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the following is an extract from the balance sheets of frc for the year ended 31 july 2001 and 31 july 2002.
2002
2001
inventory
50
80
receivables
60
50
payables
35
30
accruals
5
20
what effect would the movements in these items during the year have on cash generated from operations,as reported in the cash flow statement of frc. :
a) 25000 outflow
b) 10000 outflow
c) 10000 inflow
d) 25000 inflow
the answer is c.
but in kaplan book there is almost the same question but instead of “accrual ” there is written “interest accrual” and they asked what is the cash generated from operations. and here is the problem in the question(first question) the movement in accruals(it decreased) was deducted. but in kaplan question no. and they explaned it so that the movement in the interest accrual is not part of the reconciliation as this is dealt with within the interest paid line of the statement of cash flows.
so can someone please explain the differenceBoth of these are true as they are. Kaplan directly expressed that the accrual is for interest so when the interest outflows are not part of the cash generated from operations therefor it doesn’t have any effects on calculation of cash generated from operations while in your question it’s not obvious the accrual is for interest payable so it should be probably an accrual of operations’ activity expense like accrual for telephone expense and etc. Therefor, this accrual should be accounted in calculation of cash generated from operations.
Key point:
it’s true that the interest paid is not part of cash generated from operations but it should be classified under cash flows from operating activities;Cash flows from operating activities ……………………. * * *
Cash generated from operations ……………….. * * *
Interest paid ………………………………………… * * *
Dividends paid ………………………………………. * * *
Tax paid ……………………………………………… * * *Good luck
as always you mahdiniaacc thanks a lot.
I thought in that way too but I was not sure because of that , if interest expense is added back to profit why interest accrual is not? but now as I understood interest accrual is in interest expense. I mean that interest accrual is the part of interest expense which is not paid. and because interest expense in not part of cash generated from operations its fully added to profit.
but when we come just to accruals(as you same maybe for telephone expense)
this accrual is part of the telephone expense which is in income statement but which is not paid and because it is from operating part only accrual is added to profit.
am I right ?Of course you are right.
You explained it better than me.Glad to read your post.
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sorry i am new to cashflow but under cashflow from finance activities shouldnt there be adju for loans recv in the period ?
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