Senior High School

Fundamentals of Accountancy,
Business and Management 2
Module 4:
Statement of Cash Flow

AIRs - LM
LU_FABM 2_Module4
ABM – FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2
Module 4: Statement of Cash Flow
Second Edition, 2021

Copyright © 2021
La Union Schools Division
Region I

All rights reserved. No part of this module may be reproduced in any form without written
permission from the copyright owners.

Development Team of the Module

Author: Jimena Veronica T. Nieva, MT II

Editor: SDO La Union, Learning Resource Quality Assurance Team
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Atty. Donato D. Balderas Jr.

Schools Division Superintendent
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Printed in the Philippines by: _________________________

Department of Education – SDO La Union

Office Address: Flores St. Catbangen, San Fernando City, La Union
Telefax: 072 – 205 – 0046
Email Address: [email protected]

LU_FABM 2_Module4
 Senior High School

Fundamentals of Accountancy,
Business and Management 2
Module 4:
Statement of Cash Flow

LU_FABM 2_Module4
Introductory Message
This Self-Learning Module (SLM) is prepared so that you, our dear
learners, can continue your studies and learn while at home. Activities,
questions, directions, exercises, and discussions are carefully stated for you
to understand each lesson.

Each SLM is composed of different parts. Each part shall guide you
step-by-step as you discover and understand the lesson prepared for you.

Pre-tests are provided to measure your prior knowledge on lessons in

each SLM. This will tell you if you need to proceed on completing this module
or if you need to ask your facilitator or your teacher’s assistance for better
understanding of the lesson. At the end of each module, you need to answer
the post-test to self-check your learning. Answer keys are provided for each
activity and test. We trust that you will be honest in using these.

In addition to the material in the main text, Notes to the Teacher are
also provided to our facilitators and parents for strategies and reminders on
how they can best help you on your home-based learning.

Please use this module with care. Do not put unnecessary marks on
any part of this SLM. Use a separate sheet of paper in answering the exercises
and tests. And read the instructions carefully before performing each task.

If you have any questions in using this SLM or any difficulty in

answering the tasks in this module, do not hesitate to consult your teacher
or facilitator.

Thank you.

LU_FABM 2_Module4
 Target

STATEMENT OF CASH FLOWS

After reading this information sheet, the learner must be able to reflect
on the importance of preparing the Cash Flows Statement, distinguish among
Operating, Financing and Investing activities, how to prepare a Cash Flows
Statement and reflect on the difference between the two CFS methods (Direct
and Indirect).
The Statement of Cash Flows will be discussed in detail including its
usefulness and benefits in business, the components and structure, the two
approaches (Direct Method and Indirect Method), the format and the
preparation of the Cash Flow Statement.

Every firm requires an accurate presentation of its financial reports

involving cash transactions having to be disclosed properly. The Accounting
Framework takes into account the objective creation and financial report
presentation such as the Cash Flow Statement in conformity with financial
reporting requirements.

MELC:
1. Discuss the components and structures of a Cash Flow Statement.
(ABM_FABM12-If-10)
2. Prepare a Cash Flow Statement (ABM_FABM12-If-11).

After going through this information sheet, you are expected to:
1. Determine its usefulness and benefits in business organization
2. Discuss the different components and activities of a Cash Flow
Statement
3. Classify the different accounts into Operating, Financing and Investing
activities in a Cash flow Statement
4. Differentiate the two methods in the preparation of Cash Flow
Statement
5. Prepare the Cash Flow statement

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 Jumpstart

Activity 1: Motivation!
Directions: Directions: Determine whether the following account titles below
are Cash Inflows or Cash Outflows. Place a checkmark (/) for CASH
INFLOWS and (X) for CASH OUTFLOWS (10 points).

____1. Cash Sales ____6. Additional Investment from owners

____2. Payment of Electric bills ____7. Collection from customers
____3. Proceeds from Bank Loans ____8. Proceeds from sale of lot
____4. Payment of Debts ____9. Delivery Services Income
____5. Supplies Expense ____10. Refunds from suppliers

The usefulness of the Cash Flow Statement

The Cash Flow Statement will give technique to analyze:

1. a company’s potential to generate cash flow in the future
2. a company’s ability to pay dividends, debts and obligation
3. rationale for the difference between the Net Income and Net Cash

The Benefits of Cash Flow Information

The Cash Flow Statement when used in context with other financial statements,
enables users to assess changes in an entity’s net assets, financial structure, and
the ability to influence the quantities and timings of cash flows. It is also important
in evaluating the entity’s ability to create and compare cost of cash and other cash
equivalents.

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 Discover

Net Income (NI) is seen as a good indicator of the period’s business

performance. Any Transactions that take place in the firm have the potential to effect
(Increase or Decrease) the balances. Additional economic resources for the company
could be a good result that can be indicated in the Net Cash Balances of the financial
report i.e. Statement of Comprehensive Income (Income Statement) to aid in decision
making. Let us have a look of the Example below:

Sales income P
500,000.00
Cost of Sales P 150,000.00
Operating expenses
100,000.00
Depreciation expense
15,000.00
Loss on disposal of plant assets
10,000.00
Interest expense
10,000.00 285,000.00
Income before tax
215,000.00
Income tax expense
32,000.00
Net Income P
183,000.00

Table 1. Net Income

The Component and Structure of a Cash Flows Statement

Statement of Cash Flows (SCF) provides an analysis of inflows and/or outflows of

cash from/to Operating, Investing and Financing activities (Deloitte Global
Services Limited, 2015). It provides the Net Changes in the cash balance of a company
for a period. This helps owners see if their revenues are translated to cash collections
or if they have enough cash inflows to pay any maturing liabilities.

The structure of an Statement of Cash Flow (SCF) generally presents the sources and
utilization of an organization’s cash. Although the SCF is historical in nature, the
information contained in this report is useful in predicting future cash outflows and
cash inflows of the organization.

Statement of Cash Flows requires an entity to present a statement of cash flows as

an integral part of its primary financial statements. Cash flows are classified and

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presented into operating activities, investing activities or financing activities, with
the latter two categories generally presented on a gross basis.

The objective of cash flows of an entity is useful in providing users of financial

statements with the basis to assess the ability of the entity to generate cash and cash
equivalents and the needs of the entity to utilize those cash flows.

Technically, there are decision rules when SCF is prepared. For the business
operation, it is primarily concerned with the actual business performance through
profit or loss (P/L). For the Investments made by the business, it is primarily
concerned with the Non-Current Assets (NCAs) such as acquisitions of equipment,
furniture and fixtures among others. For financing purposes, it shall primarily
concerned with the increase and decrease of Owner’s Equity and Non-Current
Liabilities (OE and NCL) to meet current maturing obligations as they fall due.

A. Activities or Components of a Cash Flow Statement

1. Operating Activities (OA) – Income Statement Accounts
2. Investing Activities (IA) – Changes in Investments and Non-Current
Assets
3. Financing Activities (FA) – Changes in Equity and Non-Current
Liabilities
L+

Operating Activities (OA)

These are cash flows related to the selling of goods and services. Examples
are;

 Cash received from customers through the sale of goods or services

performed
 Cash received from non-operating activities such as dividends from
investments, interest revenue, commissions and fees
 Cash payments to suppliers or employees
 Cash payments for taxes and other expenses

Cash Flows from Operating Activities

Operating Activities (OA) generally involve producing and delivering goods and
providing services. It includes;

1. Cash flows from operating activities are generally the cash effects of
transactions and other events that enter into the determination of net
income
3. Operating activities also include all transactions and other events that are not
defined as investing or financing activities

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Cash inflows from operating activities are:
1. Cash receipts from sales of goods or services including receipts from the
collection of receivable balances and both short and long-term notes
receivable from customers arising from those sales.
2. Cash receipts from returns on loans, other debt instruments other entities,
and equity securities – interest and dividends (alternatively may be
classified as investing cash flow)
3. All other cash receipts that do not stem from transactions defined as
investing or financing activities.

Cash outflows for operating activities are:

1. Cash payments to acquire materials for manufacture or goods for resale,
including principal payments on accounts and both short-and long-term
notes payable to suppliers for those materials or goods
2. Cash payments to other suppliers and employees for other goods or
services
3. Cash payments to governments for taxes should be classified as cash
flows from operating activities unless they can be specifically identified
with financing and investing activities. Taxation cash flows are often
difficult to match to the originating underlying transaction, so most of
the time and all tax cash flows are classified as arising from operating
activities.
4. Cash payments to lenders and other creditors for interest (alternatively
these may be classified as financing cash flows)

All other cash payments that do not stem from transactions defined as
investing or financing activities

Investing Activities (IA)

These are cash flows related to the acquisition or sale of Non-Current Assets.
Examples are;
• Cash payments to acquire Property, Plant and Equipment (PPE), other
tangible or intangible assets, other long-term assets, and sale of such
assets.
• Loans extended to other companies and collection of such loans

Cash Flows from Investing Activities

Investing Activities (IA) generally represent the acquisition of equipment, furniture

and fixtures including the disposal of Non-Current Assets. It includes;

 Making and collecting loans

 Acquiring and disposing of debt or equity instruments, Property, Plant and
Equipment (PPE), and other productive assets (assets held for or used in
the production of goods or services by the enterprise other than items that
are part of the enterprise’s inventory)

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Cash inflows from investing activities are:

1. Receipts from collections of loans by the enterprise and sale of other entities’
debt instruments (other than cash equivalents) that were purchased by the
enterprise
2. Receipts from sales of equity instruments of other enterprises and returns of
investment in those instruments
3. Receipts from sales of Property, Plant and Equipment (PPE) and other
productive assets

Cash outflows for investing activities are:

1. Disbursements for loans made by the enterprise and payments to acquire debt
instruments of other entities (other than cash equivalents).

2. Payments to acquire equity instruments of other enterprises.

3. Payments at the time of purchase, or soon before or after purchase, to acquire
Property, Plant and Equipment (PPE) and other productive assets.

4. Generally, only advance payments, the down payment or other amounts paid
at the time of purchase or soon before or after the purchase of Property, Plant
and Equipment (PPE) and other productive assets are investing cash outflows.

5. Generally, principal payments on seller-financed debt directly related to a

purchase of Property, Plant and Equipment (PPE) or other productive assets
are financing cash outflows

Financing Activities (FA)

These are cash flows related to the owner’s equity and borrowings. Examples are;
 Cash received from issuing share capital
 Cash proceeds from issuing bonds, loans, notes, mortgages and other
short or long-term borrowings
 Cash repayment of loans and other borrowings
 Cash payments to shareholders as dividends

Cash Flows from Financing Activities

Financing Activities (FA) are cash transactions that involve changes in equity and
borrowings such as the short-term and long-term cash flows related to liabilities and
net capital. It includes;
1. Obtaining resources from owners and providing them with a return on, and a
return of their investment.
2. Borrowing money and repaying amounts borrowed or otherwise settling the
obligation.
3. Obtaining and paying for other resources obtained from creditors on long-term
credit

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 Cash inflows from financing activities are:
 Proceeds from issuing equity instruments (e.g., ordinary and preferred
shares)
 Proceeds from issuing bonds, notes, and from other short or long-term
borrowings
Cash outflows for financing activities are:

 Payments of dividends or other distributions to owners (alternatively may

be classified as operating cash flows).
 Repayments of amounts borrowed
 Other principal payments to creditors who have extended long-term credit
Net Change in Cash or Net Cash Flow
This is the net amount of change (increase/decrease) 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

This is the balance of the cash account at the beginning of the accounting period.
Ending Cash Balance
This is 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.

Direct and Indirect Methods of the CFS

Direct method vs Indirect method

The direct method discloses major classes of gross cash receipts and gross cash
payments while indirect method the net profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense associated with
investing or financing cash flows.

Direct Method

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 (Deloitte Global Services
Limited, 2015). It will appear like this;

Cash receipts from customers xx,xxx

Cash paid to suppliers xx,xxx
Cash paid to employees xx,xxx
Cash paid for other operating expenses xx,xxx
Interest paid xx,xxx

Income taxes paid xx,xxx

Net cash from operating activities xx,xxx

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Indirect Method

The operating cash flow section of the Cash Flow Statement (CFS) under the indirect
method will reconcile the net profit/loss of the company with the total cash flows
generated/used in operating activities by adjusting the net profit/loss for effects of
non-cash transactions (Deloitte Global Services Limited 2015). It will appear like this;

Profit before interest and income taxes xx,xxx

Add back depreciation xx,xxx

Add back impairment of assets xx,xxx

Increase in receivables xx,xxx

Decrease in inventories xx,xxx

Increase in trade payables xx,xxx

Interest expense xx,xxx

Less Interest accrued but not yet paid xx,xxx

Interest paid xx,xxx

Income taxes paid xx,xxx

Net cash from operating activities xx,xxx

Let us check how well you have understood the lessons by working on some of the
enrichment activities below. Good luck!

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 Explore

Enrichment Activity 1: Components and Structure of A Cash Flow

Direction: Please select which among the given account titles below will
structure the Cash Flows Statement. Classify them according to the three (3)
important activities in the preparation and presentation of a CFS. Use a
separate sheet for your answers. (15 points) Operating activities, investing
activities, financing activities.

Purchase of fixtures Refund from Suppliers

Payment of interests Supplies Bought
Payment-short-term Cash Purchases-Mdse.
debt
Payment-long-term debt Collections of
Receivables
Cash Sales Refund to Suppliers
Payment to employees Freight-In
Purchase of equipment Initial Investments
Drawings Payment to suppliers of services
Refund from suppliers Payment to Suppliers of goods

Enrichment Activity 2: Direct Method

Direction: Analyze the foregoing transactions and present the CFS using the
direct method. Use a separate sheet to show your answers.

Prepare A CFS using the Direct Method

SOX Store August 20XX

Purchase of Goods 500,000
Sale of Goods 600,000
Paid Utilities 40,000
Paid Rent 25,000
Sold equipment 200,000
Drawings 5,000

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Enrichment Activity 3: Indirect Method

Direction: Analyze the foregoing transactions and present the CFS using the
indirect method. Use a separate sheet to show your answers.

Prepare A CFS using the Indirect Method

Maria Leonora Services September 20XX

Net Income 600,000
Depreciation Expense 30,000
Gain on sale of PPE 5,000
Net – trade and other receivables 15,000
Net – trade and other payables 3,000
Proceeds from sale of PPE 25,000
Loan Payment 4,000
Cash, Beg, Sep. 01 100,000

Great job! You have understood the lesson. Are you

now ready to summarize?

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 Deepen

Prepare a proforma of a Cash Flows Statement (CFS). The scoring rubric is given
on the next page for the assessment of your outputs.

CFS Proforma

Direction: Using the information below, prepare a proforma Cash Flow

Statement with the components of a Cash Flows (operating, investing,
financing), Use a separate sheet to show your answers.

XYZ COMPANY
Cash Flow Statement
January 31, 2020

Purchases of Equipment xxxx

Notes payable xxxx
Cash Flow for month ended Dec. 2019 xxxx
Net Cash from Operations xxxx
Depreciation xxxx
Net Income xxxx
Increase in Accounts Payable xxxx
Increase in Receivable xxxx
Increase in Inventory xxxx

Great job! You have understood the lesson well! Are you now ready
to take the final assessment?

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Rubrics
5 4 3 2 1
90%+ 80%+ 70%+ 60%+ Less than 60%
Mastered Exceeded Attained Approaching Unattained
Attainment
Learner Learner Learner meets Learner Learner
presents a presents a written works’ knowledge of knowledge of
clear, specific clear, specific expectations. the topic is the subject is
understanding understanding understood, not shown.
of the of the The learner but Steps through
competency. competency. demonstrates at minimum the process
All notes, All notes, new knowledge level of were not
assignments, assignments, learned in oral competency. followed. Notes
test, work tests, required participation The written and written
completed on are completed and or written works are works lack
time, on time, are tasks. The occasionally neatness,
exemplary organized and work is well- incomplete organization,
well-organized questions are organized and and could be detail and
and questions answered complete. The organized evidence of
are answered accurately. learner better. new
accurately. understood knowledge.
The learner the Some Work does not
High interest has used assignments. resources have meet
and excitement more been used, but requirements.
have led the resources The learner it is not clear Parts are
learner to than required used the what the missing.
reach far and resources learner
beyond the demonstrates required and understood. Participation is
requirements. new organized weak or learner
knowledge in information in Learner does is often not
The learner has written work all written most of what participating.
used his/her and uses this works, is required, Learner has
new knowledge knowledge in carefully done but nothing failed to grasp
when his/her and the more. Some of new concepts
participating in assignments learner meets the work may covered in the
making and oral just not be competency.
assignments participation. above the finished. Tasks
and written minimum are not The level of
work. All tests are requirements carefully done achievement
beyond the and and the is below
The learner standard level expectations. information 60%.
obtained the of achievement from the
highest level of between 80% All tests, resources is
achievement participation not used.
above 90%. and
assignments Written works
meet the are at a level of
standard level achievement
of achievement between
between 60% to 69%.
70% to 79%.

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 Gauge

Direction: Choose the best answer and write the letter of your answer in a
separate sheet of paper.

____ 1. What statement shows the inflows and outflows of cash during a particular
period?
A. Balance Sheet B. Income Statement
C. Statement of Cash flows D. Statement of Changes in Equity

____ 2. How many activities or sections are there in a Cash Flow Statement?

A. 3 B. 4 C. 5 D. 6
____ 3. Which of the following is NOT a source of cash?

A. Depreciation expense.
B. Sale of operating asset for cash.
C. Collection of a short-term receivable.
D. Cash borrowed on a short-term note.

____ 4. The following are operating cash flow, EXCEPT?

A. Collection of cash from Receivables
B. Payment of Income Tax
C. Payment of operating expense
D. Purchase of equipment for cash

____ 5. What item appears first on the statement of cash flows prepared using
the direct method?
A. Cash receipts from customers. B. Depreciation
C. Net income. D. Retained earnings.

____ 6. Which of the following is NOT TRUE about Statement of Cash Flow?
A. It is the fourth basic financial statement
B. It provides information on cash receipts and cash payments of an entity
During a period
C. It reconciles the ending cash account balance to the balance per bank
statement
D. Provides information about the operating, investing and financing activities
of the business

_____7. All of the following will be reported in the Cash Flow Statement, EXCEPT?

A. Cash payment for assets during the period

B. Borrowings from banks during the period
C. The changes in owner’s equity during the period
D. Cash collections for receivables during the period

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_____8. What activity in the Cash Flow Statement do cash receipts and cash-
payments classified?

A. Operating and non- operating

B. Operating, Investing and Financing
C. Operating, Financing and Non- Operating
D. Investing, Financing and Non- Operating
_____9. Which of the following is NOT a financing activity?

A. Issuance of Bonds Payable

B. Issuance of common Stocks
C. Purchase of Treasury Stocks
D. Sale of Investment

_____10. Which of the following is NOT a cash outflow for the firm?

A. Depreciation B. Dividends
C. Interest Payment D. Taxes

_____11. Which of the following would be considered a “use of funds”?

A. A decrease in cash
B. An increase in cash
C. An Increase in accounts payable
D. A decrease in accounts receivable

_____12. In cash flows, when a firm invests in fixed assets and short-term
financial investments result in what?

A. Increased Equity B. Increased Cash

C. Decreased Cash D. Decreased Liability

_____13. The statement of cash flow clarifies cash flows according to what?
A. Inflow and Outflow
B. Investing and Non-operating Flows
C. Operating and Non-operating Flows
D. Operating, Investing, and Financing Activities

_____14. A firm that issues stocks and bonds to raise funds results in what?

A. Decreases Cash B. Increases Cash

C. Increases Equity D. Increases Liabilities

_____15. The purchase value of assets over its serviceable life is categorized
as?
A. Appreciated Liabilities B. Appreciated Assets
C. Depreciation D. Appreciation

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References
Department of Education – Curriculum Guide (2013). Fundamentals of Accountancy,
Business and Management II for Grade 12. K to 12 Senior High School ABM
Specialized Subject. Second Semester. Pp 1-6. December 01, 2013. Pasig City,
Manila.

Department of Education – Teacher’s Guide (2016). Fundamentals of Accountancy,

Business and Management II. Teaching Guide for Senior High School –
Academic ABM. The Commission on Higher Education in collaboration with
the Philippine Normal University. Pp 1-187. EC-TEC Commercial. Quezon
City.

Financial Accounting – First Edition (2010) By Conrado T. Valix, Jose F. Peralta and
Christian Aris M. Valix. ISBN 9710489688. Vol 1. Pp 1-1289 GIC Enterprises
and Co. Inc., Manila.

Financial Accounting (2018 – 2019 Edition) by Ma. Elenita B. Cabrera. ISBN

9789719919414 (Vol.3). GIC Enterprises and Co. Inc., Manila.

Managerial Accounting – Fourth Edition by Wiley and Richard McDermott. Retrieved

from https://www.google.com/amp/s/slideplayer.com/amp/4210102/

Other References
https://wps.prenhall.com/bp_fraser_financial_10/217/55796/14284024.cw/index
.html
https://byjus.com/commerce/mcq-on-cash-flow-statement/
https://www.accountingformanagement.org/socf-mcqs/
https://quizlet.com/386651666/chapter-12-multiple-choice-flash-cards/

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LU_FABM 2_Module4
16
GAUGE JUMPSTART
1. C
2. A 1./
3. A 2.X
4. D
5. A 3. /
6. C 4.X
7. C
8. B 5. X
9. D
6. /
10. A
11. A 7. /
12. C
13. D 8. /
14. B 9./
15. C
10./
Answer Key
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 For inquiries or feedback, please write or call:

Department of Education – SDO La Union

Curriculum Implementation Division
Learning Resource Management Section
Flores St. Catbangen, San Fernando City La Union 2500
Telephone: (072) 607 - 8127
Telefax: (072) 205 - 0046
Email Address:
[email protected]
[email protected]

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