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Hand Outs - Statement of Cash Flows

The statement of cash flows provides information on a company's cash inflows and outflows during a period. It is comprised of operating, investing, and financing activities. Operating activities relate to income and expenses, investing activities relate to purchases and sales of long-term assets, and financing activities relate to transactions with owners and lenders. The statement can present cash flows from operating activities using either the direct method, showing cash receipts and payments, or the indirect method, which adjusts net income for non-cash items and changes in current assets and liabilities.

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Francez Anne Guanzon
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85 views2 pages

Hand Outs - Statement of Cash Flows

The statement of cash flows provides information on a company's cash inflows and outflows during a period. It is comprised of operating, investing, and financing activities. Operating activities relate to income and expenses, investing activities relate to purchases and sales of long-term assets, and financing activities relate to transactions with owners and lenders. The statement can present cash flows from operating activities using either the direct method, showing cash receipts and payments, or the indirect method, which adjusts net income for non-cash items and changes in current assets and liabilities.

Uploaded by

Francez Anne Guanzon
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 4 STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS- provides information on the sources and utilization of cash during the
period. Simply stated, provides information on cash inflows and cash outflows during the period.

PRESENTATION OF CASH FLOWS


Comprised of three activities:
1. Operating Activities
2. Investing Activities
3. Financing Activities

OPERATING ACTIVITIES
- primarily result from transactions that affect income and expenses
EXAMPLES:
1. Cash receipts from sale of goods and rendering of services
2. Cash receipts from interest income
3. Cash payments for purchase of inventory
4. Cash payments for expenses

INVESTING ACTIVITIES
- primarily result from the acquisition and disposal of long term assets and other investments,
like property, plant, and equipment
EXAMPLES:
1. Cash payments for the acquisition of property, plant, and equipment
2. Cash receipts from sale of Property, Plant, and Equipment

FINANCING ACTIVITIES
- primarily result from transactions with the owner and from borrowings
EXAMPLES:
1. Cash receipts from investments made by the owner
2. Cash payments made to withdrawals of owner
3. Cash receipts on loans
4. Cash payments on repayments of loan

REMEMBER THE FOLLOWING:


TYPE OF ACTIVITY NATURE OF TRANSACTION
1. Operating Activities - Affect income and expense
2. Investing Activities - Acquisition and disposal of PPE
3. Financing Activities - Investments and drawings by owner and loan
transactions.

NOTE: Only transactions affecting cash is included in the statement of cash flows. Thus, those that
do not affect cash are excluded from the statement of cash flows.

CASH FLOWS FROM OPERATING ACTIVITIES MAY BE PRESENTED USING:


1. DIRECT METHOD- Shows each major class of gross cash receipts and gross cash payments
EXAMPLE:
Cash receipts from sale of goods PXX
Cash paid for purchase of inventory (XX)
Cash paid for salaries expense (XX)
Cash paid for utilities expense (XX)
Cash paid for interest expense (XX)
Net cash from operating activities PXXX

2. INDIRECT METHOD- Adjusts accrual basis profit or loss for the effects of changes in operating
assets and liabilities and effects of non- cash items
EXAMPLE:
Profit PXX
Non-cash Expense XX
Non-cash Income (XX)
Increase in Current Assets (XX)
Decrease in Current Asset XX
Increase in Current Liability XX
Decrease in Current Liability (XX)
Net cash from operating activities PXXX
Profit PXX
Non-cash Expense XX
Non-cash Income (XX)
Increase in Current Assets (INVERSE) (XX)
Increase in Current Liability (DIRECT) XX
Net cash from operating activities PXXX

*If current assets, inverse relationship


*If current liabilities, direct relationship

GUIDELINES FOR INDIRECT METHOD:


1. NON CASH EXPENSES:
- Depreciation expense is added to accrual basis profit because depreciation decreases
accrual basis profit but does not affect cash.
- Losses on sale of PPE are added to accrual basis profit because depreciation decreases
accrual basis profit but pertain to investing activity.
2. GAIN ON SALE OF PPE
- Gains on sale of PPE are deducted from accrual basis profit because gains on sale of PPE
increase accrual basis profit but they pertain to investing activity.
3. Increases in current assets, except cash (ex. Trade accounts receivable and notes
receivable, inventory and prepaid assets) are deducted from accrual basis profit.
4. Decreases in current assets, except cash (ex. Trade accounts receivable and notes
receivable, inventory and prepaid assets) are added to accrual basis profit.
5. Increases in current liabilities (ex. Trade accounts payable and notes payable, accrued
liability, and unearned income) are added to accrual basis profit.
6. Decreases in current liabilities (ex. Trade accounts payable and notes payable, accrued
liability, and unearned income) are deducted from accrual basis profit.

REPORTING CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES:


Cash outflows and inflows from investing activities and financing activities are reported on the basis
of major classes of gross cash receipts and gross cash payments (similar to the direct method of
presenting cash flows from operating activities).

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