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ACC111:

Resource Management
Kristin A. Militante

Statement of Cash Flows (Indirect Method)



Cash Flows from Operating Activities
Net income







Adjustments for noncash items:

+ Depreciation Expense




xxx

+ Bad Debts Expense




xxx

+ Losses on sale of assets



xxx
- Gains on sale of assets


(xxx)

Adjustments for changes in the current operating
accounts (except cash)
- increase in Current Assets



(xxx)
+ decrease in Current Assets



xxx
+ increase in Current Liabilities

xxx
- decrease in Current Liabilities


(xxx)

Net cash provided by (used in) Operating Activities


Cash Flows from Investing Activities
+ Receipts from sale of non-current assets


xx
- Payments for purchase of fixed assets

(xx)
+ Receipts from debtors for the principal amount of loan xx
- Payments to debtors for the principal amount of loan (xx)
Net cash provided by (used in) Investing Activities



Cash Flows from Financing Activities
+ Investment of owner to the business


xx
- Cash withdrawal of owner



(xx)
+ Receipts from creditors for principal amount of loans xx
- Payment to creditors for the principal amount of loans (xx)
Net cash provided by (used in) Financing Activities



Increase in cash







Cash, beginning








Cash balance, December 31, 20XX












XXX

XXX

XXX

XXX

XXX

P XXX
XXX
P XXX

ACC111: Resource Management


Kristin A. Militante

Adjustments Made to Net Income (Operating Activities)



Adjustments are made to net income so that we can arrive at the actual cash-out and
cash-in under operating activities.

Refer to the income statement below for letters A-F.

Happy Clinic


Income Statement

For the period ending Dec. 31, 2015




P 750,500
Service
Revenue

Depreciation Expense

35,000
Bad Debts Expense
1,000
Utilities Expense
12,000
Wages Expense
16,000
Rent Expense
36,000 -100,000


Other
Revenues and Expenses
Gain on Sale of Furniture
Loss on Sale of Motor Vehicle

Income
Net

P 800,500

200,000
-50,000



A. Adding back depreciation and bad debts expense to net income
In making the cash flow statement, we are concerned with
transactions involving cash. Note that before we arrived at net income, we
considered the revenues and expenses of the business. Net income is not
always equal to cash. Some expenses do not involve an actual cash-out. Lets
take depreciation expense, for example. The journal entry to recognize
depreciation would be:
Depreciation Expense



35,000

Accumulated Depreciation Equipment

35,000


Was there an actual cash-out? No. As seen in the journal entry, we did
not credit cash (therefore, no decrease in cash). Another example would be
bad debts expense. To recognize allotment for uncollectible accounts during
the year, the journal entry would be:
Bad Debts Expense


Allowance for Bad Debts

1,000

1,000
2

ACC111: Resource Management


Kristin A. Militante




Again, there was no actual cash-out. As such, we need add these two
accounts back to net income to recognize the reality that no cash was used when
these expenses were incurred/recorded.

B. Adding back losses / subtracting gains on sale of fixed asset to net income
Transactions that involve selling of non-current assets would fall under investing
activities. At this point, what we want to get from net income would be transactions
that would fall under operating activities. As such, we add back the loss on sale on
fixed asset (since it was previously subtracted from revenue), and subtract gains on
sale of fixed asset (since it was previously added to revenue). The effect on the sale
of the fixed assets would be taken into consideration later when computing for the
net cash provided by (used in) investing activities.

C. Subtracting the increase in current assets from net income

Consider the increase in accounts receivable in the table below:


January 1, 2015
December 31, 2015
Accounts Receivable
P 10,000
P 30,000


Accounts receivable increases when service revenue is rendered on account.
The journal entry for this transaction is as follows:


Accounts Receivable



20,000


Service Revenue





20,000


Was there cash received? No. However, revenue was earned because the
service was already rendered. Because of this, the P20,000 contributed to net
income. Remember that we only want to get actual cash transactions from net
income. Since in this scenario no actual cash was received, we subtract the increase
in accounts receivable to get rid of the portion of service revenue that represents
service rendered on account.


D. Adding the decrease in current assets to net income

Consider the increase in accounts receivable in the table below:


January 1, 2015
December 31, 2015
Accounts Receivable
P 15,000
P 10,000



ACC111: Resource Management


Kristin A. Militante

Accounts receivable goes down when the business collects cash from the
customer. To illustrate, the journal entry is as follows:

Cash


5,000
Accounts Receivable


5,000

Was there an actual increase in cash? Yes. Was this considered in the income
statement (reflected in the net income)? No. As such, we need to add the decrease in
accounts receivable to net income to take into consideration the transactions that
fall under operating activities.

E. Adding back the increase in current liabilities to net income


January 1, 2015
December 31, 2015
Utilities payable
P 0
P 12,000


For the utilities payable to be recorded, there must be at least one account
that was debited. In this case, the account partnered with utilities payable is utilities
expense. Journal entry as follows:

Utilities Expense

12,000

Utilities Payable




12,000


Utilities expense was recorded because utilities were already used or
consumed by the company during the period. However, they have not paid actual
cash yet to the utility companies. For this reason, a liability is recorded in the form
of utilities payable.


Was there an inflow or an outflow of cash in this scenario? No. However,
utilities expense was subtracted from revenues when the net income of P800,500
was recorded. Since we want to only get actual cash transactions from net income,
we add back the increase in utilities payable amounting to P12,000 to add back the
amount previously deducted from service revenue in the form of utilities expense.

F. Subtracting the decrease in current liabilities from net income


January 1, 2015
December 31, 2015
Accounts payable
P 5,800
P 0


Payables decrease when we pay the parties we owe money to. These could
be the suppliers, utility companies, our employees or financial institutions. In this
case, noticeably, our accounts payable decreased by P5,800. Journal entry for this is
as follows:

ACC111: Resource Management


Kristin A. Militante


Accounts Payable
5,800


Cash




5,800


Was there an actual cash-out? Yes. Was this considered in the net income?
No. As such, we need to add the decrease in the accounts payable to net income in
order to obtain actual cash transactions falling under operating activities.


SOMETHING TO TICKLE YOUR MIND



Given:

Net Income
P 800,500
Increase in office supplies
6,000
Increase in accounts payable
6,000

If these are the only transactions that are to be considered to compute for the net
cash provided by operating activities, what amount will you get? Is it correct to say
that the net income in this scenario already reflects cash transactions categorized
under operating activities?