Statement of

Cash Flows
 Statement of Cash
Flows
Learning Objectives
• Describe the statement of cash
flows.
• Differentiate between the
following: (1) Operating
activities, (2) Investing activities,
and (3) Financing activities.
• State the classifications of the
following in a statement of cash
flows: (a) dividends received, (b)
dividends paid, (c) interest paid
and (d) interest received.
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan)
2
 Cash Flow Definitions
• Cash Flow: Inflows and outflows of
cash and cash equivalents (learn more
in CFI’s Ultimate Cash Flow Guide)

• Cash Balance: Cash on hand and

demand deposits (cash balance on the
balance sheet)

• Cash Equivalents: Cash equivalents

include cash held as bank deposits,
short-term investments, and any very
easily cash-convertible assets –
includes overdrafts and cash
equivalents with short-term maturities
(less than three months).
 Cash Flow Definitions
• Bankrupt -a person judged by
a court to be insolvent, whose
property is taken and
disposed of for the benefit of
creditors.
• insolvent debtor - a person
unable to satisfy any just
claims made upon him or her.
• break even - a point in a
business venture when the
profits are equal to the costs.
A point of balance making
neither a profit nor a loss.
 What Is a Cash Flow
Statement?
• summarizes the amount of
cash and cash equivalents
entering and leaving a
company.
• measures how well a
company manages its cash
position, meaning how well
the company generates cash
to pay its debt obligations
and fund its operating
expenses.
https://www.investopedia.com/investing/what-is-a-cash-flow-statement
 CASH is not same as
NET INCOME
It's important to note that the CFS
is distinct from the income
statement and balance sheet
because it does not include the
amount of future incoming and
outgoing cash that has been
recorded on credit. Therefore,
cash is not the same as net
income, which on the income
statement and balance sheet,
includes cash sales and sales
made on credit.
https://www.investopedia.com/investing/what-is-a-cash-flow-statement/
 Statement of Cash
Flows
• The statement of cash flows
provides information about the
sources and utilization (i.e., historical
changes) of cash and cash
equivalents during the period. The
statement of cash flows presents
cash flows according to the following
classifications:
1. Operating activities
2. Investing activities
3. Financing activities
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 7
 Statement of Cash Flow

Image from CFI’s Financial Analysis Fundamentals Course.

 Activities
1. Operating activities include
transactions that enter into the
determination of profit or loss.
These transactions normally affect
income statement accounts.

2. Investing activities include

transactions that affect long-term
assets and other non-operating
assets.

3. Financing activities include

transactions that affect equity and
non-operating liabilities.
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 9
 Examples of cash flows from
Operating Activities
a. cash receipts from the sale of
goods, rendering of services, or
other forms of income
b. cash payments for purchases of
goods and services
c. cash payments for operating
expenses, such as employee
benefits, insurance, and the like,
and payments or refunds of income
taxes
d. cash receipts and payments from
contracts held for dealing or trading
purposes
10
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan)
 Examples of cash flows
from Investing Activities
a. cash receipts and cash payments
in the acquisition and disposal of
property, plant and equipment,
investment property, intangible
assets and other noncurrent
assets
b. cash receipts and cash payments
in the acquisition and sale of
equity or debt instruments of
other entities (other than those
that are classified as cash
equivalents or held for trading)
11
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan)
 Cash Flow from
Investing Activities
• includes the acquisition and
disposal of non-current assets and
other investments not included in
cash equivalents. Investing cash
flows typically include the cash
flows associated with buying or
selling property, plant, and
equipment (PP&E), other non-
current assets, and other financial
assets.
• Cash spent on purchasing PP&E is
called capital expenditures
(or CapEx for short)
https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-
of-cash-flows/
 Examples of cash flows
from Financing Activities
a. cash receipts from issuing shares
or other equity instruments and
cash payments to redeem them
b. cash receipts from issuing notes,
loans, bonds and mortgage
payable and other short-term or
long-term borrowings, and their
repayments
c. cash payments by a lessee for the
reduction of the outstanding
liability relating to a lease.
Conceptual Framework & Acctg. Standards
(by: Zeus Vernon B. Millan) 13
 Cash Flow from
Financing Activities
• are activities that result in
changes in the size and
composition of the equity
capital or borrowings of the
entity. Financing cash flows
typically include cash flows
associated with borrowing and
repaying bank loans, and
issuing and buying back shares.
The payment of a dividend is
also treated as a financing cash
flow.
https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-
of-cash-flows/
 Operating Activities
In the case of a trading portfolio or
an investment company, receipts
from the sale of loans, debt, or
equity instruments are also
included. When preparing a cash
flow statement under the indirect
method, depreciation, amortization,
deferred tax, gains or losses
associated with a noncurrent asset,
and dividends or revenue received
from certain investing activities are
also included. However, purchases
or sales of long-term assets are not
included in operating activities.
https://www.investopedia.com/investing/what-is-a-cash-flow-statement/
 Examples of cash flows
from Investing Activities
d. cash receipts and cash
payments on derivative assets
and liabilities (other than
those that are held for trading
or classified as financing
activities)
e. loans to other parties and
collections thereof (other
than loans made by a financial
institution)
REMEMBER THE FOLLOWING:

1.Operating - affect profit or

loss
2.Investing – affect non-
current assets and other
investments
3.Financing – affect
barrowings and equity

Conceptual Framework & Acctg. Standards

(by: Zeus Vernon B. Millan)
17
 Core principle
When preparing Statement
of Cash Flows:
1.Include ONLY transactions
that have affected CASH &
CASH EQUIVALENT
2.EXCLUDE transactions that
have NOT AFFECTED CASH
& CASH EQUIVALENT
Conceptual Framework & Acctg. Standards
(by: Zeus Vernon B. Millan)

18
 Interests and Dividends
Cash flows Option 1 Option 2
from/for
1. Interest Operating Investing
income Activity Activity
received
2. Interest Operating Financing
Expense Paid Activity Activity
3. Dividend Operating Investing
income Activity Activity
Received
4. Dividend Financing Operating
paid to owners Activity Activity
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 19
 Reporting cash flows
from operating activities
1. Direct method - shows
each major class of gross
cash receipts and gross
cash payments.

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.
Conceptual Framework & Acctg. Standards
(by: Zeus Vernon B. Millan) 20
 Direct Cash Flow Method

adds up all the various types

of cash payments and
receipts
• cash paid to suppliers
• cash receipts from
customers
• cash paid out in salaries
https://www.investopedia.com/terms/i/indirect_method.asp
 Sample Direct Method

https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-of-cash-flows/
 Indirect Method
• The indirect method uses
increases and decreases in
balance sheet line items
to modify the operating
section of the cash flow
statement from the
accrual method to cash
method of accounting.
https://www.investopedia.com/terms/i/indirect_method.asp
 Indirect Method
• simpler than the direct
method to prepare because
most companies keep their
records on an accrual basis.
• 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.
https://www.investopedia.com/terms/i/indirect_method.asp
 Indirect Method
Profit P
Depreciation D
Amortization A
Impairment expense I
Change in working capital ΔWC
Change in provisions ΔP
Interest Tax (I)
Tax (T)
Operating cash flow OCF
https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-of-cash-flows/
 Indirect Method
• Depreciation expense
reduces profit but does
not impact cash flow (it is
a non-cash expense).
Hence, it is added back.
 Indirect Method

https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-of-cash-flows/
 Thank you
• Please answer the
Statement of Cash Flow
Reviewer.