Cash flow statement

(Direct Method)
CASH FLOW STATEMENT

•Provides an analysis of inflows and/or

outflows of cash from/to operating,
investing and financing activities.
•This statement shows cash transactions
only compared to the SCI which follows
the accrual principle.
Accrual principle
• Record and report revenue at the time it is earned and realized by
the business, not when the cash for the revenue is received by the
business.
• Known as accrual basis accounting. The purpose of this principle is
to actually show what work has been completed and not what is to
be done in the future.
Accrual Accounting – is an accounting method that records revenues
and expenses when they are incurred, regardless of when cash is
exchanged.
Accrual – refers to any individual entry recording revenue or expense
in the absence of a cash transaction.
Importance of CFS

•The CFS provides the net change in the cash

balance of a company for a period. This
helps owners see if their revenues are
actually translated to cash collections or if
they have enough cash inflows in order to
pay any maturing liabilities.
Direct vs. Indirect Approach of
the CFS
• Direct – The operating cash flow section of the CFS under
the direct method would show each major class of gross
cash receipts and gross cash payments.
• Indirect – The operating cash flow section of the CFS under
the indirect method will reconcile the net income/loss of the
company with the total cash flows generated/used in
operating activities by adjusting the net income/loss for
effects of non-cash transactions.
Points to ponder
• The advantage of the direct method over the indirect method
is that it reveals operating cash receipts and payments.
• The standard-setting bodies encourage the use of the direct
method, but it is rarely used, for the excellent reason that
the information in it is difficult to assemble; companies
simply do not collect and store information in the manner
required for this format. Using the direct method may
require that the chart of accounts be restructured in order
to collect different types of information. Instead, they use
the indirect method, which can be more easily derived from
existing accounting reports.
different parts of the Cash
Flow Statement
• Operating Activities – Activities that are directly related to the main
revenue-producing activities of the company such as cash from
customers and cash paid to suppliers/employees (Deloitte Global
Services Limited, 2015).
• Investing Activities – Cash transactions related to purchase or sale of
non-current assets (Deloitte Global Services Limited, 2015).
• Financing Activities – Cash transactions related to changes in equity
and borrowings.
different parts of the Cash
Flow Statement
• Net change in cash or net cash flow (increase/decrease) – The net
amount of change in cash whether it is an increase or decrease for
the current period. The total change brought by operating, investing
and financing activities.
• Beginning Cash Balance – The balance of the cash account at the
beginning of the accounting period.
• Ending Cash Balance – The balance of the cash account at the end of
the accounting period computed using the beginning balance plus
the net change in cash for the current period.
Cash flows from operating
activities
Cash Inflows:
1. Collections from customers including cash
received from sales (or services) and
collections of A/R.
2. Cash receipts of interests or dividends.
3. Collections of other operating receipts (i.e.,
unearned revenue, rent revenue).

Statement of Cash Flows 9

Cash Flows from
Operating Activities (contd.)
Cash Outflows:
1. Payments to suppliers.
2. Payments to employees.
3. Payments for interest expense.
4. Payments for income taxes.
5. Payments for other expenses(i.e., Prepaid
expenses; rent expenses).

Statement of Cash Flows 10

Cash Flows from
Investing Activities
Transactions involving acquiring (Investing
(Cash outflows)) and selling (Disinvesting
(Cash inflows)) :
a. Property, Plant and Equipment.
b. Investments (current and non-current).
c. Notes Receivable (current and non-
current).

Statement of Cash Flows 11

Notes Receivable
Notes Receivable (current and non-current),
including:
• Lending money (N/R , cash outflow);
• Collecting of loan (N/R , cash inflow);
• Selling of N/R (N/R, discounting N/R,
cash inflow)

Statement of Cash Flows 12

Cash Flows from
Financing Activities
Obtaining resources from owners and
creditors (cash inflows) and repaying the
amount borrowed (cash outflows).
Cash inflows:
• Cash received from issuance of common
stock.
• Cash received from issuance of bonds.
• Cash received from issuance of N/P (short-
term or long term).

Statement of Cash Flows 13

Cash Flows from
Financing Activities (contd.)
Cash Outflows:
• Retirement of bonds.

• Retirement of stock.

• Payments of N/P.

• Payments of dividends.

Statement of Cash Flows 14

Cash Flow Statement Structure
a. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date of preparation (emphasis on the wording – “for the”)
b. Sample of the Direct Method
i. First part is operating activities
ii. Second part is investing activities
iii. Third part is financing activities
Cash flow statement (direct
Method) Sample
Formula for Receipts from
customers
Collections (receipts from customers) = Beginning Accounts
Receivable + Net Sales or Net Revenue –Ending Accounts
Receivable
Formula for Payments to
Suppliers and Employees
Payments = Beginning Accounts Payable + Beginning Accrued Salaries
Expense + Net Purchases + Salaries Expense – Payments
quiz
Direction: Identify which of the following transactions fall under operating, investing and
financing activities:
a. Cash received from customers
b. Cash paid to suppliers
c. Cash paid to employees
d. Cash paid to purchase equipment (company does not sell equipment)
e. Cash received from sale of furniture (company’s main line of business is not related to
furniture)
f. Depreciation expense
g. Sale of goods on credit
h. Purchase of goods on credit
i. Cash received from getting a loan from a bank
j. Cash paid to owners
answers
a. Cash received from customers - Operating
b. Cash paid to suppliers - Operating
c. Cash paid to employees - Operating
d. Cash paid to purchase equipment (company does not sell equipment) -
Investing
e. Cash received from sale of furniture (company’s main line of business is not
related to furniture) - Investing
f. Depreciation expense - Non-cash
g. Sale of goods on credit - Non-cash
h. Purchase of goods on credit - Non-cash
i. Cash received from getting a loan from a bank = Financing
j. Cash paid to owners - Financing