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June 19, 2016 at 12:05 pm
In the given information for example 1, it says
‘The asset sold had originally cost $50,000 and had a net book value of $20,000.’
If so, what happens to the deprecation cost of $30,000 that occurs?
Or is that already included in the given depreciation of $40,000?
So it is always the Net Book Value we look at when we need the amount for disposal?
Do we just disregard the original cost?
John Moffat says
June 19, 2016 at 3:07 pm
The depreciation would relate to previous years – we are only interested in this years depreciation charge.
If you are given net book values as the balances, then we only need the net book value of the asset sold.
If the balances are given for both cost and accumulated depreciation, then you need to remove the cost and depreciation of the disposal separately (as normally in the entries for the sale of an asset, as covered in the lectures on depreciation).
June 20, 2016 at 3:56 pm
Thanks for your clear explanation and a quick reply 🙂
June 21, 2016 at 8:23 am
You are welcome 🙂
May 11, 2016 at 11:23 pm
Sir, Ive gone through the comments and noticed that several people asked this question, but I still don’t get it. In you example, depreciation amounted to 40,000 as given by the question, you didnt add the depreciation of the asset that was sold though -> $30,000. Why?
I’m only getting confused when I try and apply your method, which is step one to deal with non-current assets to question 19.4 in the BPP revision kit. They add the depreciation of the asset sold to the accumulated depreciation that was calculated in the question. They also work out the non current assets t-account all at cost, rather than carrying value, which we also have? Could you clear this up? I would greatly appreciate it!
May 12, 2016 at 5:55 am
It depends whether the question gives you the cost and accumulated depreciation separately in the Statements of Financial Position or (as in the lecture example) simply gives the net book value in the Statements of Financial Position.
Since in this example we only have the net book values, we only adjust by the NBV of the asset sold.
Abdul Nishad says
March 4, 2016 at 10:25 am
Dear Mr. John,
First of all let me thank you for your spectscular lectures which helped me clear my F2 paper in just few days.
In the lecture here, you have credited the non current assets with the net value (20000), but in the previous lecture when an asset is sold it was credited at the full actual cost.
Kindly explain why ?
I believe net value is the cost – Accumulated depreciation
March 4, 2016 at 10:56 am
It is because we only know the net book value at the start and end of the period – we do not know the cost and accumulated depreciation.
January 22, 2016 at 2:36 pm
Can you explain for me in the Example 1, When you calculate the value of acquisition asset during the year = CL+ depreciation + disposal- OB. I just wonder if the Closing balance and OB of the assets on the balance sheet are the net book value ? ( because I think they deducted depreciation twice ?)
Thank you very much,
January 22, 2016 at 6:14 pm
The values in this question must be at net book value, because that is the final value that shows in the Statement of financial position.
January 23, 2016 at 3:20 am
I think so,but why you less depreciation again? I think the purchase of asset would be by CL + disposal-OB= 545+ 20-410=155 ( your answer is 195 because you also added depreciation????)
January 23, 2016 at 7:59 am
The opening balance will be reduced by the depreciation for the year, reduced by the NBV of the disposals, and increased by the cost of the acquisitions. Since we know what the closing balance is, the acquisitions must be the missing figure.
January 25, 2016 at 7:01 am
I understand now. Thank you very much :).
December 27, 2015 at 4:43 pm
Hello sir! You took the operating profit amount initially instead of profit before tax amount and subtracted the interest expense. But if we were supposed to write the profit before tax amount, we would’ve added back the interest expense right?
December 28, 2015 at 7:16 am
Yes – taking the profit before tax and adding back the interest expense gives you the operating profit.
The rest of the statement from then on remains the same – we subtract the interest paid (which in this question is the same as the interest expense for the year, but will not always be the same).
December 23, 2015 at 4:45 pm
Can you explain how did u know profit on sale of non current asset was included already in operating profit. And under operating activities why did you included receivables and payable, what so they have to do with profit???
December 23, 2015 at 5:42 pm
But the profit on sale of non-current assets always appears in the Statement of profit or loss – it has to! (Have you watched the lectures on depreciation?)
It will therefore automatically have been included in the operating profit.
With regard to receivables and payables – what is included is the increase or decrease over the year. The Statement of profit or loss will have included the total sales and purchases for the year (whether or not the cash had been received or paid) and therefore we need to adjust for the changes in receivables and payables to turn it into a cash flow).
I don’t know whether or not you have watched all the earlier lectures, but if not then I do suggest that you do watch them. Our free lectures are a complete course for Paper F3 and cover everything you need to be able to pass the exam well.
December 23, 2015 at 6:15 pm
Sir actually i think i need to revise previous chapters also i have not practised test questions. Well sir previously in chapter 2 you said that revenue and capital expenditure will be disscussed in coming chapters but uptill chapter 13 there is no discussion on that…..
December 23, 2015 at 6:21 pm
Everything that is needed to be said for the exam about the difference between revenue and capital expenditure is covered in chapter 2 and the chapter on depreciation.
December 23, 2015 at 6:25 pm
But i have completed depreciation chapter and there is nothing regarding that in it…..
December 23, 2015 at 7:56 pm
So you have everything you need 🙂
November 25, 2015 at 7:25 pm
I refer the Statement of Cash flows pg 91 of the notes. An observation that doesn’t make sense.
The accumulated profits as at 2007 were $431,000; The profit for 2008 as per the Statement of Profit or Loss yr ended 31 Dec was $61,000 – surely this would make the Accum profit for 2008 (431,000+61,000) $492,000 – why does it have $476,000?
November 26, 2015 at 8:05 am
Because there is a dividend of 16,000.
492,000 – 16,000 = 476,000
October 14, 2015 at 9:16 am
Why 30000 which came by selling non-current assets not accounted for. I understand that 10000 was not actual profit ( because depreciation was included) and therefore it was deducted from operating profit but 30000 was recevied as cash when we sold NC assets so why is it not included in cash flow from operating profit?
October 14, 2015 at 7:04 am
Am already answered by reading different comments.Thanks my brother.God bless you!Due to my financially constrains i could not buy online courses.Very helpful!
October 14, 2015 at 8:33 am
September 29, 2015 at 2:33 pm
Hi sir, from where did you got the 70000 figure for issues of shares and 64000 for cash balance?
September 29, 2015 at 2:39 pm
If you look at the Statements of financial position in the question, you will see that share capital has increased by 50,000 and that share premium has increased by 20,000. SO they must have raised cash of 70,000.
The cash balance at the end of last year is again on the Statement of financial position for last year!
(I assume that you have downloaded the free Lecture Notes? There is no point in watching the lectures without them!!)
October 4, 2015 at 8:54 am
Alright, thanks sir.
September 23, 2015 at 6:33 pm
Dear John, do we use increase (decrease) in net receivables or total receivables?
August 23, 2015 at 2:13 am
On your proforma for the statement of cashflows i notice provision for interest expense.There is an interest expense also in the Income Statement of the example.Why doesnt it appear though in the operating activities?
August 23, 2015 at 5:43 am
We take the operating profit (which is before interest) and then show the interest actually paid as a separate cash outflow.
I do explain this in the lecture.
September 2, 2015 at 11:49 am
Hi, I’ know you need answer not a question. But not sure where to ask here.
this notes are date to when? because my books are from this year. I don’t match his samples questions on page 89. Please if you could tell me.
September 2, 2015 at 2:55 pm
The lecture goes through the example on page 91 of our free lecture notes.
Our lectures and lecture notes cover the current syllabus for Paper F3.
September 2, 2015 at 4:05 pm
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.
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!
May 8, 2014 at 7:45 am
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?
May 8, 2014 at 7:48 am
The profit is not a cash figure. The cash is the cash actually received from the sale, and this is shown under ‘cash flows from investing activities’.
August 21, 2013 at 4:17 pm
July 10, 2013 at 10:38 am
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 ?
July 10, 2013 at 11:23 am
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.
July 10, 2013 at 2:07 pm
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 🙂
July 10, 2013 at 4:53 pm
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.
July 11, 2013 at 2:53 am
Thank you a lot! I got it. 🙂
September 2, 2013 at 7:32 pm
Great work you have done here.
June 20, 2013 at 8:19 pm
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?
June 21, 2013 at 9:12 am
You would, but deferred tax cannot be mentioned in Paper F3. (It is relevant for F7 so if you are interested you will find lectures there, but not for F3).
April 6, 2013 at 12:53 pm
I Dont fully understand and get at 5:30 why 20 000 is being used for disposals thank you
April 6, 2013 at 12:58 pm
Forget it I understand it now 🙂
January 12, 2013 at 4:34 pm
Another question when tax amount is charged to income stt. doesn’t this mean it’s our expense? so it’s going to be on the debit side of tax payable acc?
January 12, 2013 at 6:26 pm
The double entry is debit tax expense account and credit tax payable account (liability).
The expense appears in the income statement, the liability appears in the statement of financial position.
January 13, 2013 at 7:09 am
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??
January 13, 2013 at 10:59 am
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).
January 13, 2013 at 11:59 am
Right. but here in the question it’s not mentioned if it’s our liability…??
January 14, 2013 at 11:09 am
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.
January 15, 2013 at 1:01 pm
thanks for the explanation.. you guys are doing a great job!!
January 12, 2013 at 4:31 pm
why are recording profit ($10000) on disposal of nca in operating activities when we are recording the whole amount under investing activities ($30000)??
January 12, 2013 at 6:25 pm
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.
January 13, 2013 at 7:29 am
can you elaborate please
January 13, 2013 at 11:03 am
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.
January 13, 2013 at 12:02 pm
thanks alot for your help 🙂
May 31, 2012 at 1:21 pm
When calculating operating activities:
Operating profit 101
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)
May 31, 2012 at 1:25 pm
my mistake, inventories were 8.
August 14, 2012 at 4:59 pm
@lbambalas, i think you mean receivables were 8. Inventories are in fact 9. (90 – 81 = 9)
May 23, 2012 at 5:45 am
very well explained!
April 29, 2012 at 8:54 pm
why is the profit on sale of non current asset being deducted from the Operating profit Under the heading: cashflows from operating activities
May 7, 2012 at 12:52 am
@markadi, because it was added to gross profit as other income and since it is due to over provision of depreciation and not actual cash it need be deducted.
DA CEILSO says
April 27, 2012 at 12:59 pm
this is very very very good
March 9, 2012 at 10:52 am
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!
August 2, 2012 at 9:49 am
@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
January 28, 2012 at 7:28 am
lecture was very useful….
December 27, 2011 at 10:12 am
this is great. learning could never be so simplified!
December 9, 2011 at 4:52 pm
Opentuition, this is really beautiful. I enjoyed it so much. Thanks so so much.
December 6, 2011 at 2:40 pm
Thanks a million………..
October 22, 2011 at 7:22 pm
tnx from Bangladesh
June 25, 2011 at 3:18 pm
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
June 5, 2011 at 6:34 am
I can’t watch part a. All other lectures are visible.
November 22, 2010 at 2:31 am
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