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Hellpp! I am really struggling
On the statement of cash flow questions, the first figure you take is meant to be the profit before tax. However in some of the questions from my revision kit, they are using the figure of operating profit(so before interest as well), whilst other questions use the standard profit before tax figure.
Would really appreciate any help.
Thanks
ok let me clear ur confusion here. accounting profit is not cash based, whatever the accounting profit is that does not mean that is whole cash so to make this profit cash based we prepare cash flow, cash flow convert account profit into cash based profit.
now to reply ur question.
profit before tax
if u see in solution when u take profit before tax, then in that case, first interest expense is added and interested income is deducted, u know why ? just bcoz we do not know how much interest expense or interest income is on cash based then after doing this adjust adjustment we deduct actual cash based interest expense and add actual cash based interest income.
Starting with Operating Profit:
when u start with Operating Profit then u do not need to add back interest expense and do not need to deduct interest income, , bcoz their impact is not included in operating profit, all u need to do is just directly deduct actual cash based interest expense and add actual cash based interest income.
u have to follow this concept with every adjustment whether their impact of non-cash based is included profit or not and work accordingly to that.
hope it clears ur confusion.
Thanks
Muhammad Irfan
Love u all@sagar143 said:
ok let me clear ur confusion here. accounting profit is not cash based, whatever the accounting profit is that does not mean that is whole cash so to make this profit cash based we prepare cash flow, cash flow convert account profit into cash based profit.
now to reply ur question.
profit before tax
if u see in solution when u take profit before tax, then in that case, first interest expense is added and interested income is deducted, u know why ? just bcoz we do not know how much interest expense or interest income is on cash based then after doing this adjust adjustment we deduct actual cash based interest expense and add actual cash based interest income.
Starting with Operating Profit:
when u start with Operating Profit then u do not need to add back interest expense and do not need to deduct interest income, , bcoz their impact is not included in operating profit, all u need to do is just directly deduct actual cash based interest expense and add actual cash based interest income.
u have to follow this concept with every adjustment whether their impact of non-cash based is included profit or not and work accordingly to that.
hope it clears ur confusion.
Thanks
Muhammad Irfan
Love u all
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