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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 $1,375,000The ans is A. However my calculation is B.
Could you kindly explain as well. Thank You.
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.
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 750We 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.
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