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  1. Avatar of christina says

    hi, i am a bit puzzled as to why would we add back profit and not just leave it netted off if it isn’t a cash flow……. by me adding back wouldn’t I have the profit included in the calculation when really it should be excluded?

    • Avatar of johnmoffat says

      We are not adding back profit – we are trying to convert the accounting profit into a cash ‘profit’ by (for example) adding back the depreciation expense because although it makes the accounting profit lower, it does not involve paying out cash.

    • Avatar of johnmoffat says

      I am assuming you are referring to adding back the profit on sale to the expenses.

      Just suppose there was a profit on sale of 20 and other expenses of 100. Since the question says that the profit had been netted off against expenses, it would mean that in the profit statement there would be a net expense of 80. However the profit on sale is not a cash item and so if we add the 20 to the 80 we get the cash expenses of 100.

  2. avatar says

    Kindly explain why the following things have been subtracted and added from Dist. and Admin?
    Dist. and Admin 120,000
    less: Depcn (36,000)
    less: Bad Debts (14,000)
    less: Employment Costs (42,000)
    Add: Profit on Sale 6,000
    $ 34,000

  3. Avatar of Javeria says

    how do we solve these type of questions?????

    Turbot Co had the following changes in its share capital and non-current liabilities during the year.
    A bonus issue of shares with a nominal value of $84,000
    A rights issue of shares with proceeds of $144,000
    A repayment of a $96,000 long-term loan

    What net amount would appear under the cash flows from financing activities heading in the Statement of Cash Flows?
    $48,000 net inflow
    $132,000 net inflow
    $228,000 net inflow
    $96,000 net outflow

  4. avatar says

    Hi can anyone help me to find out the answer here please explain..

    14. A business received a delivery of goods on 29 June 2007, which was included in inventory at 30 June 2007.

    The invoice for the goods was recorded in July 2007.

    What effect will this have had on the business?

    1) Profit for the year ended 30 June 2007 will be overstated

    2) Inventory at 30 June 2007 will be understated

    3) Profit for the year ended 30 June 2008 will be overstated

    4) Inventory at 30 June 2007 will be overstated

    1 and 2 only
    2 and 3 only
    1 and 4 only
    1 only

    • avatar says

      The answer is 1only. The reason is that, since the invoiced was not received in the 2007 accounting period, the purchase will not be captured/recorded in the purchases account hence reducing cost of sales which increase profit (overstates profit)
      Inventory will not be affected because figure is normally taken from stock-tatking records

  5. avatar says

    Any one help me how answer is 890000 and not 990000:

    11. In the course of preparing a company’s Statement of Cash Flows, the following figures are to be included in the calculation of net cash from operating activities:
    $
    Depreciation charges

    980,000
    Profit on sale of non-current assets

    40,000
    Increase in inventories

    130,000
    Decrease in receivables

    100,000
    Increase in payables

    80,000

    What will be the net effect of these items in the Statement of Cash Flows?

    addition to operating profit of $1,070,000
    subtraction from operating profit of $890,000
    addition to operating profit of $990,000
    addition to operating profit of $890,000
    Thank you.

    • avatar says

      Add: Depreciation 980000
      Less: Profit on sale (40,000)
      ————-
      940,000
      Less: Inc. in receivables 0000000
      (What we have there was a decrease)

      Less: Inc in inventories (130,000)
      Add: Increase in Payables 80,000
      —————
      890,000
      —————

      I hope I am right.Can someone please confirm this.

      • avatar says

        Shouldn’t the decrease in receivables be added to the net cash?
        Add Depreciation 980
        Less Profit on sale (40)
        Add Decrease in receivable 100
        Less increase in Inventory (130)
        Add increase in Payables 80

        Net 990
        Mr. John can you explain please?

    • Avatar of johnmoffat says

      @sengseng, Note (b) of the question says that the profit on sale of the non-current asset has been netted of expenses (i.e. because it is a profit it has been treated as a negative expense – if it was not there then the total expenses would be higher).
      Since the profit itself is not a cash flow, it is not relevant for the cash flow statement. If we remove this ‘negative expense’ then the remaining expense figure will be higher.

    • avatar says

      @shahbaz963, let’s say that we sold a non-current asset of net book value of 20K for 30K. So the profit on disposal is 10K. In cash flow statement we are concerned about physical cash, not profits. So we deduct the profit of 10K, but then, in investing activities hedding, we add that very 30K that we actually recieved

  8. Avatar of trevon2020 says

    i’m writing paper CAT 6/ FFA in December 2011, as meantioned by nosaj i would also like the lecturers to do one with the two years where u have to find the differences it would really help allot…keep up the good work and i’ll be waiting on your 2011 Dec notes….

  9. avatar says

    cashflow
    can \someone please assist when you are asked to calculate the net cashflow and you are given two years figure eg
    inventory o6 and 07 and i you would find the difference and aplly whether increase or decrease. If you are given two profits one for 06 and one for 07 how do you treat this

  10. avatar says

    i appreciate open tuition.it is much better than a free lunch which is not suppose to exist .a question regarding cash flow.under cashflow from finance activities shouldnt there be adj for loans recv in the period ?

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