Statement of
Cash Flows:
The Two
Methods
(Indirect)
Prepared by: Prof. Jericko
Lian Del Rosario
Two Methods (Operating activities):
• Direct method - lists the cash receipts and cash
payments made during the accounting period to
compute for the cash flows from operations.
• Indirect Method – computes the cash flow from
operations based on the net income
The Direct Method
Cash collected from customers
XX
Cash paid to suppliers
(XX)
Cash paid for prepaid expenses
(XX)
Cash paid for operating expense
(XX)
Interest paid
Interest received
(XX)
XX
Income taxes paid
(XX)
Dividends received
XX
Cash Flows from Operations
XX
Indirect Method
Net Income
XX
Depreciation
XX
Doubtful
XX
Amortization
XX
Increase in Current assets
(XX)
Decrease in Current assets
XX
Increase in Current liability
XX
Decrease in Current liability
(XX)
Gain on sale of assets
(XX)
Loss on sale of assets
XX
Cash f lows from operations
XX
Non-cash expenses
+CA = -CF
-CA = +CF
+CL = +CF
-CL = -CF
Sample Problem
The following comparative current accounts of VAL Merchandising for the year ended December 31,
2018 have been provided:
Beginning
Ending
P 550,000
P 900,000
Accounts Receivable
200,000
100,000
Inventory
100,000
200,000
Accounts payable
300,000
400,000
Utilities payable
120,000
70,000
Cash and Cash equivalents
The Net Income for the year amounted to P1,500,000 after considering the following items:
Doubtful
10,000
Depreciation
20,000
Amortization
30,000
Salaries
40,000
Loss on sale of PPE
15,000
Requirements:
a. How much is the total non-cash expenses?
b. How much is the change in current assets?
c. How much is the change in current liabilities?
d. How much is the net cash flow from operations?
T he f ollowi ng c om par ative c ur r ent ac c ounts of VAL Mer c handis in g f or the year ended
December 31, 2018 have been provided:
Beginning
Ending
P 550,000
P 900,000
Accounts Receivable
200,000
100,000
Inventory
100,000
200,000
Ac c ounts payab le
300,000
400,000
Utilit i es payabl e
120,000
70,000
Cash and Cash equivalents
T he Net Inc om e f or the year am ounted to P1,500,000 af ter c ons ider in g the f ollowi ng item s :
Doubtful
10,000
Depreciation
20,000
Am ortization
30,000
Salaries
40,000
Loss on sale of PPE
15,000
b. Decrease in A/R
Increase in Inventory
Change in CA
c. Increase in A/P
Decrease in U/P
Change in CL
Requirements:
a.
How much is the total non-cash expenses?
b.
How much is the change in current assets?
c.
How much is the change in current liabilities?
d.
How much is the net cash flow from operations?
100,000
(100,000)
0
100,000
(50,000)
50,000
Net income
P
1,500,000
Doubtful
10,000
Depreciation
20,000
Amortization
30,000
Decrease in A/R
100,000
Increase in inventory
(100,000)
Increase in A/P
100,000
Decrease in Util. payable
(50,000)
Loss of sale of PPE
15,000
Net Cash flow from operations P1,625,000
a. Doubtful
Depreciation
Amortization
Non-cash exp
10,000
20,000
30,000
60,000