Republic of the Philippines

DEPARTMENT OF EDUCATION
Region I
Schools Division Office I Pangasinan
Pangasinan National High School
Lingayen, Pangasinan

FUNDAMENTALS OF
ACCOUNTANCY, BUSINESS
AND MANAGEMENT II
Cash Flow Statement

Quarter 1 - Week 5 – Module 5

Most Essential Learning Competency: Discuss the

components and structures of a Cash Flow
Statement and Prepare a Cash Flow Statement

K to 12 BEC CG: ABM_FABM12-If-10 and ABM_FABM12-If-11

What I Need to Know
Distance Learning Delivery of Education today as a mode of learning and communicating to
students in the new normal form of education. Modules and Activity Sheets are the types of Printed Modular
Distance Learning that will be used in Fundamentals of Accountancy, Business and Management II (FABM
2) aside from Digital Modular Distance learning and Online Distance Learning.
At the end of this module, you will be able to know how to prepare a Cash Flow Statement (CFS)
and its principles.
Specifically, this module will help you to how to:

✓ Identify each component in the structure of cash flow

✓ Classification of Operating Activities, Investing Activities and Financing Activities
✓ Solve problem in the cash flow through two (2) types of method (Direct Method and
Indirect Method).
✓ Prepare a cash flow statement using direct method.

What I Know
Pre-Test
This activity will test your basic understanding about the principles of Cash Flow Statement prior
to the discussion of this module. This will serve as you diagnostic of this module
Directions: Identify the classification of the following account record. Write the Letter of the
correct answer in the space provided.

A. Operating B. Investing C. Financing D. Non-Cash transaction

____1. Cash received through selling of long-term investments.

____2. Cash paid for interest of long-term note
____3. Depreciation of building
____4. Income tax paid by the company
____5. Proceeds of issuance of ordinary shares
____6. Cash received through dividend
____7. Paid a note payable from supplier
____8. Allowance of doubtful accounts of a customer
____9. Interest received from notes receivable of a customer
____10. Proceeds from selling a product to customer
____11. A declared dividend to be paid early next year
____12. Paid rent in advance for the next six months.
____13. Sold a parcel of unused land at a loss.
____14. collected interest on notes receivable
____15. Collected accounts receivable from a customer
 What is It
This module in Fundamentals of Accountancy, Business and Management II (FABM 2)
leads the learners through the process of preparation of a Financial Statements.
In the previous four (4) modules, it introduces the preparation of the Statement of Financial
Position, Statement of Comprehensive Income and Statement of Changes in Equity which leads to
the partial Preparation of Financial Statements. In this module five (5), categorize the preparation
of cash flow which is important to the users of information to make sound decision making to the
business. This capture the interest of the user in terms of the flow of cash within the business.

Discussions

Lesson 4 Cash Flow Statement – Principles, Practices and Preparation

The Cash Flow Statement is a financial tool that provides information about the causes
of a changes in a company’s cash balance from the beginning to the end of specific period. It
also add to the information about the company’s cash receipt and cash payment during specific
period, the Cash Flow Statement helps investors, creditors and other external parties to:
• Assess company’s ability to generate positive future net cash flows.
• Assess the company’s need for external financing and its ability to pay its debt and
pay the owner’s interest.
• Reconcile the differences between net income and the change in cash.

Illustration below is the Ledger of the business represent the Cash flow:

CASH LEDGER
A cash flow of the Date Particular/Description Debit Credit
business from the Jan 1, 2020 Beginning Cash 100,000
result of the
operation (Statement Payment to purchase of Materials 40,000
of Comprehensive Cash received from Customer 15,000
Income) which Payment to salaries of employees 5,000
represent the inflow
and outflow of cash Cash received from receivables 10,000
Total 125,000 45,000
Dec 31, 2020 Ending Cash Balance 80,000

The effect of cash transaction to the balance (decrease of

20,000 from the beginning cash)

Basic Organization of the Cash Flow Statement

The Cash Flow Statement discloses exactly what caused the cash balance to the change from the
beginning period to the end of period (see Illustration above). This statement is organized around
three major types of business activities, namely:
A. Operating
B. Investing
C. Financing

Note: The total effect of these three activities will results in either a net increase to cash or net
decrease to cash. Only cash transaction will be included in the statement.
A. Cash In (Out) Flows from Operating Activities

Operating Activities explains the sources and uses of cash from ongoing regular business
activities in a given period of time. This results in cash inflows and outflows from the normal
course of business transaction of the company. This typically includes net income from the income
statement, adjustments to net income, and changes in working capital.

Examples of business transactions that either generate or use cash will be Basis of Operating
reported in these operating activities are: Activities come from
a. Cash flow received (inflow) from sale of goods or rendered services. change of the
b. Cash flow received (inflow) from rental/interest of the company’s company’s Income
property to other parties. Statement from
c. Cash payment (outflow) to supplier, to government for taxes, and Sales/Service Income
other parties for the expenses made by the company during its (inflow) and Expenses
operation. (outflow).

B. Cash In (Out) Flows from Investing Activities

Investing Activities are those centered in support of the operations of the business. This support
may take the form of either purchase of assets to be used in the operation of business (such as
vehicles, machines and equipment, furniture and fixtures) that a business needs in its operation.

Examples of transaction that will be reflected as investing activities are as follows:

Basis of Investing
a. Cash paid (outflow) for purchase of property, plant and equipment. Activities usually
b. Cash paid (outflow) for purchase of equity investments (Long-term involves items from
investments) in other companies. the non-current
c. Cash received (inflows) from the sale of property other than in the asset section of the
ordinary course of business. (inventory) balance sheet.

C. Cash In (Out) Flows from Financing Activities

Financing Activities deal only with external financing while internal financing (generated inside
the company) is accomplished through operating activities.
The financing activity
A company can obtain cash inflow from two external sources. usually involves items
a. Additional investment from the owner that are reported in
b. Obtaining loans from banks or other lenders. the long-term liability
or owner’s equity
While repayment of the loans as well as withdrawals by owners are section of the balance
financing transactions that are reported as cash outflows under financing sheet.
activity section.

Preparation of Cash Flow Statements

1. Determining the heading

2. Analyze the cash Transaction
Below is the cash ledger using T-account of a company (XYZ Law Office)

Cash - 101
Debit Credit
Dec. 1 Cash invest by the owner 500,000 Dec. 1 Payment of business permit 10,000
Dec. 1 Proceeds from bank loan 100,000 Dec. 1 Payment for annual rent 120,000
Dec. 8 Collection from the customer 37,500 Dec. 2 Payment of purchase supplies 5,000
Dec. 15 Collection from the customer 135,000 Dec. 8 Payment of purchase equipment 36,000
Dec. 22 Received cash from Rent 35,000 Dec. 17 Cash withdrawal of owner 25,000
Dec. 31 Payment of salaries 23,000
Total 807,500 219,000
Based on the table above, the description of each transaction was analyzed in the succeeding
table.

Debits Amount Nature Classification Reason

Dec. 1 500,000 Cash invest by the owner Financing Affects equity
Dec. 1 100,000 Proceeds from long term loan Financing Affects non-current liability
Dec. 8 37,500 Collection from the customer Operating Affects net income
Dec. 15 135,000 Collection from the customer Operating Affects net income
Dec. 22 35,000 Received cash from Rent Operating Affects net income

Credits Amount Nature Classification Reason

Dec. 1 10,000 Payment of business permit Operating Affects net income
Dec. 1 120,000 Payment for annual rent Operating Affects net income
Dec. 2 5,000 Payment of purchase supplies Operating Affects net income
Dec. 8 36,000 Payment of purchase Investing Affects non-current assets
equipment
Dec. 17 25,000 Cash withdrawal of owner Financing Affects equity
Dec. 31 23,000 Payment of salaries Operating Affects net income

3. After analyzing the transaction from their classification in the cash flow, we will combine
all the activities accordingly: operating, investing and financing.

➢ Cash Flow from Operating Activities

Inflows:
Total Cash collection from customer 172,500
Cash received from rent 35,000
Total Cash receipts from operation 207,500
Net Cash
Outflows: inflow from
Cash payments operating
Business permits 10,000 activities is
Annual rent 120,000 49,500
Office Supplies 5,000 (207,500
Salaries 23,000 minus 158,00)
Total Cash paid from operation (158,000)

➢ Cash Flow from Investing Activities

Outflow:
Payment of purchase equipment (36,000)

➢ Cash Flow from Financing Activities

Inflows: Net Cash

Cash invest by the owner 500,000 inflow from
Proceeds from long term loan 100,000 financing
Total Cash received 600,000 activities is
575,000
Outflow: (600,00 minus
Payment to owner (25,000) 25,000)
 4. Determining the ending balance
After determining the net effects of the operating, investing and financing activities.
Below is the line item for the total effect of cash transaction for the year:

XYZ LAW OFFICE

Cash Flow Statement
For the period ended, December 31, 2020

CASH FLOW FROM OPERATING ACTIVITIES

Cash receipts from operation P 207,500
Cash payment from operation ( 158,000)
Net cash inflow from operating activities 49,500

CASH FLOW FROM INVESTING ACTIVITIES

Payment of purchase equipment (36,000)

CASH FLOW FROM FINANCING ACTIVITIES

Cash invest by the owner 500,000
Cash proceeds from long term loan 100,000
Payment to the owner ( 25,000)
Net cash inflow from financing activities 575,000

Net increase in cash 588,500

Add: Cash balance at the beginning 0
Cash balance ending P 588,500

Note: If you will get sum of the net flows of the activities: operating, investing and
financing, you will be arrived to the net increase in cash of 588,500 since it results to a
positive sign, otherwise net decrease if it result to negative sign. The beginning balance
of cash is added to item above (net increase in cash) to arrive at the ending balance.
Since this is the first year of operation of the business, there is no beginning balance for
cash accounts.

Points to remember to Operating Activities

There are expenses included in your Net income that are not cash transaction. Only cash
transaction will be included in the computation of your operating activities. The very common
non-cash transactions with in the net income are as follows:
a. Depreciation Expenses
b. Amortization Loss
c. Doubtful accounts expense/Bad debts expense
d. Non cash transaction

Two Methods of Presentation of Cash Flow Statement

Direct Method versus Indirect Method
According to IAS 7 (International Accounting Standard), the entities are given option whether ti
present the statement using direct or indirect method. It depends on the availability of the data
information given by the company.
➢ Direct Method
This method presents each major classification of gross receipts and gross payments for
operating activities.

XYZ LAW OFFICE

Cash Flow Statement
For the period ended, December 31, 2020

CASH FLOW FROM OPERATING ACTIVITIES

Cash receipts from operation P 207,500
Cash payment from operation ( 158,000)
Net cash inflow from operating activities 49,500

CASH FLOW FROM INVESTING ACTIVITIES

Payment of purchase equipment (36,000)

CASH FLOW FROM FINANCING ACTIVITIES

Cash invest by the owner 500,000
Cash proceeds from long term loan 100,000
Payment to the owner ( 25,000)
Net cash inflow from financing activities 575,000

Net increase in cash 588,500

Add: Cash balance at the beginning 0
Cash balance ending P 588,500

➢ Indirect Method
This method presents the operating activities starting with the Income before tax and then
reconcile this income for non-cash income and expenditures. After which, the movement in
the current assets and current liabilities are adjusted to the resulting figures
.
XYZ LAW OFFICE
Cash Flow Statement
For the period ended, December 31, 2020

CASH FLOW FROM OPERATING ACTIVITIES

Income before tax 100,000
Adjustments for:
Depreciation expense 10,000
Amortization 20,000
Operating Income before current asset and liabilities changes 130,000
Increase in Accounts receivable (50,000)
Decrease in inventories 20,000
Increase in account payables 15,000
Decrease in notes payable (65,500)
Net cash flow from operating activities 49,500

CASH FLOW FROM INVESTING ACTIVITIES

Payment of purchase equipment (36,000)

CASH FLOW FROM FINANCING ACTIVITIES

Cash invest by the owner 500,000
Cash proceeds from long term loan 100,000
Payment to the owner ( 25,000)
Net cash inflow from financing activities 575,000

Net increase in cash 588,500

Add: Cash balance at the beginning 0
Cash balance ending P 588,500
General rule of thumb in indirect Method (see the Illustration above)
1. The indirect operating activities section always starts out with the net income.
2. Determine the non-cash transaction included in the income statement such as:
✓ Depreciation expense – add back to the computation
✓ Amortization expense - add back to the computation
✓ Doubtful accounts/ Bad debts expense from accounts receivable - add back to the
computation
✓ Gains or Losses from sale of property – Deduct if gain, add back if loss, this item
is already included in your investing activities.

3. Operating activities adjusts net income for the changes in CURRENT ASSET
ACCOUNTS and CURRENT LIABILITIES that affected cash which normally:
Accounts receivable, Inventory, Prepaid Expenses, Short term investment, Accounts
payables and accrued payables

✓ When current asset increases – the effect of the amount is subtracted from the net
income
✓ When current asset decreases – the effect of the amount is added from the net
income
✓ When current liability increases - the effect of the amount is added from the net
income
✓ When current liability decreases - the effect of the amount is subtracted from the
net income

All of these adjustments are totaled to adjust the net income for the period to match the cash
provided by operating activities.

What’s More
Below are the activities given to this module
A. Title of the Activity: Am I, In or Out?
Directions: Determine each transaction whether they are operating, financing, or investing.
After which, indicate the reason for such classification and indicate the effect of the transaction
to cash flow

Transaction Activity Reason Effect

Operating Affects Decreases
Payment to supplier (example item) Profit/Loss Cash

1. Receipts from goods sold

2. Purchases of Patents

3. Payment of Interest

4. Investment made by owner

5. Proceeds from long-term debt

6. Proceeds from sale of trademarks

7. Sold product to the costumer in cash

8. Proceeds of Interest on notes receivable

 9. Payment of taxes

10. Withdrawal of the owner for personal use

11. Payment for the acquisition of vehicle

12. Payment of the utility’s expenses

13. Cash advance paid by the customer

14. Cash advance paid by the company

15. Dividend Income received

B. Title of the Activity: Problem-solving Cash Flow

Directions: Solve the following items independently, you must present your solution and
answers legibly and clearly in the space provided.

A) Assume all the information are during the current year of operation of the business.

Cash balance, Jan. 1 540,000

Cash payment for the purchase of machine 100,000
Cash payment for short-term debts 100,000
Cash received due to bank loan 500,000
Payment for rent 40,000
Cash payment to supplier 90,000
Cash collected from customer 850,000
Salaries paid to employees 50,000

1. How much is net provided by operating activities?

2. How much is the cash balance, ending?

B) The net income for the year for A company was 2,520,000. Additional data are as follows
(use the indirect method)
Depreciation expense 1,020,000
Gain on sale on Equipment 200,000
Increase in Accts. Receivable 1,260,000
Decrease in inventory 900,000
Increase in accts. Payable 240,000
Dividends paid 540,000
Purchase of financial asset 220,000
Decrease in income tax payable 160,000
Increase in long-term note payable 2,000,000

3. What is the net cash flow from operating activities?

C) Matibay Company provided the following data incurred for current year:

Dividends declared and paid 80,000

Cash flow from investing (120,000)
Cash flow from financing 560,000
Cash balance, beginning 1,200,000
The following data were on the account in the financial position as of December 31, 2019.
Dec. 31
Cash ?
Other Assets 21,000,000
Liabilities 10,500,000
Total Shareholders’ equity (Capital) 12,600,000

4. How much is the cash flow operating activities?

D) The following information pertains to Lax Company of CASH T-Account

Debit Credit
Cash, begin 1,800,000 Dividend 1,000,000
paid
Dividend 500,000 Cash paid to 6,000,000
received supplier
Collection 9,000,000 Cash paid 400,000
from from
customer purchase of
equipment
Issuance of 1,500,000 Income 300,000
stock taxes paid
Interest 200,000
received
Proceeds 2,000,000
from sale of
investment

5. How much is the cash flow from operating activities?

6. How much is the cash flow from investing activities?
7. How much is the cash flow from financing activities?

E) Using the information below from Ice Company as of December 31, 2016

Cash Balance, Jan. 1 1,040,000

Accounts receivable, ending 20,000
Cash received from customers 850,000
Cash received from rental 85,000
Additional investment of owner (car) 100,000
Additional investment of owner (cash) 50,000
Cash payment to suppliers 50,000
Salaries paid to employees 60,000
Payment for utilities 90,000
Cash payment for purchase of machinery 175,000
Cash received from bank loan 700,000
Cash payment for short-term borrowing 60,000
Capital, beginning 5,950,000
Net income 1,835,000

8. How much is the operating activities?

9. How much is the financing activities?
10. How much is the cash balance, Dec. 31 (ending)
 What I Have Learned

This module discussed the theories, applied concept and practices of Cash Flow
Statements. It also includes application of such concepts, principles and practices to help students
understand and demonstrate the cash flow statement as financial tool to help the business in
decision making.
The major concept of this is the understanding the cash flow transaction of the business
which are summarize accordance to the standard presented by General Accepted Accounting
Principles (GAAP). To summarize, it is appropriate to say that cash transaction items that will
affected in net income or profit or loss will be classified as operating activities. Cash transaction
items affecting non-current assets in the balance sheets will be classified as investing. Finally, cash
transaction items affecting non-current liabilities and equity will be classified as financing.

o Operating – Profit or Loss

o Investing – Non-Current Assets
o Financing – Non-Current Liabilities and Equity

The presentation of the Cash Flow Statements depends on the availability of the data of the
company. The method in presenting the cash flow statements are direct method or indirect
method, but most of this method used by the business is direct method.

What I Can Do (Performance Task)

Title of the Activity: Prepare a Cash Flow Statement

Directions: Prepare a good form of a Cash Flow Statement according to the
standard of General Accepted Accounting Principle (GAAP) using DIRECT METHOD.
Compute for the total cash provided with the presentation of operating activities, investing and
financing activities

Balances of the Kirito X Company as of December 31, 2020

Payment to suppliers 15,000

Payment to long term creditors 25,000
Cash collection from customers 60,000
Cash payment for maintenance expense 5,000
Cash payment to acquire a building 500,000
Cash receipts from rent to clients 12,000
Cash payment to salaries of employees 18,000
Sale on account 90,000
Purchases on account 25,000
Depreciation of machinery 15,000
Additional cash from the owner 90,000
Cash payment for the amount borrowed -notes payable 6,000
Cash receipts from bank loan – 5 years due 100,000
Cash withdrawal of owner 10,000
Cash received for selling non-current asset 420,000
Net income 900,000
Capital, January 1 2,900,000
Cash, January 1 1,500,000

Kirito X Company
Cash Flow Statement
For the year ended, December 31, 2020
 REFERENCES

A. Books
Ma. Elenita B. Cabrera and Gilbert Anthony B. Cabrera . 2017. Fundamentals of
Accountancy, Business and Management 2 Volume 2 .CM Recto Avenue Manila
Philippines: GIC Enterprises and Co., INC
Maria Veronica Joy M. Binuya. 2016. Fundamentals of Accountancy, Business and
Management Book 2. Manila, Philippines: JFS Publishing Services

B. Government Publications

Josefina L. Beticon,et.al. 2016. Fundamentals of Accountancy, Business and Management

2. 1253 Gregorio Araneta Avenue, Quezon City, Philippines: Vidal Group, Inc.

C. Online and Other Sources

None