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Dear tutor,
I am confused when it comes to the preparation of the statement of cash flow involving the unrealized exchange difference arising from translation of the monetary assets like the trade receivables and the trade payables.
For instance, where the trade receivables at 31/12/2012 and 31/12/2011 were $10,000 (inclusive of unrealized exchange gain of 300) and $5,000 respectively,
should the unrealized gain be separately shown under “Adjustment made under operating activities” as in (i), OR simply show the full movement in the trade receivables under the working capital changes as in (ii) OR BOTH are correct?(i) (ii)
2012 2012
Operating activities
Profit before taxationAdjustment for:
Exchange gain (300) –Operating profit
before working capital changes
Increase in trade receivables (4,700) (5,000)Thank you in advance for your help.
Is this really an F7 question?
Exchange differences are “non-cash” items and need to be adjusted as non-cash items! Where the exchange difference may have been taken to Statement of Income ( wrongly ), it needs to be adjusted by adding back an exchange loss to the “Profit before taxation” amount which was the start point for your cash flow statement.
If it has been correctly treated as a “Comprehensive Income” item, no adjustment would be necessary within the Statement of Cash Flows.
Nor is there any need to make an adjustment to the Changes in Working Capital calculation because the exchange differences will already have been adjusted within the Receivables and Payables figures
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