Comments

  1. avatar says

    Hello, please help me with such a question, why when we do the indirect method, we don’t deduct bad debt from profit? It is included in expenses and doesn’t generate a cash flow! Shouldn’t we do so:?
    Profit 240000
    Depreciation 36000
    Profit on sale (6000)
    Bad debt 14000
    ?
    Thank you!

    • Profile photo of John Moffat says

      But there is effectively a cash flow – it there is an irrecoverable debt then it means that we have not received cash that we otherwise would have received :-)

      Irrecoverable debts never require adjusting for with the indirect method.

  2. avatar says

    Hi John,
    Please could you explain question test question 5 of chapter 14 in a bit more detail, I have struggled to understand the question altogether. What exactly is being asked for here, and what’s the best way to attempt this question? Thanks in advance!

    • Profile photo of John Moffat says

      (In future please ask this sort of question in the Ask the Tutor Forum rather than as a comment on a lecture)

      The question simply wants to know the figure for purchases of non-current assets (tangible – so excluding the development expenditure). You approach it in exactly the same way as I do in the lecture (this is an easier version of what is in the lecture – have you watched the lecture?).
      You know the NBV of the assets at the start and end of the year – the only reasons they will have changed is because of depreciation and because of additions. You know the depreciation, so the additions are the missing figure.

      • avatar says

        Thank you very much. Yes, I always watch the videos before attempting the tests but made it more complicated than it ought to be. It’s clear now, and I’ve noted your request to post in the Ask Tutor Forum going forward

  3. avatar says

    why are we assuming that all the revenue collected of 1,200,000 was received from sales on credit? I ask because we have included it in the T account of receivables while trying to look for the cash received from recevables during the year.

    • Profile photo of John Moffat says

      It is irrelevant whether the revenue of 1,200,000 was cash sales of credit sales (or, more likely, a combination).

      The revenue earned (not collected) is 1,200,000 – this is the total of the sales for the year.

      Just suppose a business had total sales of 100,000, and that customers still owed them 10,000 at the end of the year. The total sales is all sales (whether or not they have yet paid) and therefore if 10,000 have not paid it must mean that only 90,000 cash has actually been received.

  4. Profile photo of kevin says

    How do we solve this??

    A company has the following info.about property,plant and equipment.
    2007. 2006
    Cost. 750. 600
    Acc.dep. 250 150
    Carryn.amt (250) (150)

    A plant wth a carryn amt of $75(original cost of $90) was sold for $30 during the year.
    What is the cashflow from investing activities during the year?

    • Profile photo of John Moffat says

      You have either copied the question wrong, or the question itself was typed wrong. The carrying value at the beginning and end of the year should be the cost minus the accumulated depreciation – and it is not!!!
      However, since the cost was 600 at the start of the year and plant with a cost of 90 was sold, this brings the cost down to 510. Therefore there must have been purchases of assets of 750 – 510 = 240.
      So the cash flow from investing activities is an outflow of 240 – 30 = 210.

    • Profile photo of John Moffat says

      No it isn’t – an irrecoverable debt is where we have received less cash (because the receivable is not paying).

      The only non cash items you will see in F3 are depreciation and profit or loss on the sale of non-current assets.

  5. Profile photo 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?

    • Profile photo of John Moffat 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.

    • Profile photo of John Moffat 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.

  6. 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

  7. Profile photo 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

  8. 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?

    • Profile photo of John Moffat 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

  9. Profile photo 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….

  10. 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

  11. 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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