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Sir, it seems that only the increase in prepayments is adjusted for when calculating “Cash flows from operations” and not the entire prepayment. I do not understand why this is so; the prepaid amount does not reduce expenses in the next year, rather it is a different method of paying so to speak (i.e. it does not reduce the expense charge for the year, just the liability for said year; thereby making it a SOFP item), therefore last years prepayment will not be reflected in the next year’s SOP/L. Accordingly should we not adjust the profit b/f tax with the full amount of this year’s prepayment not just the increase?
I hope that was not too long winded
The expense charged in the SOPL in arriving at the profit is the cash paid during the year – opening prepayment + closing prepayment.
Given that for the statement of cash flows we are wanting the cash flow, we need to adjust the profit by both the opening and the closing prepayments.
Have you watched my free lectures on the statement of cash flows? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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