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sir i dont understand the direct method in other payments how you calculate the expense 6000 and add this plz tell me
Have you watched the lecture on the direct method, because I do explain this in the lecture.
great lectures but why are these lectures not downloadable. just only the note .
It is the only way that we can keep this website free of charge.
Dear Mr. Moffat
I still concern about some points related to preparing cash flow statement, but i do not know if they are correct. Kindly help explain them for me.
effect on profit effect on cash adjustment on
cash flow stmt
——— ———- ————
1. allowance for rcvbl decrease no no need adjustment as
bad debs (as those items
already adjusted in increase/
decrease in receivable)
2. bad debts subsequently
paid increase increase no need adjustment
3. accruals and provision decrease no add back to profit
4. prepayment no decrease deduct from profit
(however, In the text book, cash advance to other parties is treated as investing activities. If prepayment made to suppliers is also treated as investing activities)
Thanks a lot for your time!
Dear Sir
(pls ignore the previous comment as it is not well presented, I rewrite as follows)
I still concern about some points related to preparing cash flow statement, but i do not know if they are correct. Kindly help explain them for me.
1. allowance for rcvbl: decrease in profit, NO effect on cash–> no need adjustment as bad debts (as those items already adjusted in increase/ decrease in receivable)
2. bad debts subsequently paid: increase in profit, increase in cash –> no need adjustment
3. accruals and provision: decrease in profit, no effect on cash –> add back to profit
4. prepayment: no effect on profit, decrease in cash –> deduct from profit
(however, In the text book, cash advance to other parties is treated as investing activities. If prepayment made to suppliers is also treated as investing activities)
Thanks a lot for your time!
You must ask this sort of question in the Ask the Tutor Forum – not as a comment on a lecture.
Sorry Sir, I will make post this question in The Ask of Turor Forum. Look forward to your reply. Thank you very much for your time!
Hi John,
Did proceeds from disposal of non current assets is at cash generate from operation? or should be at financial investment rite?
Hi John,
Did proceeds from disposal of non current assets is at cash generate from operation? or should be at cash flow from investing activities rite?ignore previous post
The proceeds from the sale are cash flows from investing activities.
(But the profit or loss on sale needs adjusting for in arriving at the cash flow from operations)
thank you John. Appreciate . =)
You are welcome 🙂
CAN YOU TELL ME THE TREATMENT OF REVALUATION GAIN IN CASH FLOW STATEMENT
Please do not write in capital letters.
Revaluation gains do not appear in the statement – they are not cash flows. The only relevance may be in sorting out the non-current assets and this is mentioned in the lecture.
While they are not part of the statement, they are necessary to reconcile the opening and closing cash and cash equivalent balances. I think IAS-7 allows something like:
..
..
..
Net increase (decrease) in cash and cash equivalents
Cash balance at the beginning of period
Unrealized gains/losses from the revaluation of foreign currency balances
Cash balance at the end of the period
Not sure how US GAAP treats this, though…
Of course they are needed in order to arrive at the cash flows from operating activities (unless using the direct method – although the reconciliation will still be required).
All of this is explained in the lecture and I therefore do not understand why you have bothered writing all of this.
US GAAP is of absolutely no relevance whatsoever for Paper F3 – what exactly are you trying to prove?
I do suggest that you watch the lecture because your into interpretation of IAS 7 makes no real sense at all.
John,
Thank you for the reply.
We might be talking about different things here. My reply was basically in response to Jimmy’s question. Sorry if that sounds irrelevant to the lecture.
So in the indirect method, the unrealized currency translation gain/loss is deducted from net income for being a non-cash transaction.
My point is that, the revaluation gains and losses on foreign currency cash holdings do affect the cash balance at the end of the period, and are needed at the end, after the financing activities section, to justify the movement of cash and cash equivalents (I’m referring to paragraph 28 of the aforementioned international standard).
Translation of foreign currency is not examinable in Paper F3 and is not what Jimmy was asking about.
I had already answered his question which was in relation to revaluation of non-current assets.
chapter 14 test question 4
the term amortisation is confusing me. Please explain the solution to me.
and question 5 too please
Are you watching the lectures in order? They are a complete course for Paper F3 and if you have watched the lecture on depreciation then you will appreciate that amortisation is effectively another word for depreciation that we use for intangible assets.
The answers are printed in full at the end of the lecture notes, and should make sense if you have watched the lectures on depreciation.
If you still have problems then do ask again (but ask in the Ask the Tutor Forum rather than as a comment on a lecture).
Hi John I must say thank you for this lecture of socf. This was well executed. Keep up the good job.
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!
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.
sir, I really didnt understand the calculations of Other Expenses ( Distr and Admin costs). could you please go through it again.
Thank you 🙂
How? I cannot type out the lecture here!
i mean why we take out and add up the costs…e.g. profit…
Because we are trying to calculate the cash that is coming from the profits – it is a cash flow statement!
I see that you made many “serious” questions. Hope you passed F3, man 😀
He passed with a high mark 🙂
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!
(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.
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
You are welcome (and I am pleased that it is now clear) 🙂
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.
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.
Thanks again. It is very clear now.
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?
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.
Which method to be stdied for the exam? Direct or indirect?
You are expected to know both methods. However most of any calculation questions will be on indirect method.
why don’t we add back bad-debt in inderect mothod . . . . .. as it is non cash item
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.
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?
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.
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.
I had the same same doubt as christina but this explanation with little example cleared it all.. Thanks of all your effort !!
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
Depreciation is removed because it is not a cash flow.
Irrecoverable debts are removed because they are dealt with in calculating the cash received from customers.
Employment costs are removed because they are shown separately when using the direct method.
Profit on sale is added back because it is not a cash flow.
Thank you.
You are welcome 🙂
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
48000 net inflow. the bonus issue is a non cash item so would not affect the cashflow.
thank u
Bonus issue of shares will also increase the cash by nominal value
whitemagician:
A bonus issue will not affect the cash at all and will not appear in the Statement of cash flows.
A bonus issue is an issue of shares free of charge – no cash is received.
Abdullah khan’s answer is correct.
Thank you sir. But I heard that the nominal value must be paid by the company itself or by the shareholders
Whitemagician: I don’t know where you heard that, but it is wrong.
Bonus issues are issues of free shares – nobody pays for them.
We increase the share capital and decrease the share premium by the amount of the bonus issue (the nominal/par value). No cash at all is received.
You should watch the free lecture on this 🙂
Thank you for correcting my misconception 🙂
48000 net inflow
I think net inflows will be $132,000 because bonus issue will increase the cash by nominal value
Whitemajician: No. See what I wrote above – a bonus issue does not result in a cash flow (they are free shares).
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.
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.
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?
Good day Mr Moffat,
I also arrived at 990 using same method as tomekswi1. Can you please explain where we went wrong?
If Receivables/Inventory figure is decrease, do we exclude it totally from our calculation or do we add it as I did?
Many thanks in advance
tomewski1 is indeed correct.
(Sorry I had not answered before but it is not possible to look at all comments – this question should have been asked in the Ask the Tutor Forum).
Thank you again Me Moffat x
I don’t really get it when profit on sales is added back to calculate other cash payment under direct method. Can someone pls explain me? Thanks in advance.
@sengseng, i also did nt got y itz adding in cash flow????????
@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.
plz tell me why profit on sale of non-current assets is deducted?
@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
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….
@trevon2020, Have you looked at the previous lecture (for example 1)?
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
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 ?
sorry,ignore the above question.found the answer.ofcourse debentures covers all loan forms.
thx a lot 🙂