DFS - Reconciliation of Profit & Cash from Operations

System

Hi,

I am working through past exam papers for DFS and I can not seem to get my head around the reconciliation of profit from operations to the net cash from operations.
I think I am just having a bad day (I hate this topic).

Can anyone help? I need an idiots guide on how to comeplete this process.

Many thanks

System

Re:DFS - Reconciliation of Profit & Cash from Operations

Hi, this is an adjustment section before the cash flow statement itself. I learnt this by taking each item and thinking about what effect it had in the bank account.

You need to add back depreciation charge, because although it is an expense in the income statement, no money actually went out of the bank, so your cash is increased.

Add loss on disposal and deduct gain on disposal as the actual proceeds will appear in the investing section of the cash flow statement. (Again we are reversing out what is in the income statement)

Inventories - deduct increases and add decreases.
If you have more stock, you have paid for it so you have less cash

Receivables - deduct increases and add decreases. If you have more debtors, they haven't paid you and so you have less cash

Payables - add increases and deduct decreases. If your creditors increase, you owe more money, which means it is still in your bank account.

As you are starting from the operating profit, you will need to deduct interest payments and tax as they are a 'real' expense in your income statement.

Hope this helps you.
Jackie

System

Re:DFS - Reconciliation of Profit & Cash from Operations

Thank you very much, I will now try again