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July 24, 2015 at 4:10 pm
Hi Sir, I do not understand why the profit on sale is deducted from the operating profit in the cash flows from operating activities? Also why do we add depreciation when it is not a cash expense, what does this mean?
Hope you can clarify my doubts.
John Moffat says
July 24, 2015 at 4:28 pm
In arriving at the profit, depreciation will have been charged as an expense. However, depreciation is not a payment of cash and so because we want the ‘cash profit’ we need to remove the expense – without it the profit would be higher. So we add it back to get the cash profit.
Similarly, any profit on sale will have increased the profit in the Statement of profit or loss. Again, the profit on sale is not a receipt of cash and so we need to remove it from the profit to get the ‘cash profit’.
(I do assume that you have watched the earlier lectures on depreciation and so are happy as to how depreciation and profit or loss on sales are calculated, and realise that these figures are not receipts or payments of cash.)
July 10, 2015 at 2:50 pm
if we had a revaluation loss what we do
July 10, 2015 at 6:44 pm
Revaluation losses do not occur in Paper F3, only revaluation profits!
June 19, 2015 at 7:12 pm
Hi John can you tell me how you knew that tbe tax figure needed to be sorted out?
June 19, 2015 at 7:32 pm
It always needs to be checked because the Statement of profit or loss shows the tax charged whereas we need the tax paid for the Statement of cash flows. So we always need to check.
June 19, 2015 at 7:34 pm
Ohhh:) i see…! Thanks!!!
May 27, 2015 at 7:42 pm
Mr Moffat, in my book, BPP P&R kit (22.5) it says that dividends received are included into investing or operating activities. (like we invested into subsidiary Co. and receiving dividends, right?). Is it different from dividends paid? (that could be either operating or financing). or is it error?
June 1, 2015 at 12:38 pm
Hi, when you sell an non-current assets the rule is that you always credit the NCA account with the original amount of an asset when it was bought. So why in chapter 13 example 1 in cash flow during the T account lecturer is crediting NCA account with net book value?
June 1, 2015 at 12:48 pm
You were not listening carefully enough
The figures for non-current assets are the net book values (the carrying values). They clearly must be and you are not given the breakdown of the cost and accumulated deprecation.
The net book value of assets increases by cost of any acquisitions; it decreased by the net book value of any disposals; it decreases due to the depreciation for the year; and (finally) it will increase due to any revaluation.
The ‘rule’ when you sell non-current assets it that remove the original cost from the cost account and you remove the depreciation from the accumulated depreciation account. Therefore you remove the net book value from the original net book value of all of the assets.
My lecture is perfectly correct (and the example is presented in exactly the same way as it is likely to be presented in the exam, if it is asked)
April 18, 2015 at 12:07 pm
How do we calculate total tax for the previous year,current year and the one given in the statement of profit and loss when preparing statement of cash flows for the current year??#please help am stuck
April 18, 2015 at 2:31 pm
You know the charge for the year from the Statement of profit and loss, and you adjust this by the tax owing at the start and end of the year (from the Statements of financial position) to find the tax actually paid.
This lecture on Statements of cash flows shows this with an example.
April 15, 2015 at 8:40 am
I usually calculate taxation paid by taking the amount owing from last year and adding to it half the amount charged for this year and get the same answer as the method you used. but in this example i did not get the same answer. 30000+(0.5)(39000)=49500 which is not the same as 49000… is the method i used wrong to use?
Thank you very much
April 15, 2015 at 9:01 am
Your method is wrong. Why should it be half of the amount charged this year?? Maybe it has been in some questions but if it has been then it is only a coincidence.
April 15, 2015 at 11:03 am
oh i thought so because i thought taxation is paid by companies 50% during their accounting year and 50% in the following year. but now i understand ill use the second method to be on the safe side. thank you
February 26, 2015 at 3:55 pm
On Example 1, while preparing cashflows from operating activities, we are removing the profit on sale of Non-current asset from the operating profit. however, this profit was not included in the statement of profit and loss as i thought it would be disclosed under other incomes just after the gross profit but since it is not, where else would it have been included? please help. thanks.
February 26, 2015 at 5:13 pm
Profit on sale does not appear as other income.
What happens is that any profit or loss on sale appears under the same heading as would the depreciation on the asset (so, for example, it is were a delivery van then it would appear under ‘selling and distribution expenses’). It it is a loss on sale then it is an extra expense, if it is a profit on sale then it is a negative expense.
(The reason is that they are not really profits or losses – they occur because we have either charged too much depreciation in the past, or charged too much depreciation. It is really a ‘correction’ to the depreciation that has been charged.)
February 27, 2015 at 9:32 pm
Oh, many thanks John. It’s all clear now.
January 11, 2015 at 1:24 pm
sir in the second adjustment-During the year there had been sales of non current assets for 30,000.the assets sold had orginally cost 50,000 and had a net book value of 20,000.
here u credited the netbook value amount of 20000 in the NCA a/c
this one from bpp,Fixtures and fittings with an original cost of 85000 and a carrying amount of 45,000 were sold for 32,000 during the year.in the bpp text book the NCA A/c has credited the original cost of 85,000
does net book value and carrying value mean the same?
January 11, 2015 at 2:00 pm
Yes – carrying value means the same as net book value.
In the example in the lecture we only had the brought forward carrying value (not the cost and accumulated depreciation separately) and so needed to remove the carrying value of the asset sold.
If, on the other hand, we have the cost and accumulated depreciation given separately then we remove the cost and the accumulated depreciation on the asset sold separately as well.
December 8, 2014 at 5:02 pm
Will the proforma be given in the CBE exam?
December 8, 2014 at 5:27 pm
BELLO OLAIDE TITUS says
November 17, 2014 at 5:44 am
Pls sir, are we likely to be asked to prepare the whole cash flows now that exam structure is changing?
November 17, 2014 at 8:48 am
It depends whether you are doing paper based or CBE.
However, either way you can be asked for any part of the statement.
November 15, 2014 at 7:37 pm
Hi quick question are you supplied with the proforma in the exams?
November 16, 2014 at 9:15 am
No you are not
May 23, 2014 at 5:22 pm
I am having trouble understanding why is depreciation entry at 5:27 in the NCA account? I thought we have separate account for depreciation and accumulated depreciation.
May 23, 2014 at 8:39 pm
The the ledger there will be accounts for cost, accumulated depreciation, and depreciation expense.
However, on the statement of financial position we show the net book value (cost less accumulated depreciation) and in this example we do not know the cost and accumulated depreciation separately (and we do not need to know them).
Because we know the net book value at the beginning and end of the year, we need to sort out why this changed. It changed because we bought some, it changed because we sold some, and it changed because the depreciated this year. This years depreciation charge will appear as an expense in the Income statement and will also reduce the net book value (because it increases the accumulated depreciation).
May 23, 2014 at 10:28 pm
Thank you so much!!!!
Really appreciate it!
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