Week 006

Statement of Cash Flows

Week 005: Statement of Cash Flows

LEARNING TARGETS
At the end of this module, you are expected to:

1. Cognitive: Understand the concept of cashflows

2. Affective: Interpret financial information of the cash flow
statement
3. Psychomotor: Prepare the cashflow using the direct and
indirect method
Week 005: Statement of Cash Flows

Statement of Cash Flows

A cash flow statement is a financial statement

that summarizes the amount of cash and cash
equivalents entering (inflow) and leaving
(outflow) a company.

https://cdn.iconscout.com/icon/free/png-256/cash-flow-2596436-2167421.png
Week 005: Statement of Cash Flows

Classification:
PAS 7 requires entities to classify and
report cash flows according to the
activity which gave rise to them.

There are three activity classes:

• Operating activities
• Investing activities
• Financing activities
Week 005: Statement of Cash Flows

Categories comprising the Statement of Cash Flows

1. Operating activities, which includes net income,
depreciation, changes in current assets and liabilities other than
cash, short-term investments, and short-term debt.

Operating activities refer to the primary revenue-generating

activities of an entity, such as cash received from the sale of goods
or services, royalties on the use of company-owned intellectual
property, commissions for sales on behalf of other entities, and
cash paid to suppliers
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Week 005: Statement of Cash Flows

Cash flow from: Operating Activities

• Salaries paid out to employees
• Cash paid to vendors and suppliers
• Cash collected from customers
• Interest income and dividends received
• Income tax paid and interest paid

*Based from IAS 7 interest payments can also be classified

under financing activities
Week 005: Statement of Cash Flows

Categories comprising the Statement of Cash Flows

Investing activities, which includes investments in or sales of fixed
assets and short-term financial investments.

Cash flows from investing activities is a line item in the statement of cash
flows, which is one of the documents comprising a company's financial
statements. This line item contains the sum total of the changes that a
company experienced during a designated reporting period in
investment gains or losses, as well as from any new investments in
or sales of fixed assets.

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Week 005: Statement of Cash Flows

Cash flow from: Investing Activities

• Purchase of fixed assets (negative cash flow)
• Sale of fixed assets (positive cash flow)
• Purchase of investment instruments, such as stocks and bonds (negative
cash flow)
• Sale of investment instruments, such as stocks and bonds (positive cash
flow)
• Lending of money (negative cash flow)
• Collection of loans (positive cash flow)
• Proceeds of insurance settlements related to damaged fixed assets (positive
cash flow)
Week 005: Statement of Cash Flows

Categories comprising the Statement of Cash Flows

Financing activities, which includes raising cash by issuing short-term
debt, long-term debt, or stock. Also, because dividend payments, stock
repurchases, and principal payments on debt reduce a company’s cash,
such transactions are included here.

Cash flows from financing activities is a line item in the statement of cash
flows. This statement is one of the documents comprising a company's
financial statements. The line item contains the sum total of the changes
that a company experienced during a designated reporting period that
were caused by transactions with owners or lenders to either: Provide
long-term funds to the company; or Return those funds to the owners or https://static.vecteezy.co
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flow-report-concept-
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Week 005: Statement of Cash Flows

Cash flow from: Financing Activities

• Sale of stock (positive cash flow)
• Repurchase of company stock (negative cash flow)
• Issuance of debt, such as bonds (positive cash flow)
• Repayment of debt (negative cash flow)
• Payment of dividends (negative cash flow)
• Donor contributions restricted to long-term use (positive cash
flow)
Week 005: Statement of Cash Flows

Categories comprising the Statement of Cash Flows

Financing activities, which includes raising cash by issuing short-term
debt, long-term debt, or stock. Also, because dividend payments, stock
repurchases, and principal payments on debt reduce a company’s cash,
such transactions are included here.

Cash flows from financing activities is a line item in the statement of cash
flows. This statement is one of the documents comprising a company's
financial statements. The line item contains the sum total of the changes
that a company experienced during a designated reporting period that
were caused by transactions with owners or lenders to either: Provide
long-term funds to the company; or Return those funds to the owners or https://static.vecteezy.co
m/system/resources/thu
lenders. mbnails/002/239/813/s
mall/accountant-ho lding-
a-calculator-checks-cash-
flow-report-concept-
illustration-vector.jpg
Week 005: Statement of Cash Flows

Categories comprising the Statement of Cash Flows

Financing activities, which includes raising cash by issuing short-term
debt, long-term debt, or stock. Also, because dividend payments, stock
repurchases, and principal payments on debt reduce a company’s cash,
such transactions are included here.

Cash flows from financing activities is a line item in the statement of cash
flows. This statement is one of the documents comprising a company's
financial statements. The line item contains the sum total of the changes
that a company experienced during a designated reporting period that
were caused by transactions with owners or lenders to either: Provide
long-term funds to the company; or Return those funds to the owners or https://static.vecteezy.co
m/system/resources/thu
lenders. mbnails/002/239/813/s
mall/accountant-ho lding-
a-calculator-checks-cash-
flow-report-concept-
illustration-vector.jpg
Week 005: Statement of Cash Flows

Direct Method
Methods of preparing the
statement of cash flows

Indirect Method
Week 005: Statement of Cash Flows

Direct Method
Also known as the "income statement method,"

The direct method cash flow statement tracks the flow of cash that
comes in and goes out of a company in a specific period.

This method also identifies changes in cash payments and receipts as a

result of a company's operating activities. It informs a company about
their financial status, allowing them to make informed decisions and
plan for the future.
Week 005: Statement of Cash Flows

Direct Method

Cash receipts from customers xx,xxx

The operating cash flows Cash paid to suppliers xx,xxx
section of the statement of Cash paid to employees xx,xxx
cash flows under the direct Cash paid for other operating
xx,xxx
method would appear expenses
something like this: Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating
xx,xxx
activities
Week 005: Statement of Cash Flows

Direct Method
Week 005: Statement of Cash Flows

Direct Method
The standard-setting bodies encourage the use of the direct method,
but it is rarely used, for the excellent reason that the information in it is
difficult to assemble;

Using the direct method may require that the chart of accounts be
restructured in order to collect different types of information. Instead,
they use the indirect method, which can be more easily derived from
existing accounting reports
Week 005: Statement of Cash Flows

Direct Method
The statement of cash flows direct method uses actual cash inflows and
outflows from the company's operations, instead of modifying the
operating section from accrual accounting to a cash basis.
Accrual accounting recognizes revenue when it is earned versus when
the payment is received from a customer.
Conversely, the cash flow direct method measures only the cash that's
been received, which is typically from customers and the cash
payments or outflows, such as to suppliers. The inflows and outflows
are netted to arrive at the cash flow.
Week 005: Statement of Cash Flows

INDIRECT METHOD
The indirect method for the preparation of the statement of cash flows
involves the adjustment of net income with changes in balance sheet
accounts to arrive at the amount of cash generated by operating
activities.

The indirect method presents the statement of cash flows beginning

with net income or loss, with subsequent additions to or deductions
from that amount for non-cash revenue and expense items, resulting in
cash flow from operating activities.
 Week 005: Statement of Cash Flows
Profit before interest and income
xx,xxx
INDIRECT METHOD taxes
Add back depreciation xx,xxx
Add back impairment of assets xx,xxx
The indirect method adjusts accrual
basis net profit or loss for the effects Increase in receivables xx,xxx
of non-cash transactions. The Decrease in inventories xx,xxx
operating cash flows section of the Increase in trade payables xx,xxx
statement of cash flows under the Interest expense xx,xxx
indirect method would appear
something like this: Less Interest accrued but not yet paid xx,xxx

Interest paid xx,xxx

Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
 Week 005: Statement of Cash Flows

INDIRECT METHOD

An example of Indirect Method of

a construction company

Cashflow Projection Report

 Week 005: Statement of Cash Flows

INDIRECT METHOD
Week 005: Statement of Cash Flows

INDIRECT METHOD
The indirect method of presentation is very popular, because the
information required for it is relatively easily assembled from the
accounts that a business normally maintains in its chart of accounts.
The indirect method however is less favored by the standard-setting
bodies, since it does not give a clear view of how cash flows through a
business
 Online Supplementary Reading Materials
1. Financial Accounting: An Introduction John Blake. Routledge Library Editions: Accounting Vol. 7. London,
England: Routledge, 2014. 224 pp
• https://link.gale.com/apps/doc/CX3607300001/GVRL?u=phama&sid=bookmark-
GVRL&xid=9017d74b
1. Small Business Sourcebook: The Entrepreneur's Resource Virgil L. Burton, III, ed. 37thed.
Farmington Hills, MI: Gale, 2020. 3571 pp. 6 vols.
https://go.gale.com/ps/i.do?p=GVRL&sw=w&u=phama&v=2.1&it=etoc&id=GALE%7C7NMU&sid=bookmar
k-GVRL
•
1. Accounting Queries Harold C. Edey. Routledge Library Editions: Accounting Vol. 27. London, England:
Routledge, 2014. 233 pp.
• https://go.gale.com/ps/i.do?p=GVRL&sw=w&u=phama&v=2.1&it=etoc&id=GALE%7C8PRZ&sid=
bookmark-GVRL
• Online Instructional Videos
• https://www.youtube.com/watch?v=1y-4x8I_s5k
• https://www.youtube.com/watch?v=AXZmlI7XUj0
• https://www.youtube.com/watch?v=wOFRMkiL2Eo
References

• Millan, Z. V. (2022). Intemediate Accounting 3. Bandolin Publishing House.

• Nenita Robles, & Empleo, P. (2019). The Intermediate Accounting Volume 1.
Millennium Books, Inc.
• Valix, C., Peralta, J., & Valix, C. (2020). Intermediate Accounting Volume 3. GIC
Enterprises & Co., Inc.