Statement of cash flows- one of the general purpose financial

statements required to be prepared for all stake holders as

provided in the Philippine Accounting Standards 1 (presentation of
financial statements)
- Informative reports designed to assist users in
making sound economic decisions

Objectives and Uses:

Managements responsibility to maintain a proper balance
between cash collections and the cash disbursements and ensure
that only a sufficient amount of cash is kept on hand by the firm
Cash flows will benefit users and enable them to:
a. Assess the firms ability to generate cash in the future and
predict future cash flows
b. Evaluate forms financial position as to liquidity and solvency
c. Examine the relationship between net income (accrual basis)
and cash flow from operation
d. Evaluate changes in the equitys net assets
e. Evaluate entitys ability to adopt to pressures and changing
circumstances and opportunities
f. Assist management in their planning and controlling
functions

Concept of cash- cash and cash equivalents

Cash- cash on hand, demand deposits
Cash equivalents- treasury bills, commercial bills, short term
highly liquid investments such as time deposits readily
convertible into cash within 3 months from acquisition date

Major categories:
Change in the cash position is brought about by 3 kinds of
activities: operating, investing, financing

Operating activities: these are the principal income producing

activities represented by:
Sales of goods or
services

Payments to suppliers
for goods and services
(expenses)
Payments to employees
for salaries

Receipts for royalties,

Fees, Commissions and
other revenues
Interest on loans granted Payment to government
for taxes
Payment to other for
contract services
Lenders for interest
Utility companies for
utilities
Others for advertising,
delivery and etc
Investing activities:
Represented by acquisition and disposal of noncurrent assets
such as plant, property and equipment, payments and receipts
from acquisition and sales of bonds and securities or interest in
joint entures, cash advances/loans of officers and employees and
other parties
Sale of property, plant and
equipment
Sale of securities such as bond

Purchase of property, plant, and

equipment
Purchase of securities such as

and stocks acquired from other

companies
Collection of principal of loans
and advances

bonds and stocks acquired from

other companes
Officers, employees, and
outsiders for loans and
advances

Financing activities: these are represented by the long term

borrowing and repayments of loans made by the enterprise;
contribution and withdrawals of investors or equity participants
Borrowings
Investors contributions

Payments for amounts

borrowed
Owners withdrawals
Dividends

Cash flow- either an inflow (source of receipt) or an outflow (use

or payment)

2 methods of reporting cash flow from operating activities:

1. Direct method
- Major classes of cash receipts and payments are
presented in the statement to arrive at the cash flow
from operating activities
Major operating activities are classified to three:
a. Collections from clients and customers
b. Payment to suppliers
c. Payment for expenses
2. Indirect method

- Major classes of receipts and payments are not

presented.
- The procedure is to convert the net income from the
accrual basis to cash basis thru a series of
adjustments for the effects of non-cash transactions
such as:
o Increase or decreases in:
Receivables
Payables
Prepayments
Deferments of income and expenses

Revenues and expenses in Income statement- used as starting

point in preparing the cash flow

Deppreciation, amortization, and loss from sale properties are

added
Gain on sale of properties are deducted bec these are non-cash
transactions wc were originally substracted (or added fir gains) to
arrive from net income

Liquidity
Current cash debt coverage ratio
-considered a better measurement of liquidity since it is
more realistic as it uses cash from operation to settle obligations
Cash from operating activities/ average current Liquidities

Rule of thumb: 1:9:1

Solvency:
Cash debt coverage ratio
-measures of solvency
Cash from operating activities/ Ave total Liab
Rule of thumb: .9:1

Free cash flow

-gives the company much leeway as this extra cash may be used
for unexpected/emergency disbursements of the company
-measures the ability of the cash from operating activities to
fund expansion (acquisition of properties) and payment of
dividends
Cash flow from operating activities less payment for dividends
and acquisition of equipment

Adequacy- similar to free cash flow except that it is expressed in a

ratio
Ratio must be more than 1

Cash from operating activities/Acquisition of equipment +

dividend payment

Cash flow to net income

-shows the relationship of the cash to the net income earned

by the entity
-shows the cash generated by a pero sale of sale
Cash flow from operating activities/net income