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The qs says that the companys depreciation policy matches the currently available tax write off for capital allowances.Then why in the answer do we add back the depreciation?
And to know the working captal why do we have to deduct the cash from the net assets figure given in the qs?
Thanks alot Sir
Depreciation is not a cash flow!!!
We need it to calculate the tax, but since the operating profit is after depreciation we must add it back to get the cash flow.For your second question, you actually mean net current assets (not net assets).
You do not have to deduct the cash – the examiners answer specifically says that you would get full credit if you did not deduct the cash.
The logic for deducting it is that although you would expect that receivables and inventory and payables will need to grow, it does not necessarily mean that the cash balance will need to grow.
However you can argue both ways, and the examiner allowed either.
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