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Statement of Cash Flows

 It provides information about the cash receipts and cash payments of an entity during a period.
 It is a formal statement that classifies cash receipts (inflows) and cash payments (outflows) into
operating, investing and financing activities.
 This statement shows the net increase or decrease in cash during the period and the cash balance
at the end of the period; it also helps project the future net cash flows of the entity.
 Each item in the statement helps explain why cash changed by the amount it did during the period.
 Importance – SCF helps the owner see if their revenues are actually translated to cash collection
or if they have enough cash inflows to pay any maturing obligations.

CASH FLOWS FROM OPERATING ACTIVITIES


 Operating activities general involve providing services and producing and delivering
goods.
 Cash Flows from operating activities are generally the cash effects of transactions and
other events that enter into the determination of profit or loss.
2 approaches in preparing cash flow statement
1. Direct Method – this is the cash basis income statement.
- Using the direct method, the entity’s net cash provided by operating
activities is obtained by adding the individual operating cash inflows
and then subtracting the individual operating cash outflows.
2. Indirect Method – it derives the net cash provided operating activities by adjusting profit
for income and expense items not resulting from cash transactions.

EXAMPLES:
a) Expenses and charges are added to the profit as it did not entail cash payments.
b) Increases in current assets and decreases in current liabilities are subtracted from
the profit.
Example: Increases in A/R from sale of goods represented an increase in profit
without corresponding increase in cash – for it is still a receivable. Since these
revenues are already included in the computation of profit, the increase in A/R
should be deducted from the profit figure.
c) Decreases in current assets and increases in current liabilities are added to profit.
Example: Increase in salaries payable meant that the entity did not pay the full
amount of salaries expense. The expense in the income statement, for cash flow
purposes is overstated by the amount of unpaid salaries. If expense is overstated,
then profit is understated by the same amount, hence, the increase in current
liability is added to profit.
Profit XX
Adjustments for:
Noncash expense (depreciation) XX
Increases in current asset (XX)
Decreases in Current Asset XX
Increases in current liability XX
Decreases in current liability (XX)
Cash Flows from Operating Activities P XXX

Major Classes of Operating Cash Flows using the Direct Method:


CASH FLOWS FROM OPERATING ACTIVITIES

 (+) Receipts from sale of goods and services


 (+) Receipts from dividends, royalties, rentals, fees, commissions and other revenues
 (-) Payments to suppliers of goods and services
 (-) Payments to employees
 (-) Payments for taxes
 (-) Payments for interest expense
 (-) Payments for another operating expense
CASH FLOWS FROM INVESTING ACTIVITIES – this include making and collecting loans; acquiring
and disposing of investments in debt or equity securities; and obtaining and selling of property
and equipment and other productive assets.

 (+) Receipts from sale of property or equipment


 (+) Receipts from sale of investments in debt or equity securities
 (+) Receipts from collections on notes receivables
 (-) Payments to acquire property and equipment
 (-) Payments to acquire debt or equity securities
 (-) Payments to make loans generally in the form of notes receivable
CASH FLOWS FROM FINANCING ACTIVITIES – this include obtaining resources from owners,
(equity, financing) and creditors (debt financing)

 (+) Receipts from investments made by the owners


 (+) receipts from issue of preference and ordinary share
 (+) Receipts from issuance of notes payable
 (-) Payments to owners in the form of withdrawals
 (-) Payments of dividends
 (-) Payments to settle notes payable
DIRECT METHOD
Design “R” US
Statement of Cash Flows
For the month ended May 31, 2019
Cash Flows from Operating Activities
Cash from clients P 60,000
Payment to suppliers (10,000)
Payment to employees (13,800)
Payment for office Rent ( 8,000)
Payment for insurance (14,400)
Payment for Utilities (3,000)
Net cash Flow from Operating Activities P 11,200
Cash Flows from Investing Activities
Payment to acquire service vehicle P (420,000)
Payment to acquire Equipment (15,000)
Net cash Flow from Investing Activities P 435,000
Cash Flows from Financing Activities
Cash investments by owner P 250,000
Cash from borrowings 210,000
Payment for withdrawals by owner (14,000)
Net cash Flow from Financing Activities P 446,000
NET INCREASE in CASH P 22,000
Cash Beginning -
Cash Ending P 22,000