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Hi Mr Mike,
I have a question, what are the possible non cash items to be adjusted for in SOCF?
I know the famous three we have, of course. But other than that, should I add back provisions? Unwinding the discount? and why is the revaluation not added/subtracted from the profit? It is a non cash item, isn’t it?!!!
Same question in the change in working capital, I know the famous three but are there any other items that could be in the CA and CL that I will need to measure their increase and decrease? or should I stick only to those three?
Thanks,
Maha
Revaluation reserve should be credited to RR account not in the PL unless otherwise mentioned that charged to pl since same asset Revaluation debited to PL.there fore RR not adjusted to the SOCF.
Thank you but I think my question was not clear enough. I was talking about the revaluation loss or gain. Why not add it or subtract it? It is a non cash item.
Thanks
Please read….
Cash Flows From / (Used in) Operating Activities
Profit/(loss) before tax from continuing operations
Profit/(loss) before tax from discontinued operationsAdjustments for
Depreciation
Foreign Currency Gains/(Losses)
Income from Investments
(increase) / Decrease in fair value of Investments Property
(Profit)/Loss on sales of Property, Plant & Equipment
Expenses settled through issue of new shares
Finance Costs
Change in the value of Short-term Investments
Provision for Defined Benefit Plans
Operating Profit/(Loss) before Working Capital Changes
(Increase)/ Decrease in Inventories
(Increase)/ Decrease in Trade and Other Receivables
Increase/ (Decrease) in Trade and Other Payables
Cash Generated from OperationsFinance Cost paid
Defined Benefit Plan Costs paid
Income Tax Paid
Net Cash From/(Used in) Operating ActivitiesCash Flows from / (Used in) Investing Activities
Acquisition of Property, Plant & Equipment
Proceeds from Sale of Property, Plant & Equipment
Acquisition of Investments
Proceeds from Sales of Other investments
Interest Received
Dividend Received
Net Cash Flows from/(Used in) Investing ActivitiesCash Flows from (Used in) Financing Activities
Proceeds From Issuance of Share Capital
Amount Paid to Repurchase of Shares
Amount Paid to Redemption of Shares
Proceeds From Interest Bearing Loans & Borrowings
Repayment of Interest Bearing Loans & Borrowings
Net Cash Proceeds from Non Interest Bearing Loans & Borrowings
Principal Payment under Finance Lease Liabilities
Dividends Paid
Net Cash Flows from/(Used in) Financing Activities
Effect of Exchange Rate Changes on Cash and Cash EquivalentsNet Increase/(Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at the beginning of the year
Cash and Cash Equivalents at the end of the yearFor statement of cashflows revaluation gain or loss is used to reconcile the accounts of property plant and equipment accounts in order to arrive the relevant cashlow of either additions of new PPE or Disposals, since it is not a cashflow they are not directly attributable to statement of cashflows, but will help in order to arrive whether you disposed of the plant or bought new one, for example your brought forward amount of PPE was 25000 and carried forward amount was 30000, it does not tell you in notes whether there is additions or disposals but tell you that property is revalued during the year, revaluation from prior year was 1000 and current year is 2000, then Deduct (2000-1000)=1000 and you will get the revaluation reserve for this year and debit in PPE account, since it is not balancing as brought forward amount and revaluation are not equal to the current year amount of 30000, then there must be additions in this year, then it can be arrived as (30000-25000-1000) = 4000, this amount will written in investing activites as negative figure as you bought new plant this year so there is a cash outflow! if there is a revluation loss, then it might be credited to the PPE account but it will not be written in cashflow statement because there will be no outflow of cash…….
I hope I am correct and I hope it helps
You missed off the impact of the year’s depreciation charge but otherwise it’s ok.
Unwinding of discount will have been included in finance charges and sufficient detail will be given for you to calculate the CASH finance expense for the year so add back finance costs in operating activities, calculate cash paid, and deduct in operating activities.
MOVEMENTS in provisions, not “provisions”, are added back or subtracted (where the movement is a decrease)
Gains and losses on asset disposals (they are not cash)
But that’s probably the full extent of the add backs and deductions within operating activities
Working capital changes – yes, the big three. But again, that’s really it. The danger here is things like interest, tax and dividends which MAY be included within current liabilities – payables. these three are dealt with as separate line items so need to be deducted from payables in the balance sheet. But don’t worry – the examiner HAS to give you the detailed information to enable you to do this
So, Mr Mike, when you say unwinding the discount will be included in the finance charges you mean that when I come to deduct the actual interest paid (cash), I should subtract the unwinded amount from the finance cost? (In the threesome of interest paid, div paid and tax paid).
As for the working cap changes, yes I get it. So for example if there is a current liab for interest, then this is used to calculate the actual cash interest paid.
As for provisions, I will take the movement and add or subtract it, that’s a good point!
Thanks a lot!
Maha
Hi Maha
In the calculation of interest for the cash flow, the first time interest comes into consideration is in the add back from the SofI information.
Now we can start to work out the figure for interest actually paid.
Let’s put some figures on this.
Say brought forward liability for interest is 10, carried forward liability is 20, Income Statement charge is 70 and that includes 15 unrolled discount
So, going to the mantra brought forward, income statement (excluding the unrolled discount), carry forward cash gives us
10 + 55 – 20 = 45 cash paid.Now, the 15 unrolled discount! This will have been added to the liability so you need to make sure that you do NOT show as an incoming cash flow the increase of 15 in the loan liability
OK?
Thanks Mr Mike, all clear! So I just take it out when calculating the finance cost paid.
I have to say F7 exam is scaring me even though I am fairly prepared for the first three big questions and I can make “good attempts” on the IAS two questions but still not getting my hopes high! I do hope though some of the IASs you predicted to come up in the exam!
Thank you 🙂
Maha
It would be of greater concern if you WEREN’T worrying! These exams al deserve respect and any sensible student will realise that they don’t know everything. Your own concerns are that the examiner doesn’t ask EVERYTHING that you don’t know.
Don’t overdo the worry level, accept that you’re not going to score 100% and resolve to give every part of every question its allocated length of time.
Thank you very much for these words Mr Mike. I will do and hopefully I will pass!
You are a great tutor btw! 🙂
Maha
Thanks for the compliment Maha – we aim to please 🙂
And good luck, not just to you but to all F7 students
PLEASE, STOP ANSWERING! If yours is the last post, I have to check to see if it’s a new post that needs an answer!
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