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Hallo,
1. In CF from OA I read that a type of CF is cash paid to and on behalf of employees. What does “on behalf of employees” mean?
2. In CF from IA I read that types of CF are:
a) cash advances and loans made to other parties;
b) cash receipts from the repayment of advances and loans made to other parties
– what does “cash receipts from the repayment of advances” mean in b)? If we have made an advance payment to someone else, why do we need it to be returned to us?Thank you!
1. The cash that is actually paid to them, plus tax that will have been subtracted but paid to the state on their behalf.
2. Usually an advance payment will not be returned (you have maybe paid in advance for goods that you receive later). However maybe you decided not to buy the goods – in that case the payment would be returned.
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!
1 You cannot possibly have seen the second of the two ways that you list.
You can either start with the profit before tax but after interest, and then add on the interest; or you can start with the profit before tax and before interest.
Later (after arriving at the cash generated from operations, you subtract the interest actually paid).2 You have written “tax I/S 140 (paid)”. The tax charge in the income statement is the charge for the year – it has not all been paid.
The owed 110 at the start of the year; they have received the charge for this year of 140. That means that if they had paid nothing then they would be owing 250. Since they are only owing 120, it means that they must have actually paid 250 – 120 = 130.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!
No you are not correct.
What I wrote before is correct – the cost of employing someone is the cash paid to them plus the tax paid to the state on their behalf.
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!
You really need to watch the lecture where all this is explained.
We do not change the Statement of profit or loss statement – the Statement of cash flows is completely separate.
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!
Prepaid and accrued revenue will appear in the Statement of financial position as current liabilities or current assets.
Increases/decreases in all current assets and liabilities are adjustments to the operating profit (apart from obviously cash, and apart from tax, interest and dividend liabilities because their cash flows are dealt with separately because they are not included in the operating profit.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!
Accrued income is a receivable and is dealt with in the same way as other receivables.
Prepaid income is a payable and is dealt with in the same way as other payables.
Tax payable is not included in operating profit. Tax paid is show as a separate item.
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!
It is the profit on sale which will have appeared in the Statement of profit or loss. This is not a cash flow and so needs removing from the profit.
The cash received is shown under Cash flows from investing activities
Hallo,
Yes, correct, sometimes losing parts of the picture, then bringing them back together.
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!
I am afraid it is a peculiarity in the english.
Interest receivable and payable when shown in the income statement means the interest income and expense for the year.
This will be the same as the interest actually received and paid (in cash) unless there are amounts shown as owing in the Statement of financial position.
In a cashflow question
Interest receivable are as follows
yr 1 yr 2
12 4
It shows a reduction in year two.
Does this affect to cash flow at all?Yes! Interest received is a cash flow under the heading ‘cash flows from investing activities’.
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).
The problem is that the same phrase is often used to mean two different things. If there is interest receivable shown in the Statement of profit or loss, then this is the total interest earned.
If there is interest receivable shown in the Statement of financial position, then it means the amount of interest still owing.The amount to show in the Statement of cash flows is the interest earned as shown in the Statement of profit or loss plus or minus any change in interest still owing to us in the Statement of financial position.
I am a bit loss, there is also interest charged in p and l in the current year.
Added to that there is accrued interest in opening and closing year
are you saying they should all come together.
The interest receivable is under current asset indeed
It is easier if I explain by inventing some numbers 🙂
Suppose the interest receivable in the Statement of profit or loss is 20.
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.
Then the cash received during the year (to appear as a cash inflow in the Statement of cash flows, under the heading ‘cash flows from investing activities’) will be 8 + 20 – 5 = 23.
(if they had paid us nothing during the year then they would owe us the 8 from last year plus the 20 earned this year i.e. 28. Since they only in fact owe us 5 at the end of this year then they must have paid us cash of 28 – 5 = 23)
Hope that helps 🙂
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,
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!
We don’t add them together.
The figure in the Statement of profit or loss is the total expense (whether or not it has been paid or is still owing).
The figures in the Statement of financial position are the amounts that are still owing.
For the Statement of cash flows we are needing to calculate how much of the expense has actually been paid in cash this year.
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