Specimen Paper - Cash Flow

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hello,

I am struggeling with one of the workings out in the DFS Specimen Paper on the Cash Flow Statement.

You have to work out the Purchase of Non-current assets for the Investing Activities section. This is worked out form the carrying values on the balance sheet. The answer tells you this is worked out by

Opening Balance - Depreciation Charge - NBV of Assets Sold + ?Additions? = Closing Balance

From this you can work out the missing figure which is the purchase of non current assets.. And it works.

What I dont understand is why you minus off the depreciation charge from the NBV values from the balance sheet, surely the values in the balance sheet already have the depreciation deducted so why do you take it off again....

Im sure its totally obvious the reason why but I just dont see it :? :? :?
Can anyone explain to me?

Thanks in advance
Andy

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Specimen Paper - Cash Flow

    Usually depreciation is not charged in the year of disposal. Therefore when you reverse the "depreciation charge" you are reversing the charge on the existing fixed assets in the year.

    The depreciation that has been charged in previous years has to be reversed on those assets that have been sold as this is included in the opening balance figure (i.e. the opening NBV). It therefore looks like you are reversing the depreciation twice but in fact when you are calculating the additions during the year for cash flow purposes you are:

    (a) reversing the "charge for the year" depreciation; then
    (b) reversing the "accumulated depreciation" on the assets sold. This is because the loss/profit on the sale of the assets is a "paper" profit/loss calculated by crediting cost debiting depreciation debiting proceeds. This profit/loss is thenadded/deducted from/to the operating profit figure (the Note 1 calculation).

    Hope that helps

    Regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Specimen Paper - Cash Flow

    It's to create a level playing field for comparison.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Specimen Paper - Cash Flow

    Hi GillG,

    I'm not quite sure I understand what you mean.

    The reason for eliminating depreciation serves two purposes:-

    1. Allows you to arrive at a "balancing figure" for items such as additions (as in the scenario above).

    2. Depreciation is a "non-cash" item - therefore has to be removed out of the cash flow statement.

    I assume you mean that the cash flow statement provides a level field for comparison of how cash has been utilised in the previous year and the current year.

    Kind regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Specimen Paper - Cash Flow

    Hi Steve aka Peugeot,

    Thanks for your reply.

    Unfortunatly this is still as clear as mud to me :roll: I just dont see it. I have read your resonse about 10 times.

    For now I will just learn the process mechanically and hopefully it will make sense to me at some point.

    Thanks
    Andyy
    Edit:-
    2mins later

    AHH The penny has dropped and I finally get it now :lol::lol:

    Thanks Again
    Andy
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Specimen Paper - Cash Flow

    Nice one! :lol:

    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Specimen Paper - Cash Flow

    Peugeot,
    No wasn't meaning the cashflow but in the scenario given. The way I logicalise (new word!) it is that the NBV opening balance either needs to have the depreciation deducted or you add back the depreciation to the current NBV,in order that you are comparing like with like when trying to calculate purchases.

    I'm not very good at wordy explanations so if I confused the issue further, I apologise.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Specimen Paper - Cash Flow

    No problem Gill. Hope I didn't offend you in anyway - I wasn't quite sure what you meant!

    Kind regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Specimen Paper - Cash Flow

    Nope, not offended one iota. Worked in male dominated IT environment in the 70's & 80's, skin tough as old boots now (apart from all the wrin... I mean laughter lines :D )

Categories

Privacy Policy