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Am an aspiring Financial Analyst and my first milestone towards my goal is to become a thorough bred Accountant. In the course of my career, I have garnered experience in the Capital Market (where I first started) and currently looking for opportunities in the Professional (Consulting) Services sector. I also aspire to pitch my tent with Private Equity firms or Investment Banks as this is one area I am passionate with - raising finance, structuring capital, performance improvements, etc.

This year, I will be sitting for the first stage of the ICAN examination - Foundation Stage. I have scouted through this forum for a discussion thread on Accounting, Financial Advisory Services, Consulting especially geared towards upcoming professionals and could not find any. Hence the reason behind this thread.

I welcome all lovers of the accounting profession, finance, economics and life (lol) to this board. These include both the prospective and experts in the field.For the experts, people like me will look forward to your inputs, suggestion and opinions on issues raised in this thread. Everyone is free to post questions, tips, ideas or anything that will improve our understanding of various issues as it concerns us and the exams.

From time to time, I will be posting thoughts and questions especially from the study packs and I encourage all to participate.

Thanks as you participate and add to the our collective knowledge base.

I was studying Cash Flows and Preparation of Cash Flow.

Based on an explanation I got and the my understanding of Cash flows, Cash Flows are either

1. Receipts (i.e. cash inflows and so are represented as a positive number in a Statement of Cash Flows) or;

2. Payments (i.e. cash outflows and so are represented as a negative number using brackets in a Statement of Cash Flows).

While analyzing the Statement of Cash Flow for Vitafoam Nigeria Plc, here are the figures I got under the Cash Flow from Operating Activities section:

In the computation of Cash generated from Operations, Finance Costs (which based on the explanation given above - is an outflow and should be represented as a negative number) was added. Buttressing further, in the other picture showing the composition of the Finance Costs, it is composed of interests on borrowings as the case may be. Thus the company paid out interests for loans it took which ought to be an outflow of resources from the company.

Also, the Interest Received which was reported as a Finance Income was subtracted (representing a Cash Outflow) rather than a Cash Inflow (as it was indeed cash received from an economic activity)

Guys, kindly put in a some further explanation.

Thanks.

CC: stagger
kjhova
adeaks
Shinelle
Jarus
ednut1
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that was an adjustment for cash from operating activities. the profit for the year comprises of things not related to operations and u need to adjust for it. eg profit is 5000. and u want to adjust for cash from operating activities assuming depreciation is 200, finance costs 500. depreciation is not actual cash and finance costs wud be shown under financing activies. your cash from operating activities is 5000+200+500= 5700

The Proforma starts from "Operating profit before Tax" and the essence is to show only cash inflows and outflows related to operations only . In the Statement of Comprehensive Income (P/L), Finance Costs and Interest Received are usually subtracted and added respectively before arriving at that PBT .

In the Cash flow statement, adjustments are made to "addback" Finance Costs that were hither to deducted and to less back Finance/ investment income that were hither to Added to arrive at that PBT. So that we are left with only Cash Profit from Operations.

They are eventually taken to their appropriate headings ie Financing Activities and Investing Activities.

Hello Ednut1 and Shinelle..

Thank you very much for your explanations.

Profit Before Tax was computed in view of the Finance Cost which is not actually an Operating Cash Flow activity; same with Interest Income and thus a reversal of the respective operations needs to be done so as to obtain a true reflection of the Operating Activities.

I also want to note that this is the Indirect Method of preparing a Cash Flow Statement.

As you said Shinelle, I've looked at the Financing Activity section (attached) and realized that the appropriate operation on Finance Cost (deduction) has been done.

Thank you guys!

Hello guys...Shinelle, ednut1...

On Disposal of Non-current Assets...

In computation of Cash Flows, why is the gain realized deducted in disposal of non-current assets and a loss realized added in disposal of non-current assets to the Cash Flow from Operating Activities?

Gains on disposal is a positive value - difference between a non-current asset's book value and the value disposed of. While loss is the negative value.

I have an idea but I don't know how cool it is.

kaboninc:
Hello guys...Shinelle, ednut1...

On Disposal of Non-current Assets...

In computation of Cash Flows, why is the gain realized deducted in disposal of non-current assets and a loss realized added in disposal of non-current assets to the Cash Flow from Operating Activities?

Gains on disposal is a positive value - difference between a non-current asset's book value and the value disposed of. While loss is the negative value.

I have an idea but I don't know how cool it is.

Basically, it follows the same principle. . The negative and positive are as a result of adjustments to cancel out prior inclusion or exclusion of the Gain or Loss on Disposal of Assets in arriving at the PBT... Assets are investing activities and as such all cash transactions (Proceeds) relating to additions and disposals are to be recognized there.

Note that only proceeds on sale and acquisitions are recognized because Gain /Loss are simply notional . They only arise due to difference btw proceeds and carrying amount(NBV) at the point of sale.
Carrying amount in itself is simply as a result of a periodic deduction (depreciation) in the Financial statements which the cash flow statement does not recognize. It doesn't involve movement in cash.. simply complies with matching concept . . .

I hope you understand.

Shinelle:


Basically, it follows the same principle. . The negative and positive are as a result of adjustments to cancel out prior inclusion or exclusion of the Gain or Loss on Disposal of Assets in arriving at the PBT... Assets are investing activities and as such all cash transactions (Proceeds) relating to additions and disposals are to be recognized there.

Note that only proceeds on sale and acquisitions are recognized because Gain /Loss are simply notional . They only arise due to difference btw proceeds and carrying amount(NBV) at the point of sale.
Carrying amount in itself is simply as a result of a periodic deduction (depreciation) in the Financial statements which the cash flow statement does not recognize. It doesn't involve movement in cash.. simply complies with matching concept . . .

I hope you understand.

Thank you very much! Yes I do understand.

I was actually pondering over it yesterday while going home and it occurred to me that the Gains/Loss on disposal were already added/subtracted in the computation of the PBT. So I see the reason why it had to be adjusted in the computation of Cash generated from Operating Activities.

Like you said about the Carry Amount, while studying this morning, I noticed that the gains/loss figure were also, already used in computing Proceeds from sale of non-current assets in the Cash Flow from Investing Activities section.

Thank you once again.

Well, I have another one and this one confuses me alot.

Companies source for funds (Equity finance or Debt Finance) and these funds come with a cost attached to them (dividend for Equity Finance and interest for Debt Finance). My difficulty is in how it is applied in preparing the Income Statement, Cash Flow and Financial Position.

I would think that these terms have the same meanings and can be used interchangeably:

Finance Costs = Interest Expenses = Interest Charges = Borrowing Costs.

My understanding of these are the interests incurred in utilizing loans/facilities and are always expensed in the year/period in which they occur. Thus a company reports these expenses in its Statement of Comprehensive Income and make necessary adjustments in the Operating Activities and Financing Activities sections of the Statement of Cash Flow.

In the figure displayed below, it can be noticed that an adjustment (addition) for Interest Charges have been made in the computation of Cash generated from Operating Activities. However, another kind of interest was deducted (Interest Paid).

Could it mean that Interest Charge is the same as Interest Payable (a current liability that occurred in the period under review and it is expected to be defrayed in the next accounting period) or Interest Expense while Interest Paid is the actual payment made for the facility obtained within the period under review?

If so, could it also mean that Interest Charges could mean the actual interest the company ought to have incurred/paid but was not able to defray the full amount while the Interest Paid represents the amount paid as Interests within the year under review?

Let me stop here....

I really need a clarification.

Thanks in anticipation of your response.