LESSON 3-1

CLASSIFICATION OF CASH FLOWS ACCORDING TO ACTIVITIES

Lesson Objectives
• know the different components that comprise the statement of cash flows
• prepare the statement of cash flows

The Statement of Cash Flows summarizes the cash receipts and cash disbursement for the accounting
period. It summarizes the cash activities of the business by classifying cash inflows (receipts) and cash
outflows (payments) into operating, investing, and financing activities. It shows the net increase or
decrease of cash in a given period and the cash balance at the end of the period. This allows management
to assess the ability of the business to generate cash and project future cash flows.

COMPONENTS OF THE STATEMENT OF CASH FLOWS CLASSIFIED ACCORDING TO

ACTIVITIES

Operating activities - the cash inflows (receipts) and the cash outflow (payments) arising from the
normal operations of the business

Receipts of Cash
• collections from customers for the performance of services or sale of goods
• royalties, fees, commissions received
• interest, dividends, and other income received

Payments of Cash
 to suppliers for services and goods acquired
 employees' salaries
 government licenses and taxes
 interest expense
 other operating expenses

Investing Activities - the cash inflows (receipts) and the cash outflows (payments) from the purchase and
sale of property and equipment, investment in debt or trading securities, lending! money and collection of
the principal amount of the money loaned.

Financing Activities - the cash inflows (receipts) and the cash outflows (payments) from the owners and
creditors of the business

Receipts of Cash
• original and additional investments by owner
• proceeds of loan

Payments of Cash
• cash withdrawal of owner
• payment for the principal balance of loan

ILLUSTRATION
Ren Ren Merchandising started business last October. The following are its transaction Classify each
transaction as an operating, investing or financing activity,

Transaction Activity

a. Additional investment in the business, P 22,200 Financing

b. Proceeds of sale of equipment, P15,000 Investing
C. Collection of interest, P9,000 Operating
d. Collection from customers, P315,800 Operating
e. Proceeds of bank loan, P 200,000 Financing
f. Proceeds from sale of furniture, P8,000 Investing
g. Payment of operating expenses, P 145,000 Operating
h. Collection of dividends, P 12,000 Operating
i. Cash withdrawal of owner, P30,000 Financing
j. Payment of interest, P6,000 Operating
k Collection of rent, P 30,000 Operating
1. Purchase of furniture, P 31,000 Investing
m. Payment of bank loan, P150,000 Financing

Based on the classification of activities above, the following is the statement of cash flow for Ren Ren
Merchandising for the year ended December 31, 2016.

Ren Ren Merchandising

Statement of Cash Flows
For Year Ended December 31, 2016

Cash Flows from Operating Activities

Receipts
Collections from customers P315,800
Rent income 30,000
Dividends income 12,000
Interest income 9,000
Payments
Operating expenses (145,000)
Interest expense (6,000)
Net Cash from Operating Activities P215,800

Cash Flows from Investing Activities

Receipts
Proceeds from sale of equipment P15,000
Proceeds from sale furniture 8,000
Payments
For purchase of furniture (31,000) (8,000)
Net Cash from Investing Activities
Cash Flows from Financing Activities
 Receipts
Additional investment of owner P22,200
Proceeds of bank loan 200,000
Payments
Cash withdrawal of owner (30,000)
Payment of bank loan (150,000)
Net Cash from FinancingActivities 42,200
Net Increase/Decrease in Cash P250,000
Cash balance - January 1 200,000
Cash balance - December 31 P450,000

The beginning balance of cash is added to the net increase or decrease in cash resulting from the
operating investing and financing activities in order to get the ending cash balance which is the same as
the amount of the cash account presented in the statement of financial position. Notice that the P 450,000
cash balance as of December 31 is the balance of the cash account in the statement of financial position,