.

tions for cash.
P140,000 was sold for cash with a gain of P30,000 on sale.
he result of a cash acquisition.

Peso Company
Statement of Cash Flows
For the year ended December 31, 2020

Operating Activities
Collections from customers
Rent received
Rent paid
Payments to suppliers
Salaries paid
Insurance paid
Interest paid
Income tax paid
*Purchase of trading securities
 Net cash provided by (used in) operating activities

Investing Activities
Sale of of equipment
Purchase of new PPE
Sale of trademark
Net cash provided by (used in) investing activities

Financing Activities
Issuance of bonds payable
Issuance of shares
*Dividends paid
Net cash provided by (used in) investing activities

Increase (decrease) in cash and cash equivalents

Add: Cash and cash equivalent, beg

Cash and cash equivalent, end

FREE CASH FLOW

The amount of cash flow available to investors (creditors and owners) after the firm
met all operating needs and paid for investments in net fixed assets.

Formula

Operating cash flow -

Less: Net fixed assets investment (NFAI)
Less: Net current asset investment (NCAI)
FREE CASH FLOWS

Operating cash flow = Net Income + Depreciation and/or Amortization

NFAI = Change in net noncurrent assets + Depreciation and/or Amortization

Or simply, change in gross fixed assets

NCAI = Change in current assets - Change in accounts payable and accruals

FREE CASH FLOWS

 4,450,000

2,400,000
2,050,000
60,000
30,000
2,140,000

1,370,000
770,000
40,000
730,000
210,000
520,000

2020

4,270,000
90,000
- 350,000
- 2,575,000
- 610,000
- 90,000
- 35,000
- 190,000
- 10,000
 500,000

80,000
- 870,000
10,000
- 780,000

600,000
1,045,000
- 160,000
1,485,000

1,205,000

150,000

1,355,000 -

ors and owners) after the firm has

et fixed assets.

d/or Amortization 780,000

reciation and/or Amortization

810,000

unts payable and accruals 1,485,000

- 1,515,000
Presented below are Peso company's statement of financial performance and comparative statement of financial position for the year ended December 31, 2020.

Net Sales 4,450,000 FREE CASH FLOW

Cost of goods sold
Inventory, beg 860,000 The amount of cash flow available to investors (creditors and owners) after the firm has
Add: Net purchases 2,630,000 met all operating needs and paid for investments in net fixed assets.
Goods available for sale 3,490,000
Less: Inventory, end 1,090,000 2,400,000 Formula
Gross income 2,050,000
Rent income 60,000 Operating cash flow -
Gain on sale of equipment 30,000 Less: Net fixed assets investment (NFAI)
Total income 2,140,000 Less: Net current asset investment (NCAI)
Expenses FREE CASH FLOWS
Salaries 640,000
Insurance 100,000 Operating cash flow = Net Income + Depreciation and/or Amortization 780,000
Rent 350,000
Depreciation 260,000 NFAI = Change in net noncurrent assets + Depreciation and/or Amortization
810,000
Bad debts 20,000 1,370,000 Or simply, change in gross fixed assets
Income before interest and taxes 770,000
Interest 40,000 NCAI = Change in current assets - Change in accounts payable and accruals 1,485,000
Income before tax 730,000
Income tax (30%) 210,000 FREE CASH FLOWS - 1,515,000
Net income 520,000

INCREASES
2019 2020 (DECREASES)
Assets Peso Company
Cash and cash equivalents 150,000 1,355,000 1,205,000 Statement of Cash Flows
Accounts receivable 210,000 370,000 160,000 For the year ended December 31, 2020
Trading securities 40,000 50,000 10,000
Inventory 860,000 1,090,000 230,000 Operating Activities
Prepaid Insurance 90,000 80,000 - 10,000 Net income 520,000
PPE (net) 2,900,000 3,460,000 560,000 1 Decrease in prepaid insurance 10,000
Intangibes 50,000 40,000 - 10,000 Increase in accounts payable 55,000
Total 4,300,000 6,445,000 Increase in salaries payable 30,000
Increase in income tax payable 20,000
Liabilities and Equity Increase in accrued interest payable 5,000
Accounts payable 345,000 400,000 55,000 Increase in unearned rent income 30,000
Salaries payable 40,000 70,000 30,000 2 Increase in accounts receivable - 160,000
Income tax payable 15,000 35,000 20,000 Increase in trading securities - 10,000
Accrued interest payable - 5,000 5,000 Increase in inventory - 230,000
Unearned rent income 90,000 120,000 30,000 3 Depreciation 260,000
Bonds payable 600,000 4 Gain on sale of equipment - 30,000
Share capital, P10 par 610,000 800,000 Net cash provided by (used in) operating activities 500,000
Share premium 2,440,000 3,295,000
Retained earnings 760,000 1,120,000 Investing Activities
Total 4,300,000 6,445,000 Sale of of equipment 80,000
- - Purchase of new PPE - 870,000
Sale of trademark 10,000
Additional Information: Net cash provided by (used in) investing activities - 780,000

1 An exsiting trademark was sold for cash. Financing Activities

2 The change in trading securities was the result of additional acquisitions for cash. Issuance of bonds payable 600,000
3 Equipment costing P190,000 and with accumulated depreciaiton of P140,000 was sold for cash Issuance of shares 1,045,000
with a gain of P30,000 on sale. *Dividends paid - 160,000
4 The net change in PPE after considering the sale of equipment was the result of a cash acquisition. Net cash provided by (used in) investing activities 1,485,000
5 The share capital was issued for cash.
Increase (decrease) in cash and cash equivalents 1,205,000

Add: Cash and cash equivalent, beg 150,000

Cash and cash equivalent, end 1,355,000 -

BUDGETING

A budget is a plan, expressed in quantitative terms, on how to acquire and use the resources of an entity during a certain period of time.

Profit Planning and Budgeting

Profit planning, in broader perspective, is a well thought-ou plan which involves setting of goals or objectives, as well as the methods
or programs by which such goals are to be achived. Budgeting, therefore, may be considered as a tool for profit planning.

Long-Range and Short-Range Profit Planning

In developing long-renage plans, projected annual income statements from a period of three to five years are prepared together with
projected balance sheets as of the end of each year of the planning period. Thereafter, to ensure successful planning and control of
operations, long-range plan must be incorporated to a short-range plan which are more detailed plans that usually cover a period of
one year, though they may also be prepared for shorter time periods depending upon the nature of business and the company's
budgeting requirements.

Avantages of Budgeting

1 Budgeting compels periodc planning.

2 Budgeting enchance coordination, cooperation and communication.
3 Budgeting forces quantification of plans and proposals.
4 Budgeting provides a framework for performance evaluation.
5 Budgeting enables members of the organization to be aware of business costs.
6 Budgeting satisfies some legel and contractual requirements.
7 Budgeting directs the firm's activities toward the achievement of organizational goals.

Limitations of Budgeting

1 The plan itself are merely estimates requiring a certain amount of judgement.
2 Budgetary system requires cooperation and participation of all the members of the organization.
3 Some managers think that budgets restrict their movements and limit their decision making powers.
4 The time of development and cost of intallation of a good budgetary system may outweigh its benefits.

Organization For Budgeting

Some firms create a budget committee which is usually composed of the sales manager, the production manager, the chief engineer,
 the treasurer, and the controller.

Functions of the Budget committee:

1 Formulate and decide on general policies relating to the firm's budgetary system.
2 Request, review and revise (if necessary) individual budget estimates from different segments of the organization.
3 Approve budgets and subsequent revisions therein.
4 Receive, analayze and evaluate budget reports.
5 Recommend necessary actions to improve operational efficiency and effectiveness.

The Master Budget

The master budget represents the overall plan of the organization for a given budget period.

Merchandising Company Master Budget

Operating Budget Financial Budget

Sales budget Budgeted balance sheet

Ending inventories budget Cash budget
Purchases budget Capital expenditure budget
Cost of goods sold budget Budgeted statement of changes in
Selling expense budget financial position
Administrative expense budget
Budgeted income from operations
Budgeted non operating items
Budgeted net income

Sales Budget

Shows the sales volume, expressed in number of units and/or amount in pesos.

Sales forecast

Sales forecast is considered as the cornerstone or foundation. Hence, extra should be exercised in making the sales
forecast. Basic approaches to sales forecasting are:
 Statistical Approach
Trend Analysis
Correlation Analysis

Internal Estimates Approach

Sales Staff Procedure
Group Executive Judgement

Inventory Levels Budget

After preparing the sales budget, the projected inventory levels at the beginning and end of the budget period should be
determined. To complete the data needed for the preparation of the purchases budget.

Purchases Budget

Shows the quantity of goods that have to be purchased to meet the sales and stock rquirements.

Budgeted Operating expenses

Includes the amount of selling and administrative expenses that the company expects to incur during the budget period.

Cash Budget

Planning cash flows is as important as profit planning for all business enterprises. Liquidity, which is different from profitability,
must likewise be achieved. The goal is to good cash management is to optimize the cash balances which means having enough
cash to meet liquidity needs, but not an excessive balance for this may sacrifice profitability.
Jessy M Inc. wants to produces and sells customized swarovski rings. Sales forecast for the first four months of 2020 are presented below:

January February March April

Sales in units 180 183 192 219

Cash Receipts Budget

Fact Pattern:

1 The trend is expected to continue until June 2020.

2 Total sales consist of 30% cash, the balance is on account. Collection of accounts receivable follows this pattern:
50% in the month of sale
30% in the month following the month of sale
18% in the second month following the month of sale
2% uncollectible
3 The selling price of each ring is P3,500.
4 Cash receipts are expected to come mainly from cash sales and collection of accounts receivables. However, the company also receives
rental income of P20,000 per month fro the commercial spaces that it lets to a number of tenants within the store premises.

January February March April May June

Sales in units 180 183 192 219 300 543
SP/u 3,500 3,500 3,500 3,500 3,500 3,500
Sales in pesos 630,000 640,500 672,000 766,500 1,050,000 1,900,500

Cash sales 189,000 192,150 201,600 229,950 315,000 570,150

Collection of credit sales
Current month 220,500 224,175 235,200 268,275 367,500 665,175
One month previous 132,300 134,505 141,120 160,965 220,500
Two month previous 79,380 80,703 84,672 96,579
Cash reciepts from sales 409,500 548,625 650,685 720,048 928,137 1,552,404
Rental income received 20,000 20,000 20,000 20,000 20,000 20,000
Total cash receipts 429,500 568,625 670,685 740,048 948,137 1,572,404

Cash Dirsbursements Budget

Fact Pattern:
 1 Because of the difficulty of finding suppliers of gold and diamonds, as well as the problem of transporting the same from the suppliers
place to Jessy's store, it set a policy of keeping in stock an inventory level equal to 40% of the next month's budgeted sales.
2 Total purchases consist of 10% cash, the balance is on account. Payment of accounts payable follows this pattern:
90% in the month of sale
10% in the month following the month of sale
3 The anticipated purchases price is expected to remain at P1,250 per unit.
4 Operating expenses amount to P45,000 per month,including depreciation of P10,000. Expenses are paid in the month od incurrence.
5 In January, the company will buy a new display shelf costing P36,000. The terms are 20% downpayment, with the balance payable in
24 equal monthly installments.
6 On February the company paid P5,000 for an ad to be published on June.

January February March April May June

Sales in units 180 183 192 219 300 543
Add: Ending inventory 73 77 88 120 217 509
Goods available for sale 253 260 280 339 517 1,052
Less: Beginning inventory 73 77 88 120 217
Puchases in units 253 187 203 251 397 835
PP/u 1,250 1,250 1,250 1,250 1,250 1,250
Purchases in pesos 316,500 233,250 253,500 314,250 496,500 1,043,250

Cash purchases 31,650 23,325 25,350 31,425 49,650 104,325

Payment of credit purchases
Current month 256,365 188,933 205,335 254,543 402,165 845,033
Previous month 28,485 20,993 22,815 28,283 44,685
Cash payments on purchases 256,365 217,418 226,328 277,358 430,448 889,718
Operating expenses paid 35,000 35,000 35,000 35,000 35,000 35,000
Fixed-asset outlays 7,200 1,200 1,200 1,200 1,200 1,200
Advertisement payment 5,000
Total cash disbursements 330,215 281,943 287,878 344,983 516,298 1,030,243

Cash Budget

For the month of January, the company expects to have a cash balance of P20,000. For the succeeding months however, the
minimum cash balance is expected to increase by 150% based on the previous months' minimum cash balance.

January February March April May June

Total cash receipts 429,500 568,625 670,685 740,048 948,137 1,572,404
Less: Total cash disbursements 330,215 281,943 287,878 344,983 516,298 1,030,243
Net cash flow 99,285 286,683 382,808 395,066 431,840 542,162
Add: Cash, beginning - 99,285 385,968 768,775 1,163,841 1,595,680
Cash, Ending 99,285 385,968 768,775 1,163,841 1,595,680 2,137,842
Less: Minimum cash balance 20,000 50,000 125,000 312,500 781,250 1,953,125
Excess cash (Required financing) 79,285 335,968 643,775 851,341 814,430 184,717