Hi Sir
I do have another question as well.
A business's bank balance increased by $750,000 during its last financial year. During the same period
it issued shares of $1 million and repaid a loan note of $750,000. It purchased non-current assets for
$200,000 and charged depreciation of $100,000. Working capital (other than the bank balance)
increased by $575,000.
What was its profit for the year?
A $1,175,000
B $1,275,000
C $1,325,000
D $1,375,000
The ans is A. However my calculation is B.
Could you kindly explain as well. Thank You.
10y ago#1Surely BPP show explanations of their answers?
This is a question on Statement of cash flows.
Cash inflows = $1M
Cash outflows = 750,000 + 200,000 = $950,000
So excluding cash flows for operating activities, there is a net inflow of 50,000.
Since cash increased by 750,000, the cash from operating activities = 700,000.
Therefore the profit = 700,000 - 100,000 (depreciation) + 575,000 (increase in working capital) = 1175000
I do suggest you watch our free lecture on Statements of cash flows. Our lectures are a complete course covering everything you need to be able to pass Paper F3.
Hi Sir
Thank you for the explanation.
BPP text do have the explanation.
However, the part which i do not understand is that the depreciation was being added back.
Below is the ans.
Profit for the year 1,175
Add back depreciation 100
1,275
Add: issue of shares 1,000
Less: repayment of loan notes (750)
Less: purchase of non current assets (200)
1,325
Less: increase in working capital (575)
Increase in bank balance 750
10y ago#3We always add back depreciation to the profit to get the cash flow from operations, because depreciation was an expense in arriving at the profit, but is not a cash flow.
(and therefore if know the cash flow from operations, we need to subtract the depreciation in order to get back to the profit.)
Again, I do suggest that you watch the free lecture on Statements of cash flows.
Ok.
Thank you for the explanation.
10y ago#5You are welcome :-)
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