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Hallo,
I don’t understand your statement very well: “We always start with the profit before interest and tax (so we need to take the profit and add back the interest expense and the tax expense)” – if the profit doesn’t include the interest and tax expense, this means the profit hasn’t been reduced yet – as interest and expense reduce the profit, so, as long as the profit hasn’t been reduced yet and if we add further interest and tax expense, this would make the profit artificially higher, or?
I opened the lecture and I am not quite clear about the following in it, only the numbered ones:
1. Net profit before taxation x
1.1. Why doesn’t it say before interest as well, because in this case it has been deducted from the profit in (1) already and thus is subtracted in (2) below or what is the reason?1.2. When it says here only taxation, this would mean we don’t need to add back the taxation expense, as it has not been subtracted yet, is this the reason why below we don’t see tax expense added?
Adjustments for:
Depreciation x
Profit on sale of non-current assets (x)2. Interest expense x
2.1. Is this the same interest that you say we are adding back, as it has been deducted from the profit in (1) in comparison to the tax expense, which hasn’t been deducted?Op. profit before working cap. changes x
Increase in accounts receivable (x)
Increase in inventories (x)
Increase in accounts payable x
Cash generated from operations x3. Interest paid (x)
3.1. Is this the same or it is not the same as the interest expense in (2), probably it’s different?Dividends paid (x)
4. Taxation paid (x)
4.1. This also is different from the interest expense you’re talking about, correct?Net cash from operating activities x
I am going to watch the video and read the lecture, but these details are escaping my understanding.
Thank you!
Hallo,
Nto get confused, when you say in your first email, which part exactly, not sure which one you refer to.
The t-account, was given in the solution for illustration, the example didn’t require to write up a t-a/c, but I still wanted to explain it to myself.
Thank you!
Hallo,
They give as correct answer B – the trial balance being $10 higher on the credit side, but I was going to give A, B makes no sense to me, why B?
Thank you!
Hallo,
Ok, I will know to use the last bill’s amount, wasn’t sure about it.
Thank you!
I forgot to say, the book is ACCA from 2010, maybe at the time the t-a/cs were still used.
Hallo,
Thank you very much, I got it now, it’s rarely in the examples that we work with the supplie’r-payble individual a/c and was in confusion at first. I understood the carry over of the 600 as overpayment, and the actual amount paid because of the standing order – these two cleared the Q.
Another Q- when receiving a supplier’s bill you say we Dr Expense, we Cr Supplier’s a/c,
but when do we do Dr Expense, Cr Payables, what is the difference – that 1st we credit the individual a/c, and then the totals of the individual a/cs are transferred to the Payables, i.e. Payables ledger control a/c, but this would mean we never credit the paybles ledger control a/c from the beginning, the moment we received the bill, as most of the time when solving examples for F3 we work with the Payalbles control a/c by directly crediting it, not so much with crediting the individual a/cs, is this correct?Thank you!
Hallo,
I also have a second question, regardinh interest paid and received, is it always that interest paid is allocated to CF from operating activities, and interest received to CF from investing activities?
Thank you!
Hallo,
When you say in you example that “Suppose the interest receivable in the Statement of profit or loss is 20” and “Suppose that on the Statement of financial position there was interest owing to us of 8 last year and 5 at the end of this year”, these 20 include the 8-5=3, which 3 we have actually received, plus another 17, which are not shown in the SOFP, so the 17 have nothing to do with 8 from last year, the 5 from this yr, but we have received 17 as income – interest received, a separate income account, rather than SOFP a/c as cash?
Thank you!
Hallo,
I’ve just read your example with the invented numbers, but still don’t understand why do we have to add numbers from SOPOL and SOFP together, meaning why the difference of 3, is not already included in the 20 from the SOPOL, as long as we must have paid it, how have we paid it when it is an expense, but at the same time we haven’t included it in the SOPOL?Shouldn’t all expenses go to the SOPOL?
Thank you!
Hallo,
May I ask, concerning your point: “If these figures appear in the Statement of financial position (as current assets), then the cash received will be the interest earned as per the Statement of profit or loss, plus 8 (the reduction in the asset)”
– why the 8 received is not already included in the Statement of profit or loss, but we have to add it additionally to the sum already in the Statement of profit or loss? I thought the decrease of 8 is already included in the Statement of profit or loss.
Thank you!
Hallo,
May I ask, continuing with the cash flows topic, I’m looking at an example:
– part of an I/S
GP 90
Less:
General expenses 17
Depr. on plant 10
Loss on disposal 4
Operating profit 59
Add:
Interest receivable 13
Less:
Interest payable 3
Profit before tax 69– then in the CF statem. from OA, I read:
Operating profi t 59,000
Add:
Depreciation 10,000
Loss on disposal of non-current assets 4,000
Decrease in inventories 10,000
Increase in payables 2,000
Less: increase in receivables 4,000
Cash generated from operations 81,000– this this continues as:
Cash generated from operations 81,000
Less: Interest paid 3 (from above the I/S)
Less: tax paid 12
= Net cash from OA– and as well in the CF from IA
Purchase of NCA 35
Interest received 13 (from above the I/S)
Proceeds on sale of NCA 3My Q is concerning the parts that come from the I/S. In the I/S we have Interest receivable 13 and Interest payable 3, and in the CF from IA and CF from OA these same are treated as received and paid, not as receivable and payable, why is it so?
Thank you!
Hallo,
Yes, correct, sometimes losing parts of the picture, then bringing them back together.
Thank you!
Hallo,
Ok, I will treat them as you say, so Accrued income CA decrease – means we have received the income, so we add it, an increase – means, we haven’t received actual cash, so we subtract it.
For Prepaid income CL – decrease – means we have received less cash, so we deduct, increase – means we have received more cash – so we add.
May I ask, watching the example in the lecture now, why profit on sale of current asset is said that it is in the operating profit, but since it is not a cash figure we subtract it. The sales price we got for the asset is all cash for us that went to the cash/bank a/c, or does it matter if it is cash or on credit, so, why the profit is removed and not a cash figure, when we’ve received all that money, we haven’t received only the profit of 10, but all 30= 20 + 10?
Thank you!
Hallo,
Going to watch the lecture now, but in the meantime, could you please tell me if the following is correct related to CF from OA:
Current Assets:
– A/R, Inventory, Prepaid Expense
Decrase – add
Increase – subtract
– Accrued income
Decrease – subtract
Increase – addCurrent Liabilities:
– A/P, Accrued Expenses/Liabilties, Income tax payable
Increase – add
Decrease – subtract
– Prepaid income
Decrease – subtract
Increase – addThank you!
Hallo,
Yes, I know that we don’t change the Statement of profit or loss. I meant that some of the items from it go to the statement of cash flow from operating activities. In this sense, I was asking if the prepaid and accrued revenue go to/ are part of the statement of cash flow from operating activities?
I will watch the lecture indeed, hopefully this is mentioned there, as this is the only thing I don’t understand so far.
Thank you!
Hallo,
Ok, we pay both the cost of employing someone and the tax.
I have another question, related to cash flow from opearating activities, that I’m currently reading about, are the prepaid revenue and accrued revenue included and how in the CF from OA, meaning added/subtracted etc., e.g. prepaid revenue is subtracted and accrued revenue is added, but does this go at all in the CF from OA statement, or is only in the I/S?
Thank you!
Hallo,
May I ask, to: “1. Cash paid to and on behalf of employees” and your statement “The cash that is actually paid to them, plus tax that will have been subtracted but paid to the state on their behalf”
– if the company pays on behalf of the employees, this payment shouldn’t be part of the CF of Opearating activities, because this is cash outflow for the employees themselves, not of the company, am I correct?
Thank you!
Hallo,
Is it possible to have the debentures in the I/S and at the same time to have the same amount under Current liabilities? Whlch would mean we haven’t paid the interest in this year.
And actually, we can’t use the word accrual for debentures, if not paid in this year, the interest will be simply listed under Current liabitilies, is this correct?
Thank you!
Hallo again,
Actually, in the solution the example says the following:
“On the assumption that the debentures have been in issue throughout the year, it is necessary to provide for a full year’s interest, and to show a liability for that interest on the statement of fi nancial position.”
– so, if the debentures haven’t been issued throughout the year, but let’s say:
1. At the end of the year
or
2. At the beginnig of the year– would that matter for having the interest as a liability or not, and in which case 1 or 2, or in both 1 and 2?
Thank you!
Hallo,
Interestingly, how should I understand if the interest has been paid or not, as the example says only 10% debentures (repayable year 20)?
Nevertheless, assuming the debenture will be repaid in 20 years, I have to appropriate 10% every year, for 20 years, interest of 20 in the I/S and 20 in the current liabilities in the SOFP? This is how it should be done, do I understand correctly?
Thank you!
Hallo,
I think I got the example wrong, it’s not about depreciation on the loss of disposal, but it’s about appropriation of the amount of loss on disposal between the three – production, selling and administration costs, then the 0.2 is the appropriation percentage, but because it was the same amount (0.2) as the depreciation, I thought it was depreciation.
Thank you!
Hallo,
Thank you for the above answer.
I continue with a few more Qs on the cash flows.
1. I see two ways of starting a CF from OA, how do I know with which one to start once, I’m solving an example, the two ways are:
1.1. Profit before interest and tax
1.2. Profit after tax but before interest?2. In an example that I’m solving:
Current assets
Inventories
Receivables
Short-term investments
Cash in hand– I see that inventories, receivables both go to the CF from OA, but in the solution I don’t see in any of the three CF statements from OA, IA, FA the short-term investments used, so am I observing correctly, that they are not part of any of the CF statements?
3. Concerning an example with tax, I observe the following:
3.1. Taxation I/S 140 (paid)
3.2. Taxation liability for last yr 110, for this yr 120
=> in CF from OA they write 110 + 140 – 120 = (130)– why do we add 110 + 140? Isn’t 110 already included in the 140 in the I/S?
Thank you!
Hallo,
Actually, I was asking, because in the book I’m reading it is said that:
1. Prepaid income received
Effect on income/expenses – reduces income (as it doesn’t relate to the current period)
Effect on profit – reduces profit (I guess because we have less income)
Effect on assets/liabilities – increases liabilitySince the book doesn’t say anything about the accrued income receivable, how would I answer it, is it correct, following the above to say:
2. Accrued income receivable
Effect on income/expenses – increases income (for the current period)
Effect on profit – increases profit (due to higher income for the period)
Effect on assets/liabilities – increases assetsWould 2 be correct the way I wrote it?
Thank you!
Hallo,
If we talk about accrued income, how are profit, income and assets affected, i.e. which increases and which decreases?
E.g .accrued income is a receivable, so it’s an asset, so we have an increase in assets, but a decrease in income and consequently in profit, is this correct?
Thank you!
