FABM 2 Module 4 SCF

Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph
MODULE 4 – FABM 2 Subject Teacher:
Statement of Cash Flows

Learning Objectives:
At the end of the modules, the student should be able to:
a. Discuss the components and structures of a CFS

b. Prepare a CFS for a sole proprietorship
The Statement of Cash Flows
The Statement of Cash Flows (or Cash Flow Statement) provides information on the sources and
utilization of cash during the period. Simply stated, the statement of cash flows provides information
on cash inflows and cash outflows during the period.
Presentation of Statement of Cash Flows
Cash inflows and outflows are presented in the statement of cash flows according to what activities
they have been generated or utilized. These activities are as follows:
1. Operating activities
2. Investing activities
3. Financing activities
Operating activities
Cash flows from operating activities result primarily from transactions that affect income and
expenses. Examples include:
a. Cash receipts from interest income.

b. Cash payments for purchases of inventory.
c. Cash payment for expenses.
Investing activities
Cash flows from investing activities result primarily from the acquisition and disposal of long term
assets and others investments, like property, plant and equipment. Examples include:
a. Cash payments for the acquisition of property, plant and equipment.

b. Cash receipts from sales of property, plant and equipment.
Financing activities
Cash flows from financing activities result primarily from transactions with the owner and from
borrowings. Examples include:
a. Cash receipts from investments of owner to the business.

b. Cash payments on drawings by owner.
c. Cash receipts on loans.
d. Cash payments on repayment of loans.
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 1 of 9

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
Remember the following:

Type of activity Nature of transactions
1. Operating activities Affect income and expenses/ result of day to
day operations of the business.
2. Investing activities Acquisition and disposal of PPE.
3. Financing activities Investment and drawings by owner and loan
transactions.
Note: Only those transactions that affect cash are included in the statement of cash flows.
Transactions that do not affect cash are excluded from the statement of cash flows.
Reporting cash flows from Operating activities
Cash flows from operating activities may be presented using either:
a. Direct method, or
b. Indirect method
a. Direct method
The direct method shows each major class of gross cash receipts and gross cash payments.
Example: Direct method
Cash flows from operating activities:

Cash receipts from sale of goods ₱xx
Cash paid for purchases of inventory (xx)
Cash paid for salaries expense (xx)
Cash paid for utilities expense (xx)
Cash paid for interest expense (xx)
Net cash from operating activities XX
Cash flows from investing activities:

Cash proceeds from sale of equipment XX
Cash paid for the acquisition of equipment (XX)
Net cash used in investing activities XX
XX
Cash flows from financing activities:
Cash invested by the owner XX
Cash payments to owner (XX)
Net cash used in financing activities XX
Net increase in cash and cash equivalents XX

Cash and cash equivalents, beginning XX
Cash and cash equivalents, ending ₱XXX
b. Indirect method
The indirect method adjusts accrual basis profit or loss for the effects of changes in operating assets
and liabilities and effects of non-cash items.

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;

Profit (loss) ₱xx
Non-cash items:
Depreciation xx
Gain on sale of Equipment (xx)
Total xx
Changes in operating assets and Liabilities:

Increase in accounts receivable (xx)
Decrease in inventory xx
Increase in prepaid assets (xx)
Increase in accounts payable xx
Decrease in salaries payable (xx)
Net cash from operating activities XX

Cash proceeds from sale of equipment XX
Cash paid for the acquisition of equipment (XX)
Net cash used in investing activities XX
XX
Cash invested by the owner XX
Cash payments to owner (XX)
Net cash used in financing activities XX
Net increase in cash and cash equivalents XX

Cash and cash equivalents, beginning XX
Cash and cash equivalents, ending ₱XXX
Guidelines: Indirect Method
1. Non-cash expenses
 Depreciation expense is added to accrual basis profit because depreciation decreases
accrual basis profit but does not affect cash.
 Losses on sale of property, plant and equipment are added to accrual basis profit
because losses on sale of PPE decrease accrual basis profit but they pertain to investing
activities.
2. Non-cash Income
 Gains on sale of property, plant, and equipment and deducted from accrual basis profit
because gains on sale of PPE increase accrual basis profit but they pertain to investing
activities.
3. Increases in operating current assets, except cash, (e.g., trade accounts and trade notes
receivables, inventor, and prepayments) are deducted from accrual basis profit.
4. Decrease in operating current assets, except cash, (e.g., trade accounts and trade notes
receivables, inventory, and prepayments) are added to accrual basis profit.
5. Increases in operating current liabilities (e.g., trade accounts and trade notes payables,
accrued expenses, and unearned income) are added to accrual basis profit.

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
6. Decreases in operating current liabilities (e.g., trade accounts and notes payables, accrued
expenses, and unearned income are deducted from accrual basis profit.
Under the indirect method, the “net cash flows from operating activities” is computed b
adjusting the accrual basis profit or losses as follows:
1. Non-cash expenses-added
2. Non- cash income – deducted
3. Increases in operating current assets- deducted (inverse relationship)
4. Increases in operating current liabilities- added (direct relationship)
Reporting cash flows from Investing and Financing activities
Cash inflows and outflows from investing activities and Financing activities are reported on the basis
of major classes of gross cash receipts and gross cash payments (similar to the direct method of
presenting cash flows from operating activities).
Sample Problem 1: Statement of Cash Flows
ABC Co.’s cash balance on January 1, 2019 was ₱20,000. The following were the transactions that
affected cash during the period:
a. Collections from customers for the sale e. Payments for employee salaries, ₱14,000.
of goods, ₱580,000. f. Payments of rent expense, ₱70,000.
b. Cash receipt from loan obtained from a g. Payments for utilities expense, ₱20,000.
bank, ₱180,000. h. Payment for acquisition of equipment,
c. Cash receipt from additional investment ₱200,000.
by the owner, ₱20,000. i. Cash disbursements for drawings by
d. Payments to suppliers for the purchase owner, ₱60,000.
of inventory, ₱120,000.
Required: Prepare the statement of cash flows using direct method. Be sure to provide a proper
heading for the statement.
Solution:
ABC Co.
For the period ended December 31, 2019

Cash receipts from sale of goods ₱ 580,000.00
Cash paid for purchases of inventory (120,000.00)
Cash paid for salaries expense (14,000.00)
Cash paid for rent expense (70,000.00)
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
Cash paid for utilities expense (20,000.00)

Net cash from operating activities ₱ 356,000.00

Cash paid for the acquisition of equipment (200,000.00)
net cash used in investing activities (200,000.00)

Cash proceeds from loan borrowed 180,000.00
Cash proceeds from investment by owner 20,000.00
Cash payments to the owner (60,000.00)
Net cash from in financing activities 140,000.00
Net increase in cash 296,000.00

Cash, beginning balance 20,000.00
Cash, ending balance ₱316, 000.00
Sample Problem 2: Statement of Cash Flows using Indirect method
The comparative balance sheet and statement of comprehensive income of ABC Co., on
December 31, 2019 are shown below:
ABC Co.
Statement of Financial Position
ASSETS 2019 2018

Cash and cash equivalents ₱ 220,000.00 ₱ 100,000.00
Trade and other receivables ₱ 65,000.00 ₱ 60,000.00
Inventory ₱ 60,000.00 ₱ 240,000.00
Prepaid assets ₱ 20,000.00 ₱ 80,000.00
Total current assets ₱ 365,000.00 ₱ 480,000.00
Property, plant & equipment ₱ 380,000.00 ₱ 220,000.00

total noncurrent assets ₱ 380,000.00 ₱ 220,000.00
TOTAL ASSETS ₱ 745,000.00 ₱ 700,000.00
LIABILITIES
Trade and other payables ₱ 310,000.00 ₱ 280,000.00
EQUITY
Owner's capital ₱ 435,000.00 ₱ 420,000.00
TOTAL LIABILITIES & EQUITY ₱ 745,000.00 ₱ 700,000.00
ABC Co.
Statement of Comprehensive Income
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
Sales ₱ 500,000.00
Cost of sales (₱ 300,000.00)
GROSS PROFIT ₱ 200,000.00
Rent Income ₱ 75,000.00

Depreciation expense (₱ 120,000.00)
Insurance expense (₱ 60,000.00)
Bad debts expense (₱ 15,000.00)
Loss on sale of equipment (₱ 20,000.00)
PROFIT FOR THE YEAR ₱ 60,000.00
Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YEAR ₱ 60,000.00
Additional Information:
 Equipment with carrying amount of ₱120,000 was sold for ₱100,000 resulting to a loss on sale
of ₱20,000.
 Equipment was acquired on cash basis for ₱400,000.
 The owner made total drawings of ₱45,000.
Required: Prepare the statement of cash flows using indirect method. Be sure to provide a proper
Solution:
ABC Co.

PROFIT FOR THE YEAR ₱ 60,000.00
Non-cash items:
Depreciation ₱ 120,000.00
Loss on sale of equipment ₱ 20,000.00
Total ₱ 200,000.00
Changes in operating assets and liabilities:
Increase in Trade and other receivables (₱ 5,000.00)
Decrease in inventory ₱ 180,000.00
Decrease in prepaid assets ₱ 60,000.00
Increase in Trade and other payables ₱ 30,000.00
Net cash from operating activities ₱ 465,000.00

Cash proceeds from sale of equipment ₱ 100,000.00
Cash paid for the acquisition of equipment (₱ 400,000.00)
Net cash used in investing activities (₱ 300,000.00

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;

Cash payments to owner (₱ 45,000.00)
Net cash used in financing activities (₱ 45,000.00)
Net increase in cash and cash equivalents ₱ 120,000.00

Cash and cash equivalents, beginning ₱ 100,000.00
Cash and cash equivalents, ending ₱ 220,000.00
Sample Problem 3: Statement of Cash Flows using indirect method
The comparative statement of financial position and statement of comprehensive income of Entity A
on December 31, 2019 are shown below:
Entity A
Statement of Financial Position
As of December 31, 2019
ASSETS 2019 2018

Cash and cash equivalents ₱440,000 ₱200,000
Trade and other receivables 130,000 120,000
Inventory 120,000 480,000
Prepaid assets 40,000 160,000
Total current assets 730,000 960,000
Property, plant & equipment 760,000 440,000

Total noncurrent assets 760,000 440,000
TOTAL ASSETS ₱1,490,000 ₱1,400,000
LIABILITIES
Trade and other payables 620,000 560,000
EQUITY
Owner’s capital 870,000 840,000
TOTAL LIABILITIES & EQUITY ₱1,490,000 ₱1,400,000
Entity A
Statement of Comprehensive Income
For the year ended December 31, 2019
Sales ₱1,000,000
Cost of sales (600,000)
GROSS PROFIT 400,000
Rent income 150,000
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
Depreciation expense (240,000)

Insurance expense (120,000)
Bad debts expense (30,000)
Loss on sale of equipment (40,000)
PROFIT FOR THE YEAR 120,000
Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YR. ₱120,000
Additional information:
 Equipment with carrying amount of ₱240,000 was sold for ₱200,000 resulting to a loss on sale of
₱40,000.
 Acquisition of equipment for cash amounted to ₱800,000.
 Owner drawings totaled ₱90,000.
Required: Prepare the statement of cash flows using indirect method. Be sure to provide a proper
Solution:
Entity A

PROFIT FOR THE YEAR ₱120,000
Non-cash items:
Depreciation 240,000
Loss on sale of equipment 40,000
Total 400,000
Changes in operating assets & liabilities:
Increase in Trade and other receivables (10,000)
Decrease in inventory 360,000
Decrease in prepaid assets 120,000
Increase in Trade and other payables 60,000
Net cash from operating activities 930,000

Cash proceeds from sale of equipment 200,000
Cash paid for the acquisition of equipment (800,000)
Net cash used in investing activities (600,000)

Cash payments to owner (90,000)
Net cash used in financing activities (90,000)
Net increase in cash and cash equivalents 240,000

Cash and cash equivalents, beginning 200,000
Cash and cash equivalents, ending ₱440,000

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
References:
Ferrer, R. & Millan Z. (2018). Fundamentals of Accountancy, Business, and Management 2. Baguio
City: Bandolin Enterprise
Ballada, W. (2019). Fundamentals of Accountancy, Business, and Management 2. Manila: DomDane

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Fundamentals of Accountancy, Business and

Governor Pack Road, Baguio City, Philippines 2600 Management 2

MODULE 4 – FABM 2 Subject Teacher:

Statement of Cash Flows

a. Discuss the components and structures of a CFS

The Statement of Cash Flows

Presentation of Statement of Cash Flows

a. Cash receipts from interest income.

a. Cash payments for the acquisition of property, plant and equipment.

a. Cash receipts from investments of owner to the business.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 1 of 9

MODULE 4 – FABM 2 Subject Teacher:

Remember the following:

Reporting cash flows from Operating activities

Cash flows from operating activities may be presented using either:

Example: Direct method

Cash flows from operating activities:

Cash flows from investing activities:

Net increase in cash and cash equivalents XX

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 2 of 9

MODULE 4 – FABM 2 Subject Teacher:

Cash flows from operating activities:

Changes in operating assets and Liabilities:

Cash flows from investing activities:

Net increase in cash and cash equivalents XX

Guidelines: Indirect Method

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 3 of 9

MODULE 4 – FABM 2 Subject Teacher:

Reporting cash flows from Investing and Financing activities

Sample Problem 1: Statement of Cash Flows

Cash flows from operating activities:

MODULE 4 – FABM 2 Subject Teacher:

Cash paid for utilities expense (20,000.00)

Cash flows from investing activities:

Cash flows from financing activities:

Net increase in cash 296,000.00

Sample Problem 2: Statement of Cash Flows using Indirect method

ASSETS 2019 2018

Property, plant & equipment ₱ 380,000.00 ₱ 220,000.00

MODULE 4 – FABM 2 Subject Teacher:

Rent Income ₱ 75,000.00

Cash flows from operating activities:

Cash flows from investing activities:

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 6 of 9

MODULE 4 – FABM 2 Subject Teacher:

Cash flows from financing activities:

Net increase in cash and cash equivalents ₱ 120,000.00

Sample Problem 3: Statement of Cash Flows using indirect method

ASSETS 2019 2018

Property, plant & equipment 760,000 440,000

TOTAL ASSETS ₱1,490,000 ₱1,400,000

TOTAL LIABILITIES & EQUITY ₱1,490,000 ₱1,400,000

MODULE 4 – FABM 2 Subject Teacher:

Depreciation expense (240,000)

Cash flows from operating activities:

Cash flows from investing activities:

Cash flows from financing activities:

Net increase in cash and cash equivalents 240,000