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STATEMENT OF CASH FLOWS

I.

II.

III.

Define statement of cash flows.


-a statement of cash flows is a component of financial statements summarizing
the operating, investing and financing activities of the entity. Its purpose is to
provide all information about the cash receipts and cash payments of an entity
during the period.
Classification of cash flows
Cash flows are inflows and outflows of cash and cash equivalents. (define cash
and cash equivalents and give example) The statement of cash flows during the
period classified as
Operating (current assets and current liabilities)
Investing (non-current assets)
Financing (non-current liabilities and Shareholders Equity)
Computation of net cash provided by operating activity
Direct method shows in detail or itemizes the cash receipts and cash
payments are disclosed. The direct method is the cash basis income
statement.
Computation of collections
Accounts receivable, beginning
Add: sales (accrual Basis)
Less: accounts receivable, ending
Collection of receivable (inflows)
Computation of payments to merchandise creditors
Accounts Payable, beginning
Add: purchases (accrual basis)
Less: accounts payable, ending
Payment to merchandise (outflows)
Computation of payments for expenses
Expenses (accrual)
Add: Prepaid expense, ending
Accrued expenses, beginning
Less: prepaid expenses, beginning
Accrued expense, ending
Expenses paid
Computation of collection of other income
Income other than sales
Add: Deferred income, ending
Accrued income, beginning

Less:

IV.

Deferred income, beginning


Accrued income, ending
Collection of other income

Indirect method presenting the cash flow operations begins with the
accrual basis net income and applies a series of adjustments to convert the
income to a cash basis.
Current assets increase deduct
Current assets decrease add
Current liabilities increase add
Current liabilities decrease deduct
Add non-cash expenses (depreciation, amortization,etc)
Add/deduct non-operating item ( gain deduct, loss add)

Illustrative Problem
Simple Company provides the following comparative statement of financial position
and income statement for 2015.
Assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Property, plant and equipment
Accumulated depreciation
Patent
Total assets

2015

2014

3,000,000
940,000
175,000
15,000
2,000,000
(500,000)
40,000
5,620,000

2,000,000
350,000
100,000
20,000
2,000,000
(500,000)
50,000
4,020,000

170,000
25,000
10,000
350,000
10,000
500,000
2,000,000
2,555,000
5,620,000

150,000
10,000
15,000
250,000
40,000
500,000
2,000,000
1,055,000
4,020,000

Liabilities and Equity


Accounts payable
Accrued salaries payable
Accrued interest payable
Income tax payable
Unearned rent income
Mortgage payable
Share capital
Retained earnings
Total liabilities and equity

Income Statement
Year ended December 31, 2015
Sales
Cost of sales:
Inventory Jan.1
Purchases
Goods available for sale
Inventory Dec. 31
Gross income
Rent income
Total income
Expenses:
Salaries
Insurance
Other expenses
Depreciation
Amortization of patent
Interest expense
Income before tax
Income tax
Net Income

6,500,000
100,000
3,200,000
3,300,000
(175,000)

950,000
40,000
500,000
50,000
10,000
55,000

SOLUTION:
1. Direct Method
Accounts receivable, 2014
Add: sales
Less: AR, 2015
Collections from customer
Rent income
Add: unearned rent income - 2015
Less: unearned rent income 2014
Rent received
AP 2014
Add: purchases
Less: AP 2015
Payments to creditors

350,000
6,500,000
940,000
5,910,000
80,000
10,000
40,000
50,000
150,000
3,200,000
170,000
3,180,000

3,125,000
3,375,000
80,000
3,455,000

1,605,000
1,850,000
(350,000)
1,500,000

Salaries
Add: accrued salaries payable-2014
Less: accrued salaries payable-2015
Salaries paid
Insurance
Add: prepaid insurance 2015
Less: prepaid insurance 2014
Payments for insurance
Other expenses paid

950,000
10,000
25,000
935,000
40,000
15,000
20,000
35,000
500,000

Interest expense
Add: accrued interest pay 2014
Less: accrued interest pay 2015
Interest paid

55,000
15,000
10,000
60,000

Income tax
Add: income tax payable 2014
Less: income tax payable 2015
Payment for income tax

350,000
250,000
350,000
250,000

Cash received from customers


Rent received
Cash payments to merchandise
Salaries paid
Insurance paid
Other expenses paid
Cash generated from operations
Interest paid
Income tax paid
Net cash provided by operating act.

5,910,000
50,000
(3,180,000)
(935,000)
(35,000)
(500,000)
1,310,000
(60,000)
(250,000)
(1,000,000)

2. Indirect method
Net income
Increase in AR
Increase in inventory
Decrease in prepaid insurance
Increase in AP
Increase in accrued salaries pay

1,500,000
(590,000)
(75,000)
5,000
20,000
15,000

Decrease in accrued interest pay


Increase in income tax payable
Decrease in unearned rent income
Depreciation
Amortization of patent
Net cash flow from operating act.

(5,000)
100,000
(30,000)
50,000
10,000
1,000,000

*The direct method and indirect method are applicable only to operating
activities.
V.

Susan Company provides the following comparative statement of financial position


and additional information necessary for the preparation of a statement of cash flows
for the year ended December 31, 2015.

Assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Property, plant and equipment
Accumulated depreciation
Patent
Total assets

2015

2014

3,000,000
820,000
1,180,000
40,000
4,000,000
(880,000)
450,000
6,760,000

1,800,000
950,000
1,100,000
60,000
2,000,000
(540,000)
500,000
4,950,000

120,000
540,000
600,000
1,000,000
3,000,000
700,000
1,040,000
(240,000)
6,760,000

110,000
600,000
800,000
----------2,500,000
200,000
740,000
----------4950,000

Liabilities and Equity


Accrued expenses
Accounts payable
Note payable 60-day
Note payable 5-year
Share capital
Share premium
Retained earnings
Treasury shares
Total liabilities and equity
Additional information during 2015:
a) The net income is P 1,000,000
b) Cash dividend of 700,000 is declared and paid.

c)
d)
e)
f)

Equipment is purchased for cash of 2,000,000


All notes payable represent bank loans.
Shares of 5,000 with par value of P100 are issued at P200 per share
Treasury shares are purchased for 240,000 cash.

Solution:

Cash flow from operating activities:

Net income
Decrease in accounts receivable
Increase in inventory
Decrease in prepaid expenses
Depreciation
Amortization of patent
Increase in accrued expenses
Decrease in accounts payable
Net cash provided by operating activities

1,000,000
130,000
(80,000)
20,000
340,000
50,000
10,000
(60,000)
1,410,000

Cash flows from investing activities:


Purchase of equipment

(2,000,000)

Cash flows from financing activities:

Proceeds of 5-year bank loan


Issuance of share capital
Payment of 60-day bank loan
Payment of cash dividend
Purchase of treasury shares
Net cash provided by financing activities

1,000,000
1,000,000
(200,000)
(700,000)
(240,000)
860,000

Increase in cash and cash equivalents

270,000

Cash and cash equivalents January 1

880,000

Cash and cash equivalents December 31

1,150,000

Comprehensive
Information on LA-DI-DA SHOWY Co.'s financial position and performance as of December 31,
20x2 and 20x1 are presented below.
LA-DI-DA SHOWY Company
Statement of financial position
As of December 31, 20x2
ASSETS

20x2

20x1

Current assets
Cash and cash equivalents

1,000,000

Held for trading securities

480,000

Accounts receivable net

600,000
-

1,520,000

1,240,000

100,000

40,000

2,000,000

3,600,000

Prepaid insurance

200,000

160,000

Total current assets

5,300,000

5,640,000

360,000

340,000

10,000,000

4,000,000

(800,000)

(800,000)

360,000

400,000

9,920,000

3,940,000

15,220,000

9,580,000

Rent receivable
Inventory

Noncurrent assets
Investment in bonds
Buildings
Accumulated depreciation
Goodwill
Total noncurrent assets
TOTAL ASSETS

LIABILITIES AND EQUITY


Current liabilities
Accounts payable
Unearned rent

480,000

320,000

80,000

120,000

Insurance payable

240,000

180,000

Dividends payable

920,000

480,000

Income tax payable

60,000

140,000

200,000

1,780,000

1,440,000

Bonds payable

4,000,000

4,000,000

Discount on bonds

(380,000)

(400,000)

60,000

40,000

Total noncurrent liabilities

3,680,000

3,640,000

TOTAL LIABILITIES

5,460,000

5,080,000

Share capital

8,000,000

4,000,000

Retained earnings

1,760,000

500,000

TOTAL EQUITY

9,760,000

4,500,000

15,220,000

9,580,000

Short-term loan payable


Total current liabilities
Noncurrent liabilities

Deferred tax liability

Equity

TOTAL LIABILITIES AND EQUITY

LA-DI-DA SHOWY Company


Statement of profit or loss
For the year ended December 31, 20x2

Sales
Cost of sales

20,000,000
(12,000,000)

Gross income

8,000,000

Rent income

1,800,000

Interest income

80,000

Insurance expense

(400,000)

Bad debts expense

(60,000)

Interest expense

(400,000)

Loss on sale of building

(160,000)

Unrealized gain on investment

80,000

Other expenses

(4,800,000)

Profit before tax

4,140,000

Income tax expense


Profit for the year

(1,200,000)
2,940,000

Additional information:
During 20x2, LA-DI-DA purchased held for trading securities for 400,000. The fair value of the
shares on December 31, 20x2 is 480,000.
The allowance for doubtful accounts has balances of 80,000 and 40,000 as of December 31,
20x2 and 20x1, respectively.
During 20x2, LA-DI-DA sold an old building with historical cost of 3,200,000 for 1,040,000.
LA-DI-DA inadvertently included depreciation expense in the Other expenses line item.
There were no acquisitions or disposals of investment in bonds during the period.
During 20x2, LA-DI-DA issued shares with an aggregate par value of 4,000,000 for 4,000,000
cash.
1. How much is the net cash flows from (used in) operating activities?
a. (6,000,000)
b. 6,000,000 c. 6,600,000
d. (7,600,000)
2. How much is the net cash flows from (used in) investing activities?
a. (8,160,000)
b. 8,460,000 c. (9,200,000) d. 8,160,000
3. How much is the net cash flows from (used in) financing activities?
a. (2,560,000)
b. 2,560,000 c. (2,960,000) d. 2,960,000

Solution:
Cash flows from operating activities
Profit for the year

2,940,00

0
Adjustments for:
Depreciation expense
Impairment loss on goodwill
Loss on sale of building
Unrealized gain on held for trading securities
Amortization of discount on investment in bonds
Amortization of discount on bonds payable

2,000,00
0
40,000
160,000
(80,000)
(20,000)
20,000
5,060,00
0

Increase in accounts receivable, net


Increase in rent receivable
Decrease in inventory
Increase in prepaid insurance
Increase in accounts payable
Decrease in unearned rent
Increase in insurance payable
Decrease in income tax payable
Increase in deferred tax liability

(280,000)
(60,000)
1,600,00
0
(40,000)
160,000
(40,000)
60,000
(80,000)
20,000
6,400,00
0

Cash paid for the acquisition of held for trading


securities
Net cash from operating activities

(400,000)
6,000,00
0

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