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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?I’m really quite confused about what the first step should even be to approach this question. At first I thought about using the formula to find a sole trader’s net profit (movement in net assets – capital introduced + drawings), but it doesn’t seem like this formula really fits the question. When looking at the answers, I don’t understand how they have arrived at the profit. How can you “add back depreciation” from the profit for the year if the profit for the year is originally unknown?
I tried to work backwards from the increase in bank balance, but didn’t understand how this would work either. I thought that perhaps each section is grouped into assets, liabilities, and capital, but that wasn’t making sense either…
From your studies of Statement of Cash Flows, you can work backwards and get the cash flows from operations. You know the cash flows from investing activities, you know the cash flows from financial activities, and you know the change in the bank balance, so the missing figure is the cash flow from operating activities.
Given that you know the depreciation and the change in the working capital, you can work backwards from the cash flow from operations to get the figure for the profit.
Have you watched my free lectures on Statement of cash flows?
Sir, can you please solve I really can’t understand why we less working capital??
We do not less working capital.
Usually, as you will know from my free lectures, to get the operating cash flow we take the profit and add back the depreciation and subtract the increase in working capital. Here, we know the operating cash flow, and so to get the profit we need to work backwards which means subtracting the depreciation and adding the increase in working capital.
You will find a full answer in your Revision Kit. I cannot copy out the answer here because it would be breaking copyright (and janelou should not have typed out the full question for the same reason 🙂 )
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