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Hi everyone,
In Mar 2020 exam, question 3, the answer is to add back depreciation of 2.4 to net cash flow.
But in Mar Jun 2019 exam, question 1, the answer is not to add back depreciation of 5,250 to net cash flow.Please help me to resolve this problem
Depreciation is not a cash flow and is only relevant for the calculation of the tax payable.
In the 2020 question, the tax was calculate in the cash flow statement. So depreciation was subtracted, then the tax calculated, then depreciation is added back.
In the 2019 question, the tax has been calculated as separate workings (based on the cash flows less the depreciation). The depreciation has not been subtracted in the cash flow statement and therefore there is nothing to add back.
In the 2020 question, either approach is fine and gives the same end result. However the second approach (as in the 2019 question) is safer for Paper AFM. The reason (as I explain in my free lectures) is that if the investment is in a foreign country (as is often the case in the exam) there could be tax losses resulting in no tax being payable but the carry forward of the losses to set off against profits in later years.
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