ExpertMedium2 marksShort Answer
ACCA · Question 22 · Preparing Basic Financial Statements
Section A
In preparing its statement of cash flows using the indirect method, a company starts with a profit before tax of $150,000. During the year, the company sold a machine for $30,000. The machine had a carrying amount of $22,000 at the date of disposal.
What is the net adjustment required to the profit before tax in respect of this disposal to arrive at cash generated from operations? (Enter the number only. If it is a deduction, include a minus sign, e.g., -5000)
Section A
In preparing its statement of cash flows using the indirect method, a company starts with a profit before tax of $150,000. During the year, the company sold a machine for $30,000. The machine had a carrying amount of $22,000 at the date of disposal.
What is the net adjustment required to the profit before tax in respect of this disposal to arrive at cash generated from operations? (Enter the number only. If it is a deduction, include a minus sign, e.g., -5000)
How to approach this question
Calculate the profit or loss on disposal. Since it's a non-cash item included in profit before tax, you must reverse it. A profit is deducted; a loss is added back.
Full Answer
Proceeds = $30,000. Carrying amount = $22,000. Profit on disposal = $8,000.
This $8,000 profit is included in the profit before tax but is an investing activity, not an operating cash flow. Therefore, it must be deducted from profit before tax in the operating activities section.
Adjustment = -8000.
Common mistakes
Adding the $8,000 instead of deducting it, or adjusting by the proceeds ($30,000).
Practice the full ACCA FA — Financial Accounting Practice Exam 5
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