DIGOS CENTRAL ADVENTIST ACADEMY, INC.

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FUNDAMETALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

GRADE XII
NAME: ___________________________________________ DATE: September 2, 2020 MODULE NUMBER: 5

TOPIC: CASH FLOW STATEMENT

CASH FLOW STATEMENT

- Reports the cash generated and used during the time interval specified in its heading.
- The period of time that the statement covers is chosen by the company.
- The heading may state “For the Three Months Ended December 31, 2017” or “The Fiscal Year Ended September 30, 2017.
The cash flow statement organizes and reports the cash generated and used in the following categories:
1. Operating Activities – converts the items reported on the income statement from the accrual basis of accounting to cash
2. Investing Activities – reports the purchase and sale of long-term investments and fixed assets or the property, plant and
equipment.
3. Financing Activities – reports the borrowings, payments of borrowing, investment and withdrawal of owner.
Income Statement – prepared under the accrual basis of accounting.
- The revenues reported may not have been collected and expenses reported might not have been paid.
Statements of Financial Position or Balance Sheet – its changes are also integrated in the cash flow statement already.

Here are few ways where the statement of cash flows is used.
1. The cash from operating activities is compared to the company’s net income . If the cash from operating activities is
consistently greater than the net income, the company’s net income or earnings are said to be of a “high quality”. If the cash
from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into
cash.
2. Some investors believe that “cash is king”, the cash flow statement identifies the cash that is flowing in and out of the
company. If a company is consistently generating more cash than it is using, the company will be able to increase its
dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are perceived to be good for
stockholder value.
3. Some financial models are based upon cash flow.
FORMAT OF CASH FLOW STATEMENT
A. Indirect Method – the presentation of this statement begins with net
income or loss, with subsequent additions to or deductions from that
amount from non-cash revenue and expense items, resulting in net income
provided by operating activities.
- This method is used by most companies.
- This method of presentation is very popular because the information
required for it is relatively easily assembled from the accounts that a
business normally maintains in its chart of accounts.
- Less favored by standard-setting bodies since it does not give a clear view
of how cash flows through a business

B. Direct Method
- Also known as income statement method
- The direct method and the indirect method of developing the cash flow statement are primarily different in the first section of
the financial statement – the Cash Flow from Operating Activities section.
- Uses major classes of cash receipts from customers as its starting point.
- It reports all cash receipts in the operating section of the cash flow statement from any source, including customers.
- It reports all cash payments or disbursements in the operating section of the statement of cash flows.
- Examples of disbursements are payments to employees, suppliers, operations, and more. Any interest the company has paid
on outstanding debt is reported along with all income taxes paid in this section.
- Using this method, it will end up with essentially cash receipts minus cash disbursements and the final figure is net cash
flows from operations.
- One of the problems of this method is level of complexity required.
If the business is small, then listing your cash receipts and cash payments is simple matter. As the business gets larger and
larger, imagine for a moment all the cash receipts and cash payments from different sources that have to be listed. The direct
method becomes very complex, which is why the majority of companies use the indirect method of developing a cash flow
statement.
- Another problem with this method is that all accounting transactions affect two accounts. In addition to the complexity of all
the cash transactions using this method.
Each cash transaction affects another account such as inventory, accounts receivable, receivables, or others. These will be
accounted in detail in developing the statement of cash flows with the direct method.
- The advantage of the direct method over the indirect method is that it reveals the operating cash receipts and payments.

Gov’t Recognition No. 001 s. 2014 (Kindergarten) I Gov’t Recognition No. 018 s. 1989 (Elementary)
Gov’t Recognition No. 001 s. 2015 (Junior High School) I Gov’t Permit No. 062 s. 2020 (Senior High School)
 DIGOS CENTRAL ADVENTIST ACADEMY, INC.
Lapu-lapu Ext., Digos City, Davao del Sur 8002 Philippines
Tel. No.: 082-553-3172 email: dcaaonline@gmail.com

- The standard- setting bodies encourage the use of the direct method, but it is rarely used, for the main reason that the
information in it is difficult to assemble. Companies simply do not collect and store information in the manner required for
this format. Using this method may require that the chart of accounts be restructured in order to collect different types of
information.

The simplest format of the direct method looks like this:

Cash Flow from Revenue
Minus: Cash Payments for Expenses
Equals: Income Before Income Taxes
Minus: Cash Payment for Income Taxes
Equals: Net Cash Flow From Operating Activities

Shown below are the three sections of the statement of cash flows, followed by a list of statement of financial position accounts
which affects it.
I. Cash Provided From or Used By Operating Activities
This section of the cash flow statement reports the company’s net income and then converts it from the accrual basis to
the cash basis bu using the changes in the balances of current asset and current liability accounts, such as:
1. Accounts Receivable
2. Inventory
3. Supplies
4. Prepaid Insurance
5. Other Current Assets
6. Notes Payable
7. Accounts Payable
8. Salaries Payable
9. Payroll Taxes Payable
10. Interest Payable
11. Income Taxes Payable
12. Unearned Revenues
13. Other Current Liabilities
In addition to using the changes in current assets and current liabilities, the operating activities section has adjustments
for depreciation expense and for the gains and losses on the sale of long-term assets.

II. Cash Provided From or Used By Investing Activities

This section of the cash flow statement reports changes in the balances of long-term asset accounts, such as:
1. Long-term Investments
2. Land
3. Buildings
4. Equipment
5. Furniture and Fixtures
6. Vehicles
In short, investing activities involve the purchase and/or sale of ling-term investments and property, plant, and equipment.

III. Cash Provided From or Used By Financing Activities

This section of the cash flow statement reports changes in balances of the long-term liability and Owner’s equity accounts, such as:
1. Notes Payable (generally due after one year)
2. Bonds Payable
3. Deferred Income Taxes
4. Cash investment by the Owner
5. Cash Withdrawals by the Owner
In short, financing activities involve the short-term and the long-term borrowings and repayments including investment and
withdrawals by the owner.
Format of the Operating Section of the Cash Flow Statement Using Direct Method
The direct method of presenting the statement of cash flows presents the specific cash flows associated with items that affect cash
flow. Items that typically do so include:
1. Cash collected from customers
2. Interest and dividends received
3. Cash paid to employees
4. Cash paid to suppliers
5. Interest paid
6. Income taxes paid

Note: The Cash from Investing and Financing Activities are the same whether Indirect Method or Direct Method.

Gov’t Recognition No. 001 s. 2014 (Kindergarten) I Gov’t Recognition No. 018 s. 1989 (Elementary)
Gov’t Recognition No. 001 s. 2015 (Junior High School) I Gov’t Permit No. 062 s. 2020 (Senior High School)
 DIGOS CENTRAL ADVENTIST ACADEMY, INC.
Lapu-lapu Ext., Digos City, Davao del Sur 8002 Philippines
Tel. No.: 082-553-3172 email: dcaaonline@gmail.com

Difference between the Direct and the Indirect Method

- The main difference involves the cash flows from operating activities, the first section of the statement of cash flows.
- Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from
customers and cash paid to suppliers. In contrast. The indirect method will show the net income followed by the adjustments
needed to convert the total net income to the cash amount from operating activities.

ACTIVITY A:
INSTRUCTION: Indicate whether each of the following has a positive or a negative EFFECT ON CASH.
Where: A positive effect could also be thought of as a source of cash, an increase in cash, or a positive amount on the cash flow
statement.

A negative effect could also be thought of as a use of cash, a decrease in cash, or a negative amount in the cash flow statement.
1. An increase in the balance of Prepaid Insurance
2. A decrease in Supplies on hand
3. The proceeds from the sale of equipment formerly used in the business
4. The Loss on the Sale of Equipment in the previous question.
5. An increase in the current liability Income Taxes Payable

6. A decrease in Accounts Payable

7. An increase in Accounts Receivable
8. An increase in the current liability Warranty Liability
9. The Gain on the Sale of Equipment formerly used in the business
10. An increase in the long-term asset Investment in Another Company.

ACTIVITY B:
Kristine Agad is a college student who enjoys buying and selling merchandise using the internet. On January 2, 2017, she decided to
turn her hobby into business called “Online Deal Co.” The following were the transactions:
1. On January 2, 2017 Kristine invested P50, 000 of her personal money into her sole proprietorship, Online Deal Co.
2. On January 20, Online Deal bought 14 graphing calculators for P1, 500 per calculator – this was about 50% less than the
selling price Kristine observed at the retail stores. The total cost to Online Deal for all 14 calculators was P21, 700.
3. On January 30, 2017, Online Deal sold 10 calculators to a nearby high school for P2, 000 each. Kristine delivered the
calculators on February 25 and gave the school a P20, 000 invoices due by February 10. Kristine received P20, 000 from the
school on February 8.
Required:
a. Prepare a Cash Flow Statement for Online Deal Co using the indirect method.
b. Prepare a Cash Flow Statement for Online Deal Co using the direct method.

Gov’t Recognition No. 001 s. 2014 (Kindergarten) I Gov’t Recognition No. 018 s. 1989 (Elementary)
Gov’t Recognition No. 001 s. 2015 (Junior High School) I Gov’t Permit No. 062 s. 2020 (Senior High School)