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- This topic has 5 replies, 2 voices, and was last updated 9 years ago by MikeLittle.
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- May 26, 2014 at 4:11 pm #170960
Hello Mike, in the OT notes, chapter 19 (the cash flow statement), what’s the difference between the investment income (under adjustments) and the investment income received (in the investing activities)? I’m think both are income received so why are the figures different [-700 vs +400]?
Also, just to be sure ….an increase in provisions is shown as a deduction in the cash flow statement….is this correct?
May 26, 2014 at 4:44 pm #170967“what’s the difference between the investment income (under adjustments) and the investment income received (in the investing activities)? I’m think both are income received so why are the figures different [-700 vs +400]?”
Investment income in the Income statement is investment income that relates to the year. (This accruals based figure will have been shown as an income in the income statement and has thus increased the profits for the year. Because it’s not a cash movement, we need to deduct it from pbt within the cash flow statement)
That does not necessarily mean that it has been actually received. You need to look at current assets to determine the extent of any investment income due to have been received last year but was still outstanding at the end of last year (and thus appeared on last year’s balance sheet as a receivable). Similarly, check this year’s receivables to see if there is any due at the end of this year but still not yet received.
In that way, we can calculate the actual CASH received from our investments and show that as an inflow in Investing Activities
“Also, just to be sure ….an increase in provisions is shown as a deduction in the cash flow statement….is this correct?”
Totally incorrect! Sorry 🙁
An increase in a provision is not a cash transaction – it’s a book adjustment and NO CASH IS INVOLVED.
But, to increase the provision, the double entry will have taken place:- Dr Income Statement Cr Provision
The effect of that entry is to reduce the profits for the year and increase the provision to carry forward. But, because it’s not cash, we should add it back to pbt
May 26, 2014 at 6:01 pm #170997Thanks for the explanation Mike. Another question …regarding the interest expense (in adjustments) and interest paid ( in operating activities), would this be similar to what you mentioned above (with the investment income) in that the interest expense is an accrual and the expense is what was actually paid?
May 26, 2014 at 6:35 pm #171019Yes! Think of the mantra:-
“brought forward,
income statement,
carried forward,
cash”You could even dance to this – it has a certain rhythm to it
Now apply it to tax, interest paid, investment income, taxation paid
May 26, 2014 at 8:29 pm #171063Thanks, i’ll work on the dance as well 🙂
May 27, 2014 at 7:39 pm #171246That’s the way – you can practice the moves after you’ve perfected the TNCA dance (apologies to the Village People)
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