Statement of Cash Flows Terminologies

Statement of cash flows is classified as to activity. The three major classifications are: cash flows from operations, cash flows from investing activities, and cash flows from financing activities.

Cash Flows from Operations present cash flows that are derived primarily from the principal revenue producing activities of the company. It is composed of the following:
Net income/loss self explanatory

Adjustments to net earnings. Net income/loss includes noncash expenses such as depreciation expense. These noncash items such as depreciation expenses are added back to net earnings because no cash was paid for depreciation. Conversely, interest income where no cash was received are deducted in the net earnings.

Adjustments for working capital changes. Working capital as defined in the balance sheet terminologies are current assets and current liabilities.

Cash flows from investing activities present cash flows from transactions involving long term assets and other investments. Acquisition of properties like land and purchase of bonds or stocks with no intention to sell within a year are considered investing activities.

Cash flows from financing activities present cash flows derived from issuance of equity or borrowing of the company. Dividends paid, issuance of shares, and acquisition of loans are presented in this section.

Income Statement Terminology

Revenues. Depending on the industry where the company do business, revenues may also be called sales. Revenues are the amount of cash or receivables generated by the company by selling its products to the market. In companies with many subsidiaries (companies that they own more than 50%), total revenues includes revenues from the subsidiaries.

Cost of sales is composed of costs that are directly related to revenues. These are costs necessary to produce the products of the company. Thus, expect this item to rise if revenues increase.

Gross profit is the net total of revenues and cost of sales.

Expenses are costs incurred in the normal course of business. Expenses has many subclassifications but it is common to divide expenses to “selling expense” and “general and administrative expenses.” Selling expenses are expenses incurred for selling the product like advertising and salaries of sales personnel. General and administrative expenses are expenses incurred for the day to day operations of the company like salaries for accountants, managers and office supplies.

Operating profit is the difference between gross margin and expenses.

Other income and expenses are income generated or expenses incurred that does not come from normal operations. Other income includes profit from sale of assets, investment profits, and interest income. Other expenses include costs incurred on sales of assets, losses on investments, foreign exchanges, and interest expense.

Profit/loss before tax is net total of operating profit and other income and expenses.

Provision for income tax self explanatory.

Net income/loss is net total of profit/loss before tax and provision for income tax.

Balance Sheet Terminologies


Current assets constitute assets owned by the company that can be converted into cash within a year. Current assets are listed in the order of liquidity or ease of convertibility to cash. Since “cash and cash equivalents” are already cash, it ranks first.

Accounts receivable represents goods sold to customers but not yet paid. On occasion, the company encounters slow payers or prove to be uncollectible. For this reason, companies establish a reserve for bad debts.

Inventories are balances of materials at various stage of manufacture: raw materials, work in process, and finished goods. A good example would be the manufacturing process of JFC, their raw materials is meat, work in process is ground pork, and finished goods are the frozen patty.

Noncurrent assets are assets which are not expected to be converted into cash for more than one year. Included in the noncurrent assets is property plant and equipment (PPE). PPE are assets owned and expected to be employed by the company on a continuing basis. To recognize the wear and tear in using an asset, all assets in the PPE are depreciated over its useful life except for land.


Current liabilities are debts that come due within one year. Included in the current liabilities is trade and accounts payable which are accounts owned by the company to its suppliers.

Noncurrent liabilities are debts that come due for more than one year.


Par value is the value that was originally assigned to each common stock shares when the company was originally organized. It is also the least amount the shares of stock can be sold for. Par value has no or little relationship with a stocks share value.

Common stock is the value of total outstanding shares multiplied by its par value. Additional paid-in capital (APIC) is the excess amount paid by a stockholder over the stated par value.  Example, shareholder A pays P5 for 1 a share of Pancake House (PCKH) which has a par value of P1, PCKH shall recognize P1 for the Common stock account and P4 for the APIC account.

Retained earnings is the sum total of each year’s net income. Retained earnings may be distributed as dividends. Other companies prefer not to declare dividends and use the cash saved for expanding the company operations.

Cash Flows Statement and Statement of Changes in Equity

Balance sheet and income statement are well known financial statements but few understood the statements of cash flows and changes in equity.

Cash Flows Statement

Statement of cash flows presents the inflows and outflows of cash over a period of time. It excludes non-cash transactions like depreciation expense. The ending balance in the cash flows statement is always equal the cash balance figure found in the balance sheet.

Let’s take a look at Juan’s statement of cash flows:

Juan’s Statement of Cash Flows
For the day ended

Net income                      P100
Changes in Accounts payable:
Increase in due to mommy       50
Cash balance beginning           0
Cash balance, End                  P150

Notice the cash flows statement’s characteristics?
1.   Inflows and outflows of cash (money given by Juan’s mom is accounted)
2.   Over a period of time (similar to that of the income statement)

Statement of Changes in Equity

Statement of changes in equity presents the changes in equity over a period of time. Net income is included in the statement of changes in equity.

Below is Juan’s statement of changes in equity:

Juan’s Statement of Changes in Equity
For the day ended

Beginning balance of Equity        P   0
Net income                                      100
Ending balance of Equity           P100

The ending balance of the statement of changes in equity is always equal the equity presented in the balance sheet.

Did you notice the connection between the four basic financial statements?

Income Statement generates Net income figures which is needed in the Statement of Cash Flows, andStatement of Changes in Equity.

The figures generated by the Statement of Cash Flows is needed for the cash balance figure of the Balance Sheet.

The figures generated by the Statement of Changes in Equity is needed for the equity balance figure of the Balance Sheet.

Income Statement

Balance Sheet depicts a company’s financial position at a specific date. Income statement presents the company’s financial performance or the revenues, expenses, & profit over a period of time.

Revenue is the money that the company generates while expense is the money that the company spends. Net income/loss is the difference between revenues and expenses.

Let’s get back to Juan. Juan is working as the secretary of Jose and paid P110 per day.

We can now prepare Juan’s income statement for the day:

Juan’s Income Statement
For the day ended

Revenue          P110
Fare Expense     (10)
Net income      P100

Notice the income statement characteristics?
1.   Presents the company’s financial performance or the revenues, expenses, & profit.
2.   Over a period of time. In this case, the period of time is one day.

Balance Sheet Basics

Balance Sheet

Balance sheet reports the financial condition of the company at a specific point in time. Financial condition is the status of a company’s assets, liabilities, and equity.

Assets are the properties owned by the company while the liabilities are the debt or claims against the company. The difference between assets and liabilities is called equity. Assets are always equal in total value with liabilities and equity:

Assets = Liabilities + Equity

Believe it or not, you can make a balance sheet of your own financial condition right now. Let’s have Juan as an example. Juan reached into his pocket and found 150 pesos.

Cash P150

Included in the P150 cash is the P50 his mother gave him for his allowance so that would be his liability.

Liability P50

The difference between Assets and Liabilities is Equity.

Equity P100



Cash P150


Payable to mommy P50


Equity P100

Notice the characteristics mentioned?
1. Contains financial condition (status of assets, liabilities, and equity)
2. At a specific point in time (you can prepare balance sheet anytime)
3. Assets are always equal in total value with liabilities and equity