Statement of Cash flows

A statement of cash flows is a component of financial statements summarizing the operating,

investing and financing activities an entity.

In simple language, the statement of cash flows provides information about the cash receipts and
cash payments of an entity during a period.

An entity shall prepare a statement of cash flows and present it as an integral part of the financial
statements for each period for which financial statements are presented.

Purpose of statement of cash flows

The primary purpose of a statement of cash flows is to provide relevant information about cash
receipts and cash payments of an entity to generate cash and cash equivalents.

The statement of cash flows also enhances the comparability of operating performance by different
entities.

Users of an entity's financial statements are interested in how the entity generates and use cash and
cash equivalents.

Entities need cash for essentially the same reasons however different in their principal revenue
producing activities might be.

Entities need cash to conduct their operations, to pay their obligations and to provide returns to
their investors.

Cash and cash equivalents

The statement of cash flows is designed to provide informative about the change in an entity's cash
and cash equivalents.

Cash comprises on hand and demand deposits.

Cash equivalents are short-term highly liquid investments that are readily convertible to known
amount of cash and which are subject to an insignificant risk of change in value.

PAS 7, paragraph 7, provides that an investment normally qualifies as a cash equivalent only when it
has a short maturity of three months or less from date of acquisition.
In other words, the investment must be acquired three months or less before the date of maturity.

Examples of cash equivalents

a. 3 month BSP treasury bill
b. 3 year BSP treasury bill purchased three months before date of maturity
c. 3 month time deposit
d. three month money market instrument or commercial paper

Thus, BSP Treasury bill that was purchased three years ago cannot qualify as cash equivalent even if
the remaining maturity is three months or less.

Equity securities cannot qualify as cash equivalents because shares do not have a maturity date.

However, preference shares with specified redemption date and acquired 3 months before the
redemption date can qualify as cash equivalents.
Components of cash and cash equivalents
An entity shall disclose the components of cash and cash equivalents and shall present reconciliation
of the amounts in the statement of cash flows with the equivalent items reported in the statement
of financial position.

It is also necessary to disclose the accounting policy used in deciding which items are included in
determining cash and cash equivalents.

Classification of cash flows

Cash flows are inflows and outflows of cash and cash equivalents.

The statement of cash flows shall report cash flows during the period classified as operating,
investing and financing activities.

Classification by activity provides information that allows user to access the impact of those
activities on the financial position of the entity and the amount of its cash and cash equivalents.

Bank borrowings are generally considered as financing activities.

However, bank overdrafts which are repayable on demand form an integral part of an entity's cash
management.

In these circumstances, bank overdrafts are included as component of cash and cash equivalents.

A characteristic of such banking arrangement is that the bank balance often fluctuates from being
positive to overdrawn.

In the Philippines, bank overdrafts generally are not permitted.

Operating activities
Operating activities are the cash flows derived primarily from the principal revenue producing
activities of the entity.

In other words, operating activities generally result from transactions and other events that enter
into the determination of net income or loss.

Examples of cash flows from operating activities are:

a. Cash receipts from sale of goods and rendering of service
b. Cash receipts from royalties, rentals, fees, commission, and revenue.
c. Cash payments to suppliers for goods and services
d. Payments for selling, administrative and other expenses
e. Cash receipts and cash payments of an insurance enterprise for premiums and claims, and other
policy benefits
f. Cash payments or refund of income taxes unless they can be specifically identified with financing
and investing activities
g. Cash receipts and payments for securities held for dealing or, trading purposes

Trading securities
PAS 7, paragraph 15, provides that cash flows arising from the purchase and sale of dealing or
trading securities are classified as operating activities.

Similarly, cash advances and loans made by a financial institution are usually classified as operating
activities since they relate to the main revenue producing activity of that entity.
Investing activities
Investing activities are the cash flows derived from the acquisition and disposal of long-term assets
and other investments not included in cash equivalent.

As a simple guide, investing activities include cash flows from transactions involving non-operating
assets.

Examples of cash flows from investing activities

a. Cash payments to acquire property, plant and equipment, intangible and other long-term
assets.
b. Cash receipts from sales of property, plant and equipment, intangible and other long-term
assets.
c. Cash payments to acquire equity or debt instruments of other entities and interests in joint
ventures( current and long-term investments)
d. Cash receipts from sales of equity or debt instruments of other entities and interests in joint
venture.
e. Cash advances and loans to other parties( other than advances and loans made by financial
institution)
f. Cash receipts from repayment of advances and loans made to other parties.
g. Cash payments for future contract, forward contract, and option contract and swap contract.
h. Cash receipts from future contract, forward contract, and option contract and swap contract.

Financing activities
Financing activities are the cash flows derived from the equity capital and borrowings of the entity.

In other words, financing activities are the cash that result from transaction and (equity financing)
and between the entity and its creditors (debt financing).

As a simple guide, financing activities include the cash flows from transactions involving non trade
liabilities and equity of an entity.

Examples of cash flows from financing activities

a. Cash receipts from issuing shares or other equity instruments (for example, issuance of ordinary
and preference shares).
b. Cash payments to owners to acquire or redeem the enterprise's shares (for example, payment
for treasury stock).
c. Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other short or long-
term borrowings.
d. Cash payments for amounts borrowed.
e. Cash payments by a lessee for the reduction of the outstanding principal lease liability.

Note that cash payments to settle such obligations as trade accounts and notes payable, Income tax
payable, accrued expenses and similar items are operating activities, not financing activities.

Noncash transactions
PAS 7, paragraph 43, provide that investing and financing transactions that do not require use of
cash or cash equivalents shall be excluded from the statement of cash flows.

Such transactions shall be disclosed elsewhere in the financial statements in the notes to financial
statements or in a separate schedule or in a way that provides all relevant information about these
transactions.

The statement of cash flows is “strictly” a cash concept. Accordingly, the following non-cash
transactions are disclosed separately:
a. Acquisition of asset either by assuming directly related liability or by means of a finance lease.
b. Acquisition of asset by means of issuing share capital or bonds payable.
c. Conversion of debt equity, for example conversion of bonds payable to share capital.
d. Conversion of preference share to ordinary share.

Interest
PAS 7, paragraph 33, provides that interest paid and interest received shall be classified as operating
cash flows because they enter into the determination of net income or loss.

Alternatively, interest paid may be classified as financing cash flow because it is a cost of obtaining
financial resources.

Alternatively, interest received may be classified as investing cash flow because it is a return on
investment.

For a financial institution, Interest paid and interest received are usually classified as operating cash
flows.

Cash flows from interest paid and interest received shall be classified in a consistent manner from
period to period as either operating, investing or financing activities.

Dividends
PAS 7, paragraph 33, provides that dividend received shall be classified as operating cash flow
because it enters into the determination of net income.

Alternatively, dividend received may be classified as investing cash flow because it is a return on
investment.

PAS 7, paragraph 34, provides that dividend paid shall be classified as financing cash flow because it
is a cost of obtaining financial resources.

Alternatively, dividend paid may be classified as operating cash flow in order to assist users to
determine the ability of the entity to pay dividends out of operating cash flows.

The classification of dividend received and dividend paid as either operating, investing or financing
activities shall be made on a consistent basis from period to period.

Income taxes
PAS 7, paragraph 35, provides that cash flows arising from income taxes shall be separately
disclosed as cash flows from operating activities unless they can be specifically identified with
investing and financing activities.

Tax cash flows are often difficult to match to the originating underlying transaction, so most of the
time all tax cash flows are classified as arising from operating activities.

Illustration- Operating activities

Simple company reported the following comparative statement of financial position and income
statement for 2019.

Assets 2019 2018

Cash 3,000,000 2,000,000
Accounts Receivable 940,000 350,000
Inventory 175,000 100,000
Prepaid Insurance 15,000 20,000
 Property, plant and equipment 2,000,000 2,000,000
Accumulated depreciation (550,000) (500,000)
Patent 40,000 50,000
Total Assets 5,620,000 4,020,000

Liabilities and Equity

Accounts Payable 170,000 150,000
Accrued salaries payable 25,000 10,000
Accrued interest payable 10,000 15,000
Income tax payable 350,000 250,000
Unearned rent income 10,000 40,000
Mortgage payable 500,000 500,000
Share Capital 2,000,000 2,000,000
Retained earnings 2,555,000 1,055,000
Total liabilities and equity 5,620,000 4,020,000

Income Statement
Year ended December 31, 2019

Sales 6,500,000
Cost of goods sold:
Inventory-January 1 100,000
Purchases 3,200,000
Goods available for sale 3,300,000
Inventory – December 31 (175,000) 3,125,000
Gross Income 3,375,000
Rent Income 80,000
Total Income 3,455,000

Expenses:
Salaries 950,000
Insurance 40,000
Other expenses 500,000
Depreciation 50,000
Amortization of patent 10,000
Interest expense 55,000 1,605,000
Income before tax 1,850,000
Income tax 350,000
Net Income 1,500,000

Direct Method
PAS 7, paragraph 18, provides that an entity shall report cash flows from operating activities using
either the direct method or indirect method.

The direct method shows in detail or itemizes the major classes of gross cash receipts and gross
cash payments.

The cash receipts are listed one by one, the cash payments are listed one by one, and the difference
represents the net cash flow from operating activities.

In essence, the direct method is the “cash basis” income statement.

Actually, the statement of cash flows is a conversion from the accrual basis to the cash basis
accounting. Accordingly, some formulas may be necessary for determining cash receipts and cash
payments.

Computation of collections
Trade accounts and notes receivable – beginning xx
Add: Sales (accrual basis) xx
Total xx
Less: Trade accounts and notes receivable – end xx
Collection of accounts and notes receivable xx

Computation of payments to merchandise creditors

Trade accounts and notes payable – beginning xx

Add: Purchases (accrual basis) xx
Total xx
Less: Trade accounts and notes payable – end xx
Payment to merchandise creditors xx

Computation of payments for expenses

Expenses (accrual) xx
Add: Prepaid expense – end xx
Accrued expense – beginning xx
Total xx
Less: Prepaid expense – beginning xx
Accrued expense – end xx xx
Expense paid xx

Computation of collection of other income

Income other than sales (accrual) xx

Add: Deferred income – end xx
Accrued income – beginning xx
Total
Less: Deferred income – beginning xx
Accrued income – end xx xx
Collection of other income xx

Computation under the direct method

1. Accounts receivable – 2018 350,000
Add: Sales 6,500,000
Total 6,850,000
Less: Accounts receivable – 2019 (940,000)
Collections from customers 5,910,000

2. Rent income 80,000

Add: Unearned rent income – 2019 10,000
Total 90,000
Less: Unearned rent income – 2018 (40,000)
Rent received 50,000

3. Accounts payable – 2018 150,000

Add: Purchases 3,200,000
 Total 3,350,000
Less: Accounts payable – 2019 (170,000)
Payments to merchandise creditors 3,180,000

4. Salaries 950,000
Add: Accrued salaries payable – 2018 10,000
Total 960,000
Less: Accrued salaries payable – 2019 (25,000)
Salaries paid 935,000

5. Insurance 40,000
Add: Prepaid Insurance – 2019 15,000
Total 55,000
Less: Prepaid Insurance – 2018 (20,000)
Payment for Insurance 35,000

6. Other expenses paid 500,000

7. Interest expense 55,000

Add: Accrued interest payable – 2018 15,000
Total 70,000
Less: Accrued interest payable – 2019 (10,000)
Interest paid 60,000

8. Income tax 350,000

Add: Income tax payable – 2018 250,000
Total 600,000
Less: Income tax payable – 2019 (350,000)
Payment for income tax 250,000

The net cash provided by operating activities under the direct method would appear as follows:

Cash received from customers 5,910,000

Rent received 50,000
Cash payments to merchandise creditors (3,180,000)
Salaries paid (935,000)
Insurance paid (35,000)
Other expenses paid (500,000)
Cash generated from operations 1,310,000
Interests paid (60,000)
Income tax paid (250,000)
Net cash provided by operating activities 1,000,000

PAS 7, paragraph 32, provides that interest paid is disclosed separately whether it has been
recognized in profit or loss or capitalized. Paragraph 35 provides that income tax paid is also
disclosed or presented separately.

Observed that the depreciation of P 50,000 and amortization of P10,000 do not appear in the
statement of cash flows using the direct method.

The reason is that these are non-cash expenses or expenses not requiring use of cash.

PAS 7, paragraph 19, provides that entities are encouraged to report cash flows from the operating
activities using the direct method.
Indirect method
The indirect method means that the net income or loss is adjusted for the effects of transactions of
a non-cash nature, any deferrals or accruals of past or future operating cash receipts and payments,
and items of income or expense associated with investing and financing activities.

The indirect method of presenting the cash flow from operating begins with the accrual basis net
income and applies a series of adjustments to convert the income to a cash basis.

The following general guidelines are offered for the adjustments of net income to cash basis:
1. All increases in trade noncash current assets are deducted from net income.
2. All decreases in trade noncash current assets are added to net income.
3. All increases in trade current liabilities are added to net income.
4. All decreases in trade current liabilities are deducted from net income.
5. Depreciation, amortization and other noncash expenses are added back to net income to
eliminate the effect they had on net income.
6. Any gain on disposal of property or gain on early retirement liabilities is included in net income
but it is a non-operating item. Thus, this is deducted from net income.
7. Any loss on disposal of property or loss on early retirement of nontrade liabilities is deducted
from net income but this is a non-operating item. Thus, this is added back to net income.

Continuing the illustration, the changes in current assets and current liabilities are summarized as
follows:
2019 2018 Increase
(Decrease)

Accounts receivable 940,000 350,000 590,000

Inventory 175,000 100,000 75,000
Prepaid insurance 15,000 20,000 (5,000)
Accounts payable 170,000 150,000 20,000
Accrued salaries payable 25,000 10,000 15,000
Accrued interest payable 10,000 15,000 (5,000)
Income tax payable 350,000 250,000 100,000
Unearned rent income 10,000 40,000 ( 30,000)

The net cash provided by operating activities using the indirect method would appear as follows:

Net income 1,500,000

Increase in accounts receivable ( 590,000)
Increase in inventory ( 75,000)
Decrease in prepaid insurance 5,000
Increase in accounts payable 20,000
Increase in accrued salaries payable 15,000
Decrease in accrued interest payable ( 5,000)
Increase in income tax payable 100,000
Decrease in unearned rent income (30,000)
Depreciation 50,000
Amortization of patent 10,000
Net cash provided by operating activities 1,000,000

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

PAS 7, paragraph 21, provides that an entity shall report separately major classes of gross cash
receipts and gross cash payments arising from investing and financing activities using the direct
method.

Comprehensive Illustration
Illustrar Company provided the following statement of financial position on December 31, 2019 and
2018 and other financial data relating to activities during 2019:

2019 2018
Cash and cash equivalents 600,000 200,000
Accounts receivable, net of allowance 1,100,000 1,040,000
Notes receivable – trade 150,000 200,000
Inventory 1,200,000 1,360,000
Prepaid expenses 110,000 120,000
Investment in equity securities, at cost 300,000 500,000
Property, plant and equipment 3,400,000 2,000,000
Accumulated depreciation (900,000) (600,000)
Patent - 80,000
5,960,000 4,900,000

Accounts payable 880,000 840,000

Notes payable – trade 60,000 240,000
Accrued expenses 100,000 330,000
Notes payable – bank (short term debt) 400,000 -
Share capital, P100 par 3,000,000 2,400,000
Share premium 530,000 400,000
Retained earnings 990,000 790,000
Treasury shares. at cost - (100,000)
5,960,000 4,900,000

The statement of retained earnings for the year ended December 31, 2019 showed the following:

Retained earnings – January 1 790,000

Add: Net Income for 2019 1,000,000
Total 1,790,000
Less: Cash dividends paid 800,000
Retained earnings – December 31 990,000

Additional information
o The entity sold an investment in equity securities for P240,000 cash. There were no other
transactions affecting the investment in equity securities.

o Land was purchased in 2019 for P1,200,000, paying P1,000,000 cash and issuing 200,000
share capital at par value.

o Equipment costing P200,000 and having a carrying amount of P80,000 was sold for P60,000
cash.

o Equipment of P400,000 was purchased for cash.

o The entity borrowed P400,000 from a bank to be paid June 30, 2020

o Share capital with par value of 400,000 was issued for cash at a premium of 100,000

o The treasury shares were reissued for 130,000 cash

 o The patent was fully amortized.

Basic guidelines
a) Operating activities include the cash effects of transactions that enter into the
determination of net income.
b) Investing activities include the cash effects of transactions involving “non-operating assets”.
c) Financing activities include the cash effects of transactions involving “non-trade liabilities”
and “equity”.

Introduction
In determining cash receipts and cash payments, it is necessary to analyze all accounts in the
statement of financial position, with the exception of cash and cash equivalents. The net changes in
all statement of financial position accounts are traced to their original entry.

Accordingly, the preparation of the statement of cash flows requires reconstruction of original
entries affecting the statement of financial position accounts.

The cash effects of transactions can be properly determined from the original entries.

Retained earnings, P200,000 increase

As a matter of procedure, it is practical and logical to analyze first the retained earnings account.

The statement of retained earnings shows a net income of P1,000,000 and cash dividend paid of
P800,000, resulting to a net increase of P200,000.

The original entries are properly numbered for easy reference.

With respect to the net income, the original entry to close the same to retained earnings is:

1. Profit and loss 1,000,000

Retained earnings 1,000,000

The net income is the principal cash inflow from operations and therefore the first item under
operating activities.

With respect to the cash dividend, the payment is recorded as follows:

2. Retained earnings 800,000

Cash 800,000

The transaction effects retained earnings, a shareholders' equity item. Therefore, the payment of
cash dividend is shown under financing activities as a deduction because it decreases cash.

Accounts receivable, P60,000 increase

The increase in accounts receivable is originally recorded as:

3. Accounts receivable 60,000

Sales 60,000
The increase in accounts receivable increase net income but did not increase cash. Thus, the
increase in accounts receivable is deducted from net income under operating activities.

Remember the basic rule that all increases in trade current assets are deducted from net income.

Note that the accounts receivable should be analyzed net of the allowance doubtful accounts.
Notes receivable - trade P50,000 decrease
The decrease in notes receivable is originally recorded as follows:

4. Cash 50,000
Notes receivable 50,000

The decrease in notes receivable increased cash but did not increase net income. Thus, the
decrease in notes receivable is added to net income under operating activities.

Again, remember the basic rule under the indirect method that all decreases in trade current assets
are added to net income.

Inventory, P160,000 decrease

The decrease in inventory is originally recorded as follows:

5. Cost of goods sold 160,000

Inventory 160,000

The decrease in inventory increased cost of goods sold and consequently decreased net income but
did not increase cash.

Thus, the decrease in inventory is added back to net income under operating activities.

Prepaid expense, P10,000 decrease

The decrease expense is originally recorded as follows:

6. Expenses 10,000
Prepaid expenses 10,000

The decrease in prepaid expenses increased expenses and consequently decreased net income but
did not decrease cash.

Thus, the decrease in prepaid expenses is added back to net income under operating activities.

Investment in equity securities, P200,000 decrease

The decrease represents sale of securities for P240,000, or a gain of P40,000. The original entry is

7. Cash 240,000
Investment in equity securities 200,000
Gain on sale of investment 40,000

The transaction involves an operating asset.

Therefore, the cash received from sale of investment is shown under investing activities as an
addition because it increases cash.

The gain on sale of investment is previously included in the determination of net income but this is a
non-operating item.

Therefore, the gain is deducted from net income under operating activities.

Property plant and equipment, P1,400,000 increase

The entity purchased land of P1,200,000 and equipment of P400,000 and sold equipment costing
P200,000. Thus, there is a net increase of P1,400,000.
The purchase of the land is originally recorded as follows:
8. Land 1,200,000
Cash 1,000,000
Share capital 200,000

Only the pavement of P1,000,000 is shown as a deduction under investing activities, because land is
a non-operating asset.

The issuance of share capital for the land is both a noncash investing and financing activities.
The transaction is simply disclosed.

The purchase of the equipment is recorded as follows:

9. Equipment 400,000
Cash 400,000

The purchase of the equipment is shown as deduction under investing activities because the
equipment is a nonoperating asset.

The sale of equipment is originally recorded as follows:

10. Cash 60,000

Accumulated depreciation 120,000
Loss on sale of equipment 20,000
Equipment 200,000

The cash received from the sale of equipment is shown as an addition under investing activities.

The loss on sale of equipment is previously deducted from the net income but this is a non-
operating item. Therefore, the loss is added back to net income under operating activities.

Accumulated depreciation, P300,000 increase

Balance – December 31, 2018 600,000

Add: Depreciation for 2019 (SQUEEZE) 420,000
Total 1,020,000
Less: Accumulated depreciation on equipment sold (120,000)
Balance – December 31, 2019 900,000

The depreciation for 2019 is P420,000 and the accumulated depreciation on the equipment sold is
P120,000. Therefore, there is a net increase of P300,000. The depreciation is originally recorded as:

11. Depreciation 420,000

Accumulated depreciation 420,000

The depreciation is a noncash expense. It is added back to net income under operating activities.

Patent, P80,000 decrease

12. Amortization of patent 80,000
Patent 80,000

The amortization is a noncash expense. It is added back to net income under operating activities.

Accounts payable, P40,000 increase

The increase in accounts payable is originally recorded as:

13. Purchases 40,000

Accounts payable 40,000

The increase in accounts payable increased cost of goods sold and consequently decreased net
income but did not decrease cash. Thus, the increase in accounts payable is added to net income
under operating activities.

Recall the basic rule under the indirect method that all increases in trade current liabilities are added
to net income.

Notes payable – trade, P180,000 decrease

The decrease in notes payable is originally recorded as follows:

14. Notes payable 180,000

Cash 180,000
The decrease in notes payable decreased cash but did not decrease net income.

Thus, the decrease in notes payable is deducted from net income under operating activities.

Recall the basic rule under the indirect that all decreases in trade current liabilities are deducted
from net income.

Accrued expenses, P230,000 decrease

The decrease in accrued expenses is originally recorded as follows:

15. Accrued expense 230,000

Cash 230,000

The decrease in accrued expenses is decrease cash but did not decrease net income.

Thus, the decrease in accrued expenses is deducted from net income under operating activities.

Notes payable – bank, P400,000 increase

The increase in note payable-bank is due to borrowing. It is originally recorded as:

16. Cash 400,000

Notes Payable 400,000
The cash received from bank note payable is shown as an addition under financing activities because
the bank note payable is a “nontrade” liability.

Share capital, P600,000 increase

The increase is analyzed as follows:

Issued for land 200,000

Issued for cash 400,000
600,000
The share capital issued for the land is already accounted for previously.

The issuance of the share capital with par value of P400,000 at a premium of P100,000 is originally
recorded as:
 17. Cash 500,000
Share capital 400,000
Share premium 100,000

The cash received from the issuance of share capital is shown as an addition under financing
activities because the share capital is a shareholder’s equity item.

Treasury shares, P100,000 decrease

The treasury shares were reissued for P130,000 and recorded as:

1. Cash 130,000
Treasury shares 100,000
Share premium 30,000

The reissuance of treasury shares is shown as an addition under financing activities because treasury
shares are a component of shareholder’s equity.

Share premium, P130,000 increase

The increase is analyzed as follows:

From issuance of share capital 100,000

From issuance of treasury share 30,000
130,000
The increase in share premium is already accounted for.

The cash effects of the properly numbered original entries are summarized as follows:

Operating Investing Financing

1. Net income 1,000,000
2. Payment of cash dividend ( 800,000)
3. Increase in accounts receivable ( 60,000)
4. Decrease in notes receivable 50,000
5. Decrease in inventory 160,000
6. Decrease in prepaid expenses 10,000
7. Sale of investment 240,000
Gain on sale of investment ( 40,000)
8. Payment for land (1,000,000)
9. Purchase of equipment ( 400,000)
10. Sale of equipment 60,000
Loss on sale of equipment 20,000
11. Depreciation 420,000
12. Amortization of patent 80,000
13. Increase in accounts payable 40 000
14. Decrease in notes payable ( 180,000)
15. Decrease in accrued expenses ( 230,000)
16. Proceeds from bank note 400,000
payable
17. Issuance of share capital 500,000
18. Reissuance of treasury shares 130,000
Net cash provided (used) 1,270,000 (1,100,000) 230,000

Observed that if the item is a cash receipt it is added because it increases cash.

If the item is a cash payment, it is deducted because it decreases cash.

Preparation of Statement of cash flows
The formal statement of cash flows can now be prepared from the preceding summary of operating,
investing and financing activities.

Illustrar Company
Statement of Cash flows
Year ended December 31, 2019

Cash flows from operating activities:

Net income 1,000,000
Increase in accounts receivable (60,000)
Decrease in notes receivable 50,000
Decrease in inventory 160,000
Decrease in prepaid expenses 10,000
Gain on sale of investment (40,000)
Loss on sale of equipment 20,000
Depreciation 420,000
Amortization of patent 80,000
Increase in accounts payable 40,000
Decrease in notes payable (180,000)
Decrease in accrued expenses (230,000)
Net cash provided by operating activities 1,270,000

Cash flows from investing activities:

Sale on investment 240,000
Sale of equipment 60,000
Purchase of land (1,000,000)
Purchase of equipment (400,000)
Net cash provided by investing activities (1,100,000)

Cash flows from financing activities:

Cash received from bank loan 400,000
Issuance of share capital 500,000
Reissuance of treasury shares 130,000
Payment of cash dividend (800,000)
Net cash provided by operating activities 230,000

Increase in cash and cash equivalents 400,000

Add: Cash and cash equivalents – January 1 200,000
Cash and cash equivalents – December 31 600,000
Note

1. The indirect method is used in presenting the cash flow from operating activities.
2. The cash balance of P600,000 on December 31, 2019 reconciles with the amount reported in
the comparative statement of financial position.
3. Actually, the statement of cash flows explains in detail the increase or decrease in the cash
balance.

Alternative approach
Susan Company provided 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, 2019.
 2019 2018
Cash and cash equivalents 1,150,000 880,000
Accounts receivable, net of allowance 820,000 950,000
Inventory 1,180,000 1,100,000
Prepaid expenses 40,000 60,000
Property, plant and equipment 4,000,000 2,000,000
Accumulated depreciation (880,000) (540,000)
Patent 450,000 500,000
6,760,000 4,950,000

Accrued expenses 120,000 110,000

Accounts payable 540,000 600,000
Note payable – 60-day bank loan 600,000 800,000
Note payable – 5-year loan 1,000,000 -
Share capital 3,000,000 2,500,000
Share premium 700,000 200,000
Retained earnings 1,040,000 740,000
Treasury shares (240,000) -
6,760,000 4,950,000

Additional information during 2019

 The net income is P1,000,000.
 Cash dividend of P700,000 is declared and paid.
 Equipment is purchased for cash of P2,000,000.
 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 P240,000 cash.

The approach is simply to copy the comparative statement of financial position and analyze the
changes into operating, investing and financing activities.

Susan Company
Statement of Cash flows
Year ended December 31, 2019

Cash flows from operating activities:

Net income 1,000,000
Decrease in accounts receivable 130,000
Increase in inventory (80,000)
Decrease in prepaid expenses 20,000
Depreciation 340,000
Amortization of patent 50,000
Increase in accrued expenses 10,000
Decrease in accounts payable (60,000)
Net cash provided by operating activities 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 1,000,000

 Issuance of share capital 1,000,000
Payment of 60-day bank loan (200,000)
Payment of cash dividend (700,000)
Purchase of treasury shares (240,000)
Net cash provided by operating activities 860,000

Increase in cash and cash equivalents 270,000

Add: Cash and cash equivalents – January 1 880,000
Cash and cash equivalents – December 31 1,150,000

Cash provided (used)

2019 2018 Operating Investing Financing
Cash 1 150,000 880,000
Accounts receivable, net of allowance 820,000 950,000 130,000
Inventory 1,180,000 1,100,000 (80,000)
Prepaid expenses 40,000 60,000 20,000
Property, plant & equipment 4,000,000 2,000,000 (2,000,000)
Accumulated depreciation (880,000) (540,000) 340,000
Patent 450,000 500,000 50 000
6,760,000 4,950,000
Accrued expenses 120,000 110,000 10,000
Accounts payable 540,000 600,000 (60,000)
Note payable,60-day bank loan 600,000 800,000 (200,000)
Note payable, 5-year loan 1,000,000 - 1,000,000
Share capital 3,000,000 2,500,000 500,000
Share premium 700,000 200,000 500,000
Retained earnings 1,040,000 740,000 1,000,000 (700,000)
Treasury shares (240,000) - (240,000)
6,760,000 4,950,000
Net cash provided (used) 1,410,000 (2,000,000) 860,000