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  1. Avatar of mujji says

    I came across couple of questions that required adjustment to PBT before incorporating it into the cashflow structure. I want to know why do we need those adjustments and how to know if we need adjustment or not?

    • Avatar of MikeLittle says

      The start point for a statement of cash flows is “profit before tax”

      If the question gives you a draft profit that still requires adjustment, then you need to make those adjustments to arrive at profit before tax.

      I remember a question that gave “profit before interest and tax”. You had to deduct the interest to arrive at pbt, then add it back as a non-cash item, and then deduct it again within operating activities as interest paid

      Ok?

      • Avatar of mujji says

        yeah i understand. However, the question in the last attempt Dec2013 Angel Group Profit Before Tax was given as $188m but the examiner has started with $197m after doing some workings. That is where i got confused why not start with the figure given in the question? I would have started with the figure given in the question, because i dont know when do we have to do that working.

      • Avatar of mahamansoor says

        Yea I have the same question as mujji. How would we know, I’m doing the Angel Question right now and I really don’t understand why we need to make adjustments to PBT?

    • Avatar of MikeLittle says

      if they don’t pay, then there’s no “cash flow” so it will not appear in the Statement of Cash Flows. The Statement shows where CASH has been received from and where CASH has been paid to. If your clients don’t pay taxes, then there’s no entry in the line for “Taxes paid”

      OK?

      • avatar says

        Thanks a lot. I just thought since current year tax liability would be in current liability, it might be in changes in working capital under operating activities.

      • Avatar of MikeLittle says

        No – when looking at changes in working capital,and in particular at creditors / payables, we only look at the trade payables and accruals figures. Any proposed dividends are dealt with separately as also are tax liabilities. If it’s a tax current liability, it’s accounted for / taken into account when calculating tax actually paid

  2. avatar says

    Hi Mike,

    I was concerned about how to categorize the dividend paid to NIC. In BPP text book on page412, it was put under cash from investing activity, but I thought it should be under the operating activity based on your note…could you elaborate please…

    • Avatar of MikeLittle says

      @cooper1982, Hi The IAS gives a choice for dividends paid – either operating activities of financing activities ( but NOT investing activities that you have written ) I always include dividends paid as operating but the big four in this part of the World tend to show them in financing.

      Incidentally, how can a dividend PAID to the nic possibly be “cash from investing activities”?

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