Basic Cash Flow Management

March 10, 2021

ATTY. JOHNSON A.H. ONG, CPA, MBA
Cash is the lifeblood of a business
Cash flow management

Is the process of tracking how much money is coming into and

out of your business. This helps you predict how much money
will be available to your business in the future. It also helps you
identify how much money your business needs to cover debts,
like paying employees and suppliers.
• Tracking of Cash inflow
• Tracking Cash Outflow
All of us need cash management
Cash balance?
Outflow
Inflow
Disbursement
Receipt Rental ?
Salary P50,000/month Food ?
Electricity ?
Water ?
Tuition fee (child) ?
Broadband (globe) ?
Insurance Premium ?
Cellphone (load) ?
Grocery ?

Budget
 Business
Cash Balance - Beginning

Revenue Expenses

Collection Payment

Cash Balance - Ending

Cash management

•Involves maintenance of cash which will

enable the entity to meet its cash
requirements and at the same time optimize
the income on idle funds.

Cash Balance Optimize

requirement income on idle
funds
Basic Rules – Cash Management
Receipts Disbursement

Collection Payment
 Current
Inflation
Treasury Rates
How can you invest in treasury
bills?

1. Through money market fund

• Mutual fund
• Unit investment trust fund
• Personal Equity and Retirement Account or
P.E.R.A
• Variable Universal Life or VUL
2. Through brokers
Deposit rates

1. Savings deposit – range from 0.125% - 0.25% (Maturity date and

amount)
2. Time Deposit – 0.75% to 3.9%
Dividend % based on price – Ordinary shares
Stock Fees

FEE AMOUNT REMARKS

Commission .25% Of the Gross Trade Amount
Value Add Tax (VAT) 12% Of Commission
Philippine Stock Exchange
.005% Of the Gross Trade Amount
Transaction Fee (PSE Trans Fee)
Securities Clearing Corporation of
.01% Of Gross Trade Amount
the Philippines Fee (SCCP)

ADDITIONAL FEE FOR SELLING

Sales Tax No. of Shares x Price x 0.006
Estimated BEP is increase in Price of
1.20% after all fees
Board Lot
Board Lot and Fluctuation Table

Price Range Tick Size Board Lot

0.0001 - 0.0099 0.0001 1,000,000

0.01 - 0.049 0.001 100,000

0.05 - 0.249 0.001 10,000

0.25 - 0.495 0.005 10,000

0.5 - 4.99 0.01 1,000

5 - 9.99 0.01 100

10 - 19.98 0.02 100

20 - 49.95 0.05 100

50 - 99.95 0.05 10

100 - 199.9 0.10 10

200 - 499.8 0.20 10

500 - 999.5 0.50 10

1000 - 1999 1.00 5

2000 - 4998 2.00 5

5000 - Up 5.00 5
Dividend – Preferred shares

6.4778 = 6.4778% (excluding tax)

=5.83002% net of tax
Cash is King
Slang term reflecting the belief that money (cash) is more
valuable than any other form of investment tools, such as
stocks or bonds. This phrase is often used when prices in
the securities market are high, and investors decide to save
their cash for when prices are cheaper. (Investopedia)
Objective of cash management
1. To meet the disbursement needs
2. To minimize funds committed to transactions and
precautionary cash balance
a. Accurate cash budgeting
b. Pre arranged lines of credit
c. Temporary investment
3. Avoid misappropriation and handling losses in the
normal course of business.
Determining Cash Need

The optimal cash balance may be derived with

the use of the following basic approach:
1. Cash budget*
2. Cash break even chart
3. Optimal cash balance model
Cash break even chart
ABC Co. has a production capacity of 600,000 kilos The selling
price per kilo is P4 per kilo.
The fixed monthly payment is P100,000 while variable payment
is 50% of sales.
Total Cash Generation Total Cash needed

500k

s 400k
a
l 300k
e
s
200k
Cash Variable Costs

100k
Cash Fixed Costs
Deficiency

100k 200k 300k 400k 500k

 The Baumol’s EOQ Model

Based on the Economic Order Quantity (EOQ), in the year 1952,

William J. Baumol gave the Baumol’s EOQ model.
This model emphasizes on maintaining the optimum cash
balance in a year to meet the business expenses on the one
hand and grab the profitable investment opportunities on the
other side.

Formula:

Where,
‘C’ is the optimum cash balance;
‘F’ is the fixed cost per transaction
‘T’ is the annual or monthly disbursement
‘i’ is the rate of interest during the period (opportunity cost of
holding cash)
Illustration: Baumol’s EOQ Model

The business has a total payment of P5,000,000 for one year, cost per
transaction of P100, and the interest rate on money market
instruments is 6%. Compute the optimal cash balance
• ‘C’ is the optimum cash balance.
• ‘F’ is the fixed cost per transaction
• ‘T’ is the annual or monthly
disbursement
• ‘i’ is the rate of interest during the
period (opportunity cost of holding
cash)
C = 2 (100) (5,000,000)
6%

C = P129,099
Function of Cash management
• Investing Idle Cash: The company needs to look for various
short term investment alternatives to utilize surplus funds.
• Controlling Cash Flows: Restricting the cash outflow and
accelerating the cash inflow is an essential function of the
business.
• Planning of Cash: Cash management is all about planning
and decision making in terms of maintaining sufficient cash
in hand and making wise investments.
• Managing Cash Flows: Maintaining the proper flow of cash
in the organization through cost-cutting and profit
generation from investments is necessary to attain a
positive cash flow.
• Optimizing Cash Level: The organization should
continuously function to maintain the required level of
liquidity and cash for business operations.
Cash Flow Management Techniques

1. Accelerating Collection of Accounts

Receivable
2. Stretching of Accounts Payable
3. Cost Cutting
4. Regular Cash Flow Monitoring
5. Wisely Using Banking Services
Effect of failed cash flow management
The need for maintaining and holding
cash
Reason:
1. Transaction Motive
• (i.e. Payment of purchase and expenses)
2. Precautionary Motive
• (i.e. slow down AR collection. Strike, increase
cash need beyond management original
projections)
3. Speculative Motive
• (i.e. Raw Material at discounted price, merger
proposal)
4. Contractual Motive
• (i.e compensating balance)
 1. Cash receipts should be deposited
intact – that is, in the same amount
and form as they are received.
2. All disbursements should be
authorized and made by check
except those involving small
amounts which should be paid from
petty cash fund.
3. Both receipts and disbursements
should be properly accounted for in
the records.
4. There should be separation of
personnel duties for
a. receiving cash
b. recording receipts
c. depositing cash collections
d. reconciling bank account
e. authorizing disbursement
f. disbursing cash
5. Bank reconciliation statement should
be prepared monthly.
6. Provide physical protection for cash.
7. Minimize cash on hand in the office.
8. Cash actually present in the office –
petty cash, change fund and
undeposited receipts can be

INTERNAL CONTROL periodically counted and compared

with the company records.

MEASURES FOR CASH 9. Adopt imprest fund system for petty

cash.
Cash and Cash Equivalent

•The first item in the current asset section of

the Balance sheet
•The most liquid assets
•The most susceptible of misappropriation
Cash and cash equivalent
The term cash and cash equivalents on the statement of cash flows
refers broadly to both cash (i.e. as coins and currency, Cash on hand
and in bank) and cash equivalents (i.e. T-Bills, Money market
placement).
Coins and
Currency
T-bills

Cash

Bank deposit Commercial

Paper
Cash – T account

CASH
Beginning Balance XXX Disbursement XXX
Receipts XXX
Ending Balance XXX
What is cash?

Cash comprises cash on hand and

demand deposits. (PAS 7, par 6)
1. Cash on Hand
• Checks, cashier’s check, manager’s check,
traveler’s check, bank draft and money
orders
2. Cash in Bank
• Savings Deposit and Demand Deposit
3. Cash Fund set aside for current purpose
• Petty cash fund, payroll fund, dividend
fund and cash fund.
Bank Deposits

• Savings account
• Passbook or ATM (cash)

• Checking account
• Demand deposit (cash)

• Time deposit account

• Not a demand deposit (not cash)
• May be considered as cash equivalent
Cash Equivalents
Short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
(PAS 7, par 6)

Cash equivalents are held for the purpose of meeting short-

term cash commitments rather than for investment or other
purposes. For an investment to qualify as a cash equivalent it
must be readily convertible to a known amount of cash and be
subject to an insignificant risk of changes in value. Therefore,
an investment normally qualifies as a cash equivalent only
when it has a short maturity of, say, three months or less from
the date of acquisition. Equity investments are excluded from
cash equivalents unless they are, in substance, cash
equivalents, for example in the case of preferred shares
acquired within a short period of their maturity and with a
specified redemption date.(PAS 7, par 7)
Examples of cash equivalents

1. Three months BSP treasury bill

2. Three year BSP treasury bill purchased three months before date
of maturity
3. Three month time deposit
4. Three month money market instrument or commercial paper.
Illustration
12/31/2020
Date of acquisition Balance Sheet Date Date of Maturity

3/31/2020 Not Cash equivalent 1/31/2021

11/31/2020 Not Cash equivalent 3/31/2021

11/31/2020 Cash equivalent 1/31/2021

 Investment of excess cash
Examples
• Time deposit evidence by certificate of deposit
• Money market placement
• Treasury bills

Presentation

Not more than 3 months 3 mos. but not more than 1 yr More than 1 year

Balance
Sheet Cash equivalents Short Term Investment Long Term Investment
Date
 Measurement of Cash
Account Valuation
Cash Face Value
Foreign currency Current Exchange Rate
Bank – suffering bankruptcy Estimated realizable Value
or financial difficulty
 Cash fund for certain purpose

Current operation Non current operation

a. Petty cash fund a. Sinking fund
b. Payroll fundExamples b. Preference share
c. Travel fund redemption fund
d. Dividend fund c. Construction of property,
e. Tax fund plant and equipment.

• If current operation – Cash and cash equivalent (CA)

• Non current operation – Long term investment (NCA)
 Problem 1
Determination of cash and cash
equivalent
On December 31, 2020, the cash account of Andrea
Company has a debit balance of P2,985,000. An analysis
of the cash account shows the following details:

Undeposited collections P 60,000

Cash in bank-PCIB checking account 700,000
Undeposited NSF check received from a customer,
dated December 1, 2020 20,000
Undeposited check from a customer, dated
January 15, 2021 25,000
Cash in bank-PCIB (fund for payroll) 150,000
Cash in bank-PCIB (savings deposit) 280,000
Cash in bank-PCIB (money market instrument, 90
days) 1,000,000
Cash in foreign bank (restricted) 100,000
IOUs from officers 130,000
Sinking fund cash 300,000
Listed stock held as temporary investment 220,000
P2,985,000

Cash and cash equivalents on Andrea Co. December

31, 2009 balance sheet should be?
 Problem 2
Determination of cash and cash
equivalent
The following data pertain to Nyca Co. on December 31,
2020
Current account at BDO P1,800,000
Current account at Metrobank 180,000
Petty cash fund (Expense receipts for P7,000) 20,000
Money market placement (due 6/30/2021) 500,000
Payroll account 300,000
Foreign bank account (in equivalent pesos) 500,000
Employee’s post dated check 18,000
IOU from employees 15,000
Credit memo from a vendor for a purchase return 20,000
Traveler’s check 60,000
Money order 25,000
Pension fund 2,000,000
DAIF check of customer 18,000
Customer’s check dated 1/5/2021 80,000
Time deposit – 30 days 200,000
Treasury bills, due 3/31/2021 (purchased 12/31/20) 200,000
Treasury bills, due 1/31/2021 (purchased 3/1/2020) 300,000
Savings deposit in a closed bank 250,000
Postage stamps 2,000

What is the cash and cash equivalents that should be reported

on the December 31, 2009 balance sheet?
Complete set of financial
statements
1. Balance sheet,
2. Income statement
3. Statement of changes in financial position (which
may be presented
4. Statement of cash flows or a statement of funds
flow
5. Notes and other statements and explanatory
material that are an integral part of the financial
statements.
6. It may include supplementary schedules and
information based on or derived from, and
expected to be read with, such statements.
Sample Financial Statement
Cash Flows from Operating Activities
Cash flows from Investing Activities
Cash Flow from Financing Activities
Purpose of the
Statement of
Why is there a
Cash Flows difference
between net
Can we meet our income and net
• Are cash flows sufficient to obligations to
support ongoing operations? cash flow?
creditors?

Will the company have

to borrow money to Can we pay
make needed dividends?
investments?
Distinction between cash basis and
accrual

Cash basis Accrual basis

Income is recognized when Income is recognized when

received regardless of when earned regardless of when
earned, and expense is received and expense is
recognized when paid recognized when incurred
regardless of when Incurred. regardless of when paid.
Does not recognize accounts This recognize accounts
receivable, accounts payable, receivable, accounts payable,
accrued income, accrued accrued income, accrued
expense, prepaid expense and expense, prepaid expense and
unearned income. unearned income.
Accrual vs Cash Basis - Revenue
The company sold merchandise on December 15,
2020 amounting to P250,000. However this was
collected on January 15, 2021.

Earned Collected
2020 2021
Accrual vs Cash Basis - Expense
The electricity incurred by the company for the
month of December 2020 is P15,000. However this
was paid only on January of 2021.

Incurred Paid
2020 2021
Statement of Cash Flow
Illustration
Definition

•A statements of cash flows is a

component of financial statements
summarizing the operating, investing
and financing activity.
Purpose of statement of cash flows

•Provide relevant information of receipt

and cash payments
•Ability of the entity to generate cash
and cash equivalent.
The Full-Fledged Statement of Cash Flows: Operating
Activities

Operating activities are the cash flows

derived primarily from the principal revenue
producing activities of the entity (activities
that enter into the determination of net
income).

Changes in
noncurrent balance
Transactions affecting
sheet accounts that
current assets
directly affect net
income
Transactions affecting
current liabilities
Examples of cash flows from operating
activities

Examples:
a. Cash receipts from sale of goods and rendering of
services
b. Cash receipts from royalties, rental, fees, commissions
and other revenue
c. Cash payments to suppliers for goods and services
d. Cash payments for selling, administrative and other
expenses
e. Cash receipts and cash payments of an insurance
enterprise for premiums and claims, annuities and
other policy benefits
f. Cash payments or refunds of income taxes unless they
can be specifically identified with financing and
investing activities
The Full-Fledged Statement of Cash Flows: Investing
Activities
Investing activities are the cash flows
derived from the acquisition and
disposal of long-term assets and
other investments not included in
cash equivalent

Lending money to
Acquiring or selling
another entity and
property, plant and
subsequently
equipment
collecting on the loan
Acquiring or selling
securities
 Examples of cash flows from investing
activities
Examples:
a. Cash payments to acquire property, plant and
equipment, intangibles and other long-term assets.
b. Cash receipts from sales of property, plant and
equipment, intangibles and other long term assets.
c. Cash payments to acquired equity or debt
instruments of other entities and, interests in joint
ventures, current and long-term investments.
d. Cash receipts from sales of equity or debt
instruments of other entities and interests in joint
venture.
e. Cash advances and loans to other parties other then
advances and loans made by financial institution.
f. Cash receipts from repayment of advances and loans
made to other parties.
 The Full-Fledged Statement of Cash Flows:
Financing Activities

Financing activities are the cash

flows derived from the equity
capital and borrowings of the
entity.

Payment of dividends
Issuing stock and
(note that interest on
purchasing treasury
debt is classified as
stock
an operating activity)
Issuing long-term
debt and repayment
of debt.
 Examples of cash flows from financing
activities
a. Cash receipts from issuing shares or other equity
instruments (for example, issuance of ordinary
and preference shares).
b. Cash payments to owners to acquire or redeem
the enterprise's shares (for example, payment for
treasury stock).
c. Cash receipts from issuing debentures; loans,.
notes, bonds, mortgages, and other short or long
term borrowings.
d. Cash payments for amounts borrowed.
Statement of Cash Flow
1. Operating activities are the principal
revenue-producing activities of the entity
and other activities that are not investing or
financing activities.
2. Investing activities are the acquisition and
disposal of long-term assets and other
investments not included in cash
equivalents.
3. Financing activities are activities that result
in changes in the size and composition of
the contributed equity and borrowings of
the entity.
 Treatment of Interest
• Interest paid and interest received shall be
classified as operating cash flows because
they enter into the determination of net
income or loss.
• Alternatively, interest paid may be classified as
financing cash flow because it is a cost of
obtaining financial resources.
• Alternatively, interest received may be classified
as investing cash flow because it is a return on
investment.
• For a financial institution, interest paid and
interest received are usually Classified as
operating cash flows.
Component of the Balance Sheet
Current Assets Current Liabilities
Cash Accounts payable
Marketable securities Accrued expense
Accounts Receivable Shor Term Loan
Merchandise Inventory Taxes payable
Prepayments

Non Current Assets Non Current Liabilities

Plant and Machinery Long Term debt
Land and Building

Investments
Equity
Ordinary shares
Retained Earnings
Basic Guide – Operating, Investing and
Financing Activities

Current Assets Current Liabilities

Operating Activities

Non Current Assets Non Current Liabilities Financing

Activities

Equity
Investing Activities
Dividends
• Dividend received shall be classified as
operating cash flow because it enters into
the determination of net income.
• Alternatively, dividend received may be
classified as investing cash flow because it’s a
return on investment.
• Dividend paid shall be classified as
financing cash flow because it is cost of
obtaining financing resources. (PAS 7,
paragraph 34)
• Alternatively, dividend paid may be classified
as operating cash flow in order to assist users
to determine the ability of the entity to pay
dividend out of operating cash flows.
Illustration
Statement of Cash Flow
Veronica Co. reported the following
comparative statement of financial
position at year end.

ASSETS 2020 2019

Cash and Cash equivalents 180,000 225,000
Accounts Receivable 555,000 315,000
Inventory 1,635,000 1,290,000
Prepaid Insurance 120,000 135,000
Property, plant and equipment 6,450,000 5,430,000
Accumulated Depreciation (1,260,000) (1,080,000)
TOTAL ASSETS 7,680,000 6,315,000
Veronica Co. reported the following
comparative statement of financial
position at year end.

2020 2019
Accounts Payable 600,000 517,500
Salaries payable 105,000 60,000
Income Tax payable 52,500 22,500
Interest payable 7,500 0
Bonds Payable 900,000 0
Ordinary share 4,575,000 4,575,000
Retained earnings 1,650,000 1,140,000
Treasury shares (210,000) 0
Liabilities and Stockholder's Equity 7,680,000 6,315,000
 The statement of financial operation for the
year ended December 31, 2020 showed the
following:
Sales 6,675,000
Inventory – January 1 1,290,000
Cost of Goods sold 3,600,000
Purchases 3,945,000
Gross Income 3,075,000
Goods available for sale 5,235,000
Gain on Sale of Machinery 90,000
Inventory – December 31 1,635,000
Total Income 3,165,000
Cost of Good Sold 3,600,000
Expenses:
Salaries expense 960,000
Insurance Expense 150,000
Rent Expense 525,000
Depreciation Expense 390,000
Bad debt written off 30,000
Interest expense 60,000 2,115,000
Income before tax 1,050,000
Income Tax 300,000
Net Income 750,000
Additional Information:

1. Cash dividends declared and paid during the year

amounting to P240,000.
2. Machinery costing P285,000 with accumulated
depreciation of P210,000 was sold for P165,000
3. The New Machinery was purchased for cash.
4. The bonds payable were issued for cash at face value
of P900,000
5. The treasury shares were purchased at a cost of
P210,000.

Required:
a. Prepare a Statement of Cash Flows using direct method
b. Prepare a Statement of Cash Flow using indirect Method.
 Cash Flow
Using Direct Method
Direct Method – Statement of Cash Flow
• The direct method shows in detail or
itemizes the major classes of gross cash
receipts and gross cash payments.
• The cash receipts and cash
disbursement are listed one by one and
the difference between the cash receipt
and cash disbursement represents the
net cash inflow (outflow) from
operating activities.
• The direct method is like the cash basis
income statement.
 Computation of collections

Accounts receivable – beginning XXX

Add: Sales XXX
Total XXX
Less: Accounts receivable – end (XXX)
Collection of accounts receivable XXX

Accounts Receivable
Beg P XXX Collection ?
Sales XXX Write Off (if any) XXX
End XXX
Computation of Payment of accounts
payable

Accounts payable – beginning XXX

Add: Purchases XXX
Total XXX
Less: Accounts payable – end (XXX)
Payment of accounts payable XXX

Accounts Payable
Payment ? Beg XXX
Purchases XXX
End XXX
Computation of Payment of Prepaid
Expenses

Expenses (accrual) XXX

Add: Prepaid Expense - End XXX
Total XXX
Less: Prepaid Expense – Beg (XXX)
Payment of Prepayment XXX

Prepaid Insurance
Beg XXX Expense XXX
Payment ?
End XXX
Computation of collection of deferred
income

Income (accrual) other than sales XXX

Add: Unearned income - End XXX
Total XXX
Less: Unearned income – Beg (XXX)
Collection of Unearned income XXX

Unearned Income
Income XXX Beg XXX
Collection ?
End XXX
Computation of Payment of accrued
expense

Expenses (accrual) XXX

Add: Accrued expense - Beg XXX
Total XXX
Less: Accrued expense – End (XXX)
Payment of Accrued expense XXX

Accrued expense Payable

Payment ? Beg XXX
Expense XXX
End XXX
Computation of collection of accrued
income

Income (accrual) XXX

Add: Accrued Income - Beg XXX
Total XXX
Less: Accrued income – End (XXX)
Collection of Accrued income XXX

Accrued income (receivable)

Beg XXX Collection ?
Income XXX
End XXX
Computation of Collection of Accounts
Receivable

Accounts Receivable
Beg P 315,000 Collection 6,405,000
Sales 6,675,000 Write Off 30,000
End 555,000
Payment of accounts payable

Inventory – January 1 1,290,000

Purchases 3,945,000
Goods available for sale 5,235,000
Inventory – December 31 1,635,000
Cost of Good Sold 3,600,000

Accounts Payable
Payment 3,862,500 Beg 517,500
Purchases 3,945,000
End 600,000
 Payment of Salaries

Salaries Payable
Payment 915,000 Beg 60,000
Expense 960,000
End 105,000
 Payment of Insurance

Prepaid Insurance
Beg 135,000 Expense 150,000
Payment 135,000
End 120,000
Payment of Rent

Payment of Rent = P525,000

 Payment of Interest

Interest Payable
Payment 52,500 Beg 0
Expense 60,000
End 7,500
 Payment of Income Tax

Income Tax Payable

Payment 270,000 Beg 22,500
Expense 300,000
End 52,500
Additional Information
Payment of cash dividend
1.) Retained earnings 240,000
Cash 240,000

Disposal of Machinery
2.) Cash 165,000
Accumulated Depreciation 210,000
Machinery 285,000
Gain on sale of machinery 90,000

Property, Plant and Equipment

Beg 5,430,000 Disposal 285,000
Purchase 1,305,000
End 6,450,000
Additional Information

Retained Earnings
Dividend 240,000 Beg 1,140,000
Net Income 750,000
End 1,650,000

Income Summary 750,000

Retained Earnings 750,000
Disposal of Machinery

Accumulated Depreciation
Disposal 210,000 Beg 1,080,000
Expense 390,000
End 1,260,000

2.) Depreciation Expense 390,000

Accumulated depreciation 390,000
Acquisition of Machinery

Property, Plant and Equipment

Beg 5,430,000 Disposal 285,000
Purchase 1,305,000
End 6,450,000

3.) Machinery 1,305,000

Cash 1,305,000
4.) Cash 900,000
Bonds Payable 900,000
5.) Treasury shares 210,000
Cash 210,000
 Veronica Company
Statement of Cash Flow
Year ended December 31, 2020
Cash flow from operating activities
Collections from customers 6,405,000
Payments to creditors (3,862,500)
Salaries paid (915,000)
Insurance paid (135,000)
Rent paid (525,000) Compare to Indirect Method
Cash generated from operation 967,500
Interest paid (52,500)
Income tax paid (270,000)
Net cash inflow (outflow) from operating activities 645,000
Cash flow from investing activities
Sale of equipment 165,000
Purchase of equipment (1,305,000)
Net cash inflow (outflow) from investing activities (1,140,000)
Cash flow from financing activities
Issuance of Bonds payable 900,000
Payment of cash dividend (240,000)
Payment of treasury shares (210,000)
Net cash inflow (outflow) from financing activities 450,000
Increase (Decrease) in cash and cash equivalent (45,000)
Cash and cash equivalent – January 1, 2020 225,000
Cash and cash equivalent – December 31, 2020 180,000
Increase (Decrease) in cash and cash equivalent (45,000)

Operating activities Investing Activities Financing Activities

645,000 (1,140,000) 450,000

(45,000)
 Cash Flow
Indirect Method
Indirect Method

Net income is adjusted to reconcile it to

net cash inflow (outflow) from operating
activities.
Rule to reconcile Net income to Net cash
inflow (outflow) from operating activities

Increase in asset = Minus

Indirect proportion
Decrease in asset = Plus

Increase in Liabilities = Plus

Direct proportion
Decrease in liabilities = Minus

Add - Expense that do not involve cash outflow (i.e. depreciation,

amortization)
Deduct - Income that do not include cash inflow from operation (i.e.
gain from disposal of Machinery)
 ASSETS 2020 2019 Increase
(Decrease)
Cash and Cash equivalents 180,000 225,000
Accounts Receivable 555,000 315,000 240,000
Inventory 1,635,000 1,290,000 345,000
Prepaid Insurance 120,000 135,000 (15,000)
Property, plant and equipment 6,450,000 5,430,000
Accumulated Depreciation (1,260,000) (1,080,000)
TOTAL ASSETS 7,680,000 6,315,000
2020 2019
Accounts Payable 600,000 517,500 82,500
Salaries payable 105,000 60,000 45,000
Income Tax payable 52,500 22,500 30,000
Interest payable 7,500 0 7,500
Bonds Payable 900,000 0
Ordinary share 4,575,000 4,575,000
Retained earnings 1,650,000 1,140,000
Treasury shares (210,000) 0
Liabilities and Stockholder's Equity 7,680,000 6,315,000
 The statement of financial operation for the
year ended December 31, 2020 showed the
following:
Sales 6,675,000
Inventory – January 1 1,290,000
Cost of Goods sold 3,600,000
Purchases 3,945,000
Gross Income 3,075,000
Goods available for sale 5,235,000
Gain on Sale of Machinery 90,000
Inventory – December 31 1,635,000
Total Income 3,165,000
Cost of Good Sold 3,600,000
Expenses:
Salaries expense 960,000
Insurance Expense 150,000
Rent Expense 525,000
Depreciation Expense 390,000
Bad debt written off 30,000
Interest expense 60,000 2,115,000
Income before tax 1,050,000
Income Tax 300,000
Net Income 750,000
 Veronica Company
Statement of Cash Flow
Year ended December 31, 2020
Cash flow from operating activities
Net Income 750,000
Depreciation 390,000
Gain of sale of Machinery (90,000)
Increase in accounts receivable (240,000)
Increase in inventory (345,000)
Decrease in prepaid insurance 15,000
Increase in Accounts payable 82,500
Increase in salaries payable 45,000
Increase in Income Tax payable 30,000
Increase in Interest payable 7,500
Net cash Inflow (outflow) from operating activities 645,000

Compare to Direct
Method
 Cont. Indirect Method
Cash flow from investing activities
Sale of equipment 165,000
Purchase of equipment (1,305,000)
Net cash inflow (outflow) from investing activities (1,140,000)
Cash flow from financing activities
Issuance of Bonds payable 900,000
Payment of cash dividend (240,000)
Payment of treasury shares (210,000)
Net cash inflow (outflow) from financing activities 450,000
Increase (Decrease) in cash and cash equivalent (45,000)
Cash and cash equivalent – January 1, 2020 225,000
Cash and cash equivalent – December 31, 2020 180,000
Activity
Problem
Cont.
Additional information
1. A cash dividend of P255,000 was declared and paid during the
year.
2. Machinery of P300,000 with accumulated depreciation of
P210,000 was sold for cash without gain nor loss.
3. The net change in the Property, plant and equipment after
considering the Machinery sold was the result of a cash
acquisition of additional Equipment.
4. The note payable bank matured this year and was accordingly
paid in cash.
5. The share capital was issued for cash.

Required:
a. Prepare statement of cash flows for the current year using the
direct method.
b. Compute the cash flow from operating activities using the
indirect method.
Cash Budget
Objective of cash budget
• To ensure that sufficient cash is available at
all times to meet the level of operations that
are outlined in the various budgets.
• Cash budgeting is subject to uncertainty, it is
necessary to provide for more than the
minimum amount required, to allow for some
margin of error in planning.
• To avoid cash balances that are surplus to its
requirements by enabling management to take steps in
advance to invest the surplus cash in short-term
investments.
• cash deficiencies can be identified in advance, and
steps can be taken to ensure that bank loans will be
available to meet any temporary cash deficiencies.
The overall aim of cash budget

maximum
maximum
interest
cash
income on any
availability
idle funds

manage the cash

Cash – T account

CASH
Beginning Balance XXX Disbursement XXX
Receipts XXX
Ending Balance XXX
 Sample Cash Budget
Cash Budegt for the year ended December 31, 2020

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Beginning Balance 45,000 125,000 170,000 305,000 45,000
Receipt from customer 980,000 1,050,000 1,120,000 985,000 4,135,000
Balance 1,025,000 1,175,000 1,290,000 1,290,000 4,180,000

Payments
Purchase of Materials 400,000 480,000 440,000 520,000 1,840,000
Payment of wages 380,000 400,000 450,000 500,000 1,730,000
Other Costs and expenses 120,000 125,000 95,000 105,000 445,000
900,000 1,005,000 985,000 1,125,000 4,015,000
Cash balance - Ending 125,000 170,000 305,000 165,000 165,000
Problem – Budgeted cash Receipt
The V. Dela Cruz Company has obtained the following
sales forecast data:
July August September October
Cash sales P80,000 P70,000 P50,000 P60,000
Credit sales P240,000 P220,000 P180,000 P200,000
The regular pattern of collection of credit sales is 20% in the
month of sale, 70% in the month following the month of sale, and
the remainder in the second month following the month of sale.
There are no bad debts.

Prepare a budgeted cash receipts for July, August, September and

October.
Solution:
Problem – Cash receipt
A company is formulating its plans for the coming year,
including the preparation of its cash budget. Historically,
the company’s sales are 30% cash. The remaining sales are
on credit with the following collection pattern:
Collection on Account Percentage
• In the month of sale 40%
• In the month following the sale 58%
• Uncollectible 2%
Sales for the first 5 months of the coming year are forecast
as follows:
January P3,500,000
February 3,800,000
March 3,600,000
April 4,000,000
May 4,200,000
Compute the projected cash receipt from January to May.
Solution:
Problem
Kiss Corporation is preparing its cash budget for July.
The budgeted beginning cash balance is P35,000.
Budgeted cash receipts total P445,000 and budgeted
cash disbursements total P438,000. The desired
ending cash balance is P50,000.
Question:
1. The excess (deficiency) of cash available over
disbursements for July is?
2. To attain its desired ending cash balance for July,
the company should borrow?
Problem –Budget Cash receipt and
Disbursement
Veronyca Company has projected sales and production in
units for the second quarter of the coming year as follows:
April May June
Sales 75,000 60,000 90,000
Production 90,000 75,000 75,000

Cash-related production costs are budgeted at P8 per unit produced. Of these

production costs, 40% are paid in the month in which they are incurred and the
balance in the following month. Selling and administrative expenses will amount
to P150,000 per month. The accounts payable balance on March 31 totals
P285,000, which will be paid in April.
All units are sold on account for P20 each. Cash collections from sales are
budgeted at 60% in the month of sale, 30% in the month following the month of
sale, and the remaining 10% in the second month following the month of sale.
Accounts receivable on April 1 totaled P750,000 (P135,000 from February's sales
and the remainder from March).
Required:

a. Prepare a schedule for each month showing

budgeted cash disbursements for the Clay
Company.
b.Prepare a schedule for each month showing
budgeted cash receipts for Clay Company.
Solution: Requirement 1

Production April May June

Production Unit Cost 90,000 75,000 75,000
Cost per unit 8 8 8
720,000 600,000 600,000

Cash disbursement
April May June
Production this month (40%) 288,000 240,000 240,000
Production prior month (60%) 285,000 432,000 360,000
Selling and Administrative Expense 150,000 150,000 150,000
Total Disbursement 723,000 822,000 750,000
 Solution: Requirement 1
Sales April May June
Sales in unit 75,000 60,000 90,000
Selling Price per unit 20 20 20
1,500,000 1,200,000 1,800,000

Cash Receipts April May June

February sales 135,000
March sales 461,250 153,750
April Sales 900,000 450,000
150,000
May Sales 720,000
360,000
June Sale 1,080,000
1,496,250 1,323,750 1,590,000

Accounts receivable 750,000

Less: receivable pertain to Feb Sales 135,000
Receivable pertain to March sales 615,000
Divide by: 40% 40%
Sales in March 1,537,500

Collection in March 922,500

Collection in May 461,250
Collectin in June 153,750
Problem
Burma Gas Corporation supplies acetylene and other
compressed gases to industry. Data regarding the store's
operations follow:
• Sales are budgeted at P330,000 for November, P300,000
for December, and P320,000 for January.
• Collections are expected to be 85% in the month of sale,
14% in the month following the sale, and 1%
uncollectible.
• The cost of goods sold is 60% of sales.
• The company purchases 80% of its merchandise in the
month prior to the month of sale and 20% in the month of
sale. Payment for merchandise is made in the month
following the purchase.
• Other monthly expenses to be paid in cash are P21,200.
• Monthly depreciation is P21,000.
• Ignore taxes.
 Statement of Financial Position
October 31
Assets:
Cash P 22,000
Accounts receivable (net of allowance for uncollectible
accounts) 83,000
Inventory 158,400
Property, plant and equipment (net of P594,000 accumulated
depreciation) 1,004,000
Total assets P1,267,400

Liabilities and Stockholders’ Equity:

Accounts payable P 196,000
Common stock 620,000
Retained earnings 451,400
Total liabilities and stockholders’ equity P1,267,400
Required: Compute the Excess (deficiency) cash available
Solution
The End