# Statement of Cash Flows Example 2

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### Comments

1. 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.

• 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.

• says

Thanks again. It is very clear now.

2. 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?

• 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.

• says

You are expected to know both methods. However most of any calculation questions will be on indirect method.

3. says

why don’t we add back bad-debt in inderect mothod . . . . .. as it is non cash item

• 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.

4. 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?

• 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.

• 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.

5. 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

• says

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.

6. 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

• says

Bonus issue of shares will also increase the cash by nominal value

• says

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.

• says

Thank you sir. But I heard that the nominal value must be paid by the company itself or by the shareholders

• says

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

• says

Thank you for correcting my misconception

• says

I think net inflows will be \$132,000 because bonus issue will increase the cash by nominal value

• says

Whitemajician: No. See what I wrote above – a bonus issue does not result in a cash flow (they are free shares).

7. 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.

• 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.

• 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?

8. says

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.

• 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.

• 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. 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. 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. 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 ?

• says

sorry,ignore the above question.found the answer.ofcourse debentures covers all loan forms.