STATEMENT
OF
CASH FLOWS
STATEMENT OF CASH FLOWS
A statement of cash flows is a component of financial statements which summarizes the operating, investing and financing activities of
an entity (information about cash receipts and cash payments made during a given period of time). The statement of cash flows is
intended to provide information about the change in an entity’s cash and cash equivalents.
Cash comprises cash on hand and demand deposits. Cash equivalents are short-term highly liquid investments that are readily
convertible to known amount of cash and which are subject to an insignificant risk of change in value.
CLASSIFICATION OF CASH FLOWS
Operating activities are the cash flows derived primarily from the principal revenue producing activities of the entity.
Examples of cash flows from operating activities are:
a. Cash receipts from sale of goods and rendering of services
b. Cash receipts from royalties, rental, fees, commissions and other revenues
c.
Cash payments to suppliers for goods and services
d. Cash payments for selling, administrative and other expenses
e. Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits
f.
Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities
g. Cash receipts and payments for securities held for dealing or trading purposes
STATEMENT OF CASH FLOWS
CLASSIFICATION OF CASH FLOWS
Investing activities are the cash flows derived from the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.
Examples of cash flows from investing activities are:
a. Cash payments to acquire property, plant and equipment, intangibles and other long-term assets
b. Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets
c.
Cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (current and long-term
investments)
d. Cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures
e. Cash advances and loans to other parties (other than advances and loans made by financial institutions)
f.
Cash receipts from repayment of advances and loans made to other parties
g. Cash payments for futures contract, forward contract, option contract and swap contract
h. Cash receipts from futures contract, forward contract, option contract and swap contract
STATEMENT OF CASH FLOWS
CLASSIFICATION OF CASH FLOWS
Financing activities are the cash flows derived from the equity capital and borrowings of the entity. Financing activities include the
cash flows from transactions involving nontrade liabilities and equity of an entity.
Cash flows from financing activities result from transactions:
a. between the entity and the owners – equity financing
b. Between the entity and the creditors – debt financing
Examples of cash flows from financing activities are:
a. Cash receipts from issuing shares or other equity instruments (e.g. issuance of ordinary and preference shares)
b. Cash payments to owners to acquire or redeem the entity’s shares (e.g. payment for treasury shares)
c.
Cash receipts from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings (nontrade)
d. Cash payments for amounts borrowed
e. Cash payments by a lessee for the reduction of the outstanding principal lease liability
IMPORTANT NOTE: Cash payments to settle obligations involving trade accounts and notes payable, income tax payable, accrued
expenses and similar items are operating activities, NOT financing activities.
STATEMENT OF CASH FLOWS
Noncash transactions
The statement of cash flows is strictly a cash concept. Accordingly, investing and financing activities that do not require the use of cash
or cash equivalents shall be excluded from the statement of cash flows.
The following noncash transactions are disclosed separately (either in the Notes to FS or in a separate schedule):
a.
b.
c.
d.
Acquisition of asset by assuming directly related liability
Acquisition of asset by means of issuing share capital
Conversion of bonds payable to share capital
Conversion of preference share to ordinary share
Interest
Interest paid and interest received shall be classified as operating cash flows because they form part of the determination of net income
or loss for the period (PAS 7, par. 33).
Alternative treatments:
1. Interest paid may be classified as financing cash flow because it is a cost of obtaining financial resources.
2. Interest received may be classified as investing cash flow because it is a return on investment
Interest paid and interest received are usually classified as operating cash flows for financial institutions.
Cash flows from interest paid and interest received shall be classified in a consistent manner from period to period as either operating,
investing or financing activities.
STATEMENT OF CASH FLOWS
Dividends
Dividend received shall be classified as operating cash flow because it enters into the determination of net income (PAS 7, par. 33).
Dividend paid shall be classified as financing cash flow because it is a cost of obtaining financial resources (PAS 7, par. 33).
Alternative treatments:
1. Dividend received may be classified as investing cash flow because it is a return on investment.
2. Dividend paid may be classified as operating cash flow in order to assist users to determine the ability of the entity to pay dividends
out of operating cash flows.
The classification of dividend received and dividend paid as either operating, investing or financing activity shall be made on a consistent
basis from period to period.
Income taxes
Cash flows arising from income taxes shall be separately disclosed as cash flows from operating activities unless they can be specifically
identified with investing and financing activities.
STATEMENT OF CASH FLOWS
Direct Method – Operating activities
This method shows in detail the major classes of gross cash receipts and gross cash payments which are listed one by one where the
difference is presented as the net cash flow from operating activities. The direct method resembles the “cash basis” income statement
which requires the conversion of some income and expense items from accrual to cash basis form.
Indirect Method – Operating activities
The net income or loss is adjusted for the effects of transactions of a noncash nature, any deferrals or accruals of past or future
operating cash receipts and payments, and items of income or expense associated with investing and financing activities.
Adjustment Guidelines (Accrual net income or loss to Cash Basis)
1. All increases in trade noncash current assets and decreases in trade noncash current liabilities are deducted from net income.
2. All decreases in trade noncash current assets and increases in trade noncash current liabilities are added to net income.
3. Depreciation, amortization and other noncash expenses are added back to net income to eliminate their effects on net income.
4. Any gain on disposal of property or gain on early retirement of nontrade liabilities shall be deducted from net income.
5. Any loss on disposal of property or loss on early retirement of nontrade liabilities shall be added back to net income.
6. Other noncash income or gain is deducted from net income and other noncash expense or loss is added to net income to eliminate
their effects on net income.
Practical computational guidelines on trade noncash current assets and trade noncash current liabilities
1. For trade noncash current assets = prior year balance minus current year balance
2. For trade noncash current liabilities = current year balance minus prior year balance
STATEMENT OF CASH FLOWS
Problem 1
COUZ FLAWS Co. reported the following income statement for the current year:
Sales
Cost of goods sold:
Inventory, Jan 1
Purchases
Goods available for sale
Inventory, Dec 31
Gross income
Expenses:
Salaries
Rent
Insurance
Doubtful accounts
Other expenses
Depreciation
Net income
4,500,000
750,000
2,850,000
3,600,000
( 600,000) 3,000,000
1,500,000
600,000
250,000
20,000
30,000
100,000
50,000 1,050,000
450,000
Additional information:
Accounts receivable
Allowance for doubtful accounts
Inventory
Prepaid insurance
Accounts payable
Salaries payable
Equipment
Accumulated depreciation
Dec 31
540,000
40,000
600,000
15,000
280,000
50,000
1,200,000
290,000
Jan 1
440,000
20,000
750,000
10,000
160,000
80,000
1,200,000
240,000
During the year, the entity recognized doubtful accounts expense of
P30,000 and wrote off uncollectible accounts of P10,000.
REQUIRED:
Determine the cash flow from operating activities using the direct method and indirect method.
STATEMENT OF CASH FLOWS
Problem 1 (Answers)
Direct method – operating activities
Accounts receivable – Jan 1
Sales
Accounts written off
Accounts receivable – Dec 31
Cash received from customers
440,000
4,500,000
( 10,000)
( 540,000)
4,390,000
Accounts payable – Jan 1
Purchases
Accounts payable – Dec 31
Cash payments to creditors
160,000
2,850,000
( 280,000)
2,730,000
Accrued salaries – Jan 1
Salaries expense
Accrued salaries – Dec 31
Salaries paid
80,000
600,000
( 50,000)
630,000
Prepaid insurance – Dec 31
Insurance expense
Prepaid insurance – Jan 1
Insurance paid
15,000
20,000
( 10,000)
25,000
Rent
250,000
Other expenses
100,000
Cash received from customers
Cash payments to creditors
Salaries paid
Insurance paid
Rent
Other expenses
Net cash provided by operating activities
4,390,000
(2,730,000)
( 630,000)
( 25,000)
( 250,000)
( 100,000)
655,000
Indirect method – operating activities
Net income
Depreciation
Increase in net accounts receivable
Decrease inventory
Increase in prepaid insurance
Increase in accounts payable
Decrease in accrued salaries
Net cash provided by operating activities
450,000
50,000
( 80,000)
150,000
( 5,000)
120,000
( 30,000)
655,000
NOTE:
Depreciation is added back since it is a noncash expense. Changes in
trade assets are inversely related to cash flows while changes in trade
liabilities are directly related to cash flows.
STATEMENT OF CASH FLOWS
Problem 2
COUZ FLAWS Co. provided the following comparative statement of financial position:
2020
Assets
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses
Property, plant & equipment, net
Accumulated depreciation
Total
Liabilities and equity
Accounts payable
Accrued expenses
Share capital
Retained earnings
Total
2019
750,000
1,750,000
2,550,000
100,000
5,300,000
(1,150,000)
9,300,000
950,000
1,100,000
1,800,000
150,000
4,300,000
( 800,000)
7,500,000
1,250,000
50,000
4,750,000
3,250,000
9,300,000
1,000,000
200,000
4,250,000
2,050,000
7,500,000
Additional information:
1. The statement of retained earnings for 2020 showed net income of
P1,500,000 and cash dividend paid of P300,000.
2.
During the current year, the entity purchased equipment for cash
and issued share capital for cash
REQUIRED:
Prepare a statement of cash flows for the current year using the indirect method.
STATEMENT OF CASH FLOWS
Problem 2 (Answer)
COUZ FLAWS Co.
Statement of Cash Flows
For the year ended December 31, 2020
Cash flows from operating activities:
Net income
Depreciation
Increase in accounts receivable
Increase in inventory
Decrease in prepaid expense
Increase in accounts payable
Decrease in accrued expenses
Net cash provided by operating activities
1,500,000
350,000
( 650,000)
( 750,000)
50,000
250,000
( 150,000)
600,000
Cash flows from investing activities:
Purchase of equipment
(1,000,000)
Cash flows from financing activities:
Issuance of share capital
Payment of cash dividend
Net cash provided by financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents – Jan 1
Cash and cash equivalents – Dec 31
500,000
( 300,000)
200,000
(
200,000)
950,000
750,000
NOTE:
Depreciation is added back since it is a noncash expense.
Changes in trade assets are inversely related to cash flows
while changes in trade liabilities are directly related to cash
flows.
STATEMENT OF CASH FLOWS
Problem 3
COUZ FLAWS Co. provided the following comparative statement of financial position and income statement as at and for the year ended 12/31/20:
2020
Assets
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid insurance
Property, plant & equipment, net
Accumulated depreciation
Total
Liabilities and Equity
Accounts payable
Salaries payable
Income tax payable
Accrued interest payable
Bonds payable
Share capital
Retained earnings
Treasury shares
Total
2019
120,000
370,000
1,090,000
80,000
4,300,000
( 840,000)
5,120,000
150,000
210,000
860,000
90,000
3,620,000
( 720,000)
4,210,000
400,000
70,000
35,000
5,000
600,000
3,050,000
1,100,000
( 140,000)
5,120,000
345,000
40,000
15,000
3,050,000
760,000
___
4,210,000
Sales
Cost of sales:
Inventory – Jan 1
Purchases
Goods available for sale
Inventory – Dec 31
Gross income
Gain on sale of equipment
Total income
Expenses:
Salaries
Insurance
Rent
Depreciation
Bad debt written off
Interest expense
Income before income tax
Income Tax
Net income
4,450,000
860,000
2,630,000
3,490,000
(1,090,000)
640,000
100,000
350,000
260,000
20,000
40,000
2,400,000
2,050,000
60,000
2,110,000
1,410,000
700,000
( 200,000)
500,000
Additional information:
1. Cash dividends of P160,000 were declared and paid during the year.
2. Equipment costing P190,000 and with accumulated depreciation of
P140,000 was sold for P110,000 cash.
STATEMENT OF CASH FLOWS:
Problem 3 (cont.)
3. New equipment was purchased for cash.
4. Bonds payable were issued for cash at the face amount of P600,000.
5. The treasury shares were purchased at cost of P140,000.
REQUIRED:
1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
ANSWERS (Requirement No. 1)
Income before tax
Depreciation
Interest expense
Gain on sale
Increase in accounts receivable
Increase in inventory
Decrease in prepaid expenses
Increase in accounts payable
Increase in salaries payable
Interest paid
Income taxes paid
Net cash provided by operating activities
ANSWERS (Requirement No. 2)
Purchase of equipment *
Proceeds from sale of equipment
Net cash used in investing activities
700,000
260,000
40,000
( 60,000)
(160,000)
(230,000)
10,000
55,000
30,000
( 35,000)
(180,000)
430,000
(870,000)
110,000
(760,000
*Increase in PPE (P4,300,000 – P3,620,000)
Cost of equipment sold
Cost of equipment purchased for cash
680,000
190,000
870,000
ANSWERS (Requirement No. 3)
Proceeds from issuance of bonds
Purchase of treasury shares
Payment of cash dividends
Net cash provided by financing activities
600,000
(140,000)
(160,000)
(760,000)
Direct method: Operating cash flows
Cash received from customers
Cash payments to suppliers
Salaries paid
Insurance paid
Rent paid
Interest paid
Income taxes paid
Net cash provided by operating activities
4,270,000
(2,575,000)
( 610,000)
( 90,000)
( 350,000)
( 35,000)
( 180,000)
430,000
NOTE (indirect method):
Depreciation is added to net income since it is a noncash expense.
Interest expense is an operating cash flow, unless otherwise elected
by the entity to present the same under financing cash flows. Gain is
added back to net income to properly adjust the latter.
STATEMENT OF CASH FLOWS
Problem 4
COUZ FLAWS Co. showed the following comparative statement of
Financial position:
Cash and cash equivalents
Accounts receivable, net of allowance
Inventory
Investment in Hall Company shares
Land
Property, plant and equipment
Accumulated depreciation
Goodwill
Total
2020
2,350,000
600,000
1,000,000
2,200,000
2,000,000
5,000,000
(1,050,000)
400,000
12,500,000
2019
350,000
700,000
850,000
2,000,000
1,500,000
4,000,000
(800,000)
400,000
9,000,000
Accounts payable
Notes payable - long term
Bonds payable
Share capital, P100 par
Share premium
Retained earnings
Treasury shares
Total
600,000
500,000
1,600,000
5,250,000
2,700,000
1,850,000
12,500,000
550,000
2,100,000
4,000,000
1,750,000
1,300,000
(700,000)
9,000,000
Additional information:
1. The net income for the current year was P3,050,000.
2.
Cash dividend paid amounted to P2,500,000.
3.
The entity sold equipment costing P200,000 with carrying amount of
P50,000. for P70,000 cash.
4.
The entity issued 10,000 shares of capital for cash at P150 per share.
5.
The entity sold all of its treasury shares for P900,000 cash.
6.
Individuals holding bonds with face amount of P500,000 exercised
their conversion privilege. Each of the 500 bonds was converted into
5 shares of capital.
7.
The entity purchased equipment for P1,200,000.
8.
Land with a fair value of P500,000 was purchased through the
issuance of long term note.
REQUIRED:
Statement of Cash Flows for the current year.
STATEMENT OF CASH FLOWS
Problem 4 (Answer)
COUZ FLAWS Co.
Statement of Cash Flows
For the year ended December 31, 2020
Cash flows from operating activities:
Net income
Depreciation
Investment income
Gain on sale
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Net cash provided by operating activities
Supporting computations and explanations:
3,050,000
400,000
(200,000)
(20,000)
100,000
(150,000)
50,000
3,230,000
Cash flows from investing activities:
Purchase of equipment
Proceeds from sale of equipment
Net cash used in investing activities
(1,200,000)
70,000
(1,130,000)
Cash flows from financing activities:
Proceeds from issuance of shares
Proceeds from sale of treasury shares
Payment of dividends
Net cash used in financing activities
1,500,000
900,000
(2,500,000)
(100,000)
Increase in cash and cash equivalents
Cash and cash equivalents – Jan 1
Cash and cash equivalents – Dec 31
2,000,000
350,000
2,350,000
Increase in PPE (P5,000,000 – P4,000,000)
Cost of equipment sold
Cost of equipment purchased for cash
1,000,000
200,000
1,200,000
The increase in the investment account is presumed to have
resulted from the fluctuation in the fair value of investment
(investment income). Since it does not have actual cash effect,
the investment income is deducted from net income to reflect the
cash basis income during the period.
Depreciation is a noncash expense, hence, added back to net
income.
Gain on sale is adjusted back to net income to properly reflect
operating cash flows. The proceeds from sale (carrying amount of
the asset sold plus the gain) is presented as a cash inflow under
the investing activities.
Changes in trade assets are inversely related to cash flows while
changes in trade liabilities are directly related to cash flows.
STATEMENT OF CASH FLOWS
Problem 5
COUZ FLAWS Co. provided the following data for the current year:
Cash balance, beginning of the year
Cash flows from financing activities
Total shareholders’ equity, end of the year
1,300,000
1,000,000
2,300,000
What amount of cash was reported at the end of the current year?
ANSWER:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net decrease in cash during the year
Cash balance, beginning of the year
Cash balance, end of the year
400,000.00
(1,500,000.00)
1,000,000.00
(100,000.00)
1,300,000.00
1,200,000
Cash flows from operating activities
Cash flows from investing activities
Total shareholders’ equity, beginning of the year
400,000
(1,500,000)
2,000,000
STATEMENT OF CASH FLOWS
Problem 6
COUZ FLAWS Co. provided the following data for the preparation of the statement of cash flows for the current year:
Dividends declared and paid
Cash flows from investing activities
Cash flows from financing activities
800,000
(2,500,000)
( 800,000)
Cash
Other assets
Liabilities
Share capital
Retained earnings
Dec 31
2,100,000
21,000,000
10,500,000
2,000,000
10,600,000
Jan 1
1,200,000
22,700,000
11,700,000
2,000,000
10,200,000
What amount should be reported as cash flows from operating activities?
ANSWER:
Cash balance, end of the year
Cash balance, beginning of the year
Net increase in cash during the year
Net cash used in investing activities
Net cash used financing activities
Net cash provided by operating activities
2,100,000
1,200,000
900,000
2,500,000
800,000
4,200,000
IMPORTANT NOTES:
The net increase in cash during the period pertains to the net effect
of the operating, investing and financing cash flows for the year.
Accordingly, the known net cash provided from an activity is
deducted from the net change in cash and the known net cash used
in an activity is added to the net change in cash to determine the
net cash flow from the other activity.
STATEMENT OF CASH FLOWS
Problem 7
COUZ FLAWS Co. provided the following data for the current year:
Cash
Retained earnings
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Dividends declared and paid
Net income
Dec 31
1,500,000
7,000,000
?
(4,800,000)
1,800,000
2,000,000
3,600,000
Jan 1
1,000,000
5,400,000
What amount should be reported as cash flows from operating activities?
ANSWER:
Cash balance, end of the year
Cash balance, beginning of the year
Net increase in cash during the year
Net cash used in investing activities
Net cash provided by financing activities
Net cash provided by operating activities
1,500,000
1,000,000
500,000
4,800,000
(1,800,000)
3,500,000
IMPORTANT NOTES:
The net increase in cash during the period pertains to the net effect
of the operating, investing and financing cash flows for the year.
Accordingly, the known net cash provided from an activity is
deducted from the net change in cash and the known net cash used
in an activity is added to the net change in cash to determine the
net cash flow from the other activity.
STATEMENT OF CASH FLOWS
Problem 8
COUZ FLAWS Co. reported net income of P5,000,000 for the current year. Depreciation expense was P1,900,000. The following working capital
accounts changed during the year:
Accounts receivable
Nontrading equity investment
Inventory
Nontrade note payable
Accounts payable
1,100,000 increase
1,600,000 increase
730,000 increase
1,500,000 increase
1,220,000 increase
What amount should be reported as cash flows from operating activities (use indirect method)?
ANSWER:
Net income for the year
Depreciation
Increase in accounts receivable
Increase in inventory
Increase in accounts payable
Cash flows provided by operating activities
5,000,000
1,900,000
(1,100,000)
(730,000)
1,220,000
6,290,000
NOTE:
Depreciation is added back since it is a noncash expense.
Changes in trade assets are inversely related to cash flows
while changes in trade liabilities are directly related to
cash flows.
STATEMENT OF CASH FLOWS
Problem 9
COUZ FLAWS Co. reported net income of P750,000 for the current year. The entity provided the following account balances for the preparation of
statement of cash flows for the current year:
Jan 1
Dec 31
Accounts receivable
115,000
145,000
Allowance for doubtful accounts
4,000
5,000
Prepaid rent expense
62,000
41,000
Accounts payable
97,000
112,000
What amount should be reported as cash flows from operating activities during the current year?
ANSWER:
Net income for the year
Increase in accounts receivable, net
Decrease in prepaid rent
Increase in accounts payable
Cash flows provided by operating activities
750,000
(29,000)
21,000
15,000
757,000
IMPORTANT NOTES:
The allowance for doubtful accounts is deducted from the gross
accounts receivable in determining the increase (decrease) in the
latter.
Changes in trade assets are inversely related to cash flows while
changes in trade liabilities are directly related to cash flows.
STATEMENT OF CASH FLOWS
Problem 10
COUZ FLAWS Co. reported net income of P 1,500,000 for the current year. The entity provided the following changes in several accounts during
the current year:
Investment in NO-FERA Co. shares carried on the equity basis
Accumulated depreciation, caused by major repair to project equipment
Premium on bonds payable
Deferred tax liability
55,000 increase
21,000 decrease
14,000 decrease
18,000 increase
What amount should be reported as cash flows from operating activities during the current year?
ANSWER:
Net income for the year
Investment income
Amortization of premium on bonds payable
Increase in deferred tax liability
Cash flows provided by operating activities
1,500,000
(55,000)
(14,000)
18,000
1,449,000
IMPORTANT NOTES:
Investment income is deducted from net income since it does not
result in any cash flow to the entity.
Amortization is a noncash expense. Accordingly, it is added back to
net income to properly reflect the cash flows from operations.
Increase in deferred tax liability decreases the income tax payments
during the period. Hence, the increase is added back to net income.
STATEMENT OF CASH FLOWS
Problem 11
COUZ FLAWS Co. provided the following information:
Accounts receivable, Jan 1, net of allowance of P100,000
Accounts receivable, Dec 31, net of allowance of P300,000
Sales for the current year – all on credit
Uncollectible accounts written off during the year
Recovery of accounts return off during the year
Bad debt expense for the year
Cash expenses for the year
Net income for the year
1,200,000
1,600,000
8,000,000
70,000
20,000
250,000
5,250,000
2,500,000
What amount should be reported as cash flows from operating activities during the current year?
ANSWER:
Beginning balance
Sales on account
Recovery
Accounts Receivable
1,300,000 Ending balance
8,000,000 Accounts written off
20,000 Collections
9,320,000
Collections from customers
Cash expenses for the year
Net cash provided by operating activities
1,900,000
70,000
7,350,000
9,320,000
7,350,000
(5,250,000)
2,100,000
Alternative computations (indirect method):
Net income
Increase in accounts receivable (P1,600,000 - P1,200,000)
Net cash provided by operating activities
2,500,000
(400,000)
2,100,000
STATEMENT OF CASH FLOWS
Problem 12
COUZ FLAWS Co. provided the following information at year end:
2020
2019
Accounts receivable
620,000
680,000
Inventory
1,960,000
1,840,000
Accounts payable
380,000
520,000
Accrued expenses
500,000
340,000
The income statement for the current year showed:
Net income
2,120,000
Depreciation
240,000
Amortization of patent
80,000
Gain on sale of land
200,000
What amount should be reported as cash flows from operating activities during the current year?
ANSWER:
Net income for the year
Depreciation
Amortization of patent
Gain on sale of land
Decrease in accounts receivable
Increase in inventory
Decrease in accounts payable
Increase in accued expenses
Net cash provided by operating activities
2,120,000
240,000
80,000
(200,000)
60,000
(120,000)
(140,000)
160,000
2,200,000
IMPORTANT NOTES:
Depreciation and amortization are noncash expense items, hence,
added back to net income.
Gain on sale is deducted from net income. The cash effect of the
sale must be reflected under investing activities.
Changes in trade assets are inversely related to cash flows while
changes in trade liabilities are directly related to cash flows.
STATEMENT OF CASH FLOWS
Problem 13
COUZ FLAWS Co. provided the following account balances:
Dec 31
Accounts receivable
800,000
Inventory
300,000
Accounts payable
500,000
Jan 1
750,000
450,000
700,000
The income statement for the current year showed:
Revenues
9,800,000
Cost of sales
(4,000,000)
Other expense
(1,300,000)
Depreciation expense
(1,000,000)
Loss on sale of equipment
( 100,000)
Net income
3,400,000
What amount should be reported as cash flows from operating activities during the current year?
ANSWER:
IMPORTANT NOTES:
Net income for the year
3,400,000
Depreciation is a noncash expense, hence, added back to net
Depreciation
1,000,000
income.
Loss on sale of equipment
100,000
Loss on sale is added back to net income. The cash effect of the sale
Increase in accounts receivable
(50,000)
must be reflected under investing activities.
Decrease in inventory
150,000
Decrease in accounts payable
(200,000)
Changes in trade assets are inversely related to cash flows while
Net cash provided by operating activities
4,400,000
changes in trade liabilities are directly related to cash flows.
STATEMENT OF CASH FLOWS
Problem 14
COUZ FLAWS Co. provided the following information for the current year:
Purchase of inventory
Purchase of land, with the vendor financing P1,000,000 for 2 years
Purchase of plant for cash
Sale of plant:
Carrying amount
Cash proceeds
Buyback of ordinary shares
1,950,000
3,500,000
2,500,000
500,000
400,000
700,000
What amount of investing net cash flows should be reported in the statement of cash flows for the current year?
ANSWER:
Sale of plant assets
Purchase of land (cash portion only)
Purchase of plant assets
Net cash used in investing activities
400,000
(2,500,000)
(2,500,000)
(4,600,000)
NOTE: The purchase of inventory is an operating cash outflow while the buyback of ordinary shares is a financing cash outflow.
STATEMENT OF CASH FLOWS
Problem 15
COUZ FLAWS Co. provided the following information at the end of each year:
2020
2019
Borrowings
2,500,000
800,000
Share capital
3,500,000
2,000,000
Retained earnings
950,000
750,000
Borrowings of P300,000 were repaid during 2020 and new borrowings include P200,000 vendor financing arising on the acquisition of a property.
The movement in retained earnings comprised profit for 2020 of P900,000 net of dividends of P700,000. The movement in share capital arose
from issuance of shares for cash during the year.
What amount should be reported as financing net cash flows for the current year?
ANSWER:
Proceeds from issuance of shares
Proceeds from new borrowings
Payment of borrowings
Payment of dividends
Net cash provided by financing activities
1,500,000
1,800,000
(300,000)
(700,000)
2,300,000
Borrowings, 12/31/20
Add: Payments made in 2020
Total
Increase resulting from noncash transactions
Borrowings, 12/31/2019
Proceeds from new borrowings
2,500,000
300,000
2,800,000
(200,000)
(800,000)
1,800,000
NOTE: The increase in borrowings resulting from the vendor financing on the acquisition of property is a noncash transaction, hence, not
considered in the determination of cash flows.
STATEMENT OF CASH FLOWS
Problem 16
COUZ FLAWS Co. provided the following data for the current year:
(a) Purchased a building for P1,200,000. Paid P400,000 and signed a mortgage with the seller for the remaining P800,000.
(b) Executed a debt – equity swap and replaced a P600,000 loan by the giving the lender ordinary shares worth P600,000 on the date the swap
was executed.
(c) Purchased land for P1,000,000. Paid P350,000 and issued ordinary shares worth P650,000.
(d) Borrowed P550,000 under a long – term loan agreement. Used the cash from the loan proceeds to purchase additional inventory of P150,000,
to pay cash dividends of P300,000 and to increase the cash balance of P100,000.
Questions:
1. What amount should be reported as net cash used in investing activities?
2. What amount should be reported as net cash provided by financing activities?
ANSWERS:
Purchase of building (cash paid only)
Purchase of land (cash paid only)
Net cash used in investing activities
(400,000)
(350,000)
(750,000)
Proceeds from long-term loan
Payment of dividends
Net cash provided by financing activities
NOTE:
The increase in building and land supported by a mortgage and issuance of shares, respectively, are noncash transactions.
The debt-equity swap transaction is also a non-cash transaction.
The purchase of inventory is an operating cash flow.
550,000
(300,000)
250,000
STATEMENT OF CASH FLOWS
Problem 17
COUZ FLAWS Co. reported net income of P3,000,000 for the current year. The following changes occurred in several accounts:
Equipment
Accumulated depreciation
Notes
250,000 increase
400,000 increase
300,000 increase
(a) During the year, the entity sold equipment costing P250,000 with accumulated depreciation of P120,000 at a gain of P50,000.
(b) In December, the entity purchased equipment costing P500,000 with P200,000 cash and a 12% note payable of P300,000.
Questions:
1. What is the depreciation expense for the year?
2. What amount should be reported as net cash used in investing activities?
3. What amount should be reported as net cash provided by operating ting activities?
ANSWERS:
Net increase in accumulated depreciation
Accumulated depreciation on asset sold
Depreciation expense for the year
400,000
120,000
520,000
Proceeds from sale of equipment*
Purchase of equipment
Net cash used in investing activities
180,000
(200,000)
(20,000)
Net income for the year
Depreciation expense
Gain on sale of equipment
Net cash provided by operating activities
*Proceeds from sale of equipment:
(CA of P130,000 plus gain of P50,000)
NOTE:
The increase in notes payable is a noncash transaction.
The proceeds from sale of equipment is equal to the carrying amount at the time of sale plus the gain on sale.
3,000,000
520,000
(50,000)
3,470,000
180,000
STATEMENT OF CASH FLOWS
Problem 17
COUZ FLAWS Co. provided the following data for the current year:
Gain on sale of equipment
Proceeds from sale of equipment
Purchase of ABC bonds, face amount P2,000,000
Amortization of bond discount
Dividends declared
Dividends paid
Proceeds from sale of treasury shares with carrying amount of P650,000
100,000
200,000
1,800,000
150,000
4,500,000
4,000,000
750,000
Questions:
1. What is the net cash used in financing activities?
2. What is the net cash used in investing activities?
ANSWERS:
Proceeds from sale of treasury shares
Payment of dividends
Net cash used in financing activities
750,000
(4,000,000)
(3,250,000)
Proceeds from sale of equipment
Purchase of Ace bonds
Net cash used in investing activities
NOTE:
The gain on sale of equipment ( - ) and amortization of bond discount ( + ) are adjustments related to operating cash flows.
The dividends paid is used to reflect the actual cash effect of dividends on the cash flows during the year.
200,000
(1,800,000)
(1,600,000)
STATEMENT OF CASH FLOWS
Problem 18
COUZ FLAWS Co. reported net income of P3,400,000 for the current year. The net income included depreciation of P840,000 and a gain on sale of
equipment of P170,000. The equipment had an original cost of P4,000,000 and accumulated depreciation of P2,400,000. All of the following
accounts increased during the current year:
Patent
Prepaid rent
Financial asset, at fair value through other comprehensive income (OCI)
Bonds payable
450,000
680,000
100,000
500,000
What amount should be reported as net cash flows from investing activities?
ANSWERS:
Proceeds from sale of equipment*
Purchase of patent
Purchase of financial asset at FVOCI
Net cash provided by investing activities
1,770,000
(450,000)
(100,000)
1,220,000
*Proceeds from sale computations:
Carrying amount of equipment
Gain on sale
Proceeds from sale of equipment
NOTE:
The gain on sale of equipment ( - ) and depreciation ( + ) are adjustments related to operating cash flows.
The increase in prepaid rent, it being a trade asset, is part of operating cash flows.
The increase in bonds payable is a financing cash flow.
1,600,000
170,000
1,770,000
STATEMENT OF CASH FLOWS
Problem 19
COUZ FLAWS Co. provided the following data for the current year:
Purchase of real estate for cash
Cash was borrowed from bank to purchase real estate
Sale of investment securities for cash
Dividends paid
Issuance of ordinary shares for cash
Purchase of patent for cash
Payment of bank loan
Increase in customers’ deposits
Issuance of bonds payable for cash
5,500,000
5,500,000
5,000,000
6,000,000
2,500,000
1,250,000
1,500,000
200,000
3,000,000
Questions:
1. What is the net cash provided by financing
activities?
2. What is the net cash used in investing
activities?
ANSWERS:
Proceeds from bank loan
Proceeds from issuance of shares
Proceeds from issuance of bonds payable
Payment of dividends
Payment of bank loan
Net cash provided by financing activities
5,500,000
2,500,000
3,000,000
(6,000,000)
(1,500,000)
3,500,000
Proceeds from sale of investment securities
Purchase of real estate
Purchase of patent
Net cash used in investing activities
5,000,000
(5,500,000)
(1,250,000)
(1,750,000)
STATEMENT OF CASH FLOWS
Problem 20
COUZ FLAWS Co. used the direct method to prepare the statement of cash flows. The entity had the following cash flows during the current year:
Cash receipts from issuance of ordinary shares
Cash receipts from customers
Cash receipts from dividends on long-term investments
Cash receipts from repayment of loans made to another entity
Cash payments for wages and other operating expenses
Cash payment for insurance
Cash payment for dividends
Cash payment for taxes
Cash payment to purchase land
Cash balance – beginning
4,000,000
2,000,000
300,000
2,200,000
1,200,000
100,000
200,000
400,000
800,000
3,500,000
ANSWERS:
Cash receipts from customers
Cash receipts from dividends on long-term investments
Cash payments for wages and other operating expenses
Cash payment for insurance
Cash payment for taxes
Net cash provided by operating activities
2,000,000
300,000
(1,200,000)
(100,000)
(400,000)
600,000
Cash receipts from repayment of loans made to another entity
Cash payment to purchase land
Net cash provided by investing activities
2,200,000
(800,000)
1,400,000
Questions:
1. What is the net cash provided by operating
activities?
2. What is the net cash provided by investing
activities?
3. What is the net cash provided by financing
activities?
4. What is the cash balance at year-end
Cash receipts from issuance of ordinary shares
Cash payment for dividends
Net cash provided by financing activities
4,000,000
(200,000)
3,800,000
Cash balance as at the start of the year
Net increase in cash during the period
Cash balance as at end of the year
3,500,000
5,800,000
9,300,000
Note: Receipt of dividends are operating cash flows, unless otherwise
elected by the entity to present the same under investing cash flows.
STATEMENT OF CASH FLOWS
Problem 21
COUZ FLAWS Co. used the direct method to prepare the statement of cash flows. The entity had the following cash flows during the current year:
Dividend received
500,000
Dividends paid
1,000,000
Questions:
Cash received from customers
9,000,000
1. What is the net cash provided by operating
Proceeds from issuance of shares
1,500,000
activities?
Interest received
200,000
2. What is the net cash provided by investing
Proceeds from sale of long-term investments
2,000,000
activities?
Cash paid to suppliers and employees
6,000,000
3. What is the net cash provided by financing
Interest paid on long-term debt
400,000
activities?
Income taxes paid
300,000
4. What is the cash balance at year-end
Cash balance – beginning
1,800,000
ANSWERS:
Cash received from customers
Dividends received
Interest received
Cash paid to suppliers and employees
Interest paid on long-term debit
Income taxes paid
Net cash provided by operating activities
Proceeds from sale of long-term investments (investing activity)
9,000,000
500,000
200,000
(6,000,000)
(400,000)
(300,000)
3,000,000
2,000,000
Proceeds from issuance of shares
Dividends paid
Net cash provided by financing activities
1,500,000
(1,000,000)
500,000
Cash balance as at the start of the year
Net increase in cash during the period
Cash balance as at end of the year
1,800,000
5,500,000
7,300,000
Note: Dividends and interest received and interest payments are
operating cash flows, unless otherwise elected by the entity to present
the same under investing cash flows and financing cash flows,
respectively.