Cash flows:Bpp study text(aug2016) Dundee question

hi !

i will try to answer your question (since this is a general forum 🙂 ) and give you a simple strategy to tackle finance cost.

remember the word “cash”flow. so basically you are looking at items that have led to actual flow of cash during the year and ADJUSTING items where CASH is not flowing IN/OUT).

when you see the question, in the P/L you see finance cost as 450. This is the total payable in this year.

Now, generally if there is corresponding fin cost in liabilities section in the ‘balance sheet’ say something like O/S Interest etc it means that you will have to adjust the figure of profit and loss to find the ACTUAL CASH PAID in respect of finance costs.

If however there is no opening or closing balance in the BALANCE SHEET, we assume that this finance cos was paid in cash this year itself. So we deduct it later.

Let me explain numerically:

In the dundee question,
if you see the balance sheet (i have the aug 2017 expiry book . but im assuming the question will not have changed) there is NO liability of finance cost in balance sheet.
So 450 is infact the cash flow.

But say for example, if there was an item like
2007 2006

Interest payable 500 250

then your calculation would be
1) add the finance cost in operating cash flow EXACTLY AS given in P/L

2) make a small working like so

opening 250
charge 450
closing (500)

finance cost CASH paid= 200
THIS 200 would be subtracted from the CASHFLOW operating statement.

Hope this helps !!