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Help with this question please don’t understand how to get the answer. Question from revision kit but they didn’t really explain how they got the answer.
A Business’s bank balance increased by $750,000 during its last financial year. During the same period it issued shares of $1 million and repaid a loan note of $750,000. It purchased non-current assets for $200,000 and charged depreciation of $100,000. Working capital (other than the bank balance increased by $575,000.
What was its profit for the year?
A 1,175,000
B 1,275,000
C 1,325,000
D 1,375,000Answer in the kit was A
This is testing you on Statement of cash flows (and I assume you have watched the free lecture and therefore know what I mean 🙂 )
We know that the bank balance increased by 750,000; the cash generated from financing activities is 250,000 (1M – 750,000); and, the cash generated from investing activities is – 200,000 (i.e. negative).
So we can calculate the cash generated from operating activities as the balancing figure, and it is therefore 750,000 – 250,000 + 200.000 = 700,000.The cash generated from operating activities is the profit as adjusted for depreciation and movement in working capital, and so we can again work backwards to get a profit of 700,000 – 100.000 + 575,000 = 1,175,000
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