FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

2nd Grading
Session 1: Statement of Cash Flows (SCF) - Categories of activities : operating, investing, financing; Preparation of the
Statement of Cash Flows

OBJECTIVES
At the end of the session, the students should be able to
1. explain the nature and uses of the Statement of Cash Flows ,
2. enumerate and describe the three major types of business activities presented in the Statement of Cash Flows,
3. give examples of business transactions classified as a) operating b) investing c) financing,
4. prepare a Statement of Cash Flows,
5. determine the cash flows from operating activities using indirect method, and
6. compute the cash flows from operating activities using direct method.

Although the financial statements are introduced as if they were independent of one another, they are interrelated and
tie together. In accounting language, they “articulate”. Articulation refers to the relationship between an operating
statement (the statement of comprehensive income or the statement of cash flows) and comparative balance sheets,
whereby an item on the operating statement helps explain the change in an item on the balance sheet from one period
to the next.

Refresher:
On January 1, 2018, the balance of Capital account is P430,000. Additional contributions made by the owner
during the year is P100,000. The Statement of Comprehensive Income for the year ended December 31, 2018
is P748,250. The owner made personal drawings of P200,000. 1) What is the capital balance, end to be shown
in the Statement of Changes in Equity for the year ended December 31, 2018 2) If the total liabilities presented
in the Statement of Financial Position as of December 31, 2018 as of P461,600, what is the amount of Total
Assets?

The Statement of Cash Flows is a financial statement that provides information about the causes of a change in a
company’s cash balance from the beginning to the end of specific period. In addition to providing information about a
company’s cash receipts and cash payments during a specific period, the Statement of Cash Flows help investors, creditors,
and other external parties to
a. Assess a company’s ability to generate positive future net cash flows.
b. Assess a company’s need for external financing and its ability to pay its debts and pay dividends.
c. Reconcile the differences between net income and change in cash.

Basic Organization of the Statement of Cash Flows

The Statement of Cash Flows discloses exactly what caused the cash balance to change from the beginning of the period
to the end of the period. This statement is organized around the three major types of business activities, namely:
1. Operating
2. Investing
3. Financing
The total effect of these three categories of activities results in either a net increase or decrease in cash.

Cash In (Out) Flows from Operating Activities

Operating Activities result in cash inflows and outflows generated from the normal courses or day to day business
transactions of the company.
Examples of the business transactions that either generate or use cash that will be reported in this section are:
a. Cash received (inflow) from the sale of goods or services (income),
b. Cash received (inflow) from the rental of company property to other parties (income), and
c. Cash paid (outflow) to suppliers of merchandise, to government for taxes and to other parties for the expenses of
operating the company (current assets, current liabilities, expenses).
Cash In (Out) Flows from Investing Activities
Investing activities are those centered in support of the operations. This support may take the form either of purchase of
assets (i.e., vehicles, furniture, equipment) that a business needs in its operations or investments outside the company to
wisely use any excess funds. Examples of transactions that will be reflected in this section are as follows.
a. Cash paid (outflow) for purchase of property, plant and equipment (non-current assets),
b. Cash paid (outflow) for purchase of equity investments in other companies (non-current assets), and
c. Cash received (inflow) from sale of delivery equipment (non-current assets).

Cash In (Out) Flow from Financing Activities

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

Operating activities are those activities that are part of the day-to-day business of a company. Major operating cash
inflow results from selling goods or providing services, while major operating cash outflows include payments to
purchase inventory and to pay wages, taxes, interest, utilities, rent and similar expenses.

Investing activities are those activities associated with buying and selling long-term assets – primarily the purchase and
sale of land, buildings and equipment.

Financing activities are those activities whereby cash is obtained from or repaid to owners and creditors. For example,
cash received from owners’ investments, cash proceeds from a loan, or cash payments to repay loans would all be
financing activities.

1. Prepare a statement of cash flows using the indirect method. The preparation of a statement of cash
flows involves three major steps: (1) Determine net cash provided/used by operating activities by
converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and
liability accounts and record as investing and financing activities, or disclose as noncash transactions. (3)
Compare the net change in cash on the statement of cash flows with the change in the cash account
reported on the balance sheet to make sure the amounts agree.

2. Analyze the statement of cash flows. Free cash flow indicates the amount of cash a company generated
during the current year that is available for the payment of additional dividends or for expansion.

3. Prepare a statement of cash flows using the direct method. The preparation of the statement of cash
flows involves three major steps: (1) Determine net cash provided/used by operating activities by
converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and
liability accounts and record as investing and financing activities, or disclose as noncash transactions. (3)
Compare the net change in cash on the statement of cash flows with the change in the cash account
reported on the balance sheet to make sure the amounts agree. The direct method reports cash receipts
less cash payments to arrive at net cash provided by operating activities.
Illustrative Statement of Cash Flows
Vortex Company
Statement of Cash Flows
For the year ended December 31, 2018

Cash Flows from Operating Activities (Direct Method)

Cash Inflows:
From customers as a result of the sale of goods or services Pxx
From interest earned on loans to others xx
From dividends received from investment in the stock of other companies xx Pxx
Cash outflows:
To suppliers for the purchase of merchandise Pxx
To employees for salaries and wages xx
To government for taxes xx
To creditors for interest on loans xx
To others for operating expenses xx xx
Net cash provided (used) by operating activities Pxx

Cash Flows from Investing activities

Cash Inflows:
From the sale of property plant and equipment Pxx
From the sale of investments in debt or equity securities of other companies xx Pxx
Cash Outflows:
To purchase of property, plant and equipment Pxx
To purchase debt or equity securities of other companies xx xx
Net cash provided (used) by Investing Activities Pxx

Cash Flows from Financing Activities

Cash Inflows:
From additional investment from Rose Pxx
From bank loans xx Pxx
Cash Outflows:
To pay withdrawals by Rose Pxx
To repay loans xx xx
Net cash provided (used) by financing activities xx
Net Increase (Decrease) in Cash in 2018 Pxx
Cash Balance, January 1, 2018 xx
Cash Balance, December 31, 2018 Pxx

Exercises
Exercise 1. Selected transactions for the Andlauer Company are listed below.
1. Collected accounts receivable.
2. Declared and paid dividends on common stock.
3. Sold long-term investments for cash.
4. Issued stock for equipment.
5. Repaid five year note payable.
6. Paid employee wages.
7. Converted bonds payable to common stock.
8. Acquired long-term investment with cash.
9. Sold buildings and equipment for cash.
10. Sold merchandise to customers.
Instructions: Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity,
or (d) a noncash investing and financing activity.
Exercise 2. Classify each of the following as a(n):
A. Operating Activity
B. Investing Activity
C. Financing Activity

_____ 1 Issuance of bonds.

_____ 2. Sale of equipment.
_____ 3. Amortization expense.
_____ 4. Purchase of treasury stock.
_____ 5. Receipt of dividends on investment.
_____ 6. Purchase of land.

Exercise 3. Selected transactions of Aranha Company are listed below.

1. Common stock is sold for cash above par value.
2. Bonds payable are issued for cash at a discount.
3. Interest receivable on a short-term note receivable is collected.
4. Land is sold for cash at book value.
5. Accounts payable are paid in cash.
6. Equipment is purchased by signing a 3-year, 10% note payable.
7. Cash dividends on common stock are declared and paid.
8. 100 shares of XYZ common stock are purchased for cash.
9. Merchandise is sold to customers for cash.
10. Bonds payable are converted into common stock.

Instructions
Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash
investing and financing activity.

Exercise 4. Assuming a statement of cash flows is prepared, indicate the reporting of the transactions and events listed
below by major categories on the statement. Use the following code letters to indicate the appropriate category under
which the item would appear on the statement of cash flows.
Code
Cash Flows From Operating Activities
Add to Net Income A
Deduct from Net Income D
Cash Flows From Investing Activities IA
Cash Flows From Financing Activities FA
Category
1. Common stock is issued for cash at an amount above par value. _____
2. Merchandise inventory increased during the period. _____
3. Depreciation expense recorded for the period. _____
4. Building was purchased for cash. _____
5. Bonds payable were acquired and retired at their carrying value. _____
6. Accounts payable decreased during the period. _____
7. Prepaid expenses decreased during the period. _____
8. Treasury stock was acquired for cash. _____
9. Land is sold for cash at an amount equal to book value. _____
10. amortization expense recorded for a period. _____
Exercise 5. Indicate whether each of the following items would be classified as (1) an operating activity, an investing
activity, or a financing activity or (2) as a noncash transaction or noncash item. Use (+) if the item represents a cash
inflow and (-) if the item represents cash outflow.

(a) Cash collected from customers.

(b) Cash paid to supplies for inventory.
(c) Cash received for interest on a nontrade note receivable.
(d) Cash received from additional investment of the owner.
(e) Cash paid withdrawals of the owner.
(f) Cash received from bank on loan.
(g) Cash paid for interest on loan.
(h) Cash paid to retire long-term loan.
(i) Cash paid for property taxes.
(j) Cash received for dividend revenue.
(k) Cash paid for wages.
(l) Cash paid for insurance.
(m) Depreciation expense for the year.
(n) Cash paid for purchase machinery.
(o) Cash received from the sale of land.

(1) Cash flows Transactions (2) Noncash Transaction/

Items Item
Operating Financing Investing
(a) Cash collected from customers.
(b) Cash paid to supplies for
inventory.
(c) Cash received for interest on a
nontrade note receivable.
(d) Cash received from additional
investment of the owner.
(e) Cash paid withdrawals of the
owner.
(f) Cash received from bank on
loan.
(g) Cash paid for interest on loan.
(h) Cash paid to retire long-term
loan.
(i) Cash paid for property taxes.
(j) Cash received for dividend
revenue.
(k) Cash paid for wages.
(l) Cash paid for insurance.
(m) Depreciation expense for the
year.
(n) Cash paid for purchase
machinery.
(o) Cash received from the sale of
land.
Exercise 6. Assume the indirect method is used to compute cash flows from operations. For each item listed below,
indicate the effect on net income in arriving at cash flows from operations by choosing one of the following code letters.
Code
Cash Flows From Operating Activities
Add to Net Income A
Deduct from Net Income D

1. Increase in accounts receivable

2. Increase in inventory
3. Decrease in prepaid expenses
4. Decrease in accounts payable
5. Increase in accrued liabilities
6. Increase in income taxes payable
7. Depreciation expense
8. Loss on sale of investment
9. Gain on disposal of equipment
10. Amortization expense

Exercise 7. Acquaviva Company had net income of P193,000 in 2017. Depreciation expense for the year is P48,000. During
the year, Accounts Receivable increased P9,000 and Prepaid Expenses decreased P1,000. The company also sold
equipment at a loss of P3,000.

Instructions
Calculate net cash flows from operating activities using the indirect method.

Exercise 8. Anchieta Company reported net income of P180,000 for the current year. Depreciation recorded on buildings
and equipment amounted to P80,000 for the year. Balances of the current asset and current liability accounts at the
beginning and end of the year are as follows:
End of Year Beginning of Year
Cash P20,000 P15,000
Accounts receivable 24,000 32,000
Inventories 50,000 65,000
Prepaid expenses 9,500 5,000
Accounts payable 12,000 18,000
Income taxes payable 1,600 1,200

Instructions
Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method.

Exercise 9. Presented below are the totals from the main three sections of Santiago Company’s most recent statement
of cash flows:

Net Cash Used by Operating Activities…………………… P (835,000)

Net Cash Used by Investing Activities …………………… P (1,280,000)
Net Cash Provided by Financing Activities ……………… P 2,153,000

What is the net increase (decrease) in Cash?

Exercise 10. Presented below are the totals from the main three sections of Bismonte Company’s most recent statement
of cash flows:

Net Cash Used by Operating Activities…………………… P (1,409,000)

Net Cash Used by Investing Activities …………………… P 1,980,000
Net Cash Provided by Financing Activities ……………… P (303,000)

What is the net increase (decrease) in Cash?

Exercise 11. The current sections of Arrowsmith Inc.'s balance sheets at December 31, 2017 and 2018, are presented
here. Arrowsmith's net income for 2018 was P200,000. Depreciation expense was P24,000.
2018 2017
Current assets
Cash P115,000 P 99,000
Accounts receivable 105,000 89,000
Inventory 153,000 172,000
Prepaid expense 27,000 22,000
Total current assets P400,000 P382,000
Current liabilities
Accrued expenses payable P 15,000 P 5,000
Accounts payable 85,000 92,000
Total current liabilities P100,000 P 97,000

Instructions
Prepare the net cash provided by operating activities section of the company's statement of cash flows for the year
ended December 31, 2018, using the indirect method.

Exercise 12. For each of the following items, indicate by using the appropriate code letter, how the item should be
reported in the statement of cash flows, using the indirect method.

A. Added to net income

B. Deducted from net income
C. Cash outflow—investing activity
D. Cash inflow—investing activity
E. Cash outflow—financing activity
F. Cash inflow—financing activity
G. Significant noncash investing and financing activity

____ 1. Decrease in accounts payable during a period

____ 2. Declaration and payment of a cash dividend.
____ 3. Loss on sale of land.
____ 4. Decrease in accounts receivable during a period.
____ 5. Redemption of bonds for cash.
____ 6. Proceeds from sale of equipment at book value.
____ 7. Issuance of common stock for cash.
____ 8. Purchase of a building for cash.
____ 9. Acquisition of land in exchange for common stock.
____ 10. Increase in merchandise inventory during a period.
Exercise 13. For each of the following items, indicate by using the appropriate code letter, how the item should be
reported in the statement of cash flows, using the direct method.

A. Added in determining cash receipts from customers

B. Deducted in determining cash receipts from customers
C. Added in determining cash payments to suppliers
D. Deducted in determining cash payments to suppliers
E. Cash outflow—investing activity
F. Cash inflow—investing activity
G. Cash outflow—financing activity
H. Cash inflow—financing activity
I. Significant noncash investing and financing activity
J. Is not shown

____ 1. Decrease in accounts payable during a period.

____ 2. Declaration and payment of a cash dividend.
____ 3. Decrease in accounts receivable during a period.
____ 4. Depreciation expense.
____ 5. Conversion of bonds payable into common stock.
____ 6. Decrease in merchandise inventory during a period.
____ 7. Sale of equipment for cash at book value.
____ 8. Issuance of preferred stock for cash
____ 9. Purchase of land for cash.
____ 10. Loss on sale of a plant asset.

Exercise 14. Baldinucci Company prepared the tabulation below at December 31, 2018.
Net Income............................................................................................................................ P340,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense, P43,000 .................................................................................. _______
Increase in accounts receivable, P50,000 ................................................................... _______
Decrease in inventory, P13,000 .................................................................................. _______
Amortization of patent, P4,000 ................................................................................... _______
Increase in accounts payable, P5,600 ......................................................................... _______
Decrease in interest receivable, P7,000 ...................................................................... _______
Increase in prepaid expenses, P6,000 ......................................................................... _______
Decrease in income taxes payable, P1,500 ................................................................. _______
Gain on sale of land, P5,000 ........................................................................................ _______
Net cash provided (used) by operating activities........................................................ _______

Instruction: Show how each item should be reported in the statement of cash flows. Use parentheses for deductions.

References :
Cabrera, M. B. (2016). Fundamentals of Accountancy, Business & Management (Vol. 2). Manila: GIC Enterprises & Co.,
Inc.
Stice, E., Stice, J., Albrecht, S., & Swain, M. (2017). Principles of Financial Accounting IFRS Edition (Second Edition ed.).
Taiwan, Taiwan: SouthWestern, Cengage Learning Asia.
Weygandt, J. K. (2012). Managerial Accounting (Sixth Edition ed.). New Jersey: John Wiley & Sons, Inc.