What about them? The retained earnings increase by the profits made during the year and the dividends paid during the year. We put the profits in the statement (and adjust for non cash items etc) and we put the dividends paid in the statement.
Thank you very much for the free lectures, they are very helpful. l need to understand something. When we are adjusting for non-cash items. If we have a loss on the sale of a current asset- Do we add or subtract the amount?
Please help me understand Risyv’s question above. Why is interest paid 50K adjusted with PBT and not 75K, as shown in the question. I thought interest paid is different from interest received?
In my own computations, I added interest paid of 75K back to profit of 300K. Then instead of showing interest received of 25K under operating activities, I used it under investing activities. Net cash flows from operating activities is giving me 73K and yet I believe it should give me 48K.( Total less interest received.
Then since interest received of 25K can be put under investing activities, that is where I put it to give me a total of (164K) instead of (189K).
As I wrote in my answer to Risyv, I do not have the BPP question and answer and so it is difficult for me to be certain as to what they have done.
However it does seem that the 50K is there not as a cash flow, but to adjust the profit – we need the profit to be before interest paid and before interest received.
The interest paid is then shown as an outflow after the cash generated from operations, and the interest received is shown as in inflow under cash flows from investing activities.
I believe because the NCA are held at Net Book Value on the Companies’s Financial Statements as opposed to Sole Traders. So the values shown on SOFP are NBV.
NCA’s are shown at net book value on the SOFP of both sole traders and limited companies.
The reason here that we just use one NBV account is because only the NBV’s are given in the question – so we do not know the details for the cost account and accumulated depreciation account.
1. If there is a revaluation surplus which has been added in retained earning what should we do about that? 2. Another is “dividend proposed” i guess we will not include any divident proposed usless they are paid right? earlier response is highly appreciated i got my exam in about 10 hours.
1. A revaluation surplus is not a cash flow and is therefore irrelevant (although it is relevant in calculating the acquisitions or disposals of non-current assets because the value of the non-current assets in the SOFP will have increased because of the revaluation if it occurred in the current year).
2. Proposed dividends appear in none of the financial statements and so are not relevant.
Sir don’t you think we should even deduct dividend paid from cash flow from financing activities.? we have reduced dividend paid in operating activity since it has to be shown in cash flow from financing activities.?
Depreciation is not a cash flow. Profit is always stated after charging depreciation and so we need to add back the depreciation to get the ‘cash’ profit.
I have problem with Interest..In BPP Book in Example question in Income statement Interest Received 25000, Interest Paid 75000..They show in Cash flow Interest Expense 50000 add with profit before Tax..Is that Right directly show it cash flow?? How could they do this??
Without having the question in front of me, I am pretty sure that they are not showing the 50,000 as a cash flow. What they are doing is adjusting the profit so that they have profit before interest in the cash flow statement.
The actual cash interest paid and received has to be shown separately in the cash flows statement because they are cash flows.
Sorry Sir for late reply because your comment won’t give notification to me..However It’s really showing 50,000 as a cash flow. If you don’t believe me then if possible please check BPP Book Page 382 383 SHABNUM CO Statement of Cash Flow..Thank you for reply..
What I wrote before is correct. They are adding the 50,000 to the profit before tax in order to get the profit before interest – not because it is a cash flow.
The cash flows are shown below ‘cash generated from operating activities’ – an inflow of 25,000 interest received and an outflow of 75,000 interest paid.
This is perfectly correct and is as I explain in my lectures.
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what to do with retained earnings?
What about them? The retained earnings increase by the profits made during the year and the dividends paid during the year. We put the profits in the statement (and adjust for non cash items etc) and we put the dividends paid in the statement.
Hello John
Thank you very much for the free lectures, they are very helpful. l need to understand something. When we are adjusting for non-cash items. If we have a loss on the sale of a current asset- Do we add or subtract the amount?
Thank you
Pellagia
We add it to the profit when adjusting the profit to arrive at the cash generated from operations.
Thank you very much
You are welcome 🙂
Hello John,
Please help me understand Risyv’s question above. Why is interest paid 50K adjusted with PBT and not 75K, as shown in the question. I thought interest paid is different from interest received?
In my own computations, I added interest paid of 75K back to profit of 300K. Then instead of showing interest received of 25K under operating activities, I used it under investing activities. Net cash flows from operating activities is giving me 73K and yet I believe it should give me 48K.( Total less interest received.
Then since interest received of 25K can be put under investing activities, that is where I put it to give me a total of (164K) instead of (189K).
As I wrote in my answer to Risyv, I do not have the BPP question and answer and so it is difficult for me to be certain as to what they have done.
However it does seem that the 50K is there not as a cash flow, but to adjust the profit – we need the profit to be before interest paid and before interest received.
The interest paid is then shown as an outflow after the cash generated from operations, and the interest received is shown as in inflow under cash flows from investing activities.
why is the non-current asset account a net book value account and not the at cost value of non-current assets?
I believe because the NCA are held at Net Book Value on the Companies’s Financial Statements as opposed to Sole Traders. So the values shown on SOFP are NBV.
NCA’s are shown at net book value on the SOFP of both sole traders and limited companies.
The reason here that we just use one NBV account is because only the NBV’s are given in the question – so we do not know the details for the cost account and accumulated depreciation account.
Hi Sir,
Got little questions.
1. If there is a revaluation surplus which has been added in retained earning what should we do about that?
2. Another is “dividend proposed” i guess we will not include any divident proposed usless they are paid right?
earlier response is highly appreciated i got my exam in about 10 hours.
Thank You.
1. A revaluation surplus is not a cash flow and is therefore irrelevant (although it is relevant in calculating the acquisitions or disposals of non-current assets because the value of the non-current assets in the SOFP will have increased because of the revaluation if it occurred in the current year).
2. Proposed dividends appear in none of the financial statements and so are not relevant.
Sir don’t you think we should even deduct dividend paid from cash flow from financing activities.? we have reduced dividend paid in operating activity since it has to be shown in cash flow from financing activities.?
The accounting standard gives the choice, as I explain in the lecture.
Hello, Sir! I just wanted to thank you for the lectures! I cant explain how much of a blessing they are to me right now!
Thank you for your post 🙂
Sir, why is interest paid listed under Operating Activities and not under Financing?
Because the accounting standard says that we must 🙂
Dear Sir,
why do you have to add depreciation rather than reducing it?
Thank you
Depreciation is not a cash flow.
Profit is always stated after charging depreciation and so we need to add back the depreciation to get the ‘cash’ profit.
Now I can understand..Thank you very much for solve my problem.
You are welcome 🙂
I have problem with Interest..In BPP Book in Example question in Income statement Interest Received 25000, Interest Paid 75000..They show in Cash flow Interest Expense 50000 add with profit before Tax..Is that Right directly show it cash flow?? How could they do this??
Without having the question in front of me, I am pretty sure that they are not showing the 50,000 as a cash flow. What they are doing is adjusting the profit so that they have profit before interest in the cash flow statement.
The actual cash interest paid and received has to be shown separately in the cash flows statement because they are cash flows.
Sorry Sir for late reply because your comment won’t give notification to me..However It’s really showing 50,000 as a cash flow. If you don’t believe me then if possible please check BPP Book Page 382 383 SHABNUM CO Statement of Cash Flow..Thank you for reply..
What I wrote before is correct. They are adding the 50,000 to the profit before tax in order to get the profit before interest – not because it is a cash flow.
The cash flows are shown below ‘cash generated from operating activities’ – an inflow of 25,000 interest received and an outflow of 75,000 interest paid.
This is perfectly correct and is as I explain in my lectures.