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  1. Profile photo of Mahoysam says

    Hi Mr Mike!! :)

    I have a question regarding the cash flow statement.

    First of all, the interest payment, why do we add the interest to the profit before tax when adjusting for non cash items and then we subtract it again under operating activities? (when we deduct interest, tax and dividend paid), I don’t see the point of adding it and subtracting it, do I have to do that?

    Secondly, Some non cash items such as unwinding the discount and FV adjustments – I thought I should adjust for them when I am adjusting for the non cash items at the top of the statement, but the way it was solved in my revision kit is that for example they subtracted the unwind-ed discount when they were accounting for the finance cost and they adjusted for the FV when they were accounting for the investment income – I believe the net effect is the same, whether I do it my way or their way, so does it matter? (e.g. If I subtract an increase in FV of an investment of 20 from the profit at the top and then I account for the whole income without subtracting the FV adjustment from it, the effect is the same, so can I do it my way?

    Regarding Q2 on the paper ( i hope it is okay to post it here) – We often get revalued PPE in that question and so on, something I need to ask about, do we assume that the depreciation charge of a company is done at the beginning of the year? I often get confused about this, sometimes the question tells me the asset was revalued at the end of the year and its remaining useful life is xx years, I understand here that the accounting treatment is to calculate the depreciation based on the restated amount over the remaining useful life but the question, is the depreciation charge here based on the original value of the asset since the asset was revalued at the end of the year so it should have been calculated before the revaluation? I hope I made my point clear and I hope this is not too long for you.

    Many thanks!

    Maha

    • avatar says

      I can answer your doubt about interest payments, in the statement of profit or loss interest is charged to it on an accrual basis whether we actually paid it or not. So initially we add back the amount charged to the statement of profit or loss (accrued figure) and then we subtract the amount we actually paid. That is why we do the subtraction and addition

    • Profile photo of MikeLittle says

      Hi Jennifer
      The change (increase or decrease) in a provision is a non-cash item which will have been credited or debited respectively to the Statement of Income in arriving at profit before tax. As such, it needs to be deducted / added to the profit before tax figure to get that profit figure back to being cash based. You could have asked the same about depreciation – that too is non-cash and needs to be adjusted within the operating activities section of the Statement of Cash Flows

      • avatar says

        I understand the case of depreciation, I don’t have to compare it with last year’s figure so it’s not a change(increase or decrease). In this situation, it is a change in the provision (suggesting a comparison between current and prior year figures). Please can you give me some examples of this kind of provision?

        Thanks a lot. Really appreciate it……

      • Profile photo of MikeLittle says

        OK, Provision for Warranty Claims brought forward from last year $62,000 (on SoFP) (on credit side of provision account)

        Provision for Warranty Claims carried forward into next year $65,000 (on SoFP) (on debit side of provision account, above the total lines and on the credit side on the same account below the total lines)

        Warranty Claims paid out per the notes in the question $8,800 (not always an amount paid out in an exam question) (on the debit side of the provision account above the total lines)

        Therefore, there must be an entry on the credit side of the provision account above the total lines in the sum of $13,800 to keep the account in balance. The double entry for that #13,800 is to the Statement of Income, but it’s non-cash.

        Therefore, in the Statement of Cash Flows, you will find an add-back in “operating activities” of $13,800 and then, lower down, an amount shown as a payment for warranty claims of $8,800

        OK?

      • avatar says

        Dear Mike, for the above example , the double entry is $ 11800 not 13800?

        Provision for Warranty Claims brought forward from last year $62,000 (on SoFP) (on credit side of provision account)

        Provision for Warranty Claims carried forward into next year $65,000 (on SoFP) (on debit side of provision account, above the total lines and on the credit side on the same account below the total lines)

        Warranty Claims paid out per the notes in the question $8,800 (not always an amount paid out in an exam question) (on the debit side of the provision account above the total lines)

        Therefore, there must be an entry on the credit side of the provision account above the total lines in the sum of $13,800 to keep the account in balance. The double entry for that #13,800 is to the Statement of Income, but it’s non-cash.

        Therefore, in the Statement of Cash Flows, you will find an add-back in “operating activities” of $13,800 and then, lower down, an amount shown as a payment for warranty claims of $8,800

  2. avatar says

    Hi any one can make me understand About Shares ( O. share , peference share, bonus shares) and any other relating to shares.
    i am having problem adjusting the cash flow from “Investing activites” due to not clear understanding of shares i guess.
    regards
    Ash

    • Profile photo of MikeLittle says

      Hi – you’re going to struggle as an accountant if you can’t get your head around something as basic as shares – sorry to be so blunt! There is certainly a session in the F3 course videos about shares – maybe you should bite the bullet and go back to revising F3. Be upbeat about it, it shouldn’t take long

      • Profile photo of MikeLittle says

        If it’s our company that is issuing shares then Maha is correct – the entry is in “financing activities” in so far as CASH is involved.

        If the matter concerning shares is because our company has made an investment in another during the year (NOT a consolidated cash flow question which is out of the F7 syllabus) then the investment would appear within “investing activities”

        OK?

  3. Profile photo of nkmile64 says

    What an entertaining lecture that was!
    Thank you sir. The problem with the signs of the Cash Flow items was something I never completely understood, but that is all in the past now. However, could you spare a minute and answer a question that I have that I’m unable to grasp?

    In the accompanying notes of the lecture in the “Cash Flows from Investing Activities” sub-section, the 2nd item reads: “Proceeds from Sale of PPE”.
    I understand that this is just the CASH component of the asset disposal i.e. what we are interested in in a Statement of Cash Flows.
    However, since in every asset disposal a profit/(loss) is eventually realised and this profit/(loss) would already have been charged against the Income Statement, shouldn’t we make an adjustment for this gain/(loss) in the “Cash Flows from Operating Activities” sub-section as well in the same way that we treated depreciation, amortisation and impairment?

  4. avatar says

    thank you very much for your lectures.I have a small guestion.Is it correct that if i make non-T account working for PPE and for the rest of items like Tax Paid & interest Paid,i make T-accounts ? Thanks alot

      • avatar says

        @admin, thanks for the reply.
        i dont think it has to do with the connection because i am using the laptop in the same area with no problems. From the ipad i cant even see the video box and i cant reply to comments too.

      • Profile photo of admin says

        Did you update it to the latest version? ( mean iOS .. ) maybe wifi is very slow? try it near the router..
        just tried, and this video works fine on ipad2

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