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 ?
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.
Thank you very much 馃檪 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 馃檪
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.
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?
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).
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?
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).
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.
why are recording profit ($10000) on disposal of nca in operating activities when we are recording the whole amount under investing activities ($30000)??
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.
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.
When calculating operating activities: Operating profit 101 Depreciation 40 Profit on sale (10) ____ 131 Increase in receivables (9) Increae in inventories (9) Increase in payables 28 ____ Cash form operations 142 <– Should be 141? (131-9-9+28)
@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.
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?
@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
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 馃檪 <3
Killqa 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!
John Moffat says
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’.
anasbadrie says
Very Understandable
Robert 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 ?
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.
Robert says
Thank you very much 馃檪 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 馃檪
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.
Robert says
Thank you a lot! I got it. 馃檪
Jim says
Great work you have done here.
Adedot2 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?
John Moffat says
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).
Mark says
I Dont fully understand and get at 5:30 why 20 000 is being used for disposals thank you
Mark says
Forget it I understand it now 馃檪
yasminf says
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?
John Moffat says
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.
yasminf 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??
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).
yasminf says
Right. but here in the question it’s not mentioned if it’s our liability…??
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.
yasminf says
thanks for the explanation.. you guys are doing a great job!!
yasminf says
why are recording profit ($10000) on disposal of nca in operating activities when we are recording the whole amount under investing activities ($30000)??
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.
yasminf says
can you elaborate please
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.
yasminf says
thanks alot for your help 馃檪
lbambalas says
When calculating operating activities:
Operating profit 101
Depreciation 40
Profit on sale (10)
____
131
Increase in receivables (9)
Increae in inventories (9)
Increase in payables 28
____
Cash form operations 142 <– Should be 141? (131-9-9+28)
lbambalas says
my mistake, inventories were 8.
glenb says
@lbambalas, i think you mean receivables were 8. Inventories are in fact 9. (90 – 81 = 9)
zaidh11 says
very well explained!
markadi says
why is the profit on sale of non current asset being deducted from the Operating profit Under the heading: cashflows from operating activities
malcolmkg says
@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
this is very very very good
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!
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
rhlmenon says
lecture was very useful….
thnx
tsepisomakolometse says
this is great. learning could never be so simplified!
juanaj says
Opentuition, this is really beautiful. I enjoyed it so much. Thanks so so much.
onican says
Thanks a million………..
yusufkhan04 says
tnx from Bangladesh
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
馃檪 <3
shadowj says
I can’t watch part a. All other lectures are visible.
vimalzincy says
thx 馃檪