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hello sir
Am stuck in a question..
There is finance cost which splits into loan notes and overdraft.. for year 2009 the loan notes is $380 and for 2008 it is $180 and overdraft for 2009 is $220 and for 2008 is nil.
In the statement of financial earnings for 2009 it says 10% loan notes is $4000 and for 2008 it is $3000.And for Bank overdraft for year 2009 it is $3600 and nil for year 2008.My question is how are they accounted and fall under which category.. operating, investing or financing activities
And how are retained earnings accounted ad for year 2009 it is $18800 and for year 2008 it is $15800… so do retained earnings fall under financing activities where we add the difference which is $3000 or
The reason for a movement in retained earnings is because the company has made some retained earnings this year and they are added (or subtracted if it’s a loss this year) from the retained earnings figure brought forward
Beware … the figure at the foot of the statement of profit or loss (what’s this “”statement of financial earnings” to which you refer) stops at the figure “Profit for the year after taxation” – so the final figure is the after-tax profit
But it’s from that after tax profit figure that a dividend may be paid so that dividend is deducted from the profit after tax to arrive at the retained earnings for the year
The treatment of the finance costs?
These finance costs are expensed in the statement of profit or loss on an accruals basis and we are trying to present information on a cash basis ie how much CASH has actually been paid in respect of interest on the loan and the overdraft
So in arriving at net cash flow from operating activities we need to add back the accruals based expenses of $380 and $220
At this point I suspect that there is some information that you haven’t given me – is there a current liability shown in the statements of financial position (this year and / or last year) for either loan interest (two years) or overdraft interest (just this year)
If so, you need to prepare a short calculation to find out exactly how much cash has been paid in respect of these two expense items
In the heading of financing activities there is an inflow of cash from the 10% loan holders $1,000
In the bottom 3 lines of the statement of cash flows (Net cash flow for the year, Cash and equivalents brought forward, Cash and equivalents carried forward) the figure for Cash and equivalents carried forward should be inclusive of the new overdraft ie deduct the overdraft balance of $3,600 from any asset balance of cash shown in Current Assets
Is all that clear?
OK?
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