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A business 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?
Answer: $ 1,175,000.
The book is using a formula that I think is new. So help understand how it is the same formula of
Closing net assets = opening net assets+ new capital + profit – drawings. And
Assets – liability = net assets.The new formula it used.
$ ,000
Profit for the year 1,175
Add back depreciation 100
1,275Add: issue of shares 1,000
Less: repayment of loan notes (750)
Less: purchase of non current assets (200)
1,325Less: increase in Working capital (575)
Increase in bank balance 750
It is not using a formula (and is not incomplete records) !
The question is testing your knowledge of the Statement of Cash Flows.
We know the Cash flows from investing activities, the know the Cash flows from financing activities, and we know the increase in the cash balance. So we can work backwards to calculate the cash flow from operating activities, and from that can calculate the profit.
Have you watched my free lectures on the Statement of Cash Flows?
Now I understand why I couldn’t figure out.
I didn’t yet watched and learned cash flow and I sow the question in the incomplete records.
Thank you very much.
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