FUNDAMENTALS OF

SENIOR
ACCOUNTANCY, BUSINESS HIGH
AND MANAGEMENT 2(FABM 2) SCHOOL
2
Self-
The Cash Flow Statement: Learning
Module
Components and Structures 8

Quarter 1
 Cash Flow Statement
The statement of cash flows analyses changes in cash and cash equivalents
during a period. Cash and cash equivalents comprise cash on hand and demand
deposits, together with short-term, highly liquid investments that are readily
convertible to a known amount of cash, and that are subject to an insignificant risk of
changes in value. (IAS 2017, 7.78)

It tells a specific story about the cash transaction of the business. Cash is a vital
resource owned and controlled by the business. This resource is also the most
vulnerable to mismanagement. (Beticon et. Al., 2016, 110)

The statement also provides an analysis of inflows and/or outflows of cash from/to
operating, investing and financing activities. It shows cash transactions only. In
addition, the cash flow statement provides the net change in the cash balance of a
company for a period. It help the owners see if their revenues are actually translated
to cash collections of if they have enough cash inflows in order to pay any maturing
liabilities. (Monfero [Link]., 2016, 48-60)

The cash flow statement has three major sections: operating, financing, and
investing. Each section represents the classification of business entity’s cash related
activities.
1. Operating activities are the main revenue-producing activities of the entity
that are not investing or financing activities, so operating cash flows include
cash received from customers and cash paid to suppliers and employees [IAS
2017, 7.14]. The following transactions are examples of operating activities:
Cash receipt from sale of goods or rendering
services (+)

Cash receipt from royalties, fees, commisions,

and other revenues (+)
Cash payments to suppliers of goods and
services (-)
Cash payments to employees (-)

Cash payments to income taxes (-)

Interest paid (-)

Interest received (+)

Dividends received (+)

Figure 8.1. Examples of Operating Activities

For operating cash flows, the direct method of presentation is encouraged, but
the indirect method is acceptable. (IAS 2017, 7.18)

• The direct method shows each major class of gross cash receipts and gross cash
payments. The operating cash flows section of the statement of cash flows under the
direct method would appear something like this:
Cash receipts from customers XXX
Cash paid to suppliers XXX
Cash paid to employees XXX
 Cash paid for other operating
XXX
expenses
Interest paid XXX
Income taxes paid XXX
Net cash from operating
XXX
activities
Figure 8.1.1. Direct Method

• The indirect method adjusts accrual basis net profit or loss for the effects of
non-cash transactions. The operating cash flows section of the statement of
cash flows under the indirect method would appear something like this:

Profit before interest and income taxes XXX

Add back depreciation XXX

Add back impairment of assets XXX

Increase in receivables XXX

Decrease in inventories XXX

Increase in trade payables XXX

Interest expense XXX

Less Interest accrued but not yet paid XXX

Interest paid XXX

Income taxes paid XXX

Net cash from operating activities XXX

Figure 8.1.2. Indirect Method

2. Investing activities are the acquisition and disposal of long-term assets and
other investments that are not considered to be cash equivalents [IAS 2017,
7.6]. The following are examples of investing activities:
Cash payments to acquire property, plants,
and equipment (-)

Cash payments to acquire intangible assets (-)

Cash receipts from sales of property, plant,

and equipment (+)
Cash receipts from sales of intangible assets
(+
)
Cash receipts from sales of long-term assets
(+
)

Figure 8.2. Examples of Investing Activities

 3. Financing activities are activities that alter the equity capital and borrowing
structure of the entity (IASB 2017, 7.6). The following are examples of
financing activities:

Cash investments from owners (+)

Cash proceed from bank loans (+)

Cash distribution from owners (-)

Repayment of bank loans (-)

Figure 8.3 Examples of Financing Activities

Finally, terms that will affect net income will be classified as operating activities.
On the other hand, items affecting noncurrent assets will be classified as investing;
items affecting non-current liabilities and equity will be classified as financing.