FINANCIAL STATEMENTS - STATEMENT OF CASH FLOWS

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

HANDOUT #3

DEFINITION
A statement of cash flows is a component of financial statements summarizing the opera?ng, inves?ng,
and financing ac?vi?es of an enIty. In simple language, the statement of cash flows provides informaIon about
the cash receipts and cash payments of an enIty during a period.

Cash flow informaIon is useful in assessing the ability of the en?ty to generate cash and cash
equivalents. The statement of cash flows also enhances the comparability of opera?ng performances by
different en??es.

CLASSIFICATION OF CASH FLOWS

A. OperaIng acIviIes
Ø The cash flows derived primarily from the principal revenue producing ac?vi?es of the en?ty. In
order words, operaIng acIviIes generally result from transacIons and other events that enter into
the determina?on of net income or loss.
Ø Examples of cash flows from operaIng acIviIes:
1. Cash receipts from sale of goods and rendering of services
2. Cash receipts from royalIes, rental, fees, commissions, and other revenue
3. Cash payments to suppliers for goods and services
4. Cash payments for selling, administraIve and other expenses
5. Cash receipts and cash payments of an insurance enterprise for premiums and claims,
annuiIes and other policy benefits
6. Cash payments or refunds of income taxes unless they can be specifically idenIfied with
financing and invesIng acIviIes
7. Cash receipts and payments for securiIes held for dealing or trading purposes
B. InvesIng acIviIes
Ø The cash flows derived from the acquisi?on and disposal of long-term assets and other investments
not included in cash equivalent. As a simple guide, invesIng acIviIes include cash flows from
transac?ons involving nonopera?ng assets.
Ø Examples of cash flows from invesIng acIviIes:
1. Cash receipts and payments from sales of property, plant, and equipment, intangible and
other long-term assets
2. Cash receipts and payments to acquire equity or debt instruments of other enIIes and
interests in joint ventures (current and long-term investments)
3. Cash advances and loans to other parIes (other than advances and loans made by financial
insItuIon)
4. Cash receipts from repayment of advances and loans made to other parIes
5. Cash receipts and payments for future contract, forward contract, opIon contract and swap
contract
C. Financing acIviIes
Ø The cash flows derived from the equity capital and borrowings of the enIty. In other words, financing
acIviIes are the cash flows that result from transacIons:
o Between the enIty and the owners – equity financing
o Between the enIty and the creditors – debt financing
Ø As a simple guide, financing acIviIes include the cash flows from transacIons involving nontrade
liabili?es and equity of an enIty.
 Ø Examples of cash flows from financing acIviIes:
1. Cash receipts from issuing shares or other equity instruments
2. Cash payments to owners to acquire or redeem the enterprise’s shares
3. Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other short or
long-term borrowings
4. Cash payments for amounts borrowed
5. Cash payments by a lessee for the reducIon of the outstanding liability relaIng to a finance
lease
Ø Note that cash payments to seble such obligaIons as trade accounts and notes payable, income tax
payable, accrued expenses and similar items are operaIng acIviIes, not financing acIviIes.

NONCASH TRANSACTIONS
PAS 7, par. 43, provide that invesIng and financing transacIons that do not require use of cash or cash
equivalents shall be excluded from the statement of cash flows.

INTEREST AND DIVIDENDS

Interest paid* OperaIng cash flow Financing cash flow
Interest received* OperaIng cash flow InvesIng cash flow
Dividend received OperaIng cash flow InvesIng cash flow
Dividend paid OperaIng cash flow Financing cash flow

*For a financial ins-tu-on, interest paid and interest received are usually classified as opera-ng cash flows.

Source:
Valix, C., Peralta, J., & Valix, C.A., (2016). Financial AccounIng Volume 3.

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