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Dear Sir,
I was asked to prepare the cash flow statement of a Private Limited Company. However there was an imbalance between cash and cash equivalent at the end of year indicated by Cash flow statement and the balance shown in the SOFP.
I noted that this difference had occurred due to a correction of error. Client had written off Electricity deposit as an expense in a previous year instead of recognising as a receivable. And He has corrected it in this year simply by making a Debit entry to electricity deposit a/c and credit entry to Retained Earnings.
When adjusting for working capital changes, I took this receivable into account as an increase in receivable and that made my cash flow working imbalance.I have two options here,
1) Add that deposit to PBT under adjustments and make an adjustment for increase in receivable under working capital changes.
Or
2) Just ignore the electricity deposit as if there weren’t such a receivable.My question is, which method is acceptable in practice ?
I’m sorry if I have made any grammar mistakes and made the question too difficult to be understood.
Thank You.
First point, why would you alter it as a prior year adjustment – it surely cannot be material
IF you insist on putting it through as a prior year adjustment, last year’s retained earnings will be increased by the amount of the electricity prepayment and so also will be the current assets from last year
Continuing, this year’s electricity charge (!) will be increased by the amount of last year’s prepayment brought forward and that in turn will decrease this year’s retained earnings (and presumably no prepayment to carry forward this year)
The net effect on this year’s statement of cash flows will be to reduce profit before tax and reduce the change in current assets (receivables)
Frankly, that adjustment cannot have thrown out your statement of cash flows! So I don’t believe that, whatever the reason for the difference, it is not the fault of a double entered (unnecessary, immaterial) adjustment
What do you think?
Thank you sir I got it..
I used old current asset balance even after I that journal entry was passed..
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