More help needed - FNST Reconciliation of prof from ops to net cash

lhwood

Hi,

I need more help - exam on Friday and am panicking!

I was looking at the reconciliation of profit from operations to net cash from operating activities. When you are making the adjustments how do you know what is to be deducted from the profit from operations and what gets added on.

Also is this quite a common question to be in the exam or is it usually the statement of comprehensive income and financial position?

Thanks.

Morpheus1980

Hi there. Try reading this article about Statement of Cash Flows, written by Steve Collings (who always knows what he's talking about!):

http://opentuition.com/acca/f7/ias-7-statement-of-cash-flows/

Don't panic! Breathe, take a break and come back to it with a clear mind. And good luck!

Steve Collings

Hi,

You need to think about the impact it has on the operating profit, so for example:

1. An increase in trade receivables means more cash is tied up in receivables than in the previous year, so less cash comes in, hence an OUTFLOW. An outflow is (deducted) from op profit. Conversely if receivables decrease, this means more cash has been collected, hence a cash INFLOW. An inflow is added to operating profit.

2. An increase in inventory means more cash is tied up in inventory. If you think of the order of liquidity: inventory turns into receivables which turns into cash (eventually). If inventory increases this mean more cash is tied up in inventory hence a cash OUTFLOW hence deducted from op profit. Decreases in inventory mean inventory has turned into receivables or cash, hence decreases result in some form of cash INFLOW, hence an inflow is added to operating profit.

3. An increase in trade payables mean you have paid out less money to payables than the previous year. This means that more money is sat in the bank account because less has been paid out to the payables. This represents a cash INFLOW, hence added on to op profit. Conversely a decrease in trade payables means more cash has been paid out to payables which represents an OUTFLOW, hence a deduction from op profit.

You can see therefore that INFLOWS are added, whereas OUTFLOWS are deducted.

I hope that helps you.

Best wishes
Steve

lhwood

Thankyou your comments have been a great help.

Fingers crossed I pass this exam

Lisa