ABM 4 Modules 5-6

The Statement of Cash Flows (pages 50 - 54)

The Statement of Cash Flows summarizes the cash receipts and cash disbursements for the accounting
period. It summarizes the cash activities of the business by classifying cash inflows (receipts) and cash
outflows (payments) into operating, investing, and financing activities. It shows the net increase or decrease of
cash in a given period and the cash balance at the end of the period. This allows management to assess the
ability of the business to generate cash and project future cash flows.

COMPONENTS OF THE STATEMENT OF CASH FLOWS CLASSIFIED ACCORDING TO ACTIVITIES

Operating activities - the cash inflows (receipts) and the cash outflows (payments) arising from the normal
operations of the business

Receipts of Cash
• collections from customers for the performance of services or sale of goods.
• royalties, fees, commissions received
• interest, dividends, and other income received

Payments of Cash
• to suppliers for services and goods acquired
• employees' salaries.
• government licenses and taxes
• interest expense
• other operating expenses

Investing Activities - the cash inflows (receipts) and the cash outflows (payments) from the purchase and
sale of property and equipment, investment in debt or trading securities, lending money and collection of the
principal amount of the money loaned.

Financing Activities - the cash inflows (receipts) and the cash outflows (payments) from the owners and
creditors of the business

Receipts of Cash
• original and additional investments by owner .
• proceeds of loan

Payments of Cash
• cash withdrawal of owner
• payment for the principal balance of loan

ILLUSTRATION

Ren Ren Merchandising started business last October. The following are its transactions. Classify each
transaction as an operating, investing or financing activity.

Transaction Activity
a. Additional investment in the business, P22,200 Financing
b. Proceeds of sale of equipment, P15,000 Investing
c. Collection of interest, P9,000 Operating
d. Collection from customers, P315,800 Operating
e. Proceeds of bank loan, P200,000 Financing
f. Proceeds from sale of furniture, P8,000 Investing
g. Payment of operating expenses, P145,000 Operating
h. Collection of dividends, P12,000 Operating
i. Cash withdrawal of owner, P30,000 Financing
j. Payment of interest, P6,000 Operating
k. Collection of rent, P30,000 Operating
l. Purchase of furniture, P31,000 Investing
m. Payment of bank loan, P150,000 Financing

Based on the classification of activities above, the following is the statement of cash flow for Ren Ren
Merchandising for the year ended December 31, 2016.

Ren Ren Merchandising

Statement of Cash Flows
For Year Ended December 31, 2016

Cash Flows from Operating Activities

Receipts
Collections from customers P315,800
Rent income 30,000
Dividends income 12,000
Interest income 9,000
Payments
Operating expenses (145,000)
Interest expense (6,000)
Net Cash from Operating Activities P215,800
Cash Flows from Investing Activities
Receipts
Proceeds from sale of equipment P 15,000
Proceeds from sale furniture 8,000
Payments
For purchase of furniture (31,000) (8,000)
Net Cash from Investing Activities
Cash Flows from Financing Activities
Receipts
Additional investment of owner P 22,200
Proceeds of bank loan 200,000
Payments
Cash withdrawal of owner (30,000)
Payment of bank loan (150,000)
Net Cash from Financing Activities 42,200
Net Increase/Decrease in Cash P250,000

Cash balance - January 1 200,000

Cash balance - December 31 P450,000
=========
The beginning balance of cash is added to the net increase or decrease in cash resulting from the operating,
investing, and financing activities in order to get the ending cash balance which is the same as the amount of
the cash account presented in the statement of financial position. Notice that the P450,000 cash balance as of
December 31 is the balance of the cash account in the statement of financial position.

POINTS TO REMEMBER

The Statement of Cash Flows summarizes the cash receipts and cash disbursements for the accounting
period. It summarizes the cash activities of the business by classifying cash inflows (receipts) and cash
outflows (payments) into operating, investing, and financing activities. It shows the net increase or decrease of
cash in a given period and the cash balance at the end of the period. This allows management to assess the
ability of the business to generate cash and project future cash flows.

→ Components of the Statement of Cash Flows classified according to activities:

a. Operating Activities - the cash inflows (receipts) and the cash outflows (payments) arising from the normal
operations of the business

b. Investing Activities - the cash inflows (receipts) and the cash outflows (payments) from the purchase and
sale of property and equipment, investment in debt or trading securities, lending money and collection of the
principal amount of the money loaned

c. Financing Activities - the cash inflows (receipts) and the cash outflows (payments) from the owners and
creditors of the business

Activity 2: Exercise 1 (page 56)

Write Op - if the cash flow activity is operating

Inv - if the cash flow activity is investing
Fin - if the cash flow is financing
NOT - if the item is not a cash flow activity

_________ 1. Proceeds from sale of building

_________2. Payment of principal loan to Allied Bank
_________3. Cash collection from customers
_________4. Cash sale of company assets
_________5. Collection of cash interest
_________6. Payment of income tax
_________7. Cash received from rent of building
_________8. Purchase of building
_________9. Payment of accounts payable
________10. Proceeds from sale of land
________11. Payment of bank loan
________12. Rent received from lease of business property
________13. Royalties received from sale of CD
________14. Depreciation expense
________15. Collection of accounts receivable
________16. Provision for uncollectible accounts
________17. Payment of rent
________18. Payment of accounts payable
________19. Collections from customers for legal services rendered
________20. Additional investment of owner
________21. Purchase of store supplies
________22. Withdrawal of owner
________23. Payment of employees salaries
________24. Payment of interest on bank loan
________25. Proceeds of bank loan
________26. Proceeds from sale of truck.
________27. Interest income from bank account
________28. Payment of government taxes
________29. Purchase of company tools
________30. Dividend received from stock investment

Activity 3: Exercise 3 (page 58)

The following data are taken from the records of Pagong Delivery Services for the year 2018.

Cash received
From customers P980,000
Collection of accounts 90,000
Proceeds of financing loan 420,000
Proceeds from sale of furniture 55,000
Dividends on stock 23,000
Commission income 11,000
Additional investment 88,000
Rent income 99,000
Cash paid
Purchase of land 700,000
Interest on loan 45,000
Partial payment of financing loan 180,000
Operating expenses 310,000
Taxes and licenses 3,750

Cash balance beginning is P 98,000.

Gain on sale of furniture is P 5,000.

Required: Prepare a statement of cash flows then determine the following:

1. Net cash flow from operating activities

2. Net cash flow from investing activities
3. Net cash flow from financing activities
4. Net increase/decrease in cash
5. Cash balance on December 31, 2018
Activity 4: Exercise 4 (page 59)

Mr. Carlo Raulo established a consultancy firm. The following data are taken from the records of C. Raulo
Consultancy Services for the year 2017.

Consultancy fees receivable from clients P500,000

Cash receipt from clients 600,000
Depreciation expense 40,000
Proceeds of Metrobank loan 350,000
Cash purchase of van 800,000
Provision for bad debts 28,000
Additional investment of C. Raulo 900,000
Dividends income received 23,000
Rent income received 32,000
Payment of operating expenses 975,000
Principal long-term loan paid 600,000
Asset withdrawal of owner 125,000
Proceeds from sale of land 950,000

Cash balance on January 1, 2017 is P308,000

Required: Prepare a statement of cash flows then determine the following:

1. Net cash flow from operating activities
2. Net cash flow from investing activities
3. Net cash flow from financing activities
4. Net increase/decrease in cash
5. Cash balance on December 31, 2017

Source: Ong, F. & Gomendoza, J. (2017). Fundamentals of Accountancy, Business, and

Management 2. C & E Publishing Inc. Quezon City