How to make a cash flow statement with examples

Today we have a practical example to show how to make a cash flow statement . This requires more than one part . In today’s part we will deal with non –cash items .

To make a Cash Flow Statement  (CFS )using the indirect method which is more practical , we have to get the income statement of the intended period in addition to the company  financial statement of two periods ( the current and previous periods ) .

This part is concerned with the income statement and its effect on the Cash Flow Statement  (CFS )and the following parts will be concerned with the other items of Cash Flow Statement  (CFS ) .

The free income statement of the ended year 2021

 

The free Cash Flow Statement of the ended year 2012


 

First: How to make adjustments in the cash flow statement:

We start with the number of net earnings before tax that is in the income statement (36150000), this is the first number in the cash flow statement and it will be adjusted as all non-cash items (expenses or revenues) are excluded.

Assets depreciation in the income statement :

Depreciation is a non-cash expense so it is added to the net earning before tax as in the list (10500000 ).Also it is included in the income statement and  it is classified as an industrial depreciation  of production and a marketing depreciation of the assets used in sales and an administrative depreciation which is concerned with administration . All we need to know now is that we add depreciation expenses to net earning before tax because it is a non-cash expense .

Intangible assets :

Intangible assets are real assets like copyrights and trademarks , they have no material existence . This is the same idea of fixed assets which have depreciation and depreciation expenses . So intangible assets are added to the cash flow statement CFS in the adjustments item as a non-cash expense . the number here is 50000 and it is in the income statement as an expense .

Financing expenses 

Financing expenses ( interests of loans and facilities ) are included in the income statement as an expenses  separate item with the amount of (1750000)  . Although they are already paid but we add them  to the item of adjustments on the net earnings before tax in order to exclude their effect from the earnings before tax  so we can have these financial expenses in the items of operating or financing activities , according to the company policy . It is better for the company to add the financing expenses to  the high  operating cash flows to enable any user of the financing statements ( ex. Investors ) to read and learn that the company has  high operating activity cash flows through which it can pay its financing expenses . In other words , the company is able to pay its liabilities through its operating activity .

This is an important point for the company as it empowers it in the banks . In the example we find that 

1750000 has been added to the net earnings before tax and this is the same number that will be deducted again in the items of operating activities as a cash outflow ( we will explain it in the following  part )

Assets decrease :

the next item is the decrease in assets value 

assets decrease includes current assets like inventory , clients , investments 

and it is the assets book value recorded with a value higher than the cash surrender value or the cash current  value of future cash flows resulting from this asset ( the bigger ). In this case the financial asset is considered vanished and the difference is an expense that is deducted from the income statement   but the non-cash expense is added to the adjustments of earnings before tax .

the most common assets decrease is the decrease in clients ( doubted received debits )

In the above income statement  the value of assets decrease  is 2750000 so it is added to the cash flow statement in the adjustments item , on the net earning before tax because it is a non-cash expense .If the decrease or a part of it is returned , it will be  deducted from the earnings before tax because it is a non-cash revenue.

The role of allocations in the cash flow statement CFS:

The allocation is recorded as :

From             A /  allocations expense   

To                   A / allocations 

This is a non-cash expense that is deducted from the income statement . Then it is added to the adjustment item of earnings before tax because it is a non-cash expense . The allocations value in the income statement  during the year in the example is 1250000L.E. In the CFS this number is   included in  the adjustments item , the allocation during the year   are considered expenses in the income statement . They are added    in the  Cash Flow Statement  (CFS ) because they are non-cash expenses. The allocation expense is one of the liabilities until it  is adjusted either by using or returning . And in the case of returning the returned amount will be deducted from the net earnings before tax as a non-cash revenue .

Currency valuation differences :

The standard is that unaccomplished  Currency valuation differences don’t have any cash flows , consequently they are adjusted in the net earnings before tax .

In the above income statement there are credit currency differences ( revenues ) of 350000 thousands . We should be aware whether the currency differences are achieved or not , because if they are achieved they will have no effect on the cash flow statement both credit and debit currency differences. But if they are not achieved –as a whole or a part – they will be added to or deducted from the net earnings before tax .

In our income statement there are unachieved currency differences of 350000 and the cash flows were 150000 .This  means that there are  150000 of unachieved  credit currency differences . Therefore they are deducted from the net earnings before tax as an unachieved revenue . If there are unachieved debit currency differences , they will be added to the net earnings before tax .

So we adjusted the non-cash items on the net    earnings before tax .In the next part we will deal with the items of operating activities ( working capital changes ) 

Also we will know The cash inflow or outflow .

We will have the financial statement of the company to complete the items if the cash flow statement CSF