Please take note that in preparing for the Statement of Cash Flow, several things should be
achieved:
1. Identify the non-cash transactions from the operating activities and make sure that
these are added back to the net income to come up with the cash transactions of the
income statement. (Indirect method)
2. In classifying the increases or decreases of current assets and liabilities as to whether
these are additions or not in the operating activities, the following will be considered:
a. Decrease in current assets will be added to the cash flow as this means it increase
the cash; like decrease accounts receivable which means that a collection was made.
b. Increase in current assets will be deducted from the cash flow as they means
decreases the cash; like the decrease in the merchandise inventory which means
that there was sale of goods which at the same time increases the cash flow.
c. Decrease in liabilities means payment which should be deducted from the cash flow.
d. Increase in liabilities means availment of credits from suppliers which should be
added to the cash flow.
3. Properly classify the transactions to its proper section – operating, financing, and
financing.
4. The net increase or decrease of cash at the bottom of the Statement of Cash Flow
should be equal to the net increase or decrease of cash in the Statement of Financial
Position.
5. The cash balance ending in the Statement of Cash Flow should be equal to the cash
balance in the Statement of Financial Position.
