1. avatar says

    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.

    • Profile photo of John Moffat says

      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.)

  2. 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)

  3. 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.

  4. 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

  5. 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.)

  6. 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.

  7. 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).

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