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Hi sir.
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 answer is 1,175,000I am solving this question using the accounting equation but I’m having trouble placing working capital. My answer will be correct if I place it in assets but I don’t understand why it is not a part of capital in the equation Assets = Capital + Liabilities.
Capital = Net assets (assets – liabilities)
Working capital = current net assets (CA – CL)
Pls help.This is a question testing Statements of Cash Flows.
You know the change in the bank balance, the flows from investing activities, and the flows from financing activities. So you can work backwards and calculate the flows from operating activities.
When you know the flows from operating activities, you also know the depreciation and the change in the working capital, so you can again work backwards and calculate the profit for the year.
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