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Good Morning Mike,
This example is from bpp study text ( expires on Aug 2016) page427 Dundee Q.30
Cash flow question.
In spl, there is FINANCE COST (250)
in further information section: it says
There was no accrual of interest at the beginning or at the end of the year.
It s contradictory information. How do we treat this finance cost in this scenario.
There are no loans in the question.
Only finance lease liabilities current and non current.
I included finance cost as interest expense paid in cash flows as it looked like an interest expense to me.
In the solution, they have included
interest expense +250 in operating activities
interest paid (250) in operating activities.
I am so confused over this. do we have to ignore what is given in the further information section and decide looking what is given in SPL.
Thank you in advance.“There was no accrual of interest at the beginning or at the end of the year.
It s contradictory information”Why / how is this contradictory?
There was no opening accrual brought forward
$250 was paid during the year
There was no closing accrual carried forward
So there’s $250 interest
We need to start the cash flow with PBIT (profit before INTEREST and tax)
The figure you’re given is (probably) PBT
So we need to add back the interest that has been charged to statement of profit or loss as the interest that relates to the financial year and then deduct the interest that has actually been PAID during the financial year
In this example, those two amounts are the same figure
So, add back the interest expense ($250) to arrive at PBIT and then deduct the interest paid ($250)
OK?
Thank you Mike.
I understand the balance b/f c/f bit now.In spl PBT is given. profit for the year is given after deducting income tax.
PBT figure includes finance cost in it.Now it further confuses me.
Why is it that the printed solution starts with PBT then? and still add and take away 250.
+interest paid 250(operating activities)
-interest expense (250)
Probably a printing error then.I have not come across any question in which I have taken PBIT in the beginning of cash flows.
Thanks Mike
“Probably a printing error then.” – no, it’s not a printing error
It’s not uncommon to be given a statement of profit or loss but without the detail of the expenses that have been charged in arriving at the year’s figures
However, you WILL be given the bottom line (profit after tax) and tax WILL be shown separately as a line item in the statement, so you are always able to find PBT
But you can’t find PBIT without being given that information
So add back the expense that will be told to you
Now we have PBIT and now we can get into the cash flow exercise in earnest
Add back non-cash (depreciation, increases in provisions, losses on disposals of assets …)
Show interest actually paid, tax paid, dividends paid
Adjust for changes in working capital
and so on ….
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