1. Profile photo of Rustam says

    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?

    • avatar says

      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?

      • Profile photo of John Moffat says

        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)

  2. Profile photo of kevin says

    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

    • Profile photo of John Moffat says

      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.

  3. avatar says

    Dear Sir,

    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

      • avatar says

        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

  4. avatar says

    hey John,

    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.

    • Profile photo of John Moffat says

      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.)

  5. avatar says

    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 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?

    • Profile photo of John Moffat says

      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.

  6. avatar says

    Dear Sir,
    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.
    Many thanks,

    • Profile photo of John Moffat says

      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).

  7. avatar says

    Dear sir,

    Very clear and concise but one question, just one.

    Why did you deduct the profits from disposal of the NCA in the operating activites?
    You mentioned that it is not regarded as cash inflow but why?

    Thank you!

  8. avatar says

    Yep, I understand the reason why you put long-term assets at a special category due to the advance payment to purchase those assets. And then, we just deduct the cost by using depreciation method so there’s nothing change with cash. However how to solve “Prepayment”. This account has the same procedure as long-term assets, hasn’t it? Should I put the expense of the year which is deducted from prepayment next to depreciation in Cash flow statement and use the amount of cash we recently credit to debit prepayment instead of the gap between two years to calculate the cash change ?

    • Profile photo of John Moffat says

      Prepayments are dealt with in exactly the same way as receivables. The change over the year is added to or subtracted from the accounting profit in order to arrive at the cash generated from operations.

      • avatar says

        Thank you very much :) Besides, There is a difference between the ACCA F3 paper and your lecture. In the paper Interest expense is stated in the category “Adjustment for” but in your lecture it is not. Is it a mistake of printing? Or just this example doesn’t need it? Thank you :)

      • Profile photo of John Moffat says

        You can either start with the profit before tax and then immediately add back the interest expense, or you can start with the profit before interest and tax – both end up exactly the same.
        Whichever you do, the interest paid is subtracted at the end (along with dividends paid and tax paid) to get the cash generated from operating activities.

  9. avatar says

    Hi, my first comment ever on this website.

    How would i account for deferred tax, if it appears in the income statement and in NCL? would i approach it the same way Tax liabilities was approached ( T accounts method) in this video?

      • avatar says

        if expense is showing in income stt. it doesn’t necessarily mean that expense has been incurred and we have paid the amount for it.. is it so??

      • Profile photo of John Moffat says

        The expense has been incurred, but it does not necessarily mean that the same amount has been paid – we might have paid less (and so there is an amount still owing in the balance sheet) or we might have paid more (in which case there is a prepayment in the balance sheet).

      • Profile photo of John Moffat says

        The amount of 39,000 in the income statement is the expense for the year.
        From the Statements of Financial Position we know the amounts owing at the end of each year.
        We can therefore calculate how much was actually paid during the year.

    • Profile photo of John Moffat says

      We are not recording the profit on disposal in operating activities. We are removing it from the profit in order to get the ‘cash’ profit.
      Under investing activities we are showing the actual cash received.

      • Profile photo of John Moffat says

        When a non-current asset is sold there will be a profit or loss on sale. In this example there was a profit. The profit will appear in the income statement and is therefore included in the operating profit. However the profit is not the same as the cash received and we are trying to prepare a cash statement.
        So we take the profit out of the operating profit (because it is not a cash amount) and show the actual cash received separately under cash flows from investing activities.

  10. avatar says

    When calculating operating activities:
    Operating profit 101
    Depreciation 40
    Profit on sale (10)
    Increase in receivables (9)
    Increae in inventories (9)
    Increase in payables 28
    Cash form operations 142 <– Should be 141? (131-9-9+28)

  11. Profile photo of drrob1983 says

    Once again, a very clear video and explanation. There is only one thing I need calrifying to make sure I have this sorted – in the notes, the proforma starts with profit before tax, then makes adjustments for Depreciation, Proceeds on Sale of NCA, and then ADDS IN THE INTEREST EXPENSE.

    Is this because in the video you started with operating profit (PBIT), and so if starting with profit before tax, you have to add in the interest expense to get back to the PBIT figure?

    I imagine so, but need it confirming.

    With kindest regards!

    • Profile photo of John Moffat says

      @drrob1983, You are correct. If we start with the profit before tax, then we need to add back the interest expense (which gives the profit before interest and tax). Then lower down we deduct the actual amount of interest paid

  12. Profile photo of wixibix says

    Hmmm… alot of stuff to note here.. but overall onces u get a hang of it! .. it works out quickly and smoothly.. practice is needed.. thank u very much for these lovely videos and notes! .. they really are awesume.. u dont need to read the wholee of kaplan or BBP (if ur not a fond reader) .. u can just log in and work your way down chapters … understanding of concepts & working of methods are understood very much! … Thank you onces again for your time & effort put in this wonderful website ! it really is award desvering
    :) <3

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