➢ Cash Flow Statement

The statement of cash flows is one of the main financial statements. It

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. For example, 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.

➢ Format of Cash Flow Statement

A. Indirect Method

Under the indirect method of presenting the statement of cash flows, the presentation of this

statement begins with net income or loss, with subsequent additions to or deduction from that amount
for

non-cash revenue and expense items, resulting in net income provided by 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 by using the changes in the balances of current assets and
current

liability accounts, such as:

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 currents 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

long-term investments and property, plant, and equipment.

This section of the cash flow statement reports changes in balances of the long-term liability

and Owner’s equity accounts, such as:

a. Notes Payable (generally due after one year)

b. Bonds Payable

c. Deferred Income Taxes

d. Cash Investment by the Owner

e. 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.

B. Direct Method

The direct method of developing the cash flow statement 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. Next, the direct method reports all cash payments or

disbursements in the operating section of the statement of cash flows. Any interest the company has

paid on outstanding debt is reported along with all income taxes paid in this section. Using the direct

method, it will end up with essentially cash receipts minus cash disbursements and the final figure is

net cash flows from operations.

The direct method is also called the income statement method. The simple 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

➢ 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

➢ Difference between the direct and the Indirect Method

The main difference between the direct and indirect method involves the cash flows from

operating activities, the first section of the statement of cash flows/ (There is no difference in the cash

flows reported in the investing and financing activities sections.)

Under the direct method, the cash flows from operating activities will included the amounts for

lines such as cash from customers and cash paid to suppliers. In contrast, the indirect method will show

net income followed by the adjustments needed to convert the total net income to the cash amount
from

operating activities.

The direct method must also provide a reconciliation of net income to the cash provided by

operating activities. This is done automatically under the indirect method.

EXAMPLE OF INDERECT METHOD

Angela Padua Services

Statement of Cash Flow

For the year ended, December 31, 2017

Cash Flows from Operating Activities

Net Income P 2,000,000

Adjustments for:

Depreciation 125,000

Allowance for Doubtful Accounts 20,000

Increase in Accounts Receivable ( 250,000)

Decrease in Trade Payables ( 50,000)

Net Cash Flows from Operating Activities P 2,170,000

Cash Flows from Investing Activities

Purchase of New Equipment P (500,000)

Proceeds from Sale of Equipment 35,000

Net Flows from Investing Activities ( 465,000)

Cash Flows from Financing Activities

Investment by Owner P 150,000

Cash Borrowings from Bank 175,000

Withdrawals of Owner ( 20,000)

Net Cash Flows from Financing Activities 305,000

Net Increase in Cash P 2,10,000, 000

Cash Balance Beginning 150,000

Cash Balance End P 1,940,000

EXAMPLE OF DIRECT METHOD

Angela Padua Services

Statement of Cash Flow

For the year ended, December 31, 2017

Cash Flows from Operating Activities

Cash Receipts from Customers P 5,800,000

Cash Paid to Suppliers ( 1,800,000)

Cash Paid to Employees ( 1,200,000)

Interest Paid ( 310,000)

Income Taxes Paid ( 570,000)

Net Cash from Operating Activities P 1,920,000