Cash Flow Statement (CFS)

The CFS is a financial report that details the cash inflows (sources of
cash) and cash outflows (uses of cash). Cash is the most used asset of a
business. Almost every transaction involves cash. In fact, there is a maxim
in finance that says “Cash is the King” to describe the importance of cash
in maintaining operational efficiency.
The CFS provides an insight on the liquidity of a business entity.
Liquidity refers to the availability of cash and other short-term assets to
pay current or short- term obligations. Thus, cash is regarded as the most
liquid asset.
Cash inflows are the cash receipts. The Cash Receipt Journal (CRJ)
documents these inflows. In the absence of the CRJ, the debit side of the
cash ledger also corresponds to the inflows.
Cash outflows, on the other hand are the cash disbursements. The
Cash Disbursement Journal (CDJ) or Cash Payment Journal (CPJ)
documents these outflows. In the absence of CDJ or CPJ, the credit side of
the cash ledger also corresponds to the outflows.
Various users will be interested in the CFS of an entity so they can
make informed decisions. Creditors like banks and lending institutions
want to know if the business has sufficient cash inflows to meet
obligations as they fall due. Employees, too, maybe interested as this
concerns their regular salary payments. Internally, management will use
the CFS in crafting plans, policies and strategies to improve the business.

Components of a Cash Flow Statement

There are three classifications of cash flow activities – Operating,

Investing and Financing. These are also the referred to as the sections,
components or parts of the CFS. A summary of the three activities is
illustrated below:

 Principal revenue-generating activities

OPERATING
of the firm
ACTIVITIES
 Payment of expenses

 Acquisition and disposal of fixed-

INVESTING assets or long-term assets.
ACTIVITIES  Investments except cash equivalents

FINANCING  Changes in the owner’s equity

ACTIVITIES  Acquisition and settlement of loans

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1. Operating Activities

Cash flows from operating activities involves transactions

affecting the income and expenses. They relate to the day-to-day
operations of the business. Here are some examples:

Inflo Outflo
w w
a. Cash receipts from the a. Cash payments for expenses
rendering of services or sale b. Cash payments for
of goods purchase of inventory
b. Cash receipts from c. Cash payment for trade
interest income payables
c. Cash receipts from
dividend income
d. Cash receipts from
collection of trade
receivables

2. Investing Activities

Cash flow from investing activities involves transactions

relating to the acquisition and disposal of long-term assets and
investments such as Fixed Assets or Property, Plant and Equipment
(PPE). Here are some examples:

Inflo Outflo
w w
a. Cash receipts from the a. Cash payments for
sale of PPE (e.g. land, acquisition of PPE
building, equipment) b. Cash payments for
b. Cash receipts from sale of purchase of stock
stock investment investment
c. Cash proceeds from c. Cash payments for
investment in bonds purchase of bond
investment

3. Financing Activities

There are two ways of financing or providing capital for a

business: equity and debt financing. Cash flow from financing
activities involves transactions relating to the owner’s cash
investment and drawings (equity financing) and business borrowings
from various sources (debt financing). Here are some examples:

Inflo Outflo
w w
a. Cash receipts from owner’s a. Cash payments on
cash investment owner’s personal drawings/
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b. Cash proceeds from loans withdrawals
b. Cash payments on
settlement of loans

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 Note:
Interest income results from interest-bearing notes receivable or from
investments in debt instruments (e.g. bonds) while dividend income is from
investment in stocks. The acquisition of stocks and bonds are investing
activities. Meanwhile, interest expense is an offshoot of loans or borrowings
which is a financing activity.
Although interests and dividends are products of investing or financing
activities, they are reported as part of operating activities because they are
presented in the entity’s Income Statement or Statement of Comprehensive
Income.

Structure of a CFS

Study the structure of a CFS taking note of the similarities or

differences from the other financial statements you have learned in the
previous lessons.

(Name of the Business)

Cash Flow Statement Heading
For the year/period ended _ _

Cash Flows from Operating Activities

Cash inflows from operating ctivities xxxx (a)
Cash outflows from operating activities (xxx) (b)
Net Cash Flow from operating activities xxxx (c)

Cash Flows from Investing Activities

Cash inflows from investing ctivities xxxx (d)
Cash outflows from investing activities (xxx) (e)
Net Cash Flow from investing activities xxxx (f)

Cash Flows from Financing Activities

Cash inflows from financing ctivities xxxx (g)
Cash outflows from financing activities (xxx) (h)
Net Cash Flow from financing activities xxxx (i)

Net increase (decrease) in cash xxxx (j)

Add: Cash, beginning balance xxx (k)
Cash, ending balance xxxx (l)

1. Heading
Just like the other financial reports, a CFS must have a
heading. The first line contains the name of the business, the second
line is the title of the report, in this case Cash Flow Statement. The
third line starts with the phrase “For the year/period ended” followed by
the date when the year or the period ends.
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 2. Net Cash Flow from the Three Sections
The three sections are distinctly presented. For each section,
the cash inflows are presented first followed by the outflows. Cash
outflows are presented as negative numbers (enclosed in
parentheses) and are deducted from the inflows. The result could be
a positive or a negative cash flow. From the pro-forma SFP above
you can see these formulas to compute for the Net Cash Flow from
each section:

o Net Cash Flow from Operating Activities

c=a–b
o Net Cash Flow from Investing Activities
f=d–e
o Net Cash Flow from Financing Activities
i=g–h

3. Net Increase (Decrease) in Cash

The net cash flow from each activity (c, f, and i) are then
added to determine the net increase or decrease in cash. A positive
net cash flow means that there is an increase in cash while a
negative cash flow means otherwise.

4. Ending Balance of Cash

The net increase (decrease) in cash (j) is added to or deducted
from the beginning balance of cash (k) to determine the ending
balance. This must be the same with the ledger balance.

Methods of Preparing the CFS

There are two methods of preparing the CFS – direct method and
indirect method. In the two methods, only the Operating Activities section is
presented differently. The Investing and Financing Activities sections are the
same. Also, the ending balances of cash between these methods will be
the same.

Direct Method Indirect Method

o utilizes the o uses the changes in the
actual beginning and ending
transactions involving balances of current
cash assets and current
liabilities to determine
the changes in cash
o applies to business o applies to business
entities having low entities having high
volume of cash- volume of cash-
related activities related activities

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 In this module, you will be learning only the direct method. The
indirect method will be learned in higher accounting subjects.

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CFS Prepared using the Direct Method
Here is an example of a CFS prepared using the direct method.

Aliwana Travel and

Tours
Cash Flow Statement
For the year ended December 31,
2019
Cash Flows from Operating Activities
Cash receipts from sale of goods Php

500,000
Cash receipts from collection of 80,000
receivables
Cash receipts from interest income 10,000
earned
Cash paid for purchase of inventories (220,000
)
Cash paid for salaries expense (30,000
)
Cash paid for rent expense (25,000
)
Cash paid for delivery expense (5,000)
Net Cash Flow from operating activities Php 310,000

Cash Flows from Investing Activities

Cash receipt from sale of old equipment Php 20,000
Cash paid for acquisition of equipment (300,000)
Net Cash Flow from investing activities Php (280,000)

Cash Flows from Financing Activities

Cash proceeds from bank loan Php

100,000
Cash receipt from owner’s investment 50,000
Cash withdrawal by the owner (20,000)
Net Cash Flow from financing activities Php 130,000

Net increase (decrease) in cash Php

160,000
Add: Cash, beginning balance 70,000
Cash, ending balance Php 230,000

Congratulations for going this far. I believe you are now ready to enhance your
understanding of the lesson by doing the7succeeding activities.
 What’s More

Activity 1: Inflow or Outflow?

Directions:
Analyze each cash-related transaction then identify whether it results to
cash
inflow or outflow. On a separate sheet of paper, write I for inflow and O for
Outflow.

Transactio Answer
n
Ex. Collection of amount owed by a customer I
1. Payments made to a local newspaper for advertisements.
2. Purchase of inventory for cash
3. Owner’s cash investment
4. Payment for water and electricity consumed during the period
5. Receipt of cash proceeds from bank loans
6. Purchase of machineries
7. Payment of advance rent for three months
8. Owner’s cash drawing
9. Receipt of cash for services rendered
10. Sale of a used laptop

Activity 2: Classify Me.

Directions:
Classify the following cash flow activities whether they are part of
Operating, Investing or Financing activities. On a separate sheet of paper,
write O for Operating, I for Investing, and F for Financing.

1. Cash receipts from sale of goods

2. Cash receipts from dividend income
3. Cash payments on the settlement of loans
4. Cash payments for the purchase of machineries
5. Cash receipts from interest income on bank deposits
6. Cash receipts from the sale of fully depreciated equipment
7. Cash receipts from owner’s cash investment
8. Cash receipts from collection of trade receivables
9. Cash payments on owner’s personal drawings
10. Cash proceeds from bank loans

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Good job! You may now proceed to the next activity.

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Activity 3: From Ledger to CFS

Directions:
This activity will connect your previous knowledge of posting journal
entries to the ledger with the preparation of CFS. Study the cash ledger
presented below:

Account Title: CASH Account #: 1001

# Transactio Dr. Cr.
n
Beginning balance 350,000
1. Payment of business fees and licenses 20,000
2. Receipt of cash for services rendered 15,000
3. Sale of depreciated office tables 5,000
4. Acquisition of new office tables 50,000
5. Purchase of bond papers and printer inks 7,000
6. Collection of receivables from customer A 12,000
7. Cash withdrawn for personal use 5,000
8. Payment of principal of interest-bearing 200,000
notes
9. Payment of interest on notes payable 2,500
10 Owner’s additional investment 100,000
.
11 Receipt of cash for services rendered 78,000
.
12 Payment of salaries of employees 35,000
.
Totals 560,000 319,500
Balance 240,500

Classify the transactions as to which activity they belong –

Operating, Investing or Financing. The first entry on the ledger has been
done for you. Copy and accomplish the tables on a separate sheet of
paper.

A. Operating B. Investing Activities C. Financing

Activities Activities
# Amount # Amount # Amount
1 (20,000)

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Another kudos for your effort in finishing this activity

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