Mindanao State University – Senior High School

Accountancy, Business, and Management (ABM)

Fundamentals Of Accountancy, Business, and Management II

MODULE 5: STATEMENT OF CASH FLOWS

ACTIVITY 1. WHAT I KNOW

Choose the letter of the best answer.

1. Which element of financial statement provides information about the cash receipts and cash payments of an
entity during a period?
a. Statement of financial position c. Statement of changes in equity
b. Statement of comprehensive income d. Statement of cash flows

2. Which component of cash flow statement involves providing services, producing and delivering goods and the
cash effects of transactions directly related to the main revenue – producing activities of the company?
a. Operating activities c. Financing activities
b. Investing activities d. All of the above

3. The decrease in the value of tangible assets such as building, furniture and equipment is called what?
a. Accrued expense c. Amortization
b. Depreciation d. Mortgage

4. What do you call an amount owed to others for unpaid expenses?

a. Accrued liabilities c. Unearned revenues
b. Depreciation expense d. Accounts payable

5. Payment of insurance premiums in advance would increase the amount of which account?
a. Prepaid expense c. Accrued income
b. Unearned income d. Accrued expense

6. Which of the following is an example of a financing activity?

a. Acquiring land c. Paying off a loan
b. Employing workers d. Selling equipment

7. The following are categorized under of Operating Activities, EXCEPT:

a. Cash received from clients
b. Payments to suppliers
c. Payments to acquire office equipment
d. Cash payment to employees

8. What would be the effect of Payment to Settle Note Payable to the company’s cash flow under financing
activities?
a. Decrease c. No effect
b. Increase d. None of the Above

9. This activity includes cash transactions related to obtaining and selling of property and equipment and other non
- current assets.
a. Operating activity c. Financing activity
b. Investing activity d. Cash flow activity

10. Which of the following is an example of an investing activity?

a. Obtaining bank loan c. Producing goods and services
b. Paying taxes to the government d. Purchasing a building

11. All are example of operating activity EXCEPT:

a. Receipts from sales of goods
b. Payments for taxes
c. Payments to acquire debt securities
d. Receipts from customers

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12. This financial statement shows the net increase/decrease in cash during the period and the cash balance at the
end of the period.
a. Statement of financial position
b. Statement of comprehensive income
c. Statement of changes in equity
d. Statement of cash flows

13. What do you call the element of financial statement prepared based on information from the income statement
and the balance sheet?
a. Statement of financial position
b. Statement of comprehensive income
c. Statement of changes in equity
d. Statement of cash flows

14. Which of the following is cash outflow from operating activities?

a. Payment for interest expense
b. Payment to acquire property and equipment
c. Payment to settle notes payable
d. Payment to owners in the form of withdrawals

15. As per Philippine Accounting Standards (PAS) No. 7, enterprises are encouraged to report cash flows from
operating activities using which method?
a. Direct method c. both a and b
b. Indirect method d. none of the above

Lesson
Components and Structures
5 of Cash Flow Statement (CFS)
We all know that each and every one is now experiencing and facing hard times due to the impact of Covid19
pandemic. In fact, our economy is the most affected as the pandemic led business establishments of cutting off their
expenses proportion to their declining sales and income.

In the business world, small businesses rarely produce a cash flow report, as profit and loss report is sufficient for
their needs. It is unlikely that small- scale businesses will involve complex non – cash transactions that would warrant
such information because they considered it as a waste of time and money to have an accountant prepare a report
that would be of little use to anyone. On the other hand, for large entities such as Nike, Toyota, and Microsoft, having
a cash flow report is imperative. Such companies will often have a significant amount of non – cash transaction,
sometimes even billions of dollars in revenue that is simply owed to them but hasn’t been received in cash yet. In this
situation, a profit and loss statement is not always sufficient, and a cash flow report is valuable to many users, such
as banks and shareholders.

In your Fundamentals of Accounting, Business and Management 1, you have learned the meaning of the accrual and
depreciation. As you go further with your study of accounting, you should bear in mind that preparation of financial
statements is guided by concepts and assumptions which are very foundations of the generally accepted accounting
principles governing its preparation. One of these assumptions is the “accrual basis assumption” in this assumption,
income is recognized when earned regardless of when received and expense is recognized when incurred regardless
of when paid. In the long run, when an enterprise purchased building, furniture and equipment for its operation,
keep in mind that the value of such assets is subject to depreciation.

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Accounting provides business owners and management with information essential to the efficient conduct and
evaluation of its activities. Financial statements are communicated to different users such as investors, lenders,
suppliers, creditors, customers and government that analyzed and interpreted by accountants who are professional
and knowledgeable in this field where accounting justifies its importance in the global business world. Financial
statements are vital to its users in making a sound economic decision. Thus, it serves its purpose when it is
communicated and prepared on time.

ACTIVITY 2: MY PERSONAL CFS

The Statement of Cash Flows (SCF) / Cash Flows Statement (CFS)

The statement of cash flows is a formal statement that provides information about the cash receipts (inflows) and
cash payments (outflows) of an entity from operating, investing, and financing activities during the period. Unlike
the SCI, this statement shows cash transaction only while the latter follows accrual principle. This statement is
prepared based on information from the income statement and balance sheet. It also portrays how company has
spent its cash. As per Phil. Accounting Standards (PAS) No. 7, enterprises are encouraged to report cash flows from
operating activities using direct method but the indirect method is acceptable.

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The Three Major parts of CFS
1. Operating Activities are generally the cash effects of transactions and other events that enter into the
determination of profit or loss. It usually involves day – to – day transactions, providing service and delivering
goods.
2. Investing Activities include making and collecting loans, activities like acquiring and disposing investments
in debt or equity securities and obtaining and selling of property and equipment.
3. Financing Activities are the net amount of funding a company generates in a given period of time to finance
its business usually include obtaining resources from owners and creditors. Hence, cash activities under this
section are deal with debt and equity.

Direct vs. Indirect Approach of CFS

Cash flows from operating activities can be presented using either direct or indirect method. If the entity’s net cash
used in operating activities is obtained by adding individual operating cash inflows and then subtracting the individual
operating cash outflows, then the method used by the entity is direct method. However, if the net cash provided by
operating activities was not resulting from cash transactions but by adjusting profit for income and expenses items,
then the method used by the entity is indirect method.

DIRECT METHOD:

LEARNING IS FUN COMPANY

HEADING CASH FLOW STATMENT

FOR THE YEAR ENDED DECEMBER 31, 2019

Cash flows from Operating Activities OPERATING ACTIVITIES

Receipts from customers P 1, 000, 000
Payments to suppliers (600, 000)
Net Cash generated by Operating Activities P 400, 000

Cash flows from Investing Activities INVESTING ACTIVITIES

Purchases of Property and Equipment P (250, 000)
Net Cash used in Investing Activities P (250, 000)

Cash flows from Financing Activities FINANCING ACTIVITES

Long term loan from a bank P 400, 000
Additional investment from owner 100, 000
Withdrawal by owner (80, 000)
Net Cash used in Financing Activities P 420, 000

Net increase in cash and cash equivalent P 570, 000

Cash, January 1, 2019 100, 000
Cash, December 31, 2019 P 670, 000

o Net change in cash or net cash flow (increase/decrease) is the net amount of change in cash either it is an
increase or decrease for the current period brought by operating, investing and financing activities.
o Beginning balance is the balance of the cash account at the beginning of the accounting period.
o Ending balance is the balance of the cash account at the end of the accounting period computed using the
beginning balance + the net change in cash for the current period.

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Cash flow statement should only include cash transactions and that the net income/loss of the company can contain
non – cash transactions such as depreciation. Changes in current assets and liabilities are included if they are related
to revenues and expenses which were included in the net income/loss even if they were non-cash transactions or if
they affected cash but was not part of the net income/loss (accrual, prepaid, unearned).

INDIRECT METHOD

P120,000

Under the indirect method of computing operating cash flows, the net income or loss is simply adjusted for the
effects of transactions of noncash nature, any deferrals or accruals of past or future operating cash receipts and
payments, and items of income or expense associated with investing and financing activities.
The following general guidelines are offered for the adjustments of net income to cash basis:
1. All increases in trade noncash current assets are deducted from net income while decreases are added.
2. All increases in trade current liabilities are added to net income while decreases are deducted.
3. Depreciation, amortization, and other noncash expenses are added back to net income.
4. Any gain on disposal of property or gain on early retirement of nontrade liabilities are to be deducted to
the next income while any loss will be added back to the net income.
5. Any other noncash income/gain or expense/loss is deducted or added back to the net income, respectively.

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ACTIVITY 3: FILL IN THE BLANKS
Complete the sentences below by filling in the blanks with the correct word/s or phrase/s.

1. The cash flows statement has three components, namely: ___________, ___________, and ____________.
2. The element of financial statement that provides information about cash transactions of an entity during the
period of time is called ___________.
3. Under PAS No. 7, the enterprises are encouraged to report cash flows from _____________using
____________but indirect method is acceptable.
4. This activity involves providing services, and producing and delivering goods is known as_____________.
5. Investing activity includes making and ____________, activities like acquiring and ______________ in debt or
equity securities and obtaining and selling of _____________.
6. Cash activity under this section includes obtaining resources from owners and creditor. This component of cash
flows statement is called _________.
7. The net amount of change in cash either it is an increase or decrease for the period brought by cash transactions
activities is known as ___________.
8. The balance of the account at the beginning of the accounting period is called __________.
9. Ending balance of the cash account is the balance at the _________ of accounting period.
10. Unlike statement of comprehensive income, cash flows statement shows ______________ while the latter
follows accrual principle.

ACTIVITY 4: PROBLEM SOLVING

Read and analyze the problem below then do the following requirements.

Assuming, you owned a sari-sari store and had a beginning cash amounting of P50, 000 and the following transactions
occurred during the month.
a. Purchase of goods. Paid in cash. 100, 000
b. Sales of goods. Received cash. 150, 000
c. Paid utilities 30, 000
d. Paid rent 10, 000
e. Sold equipment for cash 100, 000
f. Owner withdraws investment 10, 000
Required:
a. Compute for your net cash flow generated/used in operating activities. (5 pts)
b. Compute for your net cash flow generated/used in investing activities. (5 pts)
c. Compute for your net cash flow used in financing activities. (5 pts)
d. Prepare a cash flows statement using direct method. ( 15 pts)

ACTIVITY 5: ANSWER ME
1. What is statement of cash flows? Briefly explain.

2. Explain the three activities under cash flows statement.

3. Discuss the differences between the direct and indirect method of presenting cash flows from operating
activities.

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ACTIVITY 6: CLASSIFYING CASH TRANSACTIONS
Categorize each cash flow as (O) for operating, (I) for investing, (F) for financing. Write your answer on the
space provided below.

1. Cash received from sale of building. ____________

2. Cash paid for salaries. ____________
3. Cash received for interest on a note receivable. ____________
4. Cash paid to acquire a new truck. ____________
5. Cash loaned out to a customer in the form of long-term note ____________
6. Cash received for a service rendered. ____________
7. Cash paid for interest. ____________
8. Cash paid for insurance on equipment. ____________
9. Cash received from a debtor representing payments
of principal. ____________
10. Cash paid out to acquire a building. ____________
11. Cash paid for taxes. ____________
12. Cash received from borrowings. ____________
13. Cash paid to acquire equity securities. ____________
14. Cash paid for utilities. ____________
15. Cash received from investments by owner. ____________

ACTIVITY 7: PREPARE ME!

Study the given data below and compute for (1) the cash generated/used in financing activities, (2) the net
change in cash for the year, and (3) prepare the CFS for the year. Write your answer on a separate worksheet.

Learning is Fun Company has presented the following information in order to aid the accountant in preparing
the Statement of Cash Flows during the month.
a. Net income: P200, 000
b. Depreciation expense: P25, 000
c. Gain on sale on property and equipment: P100. 000
d. Decrease in trade and other receivables: P 70, 000
e. Purchase of property and equipment: P200, 000
f. Payment of loan from bank: P150, 000

1. Compute for the cash generated/used in financing activities. (5 pts)

2. Based on the given above, compute for the net change in cash for the year. (5 pts)
3. If the ending balance of cash account is P700, 000, prepare the CFS for the year. (15 pts)

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