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September 24, 2015 at 10:01 am
Can you elaborate on why an increase in inventory and receivables are deducted from PBT while payables is added back. Struggling to find the connection as its not straight forward on how these items go through P/L like for e.g. expenses or income.
September 24, 2015 at 10:31 am
Is your question related to a problem of “increase” and “decrease” or is it related to why adjustments to inventory, receivables and payables is used as adjustments?
I’m guessing that the question is “Why do these items from the statement of financial position feature as adjustments in a statement of cash flows?”
Fundamentally a statement of cash flows is trying to find cash movements, both from and to whatever source. But we’re faced with a profit figure based on accruals accounting principles.
If we were to use the direct method of presentation, we would see values for “cash received from sales” and “cash paid to suppliers”
To arrive at those figures (for sales – for purchases it’s the same principles) we would have to take the opening balance of receivables, add on the sales revenue, deduct the closing balance of receivables (adjust for any bad debt write-offs if applicable) and the missing figure would be “cash received from customers”
Can you see that, by using the opening and closing balances brought forward and carried forward, we arrive at the cash flow position?
Well, that’s the effect of adding or deducting the change in the two balances when we’re preparing a statement of cash flows using the indirect presentation. It’s just that we don’t add on one and then deduct the other – we simply take the difference and add or deduct as appropriate
Is that better?
September 30, 2015 at 12:22 am
Yes it makes sense. now. Thanks. Its just that growing up, learning book keeping with Frank Wood’s books, I was used to the direct method where I could clearly fit everything nicely in my T accounts using Account receivables and payables to get cash items from customers or suppliers. Those days are long gone and now we have to settle using the inderect method as it has swept accross the industry with many company’s preferring it like you said ha ha.
September 30, 2015 at 9:14 am
Again, good that it’s now clear in your head
April 4, 2015 at 4:20 pm
hello sir why are gains deducted and losses added?
April 4, 2015 at 6:18 pm
If you are referring to non-cash items, a gain has been added into profit or loss account and has increased the profit for the year. However, if it’s non-cash we need to deduct it because we’re only interested in CASH movements
The same logic applies to non-cash expenses, but in reverse
April 6, 2015 at 4:10 pm
yeh ok thans
April 22, 2014 at 7:22 am
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?
April 22, 2014 at 2:27 pm
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
April 22, 2014 at 5:34 pm
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.
May 9, 2014 at 12:51 pm
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?
October 12, 2013 at 8:15 pm
In my country, I have many clients that don’t pay their taxes. How do I treat it in the Cash Flow statement under IAS 7?
October 13, 2013 at 9:15 am
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”
October 13, 2013 at 8:20 pm
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.
October 13, 2013 at 9:20 pm
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
October 14, 2013 at 11:32 pm
Thank you very much.
June 8, 2013 at 3:58 am
June 1, 2013 at 9:22 pm
Good luck to Allllllllllllllllllllllllllllllllllllllllllll
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