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Hi John,
In F3 KIT book, when calculating the cash flows from operating activities, sometimes they use “Net profit before interest and tax”, sometimes they use “Net profit before tax”. I am really confused about it. Could you please explain?
Thank you so much in advance.
In future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
As I explain in my free lectures on this, then if we are writing up a full statement then we should start with the profit before interest and tax in arriving at the cash generated from operations, and then subtract the interest paid when arriving at the net cash flow from operating activities.
If the question asks just for the net cash flow from operating activities then it doesn’t really matter providing that the interest expense in the SOPL is the same as the interest actually paid (as is usually the case).
If a specific question is troubling you, then say which one and I will explain (provided it is in the current edition of the Revision Kit which will be labelled FA and not F3 because it stopped being called F3 several years ago 🙂 )
I’m confused by question 19.4 and 19.5. In Answers section, in 19.4, they use the figure before deducting the Finance costs ($410,000), but in 19.5, they use the figure after deducting the Finance costs ($2,350,000) for Net profit before tax. Thank you.
The interest has to be subtracted as some stage before arriving at the final figure for “cash flows from operating activities”.
In 19.4 there is a space on the statement provided in the question for ‘interest paid’ and therefore we must start with the profit before interest.
In 19.5 there is no space on the statement in the question for ‘interest paid’ and therefore we must start with the profit after interest.
Strictly the correct treatment is as in 19.4. However given that you cannot be asked to produce a full statement in the exam (you can only be asked to fill in the spaces) you need to check the labels against the spaces.
Thank you so much for that. I have one more question about question 19.4. If we start with Net profit before tax and interest then we must subtract the Interest paid. However in Answer section, they leave the figure of “Interest paid” blank. Could you please explain this?
It is a typing mistake and it should not be blank.
If you use the code on your Revision Kit to access the BPP website then you will find an errata sheet listing all the errors in the kit, and I am sure that this will be in the list 🙂
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