The second episode of the cash flow statement

To complete the list of cash flows; as we took in the previous episode of the list of cash flows, we will now talk in this episode in more detail. Let's start with the indirect method, as we mentioned earlier about the difference between the direct and indirect method, such as the cash flows for operating activities. Starting with the indirect method of preparing the list of cash flows The first need in this method is to begin with the net profit, which the number exist in the income statement, so the question is right now we start with the net profit before or after tax? We will see this through the form of the cash flow statement.

Net profit before income tax

Of course, we will start with the net profit before tax, because simply this income tax will be paid the following year, meaning that you are working the income statement for the year 2018, and let's assume there is a million pounds in profit before tax and you submitted your tax return which It is usually due in March or April 2019, for example, and the tax value rises to 120,000, for example. This tax value will be shown in the income statement for the year 2018, but it will actually be paid in 2019

So now we know we will start with the net profit before tax from the income statement, let it be one million pounds, as we mentioned

Now, we want to do net profit adjustments on the net profit before tax (the number we collect from the income statement) so that we exclude from it any expense or any non-monetary revenue, and we will start with as the first item of the adjustments items, depreciation of fixed assets

We also know that fixed assets have a monthly or annual depreciation according to the accounts system, but monthly are better. And make a financial center monthly or periodically

Destruction is its simple idea as a distribution of the asset's cost over its useful life years,

Using any method of depreciation, the depreciation entry is as follows:

Depreciation expense / account

       To
  Depreciation account / accumulator

This is of course for each class of assets (we will take the topic of fixed assets with a full explanation of the standard and practical reality) what concerned us now is the topic of the cash flow list, where the depreciation, of the non-monetary expense during the period.
 

Because the company bought the asset during a previous period (buying these assets is considered as Cash flows from investing activities)

Detailed explanation of the depreciation entry

This entry means that there is an expense that was deducted from the income statement and reduced the net profit before tax, and this depreciation expense, as we said, is non-monetary so we will add the depreciation expense item to the net profit before tax

Depreciations are found in the income statement in several places where industrial depreciation is part of the cost of sales and administrative or sales loss within the administrative or selling expenses, and of course there is a disclosure and clarifications of fixed assets and their depreciations
 

What is applied to fixed assets applied to intangible assets;
 

So If you have patents, copyrights and trade mark in the company, you do something called amortization which is exactly the same than depreciation but with different name. Intangible assets (have their own standard)

As we also add the amortization expense of intangible assets to the net profit before tax because it is a non-monetary expense. There is something about the issue of adjustments on net profit before tax and its relationship to fixed assets, which is the idea of selling fixed assets When assets are sold for an amount greater or less than its book value (cost - accumulated depreciation), then you will have a gain or loss these gain or loss are considered as intervention in the income statement.

If I have a capital gain, we deduct it from the net profit before tax in the adjustments clause.

If I have losses in this capital loss, we add it to the net profit before tax in the adjustments item.

Well, one asks and:" when the company sold or lost, did it get the money for the sale?" The price value of this sale, whether with a gain or a loss goes to the statement of cash flows from investing activities...?

This is very important (provision)\ *

Create provision from an expense account

The entry for the creation of an provision is from the expense account to the provision account to assume that the company was assigned to a disputed case and let be 10000 learn more about the most powerful accounts program from Accflex    

accounts / expenses for disputed cases 100,000

accounts /allocations disputed issues 100,000

This expense goes to the income and expense statement. For sure it is a non-monetary expense, therefore I will add the expense from the allocation that was created this to the net profit before tax as it is a non-monetary expense, And if we assume that it comes into the next financial period and receives the allocation, that means ;the purpose for this created allocation was expired, the amount for which this allocation was created remains, and therefore the return of this allocation goes to the income statement as income, but it is non-monetary revenue Consequently, it was deducted from the net profit before tax, in which there is a partial provision related to operating cash flows in the next episode.

Decline or assets impairment

The most famous type of impairment in assets is the decrease or impairment of customers balance, we also call it the provision for doubtful debts, which have the same method of calculation, the decline in assets has its own criterion and we will talk about it very soon.

The important thing is when there is a depreciation or impairment in the assets the entry is

      Depreciation expense / expense in assets

To

      Account / Complex Decline in Assets
 

This expense is carried over to the income statement and it is of course a non-monetary expense and therefore is added to the net profit before tax, and the same thing in the provision, when the decline in assets is recovered, this is revenue that is added to the income list and therefore when we do the cash flows by deducting the value of the return of the decline in assets, Because the revenue is non-monetary, and the value of the decrease expense that is recognized during the fiscal period or the fiscal year is recognized in

the income expense list and the entry is as follows

5000 account  / depreciation expense for customers.

5000 account / decrease in customer value.

This expense is deducted from the income statement, which is the reduction of the net profit, and it is added to the cash flow statement in the adjustments item on the net profit before tax, as it is a non-monetary expense, well assuming that the company decided to refund or reduce part of the decline in the value of customers in the next financial period Or the next year, so the effect of this on the financial statements would be 2000
 

2000 account/ Depreciation of customers.

2000 Accounts / Income to return the decline in the value of customers.

It will be added to the income statement unlike what was deducted when it was created, and for the cash flow statement, the amount will be deducted from the net profit before tax because it is a non-monetary income.

Currency differences in the statement of cash flows

The standard indicates that the Unearned Profit and Loss, due from  the changes in foreign currency exchange rates are not considered cash flows but entre into the settlements, on the net profit before tax, the differences in this debit currency are, for example, in the case of external purchase from a supplier At an exchange rate of 10 pounds on the date of receiving the invoice, and the exchange rate at the time of payment was 11 pounds, so there are differences in the evaluation of the debit currency to adjust the supplier's account

( And it was explained before that in the article ) currency valuation differences We come to the point that interests us now

currency unearned difference is deducted From the income statement and reduce the net profit before tax,

and thus in the list of cash flows in the adjustments on the net profit before tax, they are added because they are considered a non-monetary expense, and vice versa in the case of unearned credit currency differences,   the

It is considered as revenue in the income statement and it is added to the cash flow then we deduce it from the adjustments clause as a non-monetary income. The unearned currency difference is in condition that the transaction is not adjust during the financial period

That mean if you have debt to foreign supplier at the end of the financial year, and you didn't pay it, and In case that the exchange rate differs at the end of the financial year from the exchange rate who was at the date of purchase at that time, we make an entry of the currency differences, which are considered unearned, and they are settled in the cash flows unlike their sign. If the unearned currency differences are in a debtor, the number of their items remains added to the adjustments that are made on the net profit before tax in the event that these currency differences are realized (meaning the transaction, whether selling or buying has been settled, and you, as a company, have taken money from the customer or paid your debt to the supplier, so the transaction is complete) At that time, the differences in the unearned currency valuation on the net profit before tax are not adjust , whether the currency differences are debit or credit, because they are realized.

What are the financial investments?

What is meant by the financial investments that the company invests in other companies; we are interested in the cash flows when the financial investments are evaluated at the end of each period. Profits will be in the income statement.
 

The loss is deducted from the income statement, but the cash flows are added to the net profit before tax as the adjustments clause, and the profits are added to the income list, in order to be deducted from the net profit before tax at the adjustments clause

About the dividends paid, this means that company has paid dividends to shareholders and investors, and add it even though they have been actually paid This is in order to remove its effects from the net profit before tax, because after that we will return to deduct it from financing activities and external cash flow and the same for financing expenditures and interest even though they are paid and deducted in the income statement. But when we make the list of cash flows, we add the interest and financing expenses to the net profit before tax, and as we said, we remove the effect on it from the net profit before tax.

The idea in this is to remain aware while making cash flows in the indirect way, how to make adjustments to the net profit before tax so that any non-cash income or expense is excluded. From operational activities.

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