1. 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,

    • Avatar 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).

  2. 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!

  3. 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 ?

    • Avatar 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 :)

      • Avatar 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.

  4. 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??

      • Avatar 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).

      • Avatar 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.

    • Avatar 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.

      • Avatar 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.

  5. 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)

  6. Avatar 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!

    • Avatar 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

  7. Avatar 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

Leave a Reply