- October 26, 2015 at 10:33 am #279004
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?
The ans is A. However my calculation is B.
Could you kindly explain as well. Thank You.October 26, 2015 at 2:05 pm #279047
Surely 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.October 27, 2015 at 1:09 am #279143
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
Add: issue of shares 1,000
Less: repayment of loan notes (750)
Less: purchase of non current assets (200)
Less: increase in working capital (575)
Increase in bank balance 750October 27, 2015 at 9:05 am #279208
We 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.October 28, 2015 at 3:14 am #279334
Thank you for the explanation.October 28, 2015 at 7:51 am #279360
You are welcome 🙂
- You must be logged in to reply to this topic.