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Hi My Dear Tutor, There is a long cash flow question in Becker revision question bank calling KINGDOM showed rent received under profit before tax(cash flow from operating activities) and investing activities?
If it has been showed under profit before tax what is the reason of showing it under investing activity again?I would prefer to put it under only investing activity.
Could you explain?
Thanks in advance
| QUOTE June 1, 2017 at 9:06 am
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MikeLittleKeymaster
The figure for rent received (and investment income, if it’s in the question) in Operating Activities is a deduction of the accruals based figure that will have been added to the operating profits to arrive at profit before taxationBecause it has been added as an income, and because it’s accruals based and not cash based, we need to deduct it from ‘profit before taxation’ to enable us to arrive at “Net cash flow from operating activities”
Now, we can work out how much actual cash has been received and that actual cash received amount goes into ‘investing activities’ as an addition
It could well be the case that the two figures are the same amount but, equally, they could well be different!
Better?
From you explanation we can conclude that for instance if investment income given and if investment income contains dividend received or rent received together and it will together recognized under profit before tax,such as MOCHA example in BPP, but separately under investing activity.
But if only investment income given not clarified such as contain dividend received or rent received what will do in this case?
Will we recognize it under only profit before tax?or while under investing activity?or simultaneously under both?
THINK!
It’s in the statement of profit or loss
It’s in there as an income so it has increased the profit for the year
But it’s an accruals based figure
So we have to deduct it from the figure for profit when we are preparing a statement of cash flows
Now we can more correctly calculate “Net cash flow from operating activities”
Next comes “Investing activities”
And within Investing activities we shall find the actual CASH received by way of various sorts of investment income
You ask “What if …”
It won’t happen
The examiner HAS TO GIVE YOU enough information for you to work out the actual CASH received from the various investing activities
Better?
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