Cash flow statement from operating activities Part 5

Published By Hisham Assal
Date of publication 2019 August 25

The direct method is used in the company to be easily displayed and read by decision makers.

As we clarified the difference between the direct and indirect methods is in the listing of the terms of  the cash flow statement from operating activities but the investing and financing activities don’t change .

To prepare a Cash flow statement using the direct method we have to examine each item of the operating activities to see the movement of cash connected to each item either receipts or payments .

Cash flow statement from operating activities

Clients’ receipts

It is called the cash statement so we want to identify if the received amount from clients during the financial period of the statement .

How to calculate the company collections ?

There is no problem in cash sales

The company knows the amount of its cash sales

It is all about credit sales

In the beginning of the financial period you have a credit balance for clients from the previous period and credit sales for the current period and it is probable or even sure to have a collected amount of the debts for the previous and current  periods .

The formula of collections from clients =

Current period sales + debit balance in the beginning of the period - debit balance at the end of the period

For example if the year starts with a clients’ debit of one million and the sales during the period are 7millions and the ending debit balance is 4 millions

So the collected amount for the current period =

4 -7+1= 4 millions


Suppliers mean a cash outflow

To figure out the amount paid for suppliers over the year

We check the company purchases, if it is a manufacturing company then the purchases are materials for packing and  packaging, spare parts and others . So we deal with suppliers for all kinds of inventory .

How to calculate the cash payment for suppliers

= purchases + suppliers’ balance beginning of the period - suppliers’ balance end of the period

To put it another way, purchases +the money I owe to suppliers at the beginning of the period – the remaining amount for the suppliers at the end of the period .

The idea is that

Assume that You bought an inventory for 5 millions during the period and the company began its financial period with 3 millions debits for suppliers . at the end of the period   the debit balance was 4 millions

To calculate the cash payments for supplies you can apply the formula as follows :

5 millions + 3 millions – 4 millions = 4 millions

The main idea is that the company had a debit of 3 millions at the beginning of the period and the purchases were for 5 millions

The ending period remaining is 4 millions

So all debits are 8 millions

And the remaining at the end of the period is 4 millions

Then what was paid is 4 millions ( the difference )

Another point in suppliers’ payments is that you may find it difficult to determine the amount of purchases

Regarding that we follow a periodic or constant inventory and  it doesn’t include purchases accounting. Then the best method to calculate the suppliers’ payments is to use a simple formula

The cost of sold goods + end of the period inventory – beginning inventory =purchases during the period

The cost of sold goods  ± inventory change – suppliers’ change

Inventory change is end of the period inventory balance – beginning inventory balance

Suppliers’ change is  end of period suppliers’ balance – beginning suppliers’ balance

To make it easy to understand

The cost of sold goods is an inventory you had then  you sold it and there was a part of it that belonged to the current period and another part belonged to the previous period .Namely you bought  part in the current period and another in the previous period.

Also to know how much was paid for the suppliers  , you have to identify both the beginning period balance for suppliers and the end of period balance.

Therefore the formula is interconnected.

So to calculate the purchases and inventory of the current period

The cost of sold goods ± inventory change (end of the period inventory balance – beginning inventory balance)

Then we subtract form the result Suppliers’ change  (end of period suppliers’ balance – beginning suppliers’ balance )

So the main idea is that I want to identify how much the purchases for the period  are and how much I owe the suppliers in the beginning  and the end of period balance . In this way , it will be easy to determine the payments for suppliers during the current period .

To give an example : the cost of purchases in 2018 was 5 millions and the  beginning inventory balance was 2 millions  and the end of the period inventory balance was 2.5 millions while beginning suppliers’ balance was 750 thousands and end of period suppliers’ balance was one million .

Payments for suppliers = the cost of sold goods + inventory change – suppliers’ change

inventory change= 2.5 – 2= .5 millions , ending inventory – beginning inventory = change

Suppliers’ change = 1 - .750 = .250 millions , ending  suppliers – beginning suppliers = change

Then we apply the formula: payments for suppliers = the cost of sold goods  ± inventory change ± suppliers’ change

So payments for suppliers = 5+ .5 - .250 = 5.250 millions

Other debit balances  

They are current assets and sums for the company which are paid for other members in or out the company . These sums will be adjusted such as charges and  the  covering of guarantee letters or insurances and advances for the employees . Also the prepaid expenses like the renal , to sum up any prepaid payments .

Also like the advanced instalments of suppliers meaning that you paid money for the suppliers but they

Haven’t delivered the goods yet . So in this case the advanced instalments for suppliers are other debit balances and the same for prepaid expenses. The idea is that the other debit balances are any sums for the company that are owned by members other than clients .

Assume that the company started the current financial period with a beginning balance of other debit balances as 600 thousands and at the  end of the period it became 600 thousands

This means that there are cash receipts from other debit balances with the amount of 300 thousands namely cash inflow .

It also means that the company was able to collect all the sums it paid in the previous period .

On the contrary if we began the period with  a balance of 500 thousands and ended with 650 thousands , it means that there was a cash outflow with the amount of 150 thousands .

In the statement we use the gross number of other debit balances after analyzing each item separately as a reference outside the statement .

To use it later in the financial analysis of cash flow statements .

In addition you can list receipts from debit balances in an item

And the payments of the debit balances in another item so that users can benefit from the financial statements  with detailed numbers .

Expenses in the cash flow statement

The company pays for suppliers the value of inventory purchases but there are other expenses . They may be general and administrative, marketing, operating or financing . Of course these are the major expenses accounts and they include each type of expenses types such as salaries .

There are administrative salaries and marketing salaries depending on the place of spending  whether it will be the administration or sales centers or  factories . Now if you want to know the paid administrative expenses during the period , you may be advised to get it from the trial balance .

Accounting is based on maturity , Meaning that every month we calculate revenues and expenses either collected , paid or not paid . Here we work on the cash flow statement , so I want to determine the general cash expenses  = general and administrative expenses + change in prepaid general expenses – change in accrued  general expenses

Change = ending balance – beginning balance ( in general )

Why did we add the prepaid expenses?

Because prepayment means that you have already added it  the advance in order to connect each month with its paid expenses so you should add it  to the general and administrative expenses balance .We simply subtracted accrued expenses because they aren’t paid till then but only connected to the month according to accrual basis .

This is true for marketing and operating expenses as well .

Financing expenses in the cash flow statement

First : both the International and the Egyptian standards didn’t include financing expenses in the operating activity or financing  activity  but they only state the condition that there must be stability in the place of the item of financing expenses This means that if you used them as operating , so every financial period they would  be in listed in the operating .But if you used them as financing , you would list them in the financing . This is because of the comparability basis .

It is common in accounting that they are stated in the operating activity especially if the company works on a high cash flow number , then the financing expenses will be included as operating in order for the company to have a powerful position for the shareholders and banks that it has a high cash flow number from operating activity and can pay the interests for banks easily .

Financing expenses are the interests of loans and facilities and also bonds if existed . In most cases there is no accrual of financing expenses in general .

If you want to calculate the amount  of cash paid at  any expense

The paid amount +change in prepaid expenses – change in accrued expense

Collected interests and other revenues

Basically the interests of deposits are included in the investing activities . Some of the interests are every 3 months , but from the accounting perspective you record in the book a monthly accrual . This is also true for other revenues .

To illustrate , if you have scrap wastes and sold them  , but till the end of financing period you didn’t collect any cash . However it is recorded as a monthly accrued revenue of the period as   FROM  : A /ACCRUED  REVENUE , TO  A / WASTES  REVENUE

So I want to know the collected interests or other collected revenues in cash .

= interests of deposits and other revenues – change in accrued revenues

In this way I could figure out the amount of cash collected from the interests or other revenues .

The other revenues may be included in the operating activity .

The profits of dividends in the cash flow statement

The idea of financing expenses can also be applied to The paid profits dividends . In other words they can be listed as operating or financing , if I want to know the actual prepaid profits

For example : in the beginning of the year the accrued profits dividends liability was  5 millions and at the end of the year there was 7.5 millions and the net profits during the year was 10 millions . The retained profits balance at the beginning of the period was 20 millions and at the end of the period it became 18 millions . So we want to figure out the payments of profits and dividends .

The answer : initially we have to be aware that the announced profits dividends are different from the paid profits dividends .

That is the company can announce   profit dividends of  5 millions , for example , and they are due on the company to the shareholders ( a liability )and the payment decision is another part that is when the company has liquid cash .

In the example : the announced profits dividends  is  net profits during the period + retained profits balance at the beginning of the period - retained profits balance at the end of the period

Retained profits mean that profits of previous years and the company haven’t distributed them on the shareholders or have used them in another activity , namely that the company has been earning over the period of retaining  but it is common that part of the earnings is divided on the shareholders and another part is a spare and a third part is considered retained profits .

In the example a part of retained profits at the end of the period balance is from the beginning balance and the other part is from the profits of the year .

To learn the accrued dividends of the company that it announced as a liability

= beginning period retained profits + the profits of the year – retained profits at the end of the period

= 20 + 18 – 10 = 12 millions

Cash dividends

Accrued dividends beginning of the period + announced dividends – accrued dividends at the end of the period

= 7.50 – 12+ 5= 9.5 millions

This means that the company distributed profits of 9.5 millions during the year as cash profits dividends

To use another method , we can put it another way after the company decides to distribute profits on the shareholders which can be after the end of the financial year

The record is as follows     FROM A   /PROFITS OF THE YEAR

                                               TO        A  / PROFITS DIVIDENDS

Or                                             FROM A/ RETAINED PROFITS

                                             TO        A  / PROFITS DIVIDENDS     


That is you know the number the company decided to distribute  which is 12 millions

The beginning balance was 5 millions

So the gross dividends credit balance is 17 millions.

At the end of the period there are 7.5 millions so the spend is 9.5 millions .

The idea is that we want to know the amount that the company decided to distribute

It is very easy to figure out the paid cash dividends .

Taxes in the income statement

The paid income tax is included in the operating activities and is calculated as follows :

Beginning Accrued tax in the financial position + current tax from the income statement for the current period -  ending accrued tax balance  in the financial position = the paid tax as tax expenses during the year ( current and deferred ) .

+ accrued income tax at the beginning of the period

+ deferred income tax at the beginning of the period

- accrued income tax at the beginning of the year

= paid cash as an income tax .

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