Cash flow question query

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Vader
Vader Registered Posts: 15
in Financial Statements for Limited Companies
Hi, could anyone please help with this question, calculating the Net cash from operating activities:

Dep charge = £200

SPL
Revenue £1397
Cost of sales £(1110)
Gross Profit £287

Gain on Disposal of PPE £80
Operating Expenses (£205)
Profit from Operations £162

Dividends received and gain on investments £20
Finance costs (£40)

Profit before tax £142
Tax (£57)

Profit for year from continuing operations £85

So the answer is:
Profit from operation £162
Adjustments for:
Depreciation £200
Gain on disposal (£80)
Decrease in inventories £30
Decrease in trade payables (£202)
Decrease in trade receivables £110

Cash generated by operations:
Tax Paid (£50)
Interest paid (£40)

Net cash from opetation activities £130


What I want to know is, in the 'adjustments for' bit, why isn't finance costs of £40 added on and dividends received of £20 taken off?

Thanks

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  • crispy
    crispy Registered Posts: 466 Dedicated contributor 🦉
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    Hello Lord Vader,

    In order to answer this question you first have to move away from the dark side of the force :)

    The finance costs are not added back as an adjustment because they are not included in Profit from Operations. You may come across another cash flow question where you would have to start from Profit before Tax as the interest per the Income statement does not equal interest paid (due to accruals) however I do not think this appears in an AAT exam.

    Dividends received again for the same reason are not part of operating Profit.
  • Vader
    Vader Registered Posts: 15
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    Someone has to do the Death Star accounts ;)

    Thanks for your answer, but aren't finance costs always subtracted from operating profit (so not included in profit from operations).
  • crispy
    crispy Registered Posts: 466 Dedicated contributor 🦉
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    Hi Vader,

    Yes, you are correct - therefore as finance costs are not included operating proift there is no need to adjust for them when calculating cash generated by operations.

    Hope this makes sense.
  • Vader
    Vader Registered Posts: 15
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    crispy said:

    Hi Vader,

    Yes, you are correct - therefore as finance costs are not included operating proift there is no need to adjust for them when calculating cash generated by operations.

    Hope this makes sense.

    Yes I think it does, thanks for your help.

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