DFS Cashflow question help please

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Flipflop
Flipflop Registered Posts: 67 Regular contributor ⭐
I know I have probably asked this before...

I am doing the reconcilliation of profit from operations to net cash from operating activities Dec 07 exam paper.

I don't understand how depreciation is a plus and gain on disposal is a minus??
when increase in inventories is a minus as is an outflow of cash.

The problem is I am not at college and am trying to teach myself so is difficult trying to decipher the answers to find out how etc.

Help please :ohmy:

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  • lork
    lork Registered Posts: 97 Regular contributor ⭐
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    Depreciation has already been deducted in the income statement to arrive at the profit from operations figure, therefore needs to be added back as it is not a cashflow.

    Similarly, a gain on disposal has already been added into income statement to arrive at the profit from operations figure, but isn't part of the business' regular operations, so needs to be deducted.
  • Ampsie
    Ampsie Registered Posts: 145 Dedicated contributor 🦉
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    Hi Flipflop,

    I'm at work doing last minute revision!

    When you're doing the reconciliation, remember that not everything that is an expense actually comes out of the bank in real money.
    For example - depreciation is an expense that is deducted in the income statement, so it reduces profit. But no actual money is paid out of the bank. So depreciation is added on the reconciliation.

    If an asset has been disposed of the loss or gain will show in the asset and disposal account but again, no actual money has moved in the bank account. So a gain is deducted and a loss is added.
    The proceeds from the sale is real money that comes into the bank and that is included in the investing part of the cash flow statement.

    If the inventories have increased then more money has been spent on them which will have actually been paid out of the bank account and decreased cash so it is deducted.

    I always try to remember it by thinking if cash has actually gone in or out of the bank as to whether it is an increase or decrease.

    I hope that helps a bit!

    Good luck for tomorrow - i'm praying there aren't too many questions on the standards!

    Ampsie
    :001_smile:
  • crispy
    crispy Registered Posts: 466 Dedicated contributor 🦉
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    Depreciation is a 'non-cash' expense item which has already been deducted to arrive at operating profit figure, so in order to calculate the cash generated from operations - it must be added back.

    Gain on dispoal is the opposite - it has been added into operating profit and therefore should be deducted to work out cash flow from operations. The disposal proceeds from the sale belong in 'Investing Activites' on the cash flow statement.
  • Flipflop
    Flipflop Registered Posts: 67 Regular contributor ⭐
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    Ok thanks, think I've got it, my head is bursting, thinking of sacraficing dfs for pcr? don't think I have done enough to be in with a chance, will see how I get on today.

    Good luck yourself :lol:
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