Question 1

**Section B - Case 2: Single Entity Accounts & Ratio Analysis**

*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
1) Depreciation on new turbines of $50,000 was omitted.
2) An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
3) Closing inventory was overvalued by $30,000.
4) An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*

How does the $50,000 depreciation adjustment affect the net cash flow from operating activities?

Accepted Answer

Remember that depreciation is a non-cash expense. It reduces profit, but because no cash leaves the business, it is added back to profit in the Statement of Cash Flows. The net effect on cash is zero.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Assuming that because it is an expense, it must reduce cash flow.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 1

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