INFORMATION PROVIDED IN THE STATEMENTOF CASH FLOWS

As previously mentioned in Chapter 1, the statement of cash flows is one of the

components of a complete set of financial statements. This component shows the

sources of cash and cash equivalents (i.e.,cash inflows) and uses of cash and cash

equivalents (i.e.,cash outflows). In addition, the statement of cash flows links the

statement of financial position and the statement of comprehensive income.

Cash flow information shows the entity's ability to generate cash and cash

equivalents since generating these amounts is the ultimate goal of engaging in

business activities. To provide more insights to the users of the financial statements,

the cash inflows and outflows are presented in the following groups in the face of

the statement of cash flows:

Activities Description

Operating The principal revenue-producing activities of the entity and other

activities that are not investing or financing activities.

Investing The acquisition and disposal of long-term assets and other

investments not included in cash equivalents.

Financing The activities that resulting changes in the size and composition of the
contributed equity and borrowings of the entity.

Lastly, the statement of cash flows enhances the comparability of operating

performance of multiple entities because the accounting for cash and cash

equivalents is relatively straightforward and is not subject to highly judgmental

accounting procedures. The standard covering the presentation of cash flows is PAS

7,Statement of Cash Flows.

The readers should take note that when preparing statement of cash flows, the

focus shall be on the cash inflows and outflows, thus, the accrual basis of accounting

will be set aside for the meantime.

Based on the author’s opinion and experience , the statement of cash flows is the
most difficult to prepare among the components of a complete set of financial statements.

lustration 1-Determining Cash Flow Transactions. For each of the following

transactions during2023,determine if it will be presented as cash inflow or outflow

in the 2023 statement of cash flows:

a. Selling of goods to customers for P500,000 cash.

b. Selling of goods to customers on account for P200,000.

C. Purchasing of goods on credit amounting to P120,000

d. Acquiring of land by issuing 10,000 ordinary shares.

e. Payment P400,000 operating expenses related to 2022.

Only items a and e above shall appear in the face of 2023 statement of cash flows

Item e is still included since the cash outflow happened during 2023, regardless if

it is related to 2022 operating expenses.

Items b,c, and d are excluded from the 2023 statement of cash flows since they do
not involve cash flows. Nonetheless, they may appear in the related notes.

DIRECT METHOD

Under this method, the procedures discussed in the previous chapter using t-

accounts are applicable but with some modifications. The major operating cash

lows that need to be computed under this method are the following:

a.Net cash received from customers

b.Net cash payments to suppliers

c.Net cash payments for operating expenses

d. Cash payments to acquire or cash receipts from selling held for trading

investments.

In connection with this, the amount of gross cash receipts from customers is

computed as follows:

Net amount of cash receipts from customers is computed gross cash receipts less refunds given to
customers.

The amount of gross payments to suppliers is computed as follows:

Net amount of cash payments to suppliers is computed as gross cash payments less refunds received
from suppliers.

The amount of gross receipts from other income is computed as follows:

The amount of gross payments for operating expenses is computed as follows:

Depending on the information provided, the depreciation (or amortization) expense can be computed as
follows:

Other way to complete for the depreciation (or amortization) expense is as follows:

The amount of cash flows related to FVTPL investments can be computed as follows:

Cash payment for the acquisition of FVTPL investments is equal to purchase price less amounts yet to be
paid. Cash received or the proceeds from selling FVTPL, investments can be computed as follows:

Carrying amount of sold investment Pxx

Add: Realized gain on sales (if there is a gain) xx

Less: Realized loss on sale (if there is a loss) (xx)

Cash received or proceeds from selling FVTPL investments Pxx

INDIRECT METHOD

As the readers may have noted, the application of direct method will usually result

to several computations and is usually very taxing to apply in actual practice .On

other hand, indirect method is fairly straightforward as the net income is simply

adjusted to arrive at the net cash flows from operating activities as follows:

Net income after tax Pxx

Add :Non-cash transactions which already decreased net income but are

not related to operating activities, for example:

Depreciation and amortization expense xx

Loss on sale of PPE, intangible assets, amortized cost securities and

FVTOCI securities, if any xx

Impairment losses charged against PPE, intangible assets,

amortized cost securities and FVTOCi securities, if any xx

Amortization of premium from amortized cost/FVTOCI securities, if any xx

Amortization of discount on bonds payable, if any xx

Share in loss of associate, if any xx

Less: Non-cash transactions which increased net income but are not

related to operating activities, for example:

Gain on sale of PPE, intangible assets, amortized cost securities and

FVOCI securities, if any (xx)

 Gain on reversal of impairment charged against PPE, intangible, assets cost/FVTOCI
securities , any
(xx)

Amortization of discount from amortized cost/FVTOCI securities, if any (xx)

Amortization of premium on bonds payable, if any (xx)

Share in profit of associate, if any (xx)

Changes in the working capital balances:

Add: Decreases in current assets, excluding cash and cash equivalents xx

Increases in current liabilities xx

Less: Increases in current assets, excluding cash and cash equivalents (xx)

Decreases in current liabilities (xx)

Net cash provided by (used in) operating activities Pxx

The readers should take note of the following:

a. Change in the balance of cash and cash equivalents is not explicitly included since the net cash
flows from all activities will ultimately result to this amount of change.
b. For the amortization of discount and premium on amortized cost/ FVTOCI securities, it is
important to recall the relationship between the interest income and interest received,
depending on the existence of premium or discount:

Amortization of premium Interest income < Interest received

Amortization of discount Interest income > Interest received

Amortization of premium is added since the amount of interest income included

in the net income is less than the actual amount of interest received. On the other
hand, amortization of discount is deducted since the amount of interest income
included in the net income is higher than the actual amount of interest received.
For the amortization of discount and premium on bonds payable, it is important
to recall the relationship between the interest expense and interest paid,
depending on the existence of premium or discount:

Amortization of premium Interest expense < Interest paid

Amortization of discount Interest expense > Interest paid

Amortization of premium is deducted since the amount of interest expense

deducted from the net income is less than the actual amount of interest paid. On
the other hand, amortization of discount is added since the amount of interest
expense deducted from the net income is higher than the actual amount of interest
paid.
Again, when preparing statement of cash flows, the focus shall be on the interest
received or interest paid, not on interest income or interest expense.

ILLUSTRATION 2. Going back to JONAS Company, the operating activities portion of its
statement of cash flows can be prepared using the indirect method as follows: