dfs, cash flow

System

Hi Everybody,

I am a distance learner and a bit confused with new DFS standards.
I study with FTC and in their books they say you should start cash flow with Profit before tax (it means after ineterst padi is deducted. But in the specimen paper here it says to start with profit from operations and it assumes that Finance costs = Interest paid. I checked with Osborne books and they state to start with profit from operations.

can anybody please help me to sort this out as I am lost completely now....


Thanks

System

Re:dfs, cash flow

Profit from operations is also known as operating profit. This is the profit achieved before interest payable and tax (other wise known as PBIT).

finance costs are a form of interest and go under the "returns on investment and servicing of finance" heading. It is otherwise known as a cost of financing the business (i.e. interest).

Your note 1 heading should look a bit like this:

Operating Profit (before interest and tax)
Add depreciation
Add decrease/deduct increase in stocks
Add decrease/deduct increase in debtors
Add increase/deduct decrease in creditors
NET CASH FLOW FROM OPERATING ACTIVITIES

What you are doing here is stripping out the non-cash items in the profit before tax/interest. Cash flows from operating activities are in general the cash effects of transactions and other events relating to operating activities.

HOpe that helps.

Kind regards
Steve

System

Re:dfs, cash flow

Quite right under FRS 1, Steve, but IAS 7 is slightly different.

The first entry is virtually the same, and starting with "Profit from Operations" (or Operating Profit, or profit before interest and tax) is the same. The adjustments are the same, to arrive at "Cash generated/used by operations", from which interest paid and income taxes paid should be deducted. This will give "net cash from operating activities", the end of the reconciliation and the start of the cashflow statement.

Good luck!

Andrew Harrington.