[{"Name":"Statement of Cash Flows","TopicPlaylistFirstVideoID":0,"Duration":null,"Videos":[{"Watched":false,"Name":"Statement of Cash Flows - Part 1","Duration":"11m 54s","ChapterTopicVideoID":26969,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":"https://www.proprep.uk/Images/Videos_Thumbnails/26969.jpeg","UploadDate":"2021-10-24T11:50:56.9930000","DurationForVideoObject":"PT11M54S","Description":null,"MetaTitle":"Statement of Cash Flows - Part 1: Video + Workbook | Proprep","MetaDescription":"Introduction to Statement of Cash Flows - Statement of Cash Flows. Watch the video made by an expert in the field. Download the workbook and maximize your learning.","Canonical":"https://www.proprep.uk/general-modules/all/introduction-to-financial-accounting-and-reporting/introduction-to-statement-of-cash-flows/statement-of-cash-flows/vid29674","VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.345","Text":"Hello and welcome to this series of video presentations"},{"Start":"00:04.345 ","End":"00:08.950","Text":"on the statement of cash flows brought you by Proprep."},{"Start":"00:08.950 ","End":"00:15.563","Text":"In this section, we will discuss the information content of the statement of cash flows,"},{"Start":"00:15.563 ","End":"00:22.105","Text":"show you how to present the classification of cash flows between operating,"},{"Start":"00:22.105 ","End":"00:25.600","Text":"investing, and financing activities."},{"Start":"00:25.600 ","End":"00:30.835","Text":"Now, these 3 words are very important in relation to the statement of cash flows,"},{"Start":"00:30.835 ","End":"00:35.245","Text":"operating, investing, and financing activities."},{"Start":"00:35.245 ","End":"00:39.460","Text":"We will be spending a lot of time talking about them."},{"Start":"00:39.460 ","End":"00:45.560","Text":"We will also then learn how to prepare a simple statement of cash flows."},{"Start":"00:45.560 ","End":"00:52.670","Text":"In this video, we will focus on the information content of the cash flow statement."},{"Start":"00:52.670 ","End":"00:55.880","Text":"Firstly, a background and then we will look"},{"Start":"00:55.880 ","End":"00:59.810","Text":"at the structure of the statement of cash flows."},{"Start":"00:59.810 ","End":"01:07.175","Text":"The value of the firm can be thought of to be the present value of future cash flows."},{"Start":"01:07.175 ","End":"01:10.910","Text":"This is an interesting concept because we can think of"},{"Start":"01:10.910 ","End":"01:14.990","Text":"the value of the firm in terms of the balance sheet value."},{"Start":"01:14.990 ","End":"01:18.500","Text":"The balance sheet value of the firm will"},{"Start":"01:18.500 ","End":"01:21.934","Text":"come from the counting equation of what are the assets,"},{"Start":"01:21.934 ","End":"01:24.375","Text":"the resources of the entity,"},{"Start":"01:24.375 ","End":"01:27.988","Text":"what are the liabilities of the entity,"},{"Start":"01:27.988 ","End":"01:31.145","Text":"and therefore, what is the owner\u0027s equity?"},{"Start":"01:31.145 ","End":"01:33.726","Text":"Rearranging into assets,"},{"Start":"01:33.726 ","End":"01:38.690","Text":"less liabilities equals owner\u0027s equity."},{"Start":"01:38.690 ","End":"01:41.240","Text":"In this case, over here,"},{"Start":"01:41.240 ","End":"01:46.745","Text":"the owner\u0027s equity is in fact the balance sheet value of the firm."},{"Start":"01:46.745 ","End":"01:51.635","Text":"We could also look at a market value of the firm,"},{"Start":"01:51.635 ","End":"01:54.650","Text":"often called the market capitalization."},{"Start":"01:54.650 ","End":"01:59.570","Text":"Here we will take the quantity of shares and issue and"},{"Start":"01:59.570 ","End":"02:05.480","Text":"multiply that by the shape price on the stock exchange."},{"Start":"02:05.480 ","End":"02:08.780","Text":"That gives an indication of"},{"Start":"02:08.780 ","End":"02:15.980","Text":"the market capitalization or the value put on the firm or the entity by the market."},{"Start":"02:15.980 ","End":"02:20.975","Text":"What we\u0027re looking at over here is the concept of the value of the firm"},{"Start":"02:20.975 ","End":"02:26.185","Text":"as the present value of"},{"Start":"02:26.185 ","End":"02:31.140","Text":"future cash flows and cash flows are"},{"Start":"02:31.140 ","End":"02:37.865","Text":"a very important part in assessing future prospects and value of any entity."},{"Start":"02:37.865 ","End":"02:43.250","Text":"Therefore, users of financial statements are interested in"},{"Start":"02:43.250 ","End":"02:51.510","Text":"how the entity both generates and also uses its cash."},{"Start":"02:51.510 ","End":"02:56.450","Text":"There are also two very important words in the statement of cash flows."},{"Start":"02:56.450 ","End":"02:58.880","Text":"The generation of cash refers to"},{"Start":"02:58.880 ","End":"03:05.090","Text":"the cash inflows and the uses of cash refer to the cash outflow."},{"Start":"03:05.090 ","End":"03:08.900","Text":"This leads on to users forecasting"},{"Start":"03:08.900 ","End":"03:14.940","Text":"the ability of the entity to generate those future cash flows."},{"Start":"03:14.940 ","End":"03:17.570","Text":"Here we are referring to net cash flows."},{"Start":"03:17.570 ","End":"03:23.300","Text":"The net of the cash generated inflow and the cash used outflow."},{"Start":"03:23.300 ","End":"03:29.825","Text":"These are important inputs for valuation models in accounting and finance."},{"Start":"03:29.825 ","End":"03:35.840","Text":"Users also want to see if the entity can meet its obligations,"},{"Start":"03:35.840 ","End":"03:38.165","Text":"which you know are its liabilities."},{"Start":"03:38.165 ","End":"03:42.335","Text":"Can entity pay dividends to shareholders,"},{"Start":"03:42.335 ","End":"03:49.218","Text":"and also finance new projects, internally generated funds?"},{"Start":"03:49.218 ","End":"03:55.940","Text":"This goes back to the concept mentioned on the previous slides of the operating,"},{"Start":"03:55.940 ","End":"03:59.045","Text":"investing, and financing activities."},{"Start":"03:59.045 ","End":"04:06.250","Text":"The internal sources of money referred to cash from operating activities."},{"Start":"04:06.250 ","End":"04:14.075","Text":"If an entity is not able to generate sufficient cash from its operating activities,"},{"Start":"04:14.075 ","End":"04:18.800","Text":"it will have to turn to external financing, and hence,"},{"Start":"04:18.800 ","End":"04:24.470","Text":"we get to the concept of the financing activities section of the statement of cash flows."},{"Start":"04:24.470 ","End":"04:29.222","Text":"Looking at all the different activities together,"},{"Start":"04:29.222 ","End":"04:35.060","Text":"users needs to understand which activity that being operating,"},{"Start":"04:35.060 ","End":"04:40.825","Text":"investing, or financing generates or uses cash."},{"Start":"04:40.825 ","End":"04:43.445","Text":"Lastly, users,"},{"Start":"04:43.445 ","End":"04:50.215","Text":"we\u0027ll look at the statement of cash flows to assist the extent to which reported profits."},{"Start":"04:50.215 ","End":"04:57.950","Text":"Remember, profits are recognized on the accrual basis of accounting,"},{"Start":"04:57.950 ","End":"05:02.525","Text":"how these profits have been realized in the form of cash."},{"Start":"05:02.525 ","End":"05:07.910","Text":"Now this conversion of an accrual-based profit number to"},{"Start":"05:07.910 ","End":"05:15.500","Text":"a cash number is known as assessing the quality of the earnings of the entity."},{"Start":"05:15.500 ","End":"05:17.885","Text":"What do we mean by quality then?"},{"Start":"05:17.885 ","End":"05:25.884","Text":"If we assume an entity has an income statement which has income,"},{"Start":"05:25.884 ","End":"05:29.370","Text":"less expenses in a very simple form,"},{"Start":"05:29.370 ","End":"05:31.580","Text":"and that results in a profit."},{"Start":"05:31.580 ","End":"05:36.095","Text":"For example, currency units of 100."},{"Start":"05:36.095 ","End":"05:41.630","Text":"Then the user goes and takes a look at the statement of cash flows and"},{"Start":"05:41.630 ","End":"05:47.420","Text":"looks at what is the cash from operating activities."},{"Start":"05:47.420 ","End":"05:52.008","Text":"Remember, this is looking at the profit for a period,"},{"Start":"05:52.008 ","End":"05:54.193","Text":"could be a year,"},{"Start":"05:54.193 ","End":"05:58.865","Text":"and the cash from operating activities for the year."},{"Start":"05:58.865 ","End":"06:08.975","Text":"Let us now say the cash from operating activities amounts to 120 currency units."},{"Start":"06:08.975 ","End":"06:14.540","Text":"That would indicate a very good quality of earnings because the business is"},{"Start":"06:14.540 ","End":"06:21.125","Text":"generating more cash in the period compared to the accrual-based profit."},{"Start":"06:21.125 ","End":"06:26.150","Text":"Whereas if the cash from operating activities was, for example,"},{"Start":"06:26.150 ","End":"06:29.810","Text":"only 80 currency units in the period that"},{"Start":"06:29.810 ","End":"06:33.500","Text":"would indicate a lesser quality of earnings because"},{"Start":"06:33.500 ","End":"06:38.015","Text":"the accrual-based profit of 100 is only being"},{"Start":"06:38.015 ","End":"06:43.299","Text":"turned into a cash flow from operating activities of [inaudible]."},{"Start":"06:43.299 ","End":"06:47.480","Text":"The statement of cash flows, classifiers,"},{"Start":"06:47.480 ","End":"06:53.785","Text":"and gives information about changes in the balance on the cash account."},{"Start":"06:53.785 ","End":"06:59.735","Text":"Now we need to spend a bit of time understanding what we mean by the cash account."},{"Start":"06:59.735 ","End":"07:03.785","Text":"Typically, and most of the examples we will look at,"},{"Start":"07:03.785 ","End":"07:07.070","Text":"that will simply be the cash or bank accounts"},{"Start":"07:07.070 ","End":"07:11.720","Text":"on the trial balance or balance sheet of the entity."},{"Start":"07:11.720 ","End":"07:17.780","Text":"However, bear in mind that the standard IAS 7 refers to"},{"Start":"07:17.780 ","End":"07:24.064","Text":"the cash account as including what is referred to as cash,"},{"Start":"07:24.064 ","End":"07:28.545","Text":"and also what is referred to as cash equivalents."},{"Start":"07:28.545 ","End":"07:38.695","Text":"Cash itself is the cash on hand and also any demand deposits that the entity may hold."},{"Start":"07:38.695 ","End":"07:48.670","Text":"The cash equivalent are typically short-term and highly liquid investments,"},{"Start":"07:48.670 ","End":"07:52.945","Text":"which can be easily converted to cash."},{"Start":"07:52.945 ","End":"07:58.420","Text":"A company preparing a statement of cash flows needs to look"},{"Start":"07:58.420 ","End":"08:03.865","Text":"at all those items in relation to the concept of cash."},{"Start":"08:03.865 ","End":"08:05.350","Text":"What then the statement,"},{"Start":"08:05.350 ","End":"08:06.775","Text":"the cash flow we\u0027ll do,"},{"Start":"08:06.775 ","End":"08:09.850","Text":"will give them information about how"},{"Start":"08:09.850 ","End":"08:15.820","Text":"the cash balance at the beginning of the year changed to"},{"Start":"08:15.820 ","End":"08:21.130","Text":"the cash balance at the end of the year and will give them information"},{"Start":"08:21.130 ","End":"08:27.120","Text":"about cash inflows from various sources operating,"},{"Start":"08:27.120 ","End":"08:29.885","Text":"investing, or financing,"},{"Start":"08:29.885 ","End":"08:38.875","Text":"as well as cash outflows for various users also operating, investing or financing."},{"Start":"08:38.875 ","End":"08:44.815","Text":"Let us now take a look at the structure of the statement of cash flows."},{"Start":"08:44.815 ","End":"08:48.835","Text":"The structure or format is important because"},{"Start":"08:48.835 ","End":"08:54.015","Text":"all statements of cash flows follow the same broad structure."},{"Start":"08:54.015 ","End":"08:58.640","Text":"The first item appearing on the statement of cash flows is"},{"Start":"08:58.640 ","End":"09:04.610","Text":"a section showing the net cash flow from operating activities."},{"Start":"09:04.610 ","End":"09:08.930","Text":"Following on from that is a section showing"},{"Start":"09:08.930 ","End":"09:14.404","Text":"the net cash flows from investing activities and finally,"},{"Start":"09:14.404 ","End":"09:21.170","Text":"a section showing the net cash flows from financing activities."},{"Start":"09:21.170 ","End":"09:26.375","Text":"Let us assume that the business we are looking at has"},{"Start":"09:26.375 ","End":"09:33.965","Text":"a cash inflow from operating activities of 70 in the current period."},{"Start":"09:33.965 ","End":"09:38.510","Text":"The business also invested quite heavily in property,"},{"Start":"09:38.510 ","End":"09:40.130","Text":"plant, and equipment,"},{"Start":"09:40.130 ","End":"09:47.600","Text":"so there was a net cash outflow from investing activities of 80."},{"Start":"09:47.600 ","End":"09:49.535","Text":"Then because of this,"},{"Start":"09:49.535 ","End":"09:52.506","Text":"the entity had to raise some finance,"},{"Start":"09:52.506 ","End":"09:58.835","Text":"and there is a net cash inflow from financing activities of 30."},{"Start":"09:58.835 ","End":"10:05.615","Text":"This results in a net cash increase in the current period,"},{"Start":"10:05.615 ","End":"10:10.040","Text":"and net increase in cash in the amount of 20."},{"Start":"10:10.040 ","End":"10:16.400","Text":"Now assuming that the cash balance at the beginning of the year was an amount of"},{"Start":"10:16.400 ","End":"10:26.075","Text":"15 that would reconcile to the cash balance at the end of the year in an amount of 35."},{"Start":"10:26.075 ","End":"10:31.070","Text":"These amounts here of 20 at the beginning of the year,"},{"Start":"10:31.070 ","End":"10:35.630","Text":"and 35 at the end of the year will be the amount you\u0027d expect to"},{"Start":"10:35.630 ","End":"10:41.810","Text":"see on the statement of financial position as a current asset for cash."},{"Start":"10:41.810 ","End":"10:44.045","Text":"To end the section,"},{"Start":"10:44.045 ","End":"10:47.810","Text":"it is worthwhile looking at how the structure of"},{"Start":"10:47.810 ","End":"10:52.130","Text":"the statement of cash flows relates to the accounting equation."},{"Start":"10:52.130 ","End":"10:55.700","Text":"You\u0027re all familiar with the accounting equation of"},{"Start":"10:55.700 ","End":"11:00.905","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"11:00.905 ","End":"11:05.750","Text":"You\u0027re also familiar with the fact that the assets can be classified"},{"Start":"11:05.750 ","End":"11:10.865","Text":"as other non-current assets or current assets."},{"Start":"11:10.865 ","End":"11:19.550","Text":"It says we can classify liabilities as non-current liabilities or current liabilities."},{"Start":"11:19.550 ","End":"11:23.420","Text":"When preparing the statement of cash flows,"},{"Start":"11:23.420 ","End":"11:26.870","Text":"we will look at the current assets and"},{"Start":"11:26.870 ","End":"11:33.410","Text":"current liabilities to determine the cash flows from operating activities."},{"Start":"11:33.410 ","End":"11:38.180","Text":"We will then look at the non-current assets to help"},{"Start":"11:38.180 ","End":"11:43.130","Text":"us determine the cash flows from investing activities."},{"Start":"11:43.130 ","End":"11:49.010","Text":"We will look at the non-current liabilities and owner\u0027s equity to"},{"Start":"11:49.010 ","End":"11:55.500","Text":"help us determine the cash flows from financing activities."}],"ID":29674},{"Watched":false,"Name":"Exercise 1 - ABC - 1A - question page","Duration":"1m 51s","ChapterTopicVideoID":26861,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.755","Text":"Today we\u0027re going to do the exercise entitled ABC."},{"Start":"00:04.755 ","End":"00:08.430","Text":"The following are select end of year balances of"},{"Start":"00:08.430 ","End":"00:13.725","Text":"ABC incorporated and its income statement for 20X2."},{"Start":"00:13.725 ","End":"00:16.230","Text":"It\u0027s just giving us some of"},{"Start":"00:16.230 ","End":"00:23.100","Text":"the balances from the balance sheet and from the income statement for 20X2."},{"Start":"00:23.100 ","End":"00:27.990","Text":"As at 31st December 20X2 and 20X1,"},{"Start":"00:27.990 ","End":"00:30.825","Text":"we\u0027ve been given the accounts receivable,"},{"Start":"00:30.825 ","End":"00:34.830","Text":"the inventory, and the accounts payable balances."},{"Start":"00:34.830 ","End":"00:39.690","Text":"Then for the year ending 31st of December 20X2 only,"},{"Start":"00:39.690 ","End":"00:42.205","Text":"we\u0027ve got revenues, in other words,"},{"Start":"00:42.205 ","End":"00:47.285","Text":"sales and the cost of sales giving us the profit for the year,"},{"Start":"00:47.285 ","End":"00:49.685","Text":"or perhaps as gross profit for the year."},{"Start":"00:49.685 ","End":"00:52.865","Text":"Required. Based on this information,"},{"Start":"00:52.865 ","End":"00:55.400","Text":"which is obviously only part of the information,"},{"Start":"00:55.400 ","End":"01:00.965","Text":"prepare the section in the cash flow statement that reports the cash generated"},{"Start":"01:00.965 ","End":"01:07.895","Text":"from or used in operating activities using the direct method."},{"Start":"01:07.895 ","End":"01:10.115","Text":"When we do the direct method,"},{"Start":"01:10.115 ","End":"01:12.110","Text":"what we\u0027re doing is we\u0027re starting"},{"Start":"01:12.110 ","End":"01:16.835","Text":"our cash flow statement with cash received from customers."},{"Start":"01:16.835 ","End":"01:22.215","Text":"Then the next line is called cash paid to suppliers and employees."},{"Start":"01:22.215 ","End":"01:23.710","Text":"In this example,"},{"Start":"01:23.710 ","End":"01:25.550","Text":"we don\u0027t have any employees."},{"Start":"01:25.550 ","End":"01:33.065","Text":"All we have to deal with here is cash received from customers and cash paid to suppliers."},{"Start":"01:33.065 ","End":"01:36.740","Text":"When I say we don\u0027t have any employees is because we don\u0027t have"},{"Start":"01:36.740 ","End":"01:41.000","Text":"any wages payable and wages expenses given to us."},{"Start":"01:41.000 ","End":"01:45.270","Text":"All we have here is the inventory and the accounts payable."},{"Start":"01:45.270 ","End":"01:51.900","Text":"That suggests suppliers of inventory is all we have to pay."}],"ID":29675},{"Watched":false,"Name":"Exercise 1 - ABC - 1B - Cash received from customers","Duration":"5m 45s","ChapterTopicVideoID":26868,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.175","Text":"Let\u0027s now look at the solution to exercise ABC."},{"Start":"00:05.175 ","End":"00:10.905","Text":"What we were asked to do was to construct to the extent possible,"},{"Start":"00:10.905 ","End":"00:18.645","Text":"the section of the cash flow statement entitled cash generated from operating activities."},{"Start":"00:18.645 ","End":"00:22.560","Text":"The first line of that when using the direct method,"},{"Start":"00:22.560 ","End":"00:25.450","Text":"which is the method we\u0027ve been asked to use,"},{"Start":"00:25.450 ","End":"00:28.955","Text":"is cash received from customers."},{"Start":"00:28.955 ","End":"00:33.275","Text":"The second line is cash paid to suppliers and employees."},{"Start":"00:33.275 ","End":"00:35.270","Text":"Let\u0027s start with the first line,"},{"Start":"00:35.270 ","End":"00:38.105","Text":"cash received from customers."},{"Start":"00:38.105 ","End":"00:40.505","Text":"To be able to calculate this,"},{"Start":"00:40.505 ","End":"00:43.790","Text":"we need the accounts receivable balances and we"},{"Start":"00:43.790 ","End":"00:47.720","Text":"need to know what the revenue was or the sales in this case."},{"Start":"00:47.720 ","End":"00:53.750","Text":"Now notice that we\u0027ve been given figures for 20X1 and 20X2."},{"Start":"00:53.750 ","End":"00:56.960","Text":"Just be careful, sometimes these 2 columns"},{"Start":"00:56.960 ","End":"01:00.865","Text":"are switched around so don\u0027t make a careless mistake."},{"Start":"01:00.865 ","End":"01:04.650","Text":"20X1 is the closing balance for 20X1,"},{"Start":"01:04.650 ","End":"01:08.205","Text":"20X2 is the closing balance for 20X2."},{"Start":"01:08.205 ","End":"01:14.435","Text":"20X1\u0027s closing balance is obviously the opening balance in 20X2."},{"Start":"01:14.435 ","End":"01:22.620","Text":"Now what we are expected to calculate is the cash received from these customers."},{"Start":"01:22.630 ","End":"01:28.970","Text":"Our customers, otherwise known as debtors or accounts receivable,"},{"Start":"01:28.970 ","End":"01:33.290","Text":"they owed us 100 at the beginning of our current year,"},{"Start":"01:33.290 ","End":"01:39.230","Text":"20X2, and they still owed us 125 at the end of X2."},{"Start":"01:39.230 ","End":"01:42.235","Text":"During the year of 20X2,"},{"Start":"01:42.235 ","End":"01:45.150","Text":"we sold to them a further 324."},{"Start":"01:45.150 ","End":"01:47.175","Text":"How much did they pay us?"},{"Start":"01:47.175 ","End":"01:49.755","Text":"We have an opening balance,"},{"Start":"01:49.755 ","End":"01:52.590","Text":"they owed us 100 at the beginning of the year,"},{"Start":"01:52.590 ","End":"01:58.065","Text":"we sold to them a further 324."},{"Start":"01:58.065 ","End":"02:04.230","Text":"That means they owed to us an amount of 424 during 20X2."},{"Start":"02:04.230 ","End":"02:06.060","Text":"They\u0027d owed us 100 at the beginning,"},{"Start":"02:06.060 ","End":"02:09.930","Text":"they owed us a further 324 during the year,"},{"Start":"02:09.930 ","End":"02:13.105","Text":"so in total they owed us 424."},{"Start":"02:13.105 ","End":"02:15.230","Text":"By the end of the year,"},{"Start":"02:15.230 ","End":"02:19.160","Text":"they owed us 125."},{"Start":"02:19.550 ","End":"02:25.350","Text":"That must mean that they had paid us 299."},{"Start":"02:25.350 ","End":"02:28.010","Text":"Or if you want to have a look at it in a T-account,"},{"Start":"02:28.010 ","End":"02:30.220","Text":"ledger account format,"},{"Start":"02:30.220 ","End":"02:32.580","Text":"it\u0027s an asset account,"},{"Start":"02:32.580 ","End":"02:38.890","Text":"which means that it gets bigger on the debit side and smaller on the credit side."},{"Start":"02:38.890 ","End":"02:41.710","Text":"Our opening balance was 100,"},{"Start":"02:41.710 ","End":"02:45.820","Text":"our closing balance was 125,"},{"Start":"02:45.820 ","End":"02:49.495","Text":"and remember that closing balance simply gets brought down."},{"Start":"02:49.495 ","End":"02:53.125","Text":"Then we have another account called sales."},{"Start":"02:53.125 ","End":"02:55.055","Text":"Sales is an income account,"},{"Start":"02:55.055 ","End":"02:58.005","Text":"so that it gets bigger on the credit side."},{"Start":"02:58.005 ","End":"03:01.740","Text":"We were told that our sales were 324 during the year,"},{"Start":"03:01.740 ","End":"03:07.264","Text":"so the contra entry to that 324 would have been to accounts receivable."},{"Start":"03:07.264 ","End":"03:09.299","Text":"We add up the debits,"},{"Start":"03:09.299 ","End":"03:15.765","Text":"424, we take it across to the credit side, 424,"},{"Start":"03:15.765 ","End":"03:26.740","Text":"you subtract your closing balance and that must mean that we had 299 received."},{"Start":"03:31.040 ","End":"03:34.625","Text":"That must mean that we received 299,"},{"Start":"03:34.625 ","End":"03:37.730","Text":"which means we would have debited our bank with"},{"Start":"03:37.730 ","End":"03:44.030","Text":"299 and credited our accounts receivable with 299."},{"Start":"03:44.030 ","End":"03:46.685","Text":"That was the amount that we were looking for,"},{"Start":"03:46.685 ","End":"03:50.645","Text":"the 299, how much did we receive?"},{"Start":"03:50.645 ","End":"03:57.810","Text":"This can be calculated in a lot simpler way by simply following a formula."},{"Start":"03:57.810 ","End":"04:00.220","Text":"Whatever you are given as your revenue,"},{"Start":"04:00.220 ","End":"04:02.950","Text":"so in this example is 324,"},{"Start":"04:02.950 ","End":"04:09.010","Text":"you simply then either subtract the increase in the accounts receivable or"},{"Start":"04:09.010 ","End":"04:14.995","Text":"you add a decrease in accounts receivable depending on which way it went."},{"Start":"04:14.995 ","End":"04:20.020","Text":"In this example here we can see we\u0027ve got a change in accounts receivable of 25."},{"Start":"04:20.020 ","End":"04:23.485","Text":"It was 100 and became 125."},{"Start":"04:23.485 ","End":"04:28.285","Text":"That is an increase in accounts receivable."},{"Start":"04:28.285 ","End":"04:31.570","Text":"That means if it\u0027s an increase in accounts receivable,"},{"Start":"04:31.570 ","End":"04:33.890","Text":"we must subtract it."},{"Start":"04:34.350 ","End":"04:38.920","Text":"You can see this format of your calculation is a lot less"},{"Start":"04:38.920 ","End":"04:44.795","Text":"writing than perhaps this one or this one."},{"Start":"04:44.795 ","End":"04:47.450","Text":"But for you to not make a careless mistake,"},{"Start":"04:47.450 ","End":"04:51.230","Text":"you really need to understand your ledger accounts,"},{"Start":"04:51.230 ","End":"04:57.035","Text":"whether you set your ledger account out in a T-account format or in a vertical format."},{"Start":"04:57.035 ","End":"05:00.620","Text":"You need to understand the journal entries that are being"},{"Start":"05:00.620 ","End":"05:05.830","Text":"processed in your ledgers to be able to calculate that without making a careless mistake."},{"Start":"05:05.830 ","End":"05:11.350","Text":"We now put that into our cash flow statement for the year ending 31st December 20X2,"},{"Start":"05:11.350 ","End":"05:14.875","Text":"cash received from customers, 299."},{"Start":"05:14.875 ","End":"05:22.970","Text":"Your calculations could have simply been to show that is a 25 increase"},{"Start":"05:22.970 ","End":"05:32.615","Text":"and we simply say the sales is 324 minus the change in the accounts receivable,"},{"Start":"05:32.615 ","End":"05:38.790","Text":"so the increase in accounts receivable of 25."},{"Start":"05:38.990 ","End":"05:45.210","Text":"Now let\u0027s move on to the cash paid to our suppliers."}],"ID":29676},{"Watched":false,"Name":"Statement of Cash Flows - Part 2.1","Duration":"2m 19s","ChapterTopicVideoID":26970,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.760","Text":"Hello and welcome to this series of"},{"Start":"00:02.760 ","End":"00:08.685","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:08.685 ","End":"00:12.344","Text":"In this video, we will learn how to present"},{"Start":"00:12.344 ","End":"00:16.335","Text":"the classification of cash flows between operating,"},{"Start":"00:16.335 ","End":"00:18.795","Text":"investing and financing activities,"},{"Start":"00:18.795 ","End":"00:22.845","Text":"with the focus here on operating activities."},{"Start":"00:22.845 ","End":"00:29.115","Text":"We will firstly have a quick reminder about the structure of the statement of cash flows."},{"Start":"00:29.115 ","End":"00:34.740","Text":"Then look at the nature of cash flows from operating activities."},{"Start":"00:34.740 ","End":"00:39.770","Text":"In other words, what type of transactions lead"},{"Start":"00:39.770 ","End":"00:45.410","Text":"to cash flows both in and out from operating activities?"},{"Start":"00:45.410 ","End":"00:49.160","Text":"We will learn about 2 methods for"},{"Start":"00:49.160 ","End":"00:54.035","Text":"preparing the cash-flow from operating activities section."},{"Start":"00:54.035 ","End":"01:01.640","Text":"There is what is called the direct method and also a method called the indirect method."},{"Start":"01:01.640 ","End":"01:06.830","Text":"Looking again at the structure of the statement of cash flow and relating"},{"Start":"01:06.830 ","End":"01:12.015","Text":"this to the previously mentioned direct and indirect methods,"},{"Start":"01:12.015 ","End":"01:15.874","Text":"it is important to appreciate that that distinction"},{"Start":"01:15.874 ","End":"01:20.330","Text":"between the direct and the indirect methods of"},{"Start":"01:20.330 ","End":"01:23.730","Text":"preparing the statement of cash flows is only"},{"Start":"01:23.730 ","End":"01:29.405","Text":"applicable to the cash flows from operating activities section."},{"Start":"01:29.405 ","End":"01:31.310","Text":"When it comes to preparing"},{"Start":"01:31.310 ","End":"01:36.560","Text":"the investing activities section and the financing activities section,"},{"Start":"01:36.560 ","End":"01:39.440","Text":"no such distinction exists."},{"Start":"01:39.440 ","End":"01:42.470","Text":"In other words, we\u0027re looking at the whole statement of"},{"Start":"01:42.470 ","End":"01:47.525","Text":"cash flows prepared under firstly, the direct method."},{"Start":"01:47.525 ","End":"01:54.995","Text":"There will be a specific direct method application for the operating activities section,"},{"Start":"01:54.995 ","End":"02:00.305","Text":"followed by a standard preparation for the investing and financing activities."},{"Start":"02:00.305 ","End":"02:05.100","Text":"However, looking at the indirect method for the statement of cash flows,"},{"Start":"02:05.100 ","End":"02:08.510","Text":"there would be a specific presentation, again,"},{"Start":"02:08.510 ","End":"02:10.730","Text":"for the operating activity section,"},{"Start":"02:10.730 ","End":"02:13.550","Text":"followed by the same presentation for"},{"Start":"02:13.550 ","End":"02:20.070","Text":"the investing and financing activity sections as you saw for the direct method."}],"ID":29677},{"Watched":false,"Name":"Statement of Cash Flows - Part 2.2","Duration":"1m 53s","ChapterTopicVideoID":26971,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.970","Text":"Hello. Welcome to this series of"},{"Start":"00:02.970 ","End":"00:08.910","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:08.910 ","End":"00:11.490","Text":"In the series of videos we will discuss"},{"Start":"00:11.490 ","End":"00:16.650","Text":"the presentation or the classification of cash flows between operating,"},{"Start":"00:16.650 ","End":"00:22.995","Text":"investing, and financing activities here focusing on operating activities."},{"Start":"00:22.995 ","End":"00:28.684","Text":"We start off with the nature of cash flows from operating activities,"},{"Start":"00:28.684 ","End":"00:31.335","Text":"so what then are operating activities?"},{"Start":"00:31.335 ","End":"00:33.190","Text":"As the name implies,"},{"Start":"00:33.190 ","End":"00:40.190","Text":"operating activities and the cash flow from operating activities refers to the cash"},{"Start":"00:40.190 ","End":"00:43.310","Text":"received or paid from the main or"},{"Start":"00:43.310 ","End":"00:48.305","Text":"the core revenue-producing activities of the enterprise."},{"Start":"00:48.305 ","End":"00:50.960","Text":"For example included in here,"},{"Start":"00:50.960 ","End":"00:54.920","Text":"whether we\u0027re looking at the direct or indirect method,"},{"Start":"00:54.920 ","End":"00:59.320","Text":"will be the effect of cash received from the enterprises\u0027 customers,"},{"Start":"00:59.320 ","End":"01:02.555","Text":"cash paid to the suppliers of the enterprise,"},{"Start":"01:02.555 ","End":"01:05.293","Text":"both for goods for resale,"},{"Start":"01:05.293 ","End":"01:12.695","Text":"and also for all other operating expenses including salaries or taxes paid in cash,"},{"Start":"01:12.695 ","End":"01:17.030","Text":"and also any interest received or paid in cash."},{"Start":"01:17.030 ","End":"01:20.585","Text":"Now you will see in later videos that there are"},{"Start":"01:20.585 ","End":"01:26.430","Text":"other presentation alternatives available for the interest received or the interest paid."},{"Start":"01:26.430 ","End":"01:30.020","Text":"The interest received could be reported as"},{"Start":"01:30.020 ","End":"01:35.510","Text":"a cash flow from investing activities because investment upon which"},{"Start":"01:35.510 ","End":"01:37.400","Text":"the interest is received is"},{"Start":"01:37.400 ","End":"01:42.320","Text":"an investing activity and the interest paid could be included as"},{"Start":"01:42.320 ","End":"01:45.586","Text":"a cash flow from financing activities"},{"Start":"01:45.586 ","End":"01:50.085","Text":"because any interest paid would be paid on borrowings,"},{"Start":"01:50.085 ","End":"01:54.690","Text":"and borrowings is a financing activity."}],"ID":29678},{"Watched":false,"Name":"Statement of Cash Flows - Part 2.3","Duration":"4m 18s","ChapterTopicVideoID":26972,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.730","Text":"Hello and welcome to this series of"},{"Start":"00:02.730 ","End":"00:08.395","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:08.395 ","End":"00:13.380","Text":"In this section we continue the focus on operating activities."},{"Start":"00:13.380 ","End":"00:20.235","Text":"There are 2 methods available to calculate the cash flow from operating activities."},{"Start":"00:20.235 ","End":"00:24.495","Text":"It is important for you to note that these 2 methods apply"},{"Start":"00:24.495 ","End":"00:30.045","Text":"only to the operating activities section of the statement of cash flows."},{"Start":"00:30.045 ","End":"00:36.060","Text":"When we move on to the investing activities section and the financing activities section,"},{"Start":"00:36.060 ","End":"00:41.390","Text":"there\u0027s only one method available which in fact has got nothing to"},{"Start":"00:41.390 ","End":"00:47.900","Text":"do with what we will now call the direct method and the indirect method."},{"Start":"00:47.900 ","End":"00:49.655","Text":"As I\u0027ve just mentioned,"},{"Start":"00:49.655 ","End":"00:53.990","Text":"the 2 methods available to calculate the cash flows from"},{"Start":"00:53.990 ","End":"01:01.050","Text":"operating activities specifically are the direct method and the indirect method."},{"Start":"01:01.050 ","End":"01:07.160","Text":"The number which you will arrive at for the cash flow from operations,"},{"Start":"01:07.160 ","End":"01:15.140","Text":"you will see will be the same when using either the direct method or the indirect method."},{"Start":"01:15.140 ","End":"01:19.610","Text":"Before we examine the computations in detail required to"},{"Start":"01:19.610 ","End":"01:24.686","Text":"compute the cash flows under both the direct and indirect methods,"},{"Start":"01:24.686 ","End":"01:27.800","Text":"it is worthwhile comparing the 2 methods in"},{"Start":"01:27.800 ","End":"01:32.280","Text":"principle to see how they differ from one another."},{"Start":"01:33.560 ","End":"01:37.790","Text":"Starting of with the direct method. The direct method as the name implies,"},{"Start":"01:37.790 ","End":"01:41.690","Text":"looks at the cash received directly relating to"},{"Start":"01:41.690 ","End":"01:47.855","Text":"operations and the cash paid directly relating to operations."},{"Start":"01:47.855 ","End":"01:51.380","Text":"The way it is set out is to start off with"},{"Start":"01:51.380 ","End":"01:56.750","Text":"a number which is called the cash received from customers,"},{"Start":"01:56.750 ","End":"02:03.170","Text":"that includes all cash received from all the businesses customers during the period."},{"Start":"02:03.170 ","End":"02:09.650","Text":"From that we subtract the cash paid this time to the suppliers of"},{"Start":"02:09.650 ","End":"02:13.280","Text":"the business and also the cash paid to"},{"Start":"02:13.280 ","End":"02:17.225","Text":"the employees of the business clearly for salaries."},{"Start":"02:17.225 ","End":"02:22.430","Text":"We\u0027ll explain more about this in the next video presentation."},{"Start":"02:22.430 ","End":"02:30.830","Text":"The subtotal of these 2 line items is the cash flow from operations."},{"Start":"02:30.830 ","End":"02:35.180","Text":"Now note that it\u0027s called the cash flow from"},{"Start":"02:35.180 ","End":"02:40.685","Text":"operations and not the cash flow from operating activity."},{"Start":"02:40.685 ","End":"02:45.710","Text":"There are some further adjustments we will have to make to convert"},{"Start":"02:45.710 ","End":"02:50.795","Text":"the cash flow from operations to the cash flow from operating activities."},{"Start":"02:50.795 ","End":"02:55.685","Text":"Moving then to the indirect method as the name implies,"},{"Start":"02:55.685 ","End":"03:01.325","Text":"the cash flow from operations is calculated indirectly."},{"Start":"03:01.325 ","End":"03:06.950","Text":"Indirectly means we are starting with the profits;"},{"Start":"03:06.950 ","End":"03:13.100","Text":"the accrual profit, and note that the accrual based profit from the income statement."},{"Start":"03:13.100 ","End":"03:19.595","Text":"To this number we adjust for non-cash items,"},{"Start":"03:19.595 ","End":"03:22.970","Text":"and they are going to be a number of"},{"Start":"03:22.970 ","End":"03:28.415","Text":"non-cash items included in the calculation of the accrual-based profit."},{"Start":"03:28.415 ","End":"03:32.668","Text":"This could be as we said a plus or a minus,"},{"Start":"03:32.668 ","End":"03:39.395","Text":"and we also adjust for any changes in what\u0027s called the working capital items."},{"Start":"03:39.395 ","End":"03:42.320","Text":"Now you should know working capital refers"},{"Start":"03:42.320 ","End":"03:46.095","Text":"to the current assets and the current liabilities."},{"Start":"03:46.095 ","End":"03:51.238","Text":"Again, we\u0027ll learn more about this in a subsequent presentation,"},{"Start":"03:51.238 ","End":"03:58.055","Text":"but here we\u0027ll also end up add and subtracting or adding any working capital adjustment."},{"Start":"03:58.055 ","End":"04:02.780","Text":"What\u0027s important just to understand at this point is it that the number we arrive at over"},{"Start":"04:02.780 ","End":"04:08.600","Text":"here will be the cash flow from operations."},{"Start":"04:08.600 ","End":"04:13.580","Text":"This cash flow from operations is the same number whether"},{"Start":"04:13.580 ","End":"04:19.320","Text":"we\u0027re using the direct method or the indirect method."}],"ID":29679},{"Watched":false,"Name":"Statement of Cash Flows - Part 2.4","Duration":"15m 53s","ChapterTopicVideoID":26973,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.550","Text":"Hello. Welcome to this series of"},{"Start":"00:02.550 ","End":"00:08.295","Text":"video presentations on the statement of cashflows brought to you by Proprep."},{"Start":"00:08.295 ","End":"00:09.945","Text":"In the section,"},{"Start":"00:09.945 ","End":"00:13.380","Text":"we are looking at the operating activities,"},{"Start":"00:13.380 ","End":"00:15.735","Text":"part of the statement of cash flows,"},{"Start":"00:15.735 ","End":"00:17.610","Text":"and in particular here,"},{"Start":"00:17.610 ","End":"00:21.480","Text":"we will look in detail at the calculation of"},{"Start":"00:21.480 ","End":"00:27.045","Text":"the cash flows from operating activities using the direct method."},{"Start":"00:27.045 ","End":"00:29.204","Text":"As we have already seen,"},{"Start":"00:29.204 ","End":"00:35.434","Text":"the major classes of cash receipts and cash payments are disclosed separately."},{"Start":"00:35.434 ","End":"00:38.450","Text":"We now look at an example of"},{"Start":"00:38.450 ","End":"00:43.175","Text":"the group statement of cash flows from the company AngloGoldAshanti."},{"Start":"00:43.175 ","End":"00:49.460","Text":"Remember we are looking at the section of the cash flows from operating activities."},{"Start":"00:49.460 ","End":"00:55.054","Text":"Here\u0027s the heading for this section and we will end up with the line item,"},{"Start":"00:55.054 ","End":"00:59.690","Text":"net cash inflow from operating activities."},{"Start":"00:59.690 ","End":"01:05.615","Text":"Ignore for a moment the reference to discontinued operations."},{"Start":"01:05.615 ","End":"01:09.065","Text":"Now before we look at the component parts of this,"},{"Start":"01:09.065 ","End":"01:13.085","Text":"remember as well that we previously discussed,"},{"Start":"01:13.085 ","End":"01:17.870","Text":"that there is also a subheading on the statement of cash flows within"},{"Start":"01:17.870 ","End":"01:23.360","Text":"the operating activity section called the cash generated from operation."},{"Start":"01:23.360 ","End":"01:28.100","Text":"That cash from operations is arrived at by looking at"},{"Start":"01:28.100 ","End":"01:34.639","Text":"the cash receipts from customers and subtracting from the cash receipts from customers,"},{"Start":"01:34.639 ","End":"01:37.175","Text":"the cash payments to suppliers,"},{"Start":"01:37.175 ","End":"01:40.175","Text":"and also to employee."},{"Start":"01:40.175 ","End":"01:42.440","Text":"Now as previously mentioned,"},{"Start":"01:42.440 ","End":"01:46.130","Text":"you see here the cash from operations is"},{"Start":"01:46.130 ","End":"01:50.615","Text":"a different number to the cash from operating activities."},{"Start":"01:50.615 ","End":"01:53.255","Text":"There will be a couple more adjustments,"},{"Start":"01:53.255 ","End":"01:58.235","Text":"such as dividends and tax to move from"},{"Start":"01:58.235 ","End":"02:04.495","Text":"the cash from operations to the broader cash from operating activities."},{"Start":"02:04.495 ","End":"02:09.020","Text":"Turning to the detailed calculation of the cash received from"},{"Start":"02:09.020 ","End":"02:15.350","Text":"customers under the direct method and assuming for the moment no unearned revenue,"},{"Start":"02:15.350 ","End":"02:21.860","Text":"we can compute the cash received from customers by looking at the following formula."},{"Start":"02:21.860 ","End":"02:26.200","Text":"If we take the opening balance in trade receivables,"},{"Start":"02:26.200 ","End":"02:28.985","Text":"and we add on the credit sales to"},{"Start":"02:28.985 ","End":"02:33.830","Text":"customers and less the cash received from those customers,"},{"Start":"02:33.830 ","End":"02:38.030","Text":"that gives us the closing balance of trade receivables."},{"Start":"02:38.030 ","End":"02:40.325","Text":"Putting some numbers to this."},{"Start":"02:40.325 ","End":"02:45.260","Text":"If we assume the opening balance in trade receivables is 100,"},{"Start":"02:45.260 ","End":"02:51.275","Text":"and during the period the business sold goods to customers for 900."},{"Start":"02:51.275 ","End":"02:56.390","Text":"Clearly, customers owe the business an amount of 1,000."},{"Start":"02:56.390 ","End":"03:03.990","Text":"If then the closing balance of trade receivables is 150,"},{"Start":"03:03.990 ","End":"03:11.285","Text":"we can compute the cash received from customers to clearly be an amount of 850."},{"Start":"03:11.285 ","End":"03:15.410","Text":"This what you\u0027re seeing here is in fact no different to"},{"Start":"03:15.410 ","End":"03:19.940","Text":"what you would see in the trade receivables ledger account."},{"Start":"03:19.940 ","End":"03:25.415","Text":"We can now take the numbers from the question and start computing"},{"Start":"03:25.415 ","End":"03:28.355","Text":"the solution to try and compute"},{"Start":"03:28.355 ","End":"03:31.805","Text":"the total cash collected from customers during the period."},{"Start":"03:31.805 ","End":"03:35.810","Text":"Focusing first on the trade receiver,"},{"Start":"03:35.810 ","End":"03:40.860","Text":"we know that the opening balance in trade receivables, in other words,"},{"Start":"03:40.860 ","End":"03:47.120","Text":"the amount customers owed us at the beginning of the period is 8,880."},{"Start":"03:47.120 ","End":"03:51.305","Text":"We know the closing balance in trade receivables,"},{"Start":"03:51.305 ","End":"03:58.280","Text":"the amounts customers owed the business at the end of the period is 6,700."},{"Start":"03:58.280 ","End":"04:00.875","Text":"Now in this particular question,"},{"Start":"04:00.875 ","End":"04:05.525","Text":"we are told that there were no further credit sales in the period."},{"Start":"04:05.525 ","End":"04:10.100","Text":"Now remembering that the opening balance of receivables is"},{"Start":"04:10.100 ","End":"04:15.125","Text":"an asset and also clearly the closing balance of receivables is an asset."},{"Start":"04:15.125 ","End":"04:24.160","Text":"The only way this asset has decreased from 8,880 at the beginning to 6,700 at the end,"},{"Start":"04:24.160 ","End":"04:29.950","Text":"with no further credit sales is that cash must have been received from"},{"Start":"04:29.950 ","End":"04:36.910","Text":"these customers in the amount of 2,180 during the period."},{"Start":"04:36.910 ","End":"04:40.180","Text":"Turning then to the unearned revenue,"},{"Start":"04:40.180 ","End":"04:46.750","Text":"you\u0027re told that the opening balance in unearned revenue is 2,750,"},{"Start":"04:46.750 ","End":"04:56.635","Text":"and the closing balance in unearned revenue is an amount of 3,920."},{"Start":"04:56.635 ","End":"04:58.450","Text":"Now bearing in mind again,"},{"Start":"04:58.450 ","End":"05:08.075","Text":"remember the unearned revenue is a liability balance."},{"Start":"05:08.075 ","End":"05:10.700","Text":"It is the obligation of the business to"},{"Start":"05:10.700 ","End":"05:15.245","Text":"provide goods or services to customers in the future."},{"Start":"05:15.245 ","End":"05:17.795","Text":"In this particular example,"},{"Start":"05:17.795 ","End":"05:21.290","Text":"we are told that the only revenue recognized during"},{"Start":"05:21.290 ","End":"05:25.625","Text":"the current period was the amount of that opening balance."},{"Start":"05:25.625 ","End":"05:33.065","Text":"The 2,750 was recognized as income or revenue during the period."},{"Start":"05:33.065 ","End":"05:37.415","Text":"Therefore, how much cash must have been received"},{"Start":"05:37.415 ","End":"05:41.990","Text":"from customers in advance in the current period."},{"Start":"05:41.990 ","End":"05:47.225","Text":"That must be the number of 3,920."},{"Start":"05:47.225 ","End":"05:50.690","Text":"We have now computed the cash received from"},{"Start":"05:50.690 ","End":"05:55.495","Text":"credit customers paying the business for goods previously purchased on credit."},{"Start":"05:55.495 ","End":"06:00.020","Text":"We have also computed the cash received in advance from"},{"Start":"06:00.020 ","End":"06:05.945","Text":"customers paying in advance for goods and services to be received in a future period."},{"Start":"06:05.945 ","End":"06:09.860","Text":"We now need to compute the cash sales for the period."},{"Start":"06:09.860 ","End":"06:14.345","Text":"We are told that there are 0 credit sales in this particular example."},{"Start":"06:14.345 ","End":"06:22.070","Text":"We also know that the amount of the unearned revenue recognized in the current period,"},{"Start":"06:22.070 ","End":"06:28.355","Text":"we\u0027ve just computed that is an amount of 2,750."},{"Start":"06:28.355 ","End":"06:36.485","Text":"We\u0027re also told that the total sales in the period amount to 101,000."},{"Start":"06:36.485 ","End":"06:41.075","Text":"The missing number therefore must be the cash sales in the period."},{"Start":"06:41.075 ","End":"06:45.680","Text":"The cash sales amount, therefore, 98,250."},{"Start":"06:45.680 ","End":"06:52.190","Text":"To summarize how much cash was collected from customers"},{"Start":"06:52.190 ","End":"06:58.895","Text":"in total during the period we\u0027ve computed the cash received from credit customers."},{"Start":"06:58.895 ","End":"07:02.480","Text":"We know is 2,180."},{"Start":"07:02.480 ","End":"07:09.095","Text":"We know the cash received in advance from customers paying us for goods and supplies."},{"Start":"07:09.095 ","End":"07:14.120","Text":"We know the cash received in advance from customers paying us for"},{"Start":"07:14.120 ","End":"07:21.035","Text":"goods or services to be provided in future periods is 3,920."},{"Start":"07:21.035 ","End":"07:25.850","Text":"We know the cash sales is 98,250."},{"Start":"07:25.850 ","End":"07:29.510","Text":"Therefore, the total cash received from customers during"},{"Start":"07:29.510 ","End":"07:37.980","Text":"the period is the 2,180 plus the 3,920,"},{"Start":"07:37.980 ","End":"07:43.515","Text":"plus the cash sales of 98,250,"},{"Start":"07:43.515 ","End":"07:50.170","Text":"which equals a total cash received of 104,350."},{"Start":"07:51.000 ","End":"07:54.940","Text":"Note the total cash received is in fact"},{"Start":"07:54.940 ","End":"08:00.370","Text":"a different number to the amount of sales for the period."},{"Start":"08:00.370 ","End":"08:05.425","Text":"We now turn to the calculation of the cash paid to suppliers."},{"Start":"08:05.425 ","End":"08:10.570","Text":"This is specifically the cash paid to suppliers of goods for resale."},{"Start":"08:10.570 ","End":"08:15.910","Text":"We use the formula of looking at the opening balance in trade payables,"},{"Start":"08:15.910 ","End":"08:18.700","Text":"a liability account, in other words,"},{"Start":"08:18.700 ","End":"08:22.780","Text":"the amount owed to suppliers at the beginning of the period,"},{"Start":"08:22.780 ","End":"08:27.670","Text":"and we also have to look at the closing balance in trade payables."},{"Start":"08:27.670 ","End":"08:32.560","Text":"In other words, the amount paid to suppliers at the end of the period."},{"Start":"08:32.560 ","End":"08:38.425","Text":"If we then add on the purchases to the amount of the opening balance,"},{"Start":"08:38.425 ","End":"08:41.185","Text":"and we know the amount of the closing balance,"},{"Start":"08:41.185 ","End":"08:47.920","Text":"we can then deduce the amount of the cash payments made to suppliers during the period."},{"Start":"08:47.920 ","End":"08:51.310","Text":"However, before we can compute the amount of"},{"Start":"08:51.310 ","End":"08:55.330","Text":"the cash payments to suppliers of goods for resale,"},{"Start":"08:55.330 ","End":"09:00.280","Text":"we need to determine the amount of the purchases during the period."},{"Start":"09:00.280 ","End":"09:08.530","Text":"Purchases are determined using the familiar formula of opening inventory plus purchases,"},{"Start":"09:08.530 ","End":"09:13.389","Text":"this closing inventory equals the cost of sales."},{"Start":"09:13.389 ","End":"09:22.630","Text":"If we assume this entity had an opening inventory of 25 and a closing inventory of 20,"},{"Start":"09:22.630 ","End":"09:29.950","Text":"and in addition, the cost of sales from the income statement is an amount of 505,"},{"Start":"09:29.950 ","End":"09:36.610","Text":"we can therefore compute the amount of the purchases on credit during the period,"},{"Start":"09:36.610 ","End":"09:38.425","Text":"which is an amount of,"},{"Start":"09:38.425 ","End":"09:41.095","Text":"in this case 500."},{"Start":"09:41.095 ","End":"09:45.340","Text":"We can take the 500 and start to plug it in to"},{"Start":"09:45.340 ","End":"09:50.545","Text":"the formula above since we know the purchases number is 500."},{"Start":"09:50.545 ","End":"09:54.295","Text":"If we assume the opening balance and trade payables,"},{"Start":"09:54.295 ","End":"09:57.775","Text":"remember a liability is 50,"},{"Start":"09:57.775 ","End":"10:00.835","Text":"and the closing balance and trade payables,"},{"Start":"10:00.835 ","End":"10:03.910","Text":"also liability is 40,"},{"Start":"10:03.910 ","End":"10:09.790","Text":"we can now determine the amount of the cash paid to suppliers during the period."},{"Start":"10:09.790 ","End":"10:16.690","Text":"This amount in this situation"},{"Start":"10:16.690 ","End":"10:22.600","Text":"amounts to 510 cash payments to supply."},{"Start":"10:22.600 ","End":"10:30.580","Text":"Let us now take a look at a formal example of the calculation of cash paid to suppliers."},{"Start":"10:30.580 ","End":"10:33.475","Text":"This particular company, Summer Incorporated,"},{"Start":"10:33.475 ","End":"10:39.985","Text":"reports 85,300 cost of sales during the 20X1 year,"},{"Start":"10:39.985 ","End":"10:46.180","Text":"as well as a inventory balance of 3,700 at"},{"Start":"10:46.180 ","End":"10:52.825","Text":"31 December X1 and 4,250 at 31 December X2."},{"Start":"10:52.825 ","End":"10:57.820","Text":"The corresponding amounts for trade payables at 31 December X1 are"},{"Start":"10:57.820 ","End":"11:04.570","Text":"12,600 and at 31 December X2 are 10,100."},{"Start":"11:04.570 ","End":"11:13.615","Text":"The required is to calculate how much cash Summer has paid to suppliers in the 20X2 year."},{"Start":"11:13.615 ","End":"11:17.410","Text":"We now know that the starting point must be to"},{"Start":"11:17.410 ","End":"11:21.025","Text":"compute the amount of the purchases during the period."},{"Start":"11:21.025 ","End":"11:28.750","Text":"In this example, we are given the opening balance in the inventory account of 3,700."},{"Start":"11:28.750 ","End":"11:33.220","Text":"To that we need to add the amount of the purchases during"},{"Start":"11:33.220 ","End":"11:38.335","Text":"the period and then subtract the amount of the closing inventory,"},{"Start":"11:38.335 ","End":"11:46.329","Text":"which we know is 4,250 and that gives us the amount of the cost of sales,"},{"Start":"11:46.329 ","End":"11:51.820","Text":"which we also know in this example to be 85,300."},{"Start":"11:51.820 ","End":"11:59.484","Text":"We can therefore compute the purchases as the missing figure, 3,700 opening inventory,"},{"Start":"11:59.484 ","End":"12:05.450","Text":"add on purchases of 85,850,"},{"Start":"12:06.270 ","End":"12:16.435","Text":"less the closing inventory of 4,250 must give us the cost of sales of 85,300."},{"Start":"12:16.435 ","End":"12:21.310","Text":"We now know the amount of the purchases during the period."},{"Start":"12:21.310 ","End":"12:26.995","Text":"We can then move on to the calculation of the cash paid to suppliers,"},{"Start":"12:26.995 ","End":"12:30.295","Text":"the opening balance in trade payables,"},{"Start":"12:30.295 ","End":"12:33.805","Text":"the amounts that the entity owed to suppliers"},{"Start":"12:33.805 ","End":"12:38.365","Text":"at the beginning of the period is given at 12,600."},{"Start":"12:38.365 ","End":"12:46.255","Text":"We now know the amount of the purchases during the period is 85,850."},{"Start":"12:46.255 ","End":"12:54.640","Text":"Therefore, if this entity owed its suppliers 12,600 at the beginning of the period,"},{"Start":"12:54.640 ","End":"13:01.690","Text":"and it purchased a further 85,850 on credit during the period,"},{"Start":"13:01.690 ","End":"13:08.845","Text":"and it owes its suppliers an amounts of 10,100,"},{"Start":"13:08.845 ","End":"13:15.985","Text":"at the end of the period we can compute the amount of the cash paid to suppliers,"},{"Start":"13:15.985 ","End":"13:22.540","Text":"must be 88,350 during the period."},{"Start":"13:22.540 ","End":"13:26.245","Text":"What you have seen in the previous calculations,"},{"Start":"13:26.245 ","End":"13:31.810","Text":"is that the amount of the cash paid is determined by linking"},{"Start":"13:31.810 ","End":"13:38.890","Text":"the relevant balance sheet accounts with the corresponding income statement amounts."},{"Start":"13:38.890 ","End":"13:42.805","Text":"For example, looking at the salaries paid,"},{"Start":"13:42.805 ","End":"13:46.750","Text":"if we take the opening balance and salaries payable,"},{"Start":"13:46.750 ","End":"13:49.510","Text":"which we know is a liability account,"},{"Start":"13:49.510 ","End":"13:54.355","Text":"and we add on the amount of the salaries expense during the period,"},{"Start":"13:54.355 ","End":"13:57.925","Text":"and then subtract salaries paid in cash,"},{"Start":"13:57.925 ","End":"14:03.610","Text":"we will end up with the closing balance in the salaries payable accounts."},{"Start":"14:03.610 ","End":"14:07.240","Text":"Therefore, if the opening balance in salaries"},{"Start":"14:07.240 ","End":"14:11.200","Text":"payable at the beginning of the period is an amount of 10,"},{"Start":"14:11.200 ","End":"14:17.575","Text":"and the salaries expense on the income statement is an amount of 100,"},{"Start":"14:17.575 ","End":"14:25.090","Text":"and the closing balance of the amount paid for salaries is an amount of 15,"},{"Start":"14:25.090 ","End":"14:28.450","Text":"we can therefore deduce that the salaries paid in"},{"Start":"14:28.450 ","End":"14:33.385","Text":"cash in the period must have been an amount of 95."},{"Start":"14:33.385 ","End":"14:35.740","Text":"The same principle will apply,"},{"Start":"14:35.740 ","End":"14:39.520","Text":"for example, to compute the amount of tax paid."},{"Start":"14:39.520 ","End":"14:44.455","Text":"Now, just note the tax paid is not part of cash flow from operations."},{"Start":"14:44.455 ","End":"14:48.670","Text":"That is in fact computed off to the cash flow from"},{"Start":"14:48.670 ","End":"14:54.385","Text":"operations and in arriving at the cash flow from operating activities."},{"Start":"14:54.385 ","End":"15:01.045","Text":"The opening balance in the tax payable is also a liability account,"},{"Start":"15:01.045 ","End":"15:03.805","Text":"the amount owing to the tax authority,"},{"Start":"15:03.805 ","End":"15:05.965","Text":"as is also the closing balance."},{"Start":"15:05.965 ","End":"15:11.680","Text":"Therefore, if we add on the amount of the tax expense charged,"},{"Start":"15:11.680 ","End":"15:13.555","Text":"the income statement during the period,"},{"Start":"15:13.555 ","End":"15:17.830","Text":"and then take off the amount of tax paid in cash,"},{"Start":"15:17.830 ","End":"15:21.100","Text":"we arrive at the closing balance in tax paid."},{"Start":"15:21.100 ","End":"15:25.090","Text":"Looking at some numbers, if the amount owing to"},{"Start":"15:25.090 ","End":"15:30.535","Text":"the tax authority is an amount of 20 at the beginning of the period,"},{"Start":"15:30.535 ","End":"15:37.480","Text":"and the amount paid to the tax authority is an amount of 15 at the end of the period,"},{"Start":"15:37.480 ","End":"15:43.555","Text":"and the amount of the tax expense charged in the income statement is 100,"},{"Start":"15:43.555 ","End":"15:48.110","Text":"we can therefore compute the amount of the tax paid to"},{"Start":"15:48.110 ","End":"15:54.660","Text":"the tax authority during the period as an amount of 105."}],"ID":29680},{"Watched":false,"Name":"Exercise 2 - BCD - 2A - question page","Duration":"51s","ChapterTopicVideoID":28369,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.795","Text":"Today\u0027s exercise is BCD."},{"Start":"00:03.795 ","End":"00:06.690","Text":"The following are select end-of year balances of"},{"Start":"00:06.690 ","End":"00:10.980","Text":"BCD together with its income statement for 20X2."},{"Start":"00:10.980 ","End":"00:14.520","Text":"Here we have as at 31st December,"},{"Start":"00:14.520 ","End":"00:16.875","Text":"3 line items that will appear in the balance sheet;"},{"Start":"00:16.875 ","End":"00:20.815","Text":"accounts receivable, inventory, and accounts payable."},{"Start":"00:20.815 ","End":"00:26.075","Text":"Then we have the income statement for the company for the year ending 31 December,"},{"Start":"00:26.075 ","End":"00:27.860","Text":"which will be 20X2,"},{"Start":"00:27.860 ","End":"00:30.605","Text":"and its revenues less cost of sales,"},{"Start":"00:30.605 ","End":"00:32.540","Text":"less the depreciation expense,"},{"Start":"00:32.540 ","End":"00:34.540","Text":"giving us the profit for the year."},{"Start":"00:34.540 ","End":"00:36.315","Text":"Let\u0027s look at the required."},{"Start":"00:36.315 ","End":"00:38.435","Text":"Based on the information given to us,"},{"Start":"00:38.435 ","End":"00:43.040","Text":"prepare the section in the cash flow statement that reports the cash"},{"Start":"00:43.040 ","End":"00:48.000","Text":"generated from or used in operating activities,"},{"Start":"00:48.000 ","End":"00:52.110","Text":"and we are to use the direct method to do this."}],"ID":29681},{"Watched":false,"Name":"Exercise 2 - BCD - 2B","Duration":"6m 34s","ChapterTopicVideoID":28370,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.635","Text":"Let\u0027s calculate the cash received from customers first"},{"Start":"00:04.635 ","End":"00:09.465","Text":"because it\u0027s the easiest and also because it\u0027s the first line in our cash flow statement."},{"Start":"00:09.465 ","End":"00:12.345","Text":"In order to calculate the cash received from customers,"},{"Start":"00:12.345 ","End":"00:14.220","Text":"all we need are these 2 accounts,"},{"Start":"00:14.220 ","End":"00:16.350","Text":"the accounts receivable and the revenues,"},{"Start":"00:16.350 ","End":"00:18.495","Text":"or it might have been described as sales."},{"Start":"00:18.495 ","End":"00:22.350","Text":"In this example, we\u0027ve been given 20X1 closing balance and"},{"Start":"00:22.350 ","End":"00:28.980","Text":"20X2 closing balance for the accounts receivable and the revenues only for 20X2,"},{"Start":"00:28.980 ","End":"00:30.420","Text":"we don\u0027t need the revenues for"},{"Start":"00:30.420 ","End":"00:35.040","Text":"20X1 for the purpose of calculating cash received from customers."},{"Start":"00:35.040 ","End":"00:40.140","Text":"Accounts receivable was 125 at the end of 20X1,"},{"Start":"00:40.140 ","End":"00:43.675","Text":"and it\u0027s now 110 at the end of 20X2."},{"Start":"00:43.675 ","End":"00:49.385","Text":"Now remember, the balance at the end of 20X1 is your opening balance in 20X2."},{"Start":"00:49.385 ","End":"00:52.655","Text":"Then we\u0027re given the revenues for 20X2."},{"Start":"00:52.655 ","End":"00:57.755","Text":"Let\u0027s now see how these 2 accounts interact."},{"Start":"00:57.755 ","End":"01:00.395","Text":"We have accounts receivable,"},{"Start":"01:00.395 ","End":"01:04.250","Text":"which is an asset account and because it\u0027s an asset account,"},{"Start":"01:04.250 ","End":"01:10.340","Text":"we know it increases on the debit side and it will decrease on the credit side."},{"Start":"01:10.340 ","End":"01:12.905","Text":"We have our revenue account,"},{"Start":"01:12.905 ","End":"01:14.915","Text":"suggests that it is income,"},{"Start":"01:14.915 ","End":"01:18.500","Text":"and income increases on the credit side."},{"Start":"01:18.500 ","End":"01:22.925","Text":"Then we obviously also going to have the impact,"},{"Start":"01:22.925 ","End":"01:25.025","Text":"which is what we\u0027re ultimately looking for,"},{"Start":"01:25.025 ","End":"01:27.475","Text":"the impact on our bank account."},{"Start":"01:27.475 ","End":"01:30.425","Text":"Let\u0027s plot the information that we\u0027ve been given."},{"Start":"01:30.425 ","End":"01:33.290","Text":"What is the opening balance on our accounts receivable?"},{"Start":"01:33.290 ","End":"01:36.875","Text":"Remember it has an opening balance on the debit side because it\u0027s an asset."},{"Start":"01:36.875 ","End":"01:42.695","Text":"The opening balance in 20X2 is the closing balance at the end of 20X1."},{"Start":"01:42.695 ","End":"01:48.955","Text":"Now our closing balance at the end of 20X2 is 110."},{"Start":"01:48.955 ","End":"01:51.125","Text":"Then we have revenue."},{"Start":"01:51.125 ","End":"01:53.750","Text":"How did that revenue get into books this year?"},{"Start":"01:53.750 ","End":"01:56.525","Text":"Well, that means we would have credited"},{"Start":"01:56.525 ","End":"02:01.835","Text":"the revenue account and we would have debited the accounts receivable."},{"Start":"02:01.835 ","End":"02:05.180","Text":"This is the sales or let\u0027s just call it"},{"Start":"02:05.180 ","End":"02:08.795","Text":"revenue because that\u0027s the account name in the company\u0027s records."},{"Start":"02:08.795 ","End":"02:14.660","Text":"You debit your accounts receivable with the amount of sales or services,"},{"Start":"02:14.660 ","End":"02:18.785","Text":"whatever it is that you\u0027re providing and you credit that revenue account."},{"Start":"02:18.785 ","End":"02:21.410","Text":"Now what we\u0027re looking for is the missing item and"},{"Start":"02:21.410 ","End":"02:24.390","Text":"the missing item is the amount we received."},{"Start":"02:24.390 ","End":"02:28.225","Text":"This is the receipts from our customers."},{"Start":"02:28.225 ","End":"02:32.600","Text":"We would\u0027ve credited the accounts receivable with the amount"},{"Start":"02:32.600 ","End":"02:36.310","Text":"we received and we would have debited that to our bank."},{"Start":"02:36.310 ","End":"02:37.557","Text":"Now, what is that amount?"},{"Start":"02:37.557 ","End":"02:39.365","Text":"We simply balanced it."},{"Start":"02:39.365 ","End":"02:44.225","Text":"We\u0027ve got 449 is the total of those 2 amounts,"},{"Start":"02:44.225 ","End":"02:45.650","Text":"take that across,"},{"Start":"02:45.650 ","End":"02:50.975","Text":"so 449, less a 110 gives us 339."},{"Start":"02:50.975 ","End":"02:53.660","Text":"That means we would have credited accounts receivable with"},{"Start":"02:53.660 ","End":"02:58.050","Text":"339 and debited our bank with 339."},{"Start":"02:58.050 ","End":"03:01.310","Text":"It\u0027s that information here that we\u0027re looking for because"},{"Start":"03:01.310 ","End":"03:06.590","Text":"remember the movement in"},{"Start":"03:06.590 ","End":"03:11.095","Text":"their bank account is ultimately what we\u0027re showing in our cash flow statement."},{"Start":"03:11.095 ","End":"03:14.235","Text":"That\u0027s the receipts from our customers."},{"Start":"03:14.235 ","End":"03:16.849","Text":"Let\u0027s put that into our cash flow statement."},{"Start":"03:16.849 ","End":"03:21.485","Text":"Cash received from customers, 339."},{"Start":"03:21.485 ","End":"03:25.775","Text":"Now we can calculate that 339 using a formula,"},{"Start":"03:25.775 ","End":"03:29.390","Text":"but I do recommend that you first understand what I\u0027ve just shown"},{"Start":"03:29.390 ","End":"03:33.125","Text":"you using the ledger accounts before you attempt to using a formula,"},{"Start":"03:33.125 ","End":"03:34.985","Text":"because the formula, as I say,"},{"Start":"03:34.985 ","End":"03:38.180","Text":"is always fraught with the potential for careless mistakes if"},{"Start":"03:38.180 ","End":"03:42.325","Text":"you don\u0027t understand what it is that you\u0027re doing."},{"Start":"03:42.325 ","End":"03:45.320","Text":"Let\u0027s have a look at that formula method."},{"Start":"03:45.320 ","End":"03:50.630","Text":"The formula method to calculate that same 339 entails taking"},{"Start":"03:50.630 ","End":"03:56.635","Text":"the revenue or the sales and adjusting it for the change in the accounts receivable."},{"Start":"03:56.635 ","End":"04:00.995","Text":"That change in accounts receivable is simply looking at the difference between"},{"Start":"04:00.995 ","End":"04:03.770","Text":"the opening balance and the closing balance in that"},{"Start":"04:03.770 ","End":"04:06.995","Text":"accounts receivable account. Let\u0027s have a look."},{"Start":"04:06.995 ","End":"04:10.320","Text":"We\u0027re going to pretend we don\u0027t know what the cash received from customers is and"},{"Start":"04:10.320 ","End":"04:13.910","Text":"we\u0027re starting all over again using the formula method."},{"Start":"04:13.910 ","End":"04:16.310","Text":"Revenues is where we begin."},{"Start":"04:16.310 ","End":"04:18.770","Text":"What are the revenues that this company has earned?"},{"Start":"04:18.770 ","End":"04:20.795","Text":"Revenues is 324,"},{"Start":"04:20.795 ","End":"04:23.675","Text":"so we put that into our formula 324."},{"Start":"04:23.675 ","End":"04:27.394","Text":"Then we make the adjustment for the change in the accounts receivable."},{"Start":"04:27.394 ","End":"04:31.955","Text":"The accounts receivable at the end of 20X1 is 125."},{"Start":"04:31.955 ","End":"04:37.100","Text":"That\u0027s opening balance in 20X2 and at the end of 20X2,"},{"Start":"04:37.100 ","End":"04:40.340","Text":"the balances dropped to 110."},{"Start":"04:40.340 ","End":"04:43.785","Text":"The change is a 15 decrease."},{"Start":"04:43.785 ","End":"04:51.290","Text":"Now, we\u0027ve already got revenues of 324, this 324."},{"Start":"04:51.290 ","End":"04:54.875","Text":"Now, let\u0027s say we assume that was received in cash."},{"Start":"04:54.875 ","End":"04:56.465","Text":"Now we\u0027re looking at the accounts"},{"Start":"04:56.465 ","End":"05:00.020","Text":"receivable and we\u0027re saying at the beginning of the year,"},{"Start":"05:00.020 ","End":"05:04.595","Text":"we had an amount of 125 owed to us by our customers."},{"Start":"05:04.595 ","End":"05:05.930","Text":"By the end of the year,"},{"Start":"05:05.930 ","End":"05:09.665","Text":"it had not grown by 324."},{"Start":"05:09.665 ","End":"05:15.530","Text":"In other words, we can assume that the 324 had been received in cash."},{"Start":"05:15.530 ","End":"05:20.795","Text":"Instead, that 125 had dropped to 110."},{"Start":"05:20.795 ","End":"05:26.030","Text":"Over and above the 324 revenue for the current year,"},{"Start":"05:26.030 ","End":"05:30.675","Text":"which we\u0027re going to first of all assume was received in cash."},{"Start":"05:30.675 ","End":"05:32.795","Text":"Over and above that cash amount,"},{"Start":"05:32.795 ","End":"05:36.770","Text":"our accounts receivable has actually diminished."},{"Start":"05:36.770 ","End":"05:40.340","Text":"That means our customers owed us 125 for"},{"Start":"05:40.340 ","End":"05:49.870","Text":"last year\u0027s revenue or sales and they\u0027ve paid off a portion of that this year."},{"Start":"05:49.870 ","End":"05:56.390","Text":"Over and above the 324 that we received from the sales in the current year,"},{"Start":"05:56.390 ","End":"06:02.540","Text":"we\u0027ve also received an extra 15 relating to amounts that the customers owed"},{"Start":"06:02.540 ","End":"06:10.205","Text":"us in the prior year so we\u0027re going to add the decrease in accounts receivable."},{"Start":"06:10.205 ","End":"06:14.390","Text":"We sold 324 this year and received that in cash."},{"Start":"06:14.390 ","End":"06:19.340","Text":"Now in addition, we\u0027re receiving 15 from sales that were made in"},{"Start":"06:19.340 ","End":"06:24.970","Text":"prior years that have now been received in the current year."},{"Start":"06:24.970 ","End":"06:28.560","Text":"That\u0027s where we get to the 339."},{"Start":"06:28.560 ","End":"06:33.900","Text":"Now we move on to the next line which is cash paid to suppliers."}],"ID":29682},{"Watched":false,"Name":"Exercise 2 - BCD - 2C","Duration":"9m 16s","ChapterTopicVideoID":28371,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.190","Text":"Now we\u0027re going to move on to the second part,"},{"Start":"00:02.190 ","End":"00:05.670","Text":"which is to calculate the cash paid to suppliers."},{"Start":"00:05.670 ","End":"00:08.415","Text":"For this, we simply need the inventory,"},{"Start":"00:08.415 ","End":"00:12.000","Text":"the accounts payable, and the cost of sales accounts."},{"Start":"00:12.000 ","End":"00:14.400","Text":"What have we been given here?"},{"Start":"00:14.400 ","End":"00:19.005","Text":"We\u0027ve been given the closing balance at the end of 20X1 and"},{"Start":"00:19.005 ","End":"00:25.005","Text":"closing balance at the end of 20X2 for the inventory and the accounts payable."},{"Start":"00:25.005 ","End":"00:29.130","Text":"Then we\u0027ve been given cost of sales for 20X2."},{"Start":"00:29.130 ","End":"00:33.310","Text":"Please note that in this question we were also given depreciation."},{"Start":"00:33.310 ","End":"00:35.585","Text":"This was what we call a red herring."},{"Start":"00:35.585 ","End":"00:38.075","Text":"It was there purely to confuse you."},{"Start":"00:38.075 ","End":"00:44.095","Text":"The depreciation has nothing to do with the calculation of our cash paid to suppliers."},{"Start":"00:44.095 ","End":"00:49.775","Text":"With that out of the way, let\u0027s have a look to see how these 3 accounts interact."},{"Start":"00:49.775 ","End":"00:53.015","Text":"We have inventory, which is an asset."},{"Start":"00:53.015 ","End":"00:55.595","Text":"Assets get bigger on the debit side."},{"Start":"00:55.595 ","End":"00:59.015","Text":"We then have accounts payable,"},{"Start":"00:59.015 ","End":"01:04.420","Text":"and that\u0027s the liability and liabilities get bigger on the credit side."},{"Start":"01:04.420 ","End":"01:08.179","Text":"Then we have our cost of sales,"},{"Start":"01:08.179 ","End":"01:09.775","Text":"which is an expense,"},{"Start":"01:09.775 ","End":"01:11.780","Text":"and these get bigger on the debit side."},{"Start":"01:11.780 ","End":"01:13.790","Text":"Then ultimately we\u0027re going to have,"},{"Start":"01:13.790 ","End":"01:15.470","Text":"let\u0027s pop it down here,"},{"Start":"01:15.470 ","End":"01:19.250","Text":"the impact of these 3 accounts on our bank."},{"Start":"01:19.250 ","End":"01:22.760","Text":"That\u0027s ultimately what we\u0027re looking for because just remember that"},{"Start":"01:22.760 ","End":"01:28.175","Text":"the bank is where we get the source information for our cash flow statement."},{"Start":"01:28.175 ","End":"01:34.400","Text":"Our opening balance for our inventory is the closing balance at the end of 20X1."},{"Start":"01:34.400 ","End":"01:37.730","Text":"Opening balance 55, then"},{"Start":"01:37.730 ","End":"01:42.365","Text":"our closing balance in our inventory is the 20X2 closing balance."},{"Start":"01:42.365 ","End":"01:44.975","Text":"Now, of our inventory,"},{"Start":"01:44.975 ","End":"01:46.220","Text":"some of it gets sold,"},{"Start":"01:46.220 ","End":"01:52.450","Text":"so our cost of sales of 247 needs to be plotted into our inventory account."},{"Start":"01:52.450 ","End":"01:56.615","Text":"If we sell any of our inventory it comes out of our inventory."},{"Start":"01:56.615 ","End":"02:00.515","Text":"It reduces the amount of inventory that we own."},{"Start":"02:00.515 ","End":"02:02.420","Text":"That amount is credited,"},{"Start":"02:02.420 ","End":"02:05.670","Text":"the credit\u0027s on the right-hand side."},{"Start":"02:05.670 ","End":"02:09.574","Text":"Anything that gets sold gets taken out of our inventory."},{"Start":"02:09.574 ","End":"02:17.280","Text":"It\u0027s a credit to our inventory account and a debit to our cost of sales."},{"Start":"02:17.280 ","End":"02:20.945","Text":"We\u0027re missing an amount and the amount that we\u0027re missing"},{"Start":"02:20.945 ","End":"02:24.545","Text":"is the amount of inventories that we have purchased."},{"Start":"02:24.545 ","End":"02:27.485","Text":"We\u0027re looking for that, that\u0027s the missing item here."},{"Start":"02:27.485 ","End":"02:29.255","Text":"Let\u0027s add this together."},{"Start":"02:29.255 ","End":"02:32.935","Text":"This is 272 take that across,"},{"Start":"02:32.935 ","End":"02:38.375","Text":"272, the purchases balanced to 217."},{"Start":"02:38.375 ","End":"02:43.850","Text":"We assume that that purchase amount of 217 was purchased for credit,"},{"Start":"02:43.850 ","End":"02:46.970","Text":"so we credit that to our accounts payable."},{"Start":"02:46.970 ","End":"02:49.325","Text":"That\u0027s a journal entry that was processed."},{"Start":"02:49.325 ","End":"02:52.715","Text":"We would have debited inventory and credited accounts payable."},{"Start":"02:52.715 ","End":"02:56.915","Text":"Now we also have to put in the opening and closing balances into the accounts payable."},{"Start":"02:56.915 ","End":"02:59.270","Text":"The opening balance is 90,"},{"Start":"02:59.270 ","End":"03:01.780","Text":"being the closing balance at the end of 20X1."},{"Start":"03:01.780 ","End":"03:04.385","Text":"Remember, accounts payable is a liability,"},{"Start":"03:04.385 ","End":"03:06.875","Text":"so it increases on the credit side."},{"Start":"03:06.875 ","End":"03:09.140","Text":"It has a credit balance."},{"Start":"03:09.140 ","End":"03:12.320","Text":"Our opening balance would have been on the credit side of 90."},{"Start":"03:12.320 ","End":"03:15.890","Text":"We have to put in the closing balance into our accounts payable."},{"Start":"03:15.890 ","End":"03:18.935","Text":"Now obviously our closing balance is also going to be a credit,"},{"Start":"03:18.935 ","End":"03:22.595","Text":"but this is simply the closing balance carried forward for the moment."},{"Start":"03:22.595 ","End":"03:27.830","Text":"The closing balance at the end of 20X2 is 66, so we pop that in."},{"Start":"03:27.830 ","End":"03:29.390","Text":"Now we\u0027re missing an amount,"},{"Start":"03:29.390 ","End":"03:32.690","Text":"and the amount that we\u0027re missing is the amount that we actually"},{"Start":"03:32.690 ","End":"03:37.375","Text":"paid to our suppliers of inventory."},{"Start":"03:37.375 ","End":"03:40.065","Text":"The account entry would have gone to bank,"},{"Start":"03:40.065 ","End":"03:41.555","Text":"so that\u0027s what we\u0027re looking for."},{"Start":"03:41.555 ","End":"03:43.280","Text":"The debit to accounts payable,"},{"Start":"03:43.280 ","End":"03:47.375","Text":"which would have been credited to bank. Let\u0027s add this up."},{"Start":"03:47.375 ","End":"03:49.625","Text":"This adds up to 307,"},{"Start":"03:49.625 ","End":"03:51.683","Text":"take that across,"},{"Start":"03:51.683 ","End":"03:59.200","Text":"307 minus 66, and that gives us 241."},{"Start":"03:59.200 ","End":"04:01.290","Text":"That\u0027s what we were looking for."},{"Start":"04:01.290 ","End":"04:06.810","Text":"Cash paid to the suppliers of our inventory is 241."},{"Start":"04:06.810 ","End":"04:12.745","Text":"All we now need to do is pop that in as the second line of our cash flow statement."},{"Start":"04:12.745 ","End":"04:18.460","Text":"Here\u0027s our cash flow statement for the year ending 31st, December 20X1."},{"Start":"04:18.460 ","End":"04:24.995","Text":"This is cash from operating activities section of the cash flow statement."},{"Start":"04:24.995 ","End":"04:29.195","Text":"Our first line item is the cash received from customers, a 339."},{"Start":"04:29.195 ","End":"04:34.310","Text":"Now we put in here cash paid to suppliers, 241."},{"Start":"04:34.310 ","End":"04:37.910","Text":"We subtract that from our cash receive from customers"},{"Start":"04:37.910 ","End":"04:42.500","Text":"and we get cash generated from operations of 98."},{"Start":"04:42.500 ","End":"04:47.428","Text":"Now remember, this is the cash generated from operations"},{"Start":"04:47.428 ","End":"04:52.780","Text":"and that terminology is laid down in the International Financial Reporting Standards,"},{"Start":"04:52.780 ","End":"04:58.390","Text":"and it\u0027s the third line item in the section of the cash flow statements that is"},{"Start":"04:58.390 ","End":"05:04.240","Text":"called cash generated from operating activities."},{"Start":"05:04.240 ","End":"05:08.095","Text":"Now remember our cash flow statement has 3 major sections."},{"Start":"05:08.095 ","End":"05:12.524","Text":"It\u0027s the cash flows from operating activities and"},{"Start":"05:12.524 ","End":"05:18.415","Text":"cash flows from investing activities and then cash flows from financing activities."},{"Start":"05:18.415 ","End":"05:22.300","Text":"We\u0027re busy with the cash flows from operating activities."},{"Start":"05:22.300 ","End":"05:26.590","Text":"The third line item of which is called cash generated from operations."},{"Start":"05:26.590 ","End":"05:33.080","Text":"We were asked to produce the cash flows from operating activities section,"},{"Start":"05:33.080 ","End":"05:35.150","Text":"but this is as far as we could go."},{"Start":"05:35.150 ","End":"05:37.480","Text":"We didn\u0027t have any further information."},{"Start":"05:37.480 ","End":"05:40.910","Text":"Before we move on to another exercise,"},{"Start":"05:40.910 ","End":"05:45.245","Text":"I want to show you how to calculate the cash paid to suppliers using"},{"Start":"05:45.245 ","End":"05:51.835","Text":"the formula similar to the formula we used for cash received from customers."},{"Start":"05:51.835 ","End":"05:54.755","Text":"There is a similar formula for cash paid to suppliers."},{"Start":"05:54.755 ","End":"05:56.090","Text":"But as I said earlier,"},{"Start":"05:56.090 ","End":"06:01.100","Text":"it\u0027s very important that you actually know how to use your ledger accounts to work it out"},{"Start":"06:01.100 ","End":"06:06.545","Text":"logically before you simply go ahead and learn the formula off by heart."},{"Start":"06:06.545 ","End":"06:11.430","Text":"Because learning a formula off by heart will lead to careless mistakes down the line."},{"Start":"06:11.430 ","End":"06:14.000","Text":"Let\u0027s look at that formula assuming now that you"},{"Start":"06:14.000 ","End":"06:17.890","Text":"understand how those 3 ledger counts interact."},{"Start":"06:17.890 ","End":"06:20.790","Text":"Cash paid to suppliers are 241."},{"Start":"06:20.790 ","End":"06:23.585","Text":"The formula is you start with your cost of sales,"},{"Start":"06:23.585 ","End":"06:26.630","Text":"you adjust it for the changes in the inventory balances and"},{"Start":"06:26.630 ","End":"06:30.640","Text":"then you adjust it for the changes in the payables balances."},{"Start":"06:30.640 ","End":"06:36.060","Text":"Let\u0027s pretend we don\u0027t know what that cash paid to supplies amount was."},{"Start":"06:36.060 ","End":"06:38.875","Text":"I\u0027ve removed the 241."},{"Start":"06:38.875 ","End":"06:41.255","Text":"We start with cost of sales."},{"Start":"06:41.255 ","End":"06:43.205","Text":"Have a look to see what we\u0027ve been given."},{"Start":"06:43.205 ","End":"06:45.620","Text":"The cost of sales is 247,"},{"Start":"06:45.620 ","End":"06:49.250","Text":"so let\u0027s put that into our formula, 247."},{"Start":"06:49.250 ","End":"06:52.669","Text":"Next we\u0027re going to adjust it for the changes in inventory."},{"Start":"06:52.669 ","End":"06:55.130","Text":"Now let\u0027s have a look to see what our inventory balances are."},{"Start":"06:55.130 ","End":"06:59.555","Text":"The inventory at the end of 20X1 was 55."},{"Start":"06:59.555 ","End":"07:03.035","Text":"It is now at the end of 20X2, only 25."},{"Start":"07:03.035 ","End":"07:07.840","Text":"That means the change is a decrease of 30."},{"Start":"07:07.840 ","End":"07:11.260","Text":"Now, you can think of it in this way."},{"Start":"07:11.260 ","End":"07:14.975","Text":"This is to help you understand whether you"},{"Start":"07:14.975 ","End":"07:19.295","Text":"add the decrease of 30 or you subtract the decrease of 30."},{"Start":"07:19.295 ","End":"07:21.665","Text":"Let\u0027s just think the other way."},{"Start":"07:21.665 ","End":"07:24.680","Text":"Imagine that your inventory had increased."},{"Start":"07:24.680 ","End":"07:26.990","Text":"If your inventory had increased,"},{"Start":"07:26.990 ","End":"07:28.550","Text":"the more inventory you buy,"},{"Start":"07:28.550 ","End":"07:31.945","Text":"the more cash you pay. That makes sense?"},{"Start":"07:31.945 ","End":"07:33.470","Text":"If it had been an increase,"},{"Start":"07:33.470 ","End":"07:34.880","Text":"you would have added it."},{"Start":"07:34.880 ","End":"07:36.170","Text":"However, in this case,"},{"Start":"07:36.170 ","End":"07:39.320","Text":"our inventory decreased so the logic is"},{"Start":"07:39.320 ","End":"07:43.760","Text":"therefore that you subtract the decrease in inventory."},{"Start":"07:43.760 ","End":"07:47.060","Text":"The decrease in inventory is an amount of 30,"},{"Start":"07:47.060 ","End":"07:49.400","Text":"so we subtract 30 in our formula."},{"Start":"07:49.400 ","End":"07:51.890","Text":"Next thing is we look at the payables."},{"Start":"07:51.890 ","End":"07:54.320","Text":"How did our payables balance change?"},{"Start":"07:54.320 ","End":"07:56.210","Text":"Let\u0027s have a look at what we\u0027re given."},{"Start":"07:56.210 ","End":"08:03.470","Text":"Our accounts payable balance at the end of 20X1 was 90 and it is now 66,"},{"Start":"08:03.470 ","End":"08:08.010","Text":"so our accounts payable decreased by 24."},{"Start":"08:08.010 ","End":"08:09.680","Text":"Think about it like this."},{"Start":"08:09.680 ","End":"08:12.500","Text":"Our balance at the end of 20X1 was 90,"},{"Start":"08:12.500 ","End":"08:15.590","Text":"so that means we owed people 90."},{"Start":"08:15.590 ","End":"08:17.420","Text":"At the end of 20X2,"},{"Start":"08:17.420 ","End":"08:19.955","Text":"we only owe them 66."},{"Start":"08:19.955 ","End":"08:23.930","Text":"That must mean that we paid them an extra 24."},{"Start":"08:23.930 ","End":"08:27.755","Text":"When your accounts payable decreases,"},{"Start":"08:27.755 ","End":"08:31.220","Text":"it means you have paid a further amount over and"},{"Start":"08:31.220 ","End":"08:35.065","Text":"above anything to do with the cost of sales and the inventory movement."},{"Start":"08:35.065 ","End":"08:36.770","Text":"Just think about it like that."},{"Start":"08:36.770 ","End":"08:40.519","Text":"Our opening balance was 90, it\u0027s dropped to 66."},{"Start":"08:40.519 ","End":"08:42.283","Text":"That means we did owe 90,"},{"Start":"08:42.283 ","End":"08:43.895","Text":"we only owe 66."},{"Start":"08:43.895 ","End":"08:46.295","Text":"It means we must have paid an extra 24."},{"Start":"08:46.295 ","End":"08:50.066","Text":"That means there\u0027s an extra cash amount that was paid."},{"Start":"08:50.066 ","End":"08:51.650","Text":"When there was a decrease in accounts payable,"},{"Start":"08:51.650 ","End":"08:55.010","Text":"we\u0027re going to add the decrease in payables."},{"Start":"08:55.010 ","End":"08:58.569","Text":"That is, adding an amount of 24."},{"Start":"08:58.569 ","End":"09:05.850","Text":"247 minus the 30 plus the 24 gives us 241."},{"Start":"09:05.850 ","End":"09:11.335","Text":"That gives us in cash generated from operations of 98."},{"Start":"09:11.335 ","End":"09:16.680","Text":"That\u0027s the end of that exercise and I hope that that helped you. Bye for now."}],"ID":29683},{"Watched":false,"Name":"Statement of Cash Flows - Part 3.1","Duration":"7m 23s","ChapterTopicVideoID":26974,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.330 ","End":"00:03.370","Text":"Hello and welcome to this series of"},{"Start":"00:03.370 ","End":"00:09.650","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:09.650 ","End":"00:11.565","Text":"In the section,"},{"Start":"00:11.565 ","End":"00:16.705","Text":"we continue with the focus on operating activities."},{"Start":"00:16.705 ","End":"00:21.175","Text":"Now turn our attention to the indirect method."},{"Start":"00:21.175 ","End":"00:27.440","Text":"The starting point for the indirect method is the operating profit."},{"Start":"00:27.440 ","End":"00:29.655","Text":"As previously discussed,"},{"Start":"00:29.655 ","End":"00:36.220","Text":"the indirect method converts the accrual-based operating profit into"},{"Start":"00:36.220 ","End":"00:43.590","Text":"a cash flow from operations and ultimately a cash flow from operating activities."},{"Start":"00:43.590 ","End":"00:49.400","Text":"Adjustments are made to the operating profit by means of additions and"},{"Start":"00:49.400 ","End":"00:54.985","Text":"subtractions to arrive at the figure for cash from operations."},{"Start":"00:54.985 ","End":"00:58.610","Text":"There are 3 main types of adjustments and we will"},{"Start":"00:58.610 ","End":"01:03.070","Text":"focus on each of these types of adjustments separately."},{"Start":"01:03.070 ","End":"01:07.400","Text":"The first category of adjustments are those where we"},{"Start":"01:07.400 ","End":"01:12.440","Text":"account for non-cash income and expenses."},{"Start":"01:12.440 ","End":"01:18.830","Text":"As you will see, there are a number of items which would have been accounted"},{"Start":"01:18.830 ","End":"01:25.820","Text":"for as income or as an expense in arriving at operating profit,"},{"Start":"01:25.820 ","End":"01:31.490","Text":"but which in fact did not involve the inflow or outflow of cash."},{"Start":"01:31.490 ","End":"01:36.455","Text":"These items will need to be reversed in working from"},{"Start":"01:36.455 ","End":"01:42.665","Text":"the accrual-based operating profit to the cash from operations."},{"Start":"01:42.665 ","End":"01:46.970","Text":"The second type of adjustments are those that are derived from"},{"Start":"01:46.970 ","End":"01:51.740","Text":"changes to the working capital items on the balance sheet."},{"Start":"01:51.740 ","End":"01:53.780","Text":"Working capital as you know,"},{"Start":"01:53.780 ","End":"01:58.465","Text":"refers to current assets and current liabilities."},{"Start":"01:58.465 ","End":"02:02.059","Text":"Any changes in these items,"},{"Start":"02:02.059 ","End":"02:04.234","Text":"current assets and current liabilities,"},{"Start":"02:04.234 ","End":"02:12.185","Text":"will lead to the accrual-based profit being different from the cash from operations."},{"Start":"02:12.185 ","End":"02:20.240","Text":"The last type of adjustment is to show the tax paid in cash as well as"},{"Start":"02:20.240 ","End":"02:28.315","Text":"any finance income received in cash or any finance expenses paid in cash."},{"Start":"02:28.315 ","End":"02:32.420","Text":"To understand these 3 adjustments requires"},{"Start":"02:32.420 ","End":"02:36.830","Text":"understanding the link between the cash flow from operations,"},{"Start":"02:36.830 ","End":"02:38.465","Text":"the income statement,"},{"Start":"02:38.465 ","End":"02:40.495","Text":"and the balance sheet."},{"Start":"02:40.495 ","End":"02:45.530","Text":"All of these 3 adjustments can be viewed from the perspective of linking"},{"Start":"02:45.530 ","End":"02:51.154","Text":"the changes in the relevant balance sheet items with the income statement."},{"Start":"02:51.154 ","End":"02:56.930","Text":"In order to properly understand the 3 adjustments previously mentioned,"},{"Start":"02:56.930 ","End":"03:00.905","Text":"it is important to understand the link between"},{"Start":"03:00.905 ","End":"03:07.060","Text":"the cash flow from operating activities and the income statement and balance sheet."},{"Start":"03:07.060 ","End":"03:13.070","Text":"All of these 3 adjustments can be viewed from the perspective of linking"},{"Start":"03:13.070 ","End":"03:17.134","Text":"the changes in the underlying balance sheet items"},{"Start":"03:17.134 ","End":"03:20.660","Text":"with the relevant income statement item."},{"Start":"03:20.660 ","End":"03:22.205","Text":"As we have seen,"},{"Start":"03:22.205 ","End":"03:27.845","Text":"the operating profit on the income statement which is the accrual-based profit,"},{"Start":"03:27.845 ","End":"03:32.120","Text":"is adjusted for any changes in"},{"Start":"03:32.120 ","End":"03:39.290","Text":"the relevant balance sheet items in order to convert that accrual profit into cash."},{"Start":"03:39.290 ","End":"03:42.750","Text":"Looking at this in diagrammatic form,"},{"Start":"03:42.750 ","End":"03:46.670","Text":"to illustrate this concept and the relationship between"},{"Start":"03:46.670 ","End":"03:52.169","Text":"the cash flow and the income statement and the changes in the balance sheet item,"},{"Start":"03:52.169 ","End":"03:56.750","Text":"let us consider these scenario of credit sale on"},{"Start":"03:56.750 ","End":"04:04.055","Text":"the income statement and the related accounts receivable balance on the balance sheet."},{"Start":"04:04.055 ","End":"04:10.460","Text":"If we look at the income statement and we draw up a little income statement here,"},{"Start":"04:10.460 ","End":"04:14.190","Text":"where we have income of for example,"},{"Start":"04:14.190 ","End":"04:17.610","Text":"100 and expenses,"},{"Start":"04:17.610 ","End":"04:26.405","Text":"for example of 70 giving us a profit in the situation of 30."},{"Start":"04:26.405 ","End":"04:32.225","Text":"Let\u0027s assume this 100 comprises all sales on credit."},{"Start":"04:32.225 ","End":"04:36.245","Text":"We must now look to the related balance sheet item."},{"Start":"04:36.245 ","End":"04:40.460","Text":"Related balance sheet item is the account receivable accounts,"},{"Start":"04:40.460 ","End":"04:44.240","Text":"so looking at the account receivable accounts in"},{"Start":"04:44.240 ","End":"04:50.600","Text":"the ledger and assuming there is an opening or beginning balance in"},{"Start":"04:50.600 ","End":"04:55.040","Text":"accounts receivable of 15 and"},{"Start":"04:55.040 ","End":"05:02.375","Text":"a closing balance or an ending balance in accounts receivable of 20."},{"Start":"05:02.375 ","End":"05:08.855","Text":"Let us consider what transactions cause the balance to change."},{"Start":"05:08.855 ","End":"05:14.960","Text":"Well, clearly it\u0027s going to be the sales on credit because it\u0027s sales to"},{"Start":"05:14.960 ","End":"05:21.915","Text":"credit customers and there will be the cash received from those customers."},{"Start":"05:21.915 ","End":"05:25.940","Text":"Now, we are told in this example that the amount of"},{"Start":"05:25.940 ","End":"05:32.300","Text":"the credit sales is in fact 100 and therefore if customers owed us"},{"Start":"05:32.300 ","End":"05:36.660","Text":"an amount of 15 at the beginning of the period and"},{"Start":"05:36.660 ","End":"05:40.730","Text":"the amount of sales increases the balance in accounts"},{"Start":"05:40.730 ","End":"05:45.470","Text":"receivable and the cash received will decrease the balance"},{"Start":"05:45.470 ","End":"05:50.642","Text":"in accounts receivable and customers owed us 20 at the end,"},{"Start":"05:50.642 ","End":"05:57.190","Text":"we can therefore deduce that the cash received from customers must be 95."},{"Start":"05:57.190 ","End":"06:00.075","Text":"But that\u0027s not the point I want to make here."},{"Start":"06:00.075 ","End":"06:04.040","Text":"The point I want to make is for us to look at the opening balance of"},{"Start":"06:04.040 ","End":"06:07.790","Text":"15 and compare with the closing balance of"},{"Start":"06:07.790 ","End":"06:11.600","Text":"20 and we see that the balance in the account"},{"Start":"06:11.600 ","End":"06:17.150","Text":"receivable accounts has in fact increased by an amount of 5."},{"Start":"06:17.150 ","End":"06:23.405","Text":"The only way that balance could increase in this case by the amount of 5 is"},{"Start":"06:23.405 ","End":"06:29.980","Text":"if the credit sales are in fact greater than the cash received."},{"Start":"06:29.980 ","End":"06:35.870","Text":"The credit sales are greater than the cash received and they are greater than"},{"Start":"06:35.870 ","End":"06:38.240","Text":"the cash received by the amount of"},{"Start":"06:38.240 ","End":"06:42.050","Text":"the difference in the balance which is the amount of 5."},{"Start":"06:42.050 ","End":"06:48.665","Text":"Therefore, the credit sales are larger than the cash received."},{"Start":"06:48.665 ","End":"06:57.725","Text":"We want to convert this accrual-based profit into a cash from operation."},{"Start":"06:57.725 ","End":"07:03.080","Text":"We just have to think of the movement we discussed on the right-hand side."},{"Start":"07:03.080 ","End":"07:10.250","Text":"The accrual-based sales are greater than the cash received and therefore the cash from"},{"Start":"07:10.250 ","End":"07:17.440","Text":"operations must be lower than the accrual-based profit by the amount of 5."},{"Start":"07:17.440 ","End":"07:24.360","Text":"Therefore, the cash from operations in this particular example must be 25."}],"ID":29684},{"Watched":false,"Name":"Statement of Cash Flows - Part 3.2","Duration":"7m 57s","ChapterTopicVideoID":26975,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.550","Text":"Hello and welcome to this series of"},{"Start":"00:02.550 ","End":"00:08.405","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:08.405 ","End":"00:13.650","Text":"In this section, we continue our focus on operating activities,"},{"Start":"00:13.650 ","End":"00:17.580","Text":"and here we look in detail at the first of"},{"Start":"00:17.580 ","End":"00:23.665","Text":"the adjustments required to the profit number in the indirect method."},{"Start":"00:23.665 ","End":"00:27.420","Text":"This is the non-cash income and expenses."},{"Start":"00:27.420 ","End":"00:31.320","Text":"You know that the operating profit is arrived at after"},{"Start":"00:31.320 ","End":"00:37.275","Text":"deducting certain expenses that are non-cash in nature."},{"Start":"00:37.275 ","End":"00:40.980","Text":"For example, depreciation on property,"},{"Start":"00:40.980 ","End":"00:42.445","Text":"plant, and equipment,"},{"Start":"00:42.445 ","End":"00:46.280","Text":"and amortization of intangible assets are"},{"Start":"00:46.280 ","End":"00:52.505","Text":"expenses on the income statement deducted in arriving at the accrual-based profit,"},{"Start":"00:52.505 ","End":"00:58.985","Text":"but there\u0027s no cash outflow for depreciation and amortization."},{"Start":"00:58.985 ","End":"01:00.635","Text":"In a similar way,"},{"Start":"01:00.635 ","End":"01:03.770","Text":"a loss on disposal of property, plant,"},{"Start":"01:03.770 ","End":"01:09.665","Text":"and equipment is recorded as an expense in arriving at the accrual-based profit,"},{"Start":"01:09.665 ","End":"01:15.890","Text":"but also there is no cash outflow in the loss on disposal of property,"},{"Start":"01:15.890 ","End":"01:17.195","Text":"plant, and equipment."},{"Start":"01:17.195 ","End":"01:22.175","Text":"We, therefore, need to reverse or add back these expenses to"},{"Start":"01:22.175 ","End":"01:28.085","Text":"operating profit in arriving at the cash flow from operating activities."},{"Start":"01:28.085 ","End":"01:31.090","Text":"Take a look at this simple illustration."},{"Start":"01:31.090 ","End":"01:35.390","Text":"If we have an income statement and we have"},{"Start":"01:35.390 ","End":"01:42.545","Text":"income less expenses equals the profit or operating profit."},{"Start":"01:42.545 ","End":"01:45.990","Text":"Included in those expenses are,"},{"Start":"01:45.990 ","End":"01:48.890","Text":"for example, depreciation on property,"},{"Start":"01:48.890 ","End":"01:50.300","Text":"plant, and equipment,"},{"Start":"01:50.300 ","End":"01:55.105","Text":"which remember has been subtracted in arriving at the profit,"},{"Start":"01:55.105 ","End":"02:01.640","Text":"and also may be a loss on disposal of some PPE,"},{"Start":"02:01.640 ","End":"02:06.230","Text":"which also has been subtracted in arriving at the profit."},{"Start":"02:06.230 ","End":"02:13.115","Text":"Now, therefore, when we come along to do the statement of cash flows,"},{"Start":"02:13.115 ","End":"02:15.710","Text":"remember the statement of cash flows,"},{"Start":"02:15.710 ","End":"02:19.704","Text":"will start off with the profit,"},{"Start":"02:19.704 ","End":"02:23.989","Text":"or the operating profit from the accrual-based income statement."},{"Start":"02:23.989 ","End":"02:31.580","Text":"We need to reverse or add back the depreciation expense and also, therefore,"},{"Start":"02:31.580 ","End":"02:36.395","Text":"add back any loss on disposal of"},{"Start":"02:36.395 ","End":"02:44.525","Text":"PPE in order to arrive at the cash flow from operating activities."},{"Start":"02:44.525 ","End":"02:48.065","Text":"Remember that that loss on disposal,"},{"Start":"02:48.065 ","End":"02:52.760","Text":"or it could be a profit on disposal is not the cash proceeds."},{"Start":"02:52.760 ","End":"03:00.275","Text":"The cash proceeds are accounted for as a cash flow from investing activities."},{"Start":"03:00.275 ","End":"03:03.155","Text":"In other words, and to explain that,"},{"Start":"03:03.155 ","End":"03:09.200","Text":"if the item of PPE that the entity is selling has for example a carrying amount of"},{"Start":"03:09.200 ","End":"03:17.180","Text":"100 and the cash proceeds on disposal of that item are 90,"},{"Start":"03:17.180 ","End":"03:23.180","Text":"and therefore, the entity incurs a loss on disposal of 10."},{"Start":"03:23.180 ","End":"03:28.250","Text":"The 90 represents the cash proceeds"},{"Start":"03:28.250 ","End":"03:32.768","Text":"which will be disclosed as a cash flow from investing activities,"},{"Start":"03:32.768 ","End":"03:35.220","Text":"whereas the loss of 10,"},{"Start":"03:35.220 ","End":"03:39.530","Text":"that loss of 10 is the loss that\u0027s added back as"},{"Start":"03:39.530 ","End":"03:45.230","Text":"a non-cash item in the cash flow from operating activities section."},{"Start":"03:45.230 ","End":"03:48.709","Text":"Please make sure that you understand this concept."},{"Start":"03:48.709 ","End":"03:53.705","Text":"A lot of students get confused with the loss or profit."},{"Start":"03:53.705 ","End":"03:58.430","Text":"In this case, the loss of 10 and the proceeds of 90."},{"Start":"03:58.430 ","End":"04:02.075","Text":"The proceeds of 90 is the cash flow."},{"Start":"04:02.075 ","End":"04:06.350","Text":"There\u0027s no cash flow in the loss of 10."},{"Start":"04:06.350 ","End":"04:08.315","Text":"In the same way,"},{"Start":"04:08.315 ","End":"04:12.440","Text":"operating profit is also arrived at after"},{"Start":"04:12.440 ","End":"04:18.290","Text":"adding certain items of income that are non-cash in nature."},{"Start":"04:18.290 ","End":"04:23.330","Text":"For example, the gain on disposal of property, plant,"},{"Start":"04:23.330 ","End":"04:30.695","Text":"and equipment if PPE is sold and the proceeds are higher than the carrying amount."},{"Start":"04:30.695 ","End":"04:36.020","Text":"We, therefore, need to reverse or subtract this income from"},{"Start":"04:36.020 ","End":"04:41.900","Text":"operating profit in arriving at the cash flow from operating activities."},{"Start":"04:41.900 ","End":"04:45.485","Text":"Again, let\u0027s look at a simple illustration."},{"Start":"04:45.485 ","End":"04:49.550","Text":"If the entity has an income statement which shows"},{"Start":"04:49.550 ","End":"04:56.020","Text":"income less expenses equals the profit or operating profit,"},{"Start":"04:56.020 ","End":"05:03.920","Text":"and included in the income is a gain on disposal of certain items of property,"},{"Start":"05:03.920 ","End":"05:05.420","Text":"plant, and equipment."},{"Start":"05:05.420 ","End":"05:13.685","Text":"Now, remember that gain would be added as an income item in arriving at the profit."},{"Start":"05:13.685 ","End":"05:22.190","Text":"Therefore, we have a non-cash item included as an addition to the accrual-based profit."},{"Start":"05:22.190 ","End":"05:25.580","Text":"When we come to do the statement of cash flows,"},{"Start":"05:25.580 ","End":"05:28.970","Text":"remember as before in the statement of cash flows,"},{"Start":"05:28.970 ","End":"05:34.670","Text":"the starting point is the profit from the income statement."},{"Start":"05:34.670 ","End":"05:41.540","Text":"We will therefore need to subtract that gain on disposal because"},{"Start":"05:41.540 ","End":"05:48.410","Text":"the gain on disposal is a non-cash item and there was no cash flow in that,"},{"Start":"05:48.410 ","End":"05:53.030","Text":"and therefore, the cash flow from operating activities"},{"Start":"05:53.030 ","End":"05:59.165","Text":"must in this case be a lower number compared to the accrual based profit."},{"Start":"05:59.165 ","End":"06:01.999","Text":"Remember as already discussed,"},{"Start":"06:01.999 ","End":"06:09.230","Text":"the cash proceeds are accounted for in the cash flows from investing activities section."},{"Start":"06:09.230 ","End":"06:13.760","Text":"Here we see an example of the cash flows from"},{"Start":"06:13.760 ","End":"06:18.560","Text":"operating activities section of the company next PLC."},{"Start":"06:18.560 ","End":"06:24.485","Text":"The starting point for the statement as you know is the operating profit."},{"Start":"06:24.485 ","End":"06:31.374","Text":"The first set of adjustments that you see are the adjustments for the non-cash items."},{"Start":"06:31.374 ","End":"06:39.245","Text":"These adjustments over here are the adjustments for the non-cash items."},{"Start":"06:39.245 ","End":"06:46.070","Text":"What you have learned is the adjustments for depreciation and impairments."},{"Start":"06:46.070 ","End":"06:48.005","Text":"In this case also,"},{"Start":"06:48.005 ","End":"06:52.415","Text":"the loss on disposal of property, plant, and equipment."},{"Start":"06:52.415 ","End":"06:57.575","Text":"There are some further depreciation here on a right of use asset,"},{"Start":"06:57.575 ","End":"07:04.010","Text":"which in fact is an asset out of interest created when a company leases an item."},{"Start":"07:04.010 ","End":"07:10.475","Text":"Also, you see here some amortization of intangible assets."},{"Start":"07:10.475 ","End":"07:16.925","Text":"Remember amortization is the expense related to the usage of an intangible asset,"},{"Start":"07:16.925 ","End":"07:22.880","Text":"whereas depreciation is the expense related to the usage of a tangible asset."},{"Start":"07:22.880 ","End":"07:29.780","Text":"Now the depreciation and amortization were subtracted as expenses in arriving at"},{"Start":"07:29.780 ","End":"07:36.825","Text":"the operating profit number of in this case 853.9 million."},{"Start":"07:36.825 ","End":"07:40.610","Text":"Therefore the depreciation and the amortization which were"},{"Start":"07:40.610 ","End":"07:44.630","Text":"expenses which did not involve the outflow of cash,"},{"Start":"07:44.630 ","End":"07:52.550","Text":"are therefore added back in arriving at the cash generated from operations,"},{"Start":"07:52.550 ","End":"07:57.210","Text":"which you see down the bottom of the statements."}],"ID":29685},{"Watched":false,"Name":"Statement of Cash Flows - Part 3.3","Duration":"1m 37s","ChapterTopicVideoID":26976,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.490","Text":"Hello and welcome to this series of"},{"Start":"00:02.490 ","End":"00:08.265","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:08.265 ","End":"00:13.920","Text":"In this section, we continue with the focus on operating activities,"},{"Start":"00:13.920 ","End":"00:18.359","Text":"now looking at the second of the adjustments required"},{"Start":"00:18.359 ","End":"00:22.845","Text":"to operating profit when using the indirect method."},{"Start":"00:22.845 ","End":"00:27.340","Text":"This is the changes in the working capital accounts."},{"Start":"00:27.340 ","End":"00:31.525","Text":"There are three important accounts to consider."},{"Start":"00:31.525 ","End":"00:36.255","Text":"These three accounts are the trade receivables,"},{"Start":"00:36.255 ","End":"00:40.940","Text":"as you know, also known as the accounts receivable."},{"Start":"00:40.940 ","End":"00:43.310","Text":"In other words, the amount owing to"},{"Start":"00:43.310 ","End":"00:47.990","Text":"the business entity by customers for goods sold on credit,"},{"Start":"00:47.990 ","End":"00:52.614","Text":"the inventory or the stock account, and thirdly,"},{"Start":"00:52.614 ","End":"00:55.295","Text":"the trade payables, as you know,"},{"Start":"00:55.295 ","End":"00:59.315","Text":"also known as the accounts payable."},{"Start":"00:59.315 ","End":"01:01.730","Text":"In other words, the amounts owing to"},{"Start":"01:01.730 ","End":"01:06.470","Text":"suppliers for goods and services purchased on credit."},{"Start":"01:06.470 ","End":"01:09.590","Text":"There are also other accounts that need to"},{"Start":"01:09.590 ","End":"01:12.635","Text":"be considered if they appear on the balance sheet."},{"Start":"01:12.635 ","End":"01:15.005","Text":"These other accounts, as you see,"},{"Start":"01:15.005 ","End":"01:20.675","Text":"are also all working capital or current asset and current liability accounts."},{"Start":"01:20.675 ","End":"01:23.720","Text":"For example, the unearned revenue,"},{"Start":"01:23.720 ","End":"01:27.585","Text":"the prepaid expenses, the accrued expenses,"},{"Start":"01:27.585 ","End":"01:29.420","Text":"and the accrued income."},{"Start":"01:29.420 ","End":"01:34.834","Text":"We will look at each one of these in turn before looking at the trade receivables,"},{"Start":"01:34.834 ","End":"01:38.339","Text":"inventory, and trade payables accounts."}],"ID":29686},{"Watched":false,"Name":"Statement of Cash Flows - Part 3.4","Duration":"24m 23s","ChapterTopicVideoID":26977,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.850","Text":"Hello and welcome to this series of"},{"Start":"00:02.850 ","End":"00:08.625","Text":"video presentations on the statement of cash flows brought you by Proprep."},{"Start":"00:08.625 ","End":"00:13.185","Text":"We continue here with our focus on operating activities."},{"Start":"00:13.185 ","End":"00:18.270","Text":"In this video, look at examples of the adjustments required"},{"Start":"00:18.270 ","End":"00:23.250","Text":"to the operating profit relating to changes in trade receivables,"},{"Start":"00:23.250 ","End":"00:29.055","Text":"changes in inventory, as well as changes in the trade payables accounts."},{"Start":"00:29.055 ","End":"00:33.240","Text":"We now go back to the 3 main working capital accounts,"},{"Start":"00:33.240 ","End":"00:37.005","Text":"trade receivables, inventory, and trade payables,"},{"Start":"00:37.005 ","End":"00:40.785","Text":"looking firstly at the changes in trade receivables."},{"Start":"00:40.785 ","End":"00:47.900","Text":"You know that credit sales increase both the operating profit and trade receivables."},{"Start":"00:47.900 ","End":"00:51.020","Text":"Because when an entity sells goods on credit,"},{"Start":"00:51.020 ","End":"00:57.500","Text":"the debit goes to the trade or the accounts receivable account,"},{"Start":"00:57.500 ","End":"01:00.990","Text":"which increases the accounts receivable or trade receivables,"},{"Start":"01:00.990 ","End":"01:04.295","Text":"and the credit goes to the sales account,"},{"Start":"01:04.295 ","End":"01:10.115","Text":"which increases sales and therefore obviously increases the operating profit."},{"Start":"01:10.115 ","End":"01:13.245","Text":"When cash is then received from customers,"},{"Start":"01:13.245 ","End":"01:16.370","Text":"there\u0027s clearly no effect on profit, but obviously,"},{"Start":"01:16.370 ","End":"01:20.555","Text":"the cash increases while the trade receivables decrease."},{"Start":"01:20.555 ","End":"01:27.260","Text":"Accounting entry would be a debit this time to cash to reflect the increase in"},{"Start":"01:27.260 ","End":"01:31.220","Text":"cash and a credit to the trade receivables or"},{"Start":"01:31.220 ","End":"01:35.660","Text":"accounts receivable account to decrease that account balance."},{"Start":"01:35.660 ","End":"01:37.895","Text":"Looking at a short example,"},{"Start":"01:37.895 ","End":"01:41.360","Text":"let\u0027s assume that the opening balance in"},{"Start":"01:41.360 ","End":"01:45.320","Text":"the trade receivables or accounts receivable account,"},{"Start":"01:45.320 ","End":"01:47.555","Text":"as an asset remember,"},{"Start":"01:47.555 ","End":"01:50.405","Text":"the opening balance is 200,"},{"Start":"01:50.405 ","End":"01:52.540","Text":"which will be a debit balance,"},{"Start":"01:52.540 ","End":"01:54.880","Text":"and then during the period,"},{"Start":"01:54.880 ","End":"01:58.430","Text":"there are credit sales to customers,"},{"Start":"01:58.430 ","End":"02:05.930","Text":"amounting to 100, which would be a debit to the account receivable and credit to sales."},{"Start":"02:05.930 ","End":"02:11.870","Text":"Then the cash received from customers during the period,"},{"Start":"02:11.870 ","End":"02:16.595","Text":"let\u0027s assume the cash received is an amount of 40,"},{"Start":"02:16.595 ","End":"02:20.605","Text":"which would be a credit to the accounts receivable account,"},{"Start":"02:20.605 ","End":"02:23.525","Text":"debit cash, credit accounts receivable,"},{"Start":"02:23.525 ","End":"02:26.014","Text":"and the closing balance,"},{"Start":"02:26.014 ","End":"02:28.160","Text":"obviously also an asset,"},{"Start":"02:28.160 ","End":"02:33.275","Text":"amounts to 260 with a debit balance."},{"Start":"02:33.275 ","End":"02:35.360","Text":"Now assuming that these were"},{"Start":"02:35.360 ","End":"02:40.400","Text":"the only transactions occurring in the period, the income statement,"},{"Start":"02:40.400 ","End":"02:45.850","Text":"would show an income amount of the credit sales of 100,"},{"Start":"02:45.850 ","End":"02:48.480","Text":"so income would be 100,"},{"Start":"02:48.480 ","End":"02:51.395","Text":"and in this hypothetical example,"},{"Start":"02:51.395 ","End":"02:54.575","Text":"they are 0 expenses,"},{"Start":"02:54.575 ","End":"02:58.685","Text":"which gives us a profit of 100."},{"Start":"02:58.685 ","End":"03:02.870","Text":"But we know the cash received is 40."},{"Start":"03:02.870 ","End":"03:06.230","Text":"In other words, we know that the cash received is"},{"Start":"03:06.230 ","End":"03:09.950","Text":"less than the amount of the credit sales,"},{"Start":"03:09.950 ","End":"03:14.240","Text":"and that we also understand by looking at"},{"Start":"03:14.240 ","End":"03:20.080","Text":"the balance at the beginning of the period of 200 and the end of the period of 260,"},{"Start":"03:20.080 ","End":"03:24.800","Text":"the only way that balance could have increased from 200 to"},{"Start":"03:24.800 ","End":"03:31.070","Text":"260 is if the credit sales are larger than the cash received,"},{"Start":"03:31.070 ","End":"03:33.115","Text":"or another way around,"},{"Start":"03:33.115 ","End":"03:37.925","Text":"the cash received is less than the credit sales."},{"Start":"03:37.925 ","End":"03:40.970","Text":"Because less cash has been received,"},{"Start":"03:40.970 ","End":"03:44.300","Text":"we may now do the statement of cash flows,"},{"Start":"03:44.300 ","End":"03:51.440","Text":"and we bring in the profit from the income statement of 100 as the starting point."},{"Start":"03:51.440 ","End":"03:54.650","Text":"Because less cash has been received,"},{"Start":"03:54.650 ","End":"04:01.670","Text":"you should now appreciate we need to subtract that increase in the accounts receivable"},{"Start":"04:01.670 ","End":"04:09.380","Text":"balance of 60 to arrive at the cash flow from operating activities of 40,"},{"Start":"04:09.380 ","End":"04:16.490","Text":"which in fact does tie in with the cash received from the receivables ledger account."},{"Start":"04:16.490 ","End":"04:21.110","Text":"Then conversely, if there is a decrease in"},{"Start":"04:21.110 ","End":"04:25.445","Text":"the trade receivables balance from the beginning to end of the period,"},{"Start":"04:25.445 ","End":"04:29.450","Text":"we would have to add this decrease onto the profit,"},{"Start":"04:29.450 ","End":"04:34.070","Text":"because the only way that the receivables balance will decrease would be if"},{"Start":"04:34.070 ","End":"04:39.895","Text":"the cash received is in fact greater than the credit sales."},{"Start":"04:39.895 ","End":"04:44.810","Text":"Again looking at some numbers in a short example."},{"Start":"04:44.810 ","End":"04:47.150","Text":"If the balance in the accounts"},{"Start":"04:47.150 ","End":"04:53.705","Text":"receivable account is an amount of 200 with a debit balance,"},{"Start":"04:53.705 ","End":"05:00.305","Text":"and the credit sales during the period amount to, for example,"},{"Start":"05:00.305 ","End":"05:07.400","Text":"40 this time, again debit to the account receivable and credit to sales."},{"Start":"05:07.400 ","End":"05:15.380","Text":"Then let\u0027s assume that the cash received from customers is now 100."},{"Start":"05:15.380 ","End":"05:17.540","Text":"More cash has been received,"},{"Start":"05:17.540 ","End":"05:21.334","Text":"debit cash, and credit accounts receivable,"},{"Start":"05:21.334 ","End":"05:29.935","Text":"giving us a closing balance in the accounts receivable account in an amount of 140."},{"Start":"05:29.935 ","End":"05:35.180","Text":"Let\u0027s now take a look at the income statement for the period."},{"Start":"05:35.180 ","End":"05:39.920","Text":"Again assuming that this is the only transaction that is occurring,"},{"Start":"05:39.920 ","End":"05:45.050","Text":"the income that is recognized is the credit sales of 40,"},{"Start":"05:45.050 ","End":"05:48.755","Text":"and there are no expenses in this example,"},{"Start":"05:48.755 ","End":"05:54.005","Text":"which gives us a profit for the period of 40."},{"Start":"05:54.005 ","End":"05:57.040","Text":"Preparing the statement of cash flows,"},{"Start":"05:57.040 ","End":"06:00.320","Text":"and as always starting with the profit"},{"Start":"06:00.320 ","End":"06:04.040","Text":"from the accrual-based income statement on the indirect method,"},{"Start":"06:04.040 ","End":"06:06.395","Text":"the profit would be 40."},{"Start":"06:06.395 ","End":"06:12.250","Text":"We know now we have received in fact 100 cash from customers,"},{"Start":"06:12.250 ","End":"06:20.180","Text":"so the balance in the accounts receivable account has gone from 200 down to 140."},{"Start":"06:20.180 ","End":"06:26.130","Text":"It has decreased. There\u0027s been a decrease in the accounts or trade receivables,"},{"Start":"06:26.130 ","End":"06:33.410","Text":"and that decrease is caused by more cash being received compared to the credit sales."},{"Start":"06:33.410 ","End":"06:36.485","Text":"Therefore, when we do the statement of cash flows,"},{"Start":"06:36.485 ","End":"06:42.350","Text":"we have to add on that decrease in the accounts receivable on the 60,"},{"Start":"06:42.350 ","End":"06:48.875","Text":"which gives us a cash flow from operating activities of 100,"},{"Start":"06:48.875 ","End":"06:55.820","Text":"which in fact does tie in with the amount of the cash received per the ledger account."},{"Start":"06:55.820 ","End":"06:59.525","Text":"Looking now at the changes in the inventory account,"},{"Start":"06:59.525 ","End":"07:02.660","Text":"the changes in inventory need to be thought"},{"Start":"07:02.660 ","End":"07:06.215","Text":"about in conjunction with the changes in accounts payable."},{"Start":"07:06.215 ","End":"07:10.835","Text":"But for the purposes of understanding the adjustments required,"},{"Start":"07:10.835 ","End":"07:13.190","Text":"we\u0027re going to look at the imagery count on its"},{"Start":"07:13.190 ","End":"07:17.120","Text":"own and the accounts payable account on its own."},{"Start":"07:17.120 ","End":"07:19.925","Text":"When inventory is purchased for cash,"},{"Start":"07:19.925 ","End":"07:23.515","Text":"and assuming for cash, inventory increases,"},{"Start":"07:23.515 ","End":"07:25.350","Text":"and cash decreases,"},{"Start":"07:25.350 ","End":"07:28.850","Text":"with the accounting entry of debit to increase"},{"Start":"07:28.850 ","End":"07:33.265","Text":"the inventory and a credit to decrease the cash."},{"Start":"07:33.265 ","End":"07:38.285","Text":"At this stage, note there\u0027s no effect on the income statement."},{"Start":"07:38.285 ","End":"07:42.710","Text":"Because the income statement effect will only come about when the inventory is"},{"Start":"07:42.710 ","End":"07:47.910","Text":"actually sold for cash and a cost of sales is recognized."},{"Start":"07:47.910 ","End":"07:53.740","Text":"Therefore, we have to deduct the increase in inventory from"},{"Start":"07:53.740 ","End":"08:00.325","Text":"the profit on the indirect method to arrive at the cash flow from operating activities."},{"Start":"08:00.325 ","End":"08:05.035","Text":"This will be illustrated in an example on a later slide."},{"Start":"08:05.035 ","End":"08:08.080","Text":"When the inventory is not sold for cash,"},{"Start":"08:08.080 ","End":"08:10.570","Text":"the inventory balance decreases,"},{"Start":"08:10.570 ","End":"08:13.509","Text":"and the income statement will show the expense,"},{"Start":"08:13.509 ","End":"08:17.845","Text":"cost of sales, which will give rise to a lower profit."},{"Start":"08:17.845 ","End":"08:19.720","Text":"At the same time, obviously,"},{"Start":"08:19.720 ","End":"08:21.775","Text":"the cash balance increases."},{"Start":"08:21.775 ","End":"08:25.495","Text":"The account entries would look like this."},{"Start":"08:25.495 ","End":"08:28.615","Text":"We will have a debit to cash,"},{"Start":"08:28.615 ","End":"08:31.255","Text":"and a credit to sales,"},{"Start":"08:31.255 ","End":"08:36.715","Text":"and also a debit to cost of sales as an expense,"},{"Start":"08:36.715 ","End":"08:39.955","Text":"and the credit to the inventory account."},{"Start":"08:39.955 ","End":"08:43.255","Text":"Therefore, we\u0027ll have to add"},{"Start":"08:43.255 ","End":"08:48.025","Text":"the decrease in inventory to the profit on the indirect method,"},{"Start":"08:48.025 ","End":"08:52.195","Text":"to arrive at the cash flow from operating activities."},{"Start":"08:52.195 ","End":"08:58.690","Text":"Looking at an example to explain the changes in inventory, in this example,"},{"Start":"08:58.690 ","End":"09:03.700","Text":"inventory is sold for 100 currents units in cash,"},{"Start":"09:03.700 ","End":"09:08.380","Text":"and this is the only transaction taking place during the year."},{"Start":"09:08.380 ","End":"09:11.440","Text":"The cost of the inventory is 60."},{"Start":"09:11.440 ","End":"09:14.740","Text":"This is paid for in the previous period."},{"Start":"09:14.740 ","End":"09:19.600","Text":"Again, assuming that this is the only transaction embedded in mind,"},{"Start":"09:19.600 ","End":"09:23.260","Text":"the looking at the inventory account,"},{"Start":"09:23.260 ","End":"09:27.115","Text":"there will be a balanced and assume that the balance of 60"},{"Start":"09:27.115 ","End":"09:31.930","Text":"was the only inventory the entity had on hand,"},{"Start":"09:31.930 ","End":"09:34.585","Text":"as this is all sold,"},{"Start":"09:34.585 ","End":"09:40.690","Text":"that will be reflected as a cost of sales and a decrease in the inventory balance."},{"Start":"09:40.690 ","End":"09:45.670","Text":"Because remember inventory as an asset would have a debit balance,"},{"Start":"09:45.670 ","End":"09:47.635","Text":"and when inventory is sold,"},{"Start":"09:47.635 ","End":"09:52.059","Text":"there\u0027s a debit to cost of sales and a credit to inventory."},{"Start":"09:52.059 ","End":"09:54.220","Text":"Giving in this situation,"},{"Start":"09:54.220 ","End":"09:56.425","Text":"of all the inventory is sold,"},{"Start":"09:56.425 ","End":"09:58.990","Text":"a closing balance of 0."},{"Start":"09:58.990 ","End":"10:03.025","Text":"Preparing the income statement in this scenario,"},{"Start":"10:03.025 ","End":"10:05.260","Text":"we would show income,"},{"Start":"10:05.260 ","End":"10:10.780","Text":"which is the sales for cash of 100."},{"Start":"10:10.780 ","End":"10:16.540","Text":"The expenses would be the cost of sales of 60,"},{"Start":"10:16.540 ","End":"10:21.350","Text":"which will give us a profit for the period of 40."},{"Start":"10:21.420 ","End":"10:25.975","Text":"Now as always, and as you should be familiar with,"},{"Start":"10:25.975 ","End":"10:33.040","Text":"the statement of cash flows brings the accrual-based profits as the starting point."},{"Start":"10:33.040 ","End":"10:35.170","Text":"There is the profit of 40."},{"Start":"10:35.170 ","End":"10:39.820","Text":"We know now that the cash received was in fact 100."},{"Start":"10:39.820 ","End":"10:43.825","Text":"We\u0027ve received more cash than what the profit is showing."},{"Start":"10:43.825 ","End":"10:48.820","Text":"We therefore have to add on that decrease in inventory of"},{"Start":"10:48.820 ","End":"10:55.705","Text":"60 to arrive at the cash flow from operating activities of 100,"},{"Start":"10:55.705 ","End":"11:01.330","Text":"which ties in with the scenario of 100 cash being received."},{"Start":"11:01.330 ","End":"11:05.500","Text":"Let us now take this Example 1 step further,"},{"Start":"11:05.500 ","End":"11:08.560","Text":"and assume that the sale is on credit."},{"Start":"11:08.560 ","End":"11:10.900","Text":"Therefore, no cash is received,"},{"Start":"11:10.900 ","End":"11:15.415","Text":"and obviously the trade receivables increases by 100."},{"Start":"11:15.415 ","End":"11:17.830","Text":"To look at the whole example together,"},{"Start":"11:17.830 ","End":"11:23.365","Text":"we will consider both the inventory accounts and the accounts receivable accounts."},{"Start":"11:23.365 ","End":"11:25.705","Text":"I\u0027ll do the inventory account again."},{"Start":"11:25.705 ","End":"11:32.710","Text":"Again, assuming that the balance of 60 is the only inventory to this entity has on hand,"},{"Start":"11:32.710 ","End":"11:35.365","Text":"and therefore a debit balance as an asset,"},{"Start":"11:35.365 ","End":"11:37.750","Text":"and this inventory is sold."},{"Start":"11:37.750 ","End":"11:40.240","Text":"Cost of sales is recognized."},{"Start":"11:40.240 ","End":"11:44.200","Text":"Debit cost of sales and credit inventory,"},{"Start":"11:44.200 ","End":"11:49.030","Text":"and therefore the closing balance in the inventory account is 0."},{"Start":"11:49.030 ","End":"11:53.320","Text":"We also need to consider the accounts receivable account now,"},{"Start":"11:53.320 ","End":"11:56.620","Text":"and let\u0027s assume that there was no balance in"},{"Start":"11:56.620 ","End":"12:00.040","Text":"accounts receivable at the beginning of the period,"},{"Start":"12:00.040 ","End":"12:07.675","Text":"and now we have the credit sales of 100 in the current period."},{"Start":"12:07.675 ","End":"12:11.515","Text":"There will be a debit to the accounts receivable account,"},{"Start":"12:11.515 ","End":"12:17.740","Text":"giving us a closing balance in accounts receivable of 100 as a debit."},{"Start":"12:17.740 ","End":"12:19.780","Text":"Now looking at the movements,"},{"Start":"12:19.780 ","End":"12:24.590","Text":"remember the inventory account has decreased from 60 to 0,"},{"Start":"12:24.600 ","End":"12:31.375","Text":"and the accounts receivable account is increased from 0 to 100."},{"Start":"12:31.375 ","End":"12:33.850","Text":"Let\u0027s do the income statement."},{"Start":"12:33.850 ","End":"12:42.715","Text":"The income statement will show sales and we know the sales or the credit sales of 100."},{"Start":"12:42.715 ","End":"12:45.050","Text":"Sales will be 100,"},{"Start":"12:45.050 ","End":"12:47.295","Text":"and the cost of sales,"},{"Start":"12:47.295 ","End":"12:48.855","Text":"which is the expense,"},{"Start":"12:48.855 ","End":"12:52.710","Text":"will be the amount we know of 60."},{"Start":"12:52.710 ","End":"12:56.070","Text":"Cost of sales or expenses are 60,"},{"Start":"12:56.070 ","End":"13:01.195","Text":"and therefore, the profit is an amount of 40."},{"Start":"13:01.195 ","End":"13:04.000","Text":"Looking at the statement of cash flows,"},{"Start":"13:04.000 ","End":"13:06.925","Text":"there are going to be 2 adjustments to make now."},{"Start":"13:06.925 ","End":"13:12.090","Text":"Profit as always comes in on the indirect method as starting point,"},{"Start":"13:12.090 ","End":"13:14.220","Text":"the accrual-based profit of 40."},{"Start":"13:14.220 ","End":"13:17.100","Text":"Now there are 2 adjustments to make,"},{"Start":"13:17.100 ","End":"13:21.860","Text":"the first adjustment to make is the increase in accounts receivable."},{"Start":"13:21.860 ","End":"13:24.865","Text":"Now accounts receivable have increased,"},{"Start":"13:24.865 ","End":"13:30.115","Text":"and that\u0027s happened because there\u0027s been no cash received at all,"},{"Start":"13:30.115 ","End":"13:36.640","Text":"so I need to subtract that increase in accounts receivable of 100."},{"Start":"13:36.640 ","End":"13:39.550","Text":"The inventory has decreased,"},{"Start":"13:39.550 ","End":"13:41.755","Text":"and the decrease in inventory,"},{"Start":"13:41.755 ","End":"13:45.250","Text":"we know we have to add on to convert"},{"Start":"13:45.250 ","End":"13:51.040","Text":"the accrual-based profit into a cash flow from operating activities,"},{"Start":"13:51.040 ","End":"13:55.555","Text":"and the decrease in inventory is the amounts of 60."},{"Start":"13:55.555 ","End":"14:01.780","Text":"This here gives us a cash flow from operating activities in this example of 0,"},{"Start":"14:01.780 ","End":"14:04.540","Text":"which is correct because if you look at the numbers,"},{"Start":"14:04.540 ","End":"14:08.095","Text":"there is no cash received or paid anywhere."},{"Start":"14:08.095 ","End":"14:12.850","Text":"The costs of sales has no cash outflow implication,"},{"Start":"14:12.850 ","End":"14:17.740","Text":"and the credit sales has no cash inflow implication."},{"Start":"14:17.740 ","End":"14:21.700","Text":"Looking now at the changes in trade payables,"},{"Start":"14:21.700 ","End":"14:24.145","Text":"and as we mentioned previously,"},{"Start":"14:24.145 ","End":"14:29.785","Text":"any changes in inventory and trade payables have to be thought of together."},{"Start":"14:29.785 ","End":"14:33.445","Text":"If we buy inventory from suppliers on credit,"},{"Start":"14:33.445 ","End":"14:39.630","Text":"remember the accounting entry will be a debit to the inventory accounts,"},{"Start":"14:39.630 ","End":"14:45.985","Text":"an asset, and a credit to the accounts payable account, a liability."},{"Start":"14:45.985 ","End":"14:50.590","Text":"There\u0027s clearly no effect on cash in this transaction."},{"Start":"14:50.590 ","End":"14:55.630","Text":"We therefore need to add any increase in trade payables to"},{"Start":"14:55.630 ","End":"14:58.990","Text":"the accrual-based profit to arrive there for at"},{"Start":"14:58.990 ","End":"15:03.220","Text":"a higher cash flow from operating activities."},{"Start":"15:03.220 ","End":"15:07.915","Text":"Conversely, when we pay suppliers, cash goes down,"},{"Start":"15:07.915 ","End":"15:12.834","Text":"the account entry would be a debit to accounts payable,"},{"Start":"15:12.834 ","End":"15:17.350","Text":"the liability, and a credit to cash."},{"Start":"15:17.350 ","End":"15:23.170","Text":"Therefore, we need to deduct any decrease in trade payables from"},{"Start":"15:23.170 ","End":"15:30.415","Text":"the accrual-based profit to arrive at a lower cash flow from operating activities."},{"Start":"15:30.415 ","End":"15:35.470","Text":"In summary, therefore, and we\u0027ll use an example to illustrate the point."},{"Start":"15:35.470 ","End":"15:38.360","Text":"If there\u0027s an increase in trade payables."},{"Start":"15:38.360 ","End":"15:43.925","Text":"We add the increase to profit as less cash is paid to suppliers,"},{"Start":"15:43.925 ","End":"15:46.745","Text":"then goods or services purchased."},{"Start":"15:46.745 ","End":"15:49.230","Text":"Think of this scenario,"},{"Start":"15:49.230 ","End":"15:55.580","Text":"if we look at the accounts payable or the trade payables account in the ledger,"},{"Start":"15:55.580 ","End":"15:58.654","Text":"and the account has an opening balance."},{"Start":"15:58.654 ","End":"16:04.630","Text":"Remember, liability of 200 which will be a credit balance,"},{"Start":"16:04.630 ","End":"16:12.050","Text":"and the inventory purchased during the period amounts to 100."},{"Start":"16:12.050 ","End":"16:15.160","Text":"The journal entry being debit inventory,"},{"Start":"16:15.160 ","End":"16:18.694","Text":"and therefore credit to accounts payable,"},{"Start":"16:18.694 ","End":"16:27.095","Text":"and the cash paid to the suppliers of the inventory during the period amounts to 40,"},{"Start":"16:27.095 ","End":"16:32.520","Text":"which would be debit accounts payable, and credit cash."},{"Start":"16:34.440 ","End":"16:43.400","Text":"The ending balance in the accounts payable account amounts to 260."},{"Start":"16:43.400 ","End":"16:51.775","Text":"Now, we also need to look alongside this at the movement in the inventory account."},{"Start":"16:51.775 ","End":"16:57.385","Text":"This is the inventory account in the ledger and the balance,"},{"Start":"16:57.385 ","End":"17:00.700","Text":"assuming no balance at the beginning of the period because"},{"Start":"17:00.700 ","End":"17:04.195","Text":"we want to focus only on this particular transaction."},{"Start":"17:04.195 ","End":"17:10.330","Text":"Therefore 0 opening balance and therefore the acquisition of inventory,"},{"Start":"17:10.330 ","End":"17:14.065","Text":"the inventory purchased during the period is the amount"},{"Start":"17:14.065 ","End":"17:18.354","Text":"of 100 as we have seen which is a debit inventory."},{"Start":"17:18.354 ","End":"17:20.335","Text":"Again, as I\u0027ve said,"},{"Start":"17:20.335 ","End":"17:22.750","Text":"assuming this is the only transaction,"},{"Start":"17:22.750 ","End":"17:28.495","Text":"the closing balance in inventory would be an amount of 100 as well."},{"Start":"17:28.495 ","End":"17:33.340","Text":"Now looking at an income statement for these transactions alone,"},{"Start":"17:33.340 ","End":"17:36.640","Text":"the income statement will look as follows."},{"Start":"17:36.640 ","End":"17:40.525","Text":"Income earned, you can clearly see is 0,"},{"Start":"17:40.525 ","End":"17:47.170","Text":"there has been no sales in the period and correspondingly there are no expenses as well."},{"Start":"17:47.170 ","End":"17:53.235","Text":"The profit in this scenario looking again as I\u0027ve said only these transactions,"},{"Start":"17:53.235 ","End":"17:55.680","Text":"the profit is in fact 0."},{"Start":"17:55.680 ","End":"17:58.650","Text":"But let\u0027s think about the cash flow implication"},{"Start":"17:58.650 ","End":"18:02.540","Text":"before we start looking at the statement of cash flows."},{"Start":"18:02.540 ","End":"18:07.210","Text":"Looking at the accounts payable and the inventory account together,"},{"Start":"18:07.210 ","End":"18:14.110","Text":"we can see the cash outflow in these transactions as an amount of 40."},{"Start":"18:14.110 ","End":"18:19.180","Text":"Therefore, looking at the statement of cash flows and remembering as always"},{"Start":"18:19.180 ","End":"18:24.415","Text":"we start with the accrual based profit from the income statement."},{"Start":"18:24.415 ","End":"18:27.640","Text":"The accrual based profit here is 0."},{"Start":"18:27.640 ","End":"18:32.350","Text":"What has happened to the accounts payable and the inventory accounts?"},{"Start":"18:32.350 ","End":"18:36.250","Text":"Well, the accounts payable account has increased by"},{"Start":"18:36.250 ","End":"18:41.484","Text":"60 and it\u0027s increased by 60 because the inventory purchased"},{"Start":"18:41.484 ","End":"18:44.740","Text":"is greater than the cash paid and"},{"Start":"18:44.740 ","End":"18:47.485","Text":"the inventory account has increased by"},{"Start":"18:47.485 ","End":"18:51.580","Text":"100 representing the additional inventory purchased."},{"Start":"18:51.580 ","End":"18:56.070","Text":"Notice inventory has been purchased on credit and therefore"},{"Start":"18:56.070 ","End":"19:00.425","Text":"the only cash movement is the 40 that we have identified."},{"Start":"19:00.425 ","End":"19:02.995","Text":"Therefore under statement of cash flows,"},{"Start":"19:02.995 ","End":"19:08.455","Text":"we need to account for both the change in accounts payable and the change in inventory."},{"Start":"19:08.455 ","End":"19:12.430","Text":"We subtract the increase in inventory which is 100,"},{"Start":"19:12.430 ","End":"19:16.629","Text":"so that\u0027s the increase in the inventory"},{"Start":"19:16.629 ","End":"19:23.350","Text":"and the increase in accounts payable is added on here,"},{"Start":"19:23.350 ","End":"19:28.945","Text":"so we add on the increase in accounts payable which is 60."},{"Start":"19:28.945 ","End":"19:37.165","Text":"This is the increase in the accounts payable that gives us a cash flow from"},{"Start":"19:37.165 ","End":"19:41.215","Text":"operating activities of a negative 40 on"},{"Start":"19:41.215 ","End":"19:47.110","Text":"cash outflow which ties in with what we see from the underlying account information."},{"Start":"19:47.110 ","End":"19:51.790","Text":"The cash paid in this transaction is an amount of 40."},{"Start":"19:51.790 ","End":"19:55.960","Text":"Moving on then to a decrease in trade payables."},{"Start":"19:55.960 ","End":"19:58.960","Text":"Here we are paying suppliers,"},{"Start":"19:58.960 ","End":"20:02.470","Text":"so on the statement of cash flows we will subtract from"},{"Start":"20:02.470 ","End":"20:09.445","Text":"profit as more cash has been paid and goods or services purchased."},{"Start":"20:09.445 ","End":"20:13.600","Text":"Again, lets look at an example and we\u0027ll need to"},{"Start":"20:13.600 ","End":"20:18.880","Text":"reconstruct again both the accounts payable and the inventory accounts."},{"Start":"20:18.880 ","End":"20:22.405","Text":"Starting with the accounts payable account."},{"Start":"20:22.405 ","End":"20:27.970","Text":"Accounts payable will take an opening balance of 200."},{"Start":"20:27.970 ","End":"20:31.765","Text":"Remember liability and therefore credit balance."},{"Start":"20:31.765 ","End":"20:37.765","Text":"The inventory purchased will make 40 this time."},{"Start":"20:37.765 ","End":"20:40.990","Text":"Inventory purchased, debit inventory,"},{"Start":"20:40.990 ","End":"20:44.260","Text":"and credit accounts payable and then"},{"Start":"20:44.260 ","End":"20:51.340","Text":"the cash paid to suppliers will make this term equal to 100."},{"Start":"20:51.340 ","End":"20:55.555","Text":"Debit accounts payable and credit cash."},{"Start":"20:55.555 ","End":"21:03.220","Text":"Therefore the closing balance in the accounts payable account amounts to 140."},{"Start":"21:03.220 ","End":"21:07.090","Text":"I will put the inventory account down again just"},{"Start":"21:07.090 ","End":"21:11.005","Text":"for illustrative purposes and the amount has changed as well."},{"Start":"21:11.005 ","End":"21:14.770","Text":"We will again assume an opening balance of"},{"Start":"21:14.770 ","End":"21:20.430","Text":"0 and the inventory purchased which as you see from the accounts"},{"Start":"21:20.430 ","End":"21:24.000","Text":"payable account has purchased on credit is"},{"Start":"21:24.000 ","End":"21:30.660","Text":"40 and therefore the closing balance in the inventory account is 40 as well."},{"Start":"21:30.660 ","End":"21:36.865","Text":"Looking at the income statement again focusing on these transactions alone,"},{"Start":"21:36.865 ","End":"21:39.085","Text":"there has been no sales,"},{"Start":"21:39.085 ","End":"21:45.730","Text":"the income is 0 and correspondingly no cost of sales expenses are again 0,"},{"Start":"21:45.730 ","End":"21:51.400","Text":"and therefore the profit is an amount of 0."},{"Start":"21:51.400 ","End":"21:56.095","Text":"Before we look at the statement of cash flows lets look and see what"},{"Start":"21:56.095 ","End":"22:00.670","Text":"is the cash movement in this particular set of transactions."},{"Start":"22:00.670 ","End":"22:05.605","Text":"We can see over here the cash paid is an amount of 100."},{"Start":"22:05.605 ","End":"22:07.630","Text":"That is the cash out flow."},{"Start":"22:07.630 ","End":"22:11.365","Text":"Moving to the statement of cash flows."},{"Start":"22:11.365 ","End":"22:14.710","Text":"Again, remember the accounting accrual"},{"Start":"22:14.710 ","End":"22:19.930","Text":"based profit comes onto the statement of cash flows, the profit is 0."},{"Start":"22:19.930 ","End":"22:23.140","Text":"What does now happen to the accounts payable account,"},{"Start":"22:23.140 ","End":"22:28.180","Text":"the accounts payable account has decreased from 200 to"},{"Start":"22:28.180 ","End":"22:35.620","Text":"140 and the inventory account has increased from 0 to 40."},{"Start":"22:35.620 ","End":"22:39.490","Text":"Therefore preparing the statement of cash flows we look at"},{"Start":"22:39.490 ","End":"22:44.980","Text":"the increase in the inventory and we subtract the increase in the inventory,"},{"Start":"22:44.980 ","End":"22:47.920","Text":"so we subtract the 40,"},{"Start":"22:47.920 ","End":"22:54.040","Text":"that\u0027s the increase in the inventory and we also then have to"},{"Start":"22:54.040 ","End":"22:56.800","Text":"subtract the decrease in accounts"},{"Start":"22:56.800 ","End":"23:02.125","Text":"payable and accounts payable have decreased by an amount of 60."},{"Start":"23:02.125 ","End":"23:05.905","Text":"That\u0027s the decrease in accounts payable."},{"Start":"23:05.905 ","End":"23:10.555","Text":"This results in a cash flow from operating activities"},{"Start":"23:10.555 ","End":"23:18.055","Text":"an outflow of 100 which again ties in with the underlying ledger accounts."},{"Start":"23:18.055 ","End":"23:24.535","Text":"Here we see an example of the statement of cash flows again from the company,"},{"Start":"23:24.535 ","End":"23:30.145","Text":"Next Plc, focusing on the working capital changes."},{"Start":"23:30.145 ","End":"23:34.285","Text":"Remember these here are the working capital changes."},{"Start":"23:34.285 ","End":"23:38.320","Text":"Previously we had looked at over here,"},{"Start":"23:38.320 ","End":"23:41.575","Text":"we had looked at the non cash items."},{"Start":"23:41.575 ","End":"23:46.240","Text":"Remember there are 2 sets of adjustments to"},{"Start":"23:46.240 ","End":"23:53.200","Text":"operating profit to arrive at the cash flow from operations using the indirect method."},{"Start":"23:53.200 ","End":"23:57.490","Text":"Applying what you\u0027ve just learned and looking at the 2020 column,"},{"Start":"23:57.490 ","End":"24:01.660","Text":"there is an increase in inventories which is subtracted,"},{"Start":"24:01.660 ","End":"24:05.530","Text":"there is an increase in receivables which is subtracted,"},{"Start":"24:05.530 ","End":"24:10.600","Text":"and there is a decrease in payables which is also subtracted."},{"Start":"24:10.600 ","End":"24:12.955","Text":"Note that 2019 year,"},{"Start":"24:12.955 ","End":"24:18.100","Text":"the trade payables increased and therefore that is added in moving from"},{"Start":"24:18.100 ","End":"24:24.110","Text":"the accrual based profit to the cash generated from operations."}],"ID":29687},{"Watched":false,"Name":"Statement of Cash Flows - Part 3.5","Duration":"12m 12s","ChapterTopicVideoID":26940,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.940","Text":"Hello and welcome to the series of"},{"Start":"00:02.940 ","End":"00:08.655","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:08.655 ","End":"00:15.195","Text":"We continue here with the focus on operating activities and with the indirect method,"},{"Start":"00:15.195 ","End":"00:22.125","Text":"look in this video at the adjustments required relating to unearned revenue,"},{"Start":"00:22.125 ","End":"00:28.205","Text":"prepaid expenses, accrued income, and accrued expenses."},{"Start":"00:28.205 ","End":"00:33.710","Text":"The first of these accounts to consider is the unearned revenue account."},{"Start":"00:33.710 ","End":"00:40.310","Text":"Remember, this is a liability account and it relates to cash received"},{"Start":"00:40.310 ","End":"00:47.705","Text":"by the entity in relation to goods and services to be provided in future periods."},{"Start":"00:47.705 ","End":"00:50.615","Text":"Looking at a short example,"},{"Start":"00:50.615 ","End":"00:56.570","Text":"let us assume that the opening balance in the unearned revenue account,"},{"Start":"00:56.570 ","End":"01:00.615","Text":"remember liability is 100,"},{"Start":"01:00.615 ","End":"01:06.590","Text":"and as a liability that will have a credit balance and then the cash received during"},{"Start":"01:06.590 ","End":"01:10.175","Text":"the period in respect of goods or services"},{"Start":"01:10.175 ","End":"01:14.885","Text":"to be provided in future periods amounts to 50."},{"Start":"01:14.885 ","End":"01:18.645","Text":"Also therefore a credit to that account,"},{"Start":"01:18.645 ","End":"01:25.805","Text":"then the revenue recognized in the current period,"},{"Start":"01:25.805 ","End":"01:28.445","Text":"which will be a debit to the account."},{"Start":"01:28.445 ","End":"01:32.419","Text":"Let\u0027s assume that is an amount of 20,"},{"Start":"01:32.419 ","End":"01:39.540","Text":"which gives us a closing balance in the unearned revenue account,"},{"Start":"01:39.540 ","End":"01:43.550","Text":"a liability remember of 130,"},{"Start":"01:43.550 ","End":"01:46.670","Text":"also therefore, a credit balance."},{"Start":"01:46.670 ","End":"01:49.670","Text":"Looking now at an income statement,"},{"Start":"01:49.670 ","End":"01:56.330","Text":"and assuming that v is the only transactions that have occurred in this illustration,"},{"Start":"01:56.330 ","End":"02:00.844","Text":"we will have income recognized of 20."},{"Start":"02:00.844 ","End":"02:06.620","Text":"That\u0027s the 20 recognized as income from the liability account as you see over there."},{"Start":"02:06.620 ","End":"02:11.840","Text":"In this case, there are no expenses on this income statement,"},{"Start":"02:11.840 ","End":"02:17.060","Text":"and therefore, the profit for the period is an amount of 20."},{"Start":"02:17.060 ","End":"02:19.865","Text":"But how much cash has been received?"},{"Start":"02:19.865 ","End":"02:24.410","Text":"We know we\u0027ve received 50 in cash during the current period."},{"Start":"02:24.410 ","End":"02:28.550","Text":"Therefore, when preparing the statement of cash flows,"},{"Start":"02:28.550 ","End":"02:35.764","Text":"remembering the starting point is always the profit from the income statement."},{"Start":"02:35.764 ","End":"02:38.225","Text":"The profit would be 20."},{"Start":"02:38.225 ","End":"02:44.390","Text":"We therefore need to add the increase in the unearned revenue."},{"Start":"02:44.390 ","End":"02:49.130","Text":"Unearned revenue has increased from 100 at the beginning of"},{"Start":"02:49.130 ","End":"02:54.005","Text":"the period to 130 at the end of the period."},{"Start":"02:54.005 ","End":"02:57.275","Text":"If we add on that 30,"},{"Start":"02:57.275 ","End":"03:05.240","Text":"that gives us the cash flow from operations or operating activities of 50,"},{"Start":"03:05.240 ","End":"03:10.405","Text":"which we know is the amount of cash received in the current period,"},{"Start":"03:10.405 ","End":"03:13.460","Text":"and conversely, if the balance in"},{"Start":"03:13.460 ","End":"03:15.320","Text":"the unearned revenue account"},{"Start":"03:15.320 ","End":"03:19.760","Text":"decreases from the beginning of the year to the end of the year."},{"Start":"03:19.760 ","End":"03:22.850","Text":"That decrease would have to be subtracted from"},{"Start":"03:22.850 ","End":"03:27.275","Text":"profit in robbing at the cash flow from operations."},{"Start":"03:27.275 ","End":"03:30.260","Text":"The second account to consider this,"},{"Start":"03:30.260 ","End":"03:35.795","Text":"the prepaid expenses, which you will recall is an asset account."},{"Start":"03:35.795 ","End":"03:39.050","Text":"The prepaid expenses referred to"},{"Start":"03:39.050 ","End":"03:43.490","Text":"amounts paid by the entity in cash in the current period,"},{"Start":"03:43.490 ","End":"03:51.175","Text":"but which relate to expenses that will be incurred and recognized in a future period."},{"Start":"03:51.175 ","End":"03:57.005","Text":"Again, let\u0027s think about a short example, and for consistency,"},{"Start":"03:57.005 ","End":"04:01.310","Text":"I\u0027m going to use the same numbers as in the previous example,"},{"Start":"04:01.310 ","End":"04:05.780","Text":"but relate them to a prepaid expenses scenario."},{"Start":"04:05.780 ","End":"04:11.300","Text":"Let us assume the opening balance in the prepaid expenses,"},{"Start":"04:11.300 ","End":"04:15.365","Text":"remember an asset account is in 100,"},{"Start":"04:15.365 ","End":"04:19.880","Text":"and as an asset it will have a debit balance."},{"Start":"04:19.880 ","End":"04:28.070","Text":"Then the cash paid in advance during the period is an amount of 50,"},{"Start":"04:28.070 ","End":"04:32.060","Text":"also therefore a debit to the prepaid expenses accounts,"},{"Start":"04:32.060 ","End":"04:34.895","Text":"and then the amount of the expense"},{"Start":"04:34.895 ","End":"04:40.285","Text":"recognized in the current period will be an amount of 20,"},{"Start":"04:40.285 ","End":"04:43.250","Text":"therefore a credit to this account,"},{"Start":"04:43.250 ","End":"04:46.430","Text":"giving us a closing balance,"},{"Start":"04:46.430 ","End":"04:53.135","Text":"also an asset in the prepaid expenses accounts of 130,"},{"Start":"04:53.135 ","End":"04:56.385","Text":"and therefore also a debit balance."},{"Start":"04:56.385 ","End":"04:59.680","Text":"Looking at the income statement, and again,"},{"Start":"04:59.680 ","End":"05:05.245","Text":"assuming that these are the only transaction that occurred in the current period,"},{"Start":"05:05.245 ","End":"05:07.360","Text":"in this hypothetical situation,"},{"Start":"05:07.360 ","End":"05:10.450","Text":"there is no income being recognized,"},{"Start":"05:10.450 ","End":"05:13.435","Text":"but the expenses being recognized,"},{"Start":"05:13.435 ","End":"05:17.095","Text":"we know are an amount of 20."},{"Start":"05:17.095 ","End":"05:20.820","Text":"We have an expense recognized of 20,"},{"Start":"05:20.820 ","End":"05:27.415","Text":"and this in fact gives us a loss in the scenario for the current period of 20."},{"Start":"05:27.415 ","End":"05:33.340","Text":"But we know that the cash paid was an amount of 50."},{"Start":"05:33.340 ","End":"05:36.655","Text":"Therefore, looking at the statement of cash flows,"},{"Start":"05:36.655 ","End":"05:40.960","Text":"and we start off with the profit on this case,"},{"Start":"05:40.960 ","End":"05:47.335","Text":"the loss from the income statement of an amount of 20,"},{"Start":"05:47.335 ","End":"05:49.390","Text":"and we know that in fact,"},{"Start":"05:49.390 ","End":"05:56.935","Text":"a further 30 has been paid in cash because the total cash paid was in fact 50."},{"Start":"05:56.935 ","End":"06:04.285","Text":"We therefore subtract this increase in the balance on the prepaid expenses,"},{"Start":"06:04.285 ","End":"06:07.315","Text":"which is an amount of 30,"},{"Start":"06:07.315 ","End":"06:13.615","Text":"which gives us the cash flow from operations or operating activities."},{"Start":"06:13.615 ","End":"06:17.724","Text":"In this case, a cash outflow of 50,"},{"Start":"06:17.724 ","End":"06:24.095","Text":"which we consult with the amount of cash paid per the ledger account."},{"Start":"06:24.095 ","End":"06:28.760","Text":"Again, conversely, if the balance in the prepaid expenses"},{"Start":"06:28.760 ","End":"06:34.140","Text":"account decreased from the beginning of the year to the end of the year,"},{"Start":"06:34.140 ","End":"06:37.415","Text":"we would have to add on that decrease"},{"Start":"06:37.415 ","End":"06:42.215","Text":"in the statement of cash flows as an adjusting item."},{"Start":"06:42.215 ","End":"06:46.535","Text":"Next, we consider the accrued expenses."},{"Start":"06:46.535 ","End":"06:51.320","Text":"Now again, you remember an accrued expense is a liability."},{"Start":"06:51.320 ","End":"06:55.550","Text":"It represents expenses incurred in the current period,"},{"Start":"06:55.550 ","End":"06:59.450","Text":"but which have not yet been paid in cash."},{"Start":"06:59.450 ","End":"07:03.560","Text":"Again, looking at an example with the same numbers,"},{"Start":"07:03.560 ","End":"07:07.115","Text":"let\u0027s assumed that there is an opening balance,"},{"Start":"07:07.115 ","End":"07:14.005","Text":"a liability in the accrued expenses of 100 credit,"},{"Start":"07:14.005 ","End":"07:19.490","Text":"and that opening balance was paid in cash during the period."},{"Start":"07:19.490 ","End":"07:22.175","Text":"The cash paid therefore was 100,"},{"Start":"07:22.175 ","End":"07:23.965","Text":"a debit to the account,"},{"Start":"07:23.965 ","End":"07:25.895","Text":"and at the end of the period,"},{"Start":"07:25.895 ","End":"07:28.940","Text":"there\u0027s a further accrual recognized."},{"Start":"07:28.940 ","End":"07:31.685","Text":"We recognize an expense,"},{"Start":"07:31.685 ","End":"07:37.615","Text":"a further cruel at the end of the period of an amount of 130,"},{"Start":"07:37.615 ","End":"07:41.045","Text":"a credit to the accrued expenses account,"},{"Start":"07:41.045 ","End":"07:44.030","Text":"which gives us a closing balance,"},{"Start":"07:44.030 ","End":"07:48.275","Text":"a liability as well on the accrued expenses account,"},{"Start":"07:48.275 ","End":"07:50.580","Text":"a credit balance of 130."},{"Start":"07:50.580 ","End":"07:57.380","Text":"Again, doing an income statement and looking at these transactions on their own,"},{"Start":"07:57.380 ","End":"08:04.355","Text":"there\u0027s going to be zero income reported in the scenario and the expenses recognized,"},{"Start":"08:04.355 ","End":"08:07.670","Text":"we know on amount of 130,"},{"Start":"08:07.670 ","End":"08:09.230","Text":"the year end accrual,"},{"Start":"08:09.230 ","End":"08:19.415","Text":"so we record 130 expense which gives us a loss for the period in an amount of 130."},{"Start":"08:19.415 ","End":"08:22.100","Text":"But how much cash was paid?"},{"Start":"08:22.100 ","End":"08:25.520","Text":"We know only 100 was paid in cash."},{"Start":"08:25.520 ","End":"08:28.760","Text":"Now, during the statement of cash flows,"},{"Start":"08:28.760 ","End":"08:32.810","Text":"and again bringing the profit on this case,"},{"Start":"08:32.810 ","End":"08:38.795","Text":"the loss from the income statement and statement of cash flow on the indirect method,"},{"Start":"08:38.795 ","End":"08:42.955","Text":"we start off with a loss of 130."},{"Start":"08:42.955 ","End":"08:46.920","Text":"Because we know that less cash was paid,"},{"Start":"08:46.920 ","End":"08:49.350","Text":"only 100 cash was paid,"},{"Start":"08:49.350 ","End":"08:54.545","Text":"we add on that increase in the accrued expenses."},{"Start":"08:54.545 ","End":"08:58.520","Text":"We add on the change in accrued expenses which moved,"},{"Start":"08:58.520 ","End":"09:02.090","Text":"remember from 100 to 130,"},{"Start":"09:02.090 ","End":"09:05.335","Text":"we add that on 30."},{"Start":"09:05.335 ","End":"09:10.070","Text":"This again gives us the cash flow from operating activities."},{"Start":"09:10.070 ","End":"09:13.520","Text":"In this case, a cash outflow of 100,"},{"Start":"09:13.520 ","End":"09:19.845","Text":"which ties in, as you see with the amount of cash paid per the ledger account,"},{"Start":"09:19.845 ","End":"09:24.710","Text":"and also conversely, if the balance in the accrued expenses"},{"Start":"09:24.710 ","End":"09:30.310","Text":"account happened to decrease from the beginning of the year to the end of the year,"},{"Start":"09:30.310 ","End":"09:35.090","Text":"we would subtract that difference on the statement of cash flows."},{"Start":"09:35.090 ","End":"09:39.770","Text":"The last of the 4 scenarios to think about is the accrued income."},{"Start":"09:39.770 ","End":"09:43.565","Text":"Accrued income, you will remember is an asset,"},{"Start":"09:43.565 ","End":"09:48.350","Text":"it\u0027s an asset because it relates to income earned in the current period,"},{"Start":"09:48.350 ","End":"09:50.730","Text":"but not yet received in cash."},{"Start":"09:50.730 ","End":"09:53.335","Text":"Looking at the accrued income account,"},{"Start":"09:53.335 ","End":"09:55.315","Text":"let\u0027s assume the balance,"},{"Start":"09:55.315 ","End":"09:59.290","Text":"an asset, an opening balance of 100,"},{"Start":"09:59.290 ","End":"10:01.790","Text":"therefore a debit balance."},{"Start":"10:01.790 ","End":"10:05.560","Text":"We would assume that all the accrued income at the beginning of"},{"Start":"10:05.560 ","End":"10:10.180","Text":"the period is in fact received in cash in the current period."},{"Start":"10:10.180 ","End":"10:13.750","Text":"Therefore, the cash received would be 100,"},{"Start":"10:13.750 ","End":"10:16.670","Text":"a credit to the accrued income account,"},{"Start":"10:16.670 ","End":"10:19.090","Text":"and then at the end of the period,"},{"Start":"10:19.090 ","End":"10:24.400","Text":"the unearned rather the accrued income, other words,"},{"Start":"10:24.400 ","End":"10:27.865","Text":"the income recognized in the current period"},{"Start":"10:27.865 ","End":"10:33.390","Text":"accrued for the current period is an amount of 130,"},{"Start":"10:33.390 ","End":"10:34.930","Text":"I debit this account,"},{"Start":"10:34.930 ","End":"10:36.785","Text":"to determine credit to income,"},{"Start":"10:36.785 ","End":"10:39.949","Text":"giving us a closing balance,"},{"Start":"10:39.949 ","End":"10:43.940","Text":"also an asset of 130."},{"Start":"10:43.940 ","End":"10:47.900","Text":"Then looking at the income statement for this period, and again,"},{"Start":"10:47.900 ","End":"10:50.870","Text":"assuming that these are the only transactions,"},{"Start":"10:50.870 ","End":"10:55.520","Text":"the amount of income recognized is 130."},{"Start":"10:55.520 ","End":"11:03.935","Text":"So we have income of 130 and there are no expenses in this particular set of numbers."},{"Start":"11:03.935 ","End":"11:08.750","Text":"Therefore, the profit is an amount of 130."},{"Start":"11:08.750 ","End":"11:14.150","Text":"But we know that the cash received is only an amount of 100."},{"Start":"11:14.150 ","End":"11:18.485","Text":"Therefore, when we start preparing the statement of cash flows,"},{"Start":"11:18.485 ","End":"11:20.570","Text":"and we start with the profit."},{"Start":"11:20.570 ","End":"11:23.465","Text":"Remember the profit always comes from the income statement."},{"Start":"11:23.465 ","End":"11:27.675","Text":"The profit will be the amount of 130,"},{"Start":"11:27.675 ","End":"11:35.660","Text":"and we know that only 100 has been received in cash in the current period."},{"Start":"11:35.660 ","End":"11:42.350","Text":"Therefore, I have to subtract the increase in the accrued income, which is 30,"},{"Start":"11:42.350 ","End":"11:48.605","Text":"which will give us the cash flow from operating activities of 100,"},{"Start":"11:48.605 ","End":"11:53.755","Text":"which ties in with the amount of cash received in the current period,"},{"Start":"11:53.755 ","End":"11:57.620","Text":"and as with the previous scenarios, conversely,"},{"Start":"11:57.620 ","End":"11:59.000","Text":"if the balance on"},{"Start":"11:59.000 ","End":"12:01.310","Text":"the accrued income account"},{"Start":"12:01.310 ","End":"12:05.110","Text":"decreased from the beginning of the year to the end of the year,"},{"Start":"12:05.110 ","End":"12:08.300","Text":"we would have to add that decrease to"},{"Start":"12:08.300 ","End":"12:13.740","Text":"the profit to arrive at the cash flow from operating activities."}],"ID":29688},{"Watched":false,"Name":"Statement of Cash Flows - Part 3.6","Duration":"2m 52s","ChapterTopicVideoID":26941,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.380 ","End":"00:03.270","Text":"Hello, and welcome to this series of"},{"Start":"00:03.270 ","End":"00:08.535","Text":"video presentations on the statement of cash flows brought to you by proprep."},{"Start":"00:08.535 ","End":"00:15.000","Text":"In this video, we continue with a focus on operating activities and here look at"},{"Start":"00:15.000 ","End":"00:21.990","Text":"the other adjustments presented after the subtotal of cash flow from operations."},{"Start":"00:21.990 ","End":"00:30.295","Text":"The tax paid or received is reported in full in the same way as in the direct method."},{"Start":"00:30.295 ","End":"00:37.445","Text":"Interest paid or received is also reported as in the direct method."},{"Start":"00:37.445 ","End":"00:44.225","Text":"It may be reported under the section cash flow from operating activities, but remember,"},{"Start":"00:44.225 ","End":"00:48.330","Text":"after the subtotal cash flow from operations,"},{"Start":"00:48.330 ","End":"00:51.255","Text":"but it also may be reported elsewhere,"},{"Start":"00:51.255 ","End":"00:54.561","Text":"also as in the direct method."},{"Start":"00:54.561 ","End":"01:01.213","Text":"Interest received may be reported as a cash flow from investing activities item,"},{"Start":"01:01.213 ","End":"01:07.985","Text":"and interest paid may be reported as a cash flow from financing activities item."},{"Start":"01:07.985 ","End":"01:11.255","Text":"Think for a moment why this is the case."},{"Start":"01:11.255 ","End":"01:17.915","Text":"Why can we choose to report the interest received as a investing activities item,"},{"Start":"01:17.915 ","End":"01:22.790","Text":"whereas the interest paid would be a financing activities item?"},{"Start":"01:22.790 ","End":"01:27.860","Text":"Think back to the discussion from a previous video where we looked at"},{"Start":"01:27.860 ","End":"01:34.235","Text":"the accounting equation of assets equals liabilities plus owner\u0027s equity."},{"Start":"01:34.235 ","End":"01:41.120","Text":"We then divided the assets into non-current assets and current assets."},{"Start":"01:41.120 ","End":"01:44.255","Text":"We divided liabilities into"},{"Start":"01:44.255 ","End":"01:49.310","Text":"current liabilities and also clearly there for non-current liabilities."},{"Start":"01:49.310 ","End":"01:51.230","Text":"You will recall at the time,"},{"Start":"01:51.230 ","End":"01:55.925","Text":"we said that movements in current assets and current liabilities,"},{"Start":"01:55.925 ","End":"02:01.040","Text":"we reflect it as cash flows from operating activities."},{"Start":"02:01.040 ","End":"02:04.910","Text":"Whereas movements in non-current assets are"},{"Start":"02:04.910 ","End":"02:09.230","Text":"reflected as cash flows from investing activities."},{"Start":"02:09.230 ","End":"02:15.800","Text":"Now the interest received is a cash flow from an investing activity because"},{"Start":"02:15.800 ","End":"02:19.940","Text":"the investment from which the interest is being derived"},{"Start":"02:19.940 ","End":"02:25.220","Text":"is a non-current asset on the statement of financial position."},{"Start":"02:25.220 ","End":"02:28.610","Text":"Also remember, movements in non-current liabilities and"},{"Start":"02:28.610 ","End":"02:35.090","Text":"equity are shown as cash flows from financing activities."},{"Start":"02:35.090 ","End":"02:42.365","Text":"Therefore, the interest paid is an interest paid on a liability, on a borrowing."},{"Start":"02:42.365 ","End":"02:44.600","Text":"That is why the interest paid,"},{"Start":"02:44.600 ","End":"02:52.560","Text":"if reported elsewhere, will be shown as a cash flow from financing activities."}],"ID":29689},{"Watched":false,"Name":"Statement of Cash Flows - Investing activities","Duration":"11m 52s","ChapterTopicVideoID":26942,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.400","Text":"Hello and welcome to this series of"},{"Start":"00:02.400 ","End":"00:08.280","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:08.280 ","End":"00:14.670","Text":"In this section, we will focus on the cash flows from investing activities."},{"Start":"00:14.670 ","End":"00:18.960","Text":"Remember this is the second part of the statement of cash flows."},{"Start":"00:18.960 ","End":"00:23.310","Text":"The first part being the cash flows from operating activities,"},{"Start":"00:23.310 ","End":"00:28.065","Text":"and the final part being the cash flows from financing activities."},{"Start":"00:28.065 ","End":"00:30.180","Text":"In this section, we will have"},{"Start":"00:30.180 ","End":"00:34.485","Text":"a brief recap on the structure of the statement of cash flows."},{"Start":"00:34.485 ","End":"00:38.760","Text":"We will discuss in detail the nature of cash flows from"},{"Start":"00:38.760 ","End":"00:43.610","Text":"investing activities and look specifically at property,"},{"Start":"00:43.610 ","End":"00:47.390","Text":"plant, and equipment as an example of"},{"Start":"00:47.390 ","End":"00:52.120","Text":"the identification of cash flows from investing activities."},{"Start":"00:52.120 ","End":"00:54.680","Text":"It is important when studying the statement of"},{"Start":"00:54.680 ","End":"00:59.555","Text":"cash flows to keep in mind always the structure of the statement."},{"Start":"00:59.555 ","End":"01:01.275","Text":"It\u0027s a long statement,"},{"Start":"01:01.275 ","End":"01:03.650","Text":"and each section, the operating,"},{"Start":"01:03.650 ","End":"01:08.946","Text":"investing, and financing activities has been taught separately."},{"Start":"01:08.946 ","End":"01:11.720","Text":"Without bearing in mind the overall structure,"},{"Start":"01:11.720 ","End":"01:14.090","Text":"it\u0027s very easy to get lost and not"},{"Start":"01:14.090 ","End":"01:17.540","Text":"appreciate which particular part or where in the statement of"},{"Start":"01:17.540 ","End":"01:24.260","Text":"cash flows you are looking or trying to find out information to reconcile numbers."},{"Start":"01:24.260 ","End":"01:30.265","Text":"We\u0027ve spent a lot of time talking about the cash flows from operating activities,"},{"Start":"01:30.265 ","End":"01:33.305","Text":"the first section of the statement of cash flows."},{"Start":"01:33.305 ","End":"01:37.039","Text":"This video looks at the cash flows from investing activities,"},{"Start":"01:37.039 ","End":"01:41.930","Text":"and then finally, we will look at the cash flows from financing activity."},{"Start":"01:41.930 ","End":"01:44.570","Text":"Remember all those together give us"},{"Start":"01:44.570 ","End":"01:49.070","Text":"the net increase or decrease in cash flows to which we"},{"Start":"01:49.070 ","End":"01:52.700","Text":"reconcile the cash at the beginning of the year to"},{"Start":"01:52.700 ","End":"01:56.520","Text":"arrive at the cash at the end of the year."},{"Start":"01:56.520 ","End":"02:01.610","Text":"Turning now to the nature of cash flows from investing activities."},{"Start":"02:01.610 ","End":"02:06.830","Text":"Investing activities cash flows relate to the cash inflows and"},{"Start":"02:06.830 ","End":"02:13.715","Text":"cash outflows resulting from buying and selling non-current or long-term assets."},{"Start":"02:13.715 ","End":"02:18.260","Text":"It is worthwhile at this stage to again remind ourselves of"},{"Start":"02:18.260 ","End":"02:21.950","Text":"the overall logic behind the creation"},{"Start":"02:21.950 ","End":"02:26.285","Text":"of a statement of cash flows looking at the accounting equation,"},{"Start":"02:26.285 ","End":"02:33.185","Text":"remember we have assets equals liabilities plus owner\u0027s equity,"},{"Start":"02:33.185 ","End":"02:38.530","Text":"and we divide our assets into non-current assets,"},{"Start":"02:38.530 ","End":"02:42.650","Text":"and current assets and we divide our liabilities into"},{"Start":"02:42.650 ","End":"02:47.090","Text":"current liabilities and non-current liabilities."},{"Start":"02:47.090 ","End":"02:51.214","Text":"Remember again, the changes in the current assets"},{"Start":"02:51.214 ","End":"02:55.460","Text":"and current liabilities will give us the cash flows from"},{"Start":"02:55.460 ","End":"02:59.240","Text":"operating activities whereas the changes in"},{"Start":"02:59.240 ","End":"03:02.570","Text":"non-current assets will give us what we\u0027re looking at"},{"Start":"03:02.570 ","End":"03:07.175","Text":"now at the cash flows from investing activities."},{"Start":"03:07.175 ","End":"03:09.845","Text":"Just to complete the picture once again,"},{"Start":"03:09.845 ","End":"03:13.220","Text":"the changes in the non-current liabilities and"},{"Start":"03:13.220 ","End":"03:19.235","Text":"equity will give us the cash flows for the financing activities."},{"Start":"03:19.235 ","End":"03:23.735","Text":"As has just been said, investing activities,"},{"Start":"03:23.735 ","End":"03:32.255","Text":"cash inflows and cash outflows results from buying and selling non-current assets."},{"Start":"03:32.255 ","End":"03:36.170","Text":"Examples of this would be the cash received or"},{"Start":"03:36.170 ","End":"03:40.070","Text":"paid from selling or therefore buying property,"},{"Start":"03:40.070 ","End":"03:41.825","Text":"plant and equipment,"},{"Start":"03:41.825 ","End":"03:49.760","Text":"the cash received or paid from the selling or buying of financial assets, for example,"},{"Start":"03:49.760 ","End":"03:53.455","Text":"shares or bonds in other entities,"},{"Start":"03:53.455 ","End":"03:59.555","Text":"loans advanced to other companies and repayment of those loans."},{"Start":"03:59.555 ","End":"04:07.085","Text":"Now remember loans advanced are moneys lent by the reporting entity to other companies."},{"Start":"04:07.085 ","End":"04:11.345","Text":"Therefore, a non-current asset on the balance sheet"},{"Start":"04:11.345 ","End":"04:15.980","Text":"and therefore included within the cash flows from investing activities."},{"Start":"04:15.980 ","End":"04:22.115","Text":"You will see later on that if the entity borrows funds from another entity,"},{"Start":"04:22.115 ","End":"04:24.485","Text":"in other words, loans raised,"},{"Start":"04:24.485 ","End":"04:30.500","Text":"these will be accounted for in the statement of cash flows as a financing activity"},{"Start":"04:30.500 ","End":"04:37.220","Text":"because they will be recognized as funds borrowed as a non-current liability."},{"Start":"04:37.220 ","End":"04:44.990","Text":"Also, the interest and dividends received on these financial assets"},{"Start":"04:44.990 ","End":"04:53.150","Text":"can be recorded as a cash flow from investing activities or as we have seen earlier on,"},{"Start":"04:53.150 ","End":"04:57.484","Text":"could be recorded within the operating activity section,"},{"Start":"04:57.484 ","End":"05:02.990","Text":"but after the subtotal of cash flow from operations."},{"Start":"05:02.990 ","End":"05:05.960","Text":"Here we see an example of"},{"Start":"05:05.960 ","End":"05:12.200","Text":"the investing activities section of the statement of cash flows of Next PLC."},{"Start":"05:12.200 ","End":"05:20.150","Text":"As an example, you will see as a cash outflow and payments to acquire property,"},{"Start":"05:20.150 ","End":"05:21.810","Text":"plant and equipment,"},{"Start":"05:21.810 ","End":"05:23.940","Text":"that\u0027s a cash outflow,"},{"Start":"05:23.940 ","End":"05:25.940","Text":"and as a cash inflow,"},{"Start":"05:25.940 ","End":"05:28.580","Text":"proceeds from the sale of property,"},{"Start":"05:28.580 ","End":"05:32.120","Text":"plant, and equipment as a cash inflow."},{"Start":"05:32.120 ","End":"05:36.035","Text":"Looking now at the case of property, plant and equipment,"},{"Start":"05:36.035 ","End":"05:43.235","Text":"as a significant component within the cash flows from investing activities section,"},{"Start":"05:43.235 ","End":"05:46.280","Text":"the carrying amount on the balance sheet,"},{"Start":"05:46.280 ","End":"05:48.950","Text":"in other words, the carrying amount of property, plant,"},{"Start":"05:48.950 ","End":"05:53.420","Text":"and equipment on the balance sheet reflects the end result of"},{"Start":"05:53.420 ","End":"05:58.925","Text":"any increases or decreases in that non-current assets,"},{"Start":"05:58.925 ","End":"06:04.115","Text":"property, plant, and equipment resulting from acquisitions, disposal,"},{"Start":"06:04.115 ","End":"06:06.845","Text":"reevaluations, depreciation,"},{"Start":"06:06.845 ","End":"06:11.995","Text":"and impairment of the underlying property, plant and equipment."},{"Start":"06:11.995 ","End":"06:17.645","Text":"To obtain the cash flow movements in non-current assets,"},{"Start":"06:17.645 ","End":"06:23.780","Text":"we need to analyze the changes in the relevant non-current asset account."},{"Start":"06:23.780 ","End":"06:26.375","Text":"Looking at property, plant and equipment,"},{"Start":"06:26.375 ","End":"06:28.550","Text":"the opening carrying amount,"},{"Start":"06:28.550 ","End":"06:31.345","Text":"which would be a debit balance,"},{"Start":"06:31.345 ","End":"06:33.660","Text":"plus any increases,"},{"Start":"06:33.660 ","End":"06:36.290","Text":"that would be, for example, purchases of property,"},{"Start":"06:36.290 ","End":"06:39.320","Text":"plant and equipment also debits to property,"},{"Start":"06:39.320 ","End":"06:43.145","Text":"plant and equipment, less any decreases,"},{"Start":"06:43.145 ","End":"06:46.040","Text":"such as disposals or depreciation,"},{"Start":"06:46.040 ","End":"06:48.110","Text":"which would be a credit to property, plant,"},{"Start":"06:48.110 ","End":"06:52.115","Text":"and equipment gives us the closing carrying amount,"},{"Start":"06:52.115 ","End":"06:55.890","Text":"which would clearly be a debit balance as it is an asset."},{"Start":"06:55.890 ","End":"06:59.319","Text":"Expanding this equation,"},{"Start":"06:59.319 ","End":"07:01.265","Text":"the opening carrying amount,"},{"Start":"07:01.265 ","End":"07:05.165","Text":"add any acquisitions which would be an increase,"},{"Start":"07:05.165 ","End":"07:08.695","Text":"and this is acquisitions at cost,"},{"Start":"07:08.695 ","End":"07:12.305","Text":"less the carrying amount of disposals,"},{"Start":"07:12.305 ","End":"07:15.785","Text":"less any depreciation expense for the year,"},{"Start":"07:15.785 ","End":"07:20.885","Text":"must give you the closing carrying amount in property, plant and equipment."},{"Start":"07:20.885 ","End":"07:25.580","Text":"Let us now take a look at an example of working with property,"},{"Start":"07:25.580 ","End":"07:30.035","Text":"plant, and equipment in the preparation of a statement of cash flows."},{"Start":"07:30.035 ","End":"07:36.290","Text":"This example shows a beginning carrying amount of 100 currency units,"},{"Start":"07:36.290 ","End":"07:39.535","Text":"an ending carrying amount of 200,"},{"Start":"07:39.535 ","End":"07:42.800","Text":"acquisitions during the year, that is property,"},{"Start":"07:42.800 ","End":"07:46.900","Text":"plant and equipment purchased at cost of 135,"},{"Start":"07:46.900 ","End":"07:53.210","Text":"the depreciation expense charged on PPE during the year of 20."},{"Start":"07:53.210 ","End":"07:54.920","Text":"Now in this example,"},{"Start":"07:54.920 ","End":"08:00.005","Text":"the carrying amount of PPE disposed off is an unknown number,"},{"Start":"08:00.005 ","End":"08:02.165","Text":"which we\u0027re going to have to compute,"},{"Start":"08:02.165 ","End":"08:09.875","Text":"and you\u0027re also told there is a profit on sale of that PPE disposed off of 5."},{"Start":"08:09.875 ","End":"08:12.500","Text":"What we can see over here,"},{"Start":"08:12.500 ","End":"08:17.775","Text":"the opening or beginning carrying amount of the PPE is 100."},{"Start":"08:17.775 ","End":"08:25.480","Text":"You\u0027re told that the entity purchased PPE at a cost of 135,"},{"Start":"08:25.480 ","End":"08:28.915","Text":"the amount of the PPE disposed off,"},{"Start":"08:28.915 ","End":"08:31.375","Text":"that\u0027s the missing number."},{"Start":"08:31.375 ","End":"08:36.250","Text":"The depreciation charged on the PPE during"},{"Start":"08:36.250 ","End":"08:42.460","Text":"the year is an amount of 20 and the closing balance in property,"},{"Start":"08:42.460 ","End":"08:47.800","Text":"plant and equipment is an amount of 200, and therefore,"},{"Start":"08:47.800 ","End":"08:50.365","Text":"by looking at this equation,"},{"Start":"08:50.365 ","End":"08:55.415","Text":"we can deduce that the carrying amount of the PPE disposed off,"},{"Start":"08:55.415 ","End":"08:57.875","Text":"must have been 15."},{"Start":"08:57.875 ","End":"09:02.735","Text":"Now note that the profit on sale of PPE,"},{"Start":"09:02.735 ","End":"09:07.540","Text":"this amount of 5 is not taken to account in"},{"Start":"09:07.540 ","End":"09:15.275","Text":"the computation of the movement in the balances on the actual PPE account itself."},{"Start":"09:15.275 ","End":"09:18.320","Text":"Those will be explained further in the next slide."},{"Start":"09:18.320 ","End":"09:21.800","Text":"But the profit on sale is the result of"},{"Start":"09:21.800 ","End":"09:26.275","Text":"disposing of the PPE at a particular selling price,"},{"Start":"09:26.275 ","End":"09:29.030","Text":"and it is that selling price, in other words,"},{"Start":"09:29.030 ","End":"09:34.310","Text":"the proceeds that we need to deduce for the statement of cash flows."},{"Start":"09:34.310 ","End":"09:41.360","Text":"So what now are the cash flows from investing activities in this particular example?"},{"Start":"09:41.360 ","End":"09:48.170","Text":"Well, we know that the purchase of PPE was an amount of 135,"},{"Start":"09:48.170 ","End":"09:51.635","Text":"which we\u0027ll put them in brackets because it was a cash outflow."},{"Start":"09:51.635 ","End":"09:55.055","Text":"We also know the PPE was disposed off."},{"Start":"09:55.055 ","End":"10:00.560","Text":"But what was the cash proceeds received for that PPE?"},{"Start":"10:00.560 ","End":"10:04.295","Text":"This we need to think about and do a computation."},{"Start":"10:04.295 ","End":"10:07.385","Text":"Well, you know, from your knowledge of PPE,"},{"Start":"10:07.385 ","End":"10:11.660","Text":"that if we take the cost of an item and we"},{"Start":"10:11.660 ","End":"10:16.355","Text":"subtract the accumulated depreciation on that item bought,"},{"Start":"10:16.355 ","End":"10:19.894","Text":"we arrive at the carrying amount."},{"Start":"10:19.894 ","End":"10:23.885","Text":"Now, if we do this exercise at the date of sale,"},{"Start":"10:23.885 ","End":"10:27.380","Text":"we have deduced from the previous slide that"},{"Start":"10:27.380 ","End":"10:32.644","Text":"the carrying amount of the PPE disposed of was 15."},{"Start":"10:32.644 ","End":"10:37.640","Text":"We don\u0027t know the amount of the cost of the PPE disposed off,"},{"Start":"10:37.640 ","End":"10:42.665","Text":"and we don\u0027t know the accumulated depreciation at the date of sale,"},{"Start":"10:42.665 ","End":"10:47.630","Text":"but we do know that the carrying amount of the PPE disposed off,"},{"Start":"10:47.630 ","End":"10:55.595","Text":"which we took into account in reconciling the opening and closing balance of PPE."},{"Start":"10:55.595 ","End":"11:00.709","Text":"We know the carrying amount of the PPE disposed of is 15."},{"Start":"11:00.709 ","End":"11:05.360","Text":"Now, you also know we can compare the selling price"},{"Start":"11:05.360 ","End":"11:10.775","Text":"to the carrying amount to get either the profit or loss on sale."},{"Start":"11:10.775 ","End":"11:13.025","Text":"In this particular example,"},{"Start":"11:13.025 ","End":"11:18.095","Text":"you\u0027re told that the profit on sale of PPE is an amount of,"},{"Start":"11:18.095 ","End":"11:24.560","Text":"and therefore we can deduce that the selling price or the proceeds is 20."},{"Start":"11:24.560 ","End":"11:30.170","Text":"It is this proceeds of 20 that goes in the statement of cash flows."},{"Start":"11:30.170 ","End":"11:32.285","Text":"Note in this 5,"},{"Start":"11:32.285 ","End":"11:35.945","Text":"there is no cash flow in the profit of 5."},{"Start":"11:35.945 ","End":"11:41.185","Text":"The cash flow sits in the 20, the selling price."},{"Start":"11:41.185 ","End":"11:43.475","Text":"These 2 items give us,"},{"Start":"11:43.475 ","End":"11:45.230","Text":"in this particular example,"},{"Start":"11:45.230 ","End":"11:53.010","Text":"a net cash outflow from investing activities of 115."}],"ID":29690},{"Watched":false,"Name":"Exercise 3 - CDE - A - question page","Duration":"1m 50s","ChapterTopicVideoID":26869,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.085","Text":"Today, we\u0027re going to do an exercise on a company called CDE."},{"Start":"00:05.085 ","End":"00:09.825","Text":"The following are select individual balances of CDE,"},{"Start":"00:09.825 ","End":"00:12.750","Text":"plus its income statement for 20X2."},{"Start":"00:12.750 ","End":"00:15.030","Text":"You can see here as at 31st,"},{"Start":"00:15.030 ","End":"00:17.490","Text":"December, 20X2,"},{"Start":"00:17.490 ","End":"00:21.720","Text":"and 20X1, we\u0027re given balances for accounts receivable,"},{"Start":"00:21.720 ","End":"00:24.540","Text":"inventory, and accounts payable."},{"Start":"00:24.540 ","End":"00:30.495","Text":"Then, we\u0027re given the income statement for the year ending 31st December."},{"Start":"00:30.495 ","End":"00:32.800","Text":"The income statement is very basic."},{"Start":"00:32.800 ","End":"00:37.145","Text":"It\u0027s simply revenue less cost of sales giving you profit for the year."},{"Start":"00:37.145 ","End":"00:40.685","Text":"Looking at the required based on this information,"},{"Start":"00:40.685 ","End":"00:45.920","Text":"prepare the section in the cash flow statement that reports the cash generated from"},{"Start":"00:45.920 ","End":"00:52.650","Text":"or used in operating activities using the indirect method."},{"Start":"00:52.720 ","End":"00:57.695","Text":"Now, you may have recognized some of these figures."},{"Start":"00:57.695 ","End":"01:04.445","Text":"This is the identical question to the exercise on company ABC."},{"Start":"01:04.445 ","End":"01:08.480","Text":"The only difference is we\u0027re now going to use the indirect method."},{"Start":"01:08.480 ","End":"01:15.605","Text":"You will see that the same figure will be reached for the cash generated from operations."},{"Start":"01:15.605 ","End":"01:18.500","Text":"The cash flows are ultimately the same,"},{"Start":"01:18.500 ","End":"01:20.420","Text":"but the first section of"},{"Start":"01:20.420 ","End":"01:23.930","Text":"your cash flow statement is going to look different so instead of"},{"Start":"01:23.930 ","End":"01:26.720","Text":"using the direct method where we simply had cash"},{"Start":"01:26.720 ","End":"01:30.080","Text":"received from customers less cash paid to suppliers,"},{"Start":"01:30.080 ","End":"01:33.845","Text":"giving you the cash generated from operations."},{"Start":"01:33.845 ","End":"01:40.365","Text":"We\u0027re now going to start with profit before tax and finance charges,"},{"Start":"01:40.365 ","End":"01:45.410","Text":"and we\u0027re going to make adjustments to that in order to calculate that same figure"},{"Start":"01:45.410 ","End":"01:51.420","Text":"for cash generated from operations. Let\u0027s get started."}],"ID":29691},{"Watched":false,"Name":"Exercise 3 - CDE - B - solution","Duration":"9m 35s","ChapterTopicVideoID":26870,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.410 ","End":"00:03.270","Text":"Let\u0027s look at the solution now."},{"Start":"00:03.270 ","End":"00:10.050","Text":"Remember we\u0027re using indirect method so when we do the cash flow statement and"},{"Start":"00:10.050 ","End":"00:17.100","Text":"the specifically the cash from operating activities section of the cash flow statement."},{"Start":"00:17.100 ","End":"00:21.185","Text":"We\u0027re going to be starting with the profit before financing and tax"},{"Start":"00:21.185 ","End":"00:25.830","Text":"so that\u0027s going to be the first line item in your cash flow statement."},{"Start":"00:25.830 ","End":"00:29.625","Text":"In this example, our profit before financing and tax"},{"Start":"00:29.625 ","End":"00:34.635","Text":"happens to equal profit for the year because our income statement was so simple."},{"Start":"00:34.635 ","End":"00:36.390","Text":"My income statement in fact,"},{"Start":"00:36.390 ","End":"00:41.710","Text":"with sales of 324 less the cost of sales of 247,"},{"Start":"00:41.710 ","End":"00:47.705","Text":"giving us profit for the year of 77 which as I say,"},{"Start":"00:47.705 ","End":"00:50.990","Text":"also equals your profit before financing and tax because in"},{"Start":"00:50.990 ","End":"00:55.610","Text":"this instance we don\u0027t have any tax expense and we don\u0027t have any financing charges."},{"Start":"00:55.610 ","End":"01:00.010","Text":"We didn\u0027t have any other income and expenses whatsoever."},{"Start":"01:00.010 ","End":"01:06.500","Text":"Very simple income statement and thus a fairly simple cash flow statement."},{"Start":"01:06.500 ","End":"01:10.790","Text":"Now, I wanted to say something about the sales and the cost of sales."},{"Start":"01:10.790 ","End":"01:15.515","Text":"By including sales of 324 in our cash flow statement,"},{"Start":"01:15.515 ","End":"01:21.110","Text":"we are saying we are assuming the sales are 324 were received in cash."},{"Start":"01:21.110 ","End":"01:26.195","Text":"Similarly, by subtracting cost of sales of 247,"},{"Start":"01:26.195 ","End":"01:30.650","Text":"we are assuming at this stage that all of the cost of those goods that were"},{"Start":"01:30.650 ","End":"01:36.055","Text":"sold 247 were actually paid for in cash in this current year."},{"Start":"01:36.055 ","End":"01:39.240","Text":"That\u0027s very simplistic obviously."},{"Start":"01:39.240 ","End":"01:42.050","Text":"Let\u0027s have a look at each of those in turn."},{"Start":"01:42.050 ","End":"01:45.610","Text":"Let\u0027s start with sales of 324,"},{"Start":"01:45.610 ","End":"01:50.765","Text":"some of those sales may have indeed been on credit so credit sales,"},{"Start":"01:50.765 ","End":"01:53.900","Text":"where our customers have not yet paid us in cash,"},{"Start":"01:53.900 ","End":"01:56.180","Text":"we need to consider that and the only way we can"},{"Start":"01:56.180 ","End":"01:58.730","Text":"work out how much of those sales are 324,"},{"Start":"01:58.730 ","End":"02:01.670","Text":"we\u0027re actually not received in cash,"},{"Start":"02:01.670 ","End":"02:06.935","Text":"but we\u0027re on credit is by looking at the accounts receivable so let\u0027s look at it."},{"Start":"02:06.935 ","End":"02:13.910","Text":"We\u0027ve got accounts receivable at the end of X1 (100) that grew to 125 at"},{"Start":"02:13.910 ","End":"02:17.930","Text":"the end of 20X2 so that\u0027s an increase in accounts"},{"Start":"02:17.930 ","End":"02:23.260","Text":"receivable of 25 so we need to put it into cash flow statement,"},{"Start":"02:23.260 ","End":"02:25.115","Text":"increase in accounts receivable."},{"Start":"02:25.115 ","End":"02:26.465","Text":"The question is now,"},{"Start":"02:26.465 ","End":"02:31.250","Text":"do we add that 25 or do we subtract the 25?"},{"Start":"02:31.250 ","End":"02:33.245","Text":"I want you to think about it."},{"Start":"02:33.245 ","End":"02:38.000","Text":"The fact that our accounts receivable increased means that"},{"Start":"02:38.000 ","End":"02:43.590","Text":"some of those sales that we made during the current year must have been on credit."},{"Start":"02:44.240 ","End":"02:52.010","Text":"Perhaps all of them were on credit but what remains owing to us as a result of this year,"},{"Start":"02:52.010 ","End":"02:56.750","Text":"sales is an extra 25 so of the sales of"},{"Start":"02:56.750 ","End":"03:03.815","Text":"324 that took place in the current year,"},{"Start":"03:03.815 ","End":"03:10.054","Text":"25 remains unpaid for so we have not received that from our customers."},{"Start":"03:10.054 ","End":"03:16.835","Text":"In other words, we need to subtract that 25 so that the net effect so far,"},{"Start":"03:16.835 ","End":"03:18.890","Text":"if you just look at the 2 figures in"},{"Start":"03:18.890 ","End":"03:21.575","Text":"our cash flow statement that are highlighted in yellow."},{"Start":"03:21.575 ","End":"03:23.975","Text":"The sales of 324,"},{"Start":"03:23.975 ","End":"03:27.390","Text":"and the 25 that\u0027s being subtracted,"},{"Start":"03:27.390 ","End":"03:30.500","Text":"you can see what we\u0027re including so far is an amount of"},{"Start":"03:30.500 ","End":"03:35.389","Text":"299 as the receipts from our customers."},{"Start":"03:35.389 ","End":"03:38.375","Text":"Then let\u0027s look at our cost of sales."},{"Start":"03:38.375 ","End":"03:41.840","Text":"By subtracting our cost of sales of 247,"},{"Start":"03:41.840 ","End":"03:47.660","Text":"we are assuming that all of the goods that were sold were in fact paid for in"},{"Start":"03:47.660 ","End":"03:54.080","Text":"cash by ourselves in that current year also, terribly simplistic."},{"Start":"03:54.080 ","End":"03:55.925","Text":"Let\u0027s look, for example,"},{"Start":"03:55.925 ","End":"03:59.750","Text":"at our inventory account and our accounts payable."},{"Start":"03:59.750 ","End":"04:01.550","Text":"If we look at inventory alone,"},{"Start":"04:01.550 ","End":"04:05.090","Text":"what you\u0027re looking at here is at the end of 20X1,"},{"Start":"04:05.090 ","End":"04:12.590","Text":"we had an amount of 25 that grew in 20X2 to an amount of 55 so that"},{"Start":"04:12.590 ","End":"04:20.060","Text":"means in addition to the 247 inventory that got sold during the current year,"},{"Start":"04:20.060 ","End":"04:27.109","Text":"and I remember we are assuming very simplistically that 247 goods sold,"},{"Start":"04:27.109 ","End":"04:30.860","Text":"we\u0027re actually purchased and paid for in this current year."},{"Start":"04:30.860 ","End":"04:35.120","Text":"Very simplistic, but what we hadn\u0027t yet taken into"},{"Start":"04:35.120 ","End":"04:39.755","Text":"account was that we might have purchased inventory that we hadn\u0027t yet sold."},{"Start":"04:39.755 ","End":"04:43.670","Text":"This is the case here. We\u0027ve got an increase of 30 and our inventory,"},{"Start":"04:43.670 ","End":"04:46.820","Text":"so we haven\u0027t sold it so we bought inventory during"},{"Start":"04:46.820 ","End":"04:52.410","Text":"the year and we didn\u0027t set it so our inventory balance increased."},{"Start":"04:52.970 ","End":"04:58.145","Text":"We\u0027ve bought inventory that got sold of 247"},{"Start":"04:58.145 ","End":"05:03.935","Text":"plus we\u0027ve also bought inventory that didn\u0027t get sold of 30."},{"Start":"05:03.935 ","End":"05:09.080","Text":"We\u0027ve got an increase in inventory and the question then is,"},{"Start":"05:09.080 ","End":"05:11.840","Text":"do we add it or subtract is?"},{"Start":"05:11.840 ","End":"05:14.366","Text":"The answer is we must subtract it."},{"Start":"05:14.366 ","End":"05:17.960","Text":"So far we\u0027ve subtracted cost of sales of 247."},{"Start":"05:17.960 ","End":"05:19.340","Text":"In other words, those are the goods,"},{"Start":"05:19.340 ","End":"05:21.725","Text":"that\u0027s the inventory or goods, whatever you want to call it."},{"Start":"05:21.725 ","End":"05:27.205","Text":"Those are the goods that we bought that were sold and then there\u0027s a 30,"},{"Start":"05:27.205 ","End":"05:34.565","Text":"which are the goods that we bought that were not sold so far, we subtracted 277."},{"Start":"05:34.565 ","End":"05:40.640","Text":"Now we\u0027ve still assumed that very simplistically that all of that"},{"Start":"05:40.640 ","End":"05:43.850","Text":"had been paid for in cash so we haven\u0027t yet taken"},{"Start":"05:43.850 ","End":"05:47.195","Text":"into account the concept of buying on credit."},{"Start":"05:47.195 ","End":"05:51.905","Text":"Clearly we have to consider that so for that to take that into account,"},{"Start":"05:51.905 ","End":"05:54.095","Text":"we look at accounts payable."},{"Start":"05:54.095 ","End":"05:57.170","Text":"What have we been told about accounts payable?"},{"Start":"05:57.170 ","End":"06:03.589","Text":"Our accounts payable at the end of 20X1 with 66 and at the end of 20X2 it was 88."},{"Start":"06:03.589 ","End":"06:05.675","Text":"That\u0027s an increase of 22."},{"Start":"06:05.675 ","End":"06:07.940","Text":"We\u0027ve got an increase in accounts payable."},{"Start":"06:07.940 ","End":"06:11.935","Text":"Question is, do we add it or do we subtract it?"},{"Start":"06:11.935 ","End":"06:13.820","Text":"As I say so far,"},{"Start":"06:13.820 ","End":"06:21.590","Text":"we had assumed that 247 and the 30 were both paid for in cash."},{"Start":"06:21.590 ","End":"06:24.230","Text":"But the fact that our accounts payable grew by"},{"Start":"06:24.230 ","End":"06:28.790","Text":"22 means that some of it was not paid for yet."},{"Start":"06:28.790 ","End":"06:33.420","Text":"It actually caused our accounts payable to increase."},{"Start":"06:33.910 ","End":"06:37.560","Text":"Therefore, we need to add it."},{"Start":"06:49.630 ","End":"06:56.470","Text":"The net effect so far is that we subtracted 247 and we subtracted 13,"},{"Start":"06:56.470 ","End":"07:01.550","Text":"so far we subtract 277 and we add it back 22 so"},{"Start":"07:01.550 ","End":"07:08.105","Text":"the net effect is we have subtracted 255 by way of cash paid to our suppliers."},{"Start":"07:08.105 ","End":"07:11.450","Text":"That was how we laid it out using"},{"Start":"07:11.450 ","End":"07:14.885","Text":"the direct method and I\u0027ll tie it back up again in a moment."},{"Start":"07:14.885 ","End":"07:17.000","Text":"Because as I said earlier,"},{"Start":"07:17.000 ","End":"07:23.990","Text":"exercise CDE uses the exact same figures as the exercise ABC does and"},{"Start":"07:23.990 ","End":"07:31.510","Text":"the only difference between the exercise ABC and this exercise CDE is 2 methods."},{"Start":"07:31.510 ","End":"07:35.645","Text":"ABC dealt with the direct method and CDE deals with the indirect method,"},{"Start":"07:35.645 ","End":"07:39.060","Text":"but the effect is identical."},{"Start":"07:39.060 ","End":"07:42.440","Text":"You can see cash generated from operations comes"},{"Start":"07:42.440 ","End":"07:46.175","Text":"to 44 and if you compare this back to excess ABC,"},{"Start":"07:46.175 ","End":"07:49.220","Text":"the cash generated from operations is also 44."},{"Start":"07:49.220 ","End":"07:51.410","Text":"But let me tie it up together for you."},{"Start":"07:51.410 ","End":"07:56.600","Text":"Here is exercise ABC using the direct method you see cash received from customers is"},{"Start":"07:56.600 ","End":"07:59.360","Text":"299 and cash paid to suppliers is"},{"Start":"07:59.360 ","End":"08:03.560","Text":"255 and there\u0027s your cash generated from operations of 44."},{"Start":"08:03.560 ","End":"08:06.545","Text":"You can see the cash generated from operations is identical."},{"Start":"08:06.545 ","End":"08:10.040","Text":"But now going back to exercise CDE using the indirect method,"},{"Start":"08:10.040 ","End":"08:17.265","Text":"there is a sales as 324 which we added to our cash flows that\u0027s an inflow."},{"Start":"08:17.265 ","End":"08:20.590","Text":"Then we subtracted the increase in the accounts receivable"},{"Start":"08:20.590 ","End":"08:23.800","Text":"of 25 because we\u0027re saying of that 324,"},{"Start":"08:23.800 ","End":"08:30.980","Text":"25 had not been received so this is where we get to figure of 299."},{"Start":"08:31.530 ","End":"08:35.364","Text":"Then if we look at the cost of sales"},{"Start":"08:35.364 ","End":"08:40.075","Text":"and the increase in inventory and increase in accounts payable."},{"Start":"08:40.075 ","End":"08:44.830","Text":"The cost of sales are 247 are being subtracted and we subtract another,"},{"Start":"08:44.830 ","End":"08:46.950","Text":"because it\u0027s in brackets, another 30,"},{"Start":"08:46.950 ","End":"08:53.680","Text":"so we\u0027ve subtracted 277 and we add it back the 22 and that gives us the"},{"Start":"08:53.680 ","End":"09:00.715","Text":"255 that we were subtracting in exercise ABC,"},{"Start":"09:00.715 ","End":"09:08.195","Text":"is the 255 cash paid to suppliers and there is the cash received from customers of 299."},{"Start":"09:08.195 ","End":"09:11.615","Text":"As you can see, I\u0027ll go back to ABC,"},{"Start":"09:11.615 ","End":"09:18.140","Text":"ABC cash generated from operations of 44 and X are CDE has a cash"},{"Start":"09:18.140 ","End":"09:21.260","Text":"generated from operations 44 so the only difference"},{"Start":"09:21.260 ","End":"09:24.770","Text":"is in the layout of how we get to that 44."},{"Start":"09:24.770 ","End":"09:27.620","Text":"The indirect method, we start with"},{"Start":"09:27.620 ","End":"09:32.045","Text":"the profit and then we make adjustments for things like,"},{"Start":"09:32.045 ","End":"09:33.335","Text":"as in this example,"},{"Start":"09:33.335 ","End":"09:35.820","Text":"changes in working capital."}],"ID":29692},{"Watched":false,"Name":"Exercise 4 - EFG - A - question page","Duration":"1m 17s","ChapterTopicVideoID":26871,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.610","Text":"Hello and welcome to another presentation in"},{"Start":"00:02.610 ","End":"00:05.430","Text":"the series entitled statement of cash flows,"},{"Start":"00:05.430 ","End":"00:07.080","Text":"brought to you by Proprep."},{"Start":"00:07.080 ","End":"00:12.705","Text":"Today, we\u0027re going to do an exercise on a company entitled EFG."},{"Start":"00:12.705 ","End":"00:19.409","Text":"The following other relevant end-of-year balances of EFG and its income statement."},{"Start":"00:19.409 ","End":"00:26.460","Text":"From its balance sheet we have 3 selected balances,"},{"Start":"00:26.460 ","End":"00:34.065","Text":"accounts receivable, inventory, and accounts payable for both 20X2 and 20X1."},{"Start":"00:34.065 ","End":"00:37.840","Text":"Then from our income statement,"},{"Start":"00:37.840 ","End":"00:43.040","Text":"we have revenues less the cost of sales,"},{"Start":"00:43.040 ","End":"00:47.150","Text":"less the depreciation expense giving us the profit for the year."},{"Start":"00:47.150 ","End":"00:50.135","Text":"This is the complete income statement,"},{"Start":"00:50.135 ","End":"00:53.600","Text":"and these are just 3 of the balances in the balance sheet."},{"Start":"00:53.600 ","End":"00:55.295","Text":"The income statement, again,"},{"Start":"00:55.295 ","End":"00:57.350","Text":"is a very simple income statement."},{"Start":"00:57.350 ","End":"00:59.240","Text":"It doesn\u0027t have finance charges,"},{"Start":"00:59.240 ","End":"01:02.075","Text":"for example, and it doesn\u0027t even have tax."},{"Start":"01:02.075 ","End":"01:03.905","Text":"Let us look at the required."},{"Start":"01:03.905 ","End":"01:05.825","Text":"Based on this information,"},{"Start":"01:05.825 ","End":"01:11.576","Text":"prepare the section in the cashflow statement that reports cash generated from,"},{"Start":"01:11.576 ","End":"01:18.330","Text":"cash used in operating activities using the indirect method."}],"ID":29693},{"Watched":false,"Name":"Statement of Cash Flows - Financing activities","Duration":"10m 10s","ChapterTopicVideoID":26943,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.975","Text":"Hello, and welcome to the series of video presentations,"},{"Start":"00:03.975 ","End":"00:06.090","Text":"on the statement of cash flows,"},{"Start":"00:06.090 ","End":"00:08.265","Text":"brought to you by Proprep."},{"Start":"00:08.265 ","End":"00:09.690","Text":"In this section,"},{"Start":"00:09.690 ","End":"00:14.925","Text":"the focus is now on the cash flows from financing activities."},{"Start":"00:14.925 ","End":"00:17.190","Text":"We will first, and once again,"},{"Start":"00:17.190 ","End":"00:22.200","Text":"remind ourselves on the structure of the statement of cash flows,"},{"Start":"00:22.200 ","End":"00:27.614","Text":"then take a look at the nature of cash flows from financing activities,"},{"Start":"00:27.614 ","End":"00:32.610","Text":"look at the cash flows related to debt instruments; borrowings,"},{"Start":"00:32.610 ","End":"00:35.525","Text":"in other words, and finally,"},{"Start":"00:35.525 ","End":"00:39.500","Text":"the cash flows related to equity instruments,"},{"Start":"00:42.810 ","End":"00:45.620","Text":"for example, share capital."},{"Start":"00:45.620 ","End":"00:49.010","Text":"As before, and before we move on to look"},{"Start":"00:49.010 ","End":"00:52.565","Text":"at the nature of the cash flows from financing activities,"},{"Start":"00:52.565 ","End":"00:54.320","Text":"it\u0027s worthwhile once again,"},{"Start":"00:54.320 ","End":"00:57.675","Text":"reminding ourselves of the accounting equation,"},{"Start":"00:57.675 ","End":"01:02.000","Text":"and therefore the elements of the statement of financial position,"},{"Start":"01:02.000 ","End":"01:08.555","Text":"and where we pick up the movements to determine the cash flows from financing activities."},{"Start":"01:08.555 ","End":"01:10.295","Text":"As you\u0027ve seen before,"},{"Start":"01:10.295 ","End":"01:13.310","Text":"the assets are broken down into non-current assets,"},{"Start":"01:13.310 ","End":"01:14.360","Text":"and current assets,"},{"Start":"01:14.360 ","End":"01:20.510","Text":"and liabilities into current liabilities, and non-current liabilities."},{"Start":"01:20.510 ","End":"01:23.375","Text":"Just to recap, for last time,"},{"Start":"01:23.375 ","End":"01:25.310","Text":"the movements in the current assets,"},{"Start":"01:25.310 ","End":"01:30.500","Text":"and current abilities gave us the cash flows from operating activities."},{"Start":"01:30.500 ","End":"01:33.635","Text":"As we\u0027ve just seen in the previous section,"},{"Start":"01:33.635 ","End":"01:35.915","Text":"the movements in non-current assets,"},{"Start":"01:35.915 ","End":"01:39.760","Text":"gave us the cash flows from investing activities."},{"Start":"01:39.760 ","End":"01:41.810","Text":"In this section now,"},{"Start":"01:41.810 ","End":"01:46.280","Text":"we look at movements in both non-current liabilities and equity,"},{"Start":"01:46.280 ","End":"01:52.115","Text":"to give us the cash flows from financing activities."},{"Start":"01:52.115 ","End":"01:58.900","Text":"We now turn to remind ourselves again of the structure of the statement of cash flows."},{"Start":"01:58.900 ","End":"02:02.760","Text":"Recalling that there are 3 sections."},{"Start":"02:02.760 ","End":"02:04.845","Text":"Cash flows from operating,"},{"Start":"02:04.845 ","End":"02:09.465","Text":"investing, and now finally, financing activities."},{"Start":"02:09.465 ","End":"02:13.080","Text":"That will give us a result of the net increase,"},{"Start":"02:13.080 ","End":"02:14.785","Text":"or decrease in cash flows,"},{"Start":"02:14.785 ","End":"02:19.000","Text":"which we reconcile with the opening balance on"},{"Start":"02:19.000 ","End":"02:23.495","Text":"cash to give us the closing balance on cash."},{"Start":"02:23.495 ","End":"02:28.525","Text":"Turning our attention now to the nature of cash flows from financing activities."},{"Start":"02:28.525 ","End":"02:33.438","Text":"As we\u0027ve mentioned, financing activities relates to the obtaining of funds,"},{"Start":"02:33.438 ","End":"02:38.155","Text":"and the repayment of funds from shareholders,"},{"Start":"02:38.155 ","End":"02:41.325","Text":"and also long-term debt holders."},{"Start":"02:41.325 ","End":"02:43.820","Text":"Remember, shareholders relate to"},{"Start":"02:43.820 ","End":"02:48.425","Text":"the owner\u0027s equity part of the statement of financial position,"},{"Start":"02:48.425 ","End":"02:53.465","Text":"and long-term debt holders relate to the liabilities part."},{"Start":"02:53.465 ","End":"02:58.760","Text":"Examples here clearly include: proceeds from issuing of shares;"},{"Start":"02:58.760 ","End":"03:01.700","Text":"which relates to owners equity,"},{"Start":"03:01.700 ","End":"03:04.129","Text":"proceeds from new borrowings;"},{"Start":"03:04.129 ","End":"03:07.645","Text":"which relates to non-current liabilities,"},{"Start":"03:07.645 ","End":"03:11.059","Text":"the buyback of shares by the company;"},{"Start":"03:11.059 ","End":"03:13.790","Text":"which relates to owner\u0027s equity,"},{"Start":"03:13.790 ","End":"03:17.900","Text":"and the repayment of those borrowings or debt;"},{"Start":"03:17.900 ","End":"03:21.620","Text":"which relates to non-current liabilities."},{"Start":"03:21.620 ","End":"03:24.860","Text":"The interest on the borrowings can be"},{"Start":"03:24.860 ","End":"03:28.985","Text":"reported on the statement of cash flows within financing activities,"},{"Start":"03:28.985 ","End":"03:31.670","Text":"because clearly the interest relates to the borrowings,"},{"Start":"03:31.670 ","End":"03:33.890","Text":"which is a financing activity,"},{"Start":"03:33.890 ","End":"03:36.765","Text":"or as we have seen previously,"},{"Start":"03:36.765 ","End":"03:42.515","Text":"the interest on borrowings could be reported within the operating activity section,"},{"Start":"03:42.515 ","End":"03:47.210","Text":"but as always, after the cash flow from operations."},{"Start":"03:47.210 ","End":"03:50.100","Text":"Dividends paid, other words,"},{"Start":"03:50.100 ","End":"03:51.830","Text":"the dividends paid to shareholders,"},{"Start":"03:51.830 ","End":"03:56.520","Text":"relates to the equity part of the financing activities."},{"Start":"03:56.520 ","End":"04:02.435","Text":"These we\u0027ll also see within the cash flows from financing activities."},{"Start":"04:02.435 ","End":"04:09.080","Text":"Looking at an example of the financing activities section from Next plc,"},{"Start":"04:09.080 ","End":"04:13.760","Text":"you will see here some examples of the items we\u0027ve mentioned already."},{"Start":"04:13.760 ","End":"04:17.430","Text":"We have the repurchase of the shares, other words,"},{"Start":"04:17.430 ","End":"04:19.170","Text":"repurchase of equity,"},{"Start":"04:19.170 ","End":"04:22.730","Text":"cash outflow from financing activities."},{"Start":"04:22.730 ","End":"04:29.510","Text":"We have an example of both the repayment and proceeds from bank loans,"},{"Start":"04:29.510 ","End":"04:31.030","Text":"in other words borrowings."},{"Start":"04:31.030 ","End":"04:33.584","Text":"A repayment, a cash outflow,"},{"Start":"04:33.584 ","End":"04:37.900","Text":"and a proceed in the previous year, a cash inflow."},{"Start":"04:37.900 ","End":"04:40.715","Text":"We have the issue of corporate bonds."},{"Start":"04:40.715 ","End":"04:43.820","Text":"Corporate bonds being a liability,"},{"Start":"04:43.820 ","End":"04:49.614","Text":"a non-current liability, and therefore the proceeds are a cash inflow."},{"Start":"04:49.614 ","End":"04:52.635","Text":"We have a lease repayment,"},{"Start":"04:52.635 ","End":"04:59.420","Text":"the capital amount repaid on a long-term lease as a cash outflow."},{"Start":"04:59.420 ","End":"05:05.720","Text":"The interest paid, shown as a cash outflow from financing activities."},{"Start":"05:05.720 ","End":"05:11.000","Text":"Clearly, Next have gone with the option of showing interests paid within financing,"},{"Start":"05:11.000 ","End":"05:14.105","Text":"and not within the operating activities section."},{"Start":"05:14.105 ","End":"05:17.360","Text":"The dividends paid as previously mentioned,"},{"Start":"05:17.360 ","End":"05:19.219","Text":"clearly a financing activity."},{"Start":"05:19.219 ","End":"05:23.400","Text":"Dividends are the reward to equity holders."},{"Start":"05:23.400 ","End":"05:29.710","Text":"The interesting item to note here on Next statement of cash flows,"},{"Start":"05:29.710 ","End":"05:34.570","Text":"is they show interest received within financing activities."},{"Start":"05:34.570 ","End":"05:38.320","Text":"Whereas one would expect interest received to be"},{"Start":"05:38.320 ","End":"05:42.685","Text":"shown as a cash inflow from an investing activity,"},{"Start":"05:42.685 ","End":"05:47.260","Text":"because the interest received relates to interest on investments,"},{"Start":"05:47.260 ","End":"05:49.865","Text":"which are in fact non-current asset."},{"Start":"05:49.865 ","End":"05:52.305","Text":"Turning now to the cash flows,"},{"Start":"05:52.305 ","End":"05:55.125","Text":"relating specifically to debt instruments,"},{"Start":"05:55.125 ","End":"05:58.455","Text":"in other words the non-current liabilities."},{"Start":"05:58.455 ","End":"06:00.480","Text":"As you\u0027ve seen before,"},{"Start":"06:00.480 ","End":"06:01.810","Text":"and for all items,"},{"Start":"06:01.810 ","End":"06:04.480","Text":"the balance sheet reflects the increase,"},{"Start":"06:04.480 ","End":"06:07.415","Text":"or decrease in these debt instruments,"},{"Start":"06:07.415 ","End":"06:10.610","Text":"such as the movements in loans,"},{"Start":"06:10.610 ","End":"06:12.840","Text":"and finance leases payables."},{"Start":"06:12.840 ","End":"06:15.184","Text":"To obtain the relevant cash flow movements,"},{"Start":"06:15.184 ","End":"06:21.320","Text":"we need to analyze in detail the changes that have occurred in the underlying accounts."},{"Start":"06:21.320 ","End":"06:24.530","Text":"It follows that the opening balance in the debt,"},{"Start":"06:24.530 ","End":"06:29.405","Text":"it will actually be a credit balance plus any increases."},{"Start":"06:29.405 ","End":"06:36.535","Text":"Further borrowings would also be a credit to this particular debt, or borrowing account."},{"Start":"06:36.535 ","End":"06:39.260","Text":"Less any decreases, in other words,"},{"Start":"06:39.260 ","End":"06:42.575","Text":"repayments, which would be a debit to the account,"},{"Start":"06:42.575 ","End":"06:46.370","Text":"would equal the closing balance in the debt borrowings,"},{"Start":"06:46.370 ","End":"06:49.105","Text":"also clearly a credit."},{"Start":"06:49.105 ","End":"06:58.075","Text":"The increases would come about from any new borrowings taken out during the period,"},{"Start":"06:58.075 ","End":"07:00.905","Text":"plus any interest expense,"},{"Start":"07:00.905 ","End":"07:05.550","Text":"which is in fact charged to the borrowings during the year."},{"Start":"07:05.550 ","End":"07:08.555","Text":"Both of these, as mentioned before,"},{"Start":"07:08.555 ","End":"07:13.610","Text":"would be credits to the liability, or borrowings accounts."},{"Start":"07:13.610 ","End":"07:17.540","Text":"Then clearly, any repayments that are made which would"},{"Start":"07:17.540 ","End":"07:21.730","Text":"be a decrease to the borrowing account,"},{"Start":"07:21.730 ","End":"07:26.300","Text":"would be recorded as a debit to the account."},{"Start":"07:26.300 ","End":"07:30.665","Text":"Remember, the opening balance is a credit as a liability,"},{"Start":"07:30.665 ","End":"07:35.285","Text":"and the closing balance is also a credit as a liability."},{"Start":"07:35.285 ","End":"07:41.599","Text":"Looking now at an example of the movements in the debt instrument."},{"Start":"07:41.599 ","End":"07:46.910","Text":"This example has an opening balance of the debt or the borrowings of 100,"},{"Start":"07:46.910 ","End":"07:50.670","Text":"a ending or closing balance of the debt,"},{"Start":"07:50.670 ","End":"07:52.585","Text":"or borrowings of 200,"},{"Start":"07:52.585 ","End":"08:01.385","Text":"and an interest expense of 2 charged on those borrowings during the year."},{"Start":"08:01.385 ","End":"08:09.135","Text":"The repayments, which are both towards interest and capital amount to 50."},{"Start":"08:09.135 ","End":"08:12.560","Text":"What we clearly don\u0027t have given to us in this example,"},{"Start":"08:12.560 ","End":"08:15.410","Text":"is the amount of the new borrowing."},{"Start":"08:15.410 ","End":"08:22.310","Text":"You can quite simply compute it by taking the opening balance in the borrowings of 100,"},{"Start":"08:22.310 ","End":"08:24.890","Text":"plus the new borrowings,"},{"Start":"08:24.890 ","End":"08:27.725","Text":"which is the missing figure in this case,"},{"Start":"08:27.725 ","End":"08:31.855","Text":"add on the interest expense of 2,"},{"Start":"08:31.855 ","End":"08:35.435","Text":"and remember the opening balance is a credit,"},{"Start":"08:35.435 ","End":"08:39.905","Text":"and the interests would also be a credit to the borrowings account."},{"Start":"08:39.905 ","End":"08:45.454","Text":"Less the repayments made on the borrowings,"},{"Start":"08:45.454 ","End":"08:46.625","Text":"which would be a debit,"},{"Start":"08:46.625 ","End":"08:48.815","Text":"and the repayments of 50."},{"Start":"08:48.815 ","End":"08:52.040","Text":"These are our debit to the borrowings or liability account,"},{"Start":"08:52.040 ","End":"08:57.940","Text":"which gives us the closing balance of 200 at the end of the period."},{"Start":"08:57.940 ","End":"08:59.989","Text":"By looking at the equation,"},{"Start":"08:59.989 ","End":"09:02.930","Text":"we can clearly establish now that the amount of"},{"Start":"09:02.930 ","End":"09:10.435","Text":"the new borrowings taken out in the period are an amount of 148."},{"Start":"09:10.435 ","End":"09:15.410","Text":"The new borrowings are clearly a cash inflow from financing activities,"},{"Start":"09:15.410 ","End":"09:18.155","Text":"so positive amount of 148,"},{"Start":"09:18.155 ","End":"09:25.550","Text":"and the repayment of 50 is a cash outflow from financing activities, so a negative."},{"Start":"09:25.550 ","End":"09:27.650","Text":"In this particular scenario,"},{"Start":"09:27.650 ","End":"09:35.255","Text":"we have a net cash inflow from financing activities amounting to 98."},{"Start":"09:35.255 ","End":"09:39.905","Text":"Lastly, looking at cash flows related to equity instruments."},{"Start":"09:39.905 ","End":"09:42.830","Text":"When the entity issues new shares,"},{"Start":"09:42.830 ","End":"09:46.900","Text":"any cash received is reported clearly as a cash inflow."},{"Start":"09:46.900 ","End":"09:50.550","Text":"When the firm buys back its own shares,"},{"Start":"09:50.550 ","End":"09:57.235","Text":"any cash paid is clearly reported as a cash outflow from financing activities."},{"Start":"09:57.235 ","End":"10:00.650","Text":"When a dividend is paid, and remember, dividends,"},{"Start":"10:00.650 ","End":"10:01.940","Text":"as I\u0027ve said before,"},{"Start":"10:01.940 ","End":"10:05.330","Text":"relate to the cost of equity funding."},{"Start":"10:05.330 ","End":"10:11.280","Text":"Those dividends paid are reported clearly as a cash outflow as well."}],"ID":29694},{"Watched":false,"Name":"Exercise 4 - EFG - B","Duration":"5m 42s","ChapterTopicVideoID":26872,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:08.475","Text":"Question EFG is actually identical to the exercise BCD,"},{"Start":"00:08.475 ","End":"00:13.635","Text":"except that BCD was done on the direct method."},{"Start":"00:13.635 ","End":"00:18.825","Text":"Whether we use the indirect method or the direct method,"},{"Start":"00:18.825 ","End":"00:22.170","Text":"what we\u0027re trying to achieve is we\u0027re trying to calculate"},{"Start":"00:22.170 ","End":"00:28.270","Text":"the cash generated from operations."},{"Start":"00:29.180 ","End":"00:31.920","Text":"When we use the direct method,"},{"Start":"00:31.920 ","End":"00:33.855","Text":"let me pop it down, we have you."},{"Start":"00:33.855 ","End":"00:37.140","Text":"When we did it using the direct method,"},{"Start":"00:37.140 ","End":"00:44.030","Text":"what we did was we calculated cash received from"},{"Start":"00:44.030 ","End":"00:51.740","Text":"customers and then we subtracted the cash paid to suppliers."},{"Start":"00:51.740 ","End":"00:55.145","Text":"Now using the indirect method,"},{"Start":"00:55.145 ","End":"01:00.170","Text":"what we\u0027re doing is we\u0027re taking the profit figure and we\u0027re going to convert it"},{"Start":"01:00.170 ","End":"01:07.995","Text":"into the cash generated from operations."},{"Start":"01:07.995 ","End":"01:12.140","Text":"Our cash flow statement is going to look slightly different depending on whether"},{"Start":"01:12.140 ","End":"01:15.755","Text":"we use the direct method or the indirect method."},{"Start":"01:15.755 ","End":"01:21.980","Text":"But ultimately, we\u0027re going to get to the same figure for cash generated from operations."},{"Start":"01:21.980 ","End":"01:23.510","Text":"After you\u0027ve done EFG,"},{"Start":"01:23.510 ","End":"01:27.865","Text":"I want you to go back to exercise BCD and have a look and compare,"},{"Start":"01:27.865 ","End":"01:30.350","Text":"you\u0027ll see that the cash generated from operations is"},{"Start":"01:30.350 ","End":"01:33.455","Text":"the same irrespective of the method used."},{"Start":"01:33.455 ","End":"01:36.560","Text":"It\u0027s just that the one starts with these 2 line items,"},{"Start":"01:36.560 ","End":"01:38.195","Text":"cash received from customers,"},{"Start":"01:38.195 ","End":"01:40.040","Text":"less cash paid to suppliers."},{"Start":"01:40.040 ","End":"01:42.230","Text":"The other one, the indirect method,"},{"Start":"01:42.230 ","End":"01:47.495","Text":"the one we\u0027re going to do now is going to start with the profit figure,"},{"Start":"01:47.495 ","End":"01:50.300","Text":"and then we\u0027re going to convert that into that same figure,"},{"Start":"01:50.300 ","End":"01:52.280","Text":"cash generated from operations."},{"Start":"01:52.280 ","End":"01:54.485","Text":"I want you to have a look at this profit figure."},{"Start":"01:54.485 ","End":"01:57.949","Text":"In order to get to that profit figure, we\u0027ve taken revenues,"},{"Start":"01:57.949 ","End":"01:59.375","Text":"subtracted cost of sales,"},{"Start":"01:59.375 ","End":"02:02.435","Text":"and subtracted depreciation expense."},{"Start":"02:02.435 ","End":"02:09.290","Text":"Now, that depreciation expense has absolutely nothing to do with cash,"},{"Start":"02:09.290 ","End":"02:11.735","Text":"is what we refer to as a non-cash item."},{"Start":"02:11.735 ","End":"02:13.775","Text":"Why do I say it\u0027s non-cash item?"},{"Start":"02:13.775 ","End":"02:15.500","Text":"Have a look at the journal entry."},{"Start":"02:15.500 ","End":"02:20.360","Text":"We would debit depreciation expense and"},{"Start":"02:20.360 ","End":"02:25.925","Text":"we credit accumulated depreciation, decreases your asset."},{"Start":"02:25.925 ","End":"02:30.800","Text":"Can you see that this has absolutely nothing to do with cash."},{"Start":"02:30.800 ","End":"02:32.960","Text":"This is a non-cash item."},{"Start":"02:32.960 ","End":"02:36.260","Text":"If you want to convert your profit figure to a cash figure,"},{"Start":"02:36.260 ","End":"02:40.640","Text":"you\u0027re obviously going to have to reverse that depreciation expense."},{"Start":"02:40.640 ","End":"02:42.859","Text":"Then if we look at revenues,"},{"Start":"02:42.859 ","End":"02:45.965","Text":"the revenue figure which is included in profit,"},{"Start":"02:45.965 ","End":"02:52.940","Text":"which is 324, assumes that that 324 was received in cash."},{"Start":"02:52.940 ","End":"02:57.695","Text":"Obviously, we know that we might have sold some on credit."},{"Start":"02:57.695 ","End":"03:02.150","Text":"In order to calculate the amount of"},{"Start":"03:02.150 ","End":"03:07.220","Text":"revenue that actually translated into cash receipts from a customer,"},{"Start":"03:07.220 ","End":"03:12.340","Text":"we had to combine revenues and accounts receivable."},{"Start":"03:12.340 ","End":"03:14.555","Text":"Both of those ledger accounts,"},{"Start":"03:14.555 ","End":"03:17.510","Text":"if you recall from when we use the direct method,"},{"Start":"03:17.510 ","End":"03:20.930","Text":"both of these ledger accounts were used to balance"},{"Start":"03:20.930 ","End":"03:25.615","Text":"back to that cash amount being the cash received from our customers."},{"Start":"03:25.615 ","End":"03:30.425","Text":"Then when we did the direct method and we calculated the cash paid to suppliers,"},{"Start":"03:30.425 ","End":"03:35.495","Text":"you might recall that we used a combination of the cost of sales account,"},{"Start":"03:35.495 ","End":"03:39.725","Text":"the accounts payable account,"},{"Start":"03:39.725 ","End":"03:44.630","Text":"and also the inventory account."},{"Start":"03:44.630 ","End":"03:50.315","Text":"These 3 ledger accounts, when recreated,"},{"Start":"03:50.315 ","End":"03:58.894","Text":"enabled us to balance back to the amount we paid to our suppliers of inventory."},{"Start":"03:58.894 ","End":"04:08.150","Text":"If we want to convert our profit of 35 into this cash generated from operations,"},{"Start":"04:08.150 ","End":"04:12.890","Text":"we\u0027re going to have to bear in mind that the revenues of 324 were not all received."},{"Start":"04:12.890 ","End":"04:18.185","Text":"In order to calculate how much of that 324 was actually received by customers,"},{"Start":"04:18.185 ","End":"04:21.379","Text":"we need to take into account the accounts receivable."},{"Start":"04:21.379 ","End":"04:26.180","Text":"Similarly, we need to bear in mind that the cost of sales of"},{"Start":"04:26.180 ","End":"04:31.625","Text":"247 were not necessarily all paid for in cash in this current year."},{"Start":"04:31.625 ","End":"04:36.535","Text":"There may have been other inventory related purchases that were also paid for."},{"Start":"04:36.535 ","End":"04:39.785","Text":"In other words, inventory that was purchased and not sold."},{"Start":"04:39.785 ","End":"04:48.530","Text":"In order to calculate the portion of that 247 that translated into a cash payment,"},{"Start":"04:48.530 ","End":"04:51.800","Text":"we need to take into account not only the cost of sales,"},{"Start":"04:51.800 ","End":"04:53.825","Text":"but the accounts payable balance,"},{"Start":"04:53.825 ","End":"04:57.090","Text":"as well as the inventory balances."},{"Start":"04:57.090 ","End":"05:00.680","Text":"To convert our profit into cash generated from operations,"},{"Start":"05:00.680 ","End":"05:03.590","Text":"we\u0027re taking the profit but we\u0027re also going to take into account"},{"Start":"05:03.590 ","End":"05:06.830","Text":"the changes in the balances of those 3 items."},{"Start":"05:06.830 ","End":"05:11.110","Text":"Those are called working capital accounts."},{"Start":"05:11.110 ","End":"05:16.430","Text":"Again, to convert profit to cash generated from operations,"},{"Start":"05:16.430 ","End":"05:21.490","Text":"we\u0027re also going to have to reverse any non-cash items."},{"Start":"05:21.490 ","End":"05:26.760","Text":"We\u0027re going to adjust our profit for any working capital changes,"},{"Start":"05:26.760 ","End":"05:31.730","Text":"and we\u0027re also going to adjust our profit for any non-cash items."},{"Start":"05:31.730 ","End":"05:35.540","Text":"In order to convert our profit for the year into the cash generated from operations,"},{"Start":"05:35.540 ","End":"05:42.630","Text":"we\u0027re going to need to adjust for working capital changes and non-cash items."}],"ID":29695},{"Watched":false,"Name":"Exercise 4 - EFG - D - solution","Duration":"12m 27s","ChapterTopicVideoID":26873,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.560 ","End":"00:05.670","Text":"Let us try the solution now to exercise EFG."},{"Start":"00:05.670 ","End":"00:10.950","Text":"This is our cashflow statement for the year ending 31th December 20X2,"},{"Start":"00:10.950 ","End":"00:17.355","Text":"and it\u0027s the section entitled cash flow from operating activities that we\u0027re busy with."},{"Start":"00:17.355 ","End":"00:22.020","Text":"The first line in this section is profit before financing and tax."},{"Start":"00:22.020 ","End":"00:25.770","Text":"This is the first line if we\u0027re using the indirect method."},{"Start":"00:25.770 ","End":"00:28.860","Text":"In this example, the profit before financing and"},{"Start":"00:28.860 ","End":"00:32.310","Text":"tax happens to equal the profit for the year that we were given."},{"Start":"00:32.310 ","End":"00:35.760","Text":"That\u0027s because in this example we don\u0027t have any financing charges,"},{"Start":"00:35.760 ","End":"00:39.630","Text":"in other words, interest expense and we also don\u0027t have any tax expense."},{"Start":"00:39.630 ","End":"00:43.555","Text":"The question gave us profits for the year,"},{"Start":"00:43.555 ","End":"00:48.170","Text":"which was profit before financing and tax as well, of 35."},{"Start":"00:48.170 ","End":"00:50.890","Text":"This is made up of sales,"},{"Start":"00:50.890 ","End":"00:53.985","Text":"less cost of sales."},{"Start":"00:53.985 ","End":"00:58.880","Text":"By including profit before financing and taxes 35,"},{"Start":"00:58.880 ","End":"01:01.220","Text":"we are including these figures,"},{"Start":"01:01.220 ","End":"01:03.845","Text":"sales, costs of sales, and depreciation."},{"Start":"01:03.845 ","End":"01:05.720","Text":"Let\u0027s look at sales again."},{"Start":"01:05.720 ","End":"01:08.555","Text":"Those sales are 324."},{"Start":"01:08.555 ","End":"01:12.350","Text":"What we\u0027re saying here is that we are assuming that all of"},{"Start":"01:12.350 ","End":"01:16.355","Text":"those sales are 324 were received in cash during the year."},{"Start":"01:16.355 ","End":"01:18.680","Text":"That may not necessarily be the case."},{"Start":"01:18.680 ","End":"01:23.370","Text":"The only way to find out would be to look at our accounts receivable."},{"Start":"01:23.530 ","End":"01:28.310","Text":"Similarly, by including the profit of 35,"},{"Start":"01:28.310 ","End":"01:33.770","Text":"we are effectively subtracting cost of sales of 247,"},{"Start":"01:33.770 ","End":"01:36.680","Text":"which means we are assuming that all of"},{"Start":"01:36.680 ","End":"01:41.090","Text":"those costs relating to the inventory that was sold"},{"Start":"01:41.090 ","End":"01:45.290","Text":"represent purchases of inventory that was"},{"Start":"01:45.290 ","End":"01:50.855","Text":"made during the year and that was paid for also during that year."},{"Start":"01:50.855 ","End":"01:53.750","Text":"This may also not be entirely true."},{"Start":"01:53.750 ","End":"01:56.870","Text":"The only way we\u0027re going to find out that is by looking"},{"Start":"01:56.870 ","End":"02:00.590","Text":"at our accounts payable and our inventory account."},{"Start":"02:00.590 ","End":"02:03.635","Text":"Then by including profit of 35,"},{"Start":"02:03.635 ","End":"02:07.775","Text":"we are effectively subtracting depreciation of 42."},{"Start":"02:07.775 ","End":"02:09.410","Text":"Well, that is patently wrong."},{"Start":"02:09.410 ","End":"02:13.325","Text":"The reason that\u0027s patently wrong is because as I\u0027ve mentioned before,"},{"Start":"02:13.325 ","End":"02:16.070","Text":"depreciation is a debit to"},{"Start":"02:16.070 ","End":"02:20.675","Text":"the depreciation expense and a credit to accumulated depreciation,"},{"Start":"02:20.675 ","End":"02:25.535","Text":"which is simply an account that reduces the related asset."},{"Start":"02:25.535 ","End":"02:30.430","Text":"It has absolutely nothing to do with cash or bank."},{"Start":"02:30.430 ","End":"02:35.225","Text":"That depreciation we\u0027re simply going to have to reverse."},{"Start":"02:35.225 ","End":"02:38.915","Text":"If this was a test situation,"},{"Start":"02:38.915 ","End":"02:44.065","Text":"the very first thing you\u0027d do is try to score an easy mark and reverse that depreciation."},{"Start":"02:44.065 ","End":"02:47.135","Text":"Here we are adding back"},{"Start":"02:47.135 ","End":"02:54.440","Text":"the depreciation expense thereby reversing the deduction of the depreciation of 42."},{"Start":"02:54.440 ","End":"02:56.245","Text":"We\u0027re adding it back here."},{"Start":"02:56.245 ","End":"02:59.995","Text":"That\u0027s like it\u0027s contra dot."},{"Start":"02:59.995 ","End":"03:02.390","Text":"Then let\u0027s look at sales."},{"Start":"03:02.390 ","End":"03:04.610","Text":"As I said, the sales are 324."},{"Start":"03:04.610 ","End":"03:07.010","Text":"By including sales at 324,"},{"Start":"03:07.010 ","End":"03:13.040","Text":"we are assuming that all of those sales resulted in cash receipts during the year."},{"Start":"03:13.040 ","End":"03:14.720","Text":"That may not be the case."},{"Start":"03:14.720 ","End":"03:18.020","Text":"To work out how much of those sales we received in the year,"},{"Start":"03:18.020 ","End":"03:21.034","Text":"we need to look at accounts receivable."},{"Start":"03:21.034 ","End":"03:24.260","Text":"What were we told about accounts receivable?"},{"Start":"03:24.260 ","End":"03:30.440","Text":"We were told that at the end of X1 we had accounts receivable of a 125."},{"Start":"03:30.440 ","End":"03:33.020","Text":"At the end of 20X2,"},{"Start":"03:33.020 ","End":"03:35.405","Text":"the accounts receivable with 110."},{"Start":"03:35.405 ","End":"03:39.455","Text":"This is a change or a decrease of 15."},{"Start":"03:39.455 ","End":"03:44.030","Text":"Let\u0027s put that into our cashflow statement."},{"Start":"03:44.030 ","End":"03:47.189","Text":"Decrease in accounts receivable."},{"Start":"03:47.260 ","End":"03:53.900","Text":"The question is, do we add it or do we subtract it? Let\u0027s think about that."},{"Start":"03:53.900 ","End":"03:59.720","Text":"If you have sales of 324 and we received none of the 324,"},{"Start":"03:59.720 ","End":"04:01.670","Text":"in other words, all of it was on credit,"},{"Start":"04:01.670 ","End":"04:11.535","Text":"then our accounts receivable would have increased from 125 to 125 plus 324 which is,"},{"Start":"04:11.535 ","End":"04:14.595","Text":"let me work it out, 449."},{"Start":"04:14.595 ","End":"04:18.800","Text":"If that was all on credit,"},{"Start":"04:18.800 ","End":"04:22.040","Text":"our accounts receivable would have increased to 449."},{"Start":"04:22.040 ","End":"04:25.180","Text":"However, it didn\u0027t increase at all."},{"Start":"04:25.180 ","End":"04:27.020","Text":"It in fact decreased."},{"Start":"04:27.020 ","End":"04:30.995","Text":"The fact that our accounts receivable did not increase at all,"},{"Start":"04:30.995 ","End":"04:37.505","Text":"we can take to mean that all of the 324 was received in cash."},{"Start":"04:37.505 ","End":"04:43.190","Text":"Then furthermore, the fact that our accounts receivable decreased from 125 to"},{"Start":"04:43.190 ","End":"04:47.045","Text":"110 means that the customers that owed us for"},{"Start":"04:47.045 ","End":"04:51.710","Text":"sales that were made to them during 20X1 and prior to 20X1,"},{"Start":"04:51.710 ","End":"04:57.545","Text":"those customers have now paid us 15 of that prior date."},{"Start":"04:57.545 ","End":"05:02.225","Text":"In other words, not only did we receive the 324 in cash,"},{"Start":"05:02.225 ","End":"05:05.660","Text":"but we also received a further 15 in cash"},{"Start":"05:05.660 ","End":"05:10.165","Text":"from sales that we had made to customers on credit in prior years."},{"Start":"05:10.165 ","End":"05:13.430","Text":"We will be adding the 15."},{"Start":"05:13.430 ","End":"05:19.645","Text":"In other words, profit before financing a tax at 35 include sales of 324."},{"Start":"05:19.645 ","End":"05:22.010","Text":"But over and above the 324,"},{"Start":"05:22.010 ","End":"05:23.690","Text":"we\u0027re also going to add 15,"},{"Start":"05:23.690 ","End":"05:27.440","Text":"324 is the cash received from"},{"Start":"05:27.440 ","End":"05:33.685","Text":"current year sales and the 15 here is the cash received from prior year sales."},{"Start":"05:33.685 ","End":"05:36.350","Text":"Let\u0027s look at the cost of the sales."},{"Start":"05:36.350 ","End":"05:38.705","Text":"By including profit of 35,"},{"Start":"05:38.705 ","End":"05:42.680","Text":"it means we are subtracting cost of sales of 247."},{"Start":"05:42.680 ","End":"05:45.830","Text":"That presupposes, just for starters,"},{"Start":"05:45.830 ","End":"05:49.190","Text":"that all of those costs of 247 relate"},{"Start":"05:49.190 ","End":"05:53.000","Text":"to inventory purchases that took place in the current year."},{"Start":"05:53.000 ","End":"05:58.700","Text":"We need to have a look at our inventory account to assist with this is indeed true."},{"Start":"05:58.700 ","End":"06:01.055","Text":"Let\u0027s look at the inventory account."},{"Start":"06:01.055 ","End":"06:03.800","Text":"What were we given with regard to inventory?"},{"Start":"06:03.800 ","End":"06:08.410","Text":"At the end of X1, the inventory balance was 55."},{"Start":"06:08.410 ","End":"06:11.700","Text":"At the end of X2, the inventory balance,"},{"Start":"06:11.700 ","End":"06:14.035","Text":"it dropped to 25."},{"Start":"06:14.035 ","End":"06:17.900","Text":"This is a change or a decrease of 30."},{"Start":"06:17.900 ","End":"06:23.160","Text":"Let\u0027s put that decrease into our cashflow statement,"},{"Start":"06:23.160 ","End":"06:24.705","Text":"decrease in the inventory."},{"Start":"06:24.705 ","End":"06:26.480","Text":"The question here is,"},{"Start":"06:26.480 ","End":"06:30.065","Text":"do we add the 30 or do we subtract the 30?"},{"Start":"06:30.065 ","End":"06:33.080","Text":"Let\u0027s think about it."},{"Start":"06:33.080 ","End":"06:36.125","Text":"Let us look at the cost of sales of 247."},{"Start":"06:36.125 ","End":"06:39.170","Text":"By subtracting the cost of sales of 247,"},{"Start":"06:39.170 ","End":"06:42.080","Text":"we are assuming that all of those goods that were"},{"Start":"06:42.080 ","End":"06:45.020","Text":"sold had been purchased during the current year."},{"Start":"06:45.020 ","End":"06:46.790","Text":"That\u0027s assumption number 1."},{"Start":"06:46.790 ","End":"06:48.335","Text":"Is that indeed true?"},{"Start":"06:48.335 ","End":"06:51.440","Text":"Let\u0027s look at our inventory account."},{"Start":"06:51.440 ","End":"06:54.080","Text":"What were we given with regard to inventory?"},{"Start":"06:54.080 ","End":"06:58.385","Text":"We were told that at 20X1 the balance of 55,"},{"Start":"06:58.385 ","End":"07:00.380","Text":"and at the end of 20X2, the balance,"},{"Start":"07:00.380 ","End":"07:03.065","Text":"it decreased to 25."},{"Start":"07:03.065 ","End":"07:05.465","Text":"That is a decrease of 30."},{"Start":"07:05.465 ","End":"07:08.495","Text":"We need to pop that into our cashflow statement."},{"Start":"07:08.495 ","End":"07:11.600","Text":"We\u0027ve got a decrease in inventory."},{"Start":"07:11.600 ","End":"07:17.660","Text":"If that 247 had been purchased and sold in the current year,"},{"Start":"07:17.660 ","End":"07:22.400","Text":"then our inventory account of 55 would have gone up by 247 and down by"},{"Start":"07:22.400 ","End":"07:28.060","Text":"247 and it would remain 55 at the end of 20X2."},{"Start":"07:28.060 ","End":"07:30.260","Text":"I\u0027ll say that again."},{"Start":"07:30.260 ","End":"07:35.270","Text":"If the cost of the goods that were sold in 20X2 of"},{"Start":"07:35.270 ","End":"07:40.605","Text":"247 had indeed been purchased in 20X2,"},{"Start":"07:40.605 ","End":"07:45.425","Text":"then our opening balance in 20X2, which was 55,"},{"Start":"07:45.425 ","End":"07:48.845","Text":"would have been increased by the purchases of 247,"},{"Start":"07:48.845 ","End":"07:53.300","Text":"and then it would have decreased by 247 when those goods were sold,"},{"Start":"07:53.300 ","End":"07:56.255","Text":"and our closing balance would have remained at 55."},{"Start":"07:56.255 ","End":"08:01.475","Text":"However, the balance of the stock that we came into our current year with,"},{"Start":"08:01.475 ","End":"08:03.980","Text":"we had 55 already on hand."},{"Start":"08:03.980 ","End":"08:06.290","Text":"That decreased by 25."},{"Start":"08:06.290 ","End":"08:12.920","Text":"We used up 30 of our old stock in order to make those sales."},{"Start":"08:12.920 ","End":"08:17.825","Text":"Therefore, we have only purchased 217."},{"Start":"08:17.825 ","End":"08:21.440","Text":"We sold goods to the value of 247,"},{"Start":"08:21.440 ","End":"08:25.639","Text":"but our inventory balance went from 55 to 25,"},{"Start":"08:25.639 ","End":"08:29.450","Text":"which means that we had used 30 of our old stock,"},{"Start":"08:29.450 ","End":"08:32.740","Text":"and then we had purchased another 217."},{"Start":"08:32.740 ","End":"08:36.540","Text":"The purchases should only be 217."},{"Start":"08:36.540 ","End":"08:38.955","Text":"We should, for starters,"},{"Start":"08:38.955 ","End":"08:43.115","Text":"only subtract 217 but we subtracted 247."},{"Start":"08:43.115 ","End":"08:46.410","Text":"Therefore, we need to add 30."},{"Start":"08:46.410 ","End":"08:51.590","Text":"At this point, our purchases is the cost of sales of"},{"Start":"08:51.590 ","End":"08:56.675","Text":"247 less the 30 decrease in our inventory."},{"Start":"08:56.675 ","End":"08:59.480","Text":"Our purchases are only 217."},{"Start":"08:59.480 ","End":"09:06.450","Text":"Then the question is, how much we paid for in cash and how much was on credit."},{"Start":"09:06.520 ","End":"09:12.590","Text":"The only way we can work that out is by looking at our accounts payable."},{"Start":"09:12.590 ","End":"09:14.600","Text":"Looking at accounts payable,"},{"Start":"09:14.600 ","End":"09:15.800","Text":"what were we told?"},{"Start":"09:15.800 ","End":"09:20.150","Text":"We were told that at the end of X1 we had"},{"Start":"09:20.150 ","End":"09:25.520","Text":"a balance of 90 and at the end of X2 we\u0027ve got a balance of 66."},{"Start":"09:25.520 ","End":"09:28.265","Text":"That is a decrease of 24."},{"Start":"09:28.265 ","End":"09:29.810","Text":"In our cashflow statement,"},{"Start":"09:29.810 ","End":"09:33.605","Text":"we need to put in here that we have a decrease in accounts payable."},{"Start":"09:33.605 ","End":"09:39.085","Text":"The question is, do we add that or do we subtract that."},{"Start":"09:39.085 ","End":"09:45.965","Text":"I said a moment ago that the purchases were in fact only 217."},{"Start":"09:45.965 ","End":"09:48.605","Text":"If we had purchased all of that on credit,"},{"Start":"09:48.605 ","End":"09:54.900","Text":"then our accounts payable would have increased by 217."},{"Start":"09:54.900 ","End":"09:59.600","Text":"It would\u0027ve been sitting at 307 at this point."},{"Start":"09:59.600 ","End":"10:04.235","Text":"However, instead, accounts payable has decreased."},{"Start":"10:04.235 ","End":"10:08.570","Text":"That suggests that all of those purchases were paid for in cash,"},{"Start":"10:08.570 ","End":"10:15.635","Text":"less amounts that we had owed at the end of X1 have been partially repaid during 20X2."},{"Start":"10:15.635 ","End":"10:22.835","Text":"We have repaid old debts as well, extent of 24."},{"Start":"10:22.835 ","End":"10:26.750","Text":"We\u0027ve paid for all of those purchases and the reason I know"},{"Start":"10:26.750 ","End":"10:31.205","Text":"that is because our accounts payable did not increase by 217."},{"Start":"10:31.205 ","End":"10:37.010","Text":"We must have paid for those 217 plus of that 90 opening balance,"},{"Start":"10:37.010 ","End":"10:38.600","Text":"that is dropped to 66."},{"Start":"10:38.600 ","End":"10:41.870","Text":"Thus, the old debt that we owed our suppliers at"},{"Start":"10:41.870 ","End":"10:46.050","Text":"the end of 20X1 has been partially repaid during 20X2."},{"Start":"10:46.050 ","End":"10:48.245","Text":"We paid an extra 24."},{"Start":"10:48.245 ","End":"10:51.305","Text":"Not only should we subtract the 217,"},{"Start":"10:51.305 ","End":"10:55.525","Text":"which is currently what we\u0027ve subtracted because we subtracted 247,"},{"Start":"10:55.525 ","End":"10:57.005","Text":"we\u0027ve added back 30,"},{"Start":"10:57.005 ","End":"11:02.840","Text":"but we need to subtract a further 24 being old debts that we have repaid."},{"Start":"11:02.840 ","End":"11:05.435","Text":"We subtract 24."},{"Start":"11:05.435 ","End":"11:09.590","Text":"So far what we have is,"},{"Start":"11:09.590 ","End":"11:15.875","Text":"we have 217 purchases plus a further 24."},{"Start":"11:15.875 ","End":"11:17.840","Text":"That\u0027s what we have subtracted."},{"Start":"11:17.840 ","End":"11:22.275","Text":"That is 241 that we\u0027re subtracting."},{"Start":"11:22.275 ","End":"11:26.150","Text":"That gives us the cash generated from operations of 98."},{"Start":"11:26.150 ","End":"11:30.770","Text":"If you go back to the exercise BCD,"},{"Start":"11:30.770 ","End":"11:36.190","Text":"which use the exact same figures as this exercise EFG."},{"Start":"11:36.190 ","End":"11:40.840","Text":"But where in BCD,"},{"Start":"11:41.020 ","End":"11:46.040","Text":"the requirement was to prepare the cash flow statement using the direct method."},{"Start":"11:46.040 ","End":"11:49.910","Text":"You see that the cash generated from operations is identical."},{"Start":"11:49.910 ","End":"11:54.180","Text":"Let\u0027s have a look. Here is Exercise BCD."},{"Start":"11:54.180 ","End":"12:00.320","Text":"The difference is that the difference is we\u0027ve got cash generated from operations of"},{"Start":"12:00.320 ","End":"12:03.290","Text":"98 but instead of there being"},{"Start":"12:03.290 ","End":"12:07.685","Text":"a reconciliation from profit to the cash generated from operations,"},{"Start":"12:07.685 ","End":"12:11.600","Text":"we have these 2 line items because this is the direct method."},{"Start":"12:11.600 ","End":"12:15.604","Text":"You show cash received from customers is cash paid to suppliers."},{"Start":"12:15.604 ","End":"12:20.000","Text":"The indirect method, you start with the profit before financing and tax and you"},{"Start":"12:20.000 ","End":"12:24.470","Text":"convert that or reconcile that to the cash generated from operations."},{"Start":"12:24.470 ","End":"12:27.990","Text":"I hope that\u0027s helped somewhat."}],"ID":29696},{"Watched":false,"Name":"Statement of Cash Flows -Question information","Duration":"5m 41s","ChapterTopicVideoID":26944,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.790","Text":"Hello and welcome to this series of"},{"Start":"00:02.790 ","End":"00:08.325","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:08.325 ","End":"00:11.820","Text":"In this section, we will apply our knowledge learned in"},{"Start":"00:11.820 ","End":"00:17.955","Text":"the previous videos and learn how to prepare a simple statement of cash flows."},{"Start":"00:17.955 ","End":"00:19.980","Text":"In the slides that follow,"},{"Start":"00:19.980 ","End":"00:25.185","Text":"we will see financial information for a company called Jubilat."},{"Start":"00:25.185 ","End":"00:29.154","Text":"We will use the balance sheet, the income statement,"},{"Start":"00:29.154 ","End":"00:35.540","Text":"and some additional information to prepare the statement of cash flows for this company."},{"Start":"00:35.540 ","End":"00:40.849","Text":"We will focus in turn on each part of the statement of cash flows."},{"Start":"00:40.849 ","End":"00:46.205","Text":"We will firstly prepare the cash flows from operating activities section."},{"Start":"00:46.205 ","End":"00:51.301","Text":"Secondly, the cash flows from investing activities section."},{"Start":"00:51.301 ","End":"00:56.360","Text":"Lastly, the cash flows from financing activities section."},{"Start":"00:56.360 ","End":"01:00.290","Text":"You will recall these are the 3 sections of the statement of"},{"Start":"01:00.290 ","End":"01:04.714","Text":"cash flows that you\u0027ve learned about in previous videos."},{"Start":"01:04.714 ","End":"01:10.670","Text":"Let us now examine the financial statements of this company Jubilat."},{"Start":"01:10.670 ","End":"01:13.810","Text":"Firstly, looking at the balance sheet."},{"Start":"01:13.810 ","End":"01:18.560","Text":"You will see we have the assets for the X1 year,"},{"Start":"01:18.560 ","End":"01:21.575","Text":"the prior, as well as X2,"},{"Start":"01:21.575 ","End":"01:23.585","Text":"which in fact is the current year."},{"Start":"01:23.585 ","End":"01:27.290","Text":"The company you see has non-current assets,"},{"Start":"01:27.290 ","End":"01:29.445","Text":"as well as current assets."},{"Start":"01:29.445 ","End":"01:32.420","Text":"The non-current assets comprise property, plant,"},{"Start":"01:32.420 ","End":"01:41.255","Text":"and equipment with a cost price and an accumulated depreciation giving a carrying amount."},{"Start":"01:41.255 ","End":"01:47.090","Text":"In other words, the 8,300 at the end of X1 and the"},{"Start":"01:47.090 ","End":"01:55.820","Text":"10,660 at the end of X2 is the carrying amount of the property, plant, and equipment."},{"Start":"01:55.820 ","End":"02:00.395","Text":"For inventory, you will see there is a provision for impairment,"},{"Start":"02:00.395 ","End":"02:04.100","Text":"which you\u0027ve learned about in the earlier videos relating to"},{"Start":"02:04.100 ","End":"02:07.850","Text":"inventory giving a balance on"},{"Start":"02:07.850 ","End":"02:16.250","Text":"the inventory of 2,300 at the end of X1 and 1,900 at the end of X2."},{"Start":"02:16.250 ","End":"02:20.750","Text":"There are also accounts receivable or debtors and"},{"Start":"02:20.750 ","End":"02:26.525","Text":"cash giving a total assets of 12,440 for the X1 year,"},{"Start":"02:26.525 ","End":"02:30.545","Text":"and 14,940 for the current year."},{"Start":"02:30.545 ","End":"02:35.150","Text":"Looking at the equity and liabilities of the balance sheet,"},{"Start":"02:35.150 ","End":"02:39.500","Text":"we have shareholders equity and liabilities."},{"Start":"02:39.500 ","End":"02:42.530","Text":"Again for both years,"},{"Start":"02:42.530 ","End":"02:44.120","Text":"the prior year,"},{"Start":"02:44.120 ","End":"02:49.050","Text":"the year ending X1 and the current year, year ending X2."},{"Start":"02:49.050 ","End":"02:50.990","Text":"Looking at shareholder\u0027s equity,"},{"Start":"02:50.990 ","End":"02:53.120","Text":"we have a shared capital balance,"},{"Start":"02:53.120 ","End":"02:57.409","Text":"some reserves and also the retained profits."},{"Start":"02:57.409 ","End":"02:59.240","Text":"Within liabilities, there are"},{"Start":"02:59.240 ","End":"03:04.375","Text":"certain financial liabilities also which you\u0027ve learned about in previous videos,"},{"Start":"03:04.375 ","End":"03:08.900","Text":"accounts payable and those accounts payable relate"},{"Start":"03:08.900 ","End":"03:13.390","Text":"to amounts owed to suppliers for goods and services purchased."},{"Start":"03:13.390 ","End":"03:17.150","Text":"There are also other accounts payable which you will see in"},{"Start":"03:17.150 ","End":"03:23.180","Text":"the following slide relates to amounts owing to the suppliers of the property, plant,"},{"Start":"03:23.180 ","End":"03:28.115","Text":"and equipment giving the total shareholders equity liabilities"},{"Start":"03:28.115 ","End":"03:33.775","Text":"equaling the total assets of 12,440 at the end of X1,"},{"Start":"03:33.775 ","End":"03:38.055","Text":"and the 14,940 at the end of X2."},{"Start":"03:38.055 ","End":"03:41.480","Text":"Looking at the income statement of this company,"},{"Start":"03:41.480 ","End":"03:45.874","Text":"it is a typical income statement you\u0027ll find for many companies."},{"Start":"03:45.874 ","End":"03:51.275","Text":"The income statement gives the information for the current year only, the X2 year."},{"Start":"03:51.275 ","End":"03:53.900","Text":"That\u0027s all we\u0027ll need in this example."},{"Start":"03:53.900 ","End":"03:56.614","Text":"Looking down the income statement,"},{"Start":"03:56.614 ","End":"03:59.110","Text":"you find the sales revenue,"},{"Start":"03:59.110 ","End":"04:03.610","Text":"this cost of sales equals the familiar number of the gross profit."},{"Start":"04:03.610 ","End":"04:08.420","Text":"Then you see a whole list of expenses before"},{"Start":"04:08.420 ","End":"04:13.220","Text":"arriving at a subtotal of the operating profit,"},{"Start":"04:13.220 ","End":"04:16.646","Text":"which remembers the profit before interest and tax."},{"Start":"04:16.646 ","End":"04:19.370","Text":"You then see the financial income and"},{"Start":"04:19.370 ","End":"04:23.620","Text":"the financial expenses giving the profit before tax,"},{"Start":"04:23.620 ","End":"04:26.485","Text":"and finally, the profit for the year,"},{"Start":"04:26.485 ","End":"04:29.645","Text":"in other words, the profit after tax."},{"Start":"04:29.645 ","End":"04:32.825","Text":"We will focus on all the relevant numbers"},{"Start":"04:32.825 ","End":"04:36.755","Text":"as we start preparing the statement of cash flows."},{"Start":"04:36.755 ","End":"04:42.575","Text":"We\u0027re now given certain additional information relevant to the financial statements."},{"Start":"04:42.575 ","End":"04:48.620","Text":"Firstly, the directors declared and paid a dividend of 2,580 for the current year,"},{"Start":"04:48.620 ","End":"04:50.335","Text":"that\u0027s the X2 year."},{"Start":"04:50.335 ","End":"04:53.990","Text":"In that year, plant and equipment was sold and"},{"Start":"04:53.990 ","End":"04:58.985","Text":"the carrying amount of the plant and equipment sold is 240."},{"Start":"04:58.985 ","End":"05:01.025","Text":"Those financial liabilities,"},{"Start":"05:01.025 ","End":"05:02.855","Text":"which you saw on the balance sheet,"},{"Start":"05:02.855 ","End":"05:06.530","Text":"include an overdraft of 950 at"},{"Start":"05:06.530 ","End":"05:11.750","Text":"the end of the current year and 200 at the end of the previous year."},{"Start":"05:11.750 ","End":"05:13.775","Text":"As I\u0027ve mentioned previously,"},{"Start":"05:13.775 ","End":"05:18.560","Text":"the other accounts payable relate to suppliers of the property,"},{"Start":"05:18.560 ","End":"05:19.963","Text":"plant, and equipment,"},{"Start":"05:19.963 ","End":"05:26.270","Text":"whereas remember the accounts payable itself relates to suppliers of goods and services."},{"Start":"05:26.270 ","End":"05:31.040","Text":"Further, there is a repayment of the loan of 400 and"},{"Start":"05:31.040 ","End":"05:35.687","Text":"a further issue of financial liabilities of 1,000."},{"Start":"05:35.687 ","End":"05:42.180","Text":"The required is to prepare a statement of cash flows using the indirect method."}],"ID":29697},{"Watched":false,"Name":"Statement of Cash Flows (Solution CFO)","Duration":"11m 47s","ChapterTopicVideoID":26945,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.290 ","End":"00:04.545","Text":"Hello and welcome to another video presentation in this series on"},{"Start":"00:04.545 ","End":"00:08.730","Text":"the statement of cash flows brought to you by Proprep."},{"Start":"00:08.730 ","End":"00:13.500","Text":"In this video, we started looking at the solution on this section,"},{"Start":"00:13.500 ","End":"00:16.845","Text":"how to prepare a simple statement of cash flows."},{"Start":"00:16.845 ","End":"00:22.605","Text":"In this video, we focus on preparing the operating activities section."},{"Start":"00:22.605 ","End":"00:27.270","Text":"What you see in front of you on the right-hand side of the screen is"},{"Start":"00:27.270 ","End":"00:33.000","Text":"an outline of the operating activities section of the statement of cash flows,"},{"Start":"00:33.000 ","End":"00:39.255","Text":"and remember here we are preparing the statement of cash flows using the indirect method."},{"Start":"00:39.255 ","End":"00:42.340","Text":"Because you are using the indirect method,"},{"Start":"00:42.340 ","End":"00:44.390","Text":"the starting point of"},{"Start":"00:44.390 ","End":"00:50.225","Text":"the operating activities section must be the profit before interest and tax,"},{"Start":"00:50.225 ","End":"00:53.660","Text":"often called the operating profit."},{"Start":"00:53.660 ","End":"01:01.625","Text":"Remember this number over here is often referred to as the operating profit."},{"Start":"01:01.625 ","End":"01:04.190","Text":"On the left-hand side of the screen,"},{"Start":"01:04.190 ","End":"01:07.055","Text":"you will see that I have presented,"},{"Start":"01:07.055 ","End":"01:09.949","Text":"in a smaller version,"},{"Start":"01:09.949 ","End":"01:12.800","Text":"the financial statements that you saw on"},{"Start":"01:12.800 ","End":"01:16.100","Text":"the previous video which introduced this question."},{"Start":"01:16.100 ","End":"01:19.940","Text":"We have the balance sheet showing the assets as well as"},{"Start":"01:19.940 ","End":"01:24.505","Text":"the equity and liabilities and we have the income statement at the bottom."},{"Start":"01:24.505 ","End":"01:27.410","Text":"Clearly to pick up the number for"},{"Start":"01:27.410 ","End":"01:32.195","Text":"the profit before interest and tax or the operating profit,"},{"Start":"01:32.195 ","End":"01:37.410","Text":"we go to the income statement and we see the number is 4,030."},{"Start":"01:37.970 ","End":"01:41.315","Text":"Therefore, I can enter a number of"},{"Start":"01:41.315 ","End":"01:48.620","Text":"4,030 on the statement of cash flows as the starting point."},{"Start":"01:48.620 ","End":"01:52.580","Text":"That\u0027s quite an important principle to remember and to try and"},{"Start":"01:52.580 ","End":"01:57.230","Text":"understand the logic it will follow in the statement of cash flows."},{"Start":"01:57.230 ","End":"02:01.295","Text":"The starting point is this operating profit,"},{"Start":"02:01.295 ","End":"02:05.450","Text":"the profit before interest and tax and think about it."},{"Start":"02:05.450 ","End":"02:12.035","Text":"That profit before interest and tax has incorporated in this number."},{"Start":"02:12.035 ","End":"02:16.175","Text":"All the income and all the expenses"},{"Start":"02:16.175 ","End":"02:20.810","Text":"recognized on the income statement to give that profit number,"},{"Start":"02:20.810 ","End":"02:24.035","Text":"in this case, the operating profit number."},{"Start":"02:24.035 ","End":"02:27.140","Text":"Therefore, a lot of the adjustments that we\u0027re going to"},{"Start":"02:27.140 ","End":"02:31.910","Text":"make will be made with the logic of saying what has"},{"Start":"02:31.910 ","End":"02:35.090","Text":"already been taken into account in arriving at"},{"Start":"02:35.090 ","End":"02:40.430","Text":"the profit figure in terms of an income or an expense item."},{"Start":"02:40.430 ","End":"02:47.890","Text":"Now, you are aware that the depreciation expense does not involve the flow of cash."},{"Start":"02:47.890 ","End":"02:52.190","Text":"On the indirect method in preparing a statement of cash flows,"},{"Start":"02:52.190 ","End":"02:55.280","Text":"one of the common adjustments to"},{"Start":"02:55.280 ","End":"03:03.125","Text":"that operating profit number is to reverse out the effect of the depreciation expense."},{"Start":"03:03.125 ","End":"03:09.105","Text":"Now, remember the depreciation expense would have been subtracted as"},{"Start":"03:09.105 ","End":"03:16.620","Text":"an expense in arriving at the profit and because there\u0027s no cash in depreciation,"},{"Start":"03:16.620 ","End":"03:21.700","Text":"I need to therefore add back the amount of the depreciation expense,"},{"Start":"03:21.700 ","End":"03:24.870","Text":"other words, reverse the effect of it."},{"Start":"03:24.870 ","End":"03:27.619","Text":"Where do I find the depreciation expense?"},{"Start":"03:27.619 ","End":"03:30.380","Text":"I will go to the income statement and I see"},{"Start":"03:30.380 ","End":"03:35.560","Text":"the depreciation expense was an amount of 1,400."},{"Start":"03:35.560 ","End":"03:37.940","Text":"Before we continue, you may say, well,"},{"Start":"03:37.940 ","End":"03:39.380","Text":"why can\u0027t I look at"},{"Start":"03:39.380 ","End":"03:45.425","Text":"this accumulated depreciation number over here and compare those 2 numbers."},{"Start":"03:45.425 ","End":"03:51.170","Text":"Surely that must also give me the depreciation expense for the period,"},{"Start":"03:51.170 ","End":"03:59.225","Text":"but remember not always because if any items of PPE had been sold during the period,"},{"Start":"03:59.225 ","End":"04:01.910","Text":"then that accumulated depreciation would have been"},{"Start":"04:01.910 ","End":"04:06.380","Text":"adjusted for any amount sold as we will see later."},{"Start":"04:06.380 ","End":"04:12.265","Text":"Therefore, I need to go to the income statement and pick up the 1,400."},{"Start":"04:12.265 ","End":"04:17.820","Text":"As I said, because the 1,400 was subtracted in arriving at the profit,"},{"Start":"04:17.820 ","End":"04:19.970","Text":"and now I have to add it back."},{"Start":"04:19.970 ","End":"04:22.100","Text":"In other words, reverse it."},{"Start":"04:22.100 ","End":"04:24.799","Text":"You also see on the income statement,"},{"Start":"04:24.799 ","End":"04:29.990","Text":"there is a line item which is the gain on"},{"Start":"04:29.990 ","End":"04:36.740","Text":"sale of non-current assets in an amount of 210."},{"Start":"04:36.740 ","End":"04:42.980","Text":"Now that gain on sale of non-current assets is a non-cash item as well."},{"Start":"04:42.980 ","End":"04:49.265","Text":"We will review this in the next video when we look at the investing activity section."},{"Start":"04:49.265 ","End":"04:51.620","Text":"But remember from your knowledge of property, plant,"},{"Start":"04:51.620 ","End":"04:56.495","Text":"and equipment, that when we sell an item of PPE,"},{"Start":"04:56.495 ","End":"05:00.260","Text":"the gain or loss on sale is"},{"Start":"05:00.260 ","End":"05:05.830","Text":"an accounting gain or loss and it doesn\u0027t represent the cash flow."},{"Start":"05:05.830 ","End":"05:09.690","Text":"That gain of 210,"},{"Start":"05:09.690 ","End":"05:15.035","Text":"the sitting inside here as an income item in arriving at the profit,"},{"Start":"05:15.035 ","End":"05:19.115","Text":"or in this case the operating profit of 4,030."},{"Start":"05:19.115 ","End":"05:22.910","Text":"Therefore, I need to subtract it to remove it,"},{"Start":"05:22.910 ","End":"05:30.020","Text":"because there\u0027s no cash inflow in that amount of 210 so I subtract the"},{"Start":"05:30.020 ","End":"05:37.279","Text":"210 in arriving at and working towards the cash flow from operating activities."},{"Start":"05:37.279 ","End":"05:40.865","Text":"Having now adjusted for the non-cash items."},{"Start":"05:40.865 ","End":"05:43.670","Text":"We can now turn our attention to"},{"Start":"05:43.670 ","End":"05:48.050","Text":"the working capital changes and these are items over here,"},{"Start":"05:48.050 ","End":"05:51.440","Text":"the change in the inventory, the accounts receivable,"},{"Start":"05:51.440 ","End":"05:56.660","Text":"and the accounts payable are known as the working capital changes."},{"Start":"05:56.660 ","End":"05:59.149","Text":"What has happened to inventory?"},{"Start":"05:59.149 ","End":"06:01.685","Text":"Looking at the balance sheet,"},{"Start":"06:01.685 ","End":"06:09.290","Text":"the net imagery number was 2,300 end of the previous year and is an amount"},{"Start":"06:09.290 ","End":"06:12.890","Text":"of 1,900 at the end of the current year"},{"Start":"06:12.890 ","End":"06:16.970","Text":"so there\u0027s been a decrease in the net inventory balance."},{"Start":"06:16.970 ","End":"06:25.760","Text":"It was 2,300 at the end of last year and an amount of 1,900 end of the current year."},{"Start":"06:25.760 ","End":"06:30.365","Text":"Other words, a decrease of 400."},{"Start":"06:30.365 ","End":"06:36.380","Text":"That decrease in inventory has worked its way through cost of sales and therefore,"},{"Start":"06:36.380 ","End":"06:39.460","Text":"wrote it way through to the operating profit."},{"Start":"06:39.460 ","End":"06:42.040","Text":"As there\u0027s no cash flow involved,"},{"Start":"06:42.040 ","End":"06:48.905","Text":"I need to add back or reverse that decrease in inventory in an amount of 400."},{"Start":"06:48.905 ","End":"06:53.210","Text":"You made this point ask what about this impairment and"},{"Start":"06:53.210 ","End":"06:58.085","Text":"provision expense you see sitting on the income statement for 100?"},{"Start":"06:58.085 ","End":"07:01.280","Text":"Well, that in fact is the provision for"},{"Start":"07:01.280 ","End":"07:04.955","Text":"the impairment of inventory which is C on the balance sheet."},{"Start":"07:04.955 ","End":"07:08.600","Text":"Because I\u0027ve worked with the net numbers over here,"},{"Start":"07:08.600 ","End":"07:11.994","Text":"these are the net numbers for inventory i.e."},{"Start":"07:11.994 ","End":"07:17.180","Text":"after provision, I don\u0027t have to have a separate line item regarding"},{"Start":"07:17.180 ","End":"07:20.720","Text":"the movement and the provision alongside"},{"Start":"07:20.720 ","End":"07:24.920","Text":"the depreciation and the gain on sale of non-current assets."},{"Start":"07:24.920 ","End":"07:27.485","Text":"Looking next at accounts receivable,"},{"Start":"07:27.485 ","End":"07:33.170","Text":"you will see accounts receivable was an amount of 1,650 at"},{"Start":"07:33.170 ","End":"07:39.695","Text":"the end of last year and sits at an amount of 2,300 into the current year."},{"Start":"07:39.695 ","End":"07:43.385","Text":"So we had 1,650 end of the last year,"},{"Start":"07:43.385 ","End":"07:49.325","Text":"and an amount of 2,300 at the end of the current year."},{"Start":"07:49.325 ","End":"07:53.660","Text":"In other words, an increase of 650."},{"Start":"07:53.660 ","End":"07:58.580","Text":"That increase of 650 means that the amount of"},{"Start":"07:58.580 ","End":"08:01.550","Text":"the credit sales in the current period"},{"Start":"08:01.550 ","End":"08:05.450","Text":"must have been greater than the cash received from customers."},{"Start":"08:05.450 ","End":"08:12.124","Text":"Those credit sales are also included in the income item on the income statement."},{"Start":"08:12.124 ","End":"08:16.550","Text":"Therefore, that extra 650 increase in account"},{"Start":"08:16.550 ","End":"08:20.570","Text":"receivable has not been received in cash and therefore,"},{"Start":"08:20.570 ","End":"08:25.640","Text":"I needed to subtract the increase in accounts receivable and again,"},{"Start":"08:25.640 ","End":"08:29.390","Text":"think of the logic in working from the profit before"},{"Start":"08:29.390 ","End":"08:35.075","Text":"tax down to the cash flow from operating activities."},{"Start":"08:35.075 ","End":"08:37.625","Text":"Looking now at accounts payable."},{"Start":"08:37.625 ","End":"08:40.850","Text":"Accounts payable totaled 60 end of"},{"Start":"08:40.850 ","End":"08:46.565","Text":"last year and totaled 870 at the end of the current year."},{"Start":"08:46.565 ","End":"08:49.850","Text":"In other words, an increase of 810."},{"Start":"08:49.850 ","End":"08:51.860","Text":"I just write it down here."},{"Start":"08:51.860 ","End":"09:00.800","Text":"Last year accounts payable was 60 and the current year accounts payable 870,"},{"Start":"09:00.800 ","End":"09:02.390","Text":"therefore, as I said,"},{"Start":"09:02.390 ","End":"09:05.195","Text":"an increase of 810."},{"Start":"09:05.195 ","End":"09:08.030","Text":"Because of the increase in accounts payable,"},{"Start":"09:08.030 ","End":"09:11.690","Text":"we have more cash compared to the profit,"},{"Start":"09:11.690 ","End":"09:17.760","Text":"so we therefore add the 810 to the operating profit number and again,"},{"Start":"09:17.760 ","End":"09:22.625","Text":"working towards the cash flow from operating activities."},{"Start":"09:22.625 ","End":"09:25.400","Text":"At this point, we could strike a subtotal."},{"Start":"09:25.400 ","End":"09:34.655","Text":"The subtotal, as you see here,"},{"Start":"09:34.655 ","End":"09:38.485","Text":"is called the cash flow from operating activities"},{"Start":"09:38.485 ","End":"09:43.025","Text":"but before the interest and the taxation,"},{"Start":"09:43.025 ","End":"09:48.860","Text":"this amounts to 5,780."},{"Start":"09:48.860 ","End":"09:52.730","Text":"To find the amount of interest paid and interest received,"},{"Start":"09:52.730 ","End":"09:59.075","Text":"we look at the income statement and we see interest paid amounts to 580,"},{"Start":"09:59.075 ","End":"10:02.225","Text":"and interest received amounts to 300."},{"Start":"10:02.225 ","End":"10:07.285","Text":"But because these 2 numbers are shown after the operating profit."},{"Start":"10:07.285 ","End":"10:09.320","Text":"Look at the income statement."},{"Start":"10:09.320 ","End":"10:16.115","Text":"There are sitting after this operating profit number of 4,030,"},{"Start":"10:16.115 ","End":"10:20.345","Text":"which we picked up for the start of the statement of cash flows."},{"Start":"10:20.345 ","End":"10:23.300","Text":"Therefore, we can directly put in"},{"Start":"10:23.300 ","End":"10:27.065","Text":"those numbers onto the face of the statement of cash flows."},{"Start":"10:27.065 ","End":"10:35.180","Text":"The interest paid, a subtraction in the amount of 580,"},{"Start":"10:35.180 ","End":"10:41.045","Text":"and the interest received and addition in the amount of 300."},{"Start":"10:41.045 ","End":"10:43.610","Text":"The income tax paid for the period,"},{"Start":"10:43.610 ","End":"10:48.455","Text":"we simply picked up again from the statement of cash flows."},{"Start":"10:48.455 ","End":"10:54.120","Text":"This income tax paid over here of 1,280,"},{"Start":"10:54.120 ","End":"10:57.940","Text":"as a subtraction 1,280."},{"Start":"10:57.940 ","End":"11:08.120","Text":"This now gives us the cash flow from operating activities amounting to 4,220."},{"Start":"11:08.120 ","End":"11:12.635","Text":"That completes the first part of the statement of cash flows,"},{"Start":"11:12.635 ","End":"11:15.275","Text":"the operating activities section."},{"Start":"11:15.275 ","End":"11:19.910","Text":"Just to recap, it\u0027s important that you know the order of the setup of"},{"Start":"11:19.910 ","End":"11:26.840","Text":"the statement starting with the profit before tax as the first point,"},{"Start":"11:26.840 ","End":"11:35.525","Text":"then looking at the non-cash items as the second or the first set of adjustments to make."},{"Start":"11:35.525 ","End":"11:40.885","Text":"Then looking at the working capital adjustments and finally,"},{"Start":"11:40.885 ","End":"11:42.680","Text":"looking at the interest paid,"},{"Start":"11:42.680 ","End":"11:47.040","Text":"interest received and texts paid for the period."}],"ID":29698},{"Watched":false,"Name":"Statement of Cash Flows (Solution CFI)","Duration":"5m 18s","ChapterTopicVideoID":26946,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.730","Text":"Hello and welcome to this series of"},{"Start":"00:02.730 ","End":"00:08.395","Text":"video presentations on the statement of cash flows brought to you by Proprep."},{"Start":"00:08.395 ","End":"00:13.380","Text":"In this section we continue the focus on operating activities."},{"Start":"00:13.380 ","End":"00:20.235","Text":"There are 2 methods available to calculate the cash flow from operating activities."},{"Start":"00:20.235 ","End":"00:24.495","Text":"It is important for you to note that these 2 methods apply"},{"Start":"00:24.495 ","End":"00:30.045","Text":"only to the operating activities section of the statement of cash flows."},{"Start":"00:30.045 ","End":"00:36.060","Text":"When we move on to the investing activities section and the financing activities section,"},{"Start":"00:36.060 ","End":"00:41.390","Text":"there\u0027s only one method available which in fact has got nothing to"},{"Start":"00:41.390 ","End":"00:47.900","Text":"do with what we will now call the direct method and the indirect method."},{"Start":"00:47.900 ","End":"00:49.655","Text":"As I\u0027ve just mentioned,"},{"Start":"00:49.655 ","End":"00:53.990","Text":"the 2 methods available to calculate the cash flows from"},{"Start":"00:53.990 ","End":"01:01.050","Text":"operating activities specifically are the direct method and the indirect method."},{"Start":"01:01.050 ","End":"01:07.160","Text":"The number which you will arrive at for the cash flow from operations,"},{"Start":"01:07.160 ","End":"01:15.140","Text":"you will see will be the same when using either the direct method or the indirect method."},{"Start":"01:15.140 ","End":"01:19.610","Text":"Before we examine the computations in detail required to"},{"Start":"01:19.610 ","End":"01:24.686","Text":"compute the cash flows under both the direct and indirect methods,"},{"Start":"01:24.686 ","End":"01:27.800","Text":"it is worthwhile comparing the 2 methods in"},{"Start":"01:27.800 ","End":"01:32.280","Text":"principle to see how they differ from one another."},{"Start":"01:33.560 ","End":"01:37.790","Text":"Starting of with the direct method. The direct method as the name implies,"},{"Start":"01:37.790 ","End":"01:41.690","Text":"looks at the cash received directly relating to"},{"Start":"01:41.690 ","End":"01:47.855","Text":"operations and the cash paid directly relating to operations."},{"Start":"01:47.855 ","End":"01:51.380","Text":"The way it is set out is to start off with"},{"Start":"01:51.380 ","End":"01:56.750","Text":"a number which is called the cash received from customers,"},{"Start":"01:56.750 ","End":"02:03.170","Text":"that includes all cash received from all the businesses customers during the period."},{"Start":"02:03.170 ","End":"02:09.650","Text":"From that we subtract the cash paid this time to the suppliers of"},{"Start":"02:09.650 ","End":"02:13.280","Text":"the business and also the cash paid to"},{"Start":"02:13.280 ","End":"02:17.225","Text":"the employees of the business clearly for salaries."},{"Start":"02:17.225 ","End":"02:22.430","Text":"We\u0027ll explain more about this in the next video presentation."},{"Start":"02:22.430 ","End":"02:30.830","Text":"The subtotal of these 2 line items is the cash flow from operations."},{"Start":"02:30.830 ","End":"02:35.180","Text":"Now note that it\u0027s called the cash flow from"},{"Start":"02:35.180 ","End":"02:40.685","Text":"operations and not the cash flow from operating activity."},{"Start":"02:40.685 ","End":"02:45.710","Text":"There are some further adjustments we will have to make to convert"},{"Start":"02:45.710 ","End":"02:50.795","Text":"the cash flow from operations to the cash flow from operating activities."},{"Start":"02:50.795 ","End":"02:55.685","Text":"Moving then to the indirect method as the name implies,"},{"Start":"02:55.685 ","End":"03:01.325","Text":"the cash flow from operations is calculated indirectly."},{"Start":"03:01.325 ","End":"03:06.950","Text":"Indirectly means we are starting with the profits;"},{"Start":"03:06.950 ","End":"03:13.100","Text":"the accrual profit, and note that the accrual based profit from the income statement."},{"Start":"03:13.100 ","End":"03:19.595","Text":"To this number we adjust for non-cash items,"},{"Start":"03:19.595 ","End":"03:22.970","Text":"and they are going to be a number of"},{"Start":"03:22.970 ","End":"03:28.415","Text":"non-cash items included in the calculation of the accrual-based profit."},{"Start":"03:28.415 ","End":"03:32.668","Text":"This could be as we said a plus or a minus,"},{"Start":"03:32.668 ","End":"03:39.395","Text":"and we also adjust for any changes in what\u0027s called the working capital items."},{"Start":"03:39.395 ","End":"03:42.320","Text":"Now you should know working capital refers"},{"Start":"03:42.320 ","End":"03:46.095","Text":"to the current assets and the current liabilities."},{"Start":"03:46.095 ","End":"03:51.238","Text":"Again, we\u0027ll learn more about this in a subsequent presentation,"},{"Start":"03:51.238 ","End":"03:58.055","Text":"but here we\u0027ll also end up add and subtracting or adding any working capital adjustment."},{"Start":"03:58.055 ","End":"04:02.780","Text":"What\u0027s important just to understand at this point is it that the number we arrive at over"},{"Start":"04:02.780 ","End":"04:08.600","Text":"here will be the cash flow from operations."},{"Start":"04:08.600 ","End":"04:13.580","Text":"This cash flow from operations is the same number whether"},{"Start":"04:13.580 ","End":"04:19.320","Text":"we\u0027re using the direct method or the indirect method."}],"ID":29699},{"Watched":false,"Name":"Statement of Cash Flows (Solution CFF)","Duration":"10m 44s","ChapterTopicVideoID":26947,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.540","Text":"Hello. Welcome to another video presentation in the series on"},{"Start":"00:03.540 ","End":"00:07.230","Text":"the statement of cash flows brought to you by Proprep."},{"Start":"00:07.230 ","End":"00:09.660","Text":"In this video, we look at the final part of"},{"Start":"00:09.660 ","End":"00:14.460","Text":"the solution on the section how to prepare simple statement of cash flows,"},{"Start":"00:14.460 ","End":"00:19.845","Text":"this time focusing on the cash flows from financing activities."},{"Start":"00:19.845 ","End":"00:24.660","Text":"Remember that financing activities includes the cash inflows and"},{"Start":"00:24.660 ","End":"00:30.315","Text":"cash outflows relating to equity and non-current liabilities."},{"Start":"00:30.315 ","End":"00:39.655","Text":"Also recall from the question that a dividend was declared and paid amounting to 2,580."},{"Start":"00:39.655 ","End":"00:43.820","Text":"Recall that the financing activities include"},{"Start":"00:43.820 ","End":"00:48.844","Text":"cash flows from movements in equity and non-current liabilities."},{"Start":"00:48.844 ","End":"00:52.174","Text":"We\u0027ll start by looking at the equity balances."},{"Start":"00:52.174 ","End":"00:56.420","Text":"Therefore, looking at the balance sheet of which I\u0027ve"},{"Start":"00:56.420 ","End":"01:00.830","Text":"included a small image on the top right-hand side here,"},{"Start":"01:00.830 ","End":"01:04.310","Text":"here we look at the equity section of the balance sheet."},{"Start":"01:04.310 ","End":"01:07.010","Text":"We\u0027re considering ourselves with the movement"},{"Start":"01:07.010 ","End":"01:11.050","Text":"in the share capital reserves and the retained profit."},{"Start":"01:11.050 ","End":"01:12.710","Text":"Starting off, therefore,"},{"Start":"01:12.710 ","End":"01:14.300","Text":"with the share capital,"},{"Start":"01:14.300 ","End":"01:18.320","Text":"we can look at the share capital and see that there was a 3,000 balance at"},{"Start":"01:18.320 ","End":"01:23.800","Text":"the end of the previous year and a 3,200 balance at the end of the current year."},{"Start":"01:23.800 ","End":"01:25.505","Text":"I\u0027m going to serve those numbers over here."},{"Start":"01:25.505 ","End":"01:31.235","Text":"A 3,000 opening balance and a 3,200 closing balance."},{"Start":"01:31.235 ","End":"01:36.425","Text":"There\u0027s no information by any repayment of share capital during the period,"},{"Start":"01:36.425 ","End":"01:40.190","Text":"and therefore the increase in share capital to make"},{"Start":"01:40.190 ","End":"01:46.415","Text":"this balance must be related to an issue of shares during the period,"},{"Start":"01:46.415 ","End":"01:51.290","Text":"which will be a cash inflow from financing activities."},{"Start":"01:51.290 ","End":"01:53.480","Text":"Turning to the reserves,"},{"Start":"01:53.480 ","End":"01:57.070","Text":"reserves were 3,000 at the end of last year,"},{"Start":"01:57.070 ","End":"01:59.700","Text":"and also 3,000 end of this year."},{"Start":"01:59.700 ","End":"02:05.625","Text":"We can put it in for completion that there\u0027s still be no movement in the reserves,"},{"Start":"02:05.625 ","End":"02:08.510","Text":"no information given by any increases or decreases."},{"Start":"02:08.510 ","End":"02:15.100","Text":"Also the reserves will not result in any cash being received or paid by the entity."},{"Start":"02:15.100 ","End":"02:17.890","Text":"Finally, turning to retained profit."},{"Start":"02:17.890 ","End":"02:27.020","Text":"Retained profit had an opening balance of 3,380 and a closing balance of 3,270."},{"Start":"02:27.020 ","End":"02:29.120","Text":"We can insert the opening balance,"},{"Start":"02:29.120 ","End":"02:35.300","Text":"3,380, and the closing balance of 3,270."},{"Start":"02:35.300 ","End":"02:37.400","Text":"Now you have to ask yourself the question,"},{"Start":"02:37.400 ","End":"02:40.970","Text":"what causes changes in retained profit?"},{"Start":"02:40.970 ","End":"02:44.205","Text":"We know that the profit for the period will"},{"Start":"02:44.205 ","End":"02:48.930","Text":"increase the retained profit and any dividends paid out,"},{"Start":"02:48.930 ","End":"02:51.255","Text":"or dividends declared rather,"},{"Start":"02:51.255 ","End":"02:54.595","Text":"would decrease the retained profit."},{"Start":"02:54.595 ","End":"02:59.630","Text":"The profit for the period we know is 2,470."},{"Start":"02:59.630 ","End":"03:05.210","Text":"The 2,470 therefore increased the retained profit because the profit"},{"Start":"03:05.210 ","End":"03:11.090","Text":"for the period is transferred from the step in the profit and loss to retained profit."},{"Start":"03:11.090 ","End":"03:16.070","Text":"Now, I could look at these numbers and deduce that the dividend"},{"Start":"03:16.070 ","End":"03:20.570","Text":"paid out is an amount of 2,580."},{"Start":"03:20.570 ","End":"03:25.875","Text":"But in any event, this was given as information in this question."},{"Start":"03:25.875 ","End":"03:28.630","Text":"Turning to the non-current liabilities,"},{"Start":"03:28.630 ","End":"03:31.120","Text":"remember there was a repayment of the loan of"},{"Start":"03:31.120 ","End":"03:36.335","Text":"400 and an issue of a financial liability of 1,000."},{"Start":"03:36.335 ","End":"03:40.845","Text":"You\u0027re also told that financial liabilities include overdrafts"},{"Start":"03:40.845 ","End":"03:47.440","Text":"of 950 into the current year and 200 into the previous year."},{"Start":"03:47.440 ","End":"03:54.500","Text":"Now, overdrafts in this example are included as part of financing activities."},{"Start":"03:54.500 ","End":"03:57.930","Text":"There are situations in our countries where"},{"Start":"03:57.930 ","End":"04:01.360","Text":"an overdraft is regarded as part of the cash and cash equivalents"},{"Start":"04:01.360 ","End":"04:08.655","Text":"if the overdraft can be demanded from a bank to be repaid at short notice."},{"Start":"04:08.655 ","End":"04:10.730","Text":"But as I said in this example,"},{"Start":"04:10.730 ","End":"04:14.090","Text":"we are taking the overdraft to be part of"},{"Start":"04:14.090 ","End":"04:19.025","Text":"the long-term finance and therefore include it in financing activities."},{"Start":"04:19.025 ","End":"04:21.740","Text":"In order to understand what is happening over here,"},{"Start":"04:21.740 ","End":"04:25.640","Text":"we need to look at the non-current liabilities, in this case,"},{"Start":"04:25.640 ","End":"04:31.340","Text":"the financial liabilities, and break it down into that part,"},{"Start":"04:31.340 ","End":"04:36.590","Text":"which is the overdraft and that part which is the remaining financial liability."},{"Start":"04:36.590 ","End":"04:39.890","Text":"From the statement of financial position,"},{"Start":"04:39.890 ","End":"04:43.280","Text":"we can see the total financial liabilities end of"},{"Start":"04:43.280 ","End":"04:47.540","Text":"the previous year was 3,000 and the total end of the current year,"},{"Start":"04:47.540 ","End":"04:50.290","Text":"the X2 year is 4,350."},{"Start":"04:50.290 ","End":"04:53.715","Text":"I can insert the opening balance of 3,000"},{"Start":"04:53.715 ","End":"05:00.430","Text":"total financial liabilities and the closing balance of 4,350."},{"Start":"05:00.460 ","End":"05:06.110","Text":"Now because we are told that those financial liabilities include an overdraft"},{"Start":"05:06.110 ","End":"05:11.780","Text":"of 200 from the previous year and 950 within then the current year,"},{"Start":"05:11.780 ","End":"05:15.055","Text":"I can insert those numbers as well."},{"Start":"05:15.055 ","End":"05:17.160","Text":"Of the 3,000,"},{"Start":"05:17.160 ","End":"05:19.640","Text":"there\u0027s 200 at the beginning of the year,"},{"Start":"05:19.640 ","End":"05:24.560","Text":"which is an overdraft and there\u0027s 950 at the end of the year,"},{"Start":"05:24.560 ","End":"05:26.555","Text":"which is also an overdraft,"},{"Start":"05:26.555 ","End":"05:28.820","Text":"which means therefore I can deduce that"},{"Start":"05:28.820 ","End":"05:36.545","Text":"the remaining financial liabilities at the beginning of the year must be 2,800,"},{"Start":"05:36.545 ","End":"05:41.170","Text":"and at the end of the year must be 3,400."},{"Start":"05:41.170 ","End":"05:48.125","Text":"We\u0027re told in the question relating to the financial liability that there is a repayment"},{"Start":"05:48.125 ","End":"05:55.790","Text":"of the loan of 400 and an issue of a further financial liability amounting to 1,000."},{"Start":"05:55.790 ","End":"06:00.565","Text":"Therefore, there is an increase of 1,000,"},{"Start":"06:00.565 ","End":"06:04.650","Text":"which must be a cash inflow from the financing activity,"},{"Start":"06:04.650 ","End":"06:10.710","Text":"and there\u0027s a decrease of 400 which must be a cash outflow from,"},{"Start":"06:10.710 ","End":"06:13.245","Text":"in this case, financing activities."},{"Start":"06:13.245 ","End":"06:15.525","Text":"This year is the issue,"},{"Start":"06:15.525 ","End":"06:17.520","Text":"further financial liabilities,"},{"Start":"06:17.520 ","End":"06:22.010","Text":"and this year is the repayment of the financial liability."},{"Start":"06:22.010 ","End":"06:24.325","Text":"Regarding the overdraft,"},{"Start":"06:24.325 ","End":"06:28.100","Text":"the overdraft increased from an amount of 200"},{"Start":"06:28.100 ","End":"06:32.810","Text":"at the beginning of the year to an amount of 950 the end of the year,"},{"Start":"06:32.810 ","End":"06:39.215","Text":"and therefore there must be an increase in the overdraft in an amount of 750."},{"Start":"06:39.215 ","End":"06:43.985","Text":"We can now, based on the previous workings and information,"},{"Start":"06:43.985 ","End":"06:49.180","Text":"prepare the financing activities section of the statement of cash flows."},{"Start":"06:49.180 ","End":"06:54.830","Text":"The dividends we\u0027re told amount to 2,580."},{"Start":"06:54.830 ","End":"07:00.280","Text":"The dividends paid must clearly be a cash outflow from financing activities."},{"Start":"07:00.280 ","End":"07:04.330","Text":"We know the full 2,580 was paid in cash"},{"Start":"07:04.330 ","End":"07:08.860","Text":"because there\u0027s no dividend liability amount on the balance sheet."},{"Start":"07:08.860 ","End":"07:14.140","Text":"We had computed by looking at the movement in the share capital account that the"},{"Start":"07:14.140 ","End":"07:21.635","Text":"amount of cash inflow relating to the issue of share capital, there\u0027s 200."},{"Start":"07:21.635 ","End":"07:24.075","Text":"On the previous slide,"},{"Start":"07:24.075 ","End":"07:27.910","Text":"when we reconciled the non-current liabilities,"},{"Start":"07:27.910 ","End":"07:34.915","Text":"we know there was a cash inflow from borrowing amounting to 1,750,"},{"Start":"07:34.915 ","End":"07:41.470","Text":"and there was a repayment of the financial liabilities of 400."},{"Start":"07:41.470 ","End":"07:45.930","Text":"Note this borrowing comprises the 1,000 relating to"},{"Start":"07:45.930 ","End":"07:53.605","Text":"the financial liability itself plus the 750 relating to the overdraft."},{"Start":"07:53.605 ","End":"07:56.105","Text":"This gives us a total,"},{"Start":"07:56.105 ","End":"07:57.620","Text":"in this case again,"},{"Start":"07:57.620 ","End":"08:00.224","Text":"or similar to the investing activities,"},{"Start":"08:00.224 ","End":"08:04.100","Text":"a cash used or utilized in financing activities,"},{"Start":"08:04.100 ","End":"08:09.520","Text":"it\u0027s the outflow in an amount of 1,030."},{"Start":"08:09.520 ","End":"08:16.160","Text":"Having now completed the 3 individual sections, the operating, investing,"},{"Start":"08:16.160 ","End":"08:18.140","Text":"and financing activity sections,"},{"Start":"08:18.140 ","End":"08:20.990","Text":"we can now complete the entire statement of"},{"Start":"08:20.990 ","End":"08:25.440","Text":"cash flows by bringing the 3 sections together."},{"Start":"08:25.440 ","End":"08:32.735","Text":"What is here over here is simply a summary of the face of a statement of cash flows."},{"Start":"08:32.735 ","End":"08:38.390","Text":"It is showing just the final number of net cash flow from operating,"},{"Start":"08:38.390 ","End":"08:41.600","Text":"investing, and financing activities."},{"Start":"08:41.600 ","End":"08:46.100","Text":"When you prepare the statement or tests, exams on practice,"},{"Start":"08:46.100 ","End":"08:52.460","Text":"the complete details as you\u0027ve competed in the previous videos for each of operating,"},{"Start":"08:52.460 ","End":"08:55.730","Text":"investing, and financing needs to be shown."},{"Start":"08:55.730 ","End":"09:01.535","Text":"This is just a summary here because of the space constraints on the slide."},{"Start":"09:01.535 ","End":"09:04.010","Text":"Going back to the previous and thinking about"},{"Start":"09:04.010 ","End":"09:08.705","Text":"the previous calculation that we\u0027ve done on previous videos,"},{"Start":"09:08.705 ","End":"09:13.865","Text":"we know that the net cash inflow from operating activities,"},{"Start":"09:13.865 ","End":"09:19.505","Text":"which we computed previously, amounts to 4,220."},{"Start":"09:19.505 ","End":"09:28.155","Text":"We know that the cash outflow from investing activities amounted to 3,330,"},{"Start":"09:28.155 ","End":"09:36.140","Text":"and we know the cash outflow relating to financing activities amounted to 1,030."},{"Start":"09:36.140 ","End":"09:44.420","Text":"This gives us a net decrease in cash flows of 110 for the period."},{"Start":"09:44.420 ","End":"09:50.990","Text":"In other words, the cash outflows exceed the cash inflows by an amount of 110."},{"Start":"09:50.990 ","End":"09:57.175","Text":"Accounting standards, it requires to reconcile that movement of 110"},{"Start":"09:57.175 ","End":"10:00.170","Text":"by looking at the cash amounts on"},{"Start":"10:00.170 ","End":"10:03.440","Text":"the balance sheet at the beginning and at the end of the year."},{"Start":"10:03.440 ","End":"10:05.300","Text":"What do we see over here?"},{"Start":"10:05.300 ","End":"10:10.310","Text":"We see the cash balance in the balance sheet had a amount of balance at"},{"Start":"10:10.310 ","End":"10:15.875","Text":"the end of last year 190 and a balance end of the current year of 80."},{"Start":"10:15.875 ","End":"10:19.195","Text":"There\u0027s the decrease of 110."},{"Start":"10:19.195 ","End":"10:22.850","Text":"We can solve it and we show this on the statement of"},{"Start":"10:22.850 ","End":"10:26.660","Text":"cash flows that the 110 decrease in cash is"},{"Start":"10:26.660 ","End":"10:34.340","Text":"reconciled by recording the cash amount at the beginning of the year of 190,"},{"Start":"10:34.340 ","End":"10:38.060","Text":"and the cash amount at the end of the year, which is 80,"},{"Start":"10:38.060 ","End":"10:44.760","Text":"which is to say reconciles back to the decrease of 110."}],"ID":29700},{"Watched":false,"Name":"Exercise 5 - FGH - A - question page","Duration":"1m 13s","ChapterTopicVideoID":26874,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.205","Text":"Today we are going to do an exercise on accompany called FGH."},{"Start":"00:05.205 ","End":"00:08.640","Text":"The following are selected end-of-year balances"},{"Start":"00:08.640 ","End":"00:12.120","Text":"of FGH together with its income statement."},{"Start":"00:12.120 ","End":"00:17.925","Text":"First of all, we\u0027ve got the balance sheet for 20x_2 and 20x_1."},{"Start":"00:17.925 ","End":"00:20.355","Text":"The line items include;"},{"Start":"00:20.355 ","End":"00:24.135","Text":"accounts receivable, inventory, accounts payable,"},{"Start":"00:24.135 ","End":"00:25.830","Text":"those you should be familiar with,"},{"Start":"00:25.830 ","End":"00:28.050","Text":"and now we\u0027ve got 2 new line items,"},{"Start":"00:28.050 ","End":"00:30.930","Text":"unearned revenues and tax payable."},{"Start":"00:30.930 ","End":"00:35.450","Text":"Our income statement has a few extra line items as well,"},{"Start":"00:35.450 ","End":"00:38.389","Text":"we\u0027ve got revenue and cost of sales."},{"Start":"00:38.389 ","End":"00:41.410","Text":"Then we\u0027ve also got some general and admin expenses,"},{"Start":"00:41.410 ","End":"00:43.779","Text":"we\u0027ve got depreciation expense."},{"Start":"00:43.779 ","End":"00:45.770","Text":"Now because you\u0027ve got tax expense,"},{"Start":"00:45.770 ","End":"00:47.885","Text":"we split our profit into 2."},{"Start":"00:47.885 ","End":"00:52.375","Text":"We first got a subtotal called profit before tax,"},{"Start":"00:52.375 ","End":"00:59.135","Text":"then we subtract the tax expense and then we get to the final profit for the year of 85."},{"Start":"00:59.135 ","End":"01:01.110","Text":"Let\u0027s read the required."},{"Start":"01:01.110 ","End":"01:02.795","Text":"Based on this information,"},{"Start":"01:02.795 ","End":"01:07.850","Text":"prepare the section on the cash flow statement that reports cash generated from or"},{"Start":"01:07.850 ","End":"01:13.950","Text":"cash used in operating activities and we\u0027ll be using the indirect method."}],"ID":29701},{"Watched":false,"Name":"Exercise 5 - FGH - B - solution","Duration":"14m 23s","ChapterTopicVideoID":26875,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.530 ","End":"00:03.315","Text":"Let\u0027s look at the solution."},{"Start":"00:03.315 ","End":"00:08.190","Text":"We\u0027ve been asked to prepare the cash flows from"},{"Start":"00:08.190 ","End":"00:10.410","Text":"operating activities section of"},{"Start":"00:10.410 ","End":"00:14.475","Text":"our cash flow statement for the year ending 31st, December 20X2."},{"Start":"00:14.475 ","End":"00:21.405","Text":"The first line item when using this indirect method is profit before financing and tax."},{"Start":"00:21.405 ","End":"00:25.250","Text":"In this example, because we have no financing costs,"},{"Start":"00:25.250 ","End":"00:30.610","Text":"this profit before financing and tax equals our profit before tax."},{"Start":"00:30.610 ","End":"00:32.510","Text":"The amount was 106."},{"Start":"00:32.510 ","End":"00:34.955","Text":"Let\u0027s just have a look to see where I got that from."},{"Start":"00:34.955 ","End":"00:39.185","Text":"Here it is profit before tax, 106."},{"Start":"00:39.185 ","End":"00:44.810","Text":"Including the profit before financing and tax is an amount of depreciation."},{"Start":"00:44.810 ","End":"00:47.749","Text":"Depreciation has nothing to do with cash flow,"},{"Start":"00:47.749 ","End":"00:49.520","Text":"it\u0027s simply a book entry."},{"Start":"00:49.520 ","End":"00:53.210","Text":"It\u0027s called a non-cash transaction and therefore,"},{"Start":"00:53.210 ","End":"00:54.740","Text":"we always reverse it."},{"Start":"00:54.740 ","End":"00:58.640","Text":"It is an expense when calculating our profit."},{"Start":"00:58.640 ","End":"01:00.140","Text":"When calculating our profit,"},{"Start":"01:00.140 ","End":"01:07.265","Text":"we would have subtracted the depreciation of 36 in order to get to the profit of 106."},{"Start":"01:07.265 ","End":"01:14.360","Text":"Thus we add it now in order to reverse that deduction of the expense of 36."},{"Start":"01:14.360 ","End":"01:17.660","Text":"Then we adjust for one of the working capital changes,"},{"Start":"01:17.660 ","End":"01:19.640","Text":"which is accounts receivable."},{"Start":"01:19.640 ","End":"01:28.745","Text":"We do this because included in profit is sales and the sales weren\u0027t all cash sales."},{"Start":"01:28.745 ","End":"01:31.115","Text":"Some of them may have been credit sales."},{"Start":"01:31.115 ","End":"01:34.745","Text":"In order to convert the sales into receipts figure,"},{"Start":"01:34.745 ","End":"01:37.010","Text":"we need to look at our accounts receivable."},{"Start":"01:37.010 ","End":"01:41.150","Text":"Now, I say we\u0027ve got a decrease in accounts receivable, why do I say that?"},{"Start":"01:41.150 ","End":"01:43.370","Text":"Because if we go back to our balance sheet,"},{"Start":"01:43.370 ","End":"01:45.500","Text":"you\u0027ll see that in 20X2,"},{"Start":"01:45.500 ","End":"01:48.800","Text":"we had 110, but the prior year,"},{"Start":"01:48.800 ","End":"01:52.250","Text":"our accounts receivable was 125."},{"Start":"01:52.250 ","End":"01:56.885","Text":"Our accounts receivable decreased by 15."},{"Start":"01:56.885 ","End":"02:00.185","Text":"But now do we add at 15 or subtract the 15?"},{"Start":"02:00.185 ","End":"02:03.995","Text":"We need to understand what that represents,"},{"Start":"02:03.995 ","End":"02:07.835","Text":"what that decrease represents. What do we do?"},{"Start":"02:07.835 ","End":"02:11.150","Text":"Do we add the 15 or do we subtract the 15?"},{"Start":"02:11.150 ","End":"02:13.280","Text":"To be able to answer that question,"},{"Start":"02:13.280 ","End":"02:17.630","Text":"you need to understand what a decrease in accounts receivable means."},{"Start":"02:17.630 ","End":"02:21.515","Text":"If our accounts receivable had remained unchanged,"},{"Start":"02:21.515 ","End":"02:23.960","Text":"it would\u0027ve meant that any sales that we made during"},{"Start":"02:23.960 ","End":"02:27.241","Text":"the current year had been received exactly in cash,"},{"Start":"02:27.241 ","End":"02:29.390","Text":"nothing more and nothing less."},{"Start":"02:29.390 ","End":"02:35.125","Text":"Had our accounts receivable increased by the amount of our sales,"},{"Start":"02:35.125 ","End":"02:37.520","Text":"the full amount of our sales,"},{"Start":"02:37.520 ","End":"02:41.690","Text":"that would\u0027ve meant that all of our sales had been on credit."},{"Start":"02:41.690 ","End":"02:45.065","Text":"However, our accounts receivable in this case did not go up,"},{"Start":"02:45.065 ","End":"02:48.095","Text":"instead, they went down."},{"Start":"02:48.095 ","End":"02:52.100","Text":"That means that all of our sales during"},{"Start":"02:52.100 ","End":"02:56.975","Text":"the current year had been received in cash and over and above that,"},{"Start":"02:56.975 ","End":"03:02.660","Text":"our customers started paying for debts that they had accrued in prior years."},{"Start":"03:02.660 ","End":"03:07.340","Text":"In other words, some of the prior year credit sales,"},{"Start":"03:07.340 ","End":"03:09.875","Text":"so sales we\u0027d made to our customers on credit"},{"Start":"03:09.875 ","End":"03:13.990","Text":"in prior years had now been received in cash."},{"Start":"03:15.940 ","End":"03:19.700","Text":"In addition to the sales that we made during the current year,"},{"Start":"03:19.700 ","End":"03:26.315","Text":"which were clearly received in cash because our accounts receivable did not go up."},{"Start":"03:26.315 ","End":"03:34.100","Text":"We also received a further 15 because our accounts receivable opening balance,"},{"Start":"03:34.100 ","End":"03:38.258","Text":"which represented prior credit sales that had not yet been paid,"},{"Start":"03:38.258 ","End":"03:41.570","Text":"that opening balance decreased by 15."},{"Start":"03:41.570 ","End":"03:43.760","Text":"Some of that 15 in other words,"},{"Start":"03:43.760 ","End":"03:47.090","Text":"had been received during the current year."},{"Start":"03:47.090 ","End":"03:50.000","Text":"Then we look at unearned revenues,"},{"Start":"03:50.000 ","End":"03:52.970","Text":"which was the next line item in our balance sheet."},{"Start":"03:52.970 ","End":"03:56.959","Text":"Why do I say we have an increase in unearned revenues?"},{"Start":"03:56.959 ","End":"03:59.305","Text":"That\u0027s because, in 20X2,"},{"Start":"03:59.305 ","End":"04:00.908","Text":"our balance was 24,"},{"Start":"04:00.908 ","End":"04:03.500","Text":"but at the end of the prior 20X1,"},{"Start":"04:03.500 ","End":"04:05.540","Text":"the balance was only 18."},{"Start":"04:05.540 ","End":"04:10.925","Text":"You can see that the unearned revenues balance increased by 6."},{"Start":"04:10.925 ","End":"04:14.885","Text":"Now, do we add the 6 or do we subtract the 6?"},{"Start":"04:14.885 ","End":"04:16.460","Text":"To be able to answer the question,"},{"Start":"04:16.460 ","End":"04:20.825","Text":"you need to understand what unearned revenues represent."},{"Start":"04:20.825 ","End":"04:27.770","Text":"Unearned revenue is money that we\u0027ve received that haven\u0027t yet earned."},{"Start":"04:27.770 ","End":"04:34.020","Text":"If our unearned revenue has increased by 6 in the current year,"},{"Start":"04:34.020 ","End":"04:40.349","Text":"it means we\u0027ve received a further 6 in the current year which we didn\u0027t earn."},{"Start":"04:40.349 ","End":"04:45.190","Text":"Now, the crux of the matter is that we didn\u0027t earn that money."},{"Start":"04:45.190 ","End":"04:46.900","Text":"If we hadn\u0027t earned it,"},{"Start":"04:46.900 ","End":"04:49.420","Text":"it\u0027s not going to be in the income statement."},{"Start":"04:49.420 ","End":"04:53.110","Text":"In other words, an increase in unearned revenues"},{"Start":"04:53.110 ","End":"04:56.890","Text":"represents receipts in the current year that have not yet been earned."},{"Start":"04:56.890 ","End":"05:01.705","Text":"The fact that they\u0027re not yet earned means that they will not be in the income statement."},{"Start":"05:01.705 ","End":"05:03.805","Text":"If it\u0027s not in the income statement,"},{"Start":"05:03.805 ","End":"05:06.590","Text":"it needs to be added because it is a receipt."},{"Start":"05:06.590 ","End":"05:08.560","Text":"Whether or not it has been earned,"},{"Start":"05:08.560 ","End":"05:09.895","Text":"it is a receipt."},{"Start":"05:09.895 ","End":"05:12.640","Text":"Remember, when you prepare a cash flow statement,"},{"Start":"05:12.640 ","End":"05:18.190","Text":"all you\u0027re showing is the cash receipts and cash payments irrespective"},{"Start":"05:18.190 ","End":"05:24.800","Text":"of whether you have earned or incurred those receipts or payments."},{"Start":"05:24.800 ","End":"05:31.700","Text":"We\u0027re going to have to add that because it\u0027s not included in our income statement."},{"Start":"05:31.700 ","End":"05:35.327","Text":"Then we look at our inventory."},{"Start":"05:35.327 ","End":"05:37.130","Text":"Now I say we\u0027ve got an increase in inventory."},{"Start":"05:37.130 ","End":"05:38.390","Text":"Why do I say that?"},{"Start":"05:38.390 ","End":"05:40.280","Text":"That\u0027s because in our balance sheet,"},{"Start":"05:40.280 ","End":"05:43.340","Text":"you\u0027ll see we\u0027ve got a balance at the end of 20X2 of"},{"Start":"05:43.340 ","End":"05:48.605","Text":"55 and the balance at the end of 20X1 was 31."},{"Start":"05:48.605 ","End":"05:52.550","Text":"To be able to understand whether to add this difference or subtract it,"},{"Start":"05:52.550 ","End":"05:56.195","Text":"we need to understand what an increase in inventory represents."},{"Start":"05:56.195 ","End":"05:59.660","Text":"An increase in inventory means that we bought"},{"Start":"05:59.660 ","End":"06:04.685","Text":"inventory during the year that we have not been able to sell."},{"Start":"06:04.685 ","End":"06:08.780","Text":"This means that this particular purchase that remains"},{"Start":"06:08.780 ","End":"06:14.030","Text":"unsold will not be included as an expense in the income statement."},{"Start":"06:14.030 ","End":"06:17.030","Text":"The only inventory expense that would appear in"},{"Start":"06:17.030 ","End":"06:21.620","Text":"the income statement would be the cost of the inventory that was sold."},{"Start":"06:21.620 ","End":"06:26.030","Text":"Since the increase in inventory represents"},{"Start":"06:26.030 ","End":"06:30.758","Text":"inventory that we bought during the year that we haven\u0027t managed to sell,"},{"Start":"06:30.758 ","End":"06:32.960","Text":"and thus, because it\u0027s not yet sold,"},{"Start":"06:32.960 ","End":"06:38.510","Text":"the purchase will not appear in the income statement and yet it is a purchase."},{"Start":"06:38.510 ","End":"06:42.965","Text":"We must subtract this when preparing the cash flow statement."},{"Start":"06:42.965 ","End":"06:46.820","Text":"In summary, an increase in inventory is inventory"},{"Start":"06:46.820 ","End":"06:50.830","Text":"that we have bought during the year that we haven\u0027t managed to sell."},{"Start":"06:50.830 ","End":"06:52.340","Text":"If we haven\u0027t managed to sell it,"},{"Start":"06:52.340 ","End":"06:54.200","Text":"remember, it\u0027s not in the income statement."},{"Start":"06:54.200 ","End":"06:57.350","Text":"In other words, it\u0027s not in our profit before"},{"Start":"06:57.350 ","End":"07:02.450","Text":"financing and tax figure it hasn\u0027t been subtracted in order to get to that 106."},{"Start":"07:02.450 ","End":"07:05.120","Text":"It is however a purchase,"},{"Start":"07:05.120 ","End":"07:08.000","Text":"so we do need to include in the cashflow statement,"},{"Start":"07:08.000 ","End":"07:11.075","Text":"so it is a further deduction that needs to come off."},{"Start":"07:11.075 ","End":"07:15.125","Text":"That increase of 24 needs to be subtracted."},{"Start":"07:15.125 ","End":"07:18.140","Text":"The next item we will look at is the accounts payable."},{"Start":"07:18.140 ","End":"07:20.765","Text":"Now, we have a decrease in accounts payable."},{"Start":"07:20.765 ","End":"07:21.905","Text":"Why do I say that?"},{"Start":"07:21.905 ","End":"07:25.544","Text":"That\u0027s because in 20X2 we\u0027ve got a closing balance of 66,"},{"Start":"07:25.544 ","End":"07:27.275","Text":"but in 20X1,"},{"Start":"07:27.275 ","End":"07:29.765","Text":"the balance had been 92."},{"Start":"07:29.765 ","End":"07:32.224","Text":"We clearly have a decrease."},{"Start":"07:32.224 ","End":"07:36.635","Text":"Now, do we subtract the decrease or do we add the decrease?"},{"Start":"07:36.635 ","End":"07:41.180","Text":"To be able to understand whether to add the decrease or subtract the decrease,"},{"Start":"07:41.180 ","End":"07:46.220","Text":"you need to understand what a decrease in accounts payable represents."},{"Start":"07:46.220 ","End":"07:48.845","Text":"Where there\u0027s a decrease in accounts payable,"},{"Start":"07:48.845 ","End":"07:51.650","Text":"it means that we have not only paid for"},{"Start":"07:51.650 ","End":"07:54.995","Text":"purchases of inventory that we made during the current year,"},{"Start":"07:54.995 ","End":"08:01.235","Text":"but we have also began paying off amounts that we owed from prior years."},{"Start":"08:01.235 ","End":"08:04.760","Text":"In other words, we\u0027ve started paying off old debts."},{"Start":"08:04.760 ","End":"08:09.110","Text":"These old debts represent purchases that had occurred in prior years."},{"Start":"08:09.110 ","End":"08:12.380","Text":"These purchases having occurred in prior years"},{"Start":"08:12.380 ","End":"08:15.605","Text":"are obviously not going to appear in our income statement."},{"Start":"08:15.605 ","End":"08:20.720","Text":"It\u0027s not going to form part of our profit before financing and tax as a deduction."},{"Start":"08:20.720 ","End":"08:26.395","Text":"Yet, it is clearly a payment that has happened during the current year."},{"Start":"08:26.395 ","End":"08:30.430","Text":"We need to subtract the decrease in accounts payable."},{"Start":"08:30.430 ","End":"08:35.765","Text":"So far that gives us our cash generated from operations."},{"Start":"08:35.765 ","End":"08:40.475","Text":"What we\u0027ve done is we\u0027ve taken our profit before financing and tax,"},{"Start":"08:40.475 ","End":"08:44.450","Text":"we\u0027ve adjusted for the non-cash items, and we only had one,"},{"Start":"08:44.450 ","End":"08:46.190","Text":"the depreciation expense,"},{"Start":"08:46.190 ","End":"08:49.625","Text":"and we\u0027ve adjusted for all the working capital movements."},{"Start":"08:49.625 ","End":"08:51.680","Text":"We\u0027ve got accounts receivable,"},{"Start":"08:51.680 ","End":"08:54.605","Text":"unearned revenues, inventory, and accounts payable."},{"Start":"08:54.605 ","End":"08:59.105","Text":"We\u0027ve got 4 working capital accounts and we have adjusted for all of those."},{"Start":"08:59.105 ","End":"09:02.060","Text":"I just like to draw your attention to what we have"},{"Start":"09:02.060 ","End":"09:05.195","Text":"adjusted for and what we still have not adjusted for."},{"Start":"09:05.195 ","End":"09:06.740","Text":"Let\u0027s go back to the question."},{"Start":"09:06.740 ","End":"09:08.525","Text":"If we go back to the balance sheet,"},{"Start":"09:08.525 ","End":"09:14.240","Text":"you\u0027ll see here that we\u0027ve adjusted for these working capital balances,"},{"Start":"09:14.240 ","End":"09:16.220","Text":"the accounts receivable, the inventory,"},{"Start":"09:16.220 ","End":"09:19.145","Text":"the accounts payable, the unearned revenues."},{"Start":"09:19.145 ","End":"09:22.250","Text":"We haven\u0027t adjusted for tax payable."},{"Start":"09:22.250 ","End":"09:26.270","Text":"The reason for that is that the taxes that we pay"},{"Start":"09:26.270 ","End":"09:30.875","Text":"are a separately disclosable item in our cashflow statement."},{"Start":"09:30.875 ","End":"09:34.610","Text":"We\u0027re going to do this as a separate item in a moment."},{"Start":"09:34.610 ","End":"09:37.650","Text":"Now let\u0027s look at the income statement."},{"Start":"09:37.650 ","End":"09:39.520","Text":"In our income statement,"},{"Start":"09:39.520 ","End":"09:45.065","Text":"we started with the profit before tax of 106."},{"Start":"09:45.065 ","End":"09:50.015","Text":"We have reversed the depreciation because that was non-cash."},{"Start":"09:50.015 ","End":"09:53.060","Text":"We obviously don\u0027t reverse revenue cost of sales"},{"Start":"09:53.060 ","End":"09:57.755","Text":"because that is part of our cash receipts and cash payments."},{"Start":"09:57.755 ","End":"10:01.309","Text":"We also haven\u0027t reversed the general and admin expenses."},{"Start":"10:01.309 ","End":"10:03.290","Text":"They\u0027re just like cost of sales."},{"Start":"10:03.290 ","End":"10:10.550","Text":"There were no general and admin expenses payable or prepaid in our balance sheet,"},{"Start":"10:10.550 ","End":"10:13.505","Text":"so there was no adjustment required in that regard."},{"Start":"10:13.505 ","End":"10:18.950","Text":"The only thing we reverse are the non-cash flow transactions,"},{"Start":"10:18.950 ","End":"10:22.489","Text":"and we only had one and that was the depreciation expense."},{"Start":"10:22.489 ","End":"10:24.710","Text":"By starting with profit before tax,"},{"Start":"10:24.710 ","End":"10:29.870","Text":"we have effectively included everything else in our income statement."},{"Start":"10:29.870 ","End":"10:31.940","Text":"We\u0027ve got profit before tax,"},{"Start":"10:31.940 ","End":"10:33.785","Text":"we\u0027ve reversed the depreciation."},{"Start":"10:33.785 ","End":"10:35.405","Text":"It means we\u0027ve included the revenue,"},{"Start":"10:35.405 ","End":"10:38.555","Text":"cost of sales, and the general and admin expenses."},{"Start":"10:38.555 ","End":"10:41.180","Text":"However, there is one item we have not yet"},{"Start":"10:41.180 ","End":"10:44.015","Text":"taken into account and that is our tax expense."},{"Start":"10:44.015 ","End":"10:46.310","Text":"This tax expense, together with the texts"},{"Start":"10:46.310 ","End":"10:49.175","Text":"payable from the balance sheet on the prior page,"},{"Start":"10:49.175 ","End":"10:52.085","Text":"we\u0027re now going to take into account and show this"},{"Start":"10:52.085 ","End":"10:55.835","Text":"as a separate line item in the cash flow statement."},{"Start":"10:55.835 ","End":"10:57.860","Text":"Looking at the cash flow statement,"},{"Start":"10:57.860 ","End":"11:01.428","Text":"you see we\u0027ve got to cash generated from operations,"},{"Start":"11:01.428 ","End":"11:03.725","Text":"now we\u0027re going to show the tax paid."},{"Start":"11:03.725 ","End":"11:05.900","Text":"Now to calculate this,"},{"Start":"11:05.900 ","End":"11:12.695","Text":"the formula is tax expense less the change in tax payable."},{"Start":"11:12.695 ","End":"11:14.510","Text":"What was the tax expense?"},{"Start":"11:14.510 ","End":"11:20.105","Text":"Tax expense was 21 and what was the change in our tax payable balances?"},{"Start":"11:20.105 ","End":"11:24.032","Text":"That was in 20X2 our tax payable was 47,"},{"Start":"11:24.032 ","End":"11:25.985","Text":"but in the end of the prior year,"},{"Start":"11:25.985 ","End":"11:29.765","Text":"20X1 was a higher balance of 52."},{"Start":"11:29.765 ","End":"11:34.820","Text":"We\u0027re taking 21 and we\u0027re subtracting -5."},{"Start":"11:34.820 ","End":"11:36.185","Text":"Where do I get -5 from?"},{"Start":"11:36.185 ","End":"11:39.860","Text":"It\u0027s the 47 minus the 52."},{"Start":"11:39.860 ","End":"11:43.490","Text":"Our tax payable decreased by 5."},{"Start":"11:43.490 ","End":"11:47.765","Text":"It\u0027s 21 minus -5,"},{"Start":"11:47.765 ","End":"11:51.320","Text":"which effectively is 21 plus 5,"},{"Start":"11:51.320 ","End":"11:53.765","Text":"so we get to 26."},{"Start":"11:53.765 ","End":"11:56.300","Text":"Now I just want to show that to you perhaps in"},{"Start":"11:56.300 ","End":"12:00.425","Text":"a ledger account format since it might make more sense."},{"Start":"12:00.425 ","End":"12:05.645","Text":"Here is our tax expense account and here\u0027s our tax payable."},{"Start":"12:05.645 ","End":"12:07.775","Text":"Tax payable is a liability."},{"Start":"12:07.775 ","End":"12:11.505","Text":"Our opening balance was 52,"},{"Start":"12:11.505 ","End":"12:15.565","Text":"our closing balance was 47."},{"Start":"12:15.565 ","End":"12:19.510","Text":"During the year we had tax expense of 21,"},{"Start":"12:19.510 ","End":"12:22.578","Text":"so we would have debited our tax expense with 21,"},{"Start":"12:22.578 ","End":"12:26.805","Text":"and we would have created our tax payable with 21."},{"Start":"12:26.805 ","End":"12:29.765","Text":"We add that up, that 73,"},{"Start":"12:29.765 ","End":"12:33.470","Text":"take it across to this side, 73."},{"Start":"12:33.470 ","End":"12:39.125","Text":"The difference is 73 minus 47 is the missing amount,"},{"Start":"12:39.125 ","End":"12:44.420","Text":"26, which is the amount we must have paid by way of cash."},{"Start":"12:44.420 ","End":"12:48.875","Text":"This is the other entry that we would have processed during the year."},{"Start":"12:48.875 ","End":"12:52.025","Text":"We must have credited our bank with the payment,"},{"Start":"12:52.025 ","End":"12:53.885","Text":"payments go on the right-hand side,"},{"Start":"12:53.885 ","End":"12:59.990","Text":"26 would have been credited to bank and tax payable was debited with 26."},{"Start":"12:59.990 ","End":"13:02.735","Text":"That\u0027s the tax payment during the year."},{"Start":"13:02.735 ","End":"13:07.445","Text":"That then gives us the cash generated from operating activities."},{"Start":"13:07.445 ","End":"13:08.892","Text":"Notice the difference."},{"Start":"13:08.892 ","End":"13:12.380","Text":"We\u0027ve got cash generated from operations and"},{"Start":"13:12.380 ","End":"13:17.030","Text":"then we\u0027ve got cash generated from operating activities."},{"Start":"13:17.030 ","End":"13:19.790","Text":"When we use the indirect method,"},{"Start":"13:19.790 ","End":"13:23.600","Text":"we start with the profit before financing and tax."},{"Start":"13:23.600 ","End":"13:27.140","Text":"We then reverse non-cash items,"},{"Start":"13:27.140 ","End":"13:30.380","Text":"whether they be income or expenses, you have to reverse them."},{"Start":"13:30.380 ","End":"13:33.104","Text":"In this case, we had a non-cash expense,"},{"Start":"13:33.104 ","End":"13:34.610","Text":"so you add it back."},{"Start":"13:34.610 ","End":"13:37.265","Text":"If you had a non-cash income,"},{"Start":"13:37.265 ","End":"13:38.690","Text":"you would subtract it."},{"Start":"13:38.690 ","End":"13:43.010","Text":"Then you adjust for working capital changes,"},{"Start":"13:43.010 ","End":"13:45.590","Text":"that little triangle means a change,"},{"Start":"13:45.590 ","End":"13:47.015","Text":"shorthand for change,"},{"Start":"13:47.015 ","End":"13:50.525","Text":"and that then gives you cash generated from operations."},{"Start":"13:50.525 ","End":"13:54.740","Text":"Then you show your separately disclosable items."},{"Start":"13:54.740 ","End":"14:00.665","Text":"In this case, we\u0027ve got tax paid."},{"Start":"14:00.665 ","End":"14:02.403","Text":"You might also have dividends paid,"},{"Start":"14:02.403 ","End":"14:05.705","Text":"you might also have finance charges and others interest paid,"},{"Start":"14:05.705 ","End":"14:08.660","Text":"but those would then be your separately disclosable items."},{"Start":"14:08.660 ","End":"14:14.765","Text":"That then gives you a final line item in the cash from operating activities section,"},{"Start":"14:14.765 ","End":"14:18.545","Text":"which is cash generated from operating activities."},{"Start":"14:18.545 ","End":"14:22.140","Text":"In this case, it was 87. Well done."}],"ID":29702},{"Watched":false,"Name":"Exercise 6 - GHI - A - question page and solution","Duration":"16m 9s","ChapterTopicVideoID":26876,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.475","Text":"Today we\u0027ll be doing the exercise on the company called GHI."},{"Start":"00:05.475 ","End":"00:11.294","Text":"The following are the relevant end-of-year balances of GHI and its income statement."},{"Start":"00:11.294 ","End":"00:12.750","Text":"In our balance sheet,"},{"Start":"00:12.750 ","End":"00:17.880","Text":"we are given balances for both 20X2 and 20X1 for the following assets and liabilities."},{"Start":"00:17.880 ","End":"00:21.705","Text":"We got accounts receivable, accounts payable,"},{"Start":"00:21.705 ","End":"00:25.125","Text":"provision for legal disputes it\u0027s a liability,"},{"Start":"00:25.125 ","End":"00:29.200","Text":"interest payable, and tax payable."},{"Start":"00:29.330 ","End":"00:33.930","Text":"For interest, we have 4 liabilities and 1 asset."},{"Start":"00:33.930 ","End":"00:40.625","Text":"Then we are given the income statement for the year ending 31st December 20X2."},{"Start":"00:40.625 ","End":"00:45.605","Text":"We have revenues, sometimes called sales or income from services."},{"Start":"00:45.605 ","End":"00:48.740","Text":"The revenues, list cost of sales,"},{"Start":"00:48.740 ","End":"00:52.915","Text":"lists the general and administrative expenses,"},{"Start":"00:52.915 ","End":"00:56.600","Text":"list depreciation and amortization expense."},{"Start":"00:56.600 ","End":"01:01.115","Text":"Remember amortization and depreciation are essentially the same thing."},{"Start":"01:01.115 ","End":"01:09.420","Text":"Depreciation is the term that we use when we write off parts of property,"},{"Start":"01:09.420 ","End":"01:10.770","Text":"plant and equipment,"},{"Start":"01:10.770 ","End":"01:18.080","Text":"and amortization is the term that we use when we write off parts of intangible assets."},{"Start":"01:18.080 ","End":"01:22.070","Text":"Depreciation and amortization are the expenses that"},{"Start":"01:22.070 ","End":"01:27.720","Text":"reflect the usage of our assets with the property plant and equipment intangible assets,"},{"Start":"01:28.100 ","End":"01:32.090","Text":"so tangible assets for depreciation,"},{"Start":"01:32.090 ","End":"01:35.540","Text":"intangible assets for amortization."},{"Start":"01:35.540 ","End":"01:39.275","Text":"Then we get to a subtitle called profit before finance cost."},{"Start":"01:39.275 ","End":"01:43.985","Text":"That gives us a subtotal profit before finance costs."},{"Start":"01:43.985 ","End":"01:46.310","Text":"We then subtract the finance costs,"},{"Start":"01:46.310 ","End":"01:48.590","Text":"otherwise known as interest expense."},{"Start":"01:48.590 ","End":"01:51.935","Text":"We get to another subtotal profit before tax."},{"Start":"01:51.935 ","End":"01:54.800","Text":"Then we subtract the tax expense and we get to"},{"Start":"01:54.800 ","End":"01:58.880","Text":"the final total of the income statement profit for the year."},{"Start":"01:58.880 ","End":"02:01.170","Text":"The required based on this information,"},{"Start":"02:01.170 ","End":"02:04.580","Text":"prepare the section on the cashflow statement that reports cash"},{"Start":"02:04.580 ","End":"02:08.375","Text":"generated from or used in operating activities,"},{"Start":"02:08.375 ","End":"02:11.185","Text":"and we are to use the indirect method."},{"Start":"02:11.185 ","End":"02:17.870","Text":"The solution to exercise GHI using the indirect method."},{"Start":"02:17.870 ","End":"02:20.960","Text":"Now we\u0027ve been asked to prepare the cash flow statement for"},{"Start":"02:20.960 ","End":"02:24.470","Text":"the year ending 31 December 20X2,"},{"Start":"02:24.470 ","End":"02:27.725","Text":"but we\u0027re only asked to prepare the cash"},{"Start":"02:27.725 ","End":"02:32.015","Text":"from operating activity section of the cash flow statement."},{"Start":"02:32.015 ","End":"02:34.640","Text":"Now when using the indirect method,"},{"Start":"02:34.640 ","End":"02:37.505","Text":"the first line item in our cashflow statement,"},{"Start":"02:37.505 ","End":"02:40.220","Text":"or the cash from operating activities,"},{"Start":"02:40.220 ","End":"02:43.130","Text":"is going to be the profit figure."},{"Start":"02:43.130 ","End":"02:48.080","Text":"The profit figure we pick up is the profit before financing and tax,"},{"Start":"02:48.080 ","End":"02:50.010","Text":"and in this case it\u0027s a 114,"},{"Start":"02:50.010 ","End":"02:52.010","Text":"but let me show you where I got it from."},{"Start":"02:52.010 ","End":"02:53.390","Text":"If we look at our income statement,"},{"Start":"02:53.390 ","End":"02:55.295","Text":"you see we\u0027ve got 3 profit figures."},{"Start":"02:55.295 ","End":"03:00.104","Text":"It\u0027s the first 1, profit before finance costs that I need to pick up,"},{"Start":"03:00.104 ","End":"03:03.830","Text":"and the reason is it\u0027s before the finance costs and you can clearly see it\u0027s"},{"Start":"03:03.830 ","End":"03:09.250","Text":"not only before the finance cost will interest expense but also before tax expense,"},{"Start":"03:09.250 ","End":"03:11.940","Text":"so it\u0027s a 114."},{"Start":"03:11.940 ","End":"03:14.420","Text":"Now if you were in test conditions,"},{"Start":"03:14.420 ","End":"03:17.150","Text":"you would want to make the quickest, easiest marks."},{"Start":"03:17.150 ","End":"03:23.570","Text":"First, so I always make adjustments for the non-cash transactions as my next step."},{"Start":"03:23.570 ","End":"03:27.450","Text":"In this exercise, our non-cash transaction,"},{"Start":"03:27.450 ","End":"03:32.240","Text":"we only had one, was depreciation and amortization expense."},{"Start":"03:32.240 ","End":"03:34.354","Text":"Don\u0027t be frightened of amortization."},{"Start":"03:34.354 ","End":"03:39.020","Text":"It\u0027s exactly the same as depreciation except depreciation is a term we use"},{"Start":"03:39.020 ","End":"03:44.030","Text":"when we write off tangible assets due to the usage,"},{"Start":"03:44.030 ","End":"03:47.810","Text":"whereas amortization is the term we use when we write off"},{"Start":"03:47.810 ","End":"03:52.335","Text":"intangible assets to reflect the usage."},{"Start":"03:52.335 ","End":"03:54.150","Text":"They\u0027re essentially the same thing."},{"Start":"03:54.150 ","End":"03:57.015","Text":"Depreciation and amortization expense,"},{"Start":"03:57.015 ","End":"03:59.845","Text":"they\u0027re both non-cash transactions so"},{"Start":"03:59.845 ","End":"04:03.970","Text":"the country entry for depreciation is accumulated depreciation,"},{"Start":"04:03.970 ","End":"04:10.985","Text":"and the country entry for amortization is a credit to accumulated amortization."},{"Start":"04:10.985 ","End":"04:12.545","Text":"This would be the debit,"},{"Start":"04:12.545 ","End":"04:18.830","Text":"and then the credits go to the accumulated depreciation or the accumulated amortization."},{"Start":"04:18.830 ","End":"04:22.820","Text":"We add the 28, and the reason for that is when we calculated profit,"},{"Start":"04:22.820 ","End":"04:26.990","Text":"we had subtracted the 28 and we need to get rid of that subtraction of 28,"},{"Start":"04:26.990 ","End":"04:28.595","Text":"so we adding it."},{"Start":"04:28.595 ","End":"04:30.830","Text":"The next thing we\u0027re going to do since that\u0027s"},{"Start":"04:30.830 ","End":"04:35.480","Text":"the only non-cash transaction is we\u0027re going to now just for any working capital changes."},{"Start":"04:35.480 ","End":"04:37.100","Text":"If we look at our balance sheet,"},{"Start":"04:37.100 ","End":"04:41.465","Text":"you\u0027ll see we\u0027ve got as an x-line item accounts receivable,"},{"Start":"04:41.465 ","End":"04:44.135","Text":"and it is an increase in accounts receivable."},{"Start":"04:44.135 ","End":"04:47.165","Text":"Why do I say it\u0027s an increase in accounts receivable?"},{"Start":"04:47.165 ","End":"04:50.160","Text":"Because in 20X2 our current year,"},{"Start":"04:50.160 ","End":"04:52.340","Text":"the closing balance was 141,"},{"Start":"04:52.340 ","End":"04:53.840","Text":"whereas in 20X1,"},{"Start":"04:53.840 ","End":"04:56.500","Text":"the closing balance was 125,"},{"Start":"04:56.500 ","End":"05:00.590","Text":"so our accounts receivable has increased."},{"Start":"05:00.590 ","End":"05:08.165","Text":"Now whether to increase or should I say add or subtract that difference of 16,"},{"Start":"05:08.165 ","End":"05:12.685","Text":"requires you to understand what an increase in accounts receivable means."},{"Start":"05:12.685 ","End":"05:17.210","Text":"Let\u0027s think about it. Included it in our profit before financing in tax of"},{"Start":"05:17.210 ","End":"05:22.580","Text":"114 is our revenue figure or sales figure, whatever that may be."},{"Start":"05:22.580 ","End":"05:25.290","Text":"Let\u0027s say it was 100, it\u0027s not the figure obviously,"},{"Start":"05:25.290 ","End":"05:27.650","Text":"but take any figure,"},{"Start":"05:27.650 ","End":"05:31.745","Text":"just imagine we\u0027ve got sales included in that 114."},{"Start":"05:31.745 ","End":"05:36.995","Text":"Some of those sales might have been on credit and not yet paid for,"},{"Start":"05:36.995 ","End":"05:39.350","Text":"and some of them might have been for cash."},{"Start":"05:39.350 ","End":"05:42.800","Text":"If we look here, increase in accounts receivable."},{"Start":"05:42.800 ","End":"05:44.990","Text":"If your accounts receivable goes up,"},{"Start":"05:44.990 ","End":"05:48.110","Text":"it means that since the beginning of the year,"},{"Start":"05:48.110 ","End":"05:52.000","Text":"further sales have taken place which have not yet been paid for."},{"Start":"05:52.000 ","End":"05:57.575","Text":"Of our sales which are included in the 114 of the sales that we\u0027ve included,"},{"Start":"05:57.575 ","End":"06:01.100","Text":"some of them did not get debited to bank."},{"Start":"06:01.100 ","End":"06:04.370","Text":"Some of them got debited to accounts receivable,"},{"Start":"06:04.370 ","End":"06:07.685","Text":"thus increasing our accounts receivable asset."},{"Start":"06:07.685 ","End":"06:11.675","Text":"Remember, accounts receivable being an asset gets bigger on the debit side."},{"Start":"06:11.675 ","End":"06:15.650","Text":"In essence, an increase in accounts receivable is where some of"},{"Start":"06:15.650 ","End":"06:20.095","Text":"the current year\u0027s credit sales had not yet been received in cash."},{"Start":"06:20.095 ","End":"06:26.765","Text":"We\u0027re going to subtract the 60 being the portion of the sales,"},{"Start":"06:26.765 ","End":"06:28.130","Text":"which are included in profit,"},{"Start":"06:28.130 ","End":"06:30.820","Text":"that clearly did not get debited to bank,"},{"Start":"06:30.820 ","End":"06:34.555","Text":"they ultimately got debit to accounts receivable."},{"Start":"06:34.555 ","End":"06:38.360","Text":"The next 1, if you look in the balance sheet,"},{"Start":"06:38.360 ","End":"06:41.455","Text":"we\u0027ve got provisions for legal costs,"},{"Start":"06:41.455 ","End":"06:44.195","Text":"but we have a decrease in these provisions."},{"Start":"06:44.195 ","End":"06:47.592","Text":"Now provisions are just a form of a liability,"},{"Start":"06:47.592 ","End":"06:50.045","Text":"so if you\u0027ve decreased your provision,"},{"Start":"06:50.045 ","End":"06:54.185","Text":"it obviously means you\u0027re paying it off. Lets just have a look."},{"Start":"06:54.185 ","End":"06:57.035","Text":"Why do I say we\u0027ve got a decrease in provisions?"},{"Start":"06:57.035 ","End":"06:58.910","Text":"It\u0027s because if you look at the balance sheets,"},{"Start":"06:58.910 ","End":"07:01.530","Text":"we\u0027ve got 20X2 our current year,"},{"Start":"07:01.530 ","End":"07:06.610","Text":"the closing balance was 18 and in 20X1 the closing balance was 24."},{"Start":"07:06.720 ","End":"07:10.630","Text":"Provisions decreased by 6."},{"Start":"07:10.630 ","End":"07:13.390","Text":"But what is a decrease in the provision?"},{"Start":"07:13.390 ","End":"07:15.370","Text":"What does it represent?"},{"Start":"07:15.370 ","End":"07:17.979","Text":"When you create a provision,"},{"Start":"07:17.979 ","End":"07:25.015","Text":"you debit the expense and you credit the provision just like any other liability."},{"Start":"07:25.015 ","End":"07:27.580","Text":"Then in a later year,"},{"Start":"07:27.580 ","End":"07:30.983","Text":"let\u0027s say you didn\u0027t pay for it so that you\u0027re closing balance,"},{"Start":"07:30.983 ","End":"07:32.500","Text":"in the later year,"},{"Start":"07:32.500 ","End":"07:35.889","Text":"this now is your opening balance for your provision."},{"Start":"07:35.889 ","End":"07:38.905","Text":"We\u0027ve got opening balance that amount of x."},{"Start":"07:38.905 ","End":"07:41.635","Text":"You might then pay y,"},{"Start":"07:41.635 ","End":"07:44.830","Text":"leaving you with a closing balance of z."},{"Start":"07:45.270 ","End":"07:50.890","Text":"Now when you make that payment and reduce your opening balance to your closing balance,"},{"Start":"07:50.890 ","End":"07:53.935","Text":"that did not affect your expense."},{"Start":"07:53.935 ","End":"07:57.070","Text":"It was only in the first year that we debited expense."},{"Start":"07:57.070 ","End":"08:01.060","Text":"In Year 1 you debit the expense then you credit the provision."},{"Start":"08:01.060 ","End":"08:03.595","Text":"That\u0027s Year 1,"},{"Start":"08:03.595 ","End":"08:06.205","Text":"when you created the liability."},{"Start":"08:06.205 ","End":"08:07.630","Text":"In Year 2,"},{"Start":"08:07.630 ","End":"08:12.040","Text":"we debited the provision with a certain amount is equal to"},{"Start":"08:12.040 ","End":"08:16.705","Text":"y and we made the payment which was a credit to bank."},{"Start":"08:16.705 ","End":"08:18.790","Text":"Payments go on the credit side,"},{"Start":"08:18.790 ","End":"08:21.550","Text":"and you can see the journal entry y,"},{"Start":"08:21.550 ","End":"08:24.970","Text":"which is the journal that went through in Year 2,"},{"Start":"08:24.970 ","End":"08:28.045","Text":"did not affect our expenses."},{"Start":"08:28.045 ","End":"08:30.460","Text":"If it doesn\u0027t affect our expenses,"},{"Start":"08:30.460 ","End":"08:32.020","Text":"it\u0027s not in the profit."},{"Start":"08:32.020 ","End":"08:34.810","Text":"Yet in Year 2 being 20X2,"},{"Start":"08:34.810 ","End":"08:37.600","Text":"you can see we definitely have something that goes through"},{"Start":"08:37.600 ","End":"08:41.870","Text":"our bank account therefore it must go through our cash flow statement."},{"Start":"08:43.440 ","End":"08:46.075","Text":"We\u0027ve got a decrease in provision,"},{"Start":"08:46.075 ","End":"08:50.900","Text":"it\u0027s an expense that was payable in a prior year."},{"Start":"08:51.090 ","End":"08:54.584","Text":"In Year 1, there was an expense that was payable,"},{"Start":"08:54.584 ","End":"08:55.825","Text":"another one it wasn\u0027t."},{"Start":"08:55.825 ","End":"08:58.555","Text":"When we process the debits to the expense of x,"},{"Start":"08:58.555 ","End":"08:59.965","Text":"we didn\u0027t create a bank."},{"Start":"08:59.965 ","End":"09:02.980","Text":"We credited to the provision with a liability account,"},{"Start":"09:02.980 ","End":"09:05.500","Text":"so it\u0027s a payable."},{"Start":"09:05.500 ","End":"09:07.930","Text":"It\u0027s an expense with payable in a prior year,"},{"Start":"09:07.930 ","End":"09:09.760","Text":"say Year 1 for example,"},{"Start":"09:09.760 ","End":"09:12.520","Text":"and it\u0027s now been paid in the current year."},{"Start":"09:12.520 ","End":"09:16.651","Text":"We\u0027ve reduced the liability now by this amount,"},{"Start":"09:16.651 ","End":"09:19.420","Text":"having this example, it\u0027s being reduced by 6."},{"Start":"09:19.420 ","End":"09:22.525","Text":"The payment went through in Year 2."},{"Start":"09:22.525 ","End":"09:28.660","Text":"We\u0027re going to obviously have to subtract that 6"},{"Start":"09:28.660 ","End":"09:34.585","Text":"because we know it wasn\u0027t included in profit in Year 2 or 20X2."},{"Start":"09:34.585 ","End":"09:36.820","Text":"There was no expense in Year 2\u0027s"},{"Start":"09:36.820 ","End":"09:41.305","Text":"profit that expense would have gone through in the prior year."},{"Start":"09:41.305 ","End":"09:44.035","Text":"That\u0027s why we subtract it because it is,"},{"Start":"09:44.035 ","End":"09:46.030","Text":"though it\u0027s not an expense in the current year,"},{"Start":"09:46.030 ","End":"09:47.995","Text":"it is a payment in the current year."},{"Start":"09:47.995 ","End":"09:49.765","Text":"Then if you look at the balance sheet,"},{"Start":"09:49.765 ","End":"09:53.650","Text":"we pick up another working capital account, accounts payable."},{"Start":"09:53.650 ","End":"09:57.355","Text":"Here we\u0027ve got a decrease in accounts payable, why do I say that?"},{"Start":"09:57.355 ","End":"10:00.160","Text":"Because in 20X2 we\u0027ve got a balance of 66,"},{"Start":"10:00.160 ","End":"10:02.785","Text":"but in 20X1 the balance is 92."},{"Start":"10:02.785 ","End":"10:06.190","Text":"That is a decrease of 26."},{"Start":"10:06.190 ","End":"10:08.200","Text":"Now what do we do with that?"},{"Start":"10:08.200 ","End":"10:10.885","Text":"Do we add it or do we subtract it?"},{"Start":"10:10.885 ","End":"10:15.445","Text":"The principle is the same as in the case of provisions,"},{"Start":"10:15.445 ","End":"10:17.665","Text":"where the provisions were decreased."},{"Start":"10:17.665 ","End":"10:23.140","Text":"The decrease in accounts payable is basically we paying off an old age."},{"Start":"10:23.140 ","End":"10:26.365","Text":"It\u0027s just the same as the decrease in provisions,"},{"Start":"10:26.365 ","End":"10:31.705","Text":"an expense arise in a prior year and potentially,"},{"Start":"10:31.705 ","End":"10:34.360","Text":"and we\u0027re paying it off now."},{"Start":"10:34.360 ","End":"10:36.745","Text":"We\u0027re paying off an opening balance."},{"Start":"10:36.745 ","End":"10:42.370","Text":"That\u0027s not going to appear as an expense in our profit before financing and tax,"},{"Start":"10:42.370 ","End":"10:47.710","Text":"but we do need to process it in our cash flow statement because it is indeed a payment."},{"Start":"10:47.710 ","End":"10:50.815","Text":"We subtract the 26. The nature of all of that"},{"Start":"10:50.815 ","End":"10:54.310","Text":"gives us what we call cash generated from operations."},{"Start":"10:54.310 ","End":"10:59.980","Text":"This is a subtotal in the cash from operating activities section."},{"Start":"10:59.980 ","End":"11:05.890","Text":"The cash generated from operations is before finance and before tax, why?"},{"Start":"11:05.890 ","End":"11:09.580","Text":"Because any finance payments or interest payments and"},{"Start":"11:09.580 ","End":"11:15.205","Text":"any tax payments are separately disclosable items so they must pays off to that."},{"Start":"11:15.205 ","End":"11:17.635","Text":"Cash generated from operations."},{"Start":"11:17.635 ","End":"11:20.200","Text":"Let\u0027s look at the finance,"},{"Start":"11:20.200 ","End":"11:22.600","Text":"how much interested we pay?"},{"Start":"11:22.600 ","End":"11:24.640","Text":"Well, to work that out,"},{"Start":"11:24.640 ","End":"11:26.515","Text":"we\u0027re going to look at the interest expense"},{"Start":"11:26.515 ","End":"11:28.480","Text":"and then we\u0027re going to look at our balance sheet to see if"},{"Start":"11:28.480 ","End":"11:32.830","Text":"there\u0027s any interest payable or perhaps this interest prepaid."},{"Start":"11:32.830 ","End":"11:35.725","Text":"Let\u0027s look at our income statement and balance sheet."},{"Start":"11:35.725 ","End":"11:37.750","Text":"If we look at our income statement,"},{"Start":"11:37.750 ","End":"11:41.660","Text":"you see our interest expense is 15,"},{"Start":"11:43.350 ","End":"11:49.045","Text":"and then let\u0027s look at our balance sheet to see if anything is payable or prepaid."},{"Start":"11:49.045 ","End":"11:52.090","Text":"There\u0027s a balance sheet and here we do indeed,"},{"Start":"11:52.090 ","End":"11:54.534","Text":"we\u0027ve got interest payable."},{"Start":"11:54.534 ","End":"12:02.995","Text":"It was 8 at the end of the current year but it was 10 at the end of last year."},{"Start":"12:02.995 ","End":"12:09.475","Text":"Interest paid is interest expense list the change in the interest payable."},{"Start":"12:09.475 ","End":"12:12.775","Text":"Interest expense, if you recall was 15,"},{"Start":"12:12.775 ","End":"12:16.900","Text":"then our change in interest payable was 8 at the end of"},{"Start":"12:16.900 ","End":"12:21.965","Text":"20X2 and 10 at the end of the prior year 20X1."},{"Start":"12:21.965 ","End":"12:24.850","Text":"That basically means we\u0027ve got interest expense in"},{"Start":"12:24.850 ","End":"12:28.700","Text":"this year and not only do we pay that off,"},{"Start":"12:28.700 ","End":"12:32.625","Text":"I know we paid it off because our interest payable did not increase"},{"Start":"12:32.625 ","End":"12:36.555","Text":"by 15, it decreased instead."},{"Start":"12:36.555 ","End":"12:39.790","Text":"It also therefore means that we have started"},{"Start":"12:39.790 ","End":"12:43.345","Text":"paying off the interest that we owed at the end of the prior year."},{"Start":"12:43.345 ","End":"12:50.665","Text":"We\u0027ve paid off 2 of the interest that had accrued in prior years,"},{"Start":"12:50.665 ","End":"12:53.575","Text":"obviously paid off 17."},{"Start":"12:53.575 ","End":"12:58.825","Text":"That\u0027s 15 minus and within the brackets is a -2."},{"Start":"12:58.825 ","End":"13:03.580","Text":"-15-2 means 15+2."},{"Start":"13:03.580 ","End":"13:07.600","Text":"Then the next line item is our tax."},{"Start":"13:07.600 ","End":"13:09.280","Text":"How much tax should we pay?"},{"Start":"13:09.280 ","End":"13:11.920","Text":"The principal are identical to the interest."},{"Start":"13:11.920 ","End":"13:15.925","Text":"The formula is the same as for the interest calculation."},{"Start":"13:15.925 ","End":"13:19.180","Text":"You\u0027re going to take tax expense"},{"Start":"13:19.180 ","End":"13:23.320","Text":"and you\u0027re going to adjust for the change in the tax payable balances."},{"Start":"13:23.320 ","End":"13:26.049","Text":"Let\u0027s have a look at where we get this information."},{"Start":"13:26.049 ","End":"13:27.430","Text":"We go to our income statement,"},{"Start":"13:27.430 ","End":"13:29.230","Text":"you can see our tax expense."},{"Start":"13:29.230 ","End":"13:31.240","Text":"Tax expense is 20,"},{"Start":"13:31.240 ","End":"13:36.325","Text":"then go to a balance sheet and what we\u0027re looking for is anything relating to tax."},{"Start":"13:36.325 ","End":"13:37.648","Text":"There we have it,"},{"Start":"13:37.648 ","End":"13:40.330","Text":"tax payable, it could have been tax prepaid."},{"Start":"13:40.330 ","End":"13:42.325","Text":"At the end of the current year,"},{"Start":"13:42.325 ","End":"13:43.825","Text":"we owed 52,"},{"Start":"13:43.825 ","End":"13:46.660","Text":"at the end of last year, we owed 46."},{"Start":"13:46.660 ","End":"13:52.405","Text":"The amount that we owe at the end of this year has increased."},{"Start":"13:52.405 ","End":"13:58.330","Text":"That suggests that of the tax expense that accrued in the current year,"},{"Start":"13:58.330 ","End":"14:02.365","Text":"some of it wasn\u0027t paid in the current year and is thus"},{"Start":"14:02.365 ","End":"14:07.480","Text":"added to the amount where owing in terms of tax."},{"Start":"14:07.480 ","End":"14:09.370","Text":"Let\u0027s plug the figures in,"},{"Start":"14:09.370 ","End":"14:11.530","Text":"the tax expense is 20."},{"Start":"14:11.530 ","End":"14:14.095","Text":"Then we will look at the change in tax payable,"},{"Start":"14:14.095 ","End":"14:17.810","Text":"we had 52 owing at the end of the current year."},{"Start":"14:17.810 ","End":"14:21.860","Text":"There was only 46 owing at the end of last year that means the amount"},{"Start":"14:21.860 ","End":"14:26.290","Text":"that we are owing in terms of tax has grown by an amount of 6."},{"Start":"14:26.290 ","End":"14:31.490","Text":"Which means that when we raised our tax expense of 20 during this current year,"},{"Start":"14:31.490 ","End":"14:33.320","Text":"we could not have paid all of it."},{"Start":"14:33.320 ","End":"14:40.265","Text":"Some of it has contributed to our growing tax payable account."},{"Start":"14:40.265 ","End":"14:44.960","Text":"That must mean that 20-6,"},{"Start":"14:44.960 ","End":"14:48.260","Text":"is what was paid, so only 14 was paid."},{"Start":"14:48.260 ","End":"14:53.480","Text":"That then gives us cash generated from operating activities"},{"Start":"14:53.480 ","End":"14:58.865","Text":"as our final line item for the cash from operating activities."},{"Start":"14:58.865 ","End":"15:05.030","Text":"Just as a recap, we start when we\u0027re using the indirect method with the profit before"},{"Start":"15:05.030 ","End":"15:11.630","Text":"financing and tax within adjust for non cash transactions."},{"Start":"15:11.630 ","End":"15:16.820","Text":"Then we adjust for working capital changes."},{"Start":"15:16.820 ","End":"15:19.250","Text":"Then we adjust for,"},{"Start":"15:19.250 ","End":"15:21.980","Text":"and these have to simply be separately disclosed."},{"Start":"15:21.980 ","End":"15:25.580","Text":"Otherwise one could have adjusted for interest payable and tax payable up here."},{"Start":"15:25.580 ","End":"15:28.490","Text":"But we\u0027re not going to do that. We show the interest paid and"},{"Start":"15:28.490 ","End":"15:32.570","Text":"the tax paid as 2 separately disclosed for items down here."},{"Start":"15:32.570 ","End":"15:40.240","Text":"These are separately disclosable items or SDIs."},{"Start":"15:40.240 ","End":"15:45.785","Text":"We take the profit,"},{"Start":"15:45.785 ","End":"15:48.320","Text":"we reverse non cash transactions,"},{"Start":"15:48.320 ","End":"15:53.420","Text":"we make adjustments for the changes in the working capital balances and then we process"},{"Start":"15:53.420 ","End":"15:59.075","Text":"the separately disclosed items after our subtotal cash generated from operations."},{"Start":"15:59.075 ","End":"16:03.740","Text":"A final line item is cash generated from operating activities."},{"Start":"16:03.740 ","End":"16:09.530","Text":"That\u0027s exercised GHI, done. Well done."}],"ID":29703},{"Watched":false,"Name":"Exercise 8 - IJK - question and solution","Duration":"30m 8s","ChapterTopicVideoID":26877,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.540","Text":"Today let\u0027s do the Exercise IJK."},{"Start":"00:03.540 ","End":"00:08.580","Text":"The following are selected end of year balances from IJK Inc\u0027s balance sheet,"},{"Start":"00:08.580 ","End":"00:12.450","Text":"together with its income statement for 20X2."},{"Start":"00:12.450 ","End":"00:20.280","Text":"On this sheet, we\u0027ve got the balance sheet as at 31st December for 20X2 and 20X1."},{"Start":"00:20.280 ","End":"00:23.640","Text":"We\u0027ve got the property, plant, and equipment cost figures."},{"Start":"00:23.640 ","End":"00:26.490","Text":"These are the closing balances relating to cost."},{"Start":"00:26.490 ","End":"00:33.180","Text":"Then we\u0027ve got the accumulated depreciation closing balances at the end of X2 and X1."},{"Start":"00:33.180 ","End":"00:36.950","Text":"The difference between cost and accumulated depreciation,"},{"Start":"00:36.950 ","End":"00:41.880","Text":"gives us the carrying amount figures of 77 and 84."},{"Start":"00:41.880 ","End":"00:43.770","Text":"Then we\u0027re told,"},{"Start":"00:43.770 ","End":"00:45.300","Text":"carrying amount of the property, plant,"},{"Start":"00:45.300 ","End":"00:49.250","Text":"and equipment that was sold during the year was 12,"},{"Start":"00:49.250 ","End":"00:51.366","Text":"and the original cost of that property, plant,"},{"Start":"00:51.366 ","End":"00:54.814","Text":"and equipment that was sold was 20."},{"Start":"00:54.814 ","End":"00:57.572","Text":"We\u0027re also told that all purchases of property, plant,"},{"Start":"00:57.572 ","End":"01:00.746","Text":"and equipment, if there were any purchases,"},{"Start":"01:00.746 ","End":"01:02.665","Text":"were paid for in cash."},{"Start":"01:02.665 ","End":"01:04.486","Text":"The sale of the property, plant,"},{"Start":"01:04.486 ","End":"01:07.039","Text":"and equipment that we referred to above here,"},{"Start":"01:07.039 ","End":"01:09.469","Text":"the carrying amount of PP\u0026E sold,"},{"Start":"01:09.469 ","End":"01:10.912","Text":"and the original cost of property, plant,"},{"Start":"01:10.912 ","End":"01:12.724","Text":"and equipment that was sold."},{"Start":"01:12.724 ","End":"01:16.410","Text":"That is a sale, and they\u0027re telling us that the sale of that property,"},{"Start":"01:16.410 ","End":"01:17.700","Text":"plant, and equipment,"},{"Start":"01:17.700 ","End":"01:19.759","Text":"was a cash sale."},{"Start":"01:19.759 ","End":"01:25.625","Text":"Then we\u0027re given that income statement for the year ending 31st December 20X2."},{"Start":"01:25.625 ","End":"01:28.144","Text":"We\u0027re told the revenue."},{"Start":"01:28.144 ","End":"01:30.454","Text":"We were given the cost of sales,"},{"Start":"01:30.454 ","End":"01:33.335","Text":"the general and admin expenses."},{"Start":"01:33.335 ","End":"01:39.380","Text":"Those two expenses, cost of sales and general and admin are deducted obviously,"},{"Start":"01:39.380 ","End":"01:41.913","Text":"and then we add the profit on disposal of property, plant,"},{"Start":"01:41.913 ","End":"01:45.589","Text":"and equipment, giving us the profit for the year."},{"Start":"01:45.589 ","End":"01:47.690","Text":"This income statement is quite basic."},{"Start":"01:47.690 ","End":"01:51.964","Text":"We don\u0027t have finance charges and we don\u0027t have tax expense."},{"Start":"01:51.964 ","End":"01:53.930","Text":"Then in the required,"},{"Start":"01:53.930 ","End":"01:56.329","Text":"there are two parts to this required."},{"Start":"01:56.329 ","End":"01:58.279","Text":"Based on the information given,"},{"Start":"01:58.279 ","End":"02:01.295","Text":"prepare the section in the cashflow statement that reports:"},{"Start":"02:01.295 ","End":"02:04.835","Text":"Cash generated from investing activities,"},{"Start":"02:04.835 ","End":"02:08.900","Text":"cash used in investing activities."},{"Start":"02:08.900 ","End":"02:13.490","Text":"The second part, is to prepare the section of the report dealing"},{"Start":"02:13.490 ","End":"02:17.480","Text":"with the cash generated from operating activities,"},{"Start":"02:17.480 ","End":"02:21.875","Text":"or cash used in operating activities."},{"Start":"02:21.875 ","End":"02:30.260","Text":"We are to use the indirect method to present this part of the cashflow statement."},{"Start":"02:30.260 ","End":"02:31.914","Text":"Let\u0027s try this question."},{"Start":"02:31.914 ","End":"02:33.505","Text":"First what I\u0027m going to do,"},{"Start":"02:33.505 ","End":"02:39.845","Text":"is I\u0027m going to show you how to calculate all the figures you need using ledger accounts."},{"Start":"02:39.845 ","End":"02:46.220","Text":"In this regard, I\u0027m going to set out these ledger accounts using a T-account format,"},{"Start":"02:46.220 ","End":"02:49.039","Text":"because that is quite commonly used."},{"Start":"02:49.039 ","End":"02:56.449","Text":"Thereafter, I\u0027m going to show you how to calculate the figures using the ledger accounts,"},{"Start":"02:56.449 ","End":"02:59.124","Text":"but using columnar format."},{"Start":"02:59.124 ","End":"03:03.574","Text":"All right. In order to be able to successfully produce a cash flow statement,"},{"Start":"03:03.574 ","End":"03:07.819","Text":"we need to understand the interaction of the ledger accounts."},{"Start":"03:07.819 ","End":"03:11.479","Text":"We need to understand that for every debit there is a corresponding credit."},{"Start":"03:11.479 ","End":"03:15.170","Text":"Really cashflow statements, they\u0027re like puzzles,"},{"Start":"03:15.170 ","End":"03:19.940","Text":"it\u0027s actually a game because we\u0027re having to balance back to the cash figures,"},{"Start":"03:19.940 ","End":"03:22.590","Text":"cash received, or cash paid."},{"Start":"03:23.210 ","End":"03:26.480","Text":"We\u0027ve got certain information that\u0027s given to us,"},{"Start":"03:26.480 ","End":"03:28.519","Text":"and there are certain missing information."},{"Start":"03:28.519 ","End":"03:33.664","Text":"The missing information is going to lead us to that cash receipt or cash payment."},{"Start":"03:33.664 ","End":"03:36.695","Text":"Let\u0027s just pop all the figures in that we do know,"},{"Start":"03:36.695 ","End":"03:38.449","Text":"and then balance back."},{"Start":"03:38.449 ","End":"03:40.760","Text":"I\u0027ll say that again because of the car."},{"Start":"03:40.760 ","End":"03:43.173","Text":"We\u0027re dealing with property,"},{"Start":"03:43.173 ","End":"03:45.125","Text":"plant, and equipment essentially."},{"Start":"03:45.125 ","End":"03:49.910","Text":"The ledger accounts that we need to look at are the cost account,"},{"Start":"03:49.910 ","End":"03:52.114","Text":"and accumulated depreciation account."},{"Start":"03:52.114 ","End":"03:54.560","Text":"There may be, as we know in this case,"},{"Start":"03:54.560 ","End":"03:56.225","Text":"we\u0027ve got a profit on sale,"},{"Start":"03:56.225 ","End":"04:01.159","Text":"so there\u0027ll be the disposal account which will lead to either profit or loss on the sale."},{"Start":"04:01.159 ","End":"04:03.649","Text":"In this question, we\u0027ll end up with a profit."},{"Start":"04:03.649 ","End":"04:05.480","Text":"We can see that from our income statement,"},{"Start":"04:05.480 ","End":"04:07.460","Text":"and obviously there\u0027s also depreciation."},{"Start":"04:07.460 ","End":"04:12.109","Text":"Let\u0027s just go back to the question for a moment."},{"Start":"04:12.109 ","End":"04:15.544","Text":"The depreciation, if we look at our income statement,"},{"Start":"04:15.544 ","End":"04:20.490","Text":"is hidden in this figure of the general and admin expense of 114,"},{"Start":"04:20.490 ","End":"04:23.105","Text":"since it includes the depreciation expense."},{"Start":"04:23.105 ","End":"04:24.950","Text":"We\u0027re not given the depreciation,"},{"Start":"04:24.950 ","End":"04:28.589","Text":"so that\u0027s something we\u0027re going to need to find out."},{"Start":"04:28.600 ","End":"04:33.445","Text":"The ledger accounts we need, we\u0027ve got a property, plant,"},{"Start":"04:33.445 ","End":"04:38.976","Text":"and equipment cost account that we need, and then there\u0027s the property, plant,"},{"Start":"04:38.976 ","End":"04:43.720","Text":"and equipment, accumulated depreciation account,"},{"Start":"04:43.720 ","End":"04:50.989","Text":"we have a disposal account which is going to lead to a profit or loss on disposal."},{"Start":"04:50.989 ","End":"04:55.340","Text":"We know it\u0027s a profit, so I\u0027m going to cross out the or loss."},{"Start":"04:55.340 ","End":"04:58.249","Text":"Then we would have a depreciation account."},{"Start":"04:58.249 ","End":"05:00.365","Text":"Ultimately what we\u0027re looking for,"},{"Start":"05:00.365 ","End":"05:01.670","Text":"is how these accounts,"},{"Start":"05:01.670 ","End":"05:03.380","Text":"all of these; cost account,"},{"Start":"05:03.380 ","End":"05:06.200","Text":"accumulated depreciation, the profit disposal,"},{"Start":"05:06.200 ","End":"05:11.520","Text":"the depreciation, we want to know if they affect bank,"},{"Start":"05:11.520 ","End":"05:14.319","Text":"and if they do affect bank, by how much."},{"Start":"05:14.319 ","End":"05:17.316","Text":"We\u0027re told that the opening balance of our property, plant,"},{"Start":"05:17.316 ","End":"05:21.199","Text":"and equipment is 125."},{"Start":"05:21.199 ","End":"05:22.790","Text":"That\u0027s the cost."},{"Start":"05:22.790 ","End":"05:25.399","Text":"I get that from the balance sheet."},{"Start":"05:25.399 ","End":"05:27.287","Text":"If we look at the question, there is our property, plant,"},{"Start":"05:27.287 ","End":"05:29.045","Text":"and equipment cost,"},{"Start":"05:29.045 ","End":"05:32.670","Text":"125 at the end of 20X1."},{"Start":"05:32.670 ","End":"05:35.190","Text":"That is our 20X2 opening balance."},{"Start":"05:35.190 ","End":"05:41.689","Text":"Then at the end of 20X2 we\u0027ve got our closing balance of 120. Let\u0027s put that in."},{"Start":"05:41.689 ","End":"05:46.370","Text":"Closing balance, 120. Now,"},{"Start":"05:46.370 ","End":"05:51.079","Text":"let\u0027s find the opening and closing balances for accumulated depreciation."},{"Start":"05:51.079 ","End":"05:53.659","Text":"Go back to our balance sheet."},{"Start":"05:53.659 ","End":"05:57.640","Text":"The accumulated depreciation at the end of 20X1,"},{"Start":"05:57.640 ","End":"06:01.320","Text":"and at the end of 20X2, it\u0027s 43."},{"Start":"06:01.320 ","End":"06:06.460","Text":"This is our opening balance and our closing balance."},{"Start":"06:06.460 ","End":"06:08.710","Text":"The purpose of accumulated depreciation,"},{"Start":"06:08.710 ","End":"06:10.830","Text":"is to reduce the carrying amount of the property,"},{"Start":"06:10.830 ","End":"06:12.094","Text":"plant, and equipment."},{"Start":"06:12.094 ","End":"06:16.419","Text":"Now, remember the property, plant, and equipment is an asset account."},{"Start":"06:16.419 ","End":"06:19.690","Text":"The asset account has a debit balance."},{"Start":"06:19.690 ","End":"06:20.830","Text":"Assets have debit balances,"},{"Start":"06:20.830 ","End":"06:22.465","Text":"so they get bigger on the debit side,"},{"Start":"06:22.465 ","End":"06:24.024","Text":"and if you want to reduce them,"},{"Start":"06:24.024 ","End":"06:26.859","Text":"put through a credit entry to reduce it."},{"Start":"06:26.859 ","End":"06:28.289","Text":"Now, the property, plant,"},{"Start":"06:28.289 ","End":"06:32.185","Text":"and equipment accumulated depreciation account is,"},{"Start":"06:32.185 ","End":"06:34.945","Text":"sometimes I just refer to it as a negative asset."},{"Start":"06:34.945 ","End":"06:37.345","Text":"There\u0027s no such thing technically as a negative asset,"},{"Start":"06:37.345 ","End":"06:40.040","Text":"but it reduces the asset."},{"Start":"06:40.040 ","End":"06:43.340","Text":"If an asset has a debit balance,"},{"Start":"06:43.340 ","End":"06:47.239","Text":"then the accumulated depreciation has a credit balance."},{"Start":"06:47.239 ","End":"06:51.499","Text":"The accumulated depreciation is going to get bigger on the credit side,"},{"Start":"06:51.499 ","End":"06:54.750","Text":"but its purpose is to reduce this asset,"},{"Start":"06:54.750 ","End":"06:56.625","Text":"property, plant, and equipment cost."},{"Start":"06:56.625 ","End":"07:02.285","Text":"Our opening balance per our balance sheet was 41,"},{"Start":"07:02.285 ","End":"07:05.945","Text":"and our closing balance was 43."},{"Start":"07:05.945 ","End":"07:08.150","Text":"Now what we would do during the year,"},{"Start":"07:08.150 ","End":"07:11.600","Text":"is we would increase our accumulated depreciation by"},{"Start":"07:11.600 ","End":"07:15.560","Text":"processing an entry where we credit the accumulated depreciation,"},{"Start":"07:15.560 ","End":"07:17.884","Text":"and debit the depreciation expense."},{"Start":"07:17.884 ","End":"07:19.849","Text":"However, we don\u0027t know what"},{"Start":"07:19.849 ","End":"07:23.660","Text":"that depreciation figure is because as we saw in the income statement,"},{"Start":"07:23.660 ","End":"07:28.880","Text":"it was included in our general and administrative expense line item,"},{"Start":"07:28.880 ","End":"07:30.349","Text":"in the income statement."},{"Start":"07:30.349 ","End":"07:32.720","Text":"We\u0027re going to have to balance to that."},{"Start":"07:32.720 ","End":"07:34.490","Text":"What we do know,"},{"Start":"07:34.490 ","End":"07:38.598","Text":"is that there was an item or items of property,"},{"Start":"07:38.598 ","End":"07:42.064","Text":"plant, and equipment that were disposed off during the year."},{"Start":"07:42.064 ","End":"07:49.040","Text":"We are told that the cost of that item was 20."},{"Start":"07:49.040 ","End":"07:50.900","Text":"When an asset is disposed off,"},{"Start":"07:50.900 ","End":"07:53.155","Text":"it would come out of the cost account."},{"Start":"07:53.155 ","End":"07:56.350","Text":"We would credit this account with 20,"},{"Start":"07:56.350 ","End":"08:00.230","Text":"to indicate that that asset is no longer ours,"},{"Start":"08:00.230 ","End":"08:02.785","Text":"and we would pop it into the disposal account."},{"Start":"08:02.785 ","End":"08:05.040","Text":"This is my first entry."},{"Start":"08:05.040 ","End":"08:06.725","Text":"I\u0027m just going to number it like this."},{"Start":"08:06.725 ","End":"08:09.290","Text":"This is the cost of the asset that I got rid of,"},{"Start":"08:09.290 ","End":"08:15.195","Text":"I credited it to the asset\u0027s cost account to reduce it,"},{"Start":"08:15.195 ","End":"08:17.779","Text":"and I put the contra entry, in other words,"},{"Start":"08:17.779 ","End":"08:20.510","Text":"the debit side into my disposal account."},{"Start":"08:20.510 ","End":"08:22.235","Text":"This is the debit side."},{"Start":"08:22.235 ","End":"08:26.160","Text":"Now, the only other thing that could happen in this account,"},{"Start":"08:26.160 ","End":"08:28.370","Text":"is we could have purchased something."},{"Start":"08:28.370 ","End":"08:31.040","Text":"This is the disposal,"},{"Start":"08:31.040 ","End":"08:33.304","Text":"and if there was a purchase,"},{"Start":"08:33.304 ","End":"08:35.485","Text":"we\u0027re going to balance to it now."},{"Start":"08:35.485 ","End":"08:37.319","Text":"Which side is bigger?"},{"Start":"08:37.319 ","End":"08:40.605","Text":"Our credit sides come to 140,"},{"Start":"08:40.605 ","End":"08:43.350","Text":"and our debit side comes to 125."},{"Start":"08:43.350 ","End":"08:45.690","Text":"We take the biggest side across,"},{"Start":"08:45.690 ","End":"08:53.209","Text":"140 and we subtract the 125 and we find the missing amount."},{"Start":"08:53.209 ","End":"08:57.410","Text":"There was a missing amount that we balance back to,"},{"Start":"08:57.410 ","End":"08:59.920","Text":"and it represents a purchase of property,"},{"Start":"08:59.920 ","End":"09:01.055","Text":"plant, and equipment."},{"Start":"09:01.055 ","End":"09:02.170","Text":"There was a purchase of property, plant,"},{"Start":"09:02.170 ","End":"09:03.820","Text":"and equipment during the year."},{"Start":"09:03.820 ","End":"09:07.280","Text":"The question didn\u0027t specifically indicate that."},{"Start":"09:07.280 ","End":"09:09.590","Text":"But when you put the information in,"},{"Start":"09:09.590 ","End":"09:12.784","Text":"you would balance back and notice that not only do you have a disposal,"},{"Start":"09:12.784 ","End":"09:14.800","Text":"but you must have had a purchase."},{"Start":"09:14.800 ","End":"09:18.515","Text":"You can only find that out by looking in the cost account."},{"Start":"09:18.515 ","End":"09:22.069","Text":"We\u0027re also told that that purchase was a cash purchase."},{"Start":"09:22.069 ","End":"09:24.064","Text":"It said if there were any purchases,"},{"Start":"09:24.064 ","End":"09:26.045","Text":"those purchases were for cash."},{"Start":"09:26.045 ","End":"09:30.275","Text":"We know that the contra entry to this entry, this is a debit."},{"Start":"09:30.275 ","End":"09:32.060","Text":"The credit must have gone to bank."},{"Start":"09:32.060 ","End":"09:35.120","Text":"This is the second entry I\u0027m going to process,"},{"Start":"09:35.120 ","End":"09:37.474","Text":"so that went into my bank account."},{"Start":"09:37.474 ","End":"09:41.479","Text":"This is going to appear in the cashflow statement."},{"Start":"09:41.479 ","End":"09:43.640","Text":"Anything that goes through the bank account,"},{"Start":"09:43.640 ","End":"09:45.709","Text":"must appear in our cashflow statement."},{"Start":"09:45.709 ","End":"09:51.230","Text":"Now that disposal, that\u0027s just simply saying what the cost of the asset was,"},{"Start":"09:51.230 ","End":"09:52.609","Text":"that was disposed off."},{"Start":"09:52.609 ","End":"09:56.870","Text":"But we need to know how much we disposed of this asset for."},{"Start":"09:56.870 ","End":"10:00.215","Text":"In other words, how much cash did we receive for this asset."},{"Start":"10:00.215 ","End":"10:06.115","Text":"We are told that there was a profit on disposal of 8."},{"Start":"10:06.115 ","End":"10:10.969","Text":"Now, the way the profit on disposal is processed,"},{"Start":"10:10.969 ","End":"10:15.300","Text":"it\u0027s a balancing item that we reach by comparing the debits and credits,"},{"Start":"10:15.300 ","End":"10:16.335","Text":"in the disposal account."},{"Start":"10:16.335 ","End":"10:19.714","Text":"Now, we\u0027ve only got the debit in the disposal account. This is the cost."},{"Start":"10:19.714 ","End":"10:21.740","Text":"What we still need to work out is,"},{"Start":"10:21.740 ","End":"10:25.750","Text":"what was the accumulated depreciation of this particular asset."},{"Start":"10:25.750 ","End":"10:27.535","Text":"Then we would say,"},{"Start":"10:27.535 ","End":"10:31.415","Text":"cost less the accumulated depreciation gives us the carrying amount."},{"Start":"10:31.415 ","End":"10:36.620","Text":"Cost minus accumulated depreciation is the carrying amount,"},{"Start":"10:36.620 ","End":"10:39.150","Text":"and then what we sell it for,"},{"Start":"10:39.150 ","End":"10:43.355","Text":"in other words, what we receive less the carrying amount"},{"Start":"10:43.355 ","End":"10:47.864","Text":"would give us the profit or the loss."},{"Start":"10:47.864 ","End":"10:52.729","Text":"Now, we don\u0027t know what the accumulated depreciation was of this item that was sold."},{"Start":"10:52.729 ","End":"10:56.880","Text":"We can\u0027t work out what the carrying amount was. Not yet."},{"Start":"10:56.880 ","End":"10:59.605","Text":"But we do know what the profit was."},{"Start":"10:59.605 ","End":"11:03.739","Text":"We didn\u0027t make a loss. We are told that there was a profit of 8."},{"Start":"11:03.739 ","End":"11:10.685","Text":"The cost less accumulated depreciation would give us that carrying amount."},{"Start":"11:10.685 ","End":"11:16.230","Text":"We would then process the receipt."},{"Start":"11:16.230 ","End":"11:20.755","Text":"Receipts go on the debit side of our bank,"},{"Start":"11:20.755 ","End":"11:21.969","Text":"and on the credit side,"},{"Start":"11:21.969 ","End":"11:23.740","Text":"we would have our payments."},{"Start":"11:23.740 ","End":"11:26.230","Text":"On the debit side, we\u0027d have the receipts."},{"Start":"11:26.230 ","End":"11:29.650","Text":"We would credit that to the disposal account."},{"Start":"11:29.650 ","End":"11:32.500","Text":"The net effect of that would be,"},{"Start":"11:32.500 ","End":"11:34.374","Text":"whether we made a profit or loss."},{"Start":"11:34.374 ","End":"11:36.685","Text":"If you have a look in the disposal account,"},{"Start":"11:36.685 ","End":"11:38.769","Text":"the cost amount of"},{"Start":"11:38.769 ","End":"11:44.815","Text":"20 less accumulated depreciation amount would be equal to your carrying amount."},{"Start":"11:44.815 ","End":"11:48.535","Text":"The costs would obviously be bigger than the accumulated depreciation."},{"Start":"11:48.535 ","End":"11:50.515","Text":"The carrying amount would be on the debit side."},{"Start":"11:50.515 ","End":"11:53.200","Text":"We\u0027d be comparing it to the amount received."},{"Start":"11:53.200 ","End":"11:54.459","Text":"How much do we sell it for,"},{"Start":"11:54.459 ","End":"11:56.800","Text":"and the proceeds or the receipts."},{"Start":"11:56.800 ","End":"12:00.384","Text":"There\u0027s the receipt here,"},{"Start":"12:00.384 ","End":"12:03.203","Text":"and here\u0027s the carrying amount here,"},{"Start":"12:03.203 ","End":"12:05.065","Text":"and then we get to the profit."},{"Start":"12:05.065 ","End":"12:07.659","Text":"If the receipt was bigger than the carrying amount,"},{"Start":"12:07.659 ","End":"12:09.189","Text":"we would have a profit."},{"Start":"12:09.189 ","End":"12:16.585","Text":"We will then debit this disposal account and credit the profit on disposal account."},{"Start":"12:16.585 ","End":"12:21.025","Text":"If our receipt was bigger than the carrying amount,"},{"Start":"12:21.025 ","End":"12:24.895","Text":"so let\u0027s say that was 100 and that was 10,"},{"Start":"12:24.895 ","End":"12:27.385","Text":"then we would debit this account with 90."},{"Start":"12:27.385 ","End":"12:30.490","Text":"In other words, if the receipt was bigger than the carrying amount,"},{"Start":"12:30.490 ","End":"12:32.605","Text":"we would have a profit."},{"Start":"12:32.605 ","End":"12:36.160","Text":"We would then debit this disposal account with"},{"Start":"12:36.160 ","End":"12:40.210","Text":"the profit and credit the profit on disposal account,"},{"Start":"12:40.210 ","End":"12:42.189","Text":"which is an income account."},{"Start":"12:42.189 ","End":"12:45.249","Text":"The income accounts get bigger on the credit side."},{"Start":"12:45.249 ","End":"12:48.850","Text":"Now, we do know that we did make a profit."},{"Start":"12:48.850 ","End":"12:52.480","Text":"We are told that the profit on disposal is 8."},{"Start":"12:52.480 ","End":"12:56.139","Text":"Let\u0027s put that into our ledge accounts."},{"Start":"12:56.139 ","End":"12:58.645","Text":"We\u0027ve got a profit and disposal of 8."},{"Start":"12:58.645 ","End":"13:01.195","Text":"We must have processed this journal entry,"},{"Start":"13:01.195 ","End":"13:05.800","Text":"so we would have debited the disposal and credited the profit on disposal."},{"Start":"13:05.800 ","End":"13:10.885","Text":"We are told that the cost of the item is 20 and,"},{"Start":"13:10.885 ","End":"13:13.720","Text":"as I say, we know that the carrying amount is 12."},{"Start":"13:13.720 ","End":"13:19.885","Text":"Therefore, we know that the accumulated depreciation on this item that was sold is 8."},{"Start":"13:19.885 ","End":"13:27.640","Text":"The journal entry here would have been credit the accumulated depreciation with 8,"},{"Start":"13:27.640 ","End":"13:32.695","Text":"and debit the accumulated depreciation account with 8."},{"Start":"13:32.695 ","End":"13:35.995","Text":"See what number I\u0027m onto now."},{"Start":"13:35.995 ","End":"13:41.814","Text":"This is the accumulated depreciation on the item that was sold."},{"Start":"13:41.814 ","End":"13:47.064","Text":"Just like, we took the cost of the item out of the cost account when it was sold,"},{"Start":"13:47.064 ","End":"13:50.590","Text":"we also take the accumulated depreciation on"},{"Start":"13:50.590 ","End":"13:55.750","Text":"the item that was sold to take that also out of the accumulated depreciation account."},{"Start":"13:55.750 ","End":"13:57.609","Text":"This is the disposal."},{"Start":"13:57.609 ","End":"13:59.634","Text":"This is the cost side,"},{"Start":"13:59.634 ","End":"14:03.505","Text":"that\u0027s being removed from our books and here\u0027s disposal again,"},{"Start":"14:03.505 ","End":"14:07.855","Text":"we\u0027re taking out the accumulated depreciation side of things."},{"Start":"14:07.855 ","End":"14:11.844","Text":"The cost goes into the debit side of the disposal account."},{"Start":"14:11.844 ","End":"14:15.550","Text":"The depreciation or the accumulated depreciation"},{"Start":"14:15.550 ","End":"14:18.115","Text":"goes onto the credit side of the disposal account."},{"Start":"14:18.115 ","End":"14:23.725","Text":"You can see that the carrying amount here is 12."},{"Start":"14:23.725 ","End":"14:25.344","Text":"Then, bearing in mind,"},{"Start":"14:25.344 ","End":"14:27.444","Text":"that if the carrying amount is 12,"},{"Start":"14:27.444 ","End":"14:29.395","Text":"and we\u0027re told that the profit is 8,"},{"Start":"14:29.395 ","End":"14:34.044","Text":"we now know that we must have received 20."},{"Start":"14:34.044 ","End":"14:37.585","Text":"Because if it had a value of 12 in our books,"},{"Start":"14:37.585 ","End":"14:39.309","Text":"and we sold it for 20."},{"Start":"14:39.309 ","End":"14:40.524","Text":"According to our books,"},{"Start":"14:40.524 ","End":"14:43.105","Text":"we\u0027ve made a profit of 8."},{"Start":"14:43.105 ","End":"14:49.990","Text":"This is an entry. We would have obviously credited the disposal account with 20,"},{"Start":"14:49.990 ","End":"14:53.900","Text":"and debited our bank with 20."},{"Start":"14:54.450 ","End":"14:59.439","Text":"Now, I have a look again. What do we have missing here?"},{"Start":"14:59.439 ","End":"15:01.075","Text":"Everything seems we filled in."},{"Start":"15:01.075 ","End":"15:03.474","Text":"No, one more thing needs to be filled in."},{"Start":"15:03.474 ","End":"15:05.710","Text":"In our accumulated depreciation account,"},{"Start":"15:05.710 ","End":"15:08.109","Text":"we\u0027ve got an opening balance of 41."},{"Start":"15:08.109 ","End":"15:11.740","Text":"We have a closing balance of 43,"},{"Start":"15:11.740 ","End":"15:15.580","Text":"and we\u0027ve got a debit in this account of 8."},{"Start":"15:15.580 ","End":"15:18.399","Text":"Currently, that doesn\u0027t add up,"},{"Start":"15:18.399 ","End":"15:23.065","Text":"so 43 plus 8 gives us 51."},{"Start":"15:23.065 ","End":"15:26.140","Text":"Take that across to the other side, 51."},{"Start":"15:26.140 ","End":"15:30.564","Text":"What\u0027s missing? Got an amount of 10 that is missing,"},{"Start":"15:30.564 ","End":"15:34.555","Text":"so that 10 must be depreciation."},{"Start":"15:34.555 ","End":"15:37.930","Text":"Let\u0027s process this as journal number,"},{"Start":"15:37.930 ","End":"15:39.940","Text":"I think we\u0027re on to Number 6."},{"Start":"15:39.940 ","End":"15:44.170","Text":"Accumulated depreciation, journal Number 6,"},{"Start":"15:44.170 ","End":"15:46.209","Text":"depreciation for the year,"},{"Start":"15:46.209 ","End":"15:48.400","Text":"must have been 10."},{"Start":"15:48.400 ","End":"15:53.714","Text":"If you have a look at our cost account, it all balances."},{"Start":"15:53.714 ","End":"15:54.810","Text":"We\u0027ve accounted for everything."},{"Start":"15:54.810 ","End":"15:58.694","Text":"In other words, accumulated depreciation. It balances."},{"Start":"15:58.694 ","End":"16:01.199","Text":"Our disposal account clears out,"},{"Start":"16:01.199 ","End":"16:03.570","Text":"20 and 8, 8 and 20."},{"Start":"16:03.570 ","End":"16:06.985","Text":"That also, is closed off. It balances."},{"Start":"16:06.985 ","End":"16:08.740","Text":"Then we\u0027ve got our profit on disposal,"},{"Start":"16:08.740 ","End":"16:10.000","Text":"which was given to us,"},{"Start":"16:10.000 ","End":"16:12.010","Text":"that appeared on our income statement."},{"Start":"16:12.010 ","End":"16:14.425","Text":"Now, we know what our depreciation is."},{"Start":"16:14.425 ","End":"16:17.700","Text":"That it didn\u0027t appear separately in our income statement,"},{"Start":"16:17.700 ","End":"16:23.765","Text":"but it was included in our general and administrative expense line item."},{"Start":"16:23.765 ","End":"16:30.549","Text":"This ultimately is then all that we need to show in our cash flow statement."},{"Start":"16:30.549 ","End":"16:33.175","Text":"In terms of cash receipts and cash payments,"},{"Start":"16:33.175 ","End":"16:38.030","Text":"you\u0027ll notice that this is an expense that appeared on our income statement."},{"Start":"16:38.280 ","End":"16:43.719","Text":"This is income that appeared on our income statement."},{"Start":"16:43.719 ","End":"16:45.580","Text":"The disposal account, clears out,"},{"Start":"16:45.580 ","End":"16:48.580","Text":"so it doesn\u0027t appear anywhere in our books."},{"Start":"16:48.580 ","End":"16:51.819","Text":"The amount of property,"},{"Start":"16:51.819 ","End":"16:53.109","Text":"plant, and equipment cost,"},{"Start":"16:53.109 ","End":"16:58.509","Text":"and it\u0027s accumulated depreciation are two line items that appeared in our balance sheet."},{"Start":"16:58.509 ","End":"17:03.580","Text":"Now, income of profit on disposal and the depreciation,"},{"Start":"17:03.580 ","End":"17:05.077","Text":"which is an expense,"},{"Start":"17:05.077 ","End":"17:10.674","Text":"both of these are what we refer to as non-cash items."},{"Start":"17:10.674 ","End":"17:16.390","Text":"You can see they\u0027re non-cash items because those income or expense items,"},{"Start":"17:16.390 ","End":"17:18.429","Text":"neither of those actually appeared in the bank,"},{"Start":"17:18.429 ","End":"17:19.824","Text":"so they were not cash."},{"Start":"17:19.824 ","End":"17:23.410","Text":"The profit was not a cash receipt and the depreciation is,"},{"Start":"17:23.410 ","End":"17:26.290","Text":"as we know, definitely not a cash payment,"},{"Start":"17:26.290 ","End":"17:28.330","Text":"it\u0027s just a book entry."},{"Start":"17:28.330 ","End":"17:32.230","Text":"Now, I\u0027m going to do the calculations all over again."},{"Start":"17:32.230 ","End":"17:33.834","Text":"If you\u0027ve understood this,"},{"Start":"17:33.834 ","End":"17:34.900","Text":"and you\u0027re happy to move on,"},{"Start":"17:34.900 ","End":"17:38.349","Text":"you can skip the next little section until we get to the section,"},{"Start":"17:38.349 ","End":"17:43.060","Text":"where I\u0027m showing you how to put all this information into your cash flow statement."},{"Start":"17:43.060 ","End":"17:45.580","Text":"The next section is,"},{"Start":"17:45.580 ","End":"17:51.954","Text":"if you don\u0027t like doing it using ledger accounts set out in the T-account format,"},{"Start":"17:51.954 ","End":"18:00.619","Text":"I\u0027m now going to show you how to do it using the columnar format of your ledger accounts."},{"Start":"18:02.250 ","End":"18:06.175","Text":"The analysis of the PP\u0026E account."},{"Start":"18:06.175 ","End":"18:09.804","Text":"Let\u0027s look at the cost account."},{"Start":"18:09.804 ","End":"18:13.554","Text":"We have an opening balance of 125."},{"Start":"18:13.554 ","End":"18:17.024","Text":"Then let\u0027s put in our closing balance or ending balance,"},{"Start":"18:17.024 ","End":"18:20.980","Text":"and that we\u0027re given, at the end of 20X2, it was 120."},{"Start":"18:20.980 ","End":"18:23.079","Text":"Now, what happens in the cost account?"},{"Start":"18:23.079 ","End":"18:25.839","Text":"You could buy assets,"},{"Start":"18:25.839 ","End":"18:27.550","Text":"and you can sell assets."},{"Start":"18:27.550 ","End":"18:29.019","Text":"If you buy an asset,"},{"Start":"18:29.019 ","End":"18:30.655","Text":"it would be a purchase."},{"Start":"18:30.655 ","End":"18:33.415","Text":"You would show the cost of that purchase."},{"Start":"18:33.415 ","End":"18:36.520","Text":"We have purchases, the costs of purchase."},{"Start":"18:36.520 ","End":"18:38.109","Text":"Then we also have disposals,"},{"Start":"18:38.109 ","End":"18:40.029","Text":"you could sell an asset."},{"Start":"18:40.029 ","End":"18:41.515","Text":"If you sell an asset,"},{"Start":"18:41.515 ","End":"18:44.454","Text":"then you\u0027ve got to take the cost of that item,"},{"Start":"18:44.454 ","End":"18:46.585","Text":"so the cost that you originally paid for it,"},{"Start":"18:46.585 ","End":"18:51.067","Text":"you need to take that out of your asset account."},{"Start":"18:51.067 ","End":"18:53.530","Text":"In other words,"},{"Start":"18:53.530 ","End":"18:56.065","Text":"your asset account balance"},{"Start":"18:56.065 ","End":"19:00.685","Text":"no longer includes the cost of the item that you no longer own."},{"Start":"19:00.685 ","End":"19:03.430","Text":"Let\u0027s put the figures in that we do know."},{"Start":"19:03.430 ","End":"19:06.654","Text":"We know that we sold an item,"},{"Start":"19:06.654 ","End":"19:10.150","Text":"and the cost of the item that we sold was originally 20,"},{"Start":"19:10.150 ","End":"19:11.830","Text":"so we take that out."},{"Start":"19:11.830 ","End":"19:16.090","Text":"But now, if you have a look, opening balance lists the disposal of 20,"},{"Start":"19:16.090 ","End":"19:18.490","Text":"gives you a balance of 105."},{"Start":"19:18.490 ","End":"19:21.805","Text":"Yet, we are told that the ending balance is 120."},{"Start":"19:21.805 ","End":"19:24.294","Text":"That means we\u0027re missing an amount of 15."},{"Start":"19:24.294 ","End":"19:28.149","Text":"That must have meant, that we\u0027ve purchased an item of property,"},{"Start":"19:28.149 ","End":"19:30.370","Text":"plant, and equipment for 15."},{"Start":"19:30.370 ","End":"19:36.280","Text":"Just notice, that to compare this format of the solution with the previous format,"},{"Start":"19:36.280 ","End":"19:40.300","Text":"the amounts without brackets are debits,"},{"Start":"19:40.300 ","End":"19:42.910","Text":"and the amounts with brackets are credits."},{"Start":"19:42.910 ","End":"19:45.564","Text":"Your asset has got a debit balance."},{"Start":"19:45.564 ","End":"19:49.434","Text":"You take the disposals out,"},{"Start":"19:49.434 ","End":"19:53.080","Text":"you add further assets that you\u0027ve purchased,"},{"Start":"19:53.080 ","End":"19:55.840","Text":"and that then gives you your final ending balance,"},{"Start":"19:55.840 ","End":"19:57.665","Text":"which would be a debit."},{"Start":"19:57.665 ","End":"20:01.140","Text":"Then we look at accumulated depreciation."},{"Start":"20:01.140 ","End":"20:08.475","Text":"We know the opening balance is 41 because that\u0027s the closing balance at the end of 20X1."},{"Start":"20:08.475 ","End":"20:10.590","Text":"Notice, it\u0027s in brackets,"},{"Start":"20:10.590 ","End":"20:13.379","Text":"which indicates that the opening balance is"},{"Start":"20:13.379 ","End":"20:18.455","Text":"a credit balance because accumulated depreciation gets big on the credit side."},{"Start":"20:18.455 ","End":"20:20.170","Text":"Put in the closing balance,"},{"Start":"20:20.170 ","End":"20:22.749","Text":"that was the balance of accumulated depreciation,"},{"Start":"20:22.749 ","End":"20:25.705","Text":"43 at the end of 20X2."},{"Start":"20:25.705 ","End":"20:30.490","Text":"Now, let\u0027s see how the disposal would affect our accumulated depreciation."},{"Start":"20:30.490 ","End":"20:32.248","Text":"When we sell an asset,"},{"Start":"20:32.248 ","End":"20:36.310","Text":"accumulated depreciation account needs to be reduced by"},{"Start":"20:36.310 ","End":"20:41.660","Text":"the amount of accumulated depreciation that relates to the asset that\u0027s sold."},{"Start":"20:41.660 ","End":"20:43.709","Text":"We aren\u0027t directly told"},{"Start":"20:43.709 ","End":"20:47.310","Text":"how much accumulated depreciation had"},{"Start":"20:47.310 ","End":"20:51.030","Text":"accrued on this particular assets that had been sold,"},{"Start":"20:51.030 ","End":"20:52.649","Text":"but we can work it out."},{"Start":"20:52.649 ","End":"20:55.334","Text":"We can work it out because we know cost"},{"Start":"20:55.334 ","End":"20:59.130","Text":"less accumulated depreciation equals the carrying amount."},{"Start":"20:59.130 ","End":"21:00.765","Text":"We are told,"},{"Start":"21:00.765 ","End":"21:02.670","Text":"that the cost is 20,"},{"Start":"21:02.670 ","End":"21:05.405","Text":"and we\u0027re told, that the carrying amount is 12."},{"Start":"21:05.405 ","End":"21:09.340","Text":"We, therefore, know that the accumulated depreciation must have been"},{"Start":"21:09.340 ","End":"21:17.829","Text":"8 because 20 minus accumulated depreciation of 8 would give us a carrying amount at 12."},{"Start":"21:17.829 ","End":"21:24.250","Text":"We\u0027re taking the accumulated depreciation on this item of property, plant and equipment."},{"Start":"21:24.250 ","End":"21:27.565","Text":"We\u0027re taking it out of the accumulated depreciation account."},{"Start":"21:27.565 ","End":"21:32.875","Text":"You can see, we\u0027re taking it out because accumulated depreciation has a credit balance,"},{"Start":"21:32.875 ","End":"21:35.388","Text":"normally or always,"},{"Start":"21:35.388 ","End":"21:37.810","Text":"and what we\u0027re doing here is we\u0027re debiting it."},{"Start":"21:37.810 ","End":"21:43.509","Text":"Therefore, we are reducing accumulated depreciation by the 8 on the item of property,"},{"Start":"21:43.509 ","End":"21:46.780","Text":"plant and equipment that we have now sold."},{"Start":"21:46.780 ","End":"21:49.824","Text":"Then the only other item that could have gone through"},{"Start":"21:49.824 ","End":"21:54.795","Text":"our accumulated depreciation relates to the depreciation expense."},{"Start":"21:54.795 ","End":"21:57.810","Text":"Every year, you depreciate your assets"},{"Start":"21:57.810 ","End":"22:01.094","Text":"further and your accumulated depreciation, therefore,"},{"Start":"22:01.094 ","End":"22:03.089","Text":"goes up because what happens is,"},{"Start":"22:03.089 ","End":"22:05.609","Text":"we debit depreciation,"},{"Start":"22:05.609 ","End":"22:09.625","Text":"and we credit accumulated depreciation."},{"Start":"22:09.625 ","End":"22:11.710","Text":"Now, how did we get to the 10?"},{"Start":"22:11.710 ","End":"22:16.915","Text":"Well, 41 minus 8 gives us 33."},{"Start":"22:16.915 ","End":"22:19.779","Text":"Yet, our closing balance is 43."},{"Start":"22:19.779 ","End":"22:23.739","Text":"Therefore, we know there is an extra amount of 10."},{"Start":"22:23.739 ","End":"22:26.080","Text":"This is 33 in brackets,"},{"Start":"22:26.080 ","End":"22:27.370","Text":"and there was a credit balance."},{"Start":"22:27.370 ","End":"22:29.289","Text":"Yet, our closing balance was 43,"},{"Start":"22:29.289 ","End":"22:31.480","Text":"so we needed another 10 credit."},{"Start":"22:31.480 ","End":"22:35.820","Text":"It must have been the depreciation expense."},{"Start":"22:35.820 ","End":"22:40.910","Text":"Then, if you like, we can also reconcile our carrying amount."},{"Start":"22:40.910 ","End":"22:43.579","Text":"The carrying amount, we look at the opening balance,"},{"Start":"22:43.579 ","End":"22:46.699","Text":"it\u0027s the 125 minus 41. It\u0027s 84."},{"Start":"22:46.699 ","End":"22:50.420","Text":"Now, disposals, we know the cost was 20,"},{"Start":"22:50.420 ","End":"22:56.045","Text":"and the accumulated depreciation on those assets or asset that was sold was 8."},{"Start":"22:56.045 ","End":"23:00.480","Text":"Therefore, the carrying amount of the disposals was 12."},{"Start":"23:01.110 ","End":"23:06.589","Text":"Then the purchases, remember purchases only affects the cost account."},{"Start":"23:06.630 ","End":"23:12.370","Text":"The 15 is the cost of an item that was purchased goes under the cost account only,"},{"Start":"23:12.370 ","End":"23:15.580","Text":"doesn\u0027t affect accumulated depreciation."},{"Start":"23:15.580 ","End":"23:18.548","Text":"Then the depreciation expense,"},{"Start":"23:18.548 ","End":"23:21.205","Text":"similarly, it doesn\u0027t affect the cost account."},{"Start":"23:21.205 ","End":"23:24.415","Text":"It\u0027s simply debit depreciation,"},{"Start":"23:24.415 ","End":"23:27.550","Text":"expense, credit accumulated depreciation."},{"Start":"23:27.550 ","End":"23:29.875","Text":"I\u0027ll just put those general entries and on the side."},{"Start":"23:29.875 ","End":"23:35.350","Text":"Purchases would have been a debit to the PPE cost."},{"Start":"23:35.350 ","End":"23:37.674","Text":"In this case, the credit went to"},{"Start":"23:37.674 ","End":"23:41.110","Text":"bank because we\u0027re told that all the purchases were made for cash."},{"Start":"23:41.110 ","End":"23:50.200","Text":"Then the depreciation expense is debit depreciation, credit accumulated depreciation."},{"Start":"23:50.200 ","End":"23:53.421","Text":"The depreciation doesn\u0027t affect the cost account,"},{"Start":"23:53.421 ","End":"23:56.875","Text":"and the purchase doesn\u0027t affect the accumulated depreciation account."},{"Start":"23:56.875 ","End":"23:59.770","Text":"That then gives us our ending balance."},{"Start":"23:59.770 ","End":"24:03.234","Text":"120 minus 43 gives you 77."},{"Start":"24:03.234 ","End":"24:05.590","Text":"Now we were asked to prepare"},{"Start":"24:05.590 ","End":"24:10.163","Text":"the cash flow statement for the year ending 31st, December 20X2,"},{"Start":"24:10.163 ","End":"24:17.800","Text":"but we were asked to first focus on the cash from investing activities."},{"Start":"24:17.800 ","End":"24:20.050","Text":"Here we\u0027ve got the cash flows from"},{"Start":"24:20.050 ","End":"24:23.905","Text":"investing activities for the year ending 31st, December 20X2."},{"Start":"24:23.905 ","End":"24:27.930","Text":"The cash paid on purchase of our property plant and equipment,"},{"Start":"24:27.930 ","End":"24:33.984","Text":"you pick that up in our property plant and equipment cost account."},{"Start":"24:33.984 ","End":"24:40.884","Text":"There it is. The 15 was our purchase and we were told that was for cash."},{"Start":"24:40.884 ","End":"24:45.730","Text":"We got it from the PPE cost account and the amount is 15."},{"Start":"24:45.730 ","End":"24:51.445","Text":"Then we have cash received from disposals of property plant and equipment."},{"Start":"24:51.445 ","End":"24:53.559","Text":"To work out the cash received,"},{"Start":"24:53.559 ","End":"24:55.179","Text":"we must remember this formula."},{"Start":"24:55.179 ","End":"24:59.680","Text":"Cash received less the carrying amount gives us our profit on sale."},{"Start":"24:59.680 ","End":"25:03.010","Text":"Or in other words, if you take the carrying amount"},{"Start":"25:03.010 ","End":"25:07.735","Text":"across to the other side in order to get the cash received on its own,"},{"Start":"25:07.735 ","End":"25:10.942","Text":"remember minus carrying amount becomes positive carrying amount,"},{"Start":"25:10.942 ","End":"25:17.305","Text":"then we thus have cash received equals profit on sale plus carrying amount."},{"Start":"25:17.305 ","End":"25:25.135","Text":"We were told that the profit on sale was 12 and the carrying amount we know was 8."},{"Start":"25:25.135 ","End":"25:29.905","Text":"We know the cash received from the disposal must have been 20."},{"Start":"25:29.905 ","End":"25:32.935","Text":"We\u0027ve purchased something with 15,"},{"Start":"25:32.935 ","End":"25:36.460","Text":"we\u0027ve sold to the value in cash of 20."},{"Start":"25:36.460 ","End":"25:41.572","Text":"We made more cash receipts than we\u0027ve made cash payments,"},{"Start":"25:41.572 ","End":"25:45.415","Text":"so we\u0027ve generated cash from our investing activities."},{"Start":"25:45.415 ","End":"25:47.049","Text":"Remember property plant and equipment,"},{"Start":"25:47.049 ","End":"25:55.015","Text":"purchases and sales fall under the investing activities."},{"Start":"25:55.015 ","End":"25:58.525","Text":"Now let\u0027s move on to the second part,"},{"Start":"25:58.525 ","End":"26:04.900","Text":"which was to calculate the cash generated or used in operating activities."},{"Start":"26:04.900 ","End":"26:10.249","Text":"We were asked to do this using the indirect method."},{"Start":"26:10.560 ","End":"26:17.500","Text":"The cash flows from operating activities using the indirect method."},{"Start":"26:17.500 ","End":"26:19.640","Text":"Let\u0027s pop that up here."},{"Start":"26:20.040 ","End":"26:26.320","Text":"The indirect method means we start with profit before finance and tax."},{"Start":"26:26.320 ","End":"26:31.795","Text":"In this example, we didn\u0027t have finance costs and we didn\u0027t have tax,"},{"Start":"26:31.795 ","End":"26:38.330","Text":"therefore, the profit before finance and tax actually equals the profit for the year."},{"Start":"26:38.580 ","End":"26:41.830","Text":"That was given to us at a 130,"},{"Start":"26:41.830 ","End":"26:44.425","Text":"that was in the income statement."},{"Start":"26:44.425 ","End":"26:47.289","Text":"Now the next thing we need to adjust for,"},{"Start":"26:47.289 ","End":"26:50.230","Text":"we adjust for changes in working capital."},{"Start":"26:50.230 ","End":"26:57.339","Text":"We adjust for separately disclosable items like tax and interest,"},{"Start":"26:57.339 ","End":"26:59.935","Text":"that is finance charges and dividends."},{"Start":"26:59.935 ","End":"27:01.570","Text":"We didn\u0027t have tax,"},{"Start":"27:01.570 ","End":"27:03.055","Text":"we didn\u0027t have interest,"},{"Start":"27:03.055 ","End":"27:04.915","Text":"and we didn\u0027t have dividends."},{"Start":"27:04.915 ","End":"27:07.614","Text":"We\u0027re not going to adjust for those in this question."},{"Start":"27:07.614 ","End":"27:10.990","Text":"I\u0027m going back to the changes in working capital that I just mentioned,"},{"Start":"27:10.990 ","End":"27:12.280","Text":"you will suggest for those,"},{"Start":"27:12.280 ","End":"27:14.500","Text":"while we didn\u0027t have any of those given to us."},{"Start":"27:14.500 ","End":"27:17.784","Text":"Working capital being things like your accounts receivable,"},{"Start":"27:17.784 ","End":"27:20.200","Text":"your accounts payable, your inventory."},{"Start":"27:20.200 ","End":"27:21.759","Text":"We didn\u0027t have that either."},{"Start":"27:21.759 ","End":"27:26.830","Text":"But the other thing that you do adjust for is the non-cash items."},{"Start":"27:26.830 ","End":"27:28.870","Text":"We did have non-cash items,"},{"Start":"27:28.870 ","End":"27:32.365","Text":"cash on bank to those later accounts that we did together."},{"Start":"27:32.365 ","End":"27:39.730","Text":"I mentioned that the profit on the sale and the depreciation are both non-cash items."},{"Start":"27:39.730 ","End":"27:44.170","Text":"You could see there were non-cash items because they hadn\u0027t touched our bank account."},{"Start":"27:44.170 ","End":"27:49.585","Text":"Those amounts, the profit on sale of the 8 and the depreciation of the 10,"},{"Start":"27:49.585 ","End":"27:52.870","Text":"did not go through our bank account at all."},{"Start":"27:52.870 ","End":"27:54.595","Text":"They\u0027re non-cash items."},{"Start":"27:54.595 ","End":"27:58.374","Text":"Remember, when we\u0027re doing the indirect method,"},{"Start":"27:58.374 ","End":"28:04.480","Text":"we adjust our profit before finance and tax separately disclosed items."},{"Start":"28:04.480 ","End":"28:09.699","Text":"These are items where if there was a cash payment or cash receipt relating to them,"},{"Start":"28:09.699 ","End":"28:12.699","Text":"we have to show them separately in our cash flow statements,"},{"Start":"28:12.699 ","End":"28:17.124","Text":"so we have to first remove them from the profits so that we can ensure them separately."},{"Start":"28:17.124 ","End":"28:20.979","Text":"We first reverse any separately disclosable items."},{"Start":"28:20.979 ","End":"28:24.084","Text":"In that regard, we\u0027ve got tax,"},{"Start":"28:24.084 ","End":"28:26.889","Text":"interest received or interest paid,"},{"Start":"28:26.889 ","End":"28:28.840","Text":"and we\u0027ve also got dividends."},{"Start":"28:28.840 ","End":"28:31.975","Text":"Also, we need to separately disclose."},{"Start":"28:31.975 ","End":"28:33.250","Text":"We didn\u0027t have any of those,"},{"Start":"28:33.250 ","End":"28:35.139","Text":"so we could ignore that."},{"Start":"28:35.139 ","End":"28:41.275","Text":"Then we would adjust for working capital changes."},{"Start":"28:41.275 ","End":"28:46.585","Text":"Things like inventory, accounts receivable,"},{"Start":"28:46.585 ","End":"28:50.290","Text":"accounts payable, and we didn\u0027t have any of that,"},{"Start":"28:50.290 ","End":"28:52.330","Text":"so we ignore that too."},{"Start":"28:52.330 ","End":"28:59.665","Text":"Then the third item that we adjust for are the non-cash items,"},{"Start":"28:59.665 ","End":"29:02.170","Text":"of which we had two."},{"Start":"29:02.170 ","End":"29:05.634","Text":"First of all, we had a depreciation expense which was hidden."},{"Start":"29:05.634 ","End":"29:07.789","Text":"We had to work it out."},{"Start":"29:08.130 ","End":"29:15.190","Text":"We balanced this in our accumulated depreciation account and found that that was 10."},{"Start":"29:15.190 ","End":"29:17.589","Text":"Remember, in order to get to our profit,"},{"Start":"29:17.589 ","End":"29:20.965","Text":"we normally subtract depreciation of 10,"},{"Start":"29:20.965 ","End":"29:23.394","Text":"so that\u0027s why I\u0027m now adding it."},{"Start":"29:23.394 ","End":"29:28.630","Text":"We\u0027re adding it back so that the impact of any depreciation has been reversed."},{"Start":"29:28.630 ","End":"29:33.039","Text":"Then the next item was profit on disposal of property, plant and equipment."},{"Start":"29:33.039 ","End":"29:34.315","Text":"We were given this."},{"Start":"29:34.315 ","End":"29:36.700","Text":"We are told that the profit was 8."},{"Start":"29:36.700 ","End":"29:39.625","Text":"The profit is in there as a positive figure."},{"Start":"29:39.625 ","End":"29:41.050","Text":"We don\u0027t want it in there,"},{"Start":"29:41.050 ","End":"29:42.715","Text":"so we subtract it."},{"Start":"29:42.715 ","End":"29:45.760","Text":"The profit had increased our profit,"},{"Start":"29:45.760 ","End":"29:48.768","Text":"and we now need to reverse it,"},{"Start":"29:48.768 ","End":"29:54.100","Text":"so we subtract it because that profit is inside the 130, we take it out."},{"Start":"29:54.100 ","End":"30:01.675","Text":"That then gives us cash generated from operations of a 132."},{"Start":"30:01.675 ","End":"30:04.959","Text":"That\u0027s the end of exercise IJK."},{"Start":"30:04.959 ","End":"30:09.589","Text":"I hope that my explanation helps."}],"ID":29704},{"Watched":false,"Name":"Exercise 9 - JKL - A - question pages","Duration":"4m 50s","ChapterTopicVideoID":26878,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.305","Text":"Today we\u0027re going to do an exercise in a company called JKL."},{"Start":"00:04.305 ","End":"00:09.135","Text":"The following are selected end-of-year balances from JKL\u0027s balance sheet,"},{"Start":"00:09.135 ","End":"00:12.450","Text":"together with its income statement for 20X2."},{"Start":"00:12.450 ","End":"00:17.250","Text":"First of all, we\u0027ve got our balance sheet and we\u0027re given the 20X2 figures."},{"Start":"00:17.250 ","End":"00:22.080","Text":"As generally as the case we\u0027re given the prior balances."},{"Start":"00:22.080 ","End":"00:24.330","Text":"In terms of our property plant and equipment,"},{"Start":"00:24.330 ","End":"00:27.330","Text":"we\u0027re told what the cost account balances are."},{"Start":"00:27.330 ","End":"00:29.070","Text":"This year is 160,"},{"Start":"00:29.070 ","End":"00:31.140","Text":"last year was 125."},{"Start":"00:31.140 ","End":"00:34.910","Text":"Then we\u0027re told what the property plant and equipment accumulated depreciation"},{"Start":"00:34.910 ","End":"00:37.835","Text":"is at the end of the current year, it was 66."},{"Start":"00:37.835 ","End":"00:40.475","Text":"At the end of the prior it was 41."},{"Start":"00:40.475 ","End":"00:41.660","Text":"Now the carrying amount, remember,"},{"Start":"00:41.660 ","End":"00:46.175","Text":"is just the cost less the accumulated depreciation that gives us"},{"Start":"00:46.175 ","End":"00:51.380","Text":"carrying amount at the end of the current year of 94 and last year, it was 84."},{"Start":"00:51.380 ","End":"00:53.705","Text":"Our carrying amount has increased."},{"Start":"00:53.705 ","End":"00:55.790","Text":"But we can\u0027t tell too much from that"},{"Start":"00:55.790 ","End":"00:59.255","Text":"because it doesn\u0027t mean that we\u0027ve purchased something with 10."},{"Start":"00:59.255 ","End":"01:01.415","Text":"We\u0027ve got to take a few things into account,"},{"Start":"01:01.415 ","End":"01:04.580","Text":"to account what our purchases were."},{"Start":"01:04.580 ","End":"01:09.320","Text":"Part of that is determining whether we\u0027ve also sold anything during the year."},{"Start":"01:09.320 ","End":"01:13.430","Text":"Then we\u0027re given an account which we have not seen before,"},{"Start":"01:13.430 ","End":"01:17.645","Text":"and it\u0027s payables, suppliers of PP\u0026E."},{"Start":"01:17.645 ","End":"01:23.000","Text":"Now, in the previous exercises within the series,"},{"Start":"01:23.000 ","End":"01:25.820","Text":"we have come across an account called payables."},{"Start":"01:25.820 ","End":"01:28.040","Text":"But in all these previous occasions,"},{"Start":"01:28.040 ","End":"01:34.190","Text":"we have assumed that the payables were amounts owing to suppliers of inventory."},{"Start":"01:34.190 ","End":"01:37.490","Text":"Now in this case, we are told that this account is the payables."},{"Start":"01:37.490 ","End":"01:40.430","Text":"In other words, the amounts that we owe to people"},{"Start":"01:40.430 ","End":"01:44.090","Text":"who have supplied us with property, plant, and equipment."},{"Start":"01:44.090 ","End":"01:48.710","Text":"Now, the balance was at the end of the prior year, it was 10."},{"Start":"01:48.710 ","End":"01:50.375","Text":"In other words, we did owe 10,"},{"Start":"01:50.375 ","End":"01:52.010","Text":"but at the end of the current year,"},{"Start":"01:52.010 ","End":"01:53.810","Text":"it is now only 3."},{"Start":"01:53.810 ","End":"02:00.260","Text":"So you can see we\u0027ve repaid 7 of the amount that we owed at the end of last year."},{"Start":"02:00.260 ","End":"02:02.210","Text":"Then we\u0027re given additional information."},{"Start":"02:02.210 ","End":"02:03.620","Text":"We\u0027ve got carrying amount of property,"},{"Start":"02:03.620 ","End":"02:06.875","Text":"plant and equipment that is sold 12."},{"Start":"02:06.875 ","End":"02:10.460","Text":"Then we have the cost of that property,"},{"Start":"02:10.460 ","End":"02:12.005","Text":"plant and equipment that was sold."},{"Start":"02:12.005 ","End":"02:14.810","Text":"That was 18. We have not been told"},{"Start":"02:14.810 ","End":"02:17.630","Text":"what the accumulated depreciation is of the property, plant,"},{"Start":"02:17.630 ","End":"02:19.070","Text":"and equipment that has been sold."},{"Start":"02:19.070 ","End":"02:21.335","Text":"But we can easily work that out."},{"Start":"02:21.335 ","End":"02:24.020","Text":"We work that out by simply understanding"},{"Start":"02:24.020 ","End":"02:29.165","Text":"that cost less accumulated depreciation gives us carrying amount."},{"Start":"02:29.165 ","End":"02:31.610","Text":"So we have 2 of the variables."},{"Start":"02:31.610 ","End":"02:34.850","Text":"So cost of the item that was sold was 18,"},{"Start":"02:34.850 ","End":"02:36.905","Text":"the carrying amount was 12."},{"Start":"02:36.905 ","End":"02:39.065","Text":"So that must mean that"},{"Start":"02:39.065 ","End":"02:44.785","Text":"our accumulated depreciation on the item that was sold will have been 6."},{"Start":"02:44.785 ","End":"02:46.730","Text":"All right. That will become useful later."},{"Start":"02:46.730 ","End":"02:51.335","Text":"Then we\u0027ve got the impairment loss recorded during the year was 7."},{"Start":"02:51.335 ","End":"02:54.934","Text":"You\u0027ll see here, we\u0027re not told what the depreciation was."},{"Start":"02:54.934 ","End":"02:57.500","Text":"But let\u0027s move on to the income statement."},{"Start":"02:57.500 ","End":"02:59.270","Text":"So in our income statement,"},{"Start":"02:59.270 ","End":"03:01.040","Text":"we\u0027ve got revenue, cost of sales,"},{"Start":"03:01.040 ","End":"03:04.625","Text":"and then we\u0027ve got the general and administrative expense,"},{"Start":"03:04.625 ","End":"03:08.570","Text":"which includes the depreciation and the impairment loss expense."},{"Start":"03:08.570 ","End":"03:10.940","Text":"Once again, the impairment loss expense,"},{"Start":"03:10.940 ","End":"03:15.680","Text":"we were told was 7 but we have not been told what the depreciation expense was."},{"Start":"03:15.680 ","End":"03:17.930","Text":"If we\u0027re using the indirect method,"},{"Start":"03:17.930 ","End":"03:18.980","Text":"which you\u0027ll see in a moment,"},{"Start":"03:18.980 ","End":"03:20.990","Text":"we will be using the indirect method."},{"Start":"03:20.990 ","End":"03:23.360","Text":"We will need that depreciation expense,"},{"Start":"03:23.360 ","End":"03:25.105","Text":"but we are going to balance back to it."},{"Start":"03:25.105 ","End":"03:30.260","Text":"Then, we have the loss on disposal of 3."},{"Start":"03:30.260 ","End":"03:35.509","Text":"All right, so the previous example referred to a profit on disposal."},{"Start":"03:35.509 ","End":"03:37.460","Text":"Then we get to the profit for the year."},{"Start":"03:37.460 ","End":"03:39.320","Text":"This income statement is quite straightforward."},{"Start":"03:39.320 ","End":"03:43.565","Text":"We don\u0027t have finance charges and we don\u0027t have tax expense."},{"Start":"03:43.565 ","End":"03:45.255","Text":"Let\u0027s look at the required."},{"Start":"03:45.255 ","End":"03:46.650","Text":"Based on this information,"},{"Start":"03:46.650 ","End":"03:50.800","Text":"prepare the section in the cash flow statement that reports cash generated"},{"Start":"03:50.800 ","End":"03:55.609","Text":"from investing activities or cash used in investing activities."},{"Start":"03:55.609 ","End":"04:01.300","Text":"Then the second part is to prepare the section reporting cash"},{"Start":"04:01.300 ","End":"04:07.000","Text":"generated from operating activities or cash used in operating activities."},{"Start":"04:07.000 ","End":"04:09.460","Text":"We are to use the indirect method."},{"Start":"04:09.460 ","End":"04:12.685","Text":"Now remember, when using the indirect method,"},{"Start":"04:12.685 ","End":"04:18.095","Text":"it means you\u0027ve got to start with the profit before finance charges and tax."},{"Start":"04:18.095 ","End":"04:22.315","Text":"Your cash generated from operating activities section,"},{"Start":"04:22.315 ","End":"04:28.020","Text":"the very first line item starts with profit before finance charges and tax."},{"Start":"04:28.020 ","End":"04:30.485","Text":"In this example, as you could see,"},{"Start":"04:30.485 ","End":"04:35.270","Text":"our income statement showed profit for the year of 119."},{"Start":"04:35.270 ","End":"04:39.150","Text":"There was no tax, there was no finance charges."},{"Start":"04:39.830 ","End":"04:44.690","Text":"Therefore, we\u0027re going to start with the profit before"},{"Start":"04:44.690 ","End":"04:50.310","Text":"finance charges and tax being 119. All right, let\u0027s get going."}],"ID":29705},{"Watched":false,"Name":"Exercise 9 - JKL - B - calculations using ledger accounts in T-account format","Duration":"14m 50s","ChapterTopicVideoID":26879,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.110 ","End":"00:03.945","Text":"Let\u0027s do the solution to exercise JKL."},{"Start":"00:03.945 ","End":"00:06.480","Text":"What I\u0027m going to do is I\u0027m going to start by"},{"Start":"00:06.480 ","End":"00:08.970","Text":"preparing the solution using ledger accounts,"},{"Start":"00:08.970 ","End":"00:11.460","Text":"but I\u0027m initially going to show you how to do"},{"Start":"00:11.460 ","End":"00:14.625","Text":"the ledger accounts using the T-account format."},{"Start":"00:14.625 ","End":"00:17.850","Text":"Now, you may or may not enjoy the T-account format."},{"Start":"00:17.850 ","End":"00:20.280","Text":"If you enjoy the T-account format then watch on."},{"Start":"00:20.280 ","End":"00:24.855","Text":"If you don\u0027t like the T-account format and prefer the columnar format, in other words,"},{"Start":"00:24.855 ","End":"00:27.005","Text":"in a vertical layout,"},{"Start":"00:27.005 ","End":"00:33.030","Text":"then please just move on in the slides to where I discuss it in a tabular format."},{"Start":"00:33.030 ","End":"00:37.710","Text":"You\u0027ll see in a moment this typed up tables and you can watch from there instead."},{"Start":"00:37.710 ","End":"00:39.795","Text":"For those of you who enjoy the T-accounts,"},{"Start":"00:39.795 ","End":"00:41.588","Text":"let\u0027s have a look at this."},{"Start":"00:41.588 ","End":"00:42.890","Text":"What do we have?"},{"Start":"00:42.890 ","End":"00:47.945","Text":"We\u0027ve got a property plant and equipment cost account,"},{"Start":"00:47.945 ","End":"00:51.490","Text":"and we have a property plant,"},{"Start":"00:51.490 ","End":"00:55.235","Text":"and equipment accumulated depreciation account."},{"Start":"00:55.235 ","End":"00:57.325","Text":"Let\u0027s pause for the moment."},{"Start":"00:57.325 ","End":"01:00.725","Text":"We\u0027ve been given the opening balance of the cost account."},{"Start":"01:00.725 ","End":"01:02.795","Text":"That was 125."},{"Start":"01:02.795 ","End":"01:07.040","Text":"Now I\u0027m putting it on the debit side and the reason is this is an asset account"},{"Start":"01:07.040 ","End":"01:11.885","Text":"and we know that asset accounts get bigger on the debit side,"},{"Start":"01:11.885 ","End":"01:13.870","Text":"in other words, the left-hand side."},{"Start":"01:13.870 ","End":"01:19.505","Text":"Then we have a closing balance on our cost account so the end of 20X2,"},{"Start":"01:19.505 ","End":"01:22.580","Text":"the closing balance was 160."},{"Start":"01:22.580 ","End":"01:26.945","Text":"Then we have an opening balance for accumulated depreciation."},{"Start":"01:26.945 ","End":"01:32.240","Text":"Remember, your closing balance is at the end of the prior year."},{"Start":"01:32.240 ","End":"01:34.670","Text":"Our opening balance at the beginning of 20X2,"},{"Start":"01:34.670 ","End":"01:39.020","Text":"is 41 being the closing balance at the end of 20X1,"},{"Start":"01:39.020 ","End":"01:43.775","Text":"and our closing balance of accumulated depreciation is 66."},{"Start":"01:43.775 ","End":"01:49.190","Text":"Now, you\u0027ll see the balances are on the opposite side to the cost account and the reason"},{"Start":"01:49.190 ","End":"01:51.725","Text":"is your accumulated depreciation"},{"Start":"01:51.725 ","End":"01:55.895","Text":"the purpose of this account is to reduce your asset balance."},{"Start":"01:55.895 ","End":"01:59.710","Text":"This account gets bigger on the credit side"},{"Start":"01:59.710 ","End":"02:04.385","Text":"in order to reduce whatever balance is in the cost account."},{"Start":"02:04.385 ","End":"02:05.840","Text":"Now, don\u0027t get confused."},{"Start":"02:05.840 ","End":"02:08.960","Text":"I\u0027ve just told you that the balances of an asset,"},{"Start":"02:08.960 ","End":"02:10.730","Text":"you\u0027ll see on the debit side,"},{"Start":"02:10.730 ","End":"02:12.620","Text":"and the balances of"},{"Start":"02:12.620 ","End":"02:16.565","Text":"the accumulated depreciation relating to that asset will be on the credit side."},{"Start":"02:16.565 ","End":"02:19.885","Text":"However, you\u0027ll see the closing balances are doing the opposite."},{"Start":"02:19.885 ","End":"02:21.905","Text":"It looks like I\u0027ve made some mistake,"},{"Start":"02:21.905 ","End":"02:23.675","Text":"but don\u0027t be alarmed."},{"Start":"02:23.675 ","End":"02:26.480","Text":"These closing balances are simply temporary."},{"Start":"02:26.480 ","End":"02:28.400","Text":"They\u0027re temporary balances and it\u0027s"},{"Start":"02:28.400 ","End":"02:32.525","Text":"the mechanism by which we balance our T-account format."},{"Start":"02:32.525 ","End":"02:35.810","Text":"That closing balance simply gets brought down to"},{"Start":"02:35.810 ","End":"02:41.525","Text":"the debit side and this closing balance of 66 will get brought down to the credit side."},{"Start":"02:41.525 ","End":"02:45.865","Text":"It\u0027s just temporary for the purposes of balancing."},{"Start":"02:45.865 ","End":"02:49.020","Text":"We are told that one of our items or a few of our items"},{"Start":"02:49.020 ","End":"02:52.745","Text":"I\u0027m not quite sure of property plant and equipment were disposed of."},{"Start":"02:52.745 ","End":"02:55.610","Text":"We will have a disposal account."},{"Start":"02:55.610 ","End":"02:59.645","Text":"There are a number of ways of working out your profit or loss and disposal."},{"Start":"02:59.645 ","End":"03:01.700","Text":"I like to use a disposal account."},{"Start":"03:01.700 ","End":"03:03.665","Text":"You may have come across a different method."},{"Start":"03:03.665 ","End":"03:06.020","Text":"As long as you get to the final answer, it\u0027s fine."},{"Start":"03:06.020 ","End":"03:08.360","Text":"But my disposal account the one I use is"},{"Start":"03:08.360 ","End":"03:11.360","Text":"a temporary account and this disposal account is really just to"},{"Start":"03:11.360 ","End":"03:13.910","Text":"compare the carrying amount of the asset that\u0027s being"},{"Start":"03:13.910 ","End":"03:16.985","Text":"sold with the proceeds that we\u0027re selling it for."},{"Start":"03:16.985 ","End":"03:21.860","Text":"What does the selling price of the item and to work out whether we made a profit or loss."},{"Start":"03:21.860 ","End":"03:26.900","Text":"In this instance, we made a loss on disposal and I know that by"},{"Start":"03:26.900 ","End":"03:32.030","Text":"looking at our income statement where we\u0027re showing a loss on disposal of property,"},{"Start":"03:32.030 ","End":"03:33.590","Text":"plant, and equipment."},{"Start":"03:33.590 ","End":"03:37.190","Text":"Loss on disposal is an expense and expenses get bigger"},{"Start":"03:37.190 ","End":"03:40.895","Text":"on the debit side so we have a loss on disposal."},{"Start":"03:40.895 ","End":"03:43.355","Text":"It was given to us as 3."},{"Start":"03:43.355 ","End":"03:45.880","Text":"I\u0027m going to pop that in."},{"Start":"03:45.880 ","End":"03:48.470","Text":"This would\u0027ve been worked out as"},{"Start":"03:48.470 ","End":"03:53.390","Text":"a balancing item from the disposal account and in the disposal account,"},{"Start":"03:53.390 ","End":"04:00.300","Text":"then I would\u0027ve had to create at this loss on disposal 3,"},{"Start":"04:00.300 ","End":"04:02.510","Text":"and I\u0027m going to call this journal number 1."},{"Start":"04:02.510 ","End":"04:05.690","Text":"You don\u0027t have to do your journals in the same order that I\u0027m doing it."},{"Start":"04:05.690 ","End":"04:09.410","Text":"I\u0027m just numbering them as I think of them."},{"Start":"04:09.410 ","End":"04:12.405","Text":"Now, you could do it in a different order entirely."},{"Start":"04:12.405 ","End":"04:17.300","Text":"Just to recap that that loss of 3 is normally a balancing item,"},{"Start":"04:17.300 ","End":"04:20.899","Text":"and I\u0027ve put it in first without all of the other information."},{"Start":"04:20.899 ","End":"04:22.430","Text":"Right, now our property,"},{"Start":"04:22.430 ","End":"04:24.005","Text":"plant, and equipment cost,"},{"Start":"04:24.005 ","End":"04:33.035","Text":"we were told an item was sold and the item that was sold had an original cost of 18."},{"Start":"04:33.035 ","End":"04:35.300","Text":"We have to take the cost of"},{"Start":"04:35.300 ","End":"04:38.720","Text":"any item that we sell out of the cost account and we\u0027d have to take"},{"Start":"04:38.720 ","End":"04:40.820","Text":"the accumulated depreciation relating to"},{"Start":"04:40.820 ","End":"04:44.990","Text":"that item also out of the accumulated depreciation account."},{"Start":"04:44.990 ","End":"04:48.160","Text":"What we do is we put them into our disposal account so"},{"Start":"04:48.160 ","End":"04:51.565","Text":"we\u0027d have the cost on the left-hand side because we\u0027re going to take it out of the cost."},{"Start":"04:51.565 ","End":"04:54.919","Text":"We\u0027re going to create at the cost and put it on the debit side of the disposal"},{"Start":"04:54.919 ","End":"04:58.880","Text":"and then we going to take the accumulated depreciation on that item that we sold."},{"Start":"04:58.880 ","End":"05:02.090","Text":"We\u0027re going to debit this account and we\u0027re going to credit"},{"Start":"05:02.090 ","End":"05:06.110","Text":"the disposal account with the accumulated depreciation."},{"Start":"05:06.110 ","End":"05:09.509","Text":"In so doing, we will have debited"},{"Start":"05:09.509 ","End":"05:13.565","Text":"the disposal account with the carrying amount effectively,"},{"Start":"05:13.565 ","End":"05:16.790","Text":"and then we would compare that with"},{"Start":"05:16.790 ","End":"05:19.910","Text":"how much we sold the item for an then balance whether we"},{"Start":"05:19.910 ","End":"05:26.438","Text":"made a profit or loss and then adjust it to the loss or profit account."},{"Start":"05:26.438 ","End":"05:29.990","Text":"We were told that the cost of the item that was disposed off,"},{"Start":"05:29.990 ","End":"05:33.035","Text":"so it goes to the disposal account was 18."},{"Start":"05:33.035 ","End":"05:35.365","Text":"I\u0027m going to call this journal number 2."},{"Start":"05:35.365 ","End":"05:39.080","Text":"We take the 18 out of the cost and put it into the disposal account."},{"Start":"05:39.080 ","End":"05:43.250","Text":"They didn\u0027t tell us what the accumulated depreciation was of this item that was sold,"},{"Start":"05:43.250 ","End":"05:48.454","Text":"but we can work it out because they tell us that the cost of the item was 18."},{"Start":"05:48.454 ","End":"05:50.915","Text":"They don\u0027t tell us the accumulated depreciation,"},{"Start":"05:50.915 ","End":"05:54.600","Text":"but they tell us that the carrying amount was 12."},{"Start":"05:54.600 ","End":"05:59.930","Text":"We know that the accumulated depreciation on the item or items that were sold was 6."},{"Start":"05:59.930 ","End":"06:03.050","Text":"We take the 6 out of the accumulated depreciation and"},{"Start":"06:03.050 ","End":"06:06.455","Text":"put that also into the disposal account."},{"Start":"06:06.455 ","End":"06:08.880","Text":"I\u0027m going to call this journal number 3."},{"Start":"06:08.880 ","End":"06:13.305","Text":"Here\u0027s the accumulated depreciation on the item of 6."},{"Start":"06:13.305 ","End":"06:15.215","Text":"If you look at the disposal account,"},{"Start":"06:15.215 ","End":"06:20.585","Text":"we have effectively debited it with a carrying amount of 12."},{"Start":"06:20.585 ","End":"06:23.495","Text":"The cost account of 18 was bigger than"},{"Start":"06:23.495 ","End":"06:29.120","Text":"the accumulated depreciation so we have a net debit of 12 being the carrying amount."},{"Start":"06:29.120 ","End":"06:31.075","Text":"To work out how much we sold it for,"},{"Start":"06:31.075 ","End":"06:33.620","Text":"we simply need to understand that what we set it for,"},{"Start":"06:33.620 ","End":"06:36.200","Text":"in other words, the proceeds, the selling price,"},{"Start":"06:36.200 ","End":"06:38.660","Text":"less the carrying amount,"},{"Start":"06:38.660 ","End":"06:44.765","Text":"will give us whether we\u0027ve made a profit or a loss."},{"Start":"06:44.765 ","End":"06:48.185","Text":"The proceeds were not told."},{"Start":"06:48.185 ","End":"06:51.815","Text":"But the carrying amount, we know is 12."},{"Start":"06:51.815 ","End":"06:55.490","Text":"We know we made a loss of 3,"},{"Start":"06:55.490 ","End":"06:59.150","Text":"so we sold it for less than it was worth to us."},{"Start":"06:59.150 ","End":"07:03.176","Text":"To us, it was worth 12 according to our book value."},{"Start":"07:03.176 ","End":"07:05.557","Text":"That must mean we must have sold it for."},{"Start":"07:05.557 ","End":"07:09.110","Text":"Now, we aren\u0027t told if we were sold for cash or credit,"},{"Start":"07:09.110 ","End":"07:11.855","Text":"so we\u0027re going to assume it was sold for cash."},{"Start":"07:11.855 ","End":"07:14.390","Text":"That\u0027s going to be journal number 4,"},{"Start":"07:14.390 ","End":"07:18.274","Text":"so that the contra account would have gone to the disposal account,"},{"Start":"07:18.274 ","End":"07:20.825","Text":"and it\u0027s an amount of 9."},{"Start":"07:20.825 ","End":"07:24.245","Text":"I would have put that on the credit side of my disposal account,"},{"Start":"07:24.245 ","End":"07:26.720","Text":"9 journal number 4."},{"Start":"07:26.720 ","End":"07:31.595","Text":"Alright, so can you see how we balanced to the bank amount of 9,"},{"Start":"07:31.595 ","End":"07:34.175","Text":"debited the account with cost of 18,"},{"Start":"07:34.175 ","End":"07:35.975","Text":"credited it with 6,"},{"Start":"07:35.975 ","End":"07:38.900","Text":"credited it with the loss of 3,"},{"Start":"07:38.900 ","End":"07:41.959","Text":"which we were told in the income statement,"},{"Start":"07:41.959 ","End":"07:44.690","Text":"and in order to make it balance,"},{"Start":"07:44.690 ","End":"07:49.085","Text":"it meant there must have been a credit of 9, which we know,"},{"Start":"07:49.085 ","End":"07:54.125","Text":"or assuming was a cash receipt of 9 into the bank."},{"Start":"07:54.125 ","End":"07:56.390","Text":"We\u0027ve balanced to the bank amount."},{"Start":"07:56.390 ","End":"07:58.910","Text":"Normally, obviously in real life,"},{"Start":"07:58.910 ","End":"08:02.630","Text":"you put the carrying amount in cost accumulated depreciation,"},{"Start":"08:02.630 ","End":"08:06.238","Text":"you recognize the receipt of 9,"},{"Start":"08:06.238 ","End":"08:07.813","Text":"and you balance to the loss,"},{"Start":"08:07.813 ","End":"08:09.350","Text":"and the loss thing goes down here."},{"Start":"08:09.350 ","End":"08:11.240","Text":"But when you\u0027re doing a cash flow statement,"},{"Start":"08:11.240 ","End":"08:13.820","Text":"you\u0027re working with what you can see in the financial statements"},{"Start":"08:13.820 ","End":"08:16.415","Text":"and trying to work backwards to that bank figure,"},{"Start":"08:16.415 ","End":"08:21.770","Text":"because the bank figure isn\u0027t shown in your income statement and balance sheet."},{"Start":"08:21.770 ","End":"08:23.360","Text":"That\u0027s what we\u0027re trying to achieve,"},{"Start":"08:23.360 ","End":"08:25.520","Text":"we\u0027re trying to show all the transactions using"},{"Start":"08:25.520 ","End":"08:29.060","Text":"this cash basis by preparing our cash flow statement,"},{"Start":"08:29.060 ","End":"08:31.355","Text":"so we\u0027ve worked backwards to the cash figure."},{"Start":"08:31.355 ","End":"08:33.410","Text":"Alright, so what else can we get from this?"},{"Start":"08:33.410 ","End":"08:39.140","Text":"We can also deduce what our depreciation is,"},{"Start":"08:39.140 ","End":"08:42.290","Text":"and we\u0027re going to need to know our depreciation expense because we"},{"Start":"08:42.290 ","End":"08:45.500","Text":"are using the indirect method in part 2 of this question."},{"Start":"08:45.500 ","End":"08:48.500","Text":"We\u0027re going to use the indirect method to prepare our cash"},{"Start":"08:48.500 ","End":"08:52.310","Text":"generated from operating activities,"},{"Start":"08:52.310 ","End":"08:55.355","Text":"and that means we have to start with the profit figure"},{"Start":"08:55.355 ","End":"08:59.240","Text":"and adjust for non-cash items, etc."},{"Start":"08:59.240 ","End":"09:02.165","Text":"One of the non-cash items is obviously depreciation,"},{"Start":"09:02.165 ","End":"09:06.095","Text":"so because of that, we need to know that depreciation figure and we were not given it."},{"Start":"09:06.095 ","End":"09:08.495","Text":"Right, what were we given?"},{"Start":"09:08.495 ","End":"09:10.625","Text":"We were given the impairment loss."},{"Start":"09:10.625 ","End":"09:12.845","Text":"I think we\u0027re on to journal number 5."},{"Start":"09:12.845 ","End":"09:16.265","Text":"We were told that we had an impairment loss of 7,"},{"Start":"09:16.265 ","End":"09:21.700","Text":"now impairment losses can be accumulated in an account called accumulated depreciation"},{"Start":"09:21.700 ","End":"09:27.250","Text":"or accumulated depreciation and impairment losses or accumulated impairment losses."},{"Start":"09:27.250 ","End":"09:32.410","Text":"We\u0027re going to assume that the accumulated impairment losses were added to"},{"Start":"09:32.410 ","End":"09:34.810","Text":"the accumulated depreciation account"},{"Start":"09:34.810 ","End":"09:38.200","Text":"because we\u0027re not given a separate accumulated impairment loss account,"},{"Start":"09:38.200 ","End":"09:41.500","Text":"so it must have gone into accumulated depreciation account."},{"Start":"09:41.500 ","End":"09:43.500","Text":"This is journal number 5,"},{"Start":"09:43.500 ","End":"09:46.940","Text":"and we say the impairment loss 7,"},{"Start":"09:46.940 ","End":"09:50.735","Text":"so contra entry goes to the accumulated depreciation account."},{"Start":"09:50.735 ","End":"09:52.910","Text":"Alright, so the only missing item in"},{"Start":"09:52.910 ","End":"09:57.395","Text":"the accumulated depreciation would have then been the depreciation expense,"},{"Start":"09:57.395 ","End":"09:59.480","Text":"and you can see there\u0027s something missing because if you add"},{"Start":"09:59.480 ","End":"10:01.910","Text":"up the debits and you add up the credits,"},{"Start":"10:01.910 ","End":"10:04.055","Text":"they don\u0027t yet total."},{"Start":"10:04.055 ","End":"10:08.990","Text":"This is 72 on this side and this side here is 48,"},{"Start":"10:08.990 ","End":"10:12.140","Text":"so we know there\u0027s something missing because both sides must add up to"},{"Start":"10:12.140 ","End":"10:16.670","Text":"72 being the higher of the two."},{"Start":"10:16.670 ","End":"10:20.855","Text":"Alright, so we\u0027ve balanced to our depreciation figure 24,"},{"Start":"10:20.855 ","End":"10:22.505","Text":"this is journal number 6,"},{"Start":"10:22.505 ","End":"10:28.400","Text":"credited accumulated depreciation and debited our depreciation expense."},{"Start":"10:28.400 ","End":"10:30.245","Text":"Impairment loss is an expense,"},{"Start":"10:30.245 ","End":"10:35.915","Text":"depreciation is an expense and that\u0027s why we\u0027re putting the entries on the debit side,"},{"Start":"10:35.915 ","End":"10:39.515","Text":"because expenses get bigger on the debit side."},{"Start":"10:39.515 ","End":"10:46.505","Text":"All right, this accumulated depreciation journal number 6 is 24,"},{"Start":"10:46.505 ","End":"10:48.451","Text":"so we\u0027ve got the depreciation."},{"Start":"10:48.451 ","End":"10:50.330","Text":"Now let\u0027s look at the PPE cost account,"},{"Start":"10:50.330 ","End":"10:52.175","Text":"does this balance? Are we finished yet?"},{"Start":"10:52.175 ","End":"10:55.805","Text":"No we\u0027re not, because if we add up on the credit side,"},{"Start":"10:55.805 ","End":"11:01.895","Text":"our credits add up to 178 and our debits add up to 125."},{"Start":"11:01.895 ","End":"11:03.590","Text":"Take the larger of the two,"},{"Start":"11:03.590 ","End":"11:06.071","Text":"178, take that across,"},{"Start":"11:06.071 ","End":"11:11.510","Text":"178 less 125 means we\u0027re missing an amount of 53."},{"Start":"11:11.510 ","End":"11:12.710","Text":"What could that be?"},{"Start":"11:12.710 ","End":"11:15.110","Text":"Well, that must be our purchases,"},{"Start":"11:15.110 ","End":"11:16.790","Text":"the cost of property,"},{"Start":"11:16.790 ","End":"11:18.665","Text":"plant and equipment that we\u0027ve purchased."},{"Start":"11:18.665 ","End":"11:20.180","Text":"This is the cost of the property,"},{"Start":"11:20.180 ","End":"11:21.830","Text":"plant and equipment that we sold,"},{"Start":"11:21.830 ","End":"11:24.515","Text":"that\u0027s the cost of the purchases."},{"Start":"11:24.515 ","End":"11:27.635","Text":"All right, where\u0027s the contra entry?"},{"Start":"11:27.635 ","End":"11:31.175","Text":"We\u0027re onto journal number 7."},{"Start":"11:31.175 ","End":"11:33.725","Text":"Where is the contra entry going to go?"},{"Start":"11:33.725 ","End":"11:38.920","Text":"Well, I would ordinarily have simply say it is going to bank,"},{"Start":"11:38.920 ","End":"11:47.125","Text":"except that we were also given the T-account for payables, suppliers of PPE."},{"Start":"11:47.125 ","End":"11:49.765","Text":"All right, so payables is a liability,"},{"Start":"11:49.765 ","End":"11:55.435","Text":"so that must mean that gets bigger on the credit side, on the right-hand side."},{"Start":"11:55.435 ","End":"12:00.620","Text":"The payable balance we were given was 10 at the end of 20X1,"},{"Start":"12:00.620 ","End":"12:03.665","Text":"which means that\u0027s the opening balance in 20X2,"},{"Start":"12:03.665 ","End":"12:06.425","Text":"and our closing balance had dropped to 3."},{"Start":"12:06.425 ","End":"12:10.760","Text":"Let\u0027s assume the purchases were initially all full credit."},{"Start":"12:10.760 ","End":"12:13.730","Text":"Let\u0027s say journal number 7,"},{"Start":"12:13.730 ","End":"12:16.130","Text":"contra entry was PPE,"},{"Start":"12:16.130 ","End":"12:17.465","Text":"journal number 7,"},{"Start":"12:17.465 ","End":"12:20.000","Text":"we put the 53 in here."},{"Start":"12:20.000 ","End":"12:23.480","Text":"You can see here the credits are bigger than the debits,"},{"Start":"12:23.480 ","End":"12:25.970","Text":"so 63, take it across,"},{"Start":"12:25.970 ","End":"12:31.145","Text":"63 less the 3 means we\u0027re missing an amount of 60,"},{"Start":"12:31.145 ","End":"12:36.800","Text":"and that must have been the amount we paid our payables, our suppliers."},{"Start":"12:36.800 ","End":"12:38.675","Text":"This is journal number 8,"},{"Start":"12:38.675 ","End":"12:42.020","Text":"this is the payments to our payables,"},{"Start":"12:42.020 ","End":"12:43.520","Text":"in other words, our creditors."},{"Start":"12:43.520 ","End":"12:47.015","Text":"I hope that has helped make some kind of sense."},{"Start":"12:47.015 ","End":"12:49.850","Text":"Just one thing I\u0027d like to point out,"},{"Start":"12:49.850 ","End":"12:56.270","Text":"is that 53, you could have assumed we paid all of that initially for cash, 53."},{"Start":"12:56.270 ","End":"13:02.435","Text":"We would have debited the PPE cost with 53 and credited bank with 53,"},{"Start":"13:02.435 ","End":"13:05.960","Text":"but then you would have still had to deal with the payables account,"},{"Start":"13:05.960 ","End":"13:08.675","Text":"which would then have looked like this."},{"Start":"13:08.675 ","End":"13:12.800","Text":"Payables, opening balance of 10,"},{"Start":"13:12.800 ","End":"13:14.480","Text":"closing balance of 3."},{"Start":"13:14.480 ","End":"13:18.095","Text":"You would have seen that the credits are bigger than the debit, so therefore,"},{"Start":"13:18.095 ","End":"13:23.795","Text":"an amount of 7 must have been paid to creditors, the payables."},{"Start":"13:23.795 ","End":"13:29.675","Text":"Then we would have had an amount of 53 being this entry here, that 53."},{"Start":"13:29.675 ","End":"13:31.400","Text":"If you\u0027d assumed it was all for cash,"},{"Start":"13:31.400 ","End":"13:34.280","Text":"you would have credited the bank account with 53,"},{"Start":"13:34.280 ","End":"13:38.225","Text":"but you would still have had to add the 7 at that point."},{"Start":"13:38.225 ","End":"13:42.755","Text":"You would still be crediting the bank account with a total of 60."},{"Start":"13:42.755 ","End":"13:44.246","Text":"It doesn\u0027t really matter,"},{"Start":"13:44.246 ","End":"13:45.875","Text":"your answer is still going to be the same."},{"Start":"13:45.875 ","End":"13:48.740","Text":"There was an amount of 60 being paid in"},{"Start":"13:48.740 ","End":"13:52.055","Text":"respect of purchases of property, plant and equipment."},{"Start":"13:52.055 ","End":"13:53.360","Text":"There\u0027s purchases of property,"},{"Start":"13:53.360 ","End":"13:56.225","Text":"plant and equipment during the current year, 53."},{"Start":"13:56.225 ","End":"14:01.145","Text":"In prior years we\u0027d purchase something and we still owe 10 for it,"},{"Start":"14:01.145 ","End":"14:03.935","Text":"but by the end of the year we only owed 3 for it,"},{"Start":"14:03.935 ","End":"14:09.050","Text":"and therefore, we had repaid 7 of an old debt,"},{"Start":"14:09.050 ","End":"14:12.710","Text":"but it\u0027s still relates to the purchase of property, plant and equipment."},{"Start":"14:12.710 ","End":"14:15.544","Text":"It\u0027s still going to form part of the 60,"},{"Start":"14:15.544 ","End":"14:17.300","Text":"which is going to be shown in"},{"Start":"14:17.300 ","End":"14:21.245","Text":"our investing activities section of our cash flow statement."},{"Start":"14:21.245 ","End":"14:26.525","Text":"Alright, so this is the end of the explanation of how we get to all the figures we need"},{"Start":"14:26.525 ","End":"14:30.050","Text":"to draft the investing activities section"},{"Start":"14:30.050 ","End":"14:33.650","Text":"of the cash flow statement using the T-account format."},{"Start":"14:33.650 ","End":"14:38.045","Text":"I\u0027m now going to show you the entire process,"},{"Start":"14:38.045 ","End":"14:41.225","Text":"but using the tabular approach."},{"Start":"14:41.225 ","End":"14:43.438","Text":"If you understood the T-account format,"},{"Start":"14:43.438 ","End":"14:46.070","Text":"then you can skip straight over to the section in"},{"Start":"14:46.070 ","End":"14:51.299","Text":"which I explain how to prepare your cash flow statement."}],"ID":29706},{"Watched":false,"Name":"Exercise 9 - JKL - B - solution","Duration":"5m 16s","ChapterTopicVideoID":26880,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.770 ","End":"00:05.260","Text":"Now we\u0027re going to do the exercise JKL,"},{"Start":"00:05.260 ","End":"00:07.405","Text":"and I\u0027m going to show you the calculations."},{"Start":"00:07.405 ","End":"00:09.175","Text":"I\u0027m doing it all over again now."},{"Start":"00:09.175 ","End":"00:13.735","Text":"I\u0027ve just shown you the calculations for the solution using the T-account format."},{"Start":"00:13.735 ","End":"00:16.600","Text":"I\u0027m now going to show you the calculations again,"},{"Start":"00:16.600 ","End":"00:20.210","Text":"using a tabular or columnar format."},{"Start":"00:20.210 ","End":"00:23.155","Text":"Let\u0027s start with the cost account first."},{"Start":"00:23.155 ","End":"00:27.400","Text":"We\u0027re given the opening balance of 125 debit balance."},{"Start":"00:27.400 ","End":"00:30.610","Text":"We\u0027re then given an ending or closing balance of a 160."},{"Start":"00:30.610 ","End":"00:34.240","Text":"Then the movement in your cost account would be"},{"Start":"00:34.240 ","End":"00:38.050","Text":"purchases of the cost of items that you bought and"},{"Start":"00:38.050 ","End":"00:41.500","Text":"then disposals being the cost of"},{"Start":"00:41.500 ","End":"00:45.680","Text":"any items that you have disposed off coming out of that account."},{"Start":"00:45.680 ","End":"00:47.330","Text":"What are we given?"},{"Start":"00:47.330 ","End":"00:50.600","Text":"We are told that the cost of the property, plant,"},{"Start":"00:50.600 ","End":"00:54.130","Text":"and equipment that was disposed off is 18,"},{"Start":"00:54.130 ","End":"01:00.020","Text":"we can balance to the cost of the items that we\u0027ve purchased being 53."},{"Start":"01:00.020 ","End":"01:03.470","Text":"That\u0027s all that appears in the cost account,"},{"Start":"01:03.470 ","End":"01:06.200","Text":"it\u0027s opening balance add whatever you\u0027ve"},{"Start":"01:06.200 ","End":"01:09.560","Text":"bought less whatever you sold gives you closing balance."},{"Start":"01:09.560 ","End":"01:13.235","Text":"Let\u0027s have a look at the accumulated depreciation account."},{"Start":"01:13.235 ","End":"01:15.950","Text":"Starting with we\u0027ve got an opening balance or being"},{"Start":"01:15.950 ","End":"01:18.470","Text":"the closing balance at the end of 20X1 or"},{"Start":"01:18.470 ","End":"01:24.905","Text":"41 and we\u0027ve got our closing balance or ending balance of 66 then the movement."},{"Start":"01:24.905 ","End":"01:28.149","Text":"Normally our accumulated depreciation,"},{"Start":"01:28.149 ","End":"01:31.730","Text":"it will be increased by the depreciation expense for the year,"},{"Start":"01:31.730 ","End":"01:33.230","Text":"but we don\u0027t know what it is."},{"Start":"01:33.230 ","End":"01:37.820","Text":"Now you\u0027ll notice that I\u0027ve got N/A or not applicable under the cost account"},{"Start":"01:37.820 ","End":"01:42.245","Text":"because the depreciation expense only affects the accumulated depreciation account,"},{"Start":"01:42.245 ","End":"01:44.270","Text":"not the cost account."},{"Start":"01:44.270 ","End":"01:47.250","Text":"I\u0027ve put in N/A in the cost column."},{"Start":"01:48.590 ","End":"01:54.170","Text":"We are assuming that our impairment loss is also accumulated"},{"Start":"01:54.170 ","End":"01:59.135","Text":"in the same accumulated depreciation account so if you want it to be technically correct,"},{"Start":"01:59.135 ","End":"02:00.350","Text":"you would now call this"},{"Start":"02:00.350 ","End":"02:04.595","Text":"the accumulated depreciation and accumulated impairment loss account."},{"Start":"02:04.595 ","End":"02:07.580","Text":"Accumulated loss is 7."},{"Start":"02:07.580 ","End":"02:10.865","Text":"Notice I\u0027ve got an N/A or not applicable in the cost account because impairment loss"},{"Start":"02:10.865 ","End":"02:14.450","Text":"only gets credited to this accumulated account."},{"Start":"02:14.450 ","End":"02:15.905","Text":"It does not affect cost."},{"Start":"02:15.905 ","End":"02:19.310","Text":"Then we have to take out of the accumulated depreciation account,"},{"Start":"02:19.310 ","End":"02:23.330","Text":"the accumulated depreciation on any item of property,"},{"Start":"02:23.330 ","End":"02:27.140","Text":"plant, and equipment that was disposed off but we don\u0027t know what that is."},{"Start":"02:27.140 ","End":"02:28.940","Text":"How we could work it out."},{"Start":"02:28.940 ","End":"02:30.380","Text":"We\u0027ll work it out in a moment,"},{"Start":"02:30.380 ","End":"02:34.430","Text":"but I\u0027ll balance back to it using this columnar format."},{"Start":"02:34.430 ","End":"02:38.570","Text":"The purchases obviously has got an N/A under"},{"Start":"02:38.570 ","End":"02:41.240","Text":"the accumulated depreciation column because the cost of"},{"Start":"02:41.240 ","End":"02:44.270","Text":"purchases only affects the cost account."},{"Start":"02:44.270 ","End":"02:47.485","Text":"It does not go into the accumulated depreciation account."},{"Start":"02:47.485 ","End":"02:51.530","Text":"We\u0027ve got 2 unknowns currently in accumulated depreciation column"},{"Start":"02:51.530 ","End":"02:55.700","Text":"so we\u0027re going to have to work out one before we can work out the other."},{"Start":"02:55.700 ","End":"02:57.800","Text":"Now let\u0027s look at the carrying amount."},{"Start":"02:57.800 ","End":"02:59.450","Text":"This is not a separate account."},{"Start":"02:59.450 ","End":"03:02.960","Text":"As you know, we\u0027ve got the cost account and accumulated depreciation account"},{"Start":"03:02.960 ","End":"03:06.650","Text":"but I\u0027ve drafted the carrying amount column because we are given"},{"Start":"03:06.650 ","End":"03:09.980","Text":"this information is going to help us with backwards to work out"},{"Start":"03:09.980 ","End":"03:13.880","Text":"the accumulated depreciation on the item that was disposed of."},{"Start":"03:13.880 ","End":"03:17.749","Text":"We\u0027re given the opening balance of 84 and the closing balance of 94."},{"Start":"03:17.749 ","End":"03:20.690","Text":"We\u0027re also told that the carrying amount of"},{"Start":"03:20.690 ","End":"03:25.015","Text":"the item or items that were disposed of was 12."},{"Start":"03:25.015 ","End":"03:27.995","Text":"Now we can work out because we know cost"},{"Start":"03:27.995 ","End":"03:30.755","Text":"less accumulated depreciation gives us carrying amount."},{"Start":"03:30.755 ","End":"03:35.960","Text":"We can now balance to the accumulated depreciation which must therefore for be 6."},{"Start":"03:35.960 ","End":"03:38.570","Text":"Let\u0027s move along. Then the purchases,"},{"Start":"03:38.570 ","End":"03:39.650","Text":"remember as I say to you,"},{"Start":"03:39.650 ","End":"03:41.945","Text":"the purchases being the cost of purchases,"},{"Start":"03:41.945 ","End":"03:44.660","Text":"obviously only goes into the cost account."},{"Start":"03:44.660 ","End":"03:49.910","Text":"It does not go into the accumulated depreciation account thus we have an N/A here."},{"Start":"03:49.910 ","End":"03:52.970","Text":"Therefore the carrying amount is 53."},{"Start":"03:52.970 ","End":"03:56.090","Text":"What goes into the carrying amount column is the net effect of what"},{"Start":"03:56.090 ","End":"03:59.060","Text":"goes into the cost and accumulated depreciation account,"},{"Start":"03:59.060 ","End":"04:01.640","Text":"so 125 minus 41 is 84,"},{"Start":"04:01.640 ","End":"04:05.255","Text":"18 minus 6 gives you 12,"},{"Start":"04:05.255 ","End":"04:08.090","Text":"53 plus nothing gives you 53, and so on."},{"Start":"04:08.090 ","End":"04:10.380","Text":"Impairment loss of 7,"},{"Start":"04:10.380 ","End":"04:12.645","Text":"the depreciation expense,"},{"Start":"04:12.645 ","End":"04:16.325","Text":"we didn\u0027t know this, but you can now balance back to it."},{"Start":"04:16.325 ","End":"04:19.160","Text":"You can either use your accumulated depreciation account,"},{"Start":"04:19.160 ","End":"04:21.025","Text":"there is only one item that\u0027s missing,"},{"Start":"04:21.025 ","End":"04:23.900","Text":"or we could use the carrying amount which is not a separate account,"},{"Start":"04:23.900 ","End":"04:26.510","Text":"but this column here you could balance back to"},{"Start":"04:26.510 ","End":"04:30.110","Text":"the depreciation this way because at the moment,"},{"Start":"04:30.110 ","End":"04:31.640","Text":"we are not sure what it is,"},{"Start":"04:31.640 ","End":"04:35.675","Text":"but to make this balance to 66 or to make this balance to 94,"},{"Start":"04:35.675 ","End":"04:40.459","Text":"we\u0027d have to subtract 24 or in the case of accumulated depreciation,"},{"Start":"04:40.459 ","End":"04:42.805","Text":"you\u0027re adding a negative 24."},{"Start":"04:42.805 ","End":"04:47.435","Text":"Those are the calculations using the columnar format,"},{"Start":"04:47.435 ","End":"04:51.320","Text":"although it doesn\u0027t yet deal with the fact that part of"},{"Start":"04:51.320 ","End":"04:55.150","Text":"our purchases must have been for credit,"},{"Start":"04:55.150 ","End":"04:59.030","Text":"or perhaps they were not partly for credit,"},{"Start":"04:59.030 ","End":"05:01.130","Text":"perhaps we paid for it entirely and cash,"},{"Start":"05:01.130 ","End":"05:07.100","Text":"but this columnar format here has not yet taken to account the cash implications of"},{"Start":"05:07.100 ","End":"05:10.590","Text":"the movement in the payable balance with"},{"Start":"05:10.590 ","End":"05:15.680","Text":"that payable balance related to suppliers of property, plant, and equipment."}],"ID":29707},{"Watched":false,"Name":"Exercise 9 - JKL - C - solution - Part 1 - cash generated from investing activities","Duration":"9m 2s","ChapterTopicVideoID":26881,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.170 ","End":"00:07.620","Text":"Now we\u0027re getting to the drafting of the cash flow statement and part 1 of this question,"},{"Start":"00:07.620 ","End":"00:10.935","Text":"Exercise JKL, asked us to prepare"},{"Start":"00:10.935 ","End":"00:14.910","Text":"the section dealing with the cash generated from investing activities."},{"Start":"00:14.910 ","End":"00:16.110","Text":"That\u0027s what we\u0027re dealing with here,"},{"Start":"00:16.110 ","End":"00:18.884","Text":"cash from investing activities."},{"Start":"00:18.884 ","End":"00:24.645","Text":"I\u0027m first going to show you how easy this is if you\u0027d used your T-account format,"},{"Start":"00:24.645 ","End":"00:26.925","Text":"it\u0027s just as easy if you hadn\u0027t,"},{"Start":"00:26.925 ","End":"00:29.955","Text":"but I\u0027m first going to deal with the T-account format"},{"Start":"00:29.955 ","End":"00:34.440","Text":"before I go and have a look at the figures in the T-account calculations."},{"Start":"00:34.440 ","End":"00:38.245","Text":"Just 1 thing about the cash from investing activities, what is it?"},{"Start":"00:38.245 ","End":"00:41.600","Text":"It\u0027s just the cash inflows and cash outflows"},{"Start":"00:41.600 ","End":"00:45.875","Text":"relating to transactions involving your long-term assets."},{"Start":"00:45.875 ","End":"00:47.810","Text":"Now, in this question,"},{"Start":"00:47.810 ","End":"00:50.210","Text":"we only had 1 long-term asset,"},{"Start":"00:50.210 ","End":"00:51.830","Text":"property, plant, and equipment."},{"Start":"00:51.830 ","End":"00:54.440","Text":"But we could\u0027ve had a question that dealt with"},{"Start":"00:54.440 ","End":"00:57.740","Text":"intangible assets or investment properties."},{"Start":"00:57.740 ","End":"01:00.500","Text":"It doesn\u0027t matter what asset it is,"},{"Start":"01:00.500 ","End":"01:02.135","Text":"the principles are the same."},{"Start":"01:02.135 ","End":"01:03.583","Text":"In this case, we\u0027ve got property, plant,"},{"Start":"01:03.583 ","End":"01:05.945","Text":"and equipment, and that\u0027s all we had."},{"Start":"01:05.945 ","End":"01:09.095","Text":"Let\u0027s get to it. Cash from investing activities,"},{"Start":"01:09.095 ","End":"01:10.460","Text":"dealing with property, plant and equipment,"},{"Start":"01:10.460 ","End":"01:11.630","Text":"that can be only 2 things."},{"Start":"01:11.630 ","End":"01:16.063","Text":"You\u0027ve got either both cash paid when purchasing property, plant,"},{"Start":"01:16.063 ","End":"01:18.440","Text":"and equipment and how much cash you received"},{"Start":"01:18.440 ","End":"01:22.345","Text":"when getting rid of your property, plant, and equipment."},{"Start":"01:22.345 ","End":"01:26.135","Text":"To get these 2 figures, you needed to have drafted your bank account."},{"Start":"01:26.135 ","End":"01:28.490","Text":"Let\u0027s have a look at the T-accounts."},{"Start":"01:28.490 ","End":"01:32.480","Text":"Your T-account, the only 1 we\u0027re looking for now, is the bank."},{"Start":"01:32.480 ","End":"01:34.730","Text":"On the left-hand side of the bank account,"},{"Start":"01:34.730 ","End":"01:36.810","Text":"remember we\u0027ve got receipts."},{"Start":"01:36.810 ","End":"01:39.470","Text":"This happens on the left-hand side."},{"Start":"01:39.470 ","End":"01:44.240","Text":"Then you have your payments on the right-hand side or the credit side."},{"Start":"01:44.240 ","End":"01:46.490","Text":"We have disposals of property,"},{"Start":"01:46.490 ","End":"01:49.490","Text":"plant, and equipment on the left-hand side,"},{"Start":"01:49.490 ","End":"01:54.200","Text":"and we\u0027ve got payables relating to the purchase of property,"},{"Start":"01:54.200 ","End":"01:57.365","Text":"plant and equipment on the right-hand side."},{"Start":"01:57.365 ","End":"02:01.850","Text":"This is the receipt relating to property, plant, and equipment."},{"Start":"02:01.850 ","End":"02:03.290","Text":"We must have sold property,"},{"Start":"02:03.290 ","End":"02:05.525","Text":"plant and equipment, and we received 9."},{"Start":"02:05.525 ","End":"02:07.790","Text":"Let\u0027s put that into our cash flow statement."},{"Start":"02:07.790 ","End":"02:10.890","Text":"Here\u0027s our cash from investing activities,"},{"Start":"02:10.890 ","End":"02:13.520","Text":"it\u0027s the cash received from disposals."},{"Start":"02:13.520 ","End":"02:15.575","Text":"We put in 9,"},{"Start":"02:15.575 ","End":"02:18.880","Text":"then we go back to the bank account to pick up the cash payment."},{"Start":"02:18.880 ","End":"02:23.375","Text":"Here\u0027s the bank account and here is the cash payment of 60."},{"Start":"02:23.375 ","End":"02:27.960","Text":"Here\u0027s the cash paid on the purchase of PP\u0026E, 60."},{"Start":"02:27.960 ","End":"02:32.345","Text":"We have a net cash outflow of 51."},{"Start":"02:32.345 ","End":"02:37.135","Text":"This is cash used in investing activities."},{"Start":"02:37.135 ","End":"02:40.340","Text":"If our receipts were bigger than our payments,"},{"Start":"02:40.340 ","End":"02:45.010","Text":"we would\u0027ve had a cash generated from investing activities instead,"},{"Start":"02:45.010 ","End":"02:48.140","Text":"but here our cash decreased by 51,"},{"Start":"02:48.140 ","End":"02:52.110","Text":"so we\u0027ve used up cash of 51."},{"Start":"02:52.450 ","End":"02:55.760","Text":"I\u0027m just going to go back to that T-account for a moment just"},{"Start":"02:55.760 ","End":"02:59.510","Text":"to clear up any potential confusion."},{"Start":"02:59.510 ","End":"03:01.970","Text":"The potential confusion you might have,"},{"Start":"03:01.970 ","End":"03:06.275","Text":"I know it might have been in my mind at this point if I was you,"},{"Start":"03:06.275 ","End":"03:09.595","Text":"this purchase figure of 53,"},{"Start":"03:09.595 ","End":"03:13.770","Text":"initially I put it into the suppliers account,"},{"Start":"03:13.770 ","End":"03:20.400","Text":"so we debited PP\u0026E with 53 and we credited the payables account with 53."},{"Start":"03:20.400 ","End":"03:23.345","Text":"We\u0027re assuming it was paid on credit."},{"Start":"03:23.345 ","End":"03:27.840","Text":"Then you added the 10 and that gave you 63."},{"Start":"03:27.840 ","End":"03:31.140","Text":"Brought it across it, but our closing balance is 3 so therefore,"},{"Start":"03:31.140 ","End":"03:34.490","Text":"that must have meant we paid 60. Fair enough."},{"Start":"03:34.490 ","End":"03:35.900","Text":"However, you might be thinking,"},{"Start":"03:35.900 ","End":"03:38.690","Text":"but how does she know this was all full credit?"},{"Start":"03:38.690 ","End":"03:43.115","Text":"Well, I don\u0027t. But it doesn\u0027t matter because it doesn\u0027t matter which way you cut this."},{"Start":"03:43.115 ","End":"03:46.170","Text":"For example, I could have said,"},{"Start":"03:46.170 ","End":"03:52.065","Text":"the purchases of 53 let\u0027s say were 50 percent credit and 50 percent cash."},{"Start":"03:52.065 ","End":"03:54.410","Text":"Let\u0027s just put this in here as"},{"Start":"03:54.410 ","End":"03:58.400","Text":"an alternative bank account and an alternative payables account."},{"Start":"03:58.400 ","End":"04:04.570","Text":"My opening balance on my payables was 10 and my closing balance was 3."},{"Start":"04:04.570 ","End":"04:13.434","Text":"This is an assumption that the purchase of 53 was 50 percent cash and 50 percent credit."},{"Start":"04:13.434 ","End":"04:18.045","Text":"Half of 53 is 26.5."},{"Start":"04:18.045 ","End":"04:20.895","Text":"If 26.5 was cash,"},{"Start":"04:20.895 ","End":"04:25.190","Text":"debited this account with 53 and the contra entry,"},{"Start":"04:25.190 ","End":"04:32.510","Text":"the credits would have been partly to bank 26.5 and partly to payables another 26.5."},{"Start":"04:32.510 ","End":"04:38.120","Text":"But we would then have noticed that our credits and our payables came to 36.5."},{"Start":"04:38.120 ","End":"04:43.160","Text":"We take that across 36.5 and we see we\u0027ve got something missing on the debit side."},{"Start":"04:43.160 ","End":"04:45.995","Text":"We would\u0027ve seen that we\u0027ve got 33.5 missing."},{"Start":"04:45.995 ","End":"04:48.745","Text":"That must have been an amount paid,"},{"Start":"04:48.745 ","End":"04:51.125","Text":"suppliers of a property, plant, and equipment."},{"Start":"04:51.125 ","End":"04:55.160","Text":"It\u0027s 33.5, so you put that as,"},{"Start":"04:55.160 ","End":"04:58.030","Text":"let\u0027s call this general number 8."},{"Start":"04:58.030 ","End":"05:01.770","Text":"You can see we\u0027ve credited the bank with 33.5"},{"Start":"05:01.770 ","End":"05:05.585","Text":"and if you add those 2 up, you still get 60."},{"Start":"05:05.585 ","End":"05:08.050","Text":"It really doesn\u0027t matter how we cut it,"},{"Start":"05:08.050 ","End":"05:10.075","Text":"it\u0027ll still come to 60."},{"Start":"05:10.075 ","End":"05:14.480","Text":"These were payments made for purchases of property, plant, and equipment."},{"Start":"05:14.480 ","End":"05:16.820","Text":"53 was a purchase we made this year."},{"Start":"05:16.820 ","End":"05:20.535","Text":"The remaining 7 payments that we made"},{"Start":"05:20.535 ","End":"05:24.260","Text":"to payables was for purchases made in a prior year,"},{"Start":"05:24.260 ","End":"05:28.205","Text":"but it\u0027s still is a cash payment relating to property, plant, and equipment."},{"Start":"05:28.205 ","End":"05:32.330","Text":"Now I\u0027m going to show you how to calculate the figures in"},{"Start":"05:32.330 ","End":"05:35.000","Text":"your cash flow statement for the cash"},{"Start":"05:35.000 ","End":"05:38.545","Text":"from investing activities if you\u0027d use the other format."},{"Start":"05:38.545 ","End":"05:42.905","Text":"Using the columnar or tabular format of your ledger accounts,"},{"Start":"05:42.905 ","End":"05:44.810","Text":"you would have seen the purchase figure of"},{"Start":"05:44.810 ","End":"05:48.290","Text":"53 and you would have seen that we have disposed"},{"Start":"05:48.290 ","End":"05:55.245","Text":"off an item which had a cost of 18 and accumulated depreciation of 6;"},{"Start":"05:55.245 ","End":"05:56.850","Text":"therefore, the carrying amount of 12."},{"Start":"05:56.850 ","End":"05:59.075","Text":"We, using this format,"},{"Start":"05:59.075 ","End":"06:02.060","Text":"have to do some of those calculations relating"},{"Start":"06:02.060 ","End":"06:06.260","Text":"to how much was actually cash on the actual cash flow statement."},{"Start":"06:06.260 ","End":"06:09.230","Text":"The cash paid on the purchases of property, plant, and equipment."},{"Start":"06:09.230 ","End":"06:10.539","Text":"The first thing you do is say,"},{"Start":"06:10.539 ","End":"06:12.020","Text":"we\u0027ve got purchases of property, plant,"},{"Start":"06:12.020 ","End":"06:13.865","Text":"and equipment, how much were they?"},{"Start":"06:13.865 ","End":"06:16.250","Text":"It was 53. Where do we get this from?"},{"Start":"06:16.250 ","End":"06:20.590","Text":"They were straight from our purchases in our cost account."},{"Start":"06:23.210 ","End":"06:28.420","Text":"Here, purchases in our cost account, 53."},{"Start":"06:29.490 ","End":"06:34.870","Text":"But then we also had to take into account the change in the payables."},{"Start":"06:34.870 ","End":"06:38.535","Text":"Now we\u0027re not sure whether to add or subtract the change in the payables,"},{"Start":"06:38.535 ","End":"06:41.830","Text":"but we do need to take into account because the payables were identified as"},{"Start":"06:41.830 ","End":"06:45.295","Text":"being related to suppliers of property, plant, and equipment."},{"Start":"06:45.295 ","End":"06:47.335","Text":"It\u0027s definitely part of payments"},{"Start":"06:47.335 ","End":"06:51.235","Text":"made regarding purchase of property, plant, and equipment."},{"Start":"06:51.235 ","End":"06:55.840","Text":"We have to look at the closing balance and compare it to our opening balance."},{"Start":"06:55.840 ","End":"07:01.220","Text":"We discovered the opening balance was 10, drops to 3."},{"Start":"07:01.220 ","End":"07:04.420","Text":"What is that? Is that an increase or a decrease?"},{"Start":"07:04.420 ","End":"07:06.295","Text":"It\u0027s a decrease."},{"Start":"07:06.295 ","End":"07:07.810","Text":"Then you have to ask yourself,"},{"Start":"07:07.810 ","End":"07:10.795","Text":"we\u0027ve got a decrease in our payables of 7,"},{"Start":"07:10.795 ","End":"07:13.955","Text":"do we add it or do we subtract it?"},{"Start":"07:13.955 ","End":"07:16.220","Text":"If your payables decreases,"},{"Start":"07:16.220 ","End":"07:17.765","Text":"it\u0027s because you\u0027ve paid them."},{"Start":"07:17.765 ","End":"07:21.020","Text":"What we\u0027re assuming here is that 53 is a payment,"},{"Start":"07:21.020 ","End":"07:23.030","Text":"say it\u0027s something we purchased during the year."},{"Start":"07:23.030 ","End":"07:25.130","Text":"It says we assume it\u0027s cash."},{"Start":"07:25.130 ","End":"07:29.090","Text":"In addition to that, we\u0027ve also paid off 7 relating to an amount"},{"Start":"07:29.090 ","End":"07:33.005","Text":"that we owed in priors relating to purchase of PP\u0026E,"},{"Start":"07:33.005 ","End":"07:34.360","Text":"so you must add it."},{"Start":"07:34.360 ","End":"07:37.775","Text":"53 plus 7 gives us 60."},{"Start":"07:37.775 ","End":"07:40.580","Text":"Then we move on to the next line,"},{"Start":"07:40.580 ","End":"07:44.690","Text":"which is the cash received from disposal PP\u0026E."},{"Start":"07:44.690 ","End":"07:48.005","Text":"To work out the cash received from the disposals,"},{"Start":"07:48.005 ","End":"07:49.730","Text":"it\u0027s a simple case of,"},{"Start":"07:49.730 ","End":"07:51.290","Text":"you will receive a certain amount,"},{"Start":"07:51.290 ","End":"07:55.025","Text":"you subtract the carrying amount and that\u0027s going to give you a profit, loss on sale."},{"Start":"07:55.025 ","End":"07:56.660","Text":"Now, in this case,"},{"Start":"07:56.660 ","End":"07:58.295","Text":"we didn\u0027t know the cash receipts,"},{"Start":"07:58.295 ","End":"08:02.630","Text":"but we did know that we had a loss on sale and we did know the carrying amount,"},{"Start":"08:02.630 ","End":"08:05.420","Text":"so let\u0027s get the cash received on 1 side."},{"Start":"08:05.420 ","End":"08:12.365","Text":"We have to take the carrying amount to the other side."},{"Start":"08:12.365 ","End":"08:17.915","Text":"In so doing, minus carrying amount becomes plus carrying amount."},{"Start":"08:17.915 ","End":"08:21.500","Text":"Cash received is equal to the profit or loss on sale plus the carrying amount."},{"Start":"08:21.500 ","End":"08:23.330","Text":"We know we had a loss on sale,"},{"Start":"08:23.330 ","End":"08:24.740","Text":"so it\u0027s in brackets,"},{"Start":"08:24.740 ","End":"08:26.825","Text":"and we know the carrying amount was 12."},{"Start":"08:26.825 ","End":"08:32.140","Text":"It\u0027s minus 3 plus 12, giving us 9."},{"Start":"08:32.660 ","End":"08:40.925","Text":"The net effect here is same as we calculated a moment ago,"},{"Start":"08:40.925 ","End":"08:48.065","Text":"and this is the cash used in investing activities."},{"Start":"08:48.065 ","End":"08:50.780","Text":"Our cash diminished,"},{"Start":"08:50.780 ","End":"08:56.015","Text":"was used up to the extent of 51 due to investing activities."},{"Start":"08:56.015 ","End":"08:58.145","Text":"We paid out more than we received."},{"Start":"08:58.145 ","End":"09:00.455","Text":"That\u0027s part 1 of this question."},{"Start":"09:00.455 ","End":"09:03.630","Text":"Let\u0027s move on to the second part."}],"ID":29708},{"Watched":false,"Name":"Exercise 9 - JKL - D - solution - Part 2 - cash generated from operating activities - indirect","Duration":"9m 19s","ChapterTopicVideoID":26882,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.770 ","End":"00:05.260","Text":"Now we\u0027re going to do the exercise JKL,"},{"Start":"00:05.260 ","End":"00:07.405","Text":"and I\u0027m going to show you the calculations."},{"Start":"00:07.405 ","End":"00:09.175","Text":"I\u0027m doing it all over again now."},{"Start":"00:09.175 ","End":"00:13.735","Text":"I\u0027ve just shown you the calculations for the solution using the T-account format."},{"Start":"00:13.735 ","End":"00:16.600","Text":"I\u0027m now going to show you the calculations again,"},{"Start":"00:16.600 ","End":"00:20.210","Text":"using a tabular or columnar format."},{"Start":"00:20.210 ","End":"00:23.155","Text":"Let\u0027s start with the cost account first."},{"Start":"00:23.155 ","End":"00:27.400","Text":"We\u0027re given the opening balance of 125 debit balance."},{"Start":"00:27.400 ","End":"00:30.610","Text":"We\u0027re then given an ending or closing balance of a 160."},{"Start":"00:30.610 ","End":"00:34.240","Text":"Then the movement in your cost account would be"},{"Start":"00:34.240 ","End":"00:38.050","Text":"purchases of the cost of items that you bought and"},{"Start":"00:38.050 ","End":"00:41.500","Text":"then disposals being the cost of"},{"Start":"00:41.500 ","End":"00:45.680","Text":"any items that you have disposed off coming out of that account."},{"Start":"00:45.680 ","End":"00:47.330","Text":"What are we given?"},{"Start":"00:47.330 ","End":"00:50.600","Text":"We are told that the cost of the property, plant,"},{"Start":"00:50.600 ","End":"00:54.130","Text":"and equipment that was disposed off is 18,"},{"Start":"00:54.130 ","End":"01:00.020","Text":"we can balance to the cost of the items that we\u0027ve purchased being 53."},{"Start":"01:00.020 ","End":"01:03.470","Text":"That\u0027s all that appears in the cost account,"},{"Start":"01:03.470 ","End":"01:06.200","Text":"it\u0027s opening balance add whatever you\u0027ve"},{"Start":"01:06.200 ","End":"01:09.560","Text":"bought less whatever you sold gives you closing balance."},{"Start":"01:09.560 ","End":"01:13.235","Text":"Let\u0027s have a look at the accumulated depreciation account."},{"Start":"01:13.235 ","End":"01:15.950","Text":"Starting with we\u0027ve got an opening balance or being"},{"Start":"01:15.950 ","End":"01:18.470","Text":"the closing balance at the end of 20X1 or"},{"Start":"01:18.470 ","End":"01:24.905","Text":"41 and we\u0027ve got our closing balance or ending balance of 66 then the movement."},{"Start":"01:24.905 ","End":"01:28.149","Text":"Normally our accumulated depreciation,"},{"Start":"01:28.149 ","End":"01:31.730","Text":"it will be increased by the depreciation expense for the year,"},{"Start":"01:31.730 ","End":"01:33.230","Text":"but we don\u0027t know what it is."},{"Start":"01:33.230 ","End":"01:37.820","Text":"Now you\u0027ll notice that I\u0027ve got N/A or not applicable under the cost account"},{"Start":"01:37.820 ","End":"01:42.245","Text":"because the depreciation expense only affects the accumulated depreciation account,"},{"Start":"01:42.245 ","End":"01:44.270","Text":"not the cost account."},{"Start":"01:44.270 ","End":"01:47.250","Text":"I\u0027ve put in N/A in the cost column."},{"Start":"01:48.590 ","End":"01:54.170","Text":"We are assuming that our impairment loss is also accumulated"},{"Start":"01:54.170 ","End":"01:59.135","Text":"in the same accumulated depreciation account so if you want it to be technically correct,"},{"Start":"01:59.135 ","End":"02:00.350","Text":"you would now call this"},{"Start":"02:00.350 ","End":"02:04.595","Text":"the accumulated depreciation and accumulated impairment loss account."},{"Start":"02:04.595 ","End":"02:07.580","Text":"Accumulated loss is 7."},{"Start":"02:07.580 ","End":"02:10.865","Text":"Notice I\u0027ve got an N/A or not applicable in the cost account because impairment loss"},{"Start":"02:10.865 ","End":"02:14.450","Text":"only gets credited to this accumulated account."},{"Start":"02:14.450 ","End":"02:15.905","Text":"It does not affect cost."},{"Start":"02:15.905 ","End":"02:19.310","Text":"Then we have to take out of the accumulated depreciation account,"},{"Start":"02:19.310 ","End":"02:23.330","Text":"the accumulated depreciation on any item of property,"},{"Start":"02:23.330 ","End":"02:27.140","Text":"plant, and equipment that was disposed off but we don\u0027t know what that is."},{"Start":"02:27.140 ","End":"02:28.940","Text":"How we could work it out."},{"Start":"02:28.940 ","End":"02:30.380","Text":"We\u0027ll work it out in a moment,"},{"Start":"02:30.380 ","End":"02:34.430","Text":"but I\u0027ll balance back to it using this columnar format."},{"Start":"02:34.430 ","End":"02:38.570","Text":"The purchases obviously has got an N/A under"},{"Start":"02:38.570 ","End":"02:41.240","Text":"the accumulated depreciation column because the cost of"},{"Start":"02:41.240 ","End":"02:44.270","Text":"purchases only affects the cost account."},{"Start":"02:44.270 ","End":"02:47.485","Text":"It does not go into the accumulated depreciation account."},{"Start":"02:47.485 ","End":"02:51.530","Text":"We\u0027ve got 2 unknowns currently in accumulated depreciation column"},{"Start":"02:51.530 ","End":"02:55.700","Text":"so we\u0027re going to have to work out one before we can work out the other."},{"Start":"02:55.700 ","End":"02:57.800","Text":"Now let\u0027s look at the carrying amount."},{"Start":"02:57.800 ","End":"02:59.450","Text":"This is not a separate account."},{"Start":"02:59.450 ","End":"03:02.960","Text":"As you know, we\u0027ve got the cost account and accumulated depreciation account"},{"Start":"03:02.960 ","End":"03:06.650","Text":"but I\u0027ve drafted the carrying amount column because we are given"},{"Start":"03:06.650 ","End":"03:09.980","Text":"this information is going to help us with backwards to work out"},{"Start":"03:09.980 ","End":"03:13.880","Text":"the accumulated depreciation on the item that was disposed of."},{"Start":"03:13.880 ","End":"03:17.749","Text":"We\u0027re given the opening balance of 84 and the closing balance of 94."},{"Start":"03:17.749 ","End":"03:20.690","Text":"We\u0027re also told that the carrying amount of"},{"Start":"03:20.690 ","End":"03:25.015","Text":"the item or items that were disposed of was 12."},{"Start":"03:25.015 ","End":"03:27.995","Text":"Now we can work out because we know cost"},{"Start":"03:27.995 ","End":"03:30.755","Text":"less accumulated depreciation gives us carrying amount."},{"Start":"03:30.755 ","End":"03:35.960","Text":"We can now balance to the accumulated depreciation which must therefore for be 6."},{"Start":"03:35.960 ","End":"03:38.570","Text":"Let\u0027s move along. Then the purchases,"},{"Start":"03:38.570 ","End":"03:39.650","Text":"remember as I say to you,"},{"Start":"03:39.650 ","End":"03:41.945","Text":"the purchases being the cost of purchases,"},{"Start":"03:41.945 ","End":"03:44.660","Text":"obviously only goes into the cost account."},{"Start":"03:44.660 ","End":"03:49.910","Text":"It does not go into the accumulated depreciation account thus we have an N/A here."},{"Start":"03:49.910 ","End":"03:52.970","Text":"Therefore the carrying amount is 53."},{"Start":"03:52.970 ","End":"03:56.090","Text":"What goes into the carrying amount column is the net effect of what"},{"Start":"03:56.090 ","End":"03:59.060","Text":"goes into the cost and accumulated depreciation account,"},{"Start":"03:59.060 ","End":"04:01.640","Text":"so 125 minus 41 is 84,"},{"Start":"04:01.640 ","End":"04:05.255","Text":"18 minus 6 gives you 12,"},{"Start":"04:05.255 ","End":"04:08.090","Text":"53 plus nothing gives you 53, and so on."},{"Start":"04:08.090 ","End":"04:10.380","Text":"Impairment loss of 7,"},{"Start":"04:10.380 ","End":"04:12.645","Text":"the depreciation expense,"},{"Start":"04:12.645 ","End":"04:16.325","Text":"we didn\u0027t know this, but you can now balance back to it."},{"Start":"04:16.325 ","End":"04:19.160","Text":"You can either use your accumulated depreciation account,"},{"Start":"04:19.160 ","End":"04:21.025","Text":"there is only one item that\u0027s missing,"},{"Start":"04:21.025 ","End":"04:23.900","Text":"or we could use the carrying amount which is not a separate account,"},{"Start":"04:23.900 ","End":"04:26.510","Text":"but this column here you could balance back to"},{"Start":"04:26.510 ","End":"04:30.110","Text":"the depreciation this way because at the moment,"},{"Start":"04:30.110 ","End":"04:31.640","Text":"we are not sure what it is,"},{"Start":"04:31.640 ","End":"04:35.675","Text":"but to make this balance to 66 or to make this balance to 94,"},{"Start":"04:35.675 ","End":"04:40.459","Text":"we\u0027d have to subtract 24 or in the case of accumulated depreciation,"},{"Start":"04:40.459 ","End":"04:42.805","Text":"you\u0027re adding a negative 24."},{"Start":"04:42.805 ","End":"04:47.435","Text":"Those are the calculations using the columnar format,"},{"Start":"04:47.435 ","End":"04:51.320","Text":"although it doesn\u0027t yet deal with the fact that part of"},{"Start":"04:51.320 ","End":"04:55.150","Text":"our purchases must have been for credit,"},{"Start":"04:55.150 ","End":"04:59.030","Text":"or perhaps they were not partly for credit,"},{"Start":"04:59.030 ","End":"05:01.130","Text":"perhaps we paid for it entirely and cash,"},{"Start":"05:01.130 ","End":"05:07.100","Text":"but this columnar format here has not yet taken to account the cash implications of"},{"Start":"05:07.100 ","End":"05:10.590","Text":"the movement in the payable balance with"},{"Start":"05:10.590 ","End":"05:15.680","Text":"that payable balance related to suppliers of property, plant, and equipment."}],"ID":29709},{"Watched":false,"Name":"Exercise 10 - KLM - A - question pages","Duration":"1m 51s","ChapterTopicVideoID":26883,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.035","Text":"Today, we\u0027re going to do an exercise entitled KLM."},{"Start":"00:04.035 ","End":"00:06.840","Text":"The following are selected end-of-year balances from"},{"Start":"00:06.840 ","End":"00:12.285","Text":"KLM\u0027s balance sheet together with its income statement for 20X2."},{"Start":"00:12.285 ","End":"00:16.110","Text":"You\u0027ll see we have a balance at the end of 20X1 of"},{"Start":"00:16.110 ","End":"00:21.870","Text":"125 and a balance at the end of 20X2 which has grown to 160."},{"Start":"00:21.870 ","End":"00:23.970","Text":"Then in additional information,"},{"Start":"00:23.970 ","End":"00:29.224","Text":"we\u0027re told that some of our assets have been sold and that the cost thereof is 12."},{"Start":"00:29.224 ","End":"00:34.280","Text":"We are also then told that the financial assets are measured at cost."},{"Start":"00:34.280 ","End":"00:40.505","Text":"These balances in the balance sheet of 125 and 160,"},{"Start":"00:40.505 ","End":"00:43.490","Text":"other balances measured at cost."},{"Start":"00:43.490 ","End":"00:47.915","Text":"The reason that that is important is that as you go on with your studies,"},{"Start":"00:47.915 ","End":"00:53.930","Text":"you will discover that financial assets can be measured at fair value."},{"Start":"00:53.930 ","End":"00:57.500","Text":"All purchases and sales of financial assets during"},{"Start":"00:57.500 ","End":"01:01.865","Text":"20X2 were cash purchases and cash sales."},{"Start":"01:01.865 ","End":"01:03.650","Text":"Now if we look at the income statement,"},{"Start":"01:03.650 ","End":"01:07.190","Text":"we\u0027ve got revenue, cost of sales,"},{"Start":"01:07.190 ","End":"01:09.995","Text":"general and administrative expenses,"},{"Start":"01:09.995 ","End":"01:12.570","Text":"gain on disposal of financial assets,"},{"Start":"01:12.570 ","End":"01:16.130","Text":"and then finally the profit for the year."},{"Start":"01:16.130 ","End":"01:19.655","Text":"Like with many of the income statements in this section,"},{"Start":"01:19.655 ","End":"01:22.640","Text":"it\u0027s quite simplified and I\u0027m saying that"},{"Start":"01:22.640 ","End":"01:25.940","Text":"it\u0027s simplified because we don\u0027t have finance costs,"},{"Start":"01:25.940 ","End":"01:29.934","Text":"in other words, interest expense and we don\u0027t have tax expense."},{"Start":"01:29.934 ","End":"01:32.140","Text":"Looking at the required,"},{"Start":"01:32.140 ","End":"01:34.010","Text":"based on this information,"},{"Start":"01:34.010 ","End":"01:37.310","Text":"prepare the section in the cash flow statement that reports cash"},{"Start":"01:37.310 ","End":"01:40.729","Text":"generated from or used in investing"},{"Start":"01:40.729 ","End":"01:45.620","Text":"activities and then cash generated from or used"},{"Start":"01:45.620 ","End":"01:51.570","Text":"in operating activities and we\u0027re to use the indirect method."}],"ID":29710},{"Watched":false,"Name":"Exercise 10 - KLM - B- solution using ledger accounts in T-account format","Duration":"7m 5s","ChapterTopicVideoID":26884,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.350 ","End":"00:06.150","Text":"I\u0027m going to show you how to do the solution using two different formats as usual."},{"Start":"00:06.150 ","End":"00:09.780","Text":"The first I\u0027m going to show you the solution"},{"Start":"00:09.780 ","End":"00:13.725","Text":"using ledger accounts presented in a T-account format."},{"Start":"00:13.725 ","End":"00:17.610","Text":"Then I\u0027m going to show you how to work out the same figures using"},{"Start":"00:17.610 ","End":"00:22.220","Text":"ledger accounts that are set out in a columnar or tabular format."},{"Start":"00:22.220 ","End":"00:25.235","Text":"If you prefer to use the columnar or tabular format,"},{"Start":"00:25.235 ","End":"00:28.670","Text":"then simply skip the next few slides in which"},{"Start":"00:28.670 ","End":"00:33.650","Text":"I hand drew these later accounts in the T-account format."},{"Start":"00:33.650 ","End":"00:38.270","Text":"We have four accounts that we need to use in order to balance back"},{"Start":"00:38.270 ","End":"00:43.910","Text":"to the cash implications of our financial assets account."},{"Start":"00:43.910 ","End":"00:51.260","Text":"The first account and core count that we\u0027re dealing with is financial assets."},{"Start":"00:51.260 ","End":"00:55.805","Text":"We are given the opening balance as a 125."},{"Start":"00:55.805 ","End":"00:58.520","Text":"That was the balance at the end of 20X1."},{"Start":"00:58.520 ","End":"01:05.665","Text":"Then our closing balance at the end of the current here is 160."},{"Start":"01:05.665 ","End":"01:13.480","Text":"We are told that financial assets with a cost of 12 were disposed of during the year,"},{"Start":"01:13.480 ","End":"01:17.710","Text":"we\u0027ll process the 12 as coming out of financial assets."},{"Start":"01:17.710 ","End":"01:20.260","Text":"Remember, financial assets, as the name implies,"},{"Start":"01:20.260 ","End":"01:25.690","Text":"are assets and assets get bigger on the debit side or the left-hand side."},{"Start":"01:25.690 ","End":"01:28.315","Text":"If an asset is sold,"},{"Start":"01:28.315 ","End":"01:32.350","Text":"it\u0027s going to come out on the right-hand side because it no longer exists."},{"Start":"01:32.350 ","End":"01:39.850","Text":"This is a disposal of an asset and the acid that was disposed off has a cost of 12."},{"Start":"01:39.850 ","End":"01:44.795","Text":"This would\u0027ve been processed as a journal entry coming"},{"Start":"01:44.795 ","End":"01:49.910","Text":"out of the financial assets created side and going to disposal account."},{"Start":"01:49.910 ","End":"01:56.690","Text":"This is the cost of the financial assets of 12. There is a credit."},{"Start":"01:56.690 ","End":"01:59.840","Text":"Financial assets has been credited with 12 and"},{"Start":"01:59.840 ","End":"02:03.095","Text":"here on the disposal account it\u0027s being debited with 12."},{"Start":"02:03.095 ","End":"02:04.565","Text":"That\u0027s your journal entry."},{"Start":"02:04.565 ","End":"02:07.355","Text":"Now, if we look at our financial assets account,"},{"Start":"02:07.355 ","End":"02:11.180","Text":"the credits add up to 172,"},{"Start":"02:11.180 ","End":"02:15.605","Text":"and therefore the debit should add up to a 172, but they don\u0027t."},{"Start":"02:15.605 ","End":"02:18.320","Text":"There is a missing amount of 47."},{"Start":"02:18.320 ","End":"02:22.160","Text":"This 47 represents the purchases."},{"Start":"02:22.160 ","End":"02:25.969","Text":"On the right-hand side when you getting rid of an asset,"},{"Start":"02:25.969 ","End":"02:28.610","Text":"that is on the credit side, when you get rid of the asset,"},{"Start":"02:28.610 ","End":"02:31.370","Text":"you take out the cost of the assets that are"},{"Start":"02:31.370 ","End":"02:34.940","Text":"sold and on the left-hand side or the debit side,"},{"Start":"02:34.940 ","End":"02:40.415","Text":"you have the purchases or acquisitions of assets where your assets are getting bigger."},{"Start":"02:40.415 ","End":"02:42.880","Text":"This is actually journal Number 2."},{"Start":"02:42.880 ","End":"02:46.535","Text":"The contra entry is going to go to our bank account."},{"Start":"02:46.535 ","End":"02:49.460","Text":"The reason I know it\u0027s the bank account is because we\u0027re actually"},{"Start":"02:49.460 ","End":"02:53.255","Text":"told that our purchases were made for cash."},{"Start":"02:53.255 ","End":"02:58.130","Text":"The bank account will be credited with 47."},{"Start":"02:58.130 ","End":"02:59.629","Text":"Why credited?"},{"Start":"02:59.629 ","End":"03:05.510","Text":"Because when you pay for something, your cash decreases."},{"Start":"03:05.510 ","End":"03:09.530","Text":"Now bank is an asset and just like the financial assets,"},{"Start":"03:09.530 ","End":"03:15.815","Text":"bank gets bigger on the debit side and it gets smaller on the credit side."},{"Start":"03:15.815 ","End":"03:18.800","Text":"On the debit side, you have your receipts,"},{"Start":"03:18.800 ","End":"03:20.795","Text":"so money coming in."},{"Start":"03:20.795 ","End":"03:24.755","Text":"On the credit side, you have the payments, money going out."},{"Start":"03:24.755 ","End":"03:27.155","Text":"This is a purchase of financial assets,"},{"Start":"03:27.155 ","End":"03:29.525","Text":"so therefore, it\u0027s money going out."},{"Start":"03:29.525 ","End":"03:34.014","Text":"This is a purchase of financial assets."},{"Start":"03:34.014 ","End":"03:37.340","Text":"Just to remind you, looking at the financial assets account,"},{"Start":"03:37.340 ","End":"03:41.600","Text":"that closing balance of 160 is a carried forward balance."},{"Start":"03:41.600 ","End":"03:46.720","Text":"We have the closing balance in brought forward on the debit side of 160."},{"Start":"03:46.720 ","End":"03:49.850","Text":"Financial assets always have a debit balance,"},{"Start":"03:49.850 ","End":"03:51.080","Text":"so don\u0027t get confused,"},{"Start":"03:51.080 ","End":"03:55.685","Text":"that simply that closing balance of 160 on the right-hand side of the credit side,"},{"Start":"03:55.685 ","End":"04:00.520","Text":"which is a temporary balance for the purposes of balancing using this T-account format."},{"Start":"04:00.520 ","End":"04:03.530","Text":"Now let\u0027s have a look at this disposal account."},{"Start":"04:03.530 ","End":"04:06.590","Text":"That\u0027s the cost of the financial asset that was disposed off"},{"Start":"04:06.590 ","End":"04:09.340","Text":"that we need to work out how much we actually received."},{"Start":"04:09.340 ","End":"04:10.970","Text":"To work at how much you actually received,"},{"Start":"04:10.970 ","End":"04:15.365","Text":"you need to look at your income statement to see whether you made a profit or loss."},{"Start":"04:15.365 ","End":"04:18.770","Text":"In this case, we made a profit they called it a gain, not a profit,"},{"Start":"04:18.770 ","End":"04:22.595","Text":"but it\u0027s the same thing. Gain on disposal."},{"Start":"04:22.595 ","End":"04:28.000","Text":"Now a gain is income and income gets bigger on the credit side,"},{"Start":"04:28.000 ","End":"04:29.765","Text":"or the right-hand side."},{"Start":"04:29.765 ","End":"04:32.990","Text":"We were told in this case that we had a gain of 10."},{"Start":"04:32.990 ","End":"04:34.460","Text":"This is journal number 3."},{"Start":"04:34.460 ","End":"04:38.530","Text":"The other side of this entry is in the disposal account."},{"Start":"04:38.530 ","End":"04:42.605","Text":"Journal Number 3 had a debit to the disposal account."},{"Start":"04:42.605 ","End":"04:46.235","Text":"This is normally a balancing item,"},{"Start":"04:46.235 ","End":"04:49.490","Text":"but we\u0027re working backwards in this case."},{"Start":"04:49.490 ","End":"04:55.250","Text":"The asset that was disposed of had a cost of 12 and we made a gain of 10,"},{"Start":"04:55.250 ","End":"05:00.605","Text":"so that means we received 10 more than we originally paid for it."},{"Start":"05:00.605 ","End":"05:08.375","Text":"That must mean that our proceeds on the sell were 22."},{"Start":"05:08.375 ","End":"05:11.930","Text":"We would\u0027ve credited the disposal account with 22,"},{"Start":"05:11.930 ","End":"05:14.720","Text":"then compared it with a cost of 12,"},{"Start":"05:14.720 ","End":"05:20.555","Text":"and realized that we\u0027d made a gain of 10 and that\u0027s credited to the gain on disposal."},{"Start":"05:20.555 ","End":"05:23.905","Text":"Going back to this credit of 22."},{"Start":"05:23.905 ","End":"05:30.620","Text":"I know that the entire proceeds of 22 went to the bank account."},{"Start":"05:30.620 ","End":"05:35.900","Text":"That\u0027s because we were told that our sales of financial assets were all cash sales."},{"Start":"05:35.900 ","End":"05:42.710","Text":"That\u0027s how and why I assumed that the amount went to our bank account."},{"Start":"05:42.710 ","End":"05:45.335","Text":"If you look at your bank account here,"},{"Start":"05:45.335 ","End":"05:50.270","Text":"you can see how our financial assets caused it to go up by 22."},{"Start":"05:50.270 ","End":"05:52.250","Text":"That\u0027s to do with the sale of financial assets."},{"Start":"05:52.250 ","End":"05:54.785","Text":"We actually receive 22."},{"Start":"05:54.785 ","End":"05:58.025","Text":"On the right-hand side, the payment side."},{"Start":"05:58.025 ","End":"06:05.420","Text":"You can see how the financial assets caused a decrease of our bank account of 47."},{"Start":"06:05.420 ","End":"06:08.465","Text":"That\u0027s to do with us purchasing financial assets."},{"Start":"06:08.465 ","End":"06:10.280","Text":"Here we have everything we now need for"},{"Start":"06:10.280 ","End":"06:13.309","Text":"our cash flow statement and our cash flow statement,"},{"Start":"06:13.309 ","End":"06:20.460","Text":"cash generated from investing activities portion of our cashless statement,"},{"Start":"06:23.630 ","End":"06:25.785","Text":"I\u0027ll just do it very quickly here,"},{"Start":"06:25.785 ","End":"06:35.805","Text":"cash paid in respect of purchases of financial assets 47, that\u0027s an outflow."},{"Start":"06:35.805 ","End":"06:40.700","Text":"Then we\u0027ve got cash received in"},{"Start":"06:40.700 ","End":"06:46.830","Text":"respect of sales of financial assets 22."},{"Start":"06:46.830 ","End":"06:51.065","Text":"Net effect is an outflow of 25."},{"Start":"06:51.065 ","End":"06:55.100","Text":"That\u0027s cash not generated because it\u0027s"},{"Start":"06:55.100 ","End":"07:01.685","Text":"an 8 outflow instead is cash used in investing activities."},{"Start":"07:01.685 ","End":"07:05.490","Text":"Now let\u0027s use the tabular format."}],"ID":29711},{"Watched":false,"Name":"Exercise 10 - KLM - B-1- solution using ledger accounts in T-account format","Duration":"3m 50s","ChapterTopicVideoID":26885,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.095","Text":"In the question exercise KLM,"},{"Start":"00:04.095 ","End":"00:09.600","Text":"part 1 was to prepare the cash generated from investing activities section,"},{"Start":"00:09.600 ","End":"00:15.270","Text":"but there was also a part 2 cash generated from operating activities."},{"Start":"00:15.270 ","End":"00:18.750","Text":"This cash generated from operating activities"},{"Start":"00:18.750 ","End":"00:21.855","Text":"had to be presented using the indirect method."},{"Start":"00:21.855 ","End":"00:26.310","Text":"I\u0027m going to prepare that cash flow statement right here underneath."},{"Start":"00:26.310 ","End":"00:29.010","Text":"In this case, we have cash."},{"Start":"00:29.010 ","End":"00:31.620","Text":"I\u0027m going to do it on this page instead."},{"Start":"00:31.620 ","End":"00:36.570","Text":"Part 2 required us to prepare the cash"},{"Start":"00:36.570 ","End":"00:42.320","Text":"from operating activities section of our cash flow statement."},{"Start":"00:42.320 ","End":"00:44.050","Text":"This is part 2."},{"Start":"00:44.050 ","End":"00:45.670","Text":"Using the indirect method,"},{"Start":"00:45.670 ","End":"00:51.980","Text":"we have to start with profit before finance charges and before tax."},{"Start":"00:51.980 ","End":"00:53.560","Text":"Now in this equation, we didn\u0027t have"},{"Start":"00:53.560 ","End":"00:56.935","Text":"any finance costs and we didn\u0027t have any tax expenses either."},{"Start":"00:56.935 ","End":"01:03.460","Text":"The profit before finance and tax is simply the profit for the year of 132."},{"Start":"01:03.460 ","End":"01:06.910","Text":"Now, when using the indirect method,"},{"Start":"01:06.910 ","End":"01:09.700","Text":"we take our profit and we have to convert it into"},{"Start":"01:09.700 ","End":"01:14.155","Text":"the cash generated from operating activities."},{"Start":"01:14.155 ","End":"01:21.440","Text":"To do that, what one does is one adjust for any non-cash flow items."},{"Start":"01:21.440 ","End":"01:24.970","Text":"Are there any income and expenses."},{"Start":"01:24.970 ","End":"01:28.025","Text":"To convert the profit into a cash figure,"},{"Start":"01:28.025 ","End":"01:31.900","Text":"we have to adjust for non-cash flow items."},{"Start":"01:31.900 ","End":"01:34.280","Text":"In this regard, we ask ourselves,"},{"Start":"01:34.280 ","End":"01:36.635","Text":"are there any income and expense items"},{"Start":"01:36.635 ","End":"01:39.590","Text":"that were included in the calculation of their profit?"},{"Start":"01:39.590 ","End":"01:42.590","Text":"Because obviously to convert it into a cash figure,"},{"Start":"01:42.590 ","End":"01:44.210","Text":"we have to remove them."},{"Start":"01:44.210 ","End":"01:47.810","Text":"Something else we would adjust for are any changes."},{"Start":"01:47.810 ","End":"01:51.320","Text":"That little triangle is shorthand for changes."},{"Start":"01:51.320 ","End":"01:54.650","Text":"Are there any changes in working capital?"},{"Start":"01:54.650 ","End":"01:58.370","Text":"Your working capital would involve things like your inventory account,"},{"Start":"01:58.370 ","End":"02:01.325","Text":"your accounts receivable, and accounts payable."},{"Start":"02:01.325 ","End":"02:07.740","Text":"Now, you take these 2 items and you adjust the profit for them."},{"Start":"02:08.000 ","End":"02:11.720","Text":"By adjusting the profit for these 2 items,"},{"Start":"02:11.720 ","End":"02:17.090","Text":"you then calculate the cash generated from operations,"},{"Start":"02:17.090 ","End":"02:21.800","Text":"which is different to the cash generated from operating activities."},{"Start":"02:21.800 ","End":"02:24.140","Text":"To convert your cash generated from"},{"Start":"02:24.140 ","End":"02:27.710","Text":"operations into cash generated from operating activities,"},{"Start":"02:27.710 ","End":"02:33.215","Text":"you need to adjust for separately disclosable items."},{"Start":"02:33.215 ","End":"02:35.390","Text":"Examples of which include,"},{"Start":"02:35.390 ","End":"02:37.880","Text":"taxes paid and dividends paid."},{"Start":"02:37.880 ","End":"02:42.770","Text":"These are the 3 categories of items that we need"},{"Start":"02:42.770 ","End":"02:47.720","Text":"to adjust for in order to convert the profit into the final cash figure."},{"Start":"02:47.720 ","End":"02:51.860","Text":"In this example, there were no changes in working capital and there were"},{"Start":"02:51.860 ","End":"02:57.170","Text":"no separately disclosable items and there was only 1 non-cash flow item."},{"Start":"02:57.170 ","End":"03:06.135","Text":"Non-cash flow item was the gain on disposal of the financial asset and that gain was 10."},{"Start":"03:06.135 ","End":"03:08.720","Text":"The 10 was included in the calculation of"},{"Start":"03:08.720 ","End":"03:13.520","Text":"the profit and obviously because it\u0027s not got anything to do with cash flow,"},{"Start":"03:13.520 ","End":"03:15.260","Text":"we have to subtract it."},{"Start":"03:15.260 ","End":"03:17.450","Text":"There were no changes in working capital,"},{"Start":"03:17.450 ","End":"03:23.525","Text":"and that therefore gives us our cash generated from operations of 122."},{"Start":"03:23.525 ","End":"03:25.850","Text":"There were no further adjustments to do with"},{"Start":"03:25.850 ","End":"03:29.840","Text":"separately disclosable items so no further adjustments."},{"Start":"03:29.840 ","End":"03:33.440","Text":"That gives us the cash generated from operating activities,"},{"Start":"03:33.440 ","End":"03:37.015","Text":"which in this case equal our cash generated from operations."},{"Start":"03:37.015 ","End":"03:39.395","Text":"Now if you\u0027re interested,"},{"Start":"03:39.395 ","End":"03:42.170","Text":"move on to the next part of the solution,"},{"Start":"03:42.170 ","End":"03:44.630","Text":"which is where I do it all over again using"},{"Start":"03:44.630 ","End":"03:50.580","Text":"the columnar format or tabular format of our ledger accounts."}],"ID":29712},{"Watched":false,"Name":"Exercise 10 - KLM - B-2 - solution using ledger accounts in columnar format","Duration":"8m 51s","ChapterTopicVideoID":26886,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.380","Text":"Now let\u0027s look at the solution to Exercise KLM using"},{"Start":"00:04.380 ","End":"00:09.750","Text":"the ledger account for financial assets in its columnar format."},{"Start":"00:09.750 ","End":"00:14.310","Text":"First, let\u0027s put in the opening balance of 125."},{"Start":"00:14.310 ","End":"00:19.739","Text":"Remember, we\u0027re told that the financial assets in this example are measured at cost."},{"Start":"00:19.739 ","End":"00:21.975","Text":"Then put in the closing balance."},{"Start":"00:21.975 ","End":"00:26.490","Text":"The closing balance measured at cost is 160."},{"Start":"00:26.490 ","End":"00:29.820","Text":"We are then told that there were financial assets that were sold,"},{"Start":"00:29.820 ","End":"00:33.105","Text":"and the cost of those sales were 12."},{"Start":"00:33.105 ","End":"00:37.835","Text":"We need to take the 12 out of the financial asset account."},{"Start":"00:37.835 ","End":"00:41.075","Text":"You see we\u0027ve subtracted 12."},{"Start":"00:41.075 ","End":"00:43.910","Text":"Now, if you take the opening balance of"},{"Start":"00:43.910 ","End":"00:49.460","Text":"125 and subtract the assets that were sold of 12,"},{"Start":"00:49.460 ","End":"00:55.880","Text":"our closing balance ought to be 125 minus 12, which is 113."},{"Start":"00:55.880 ","End":"00:58.583","Text":"Yet the closing balance is larger,"},{"Start":"00:58.583 ","End":"01:00.755","Text":"it\u0027s larger by 47."},{"Start":"01:00.755 ","End":"01:04.690","Text":"That must mean that we purchased assets during the year."},{"Start":"01:04.690 ","End":"01:09.725","Text":"The purchase of assets during the year must have been 47."},{"Start":"01:09.725 ","End":"01:14.540","Text":"Using this information, we can now construct our cash flow statement."},{"Start":"01:14.540 ","End":"01:16.185","Text":"This is Part 1."},{"Start":"01:16.185 ","End":"01:18.625","Text":"In the cash flow statement Part 1,"},{"Start":"01:18.625 ","End":"01:24.135","Text":"we were asked to construct the cash generated from investing activities section."},{"Start":"01:24.135 ","End":"01:30.100","Text":"This section involves identifying the cash paid when purchasing"},{"Start":"01:30.100 ","End":"01:35.625","Text":"financial assets and the cash received from selling financial assets."},{"Start":"01:35.625 ","End":"01:40.480","Text":"The net effect of that is going to be either cash generated from investing activities."},{"Start":"01:40.480 ","End":"01:44.935","Text":"In other words, if we\u0027ve received more than we paid or as in this case,"},{"Start":"01:44.935 ","End":"01:49.900","Text":"it will be cash used in investing activities because as you\u0027ll see,"},{"Start":"01:49.900 ","End":"01:53.530","Text":"our cash payments exceeded the cash receipts,"},{"Start":"01:53.530 ","End":"01:54.985","Text":"so there was a net outflow."},{"Start":"01:54.985 ","End":"01:58.535","Text":"We call it cash used in investing activities."},{"Start":"01:58.535 ","End":"02:01.660","Text":"Let\u0027s start with the first line item in"},{"Start":"02:01.660 ","End":"02:04.375","Text":"the cash generated from investing activities section,"},{"Start":"02:04.375 ","End":"02:09.605","Text":"which is the cash paid in purchasing financial assets."},{"Start":"02:09.605 ","End":"02:12.500","Text":"If we had used the T-account format,"},{"Start":"02:12.500 ","End":"02:16.984","Text":"you\u0027d simply look at the bank account and you would see there was a payment of 47."},{"Start":"02:16.984 ","End":"02:18.770","Text":"However, in this section,"},{"Start":"02:18.770 ","End":"02:22.565","Text":"I\u0027m showing you the use of the tabular approach."},{"Start":"02:22.565 ","End":"02:29.210","Text":"We look at the financial asset account and pick out the purchase amount."},{"Start":"02:29.210 ","End":"02:36.170","Text":"If you recall, we looked at the financial asset account and find the amount of purchases."},{"Start":"02:36.170 ","End":"02:41.750","Text":"We then need to adjust that for any change in the related payables account."},{"Start":"02:41.750 ","End":"02:46.505","Text":"There might be a payable for financial assets purchased account."},{"Start":"02:46.505 ","End":"02:49.940","Text":"Taking that into account together with"},{"Start":"02:49.940 ","End":"02:53.420","Text":"the purchase amount that appears in your financial asset account,"},{"Start":"02:53.420 ","End":"02:57.380","Text":"we then determine how much you\u0027d actually paid for in cash."},{"Start":"02:57.380 ","End":"03:00.140","Text":"Looking at our financial asset account,"},{"Start":"03:00.140 ","End":"03:03.485","Text":"the purchases amount that we balanced to was 47."},{"Start":"03:03.485 ","End":"03:07.925","Text":"Then looking at the change in related payables, that was 0."},{"Start":"03:07.925 ","End":"03:11.000","Text":"The reason I know that is because we are told that"},{"Start":"03:11.000 ","End":"03:14.825","Text":"financial asset purchases were paid for in cash."},{"Start":"03:14.825 ","End":"03:19.700","Text":"In other words, we did not have a related payables account that was 0."},{"Start":"03:19.700 ","End":"03:24.425","Text":"The cash paid in purchasing financial assets was there for 47."},{"Start":"03:24.425 ","End":"03:29.855","Text":"Now we move on to the cash received from selling financial assets."},{"Start":"03:29.855 ","End":"03:32.990","Text":"Once again, if you\u0027d use the T-account approach,"},{"Start":"03:32.990 ","End":"03:37.180","Text":"all you would do is have a look at your bank account for the receipts."},{"Start":"03:37.180 ","End":"03:42.860","Text":"In the bank account, you would have noticed a receipt relating to financial assets of 22."},{"Start":"03:42.860 ","End":"03:46.490","Text":"But I\u0027m showing you in this example the tabular approach."},{"Start":"03:46.490 ","End":"03:50.090","Text":"The tabular approach, when trying to work out the cash received from"},{"Start":"03:50.090 ","End":"03:53.480","Text":"the selling of financial assets involves 3 aspects."},{"Start":"03:53.480 ","End":"03:56.360","Text":"We\u0027re going to look for the cost of the financial assets sold,"},{"Start":"03:56.360 ","End":"03:59.015","Text":"which you\u0027ll find in the financial asset account,"},{"Start":"03:59.015 ","End":"04:01.085","Text":"then you\u0027re going to have to take into account"},{"Start":"04:01.085 ","End":"04:03.605","Text":"whether there was a profit or loss on disposal."},{"Start":"04:03.605 ","End":"04:06.550","Text":"In this example, we had a profit on disposal."},{"Start":"04:06.550 ","End":"04:09.485","Text":"In the question, it was referred to as a gain on disposal,"},{"Start":"04:09.485 ","End":"04:11.345","Text":"but it means the same thing."},{"Start":"04:11.345 ","End":"04:15.515","Text":"Then we\u0027d still have to adjust for the change in related receivables."},{"Start":"04:15.515 ","End":"04:18.890","Text":"Notice here I\u0027m looking at the receivables,"},{"Start":"04:18.890 ","End":"04:23.615","Text":"whereas when we were dealing with cash paid in terms of purchases of financial assets,"},{"Start":"04:23.615 ","End":"04:27.410","Text":"we had to take into account the change in related payables."},{"Start":"04:27.410 ","End":"04:29.990","Text":"If we look at the cost of the financial assets"},{"Start":"04:29.990 ","End":"04:32.615","Text":"sold and we take into account the profit on disposal,"},{"Start":"04:32.615 ","End":"04:38.225","Text":"the 2 items together give you the proceeds on sale."},{"Start":"04:38.225 ","End":"04:43.700","Text":"For example, if the financial asset that was sold"},{"Start":"04:43.700 ","End":"04:49.565","Text":"had a cost of 100 and we can see that we made a profit on disposal of 20,"},{"Start":"04:49.565 ","End":"04:52.850","Text":"then that must have meant that we sold it for 120."},{"Start":"04:52.850 ","End":"04:56.180","Text":"Conversely, if the cost of the financial assets"},{"Start":"04:56.180 ","End":"05:01.130","Text":"sold were 100 and let\u0027s say we had not a profit,"},{"Start":"05:01.130 ","End":"05:04.400","Text":"but a loss of 20,"},{"Start":"05:04.400 ","End":"05:08.045","Text":"that would have meant that we had received 80."},{"Start":"05:08.045 ","End":"05:10.160","Text":"We then take into account the change in"},{"Start":"05:10.160 ","End":"05:14.270","Text":"the related receivables to try to determine how much of that 80,"},{"Start":"05:14.270 ","End":"05:17.495","Text":"for example, had actually been received."},{"Start":"05:17.495 ","End":"05:20.584","Text":"If the receivables balance hadn\u0027t changed,"},{"Start":"05:20.584 ","End":"05:25.850","Text":"we would know automatically that all of the 80 had been received in cash."},{"Start":"05:25.850 ","End":"05:29.705","Text":"Now let\u0027s look at the figures used in the question."},{"Start":"05:29.705 ","End":"05:33.860","Text":"The cost of the financial assets sold were 12."},{"Start":"05:33.860 ","End":"05:37.130","Text":"You could pick that up from the financial asset account,"},{"Start":"05:37.130 ","End":"05:39.770","Text":"but in the question, it was also given to us."},{"Start":"05:39.770 ","End":"05:41.516","Text":"Then we\u0027d have to look at the profit on"},{"Start":"05:41.516 ","End":"05:45.745","Text":"disposal account that was also given to us, it was 10."},{"Start":"05:45.745 ","End":"05:51.056","Text":"This then means that we sold the financial asset for 22,"},{"Start":"05:51.056 ","End":"05:54.540","Text":"10 more than it originally cost us."},{"Start":"05:54.890 ","End":"05:57.515","Text":"We sold for 22,"},{"Start":"05:57.515 ","End":"06:01.490","Text":"but now we need to consider how much of that was received in cash."},{"Start":"06:01.490 ","End":"06:04.280","Text":"We have to look at the related receivables account."},{"Start":"06:04.280 ","End":"06:11.090","Text":"We weren\u0027t given a receivables account and instead we\u0027re told that the sale was for cash."},{"Start":"06:11.090 ","End":"06:18.680","Text":"Therefore, we can tell that we sold for 22 and that that was received in cash."},{"Start":"06:18.680 ","End":"06:22.310","Text":"If we compare that with our cash payment of 47,"},{"Start":"06:22.310 ","End":"06:27.005","Text":"so we can see that the cash used in investing activities was 25."},{"Start":"06:27.005 ","End":"06:29.005","Text":"Now let\u0027s move on to Part 2."},{"Start":"06:29.005 ","End":"06:33.110","Text":"Part 2 of Exercise KLM required that we prepare"},{"Start":"06:33.110 ","End":"06:38.390","Text":"the cash generated from operating activities for the year end, 31st December 20X2."},{"Start":"06:38.390 ","End":"06:41.660","Text":"We were asked to do this using the indirect method."},{"Start":"06:41.660 ","End":"06:46.640","Text":"The indirect method requires that we start with the profit before finance and tax."},{"Start":"06:46.640 ","End":"06:48.925","Text":"In this example,"},{"Start":"06:48.925 ","End":"06:51.260","Text":"there was no finance charge, in other words,"},{"Start":"06:51.260 ","End":"06:54.275","Text":"no interest expense and there was no tax expense either."},{"Start":"06:54.275 ","End":"06:59.710","Text":"Thus, the profit before finance and tax equaled our profit for the year."},{"Start":"06:59.710 ","End":"07:01.485","Text":"That was given to us."},{"Start":"07:01.485 ","End":"07:06.365","Text":"When converting the profit for the year into cash generated from operating activities,"},{"Start":"07:06.365 ","End":"07:08.630","Text":"we adjust for certain items."},{"Start":"07:08.630 ","End":"07:10.730","Text":"I will summarize these here for you."},{"Start":"07:10.730 ","End":"07:13.970","Text":"Profit before finance and tax."},{"Start":"07:13.970 ","End":"07:17.845","Text":"We would then adjust for non-cash flow items,"},{"Start":"07:17.845 ","End":"07:22.100","Text":"these are non-cash income and expense items that were included in"},{"Start":"07:22.100 ","End":"07:24.440","Text":"profit that need to obviously be reversed"},{"Start":"07:24.440 ","End":"07:27.350","Text":"because we\u0027re trying to convert the profit into a cash item."},{"Start":"07:27.350 ","End":"07:30.305","Text":"We take out anything that was not cash,"},{"Start":"07:30.305 ","End":"07:34.400","Text":"then we adjust for working capital changes."},{"Start":"07:34.400 ","End":"07:36.590","Text":"Working capital changes, for example,"},{"Start":"07:36.590 ","End":"07:38.240","Text":"refer to things like inventory."},{"Start":"07:38.240 ","End":"07:39.320","Text":"Did the inventory go up,"},{"Start":"07:39.320 ","End":"07:41.180","Text":"did it go down, did the receivables go up,"},{"Start":"07:41.180 ","End":"07:42.890","Text":"did the receivables go down,"},{"Start":"07:42.890 ","End":"07:44.990","Text":"did the payables go up or down?"},{"Start":"07:44.990 ","End":"07:50.265","Text":"That then gives us the cash generated from operations."},{"Start":"07:50.265 ","End":"07:55.085","Text":"After that, we then adjust for separately disclosable items."},{"Start":"07:55.085 ","End":"07:57.455","Text":"That then gives us a final balance,"},{"Start":"07:57.455 ","End":"08:02.495","Text":"cash generated from operating activities."},{"Start":"08:02.495 ","End":"08:06.350","Text":"Let\u0027s go back to the particulars of this example."},{"Start":"08:06.350 ","End":"08:11.360","Text":"In this example, you\u0027ll see we only have a single non-cash flow item."},{"Start":"08:11.360 ","End":"08:13.550","Text":"There were no working capital changes in"},{"Start":"08:13.550 ","End":"08:16.610","Text":"this example and there were no separately disclosable items."},{"Start":"08:16.610 ","End":"08:19.160","Text":"Separately disclosable items include examples,"},{"Start":"08:19.160 ","End":"08:22.380","Text":"such as dividend payments and tax payments."},{"Start":"08:22.380 ","End":"08:24.645","Text":"In this example, we only had the 1."},{"Start":"08:24.645 ","End":"08:29.440","Text":"There were no working capital changes and there were no separately disclosable items."},{"Start":"08:29.440 ","End":"08:33.200","Text":"Our non-cash flow item in this particular case was simply the gain,"},{"Start":"08:33.200 ","End":"08:34.445","Text":"otherwise known as the profit,"},{"Start":"08:34.445 ","End":"08:36.529","Text":"on disposal of the financial assets."},{"Start":"08:36.529 ","End":"08:38.090","Text":"That was given to us as 10."},{"Start":"08:38.090 ","End":"08:40.310","Text":"Since there were no other working capital changes"},{"Start":"08:40.310 ","End":"08:43.385","Text":"given to us and there were no separately disclosable items,"},{"Start":"08:43.385 ","End":"08:48.530","Text":"our answer ends with the cash generated from operations line item."},{"Start":"08:48.530 ","End":"08:51.120","Text":"I hope that\u0027s helped."}],"ID":29713},{"Watched":false,"Name":"Exercise 11 - LMN - A - question pages","Duration":"4m 37s","ChapterTopicVideoID":26887,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.020","Text":"Today we\u0027re going to do an exercise entitled LMN."},{"Start":"00:04.020 ","End":"00:08.815","Text":"The following are selected end-of year balances from LMN\u0027s balance sheet."},{"Start":"00:08.815 ","End":"00:11.745","Text":"Now the line items that we are given,"},{"Start":"00:11.745 ","End":"00:15.554","Text":"you will notice will be all financial assets."},{"Start":"00:15.554 ","End":"00:19.649","Text":"The first line item is an investment in an associate company."},{"Start":"00:19.649 ","End":"00:22.605","Text":"It was 228 and it\u0027s dropped to 217."},{"Start":"00:22.605 ","End":"00:27.150","Text":"Then we have financial assets other than loans that will make sense in a moment."},{"Start":"00:27.150 ","End":"00:30.105","Text":"It was 155, it\u0027s dropped to 120."},{"Start":"00:30.105 ","End":"00:33.135","Text":"We\u0027ve got loans to associate companies."},{"Start":"00:33.135 ","End":"00:36.660","Text":"That third line item is excluded from the second line items."},{"Start":"00:36.660 ","End":"00:39.090","Text":"The second line item was saying the financial assets other"},{"Start":"00:39.090 ","End":"00:42.120","Text":"than the financial assets that are loans."},{"Start":"00:42.120 ","End":"00:45.690","Text":"The third line item is the loans that was referring to."},{"Start":"00:45.690 ","End":"00:48.755","Text":"The loans to the associated companies where 28,"},{"Start":"00:48.755 ","End":"00:50.660","Text":"is now grown to 43."},{"Start":"00:50.660 ","End":"00:56.885","Text":"The interest receivable on these loans was 3 and that has grown as well to 4."},{"Start":"00:56.885 ","End":"00:59.270","Text":"Then we\u0027re given additional information."},{"Start":"00:59.270 ","End":"01:02.180","Text":"We\u0027re told that the cost of financial assets"},{"Start":"01:02.180 ","End":"01:06.560","Text":"purchased was 12 and at the purchases were for cash."},{"Start":"01:06.560 ","End":"01:12.110","Text":"Then told loans repaid by the associate companies was to the value of"},{"Start":"01:12.110 ","End":"01:19.160","Text":"8 and that cash dividend received from associated companies was 11."},{"Start":"01:19.160 ","End":"01:22.280","Text":"Then moving on to the income statement of LMN."},{"Start":"01:22.280 ","End":"01:24.740","Text":"We start off with the usual line items."},{"Start":"01:24.740 ","End":"01:27.500","Text":"You\u0027ve got revenue, cost of sales,"},{"Start":"01:27.500 ","End":"01:31.040","Text":"general and administrative expenses."},{"Start":"01:31.040 ","End":"01:37.955","Text":"Then we have a loss on the disposal of one of the financial assets other than loans,"},{"Start":"01:37.955 ","End":"01:41.930","Text":"that gave us a subtotal profit before finance."},{"Start":"01:41.930 ","End":"01:46.144","Text":"We\u0027ve been added, in this case interest income."},{"Start":"01:46.144 ","End":"01:50.225","Text":"That gives us profit before tax a subtitle."},{"Start":"01:50.225 ","End":"01:52.730","Text":"Then we adjust for the tax expense."},{"Start":"01:52.730 ","End":"01:57.535","Text":"We\u0027re told in this question the tax expense equals the tax paid."},{"Start":"01:57.535 ","End":"02:03.060","Text":"That gives us a final loan item in our income statement of profit for the year."},{"Start":"02:03.290 ","End":"02:06.830","Text":"We are then given additional information."},{"Start":"02:06.830 ","End":"02:10.340","Text":"Number 1, the investment in associates"},{"Start":"02:10.340 ","End":"02:14.255","Text":"account has been accounted for using the equity method."},{"Start":"02:14.255 ","End":"02:20.360","Text":"This method for those of you who are unsure or have forgotten,"},{"Start":"02:20.360 ","End":"02:24.004","Text":"but this method involves the investment and associates account,"},{"Start":"02:24.004 ","End":"02:31.175","Text":"which starts off at cost being debited with elements share of the associates profit."},{"Start":"02:31.175 ","End":"02:34.760","Text":"In other words, we\u0027re going to take the cost which will be on the debit side and we would"},{"Start":"02:34.760 ","End":"02:39.355","Text":"then add our share of the associates profit."},{"Start":"02:39.355 ","End":"02:42.170","Text":"The costs would be on the debit side and we\u0027re going to debit it with"},{"Start":"02:42.170 ","End":"02:45.590","Text":"a further share of the associates profit."},{"Start":"02:45.590 ","End":"02:49.310","Text":"Then we\u0027re going to reduce it by crediting it with"},{"Start":"02:49.310 ","End":"02:54.145","Text":"our company\u0027s share of the associates dividends declared."},{"Start":"02:54.145 ","End":"02:58.280","Text":"If for example the associate declared the dividend of 100 and"},{"Start":"02:58.280 ","End":"03:02.945","Text":"we owned a 15 percent share in that associate,"},{"Start":"03:02.945 ","End":"03:06.740","Text":"then 15 of that 100 dividend declaration"},{"Start":"03:06.740 ","End":"03:09.695","Text":"is something that we are going to expect to receive."},{"Start":"03:09.695 ","End":"03:12.470","Text":"We would debit dividend receivable and we would"},{"Start":"03:12.470 ","End":"03:16.285","Text":"credit the investment in associate asset account."},{"Start":"03:16.285 ","End":"03:20.630","Text":"We are then told that the associate reported a profit of zero for the year,"},{"Start":"03:20.630 ","End":"03:22.865","Text":"so it didn\u0027t make a profit of any amount,"},{"Start":"03:22.865 ","End":"03:24.980","Text":"and it also obviously didn\u0027t make a loss."},{"Start":"03:24.980 ","End":"03:27.800","Text":"It made a profit of exactly zero."},{"Start":"03:27.800 ","End":"03:32.420","Text":"Accordingly, the reduction in the balance on the investments in associate"},{"Start":"03:32.420 ","End":"03:37.549","Text":"simply represents elements share the dividend declared by the associate."},{"Start":"03:37.549 ","End":"03:40.790","Text":"This dividend from the associate was received in cash,"},{"Start":"03:40.790 ","End":"03:45.770","Text":"and no further investments in associates were made during the year."},{"Start":"03:45.770 ","End":"03:47.615","Text":"Then looking at the required,"},{"Start":"03:47.615 ","End":"03:49.460","Text":"based on the information you\u0027ve been given,"},{"Start":"03:49.460 ","End":"03:52.400","Text":"prepare the following sections in the cash flow statement."},{"Start":"03:52.400 ","End":"03:57.350","Text":"First of all, you must prepare the cash generated from or used in investing"},{"Start":"03:57.350 ","End":"04:00.380","Text":"activities and then the section entitled cash"},{"Start":"04:00.380 ","End":"04:03.995","Text":"generated from or used in operating activities."},{"Start":"04:03.995 ","End":"04:06.500","Text":"We are going to be using the indirect method."},{"Start":"04:06.500 ","End":"04:11.270","Text":"We\u0027re then told that LMN\u0027s policies to classify interest received"},{"Start":"04:11.270 ","End":"04:16.580","Text":"in the cash from investing activities section of the statement of cash flow."},{"Start":"04:16.580 ","End":"04:22.625","Text":"That\u0027s because interest received can be presented in the operating activities section,"},{"Start":"04:22.625 ","End":"04:25.820","Text":"all the investing activities section."},{"Start":"04:25.820 ","End":"04:29.045","Text":"It is a choice that the company may make,"},{"Start":"04:29.045 ","End":"04:36.510","Text":"but the company must simply consistently apply that choice from one year to the next."}],"ID":29714},{"Watched":false,"Name":"Exercise 11 - LMN - B - Brief explanation of the equity accounting method","Duration":"4m 58s","ChapterTopicVideoID":26862,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.824","Text":"The following is a very brief overview"},{"Start":"00:03.824 ","End":"00:06.870","Text":"of how to account for associates using the equity method."},{"Start":"00:06.870 ","End":"00:10.190","Text":"If you know how to account for associates using the equity method,"},{"Start":"00:10.190 ","End":"00:12.930","Text":"then please you\u0027re feel free to move on to the solution."},{"Start":"00:12.930 ","End":"00:14.760","Text":"When purchasing an associate,"},{"Start":"00:14.760 ","End":"00:17.050","Text":"let\u0027s say we purchased it for cash,"},{"Start":"00:17.050 ","End":"00:18.945","Text":"we would credit the bank."},{"Start":"00:18.945 ","End":"00:21.445","Text":"Let\u0027s say it\u0027s for a 100."},{"Start":"00:21.445 ","End":"00:26.864","Text":"We will then debit the investment associate."},{"Start":"00:26.864 ","End":"00:29.222","Text":"This is an asset account,"},{"Start":"00:29.222 ","End":"00:31.620","Text":"so it gets bigger on the debit side,"},{"Start":"00:31.620 ","End":"00:33.110","Text":"or the left-hand side."},{"Start":"00:33.110 ","End":"00:38.225","Text":"We start off by showing the investment and associate at the amount we pay for it,"},{"Start":"00:38.225 ","End":"00:40.280","Text":"in other words, the cost."},{"Start":"00:40.280 ","End":"00:43.160","Text":"Now an associate is defined."},{"Start":"00:43.160 ","End":"00:46.435","Text":"I won\u0027t go into the details."},{"Start":"00:46.435 ","End":"00:49.820","Text":"But if you don\u0027t control the company,"},{"Start":"00:49.820 ","End":"00:53.150","Text":"but you do have significant influence over it,"},{"Start":"00:53.150 ","End":"00:58.085","Text":"you would have what is referred to as an associate."},{"Start":"00:58.085 ","End":"01:01.790","Text":"When you have significant influence over the company,"},{"Start":"01:01.790 ","End":"01:08.660","Text":"you need to include that share that you have significant influence over."},{"Start":"01:08.660 ","End":"01:14.599","Text":"You need to include that share of the associate\u0027s profit within your income statement."},{"Start":"01:14.599 ","End":"01:18.905","Text":"Similarly, if that associate declares a dividend,"},{"Start":"01:18.905 ","End":"01:24.350","Text":"because you own a portion of that company,"},{"Start":"01:24.350 ","End":"01:28.040","Text":"you are going to receive a portion of that dividend."},{"Start":"01:28.040 ","End":"01:32.300","Text":"Using the equity accounting method,"},{"Start":"01:32.300 ","End":"01:37.039","Text":"what happens when the associate earns a profit?"},{"Start":"01:37.039 ","End":"01:40.565","Text":"Let\u0027s say the profit is 200,"},{"Start":"01:40.565 ","End":"01:49.165","Text":"and let\u0027s say you own a 15 percent share in that company,"},{"Start":"01:49.165 ","End":"01:53.210","Text":"then 15 percent of the associate\u0027s profit."},{"Start":"01:53.210 ","End":"01:55.505","Text":"Let me write it up here, the profit."},{"Start":"01:55.505 ","End":"01:59.330","Text":"That means our share is 30,"},{"Start":"01:59.330 ","End":"02:04.080","Text":"200 multiplied by 15 percent."},{"Start":"02:04.270 ","End":"02:10.820","Text":"So share of associate\u0027s profit is going to be one of our income accounts,"},{"Start":"02:10.820 ","End":"02:13.295","Text":"and we\u0027re going to record it at 30."},{"Start":"02:13.295 ","End":"02:17.690","Text":"We\u0027re then going to debit that to the investment in associate."},{"Start":"02:17.690 ","End":"02:21.835","Text":"This is our share of the associate\u0027s profit."},{"Start":"02:21.835 ","End":"02:24.125","Text":"So far we\u0027ve got 2 entries."},{"Start":"02:24.125 ","End":"02:26.735","Text":"The first was when we purchased the investment,"},{"Start":"02:26.735 ","End":"02:31.085","Text":"and we recognized the investment at cost."},{"Start":"02:31.085 ","End":"02:36.890","Text":"We then recognized the fact that the associate has made a profit of 200,"},{"Start":"02:36.890 ","End":"02:40.400","Text":"and we have assumed that we own a share of 15 percent."},{"Start":"02:40.400 ","End":"02:45.255","Text":"Therefore, we\u0027re going to recognize our share of that profit of 30,"},{"Start":"02:45.255 ","End":"02:49.950","Text":"and we\u0027re going to increase our investment in the associate by 30."},{"Start":"02:49.950 ","End":"02:53.510","Text":"Now that associate is worth not only the 100 that we\u0027ve put into it,"},{"Start":"02:53.510 ","End":"02:56.570","Text":"but now it has grown by a further 30."},{"Start":"02:56.570 ","End":"03:00.575","Text":"So our asset is now sitting at a value of 130."},{"Start":"03:00.575 ","End":"03:04.879","Text":"Now let\u0027s assume that the associate declares a dividend."},{"Start":"03:04.879 ","End":"03:06.525","Text":"I\u0027ll pop it down here."},{"Start":"03:06.525 ","End":"03:10.215","Text":"Dividend declared by the associate."},{"Start":"03:10.215 ","End":"03:16.520","Text":"That means given that our share is 15 percent,"},{"Start":"03:16.520 ","End":"03:20.720","Text":"we are expecting to receive a dividend of 6."},{"Start":"03:20.720 ","End":"03:24.815","Text":"Now remember, dividends are declared out of profits."},{"Start":"03:24.815 ","End":"03:27.350","Text":"So if you look at the investment in the associate account,"},{"Start":"03:27.350 ","End":"03:31.655","Text":"we are currently including in the investment our share of the profits of 30."},{"Start":"03:31.655 ","End":"03:37.760","Text":"But then if they pay us 6 out of those profits,"},{"Start":"03:37.760 ","End":"03:39.982","Text":"then they\u0027re going to owe us [inaudible]."},{"Start":"03:39.982 ","End":"03:42.830","Text":"At the moment they owe us in [inaudible] commerce,"},{"Start":"03:42.830 ","End":"03:46.085","Text":"they owe us that profit of 30."},{"Start":"03:46.085 ","End":"03:48.770","Text":"Once they declare the dividend,"},{"Start":"03:48.770 ","End":"03:52.330","Text":"what we\u0027re going to do is we\u0027re going to debit"},{"Start":"03:52.330 ","End":"03:57.646","Text":"dividend receivable because we know we\u0027re going to receive this dividend."},{"Start":"03:57.646 ","End":"04:00.775","Text":"Let\u0027s assume we haven\u0027t received it yet."},{"Start":"04:00.775 ","End":"04:04.075","Text":"So we debit dividend receivable with 6,"},{"Start":"04:04.075 ","End":"04:08.620","Text":"and we reduce our investment in associate by 6."},{"Start":"04:08.620 ","End":"04:11.300","Text":"Because of the 30 we\u0027ve put in,"},{"Start":"04:11.300 ","End":"04:13.800","Text":"6 is going to get paid to us,"},{"Start":"04:13.800 ","End":"04:17.050","Text":"and therefore, there is a balance of 24,"},{"Start":"04:17.050 ","End":"04:19.795","Text":"which we believe belongs to us."},{"Start":"04:19.795 ","End":"04:22.150","Text":"Now our investment in an associate,"},{"Start":"04:22.150 ","End":"04:25.350","Text":"if you take the bigger side across, which is 130,"},{"Start":"04:25.350 ","End":"04:29.138","Text":"130 less the 6 is 124,"},{"Start":"04:29.138 ","End":"04:37.350","Text":"and that\u0027s the balance carried down and balance brought down, 124."},{"Start":"04:37.350 ","End":"04:41.690","Text":"That balance brought down of 124 is the value of"},{"Start":"04:41.690 ","End":"04:46.610","Text":"our investment in associate measured using the equity method."},{"Start":"04:46.610 ","End":"04:49.340","Text":"So it\u0027s not measured at cost anymore."},{"Start":"04:49.340 ","End":"04:52.230","Text":"It\u0027s measured using the equity method."},{"Start":"04:52.230 ","End":"04:57.260","Text":"I hope that\u0027s helped. Now let\u0027s try the solution."}],"ID":29715},{"Watched":false,"Name":"Exercise 11 - LMN - C - CFI - Investment in Associates account","Duration":"6m 26s","ChapterTopicVideoID":26863,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.380 ","End":"00:03.600","Text":"Let\u0027s try to answer the question."},{"Start":"00:03.600 ","End":"00:09.795","Text":"The first line item in our balance sheet is the investment in associates company."},{"Start":"00:09.795 ","End":"00:16.290","Text":"I\u0027m going to start by reconciling or reconstructing the investment in associate company."},{"Start":"00:16.290 ","End":"00:18.630","Text":"Now I\u0027m using the columnar format here."},{"Start":"00:18.630 ","End":"00:22.830","Text":"We start by putting in the opening balance, which was 228."},{"Start":"00:22.830 ","End":"00:25.185","Text":"Then let\u0027s put in our closing balance,"},{"Start":"00:25.185 ","End":"00:28.410","Text":"which had reduced to 217."},{"Start":"00:28.410 ","End":"00:32.490","Text":"We then have purchase of further associates."},{"Start":"00:32.490 ","End":"00:35.160","Text":"We might have purchased more associates during the year,"},{"Start":"00:35.160 ","End":"00:37.220","Text":"but we were told that there were"},{"Start":"00:37.220 ","End":"00:40.820","Text":"no further associates that were purchased during the year."},{"Start":"00:40.820 ","End":"00:46.925","Text":"This was information provided as additional information, point number 4."},{"Start":"00:46.925 ","End":"00:53.940","Text":"Then we look to see what the share of the associates profit was for the year."},{"Start":"00:53.940 ","End":"00:58.160","Text":"In this case, we were told that they associate made 0 profit."},{"Start":"00:58.160 ","End":"01:02.285","Text":"Therefore irrespective of what our share of the profit is,"},{"Start":"01:02.285 ","End":"01:04.745","Text":"our share with us be 0."},{"Start":"01:04.745 ","End":"01:08.540","Text":"The fact that the associate made a 0 profit was given to"},{"Start":"01:08.540 ","End":"01:12.935","Text":"us in point number 2 under the additional information,"},{"Start":"01:12.935 ","End":"01:18.275","Text":"then we need to account for our share of the associates dividend declared."},{"Start":"01:18.275 ","End":"01:20.600","Text":"Since the other 2 line items,"},{"Start":"01:20.600 ","End":"01:24.405","Text":"the purchase of further associates at cost was 0,"},{"Start":"01:24.405 ","End":"01:28.085","Text":"and then our share these associates profit for the year was 0."},{"Start":"01:28.085 ","End":"01:31.850","Text":"It means that the movement between the opening balance and closing balance of"},{"Start":"01:31.850 ","End":"01:36.695","Text":"11 must have been our shared associates dividend declared."},{"Start":"01:36.695 ","End":"01:39.515","Text":"That figure was also given to us however,"},{"Start":"01:39.515 ","End":"01:44.450","Text":"and if you have a look at point number 3 under the additional information."},{"Start":"01:44.450 ","End":"01:51.580","Text":"It tells us that the associates dividend declared was received in cash."},{"Start":"01:51.580 ","End":"01:57.480","Text":"If you prefer the T-account format I\u0027ll just jot it down here."},{"Start":"01:57.480 ","End":"02:03.560","Text":"Investment in associate what we\u0027re doing is we\u0027re putting in the opening balance of 228."},{"Start":"02:03.560 ","End":"02:05.660","Text":"We would then put in the cost of"},{"Start":"02:05.660 ","End":"02:09.155","Text":"any further investments that we might have purchased, but there weren\u0027t any."},{"Start":"02:09.155 ","End":"02:11.120","Text":"That would\u0027ve been credit to"},{"Start":"02:11.120 ","End":"02:16.670","Text":"our bank and debit to the investment and associates, but it was 0."},{"Start":"02:16.670 ","End":"02:20.330","Text":"Then we take our share of the profits,"},{"Start":"02:20.330 ","End":"02:24.365","Text":"share of associates profit."},{"Start":"02:24.365 ","End":"02:26.870","Text":"We would debit that to the investment and associates"},{"Start":"02:26.870 ","End":"02:29.720","Text":"because we\u0027re using the equity accounting method"},{"Start":"02:29.720 ","End":"02:36.244","Text":"and we would credit our share of associates profit."},{"Start":"02:36.244 ","End":"02:38.720","Text":"It\u0027s an income account for us."},{"Start":"02:38.720 ","End":"02:41.150","Text":"Income gets bigger on the credit side,"},{"Start":"02:41.150 ","End":"02:42.900","Text":"so we would have credited"},{"Start":"02:42.900 ","End":"02:46.615","Text":"our share resources profit and debited the investment in associates."},{"Start":"02:46.615 ","End":"02:48.265","Text":"That\u0027s the entry that would happen."},{"Start":"02:48.265 ","End":"02:50.995","Text":"Obviously, you don\u0027t process journal entries for 0."},{"Start":"02:50.995 ","End":"02:55.555","Text":"I\u0027m just showing it here for you so that you can see the entire picture."},{"Start":"02:55.555 ","End":"02:59.335","Text":"Then if the associate declared a dividend,"},{"Start":"02:59.335 ","End":"03:02.920","Text":"then we need to recognize our share of that dividend."},{"Start":"03:02.920 ","End":"03:07.480","Text":"In this case, we were told that the dividend was received in cash."},{"Start":"03:07.480 ","End":"03:12.740","Text":"We would have debited our bank and credited the investment in the Associate,"},{"Start":"03:12.740 ","End":"03:17.085","Text":"so that\u0027s the our share of the dividend."},{"Start":"03:17.085 ","End":"03:18.690","Text":"You take the 228,"},{"Start":"03:18.690 ","End":"03:22.715","Text":"which is the bigger of the 2 sides take it across to see if there\u0027s anything missing."},{"Start":"03:22.715 ","End":"03:27.840","Text":"The difference between 228 less 11 is 217,"},{"Start":"03:27.840 ","End":"03:30.075","Text":"so there\u0027s nothing missing in this case."},{"Start":"03:30.075 ","End":"03:35.860","Text":"Closing balance brought down is 217,"},{"Start":"03:35.860 ","End":"03:39.655","Text":"so that was the only cash transaction here."},{"Start":"03:39.655 ","End":"03:42.800","Text":"It was cash because we were told it was cash."},{"Start":"03:42.800 ","End":"03:45.065","Text":"Otherwise, you need to watch out for that."},{"Start":"03:45.065 ","End":"03:47.884","Text":"You might have found in the balance sheet for example,"},{"Start":"03:47.884 ","End":"03:51.920","Text":"dividends receivable of 11 at the end of the year."},{"Start":"03:51.920 ","End":"03:54.020","Text":"With an opening balance of 0,"},{"Start":"03:54.020 ","End":"03:57.470","Text":"which would have then meant that the dividend,"},{"Start":"03:57.470 ","End":"04:00.995","Text":"although it was receivable but as had not been received,"},{"Start":"04:00.995 ","End":"04:03.605","Text":"in which case it would not appear on the cash flow statement."},{"Start":"04:03.605 ","End":"04:08.630","Text":"In this case, we were told that the dividend from associate was received in cash."},{"Start":"04:08.630 ","End":"04:12.215","Text":"Now where do we put it in our cash flow statement?"},{"Start":"04:12.215 ","End":"04:15.605","Text":"Now, in the required of the question,"},{"Start":"04:15.605 ","End":"04:19.295","Text":"there was a note and the requirement 1 and 2."},{"Start":"04:19.295 ","End":"04:23.690","Text":"The note read LMN\u0027s policy is to classify interest received"},{"Start":"04:23.690 ","End":"04:28.100","Text":"in the cash from investing activities section of the statement of cash flows."},{"Start":"04:28.100 ","End":"04:29.570","Text":"Now this note was put in,"},{"Start":"04:29.570 ","End":"04:34.910","Text":"because the standard on cashflow statements allows us to choose."},{"Start":"04:34.910 ","End":"04:37.940","Text":"Where to put the interest received either in the cash from"},{"Start":"04:37.940 ","End":"04:42.725","Text":"investing activities section or the cash from operating activities section."},{"Start":"04:42.725 ","End":"04:46.055","Text":"But there is also a choice regarding dividends,"},{"Start":"04:46.055 ","End":"04:48.620","Text":"but we weren\u0027t told anything about this."},{"Start":"04:48.620 ","End":"04:50.855","Text":"How do we know where to put it?"},{"Start":"04:50.855 ","End":"04:52.745","Text":"Now we could put it,"},{"Start":"04:52.745 ","End":"04:56.255","Text":"typically 1 puts it under investing activities,"},{"Start":"04:56.255 ","End":"04:59.029","Text":"but we have a choice."},{"Start":"04:59.029 ","End":"05:02.150","Text":"It could also be under operating activities."},{"Start":"05:02.150 ","End":"05:04.400","Text":"However, you could only put it under"},{"Start":"05:04.400 ","End":"05:09.725","Text":"operating activities if the dividend income had been included in profits."},{"Start":"05:09.725 ","End":"05:11.300","Text":"Now if you recall,"},{"Start":"05:11.300 ","End":"05:15.935","Text":"we are using the equity method of accounting for this associate,"},{"Start":"05:15.935 ","End":"05:22.655","Text":"which means that when we debited bank or dividend receivable for that matter,"},{"Start":"05:22.655 ","End":"05:26.840","Text":"with the share of the dividends coming from our associate."},{"Start":"05:26.840 ","End":"05:30.815","Text":"We credited not dividend income,"},{"Start":"05:30.815 ","End":"05:35.780","Text":"but we credited the investment in the associates asset account."},{"Start":"05:35.780 ","End":"05:39.260","Text":"That therefore means that the dividend that we"},{"Start":"05:39.260 ","End":"05:43.690","Text":"receive from our associate is not going to be included in profit."},{"Start":"05:43.690 ","End":"05:47.480","Text":"Therefore, it cannot be presented under"},{"Start":"05:47.480 ","End":"05:49.250","Text":"the operating activities section of"},{"Start":"05:49.250 ","End":"05:53.345","Text":"our cash flow statement so it must automatically be included."},{"Start":"05:53.345 ","End":"05:58.770","Text":"Therefore, under the investing activities section of the cash flow statement."},{"Start":"05:59.060 ","End":"06:01.730","Text":"Here\u0027s our cash flow statement,"},{"Start":"06:01.730 ","End":"06:05.855","Text":"and it\u0027s the cash from investing activities section, CFI."},{"Start":"06:05.855 ","End":"06:09.275","Text":"Now you see cash dividend received 11."},{"Start":"06:09.275 ","End":"06:15.200","Text":"Now we both worked it out by reconciling our investment and associate asset account."},{"Start":"06:15.200 ","End":"06:20.995","Text":"But that was also given to us in the information provided in the question."},{"Start":"06:20.995 ","End":"06:26.130","Text":"Let\u0027s move on to the next line item given to us in the balance sheet."}],"ID":29716},{"Watched":false,"Name":"Exercise 11 - LMN - D - CFI - Financial Assets other than Loans account","Duration":"2m 51s","ChapterTopicVideoID":26864,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.880","Text":"The second line item given to us in"},{"Start":"00:02.880 ","End":"00:07.470","Text":"the balance sheet was financial assets other than loans."},{"Start":"00:07.470 ","End":"00:12.435","Text":"Let\u0027s reconstruct this account to see if there is any impact on our bank account."},{"Start":"00:12.435 ","End":"00:16.695","Text":"First put in the opening balance which was 155,"},{"Start":"00:16.695 ","End":"00:21.060","Text":"input in your closing balance, which was 120."},{"Start":"00:21.060 ","End":"00:26.880","Text":"Then look to see whether we have purchased any further assets during the year."},{"Start":"00:26.880 ","End":"00:31.850","Text":"We were told that we purchased for cash an amount of"},{"Start":"00:31.850 ","End":"00:35.270","Text":"12 that was given to us in"},{"Start":"00:35.270 ","End":"00:39.215","Text":"the additional information immediately below the balance sheet."},{"Start":"00:39.215 ","End":"00:45.935","Text":"Now, 155 plus 12 gives us 167,"},{"Start":"00:45.935 ","End":"00:48.650","Text":"but our closing balance is 120."},{"Start":"00:48.650 ","End":"00:51.950","Text":"We\u0027re missing 47 so that must be"},{"Start":"00:51.950 ","End":"00:55.430","Text":"the cost of assets that must have been sold during the year."},{"Start":"00:55.430 ","End":"00:58.100","Text":"Now remember, what we\u0027re doing when we sell"},{"Start":"00:58.100 ","End":"01:02.825","Text":"that asset is we take the cost out of the asset account,"},{"Start":"01:02.825 ","End":"01:06.050","Text":"but that doesn\u0027t mean that we received 47."},{"Start":"01:06.050 ","End":"01:10.420","Text":"What we need to know is how much we received for the sale of these assets."},{"Start":"01:10.420 ","End":"01:12.965","Text":"Or what are the proceeds on the sale?"},{"Start":"01:12.965 ","End":"01:16.610","Text":"In order to do that, we need to go to the income statement to see whether"},{"Start":"01:16.610 ","End":"01:20.780","Text":"there is a profit or a loss on the sale of these assets."},{"Start":"01:20.780 ","End":"01:23.345","Text":"Let\u0027s take a look at our income statement."},{"Start":"01:23.345 ","End":"01:25.175","Text":"Here\u0027s our income statement."},{"Start":"01:25.175 ","End":"01:31.025","Text":"You see we have a loss on disposal of financial assets other than loans of 10."},{"Start":"01:31.025 ","End":"01:34.250","Text":"That must mean that we received an amount of 37,"},{"Start":"01:34.250 ","End":"01:38.140","Text":"that cost us 47, we made a loss of 10."},{"Start":"01:38.140 ","End":"01:41.495","Text":"It must have meant that we sold it for 37."},{"Start":"01:41.495 ","End":"01:45.380","Text":"Let\u0027s see how this is presented in the cash flow statement."},{"Start":"01:45.380 ","End":"01:49.070","Text":"First of all, we\u0027re going to put in the cash paid on the purchase of"},{"Start":"01:49.070 ","End":"01:54.770","Text":"the financial assets of 12 and then we deal with the sale of the financial assets,"},{"Start":"01:54.770 ","End":"01:58.400","Text":"the cash received from the sale of financial assets."},{"Start":"01:58.400 ","End":"02:01.340","Text":"We\u0027re going to reconcile this under the comments."},{"Start":"02:01.340 ","End":"02:04.220","Text":"It\u0027s the cost of the financial assets that we have"},{"Start":"02:04.220 ","End":"02:07.445","Text":"sold and we\u0027ve just determined that as being 47."},{"Start":"02:07.445 ","End":"02:13.760","Text":"We did that by reconstructing financial assets other than loan account."},{"Start":"02:13.760 ","End":"02:17.364","Text":"Then we\u0027re going to adjust it for the profit or loss on disposal."},{"Start":"02:17.364 ","End":"02:20.720","Text":"Actually, it started with the cost of the financial asset sold."},{"Start":"02:20.720 ","End":"02:23.300","Text":"As I say, we pick that up from the reconstruction"},{"Start":"02:23.300 ","End":"02:25.985","Text":"of our financial assets other than loans account,"},{"Start":"02:25.985 ","End":"02:29.480","Text":"there is cost of assets sold is 47, put that in."},{"Start":"02:29.480 ","End":"02:32.240","Text":"Then we adjust for the profit or loss on disposal."},{"Start":"02:32.240 ","End":"02:34.310","Text":"Is it a profit or is it a loss?"},{"Start":"02:34.310 ","End":"02:36.140","Text":"We looked at the income statement,"},{"Start":"02:36.140 ","End":"02:43.195","Text":"it\u0027s a loss so we reduce it by the loss instead of adding, we subtract."},{"Start":"02:43.195 ","End":"02:45.353","Text":"That gives us 37."},{"Start":"02:45.353 ","End":"02:50.670","Text":"Now, let\u0027s move on to the next line item given to us in the balance sheet."}],"ID":29717},{"Watched":false,"Name":"Exercise 11 - LMN - E - CFI - Loans to Associates account","Duration":"2m 42s","ChapterTopicVideoID":26865,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:06.735","Text":"The third line item given to us in our balance sheet is loans to associate companies."},{"Start":"00:06.735 ","End":"00:11.895","Text":"Let\u0027s reconstruct this account now to see whether it has any impact on our bank account."},{"Start":"00:11.895 ","End":"00:14.310","Text":"First thing to do is put in your opening balance,"},{"Start":"00:14.310 ","End":"00:19.050","Text":"which was 28, then put in your closing balance, which was 43."},{"Start":"00:19.050 ","End":"00:22.440","Text":"Then if you have a look and your balance sheet in the question,"},{"Start":"00:22.440 ","End":"00:26.220","Text":"there is additional information where it tells us that we"},{"Start":"00:26.220 ","End":"00:30.405","Text":"received loan repayments from our associates to the amount of 8."},{"Start":"00:30.405 ","End":"00:33.300","Text":"If you take the opening balance and subtract how much we\u0027ve"},{"Start":"00:33.300 ","End":"00:37.105","Text":"received during the in terms of loan repayments of 8,"},{"Start":"00:37.105 ","End":"00:39.259","Text":"we should have a balance of 20."},{"Start":"00:39.259 ","End":"00:41.795","Text":"However, we have a balance of 43,"},{"Start":"00:41.795 ","End":"00:46.265","Text":"which means that there is a missing debit of 23."},{"Start":"00:46.265 ","End":"00:52.445","Text":"That must mean that we\u0027ve issued new loans to associate companies during the year."},{"Start":"00:52.445 ","End":"00:55.675","Text":"Both of these, since they are loans,"},{"Start":"00:55.675 ","End":"00:57.360","Text":"deal with cash,"},{"Start":"00:57.360 ","End":"01:01.310","Text":"so if you prefer looking at it using the T-account format,"},{"Start":"01:01.310 ","End":"01:03.830","Text":"present this to you as follows."},{"Start":"01:03.830 ","End":"01:05.780","Text":"We\u0027d have the opening balance of 28."},{"Start":"01:05.780 ","End":"01:08.930","Text":"Now remember this is a loan that you have made to somebody else\u0027s."},{"Start":"01:08.930 ","End":"01:11.670","Text":"This is not a loan that you have borrowed,"},{"Start":"01:11.670 ","End":"01:13.500","Text":"you are issuing a loan."},{"Start":"01:13.500 ","End":"01:15.619","Text":"We have the opening balance of 28,"},{"Start":"01:15.619 ","End":"01:18.700","Text":"we have a closing balance of 43,"},{"Start":"01:18.700 ","End":"01:20.060","Text":"extend it a little bit."},{"Start":"01:20.060 ","End":"01:24.560","Text":"We received 8 from our associates when they repaid"},{"Start":"01:24.560 ","End":"01:30.570","Text":"portions of their loans and the contra entry was obviously then bank."},{"Start":"01:30.570 ","End":"01:38.614","Text":"Then we discovered that we had a missing debit of 23 in order to make up the total."},{"Start":"01:38.614 ","End":"01:39.960","Text":"If we look at the credit side,"},{"Start":"01:39.960 ","End":"01:47.015","Text":"8 plus 43 came to 51 and we only had a balance on the debit side of 28."},{"Start":"01:47.015 ","End":"01:49.205","Text":"To get it to add up to 51,"},{"Start":"01:49.205 ","End":"01:52.205","Text":"we had a missing debit of 23."},{"Start":"01:52.205 ","End":"01:56.570","Text":"That is also a cash transaction and that is"},{"Start":"01:56.570 ","End":"02:00.994","Text":"us giving our associates an amount of 23 on loan."},{"Start":"02:00.994 ","End":"02:07.410","Text":"This here is a cash receipt and this here is a cash payment."},{"Start":"02:07.410 ","End":"02:09.740","Text":"Let\u0027s put that into our cash flow statement."},{"Start":"02:09.740 ","End":"02:12.330","Text":"Now once again, we\u0027re dealing with an asset,"},{"Start":"02:12.330 ","End":"02:13.820","Text":"loans to associate companies,"},{"Start":"02:13.820 ","End":"02:20.800","Text":"it\u0027s an asset and so it\u0027s going to be in our cash from investing activities section."},{"Start":"02:20.800 ","End":"02:23.900","Text":"Here we put in the cash received from the associates when they were"},{"Start":"02:23.900 ","End":"02:26.630","Text":"repaying the loans of 8 and then we have"},{"Start":"02:26.630 ","End":"02:33.965","Text":"the cash that we paid out in respect of giving further loans to our associates of 23."},{"Start":"02:33.965 ","End":"02:38.630","Text":"Now let\u0027s move on to the fourth line item in our balance sheet,"},{"Start":"02:38.630 ","End":"02:42.990","Text":"which dealt with the interest receivable on these loans."}],"ID":29718},{"Watched":false,"Name":"Exercise 11 - LMN - F - CFI - Interest receivable account and Finalising the CFI section","Duration":"8m 1s","ChapterTopicVideoID":26866,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.730","Text":"The fourth line item in our balance sheet that we were"},{"Start":"00:02.730 ","End":"00:05.760","Text":"given was interest receivable on the loans account."},{"Start":"00:05.760 ","End":"00:09.015","Text":"Let\u0027s reconstruct this account in order to"},{"Start":"00:09.015 ","End":"00:12.915","Text":"determine whether there\u0027s been any impact on our bank account."},{"Start":"00:12.915 ","End":"00:14.925","Text":"Put in your opening balance,"},{"Start":"00:14.925 ","End":"00:16.200","Text":"which was 3,"},{"Start":"00:16.200 ","End":"00:19.315","Text":"then put in your closing balance which was 4."},{"Start":"00:19.315 ","End":"00:22.605","Text":"Then because this is interest receivable,"},{"Start":"00:22.605 ","End":"00:30.270","Text":"we need to identify what interest income was earned by us during the year."},{"Start":"00:30.270 ","End":"00:34.380","Text":"Interest income being income is going to be found in our income statement."},{"Start":"00:34.380 ","End":"00:36.375","Text":"Let\u0027s have a look at our income statement."},{"Start":"00:36.375 ","End":"00:38.340","Text":"Here\u0027s our income statement,"},{"Start":"00:38.340 ","End":"00:43.105","Text":"and there you will see we\u0027ve got interest income of 5."},{"Start":"00:43.105 ","End":"00:48.425","Text":"Put the interest income of 5 into our interest receivable accounts."},{"Start":"00:48.425 ","End":"00:52.400","Text":"In other words, we\u0027re going to increase the amount that is receivable from"},{"Start":"00:52.400 ","End":"00:57.860","Text":"our associates because we\u0027ve earned interest from them are 5."},{"Start":"00:57.860 ","End":"00:59.570","Text":"We\u0027re assuming, by the way,"},{"Start":"00:59.570 ","End":"01:03.560","Text":"we\u0027re assuming that the interest income that was given to us in"},{"Start":"01:03.560 ","End":"01:08.690","Text":"our income statement had to do with the loans to our associates."},{"Start":"01:08.690 ","End":"01:10.940","Text":"But it\u0027s a fair assumption given that there was"},{"Start":"01:10.940 ","End":"01:16.550","Text":"no further information given to us regarding any other interest-bearing investment."},{"Start":"01:16.550 ","End":"01:20.390","Text":"We have assumed that the interest income given to us in the income statement is 5."},{"Start":"01:20.390 ","End":"01:23.960","Text":"We pop that into the interest receivable from our associates."},{"Start":"01:23.960 ","End":"01:27.110","Text":"If we take an opening balance plus net amount of 5,"},{"Start":"01:27.110 ","End":"01:29.270","Text":"it means that our closing balance should have been 8,"},{"Start":"01:29.270 ","End":"01:30.695","Text":"but it isn\u0027t it\u0027s 4."},{"Start":"01:30.695 ","End":"01:36.135","Text":"That must mean that we\u0027ve credited this account with 4 or reduced it with 4,"},{"Start":"01:36.135 ","End":"01:40.475","Text":"and that would therefore be the cash that we\u0027ve received during the year."},{"Start":"01:40.475 ","End":"01:43.160","Text":"If you look at it from a T-account perspective,"},{"Start":"01:43.160 ","End":"01:48.320","Text":"you\u0027ve got interest receivable in the asset account,"},{"Start":"01:48.320 ","End":"01:51.150","Text":"which obviously gets bigger on the debit side."},{"Start":"01:51.150 ","End":"01:53.660","Text":"Our opening balance was 3,"},{"Start":"01:53.660 ","End":"01:55.920","Text":"our closing balance was 4."},{"Start":"01:55.920 ","End":"01:59.710","Text":"We earned interest income of 5 during the year."},{"Start":"01:59.710 ","End":"02:02.860","Text":"That was not a cash transaction."},{"Start":"02:02.860 ","End":"02:06.040","Text":"It\u0027s credit, interest income and income account"},{"Start":"02:06.040 ","End":"02:10.615","Text":"which being income increases on the credit side."},{"Start":"02:10.615 ","End":"02:12.775","Text":"Let\u0027s generally entry number 1,"},{"Start":"02:12.775 ","End":"02:15.385","Text":"we debit the interest receivable asset."},{"Start":"02:15.385 ","End":"02:18.115","Text":"We created the interest income account."},{"Start":"02:18.115 ","End":"02:23.025","Text":"We realized that our debits are currently sitting at h. It\u0027s the bigger of the 2 sides."},{"Start":"02:23.025 ","End":"02:27.430","Text":"8 less 4 means that we are missing a 4 on the credit side,"},{"Start":"02:27.430 ","End":"02:31.380","Text":"and that must have been a cash receipt."},{"Start":"02:31.380 ","End":"02:35.280","Text":"This is journal Number 2 debit,"},{"Start":"02:35.280 ","End":"02:37.555","Text":"the bank with 4."},{"Start":"02:37.555 ","End":"02:42.800","Text":"Remember, receipts go through on the debit side of your bank account."},{"Start":"02:42.800 ","End":"02:50.050","Text":"Where does cash received in terms of interest get presented in the cash-flow statement?"},{"Start":"02:50.050 ","End":"02:53.160","Text":"According to the standard on cash-flow statements,"},{"Start":"02:53.160 ","End":"02:54.714","Text":"there is a choice."},{"Start":"02:54.714 ","End":"02:57.890","Text":"If you go back to the question under the required,"},{"Start":"02:57.890 ","End":"03:02.750","Text":"there was a note and it told us that LMN had chosen as a policy"},{"Start":"03:02.750 ","End":"03:08.105","Text":"to classify their interest received in the cash from investing activities section."},{"Start":"03:08.105 ","End":"03:12.740","Text":"Therefore, under the cash from investing activities section,"},{"Start":"03:12.740 ","End":"03:15.950","Text":"you\u0027ll find the cash interest received a 4."},{"Start":"03:15.950 ","End":"03:20.150","Text":"Now I think that\u0027s all there is for the cash from investing activities section."},{"Start":"03:20.150 ","End":"03:25.340","Text":"But before I total that section,"},{"Start":"03:25.340 ","End":"03:27.710","Text":"I need to make sure we\u0027ve taken into account"},{"Start":"03:27.710 ","End":"03:30.860","Text":"everything that has been given to us in the question."},{"Start":"03:30.860 ","End":"03:34.230","Text":"Let\u0027s go through the question very carefully."},{"Start":"03:34.510 ","End":"03:36.620","Text":"If we look at the balance sheet,"},{"Start":"03:36.620 ","End":"03:38.840","Text":"we\u0027ve got the investment in associate companies,"},{"Start":"03:38.840 ","End":"03:41.345","Text":"and we have reconstructed that account."},{"Start":"03:41.345 ","End":"03:45.395","Text":"We\u0027ve been given the financial assets other than learns which we reconstructed,"},{"Start":"03:45.395 ","End":"03:49.430","Text":"we\u0027ve been given learns to associate companies which we reconstructed."},{"Start":"03:49.430 ","End":"03:53.795","Text":"We\u0027ve been given interest receivable on these learns which we reconstructed."},{"Start":"03:53.795 ","End":"03:56.345","Text":"Then in terms of additional information,"},{"Start":"03:56.345 ","End":"03:59.735","Text":"the cost of the financial assets purchased for cash,"},{"Start":"03:59.735 ","End":"04:02.240","Text":"we took that into account."},{"Start":"04:02.240 ","End":"04:08.540","Text":"When we reconstructed the financial assets other than loans that was taken into account,"},{"Start":"04:08.540 ","End":"04:13.145","Text":"loans repaid by the associate companies."},{"Start":"04:13.145 ","End":"04:20.375","Text":"We took that into account when we reconstructed the loans to associate company\u0027s account."},{"Start":"04:20.375 ","End":"04:24.860","Text":"Then we\u0027ve got cash dividend received from associate companies."},{"Start":"04:24.860 ","End":"04:31.920","Text":"We took that into account when we reconstructed the investment in associate companies."},{"Start":"04:31.960 ","End":"04:35.120","Text":"All of that information has been taken into account."},{"Start":"04:35.120 ","End":"04:38.859","Text":"Let\u0027s move on. Looking at the income statement."},{"Start":"04:38.859 ","End":"04:40.720","Text":"We\u0027ve got revenue, cost of sales,"},{"Start":"04:40.720 ","End":"04:44.320","Text":"general, and administrative expenses."},{"Start":"04:44.320 ","End":"04:48.940","Text":"Now, all of those actually belongs under"},{"Start":"04:48.940 ","End":"04:52.090","Text":"the operating activities section of the cashless statement and"},{"Start":"04:52.090 ","End":"04:56.515","Text":"we\u0027re currently busy with the cash from investing activities section."},{"Start":"04:56.515 ","End":"05:03.415","Text":"Then we come to the loss on disposal of financial assets other than loans."},{"Start":"05:03.415 ","End":"05:06.370","Text":"We took that into account when reconstructing"},{"Start":"05:06.370 ","End":"05:09.685","Text":"that account financial assets other than loans,"},{"Start":"05:09.685 ","End":"05:12.610","Text":"that gives us profit before finance,"},{"Start":"05:12.610 ","End":"05:16.300","Text":"that\u0027s just a subtotal, so not applicable."},{"Start":"05:16.300 ","End":"05:19.510","Text":"Then we have interest income,"},{"Start":"05:19.510 ","End":"05:27.550","Text":"we took this into"},{"Start":"05:27.550 ","End":"05:29.440","Text":"account when we reconstructed"},{"Start":"05:29.440 ","End":"05:33.760","Text":"the interest receivable account and we get profit before tax."},{"Start":"05:33.760 ","End":"05:37.900","Text":"That is not applicable because it\u0027s simply a subtotal."},{"Start":"05:37.900 ","End":"05:40.255","Text":"Then we get to tax expense,"},{"Start":"05:40.255 ","End":"05:43.105","Text":"which equals tax payment in terms of this question,"},{"Start":"05:43.105 ","End":"05:46.690","Text":"and this is irrelevant for the investing activities section"},{"Start":"05:46.690 ","End":"05:50.795","Text":"because it belongs under the operating activities section,"},{"Start":"05:50.795 ","End":"05:55.450","Text":"and then profit for the year is just a subtotal was actually the final total."},{"Start":"05:55.450 ","End":"05:57.640","Text":"That too is not applicable."},{"Start":"05:57.640 ","End":"06:01.660","Text":"So far, everything that we needed to take into account for"},{"Start":"06:01.660 ","End":"06:06.485","Text":"our investing activities section of the cash flow statement we have,"},{"Start":"06:06.485 ","End":"06:11.410","Text":"and last piece of information is the additional information sheet,"},{"Start":"06:11.410 ","End":"06:14.420","Text":"and here we were told about the investment"},{"Start":"06:14.420 ","End":"06:17.240","Text":"and associates having been accounted for using the equity method."},{"Start":"06:17.240 ","End":"06:20.525","Text":"Well, and this is just simply a description of what that meant,"},{"Start":"06:20.525 ","End":"06:24.470","Text":"but we know that now and the associate"},{"Start":"06:24.470 ","End":"06:29.030","Text":"reported a profit of 0 for the year that affected the equity method,"},{"Start":"06:29.030 ","End":"06:31.940","Text":"and it was explaining that,"},{"Start":"06:31.940 ","End":"06:34.310","Text":"whereas the equity method requires us to"},{"Start":"06:34.310 ","End":"06:38.450","Text":"debit the associates account with our share of the profit,"},{"Start":"06:38.450 ","End":"06:40.235","Text":"there was no profit."},{"Start":"06:40.235 ","End":"06:42.065","Text":"That\u0027s all it was saying there."},{"Start":"06:42.065 ","End":"06:45.525","Text":"Point 2 and Point 1 are related,"},{"Start":"06:45.525 ","End":"06:52.130","Text":"and this simply then explains that any movement in our investment and associates must"},{"Start":"06:52.130 ","End":"06:59.030","Text":"therefore have been in respect to our share of the dividend that we had received,"},{"Start":"06:59.030 ","End":"07:04.280","Text":"and then Point 3 was this dividend from the associated was received in cash."},{"Start":"07:04.280 ","End":"07:08.690","Text":"All of this information here was taken to account"},{"Start":"07:08.690 ","End":"07:14.645","Text":"when we reconstructed our investment in associates account."},{"Start":"07:14.645 ","End":"07:19.025","Text":"There is no further information that we needed to take into account"},{"Start":"07:19.025 ","End":"07:23.240","Text":"when presenting the cash from investing activities section."},{"Start":"07:23.240 ","End":"07:25.010","Text":"Let\u0027s have a look then."},{"Start":"07:25.010 ","End":"07:28.010","Text":"Our cash from investing activities section,"},{"Start":"07:28.010 ","End":"07:30.745","Text":"we can now safely total,"},{"Start":"07:30.745 ","End":"07:34.250","Text":"and it\u0027s a cash generated figure."},{"Start":"07:34.250 ","End":"07:37.610","Text":"If you add up all of the outflows, ones in brackets,"},{"Start":"07:37.610 ","End":"07:43.100","Text":"and you subtract it from all of the amounts that are not in brackets,"},{"Start":"07:43.100 ","End":"07:45.575","Text":"you get to a positive figure."},{"Start":"07:45.575 ","End":"07:49.195","Text":"In other words, without brackets of 25."},{"Start":"07:49.195 ","End":"07:53.180","Text":"That\u0027s Part 1 of the required that has been dealt with,"},{"Start":"07:53.180 ","End":"07:55.820","Text":"and now we move on to Part 2 of the required,"},{"Start":"07:55.820 ","End":"08:01.020","Text":"which is to present the cash from operating activities section."}],"ID":29719},{"Watched":false,"Name":"Exercise 11 - LMN - G - CFO","Duration":"7m 46s","ChapterTopicVideoID":26867,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.680 ","End":"00:04.560","Text":"Now let\u0027s move on to the second part,"},{"Start":"00:04.560 ","End":"00:08.655","Text":"to the required and that was to prepare the cash generated from"},{"Start":"00:08.655 ","End":"00:15.675","Text":"operating activities section of our cash flow statement and using the indirect method."},{"Start":"00:15.675 ","End":"00:19.605","Text":"Here we have our cash from operating activities section."},{"Start":"00:19.605 ","End":"00:21.570","Text":"Using the indirect method,"},{"Start":"00:21.570 ","End":"00:27.420","Text":"we need to start with our profit before finance and before tax line item."},{"Start":"00:27.420 ","End":"00:33.390","Text":"Go to your income statement and here we have our interest and our tax."},{"Start":"00:33.390 ","End":"00:37.275","Text":"Its profit before finance and before tax."},{"Start":"00:37.275 ","End":"00:40.560","Text":"That\u0027s the figure we are looking for, 112."},{"Start":"00:40.560 ","End":"00:44.975","Text":"Pop that in, profit before finance and tax of 112."},{"Start":"00:44.975 ","End":"00:48.770","Text":"The next thing to do is to adjust this for"},{"Start":"00:48.770 ","End":"00:56.795","Text":"non-cash flow items and adjust for changes in working capital accounts."},{"Start":"00:56.795 ","End":"00:59.155","Text":"That little triangle means changes."},{"Start":"00:59.155 ","End":"01:04.969","Text":"Working capital accounts refer to things like your accounts receivable, accounts payable,"},{"Start":"01:04.969 ","End":"01:10.730","Text":"inventory and then we\u0027re going to get to a subtotal cash generated"},{"Start":"01:10.730 ","End":"01:19.430","Text":"from operations and then we\u0027re going to adjust for separately disclosable items."},{"Start":"01:19.430 ","End":"01:24.170","Text":"Separately disclosable items include things like tax payments,"},{"Start":"01:24.170 ","End":"01:27.080","Text":"interest receipts, interest payments,"},{"Start":"01:27.080 ","End":"01:30.270","Text":"dividend receipts, and so on."},{"Start":"01:30.520 ","End":"01:33.665","Text":"Let\u0027s have a look to see what we have here."},{"Start":"01:33.665 ","End":"01:35.510","Text":"Looking at that income statement,"},{"Start":"01:35.510 ","End":"01:38.480","Text":"we had profit before finance of 112."},{"Start":"01:38.480 ","End":"01:44.345","Text":"Were there any non-cash flow items that occurred in order to get to the 112?"},{"Start":"01:44.345 ","End":"01:47.870","Text":"Well, yes there was, it was a loss on disposal of financial assets,"},{"Start":"01:47.870 ","End":"01:52.880","Text":"so that 10 was accounted for by debiting the loss on"},{"Start":"01:52.880 ","End":"01:59.690","Text":"disposal with 10 and crediting a disposal account with 10."},{"Start":"01:59.690 ","End":"02:05.335","Text":"That loss on disposal is a non-cash flow and the contra entry was not to bank."},{"Start":"02:05.335 ","End":"02:08.395","Text":"We\u0027re going to adjust for that loss and disposal."},{"Start":"02:08.395 ","End":"02:13.990","Text":"You might be wondering why we aren\u0027t also adjusting for revenue and"},{"Start":"02:13.990 ","End":"02:19.660","Text":"cost of sales because revenue doesn\u0027t necessarily have a contra account of bank."},{"Start":"02:19.660 ","End":"02:22.840","Text":"In fact, revenue invariably will"},{"Start":"02:22.840 ","End":"02:26.035","Text":"be a credit to revenue and a debit to accounts receivable."},{"Start":"02:26.035 ","End":"02:29.410","Text":"That\u0027s going to be taken into account when we adjust for the changes"},{"Start":"02:29.410 ","End":"02:32.805","Text":"in the working capital account called accounts receivable."},{"Start":"02:32.805 ","End":"02:35.440","Text":"We don\u0027t need to adjust for that even though we know that"},{"Start":"02:35.440 ","End":"02:38.540","Text":"the contra entry may not necessarily have been to bank."},{"Start":"02:38.540 ","End":"02:41.320","Text":"Similarly, with cost of sales,"},{"Start":"02:41.320 ","End":"02:43.720","Text":"we know that the cost of sales entry is normally"},{"Start":"02:43.720 ","End":"02:46.640","Text":"a debit cost of sales and a credit to inventory."},{"Start":"02:46.640 ","End":"02:51.199","Text":"We know that is a non-cash flow item because it doesn\u0027t affect bank,"},{"Start":"02:51.199 ","End":"02:55.550","Text":"it\u0027s a debit as to cost of sales and a credit to inventory."},{"Start":"02:55.550 ","End":"03:00.020","Text":"However, this non-cash flow aspect of the cost of"},{"Start":"03:00.020 ","End":"03:02.210","Text":"sales expense is going to be taken into"},{"Start":"03:02.210 ","End":"03:05.900","Text":"account when we adjust to the changes in working capital accounts,"},{"Start":"03:05.900 ","End":"03:08.995","Text":"inventory, and accounts payable."},{"Start":"03:08.995 ","End":"03:11.225","Text":"We don\u0027t need to worry about that."},{"Start":"03:11.225 ","End":"03:14.535","Text":"General and admin expenses, similarly,"},{"Start":"03:14.535 ","End":"03:19.220","Text":"if there was an expenses payable or expenses prepaid account,"},{"Start":"03:19.220 ","End":"03:24.760","Text":"that would also be taken into account when we adjust for the changes in working capital."},{"Start":"03:24.760 ","End":"03:27.710","Text":"There is only 1 account here,"},{"Start":"03:27.710 ","End":"03:31.580","Text":"the loss on disposal of financial assets other than loans that we need to"},{"Start":"03:31.580 ","End":"03:36.340","Text":"take into account here in terms of non-cash flow items."},{"Start":"03:36.340 ","End":"03:40.325","Text":"You pop that in. Then we look for changes in working capital."},{"Start":"03:40.325 ","End":"03:44.480","Text":"You go to your balance sheet and in this particular scenario,"},{"Start":"03:44.480 ","End":"03:50.360","Text":"we only have 4 assets and they\u0027re all financial assets,"},{"Start":"03:50.360 ","End":"03:53.480","Text":"investments and associates financial assets other than loans,"},{"Start":"03:53.480 ","End":"03:56.795","Text":"loans to associate an interest receivable on these loans."},{"Start":"03:56.795 ","End":"04:00.320","Text":"All of those are financial assets and it would appear that there"},{"Start":"04:00.320 ","End":"04:03.845","Text":"are no working capital accounts in this company at all,"},{"Start":"04:03.845 ","End":"04:06.049","Text":"no inventory, no accounts receivable,"},{"Start":"04:06.049 ","End":"04:07.235","Text":"no accounts payable,"},{"Start":"04:07.235 ","End":"04:10.895","Text":"no prepayments, no received in advance."},{"Start":"04:10.895 ","End":"04:14.510","Text":"We don\u0027t have any working capital in this question."},{"Start":"04:14.510 ","End":"04:18.560","Text":"We are assuming we have no working capital accounts."},{"Start":"04:18.560 ","End":"04:22.220","Text":"Since we don\u0027t have any working capital accounts suggest for,"},{"Start":"04:22.220 ","End":"04:25.279","Text":"we simply get to the subtotal called cash generated"},{"Start":"04:25.279 ","End":"04:28.745","Text":"from operations and that\u0027s now sitting at 122."},{"Start":"04:28.745 ","End":"04:34.155","Text":"Then the next item we need to adjust for are those separately disclosable items."},{"Start":"04:34.155 ","End":"04:37.235","Text":"Let\u0027s have a look at our income statement."},{"Start":"04:37.235 ","End":"04:39.930","Text":"Separately disclosable items,"},{"Start":"04:39.930 ","End":"04:42.360","Text":"let\u0027s just pop that in as SDI."},{"Start":"04:42.360 ","End":"04:47.075","Text":"Separately disclosable items are things like your tax payments,"},{"Start":"04:47.075 ","End":"04:50.390","Text":"interest payments or receipts,"},{"Start":"04:50.390 ","End":"04:54.715","Text":"and dividend payments or receipts."},{"Start":"04:54.715 ","End":"04:57.515","Text":"Now, we have a tax expense,"},{"Start":"04:57.515 ","End":"05:02.485","Text":"and in this question we\u0027re told that the tax expense equals the tax paid, and that\u0027s 29."},{"Start":"05:02.485 ","End":"05:04.880","Text":"We\u0027re going to put that into our cash flow statement."},{"Start":"05:04.880 ","End":"05:09.125","Text":"However, just a point about the interest,"},{"Start":"05:09.125 ","End":"05:16.505","Text":"interest receipts could be presented in the operating activities section."},{"Start":"05:16.505 ","End":"05:18.920","Text":"However, in the required,"},{"Start":"05:18.920 ","End":"05:22.010","Text":"we were told that the company had chosen to"},{"Start":"05:22.010 ","End":"05:27.080","Text":"present interest in the investing activities section,"},{"Start":"05:27.080 ","End":"05:30.170","Text":"not the operating activities section."},{"Start":"05:30.170 ","End":"05:33.770","Text":"Although interest receipts would have been"},{"Start":"05:33.770 ","End":"05:37.511","Text":"a separately disclosable item under operating activities section,"},{"Start":"05:37.511 ","End":"05:39.200","Text":"you\u0027re not finding it in"},{"Start":"05:39.200 ","End":"05:43.010","Text":"this particular company\u0027s operating activities section because"},{"Start":"05:43.010 ","End":"05:48.080","Text":"this company had chosen to present it under the investing activities section."},{"Start":"05:48.080 ","End":"05:53.210","Text":"Similarly, dividend receipts may only be presented under"},{"Start":"05:53.210 ","End":"05:56.030","Text":"the operating activities section if"},{"Start":"05:56.030 ","End":"06:01.310","Text":"the dividend income had been included in the calculation of profit."},{"Start":"06:01.310 ","End":"06:03.215","Text":"In this case, however,"},{"Start":"06:03.215 ","End":"06:08.810","Text":"the dividend income had not been included in profit and the reason is it"},{"Start":"06:08.810 ","End":"06:15.020","Text":"was a dividend from an associate and we had chosen to equity account our associates."},{"Start":"06:15.020 ","End":"06:20.690","Text":"That meant that the dividend from our associate was not credited to"},{"Start":"06:20.690 ","End":"06:26.660","Text":"income but was created to the investment in the associate account instead,"},{"Start":"06:26.660 ","End":"06:29.180","Text":"it had been credited to an asset account."},{"Start":"06:29.180 ","End":"06:31.820","Text":"It had not been credited to income and"},{"Start":"06:31.820 ","End":"06:35.555","Text":"therefore that dividend had not been included in profit."},{"Start":"06:35.555 ","End":"06:41.030","Text":"Therefore, the dividend received is not going to"},{"Start":"06:41.030 ","End":"06:46.070","Text":"appear in the operating activities section of our cash flow statement."},{"Start":"06:46.070 ","End":"06:52.060","Text":"It has to appear in the cash from investing activities section."},{"Start":"06:52.060 ","End":"06:54.615","Text":"As you can see then, we only have"},{"Start":"06:54.615 ","End":"06:59.900","Text":"1 separately disposable item and that is the tax payment, 29."},{"Start":"06:59.900 ","End":"07:03.545","Text":"We pop that into the cash from operating activities section,"},{"Start":"07:03.545 ","End":"07:08.990","Text":"tax paid 29 and we can see because we\u0027ve gone through everything in"},{"Start":"07:08.990 ","End":"07:11.600","Text":"our balance sheet and income statement and"},{"Start":"07:11.600 ","End":"07:14.900","Text":"all of the additional information we ticked everything off,"},{"Start":"07:14.900 ","End":"07:18.020","Text":"we now know that our cash generated from"},{"Start":"07:18.020 ","End":"07:22.475","Text":"operating activities can be totaled and that will be 93."},{"Start":"07:22.475 ","End":"07:26.040","Text":"In inflow, cash generated from certain inflow,"},{"Start":"07:26.040 ","End":"07:27.210","Text":"the net inflows,"},{"Start":"07:27.210 ","End":"07:28.835","Text":"this is an outflow,"},{"Start":"07:28.835 ","End":"07:30.740","Text":"everything without brackets as an inflow,"},{"Start":"07:30.740 ","End":"07:33.430","Text":"we\u0027ve got a net inflow of 93."},{"Start":"07:33.430 ","End":"07:36.005","Text":"Well done for completing that."},{"Start":"07:36.005 ","End":"07:42.500","Text":"This was a particularly difficult question if you hadn\u0027t covered associates before."},{"Start":"07:42.500 ","End":"07:47.040","Text":"Well done for completing it. Bye for now."}],"ID":29720},{"Watched":false,"Name":"Exercise 12 MNO - A - question pages","Duration":"4m 12s","ChapterTopicVideoID":26896,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.840","Text":"Today we\u0027re going to do an exercise called MNO."},{"Start":"00:03.840 ","End":"00:06.810","Text":"The following are selected end-of-year balances from"},{"Start":"00:06.810 ","End":"00:11.160","Text":"MNO\u0027s balance sheet together with its income statement for 20X2."},{"Start":"00:11.160 ","End":"00:14.100","Text":"We\u0027re told we have short-term borrowings and"},{"Start":"00:14.100 ","End":"00:16.920","Text":"long-term borrowings and we\u0027re given the opening balances."},{"Start":"00:16.920 ","End":"00:19.800","Text":"In other words, the balances the end of 20X1,"},{"Start":"00:19.800 ","End":"00:22.830","Text":"55 and 162 respectively,"},{"Start":"00:22.830 ","End":"00:28.720","Text":"and that the closing balances changed 47 and 181 respectively."},{"Start":"00:28.720 ","End":"00:33.350","Text":"Then we\u0027re given interest payable with respect to these loans."},{"Start":"00:33.350 ","End":"00:40.415","Text":"We owed 8 in interest at the end of 20X1 and now we owe 12 share capital."},{"Start":"00:40.415 ","End":"00:43.895","Text":"At the end of 20X1 was 280,"},{"Start":"00:43.895 ","End":"00:46.220","Text":"and it has grown to 300."},{"Start":"00:46.220 ","End":"00:52.730","Text":"Then we have retained earnings which grew from 478 to 534."},{"Start":"00:52.730 ","End":"00:55.325","Text":"Then we are given additional information."},{"Start":"00:55.325 ","End":"01:00.110","Text":"We\u0027re told we\u0027ve repaid borrowings to the extent of 55 currency units."},{"Start":"01:00.110 ","End":"01:02.825","Text":"Then we\u0027re told that we\u0027ve repurchased"},{"Start":"01:02.825 ","End":"01:07.010","Text":"shares during the year to the extent of 10 currency units."},{"Start":"01:07.010 ","End":"01:09.130","Text":"All movements in the share capital account were"},{"Start":"01:09.130 ","End":"01:13.965","Text":"cash transactions and that\u0027s important because they are all"},{"Start":"01:13.965 ","End":"01:18.080","Text":"share capital transactions that can occur that don\u0027t affect the bank at"},{"Start":"01:18.080 ","End":"01:21.970","Text":"all such as share splits."},{"Start":"01:21.970 ","End":"01:25.010","Text":"There were no transfers in or out of"},{"Start":"01:25.010 ","End":"01:28.610","Text":"the retained earnings account and that\u0027s also of importance in"},{"Start":"01:28.610 ","End":"01:32.000","Text":"particular because we certainly have movements in shares and"},{"Start":"01:32.000 ","End":"01:36.170","Text":"sometimes where we have share repurchases."},{"Start":"01:36.170 ","End":"01:42.080","Text":"For example, we would have to transfer from our retained earnings to another account,"},{"Start":"01:42.080 ","End":"01:44.765","Text":"often referred to as the capital redemption reserve fund."},{"Start":"01:44.765 ","End":"01:49.025","Text":"It all depends on the legal system in which your company operates."},{"Start":"01:49.025 ","End":"01:51.320","Text":"But there were no transfers in or out of"},{"Start":"01:51.320 ","End":"01:57.260","Text":"the retained earnings and any dividends declared were paid in cash."},{"Start":"01:57.260 ","End":"02:01.475","Text":"That\u0027s also important because some dividends can be script dividends,"},{"Start":"02:01.475 ","End":"02:03.919","Text":"which are not cash dividends."},{"Start":"02:03.919 ","End":"02:06.815","Text":"Now we\u0027re also given the income statement."},{"Start":"02:06.815 ","End":"02:10.430","Text":"The usual line items are given here."},{"Start":"02:10.430 ","End":"02:12.994","Text":"We\u0027ve got revenue, cost of sales."},{"Start":"02:12.994 ","End":"02:16.880","Text":"Sometimes they have another line item showing the difference"},{"Start":"02:16.880 ","End":"02:20.990","Text":"between revenue less costs of sales being gross profit is not a requirement to show it,"},{"Start":"02:20.990 ","End":"02:22.550","Text":"so they haven\u0027t shown it here."},{"Start":"02:22.550 ","End":"02:27.425","Text":"Then there\u0027s the general and administrative expenses deducted,"},{"Start":"02:27.425 ","End":"02:32.335","Text":"and that gives us the profit before finance charges of 122."},{"Start":"02:32.335 ","End":"02:34.790","Text":"Then of course we subtract the finance charges,"},{"Start":"02:34.790 ","End":"02:37.400","Text":"otherwise known as interest expense of 20."},{"Start":"02:37.400 ","End":"02:39.980","Text":"That gives us our profit before tax."},{"Start":"02:39.980 ","End":"02:43.985","Text":"We then subtract our tax and that gives us profit for the year."},{"Start":"02:43.985 ","End":"02:49.780","Text":"In this question, we are told that the tax expense was also equal to the tax payment."},{"Start":"02:49.780 ","End":"02:52.970","Text":"As it turns out, that\u0027s not going to be of relevance at"},{"Start":"02:52.970 ","End":"02:55.580","Text":"all to the question because we\u0027re not"},{"Start":"02:55.580 ","End":"02:58.250","Text":"asked for the cash generated"},{"Start":"02:58.250 ","End":"03:01.745","Text":"from operating activities section of the cash flow statement."},{"Start":"03:01.745 ","End":"03:05.039","Text":"This was just irrelevant information."},{"Start":"03:05.230 ","End":"03:09.890","Text":"Alright, then in terms of the required it says based on this information,"},{"Start":"03:09.890 ","End":"03:13.250","Text":"prepare the section in the cash flow statement that reports the cash"},{"Start":"03:13.250 ","End":"03:17.029","Text":"generated from or used in financing activities."},{"Start":"03:17.029 ","End":"03:20.000","Text":"Now remember there are 3 main sections of the cash flow statement."},{"Start":"03:20.000 ","End":"03:22.895","Text":"There is cash generated from operating activities,"},{"Start":"03:22.895 ","End":"03:25.414","Text":"cash generated from investing activities,"},{"Start":"03:25.414 ","End":"03:28.970","Text":"and cash generated from financing activities and it\u0027s"},{"Start":"03:28.970 ","End":"03:32.825","Text":"this last section that we\u0027re required to produce in this particular exercise."},{"Start":"03:32.825 ","End":"03:38.120","Text":"Then we\u0027re also been told by whatever note that LMN\u0027s policy is to"},{"Start":"03:38.120 ","End":"03:41.360","Text":"classify interest paid in"},{"Start":"03:41.360 ","End":"03:45.665","Text":"the cash from financing activities section of the statement of cash flows."},{"Start":"03:45.665 ","End":"03:48.980","Text":"Now that\u0027s interesting and important because we do have"},{"Start":"03:48.980 ","End":"03:53.135","Text":"interest payments and interest expense in this particular question."},{"Start":"03:53.135 ","End":"03:56.060","Text":"Interest payments can be classified as"},{"Start":"03:56.060 ","End":"03:59.870","Text":"either part of your cash from operating activities,"},{"Start":"03:59.870 ","End":"04:03.315","Text":"or cash from financing activities."},{"Start":"04:03.315 ","End":"04:07.280","Text":"We\u0027re being told that the interest payment must appear in the cash from"},{"Start":"04:07.280 ","End":"04:12.660","Text":"financing activities so it is going to affect our solution."}],"ID":29721},{"Watched":false,"Name":"Exercise 12 MNO - B - solution - an overview of how to approach this question","Duration":"2m 43s","ChapterTopicVideoID":26897,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.645","Text":"Let\u0027s look at the solution to MNO."},{"Start":"00:03.645 ","End":"00:05.580","Text":"Before we get started,"},{"Start":"00:05.580 ","End":"00:09.135","Text":"let\u0027s decide how to approach the solution."},{"Start":"00:09.135 ","End":"00:11.895","Text":"Remember to always start by looking at the required."},{"Start":"00:11.895 ","End":"00:15.450","Text":"In this question, we were asked to produce the cash generated from"},{"Start":"00:15.450 ","End":"00:19.290","Text":"financing activities section of our cash flow statement."},{"Start":"00:19.290 ","End":"00:22.440","Text":"Now, when we\u0027re talking about financing,"},{"Start":"00:22.440 ","End":"00:25.845","Text":"we are talking about liabilities and equity."},{"Start":"00:25.845 ","End":"00:28.155","Text":"Thus, with that in mind,"},{"Start":"00:28.155 ","End":"00:31.650","Text":"we need to go through the information that\u0027s given to us in the question to"},{"Start":"00:31.650 ","End":"00:36.075","Text":"find anything that relates to liability and equity."},{"Start":"00:36.075 ","End":"00:38.060","Text":"Starting with the balance sheet,"},{"Start":"00:38.060 ","End":"00:40.730","Text":"you can see we\u0027ve been given short-term borrowings, long-term borrowings,"},{"Start":"00:40.730 ","End":"00:41.915","Text":"and interest payable,"},{"Start":"00:41.915 ","End":"00:45.735","Text":"and those are liabilities."},{"Start":"00:45.735 ","End":"00:49.325","Text":"Then we\u0027ve been given share capital and retained earnings,"},{"Start":"00:49.325 ","End":"00:52.415","Text":"and those 2 are equity accounts."},{"Start":"00:52.415 ","End":"00:55.490","Text":"We\u0027re going to need to reconcile each one of those accounts to"},{"Start":"00:55.490 ","End":"00:59.945","Text":"see if they affect our bank account and if so, by how much."},{"Start":"00:59.945 ","End":"01:01.400","Text":"In order to do that, though,"},{"Start":"01:01.400 ","End":"01:05.705","Text":"we need to consider all the other information that\u0027s given to us in the question."},{"Start":"01:05.705 ","End":"01:08.990","Text":"We will look through the additional information and my advice to"},{"Start":"01:08.990 ","End":"01:12.110","Text":"you is to tick off each piece of additional information,"},{"Start":"01:12.110 ","End":"01:15.050","Text":"and in fact, each line item in that balance sheet,"},{"Start":"01:15.050 ","End":"01:18.230","Text":"as you deal with it in your calculations."},{"Start":"01:18.230 ","End":"01:20.780","Text":"That way, you won\u0027t inadvertently"},{"Start":"01:20.780 ","End":"01:25.420","Text":"miss taking into account some of the information that\u0027s been provided to you."},{"Start":"01:25.420 ","End":"01:27.290","Text":"We\u0027ll go through the additional information,"},{"Start":"01:27.290 ","End":"01:28.730","Text":"taking it off as we use it."},{"Start":"01:28.730 ","End":"01:31.460","Text":"Then we\u0027ll go through the income statement doing exactly the same."},{"Start":"01:31.460 ","End":"01:34.610","Text":"You will notice that some of the line items, for example,"},{"Start":"01:34.610 ","End":"01:38.375","Text":"the revenue and the cost of sales and the general and admin expenses,"},{"Start":"01:38.375 ","End":"01:41.520","Text":"actually don\u0027t affect financing."},{"Start":"01:41.520 ","End":"01:46.160","Text":"On occasion, you will notice that some of the items that is given to you, for example,"},{"Start":"01:46.160 ","End":"01:48.740","Text":"in our income statement that does not actually get"},{"Start":"01:48.740 ","End":"01:51.780","Text":"taken into account in the calculations."},{"Start":"01:51.780 ","End":"01:53.190","Text":"For example, revenue,"},{"Start":"01:53.190 ","End":"01:54.800","Text":"costs of sales, general,"},{"Start":"01:54.800 ","End":"02:00.259","Text":"and administrative expenses don\u0027t affect liabilities and equity,"},{"Start":"02:00.259 ","End":"02:03.560","Text":"except to the extent that they do affect profit and profit will"},{"Start":"02:03.560 ","End":"02:06.860","Text":"ultimately affect retained earnings that we will take into account."},{"Start":"02:06.860 ","End":"02:12.935","Text":"But these individual accounts here don\u0027t affect liabilities and they don\u0027t affect equity,"},{"Start":"02:12.935 ","End":"02:16.175","Text":"and therefore, they will not be included in our calculations."},{"Start":"02:16.175 ","End":"02:19.850","Text":"They are what we refer to quite often in academia as red herrings,"},{"Start":"02:19.850 ","End":"02:23.610","Text":"they\u0027re there to simply confuse you."},{"Start":"02:23.610 ","End":"02:26.792","Text":"That\u0027s not to be nasty,"},{"Start":"02:26.792 ","End":"02:28.550","Text":"it\u0027s the way life is."},{"Start":"02:28.550 ","End":"02:30.365","Text":"In real life, you\u0027re going to come across"},{"Start":"02:30.365 ","End":"02:33.950","Text":"a lot more information than is presented to you on the sheet of paper,"},{"Start":"02:33.950 ","End":"02:37.970","Text":"and you\u0027re going to have to sift through it and decide what is relevant to"},{"Start":"02:37.970 ","End":"02:40.220","Text":"the exercise you\u0027re busy with for the business"},{"Start":"02:40.220 ","End":"02:43.560","Text":"that you work for or the business that you run."}],"ID":29722},{"Watched":false,"Name":"Exercise 12 MNO - C - solution - Analysis of Borrowing accounts","Duration":"5m 41s","ChapterTopicVideoID":26898,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.350 ","End":"00:02.370","Text":"Looking at the balance sheet,"},{"Start":"00:02.370 ","End":"00:04.230","Text":"you can see we have 2 borrowing accounts."},{"Start":"00:04.230 ","End":"00:07.200","Text":"We\u0027ve got short-term borrowings and long-term borrowings."},{"Start":"00:07.200 ","End":"00:09.810","Text":"Now, in the cash flow statement,"},{"Start":"00:09.810 ","End":"00:13.680","Text":"we do not need to separate the cash receipts and cash payments that"},{"Start":"00:13.680 ","End":"00:15.900","Text":"relate to short-term borrowings from the cash receipts"},{"Start":"00:15.900 ","End":"00:18.360","Text":"and cash payments relating to long-term borrowings."},{"Start":"00:18.360 ","End":"00:21.350","Text":"For that reason, when we analyze our borrowings,"},{"Start":"00:21.350 ","End":"00:25.750","Text":"we\u0027re simply going to combine the short-term and long-term borrowings together."},{"Start":"00:25.750 ","End":"00:31.670","Text":"We have borrowings which we\u0027re going to combine together short-term and long-term."},{"Start":"00:31.670 ","End":"00:33.860","Text":"Borrowings is a liability."},{"Start":"00:33.860 ","End":"00:36.170","Text":"Liabilities get bigger on the credit side,"},{"Start":"00:36.170 ","End":"00:37.985","Text":"in other words, the right-hand side."},{"Start":"00:37.985 ","End":"00:40.475","Text":"Then we\u0027re going to have the bank account,"},{"Start":"00:40.475 ","End":"00:45.200","Text":"to record any effect the borrowings had on the bank."},{"Start":"00:45.200 ","End":"00:50.330","Text":"Now, our opening balance is 217."},{"Start":"00:50.330 ","End":"00:55.760","Text":"I got that by adding the opening balance of the short-term plus"},{"Start":"00:55.760 ","End":"01:02.320","Text":"the opening balance of the long-term was 55 and 162 respectively."},{"Start":"01:02.320 ","End":"01:05.260","Text":"Those were the balances at the end of 20X1."},{"Start":"01:05.260 ","End":"01:10.540","Text":"Then, I put in the closing balance and my closing balance is 228."},{"Start":"01:10.540 ","End":"01:20.790","Text":"This is made up of short-term and long-term 47 and 181, respectively."},{"Start":"01:20.790 ","End":"01:29.200","Text":"Now we\u0027re also told that we repaid some of our borrowing and we repayed 55."},{"Start":"01:29.200 ","End":"01:30.520","Text":"If you made a payment,"},{"Start":"01:30.520 ","End":"01:32.800","Text":"you would have credited to the bank,"},{"Start":"01:32.800 ","End":"01:35.425","Text":"because payments go through on the credit side."},{"Start":"01:35.425 ","End":"01:40.725","Text":"This is the credit side, your bank gets smaller because it\u0027s ideally an asset."},{"Start":"01:40.725 ","End":"01:44.815","Text":"Your bank asset gets smaller when you make a payment."},{"Start":"01:44.815 ","End":"01:52.035","Text":"We would\u0027ve made a payment by crediting bank 55 and debiting our borrowing."},{"Start":"01:52.035 ","End":"01:54.410","Text":"Our borrowings are going to get smaller on the debit side,"},{"Start":"01:54.410 ","End":"01:56.454","Text":"because remember borrowings are a liability."},{"Start":"01:56.454 ","End":"01:58.180","Text":"They get bigger on the right-hand side,"},{"Start":"01:58.180 ","End":"02:00.820","Text":"smaller on the left hand or debit side."},{"Start":"02:00.820 ","End":"02:02.770","Text":"This is a journal entry,"},{"Start":"02:02.770 ","End":"02:05.005","Text":"let\u0027s call it journal number 1."},{"Start":"02:05.005 ","End":"02:07.750","Text":"Now looking at the borrowing account,"},{"Start":"02:07.750 ","End":"02:09.325","Text":"which side is bigger?"},{"Start":"02:09.325 ","End":"02:11.110","Text":"Is that the debit side or the credit side?"},{"Start":"02:11.110 ","End":"02:15.760","Text":"Where we can see clearly the debits add up to 283."},{"Start":"02:15.760 ","End":"02:18.595","Text":"We need to take that across to the other side,"},{"Start":"02:18.595 ","End":"02:22.465","Text":"283 less 217,"},{"Start":"02:22.465 ","End":"02:26.805","Text":"means that we\u0027re missing an amount of 66."},{"Start":"02:26.805 ","End":"02:29.300","Text":"Now the 66 being on the credit side means that"},{"Start":"02:29.300 ","End":"02:31.760","Text":"our borrowings got bigger during the year by 66,"},{"Start":"02:31.760 ","End":"02:35.450","Text":"and that therefore means that we must have received further borrowings."},{"Start":"02:35.450 ","End":"02:39.335","Text":"In other words, we\u0027ve got another loan or we made an existing loan bigger."},{"Start":"02:39.335 ","End":"02:42.695","Text":"Let\u0027s call this journal number 2."},{"Start":"02:42.695 ","End":"02:46.715","Text":"We must have credited borrowings and we must have debited bank."},{"Start":"02:46.715 ","End":"02:48.260","Text":"We got a new loans,"},{"Start":"02:48.260 ","End":"02:53.750","Text":"so we received a new loan and receipts go through on the debit side of your bank."},{"Start":"02:53.750 ","End":"02:57.195","Text":"Debit side receipts make your bank bigger."},{"Start":"02:57.195 ","End":"02:58.800","Text":"We received a new loan,"},{"Start":"02:58.800 ","End":"03:04.230","Text":"you repaid a loan or part of a loan."},{"Start":"03:04.230 ","End":"03:08.825","Text":"Because our borrowing has affected bank,"},{"Start":"03:08.825 ","End":"03:13.674","Text":"it means that it\u0027s going to appear in our cash flow statement."},{"Start":"03:13.674 ","End":"03:19.765","Text":"Before I show you these 2 amounts of the 66 and 55 in the cash flow statement,"},{"Start":"03:19.765 ","End":"03:23.630","Text":"I\u0027m going to now show you the calculations again,"},{"Start":"03:23.630 ","End":"03:25.655","Text":"but this time using the columnar format."},{"Start":"03:25.655 ","End":"03:27.710","Text":"This was the T-account format."},{"Start":"03:27.710 ","End":"03:30.020","Text":"If you\u0027ve understood the T-account format"},{"Start":"03:30.020 ","End":"03:31.940","Text":"and you don\u0027t feel like looking at the next slide,"},{"Start":"03:31.940 ","End":"03:34.130","Text":"you\u0027re welcome to skip across to where I show"},{"Start":"03:34.130 ","End":"03:37.660","Text":"you how these 2 figures appear in our cash flow statement."},{"Start":"03:37.660 ","End":"03:40.115","Text":"Now, let\u0027s look at the bearing accounts again."},{"Start":"03:40.115 ","End":"03:44.255","Text":"This time I\u0027m going to reconcile the borrowing accounts but using the columnar format."},{"Start":"03:44.255 ","End":"03:46.565","Text":"We\u0027re going to get to the same answer it\u0027s a different layout,"},{"Start":"03:46.565 ","End":"03:48.670","Text":"you may prefer this layout."},{"Start":"03:48.670 ","End":"03:50.815","Text":"We\u0027ve got the opening balance,"},{"Start":"03:50.815 ","End":"03:54.890","Text":"short-term and long-term accounts were added together because we don\u0027t need to"},{"Start":"03:54.890 ","End":"03:59.285","Text":"separately disclose the cash flows relating to short-term and long-term borrowings."},{"Start":"03:59.285 ","End":"04:04.915","Text":"The short-term borrowings were 55 and the long-term borrowings were 162,"},{"Start":"04:04.915 ","End":"04:10.980","Text":"55 plus 162 and that gave us the 217."},{"Start":"04:10.980 ","End":"04:13.460","Text":"Then put in your closing balance or your ending balance."},{"Start":"04:13.460 ","End":"04:20.435","Text":"In this case, our short-term balance was 47 and a long-term closing balance was 181."},{"Start":"04:20.435 ","End":"04:23.635","Text":"The 2 together gives us 228."},{"Start":"04:23.635 ","End":"04:27.120","Text":"We were also told that we repaid some of our loans,"},{"Start":"04:27.120 ","End":"04:31.775","Text":"So that 217 would have decreased by the amount that we had repaid."},{"Start":"04:31.775 ","End":"04:35.270","Text":"We would have subtracted the repayment of 55."},{"Start":"04:35.270 ","End":"04:38.360","Text":"Now we have a missing line item here,"},{"Start":"04:38.360 ","End":"04:40.610","Text":"and this is obviously the receipt,"},{"Start":"04:40.610 ","End":"04:46.605","Text":"because 217 less 55 is 162."},{"Start":"04:46.605 ","End":"04:49.549","Text":"Therefore we can see that we must have received"},{"Start":"04:49.549 ","End":"04:54.820","Text":"an amount of 66 because our closing balance is 228."},{"Start":"04:54.820 ","End":"04:58.910","Text":"It doesn\u0027t matter which method you use the T-account format or the columnar format,"},{"Start":"04:58.910 ","End":"05:00.965","Text":"but here are your 2 cash flow amounts."},{"Start":"05:00.965 ","End":"05:06.100","Text":"We paid an amount of 55 and we received another loan of 66."},{"Start":"05:06.100 ","End":"05:10.509","Text":"Both of these have to go through to our cash flow statement."},{"Start":"05:10.509 ","End":"05:14.875","Text":"We\u0027re going to put it into our financing activities section,"},{"Start":"05:14.875 ","End":"05:17.010","Text":"within the cash flow statement."},{"Start":"05:17.010 ","End":"05:25.860","Text":"In our cash flows from financing activities section for the year 31st symmetry X2,"},{"Start":"05:25.860 ","End":"05:30.540","Text":"we\u0027ve got a cash outflow when we repaid our borrowings at 55,"},{"Start":"05:30.540 ","End":"05:35.985","Text":"and we\u0027ve got a cash inflow from new borrowings during year of 66."},{"Start":"05:35.985 ","End":"05:42.690","Text":"Let\u0027s move on to the next ledger accounts that we need to reconcile."}],"ID":29723},{"Watched":false,"Name":"Exercise 12 MNO - D - solution - Analysis of the Interest Payable account","Duration":"4m 54s","ChapterTopicVideoID":26899,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.390","Text":"Now let\u0027s analyze the interest payable account."},{"Start":"00:03.390 ","End":"00:07.095","Text":"First, I\u0027m going to show you how to analyze it using the T-account format."},{"Start":"00:07.095 ","End":"00:10.005","Text":"If you don\u0027t like the T-account method,"},{"Start":"00:10.005 ","End":"00:13.440","Text":"then just move on from this particular slide to the next slide"},{"Start":"00:13.440 ","End":"00:17.160","Text":"where I\u0027ll show you how to do the reconciliation using the columnar format."},{"Start":"00:17.160 ","End":"00:19.860","Text":"We have an interest payable account,"},{"Start":"00:19.860 ","End":"00:21.755","Text":"which is a liability,"},{"Start":"00:21.755 ","End":"00:24.900","Text":"and liabilities get bigger on the credit side."},{"Start":"00:24.900 ","End":"00:29.520","Text":"Our opening balance of our interest payable is 8,"},{"Start":"00:29.520 ","End":"00:34.170","Text":"and the closing balance grew to an amount of 12."},{"Start":"00:34.170 ","End":"00:37.950","Text":"Now, obviously, that opening balance of interest that we owed at"},{"Start":"00:37.950 ","End":"00:42.585","Text":"the beginning of the year would get bigger if we incurred any further interest expense."},{"Start":"00:42.585 ","End":"00:47.290","Text":"Interest expense, this get bigger on the debit side."},{"Start":"00:47.290 ","End":"00:49.855","Text":"Expenses get bigger on the debit side."},{"Start":"00:49.855 ","End":"00:53.435","Text":"For this, we needed to have a look at our income statement."},{"Start":"00:53.435 ","End":"00:55.285","Text":"If you look at the income statement,"},{"Start":"00:55.285 ","End":"00:57.985","Text":"interest expense, sometimes called finance charges,"},{"Start":"00:57.985 ","End":"01:00.460","Text":"is a separately disclosable item that you should be able to"},{"Start":"01:00.460 ","End":"01:03.145","Text":"pick up from the face of that income statement."},{"Start":"01:03.145 ","End":"01:05.585","Text":"There it is, the amount is 20."},{"Start":"01:05.585 ","End":"01:09.520","Text":"During the year, we must have debited the interest expense with"},{"Start":"01:09.520 ","End":"01:13.825","Text":"20 and we would have credited that to interest payable."},{"Start":"01:13.825 ","End":"01:18.265","Text":"But that means that our interest payable by the end of the year should have been 28."},{"Start":"01:18.265 ","End":"01:20.350","Text":"But you can see it isn\u0027t."},{"Start":"01:20.350 ","End":"01:24.070","Text":"The closing balance carried forward is 12."},{"Start":"01:24.070 ","End":"01:30.095","Text":"That closing balance would obviously be brought forward onto the credit side."},{"Start":"01:30.095 ","End":"01:32.675","Text":"We have a missing debit."},{"Start":"01:32.675 ","End":"01:35.570","Text":"The amount that\u0027s missing is 16."},{"Start":"01:35.570 ","End":"01:38.095","Text":"Let\u0027s call this journal number 2."},{"Start":"01:38.095 ","End":"01:43.610","Text":"What this is, is the amount that was paid in terms of the interest."},{"Start":"01:43.610 ","End":"01:46.609","Text":"This is an interest payment."},{"Start":"01:46.609 ","End":"01:51.030","Text":"On other words, contra account would\u0027ve been bank."},{"Start":"01:51.030 ","End":"01:53.105","Text":"If we go to a bank account,"},{"Start":"01:53.105 ","End":"01:57.415","Text":"we remember that payments go through on the credit side."},{"Start":"01:57.415 ","End":"02:02.360","Text":"The credits reduce your bank because bank is an asset."},{"Start":"02:02.360 ","End":"02:07.139","Text":"It\u0027s normally an asset anyway. That\u0027s 16."},{"Start":"02:07.139 ","End":"02:08.695","Text":"That\u0027s journal number 2."},{"Start":"02:08.695 ","End":"02:11.105","Text":"If you look at your interest payable, it now balances."},{"Start":"02:11.105 ","End":"02:15.420","Text":"There was only 1 item in the interest payable that affected your bank,"},{"Start":"02:15.420 ","End":"02:19.375","Text":"and it was the interest payment of 16. You can see it there."},{"Start":"02:19.375 ","End":"02:22.820","Text":"Now let\u0027s look at the columnar format if you prefer the columnar format."},{"Start":"02:22.820 ","End":"02:26.329","Text":"The columnar format of the interest payable analysis."},{"Start":"02:26.329 ","End":"02:29.465","Text":"First, we\u0027ll put in your opening balance of 8,"},{"Start":"02:29.465 ","End":"02:33.035","Text":"then put in your ending balance of 12."},{"Start":"02:33.035 ","End":"02:35.990","Text":"Remember that your interest payable would have"},{"Start":"02:35.990 ","End":"02:39.345","Text":"increased by any interest expense incurred during the year."},{"Start":"02:39.345 ","End":"02:43.195","Text":"Pick that up from your income statement and you add that."},{"Start":"02:43.195 ","End":"02:46.660","Text":"Your credit balance had an opening balance of 8,"},{"Start":"02:46.660 ","End":"02:49.430","Text":"it would have increased by a further 20."},{"Start":"02:49.430 ","End":"02:52.040","Text":"Remember that is debit,"},{"Start":"02:52.040 ","End":"02:53.645","Text":"your interest expense,"},{"Start":"02:53.645 ","End":"02:56.680","Text":"and credit, your interest payable."},{"Start":"02:56.680 ","End":"03:00.080","Text":"Bear in mind, we\u0027re looking at the interest payable account,"},{"Start":"03:00.080 ","End":"03:01.250","Text":"which is the liability."},{"Start":"03:01.250 ","End":"03:05.300","Text":"Our opening balance is credit and this is not an interest expense,"},{"Start":"03:05.300 ","End":"03:08.155","Text":"but it\u0027s the contra entry to the interest expense,"},{"Start":"03:08.155 ","End":"03:11.675","Text":"and this is the entry that was made in the interest payable accounts."},{"Start":"03:11.675 ","End":"03:15.500","Text":"That\u0027s the credit. Interest expense would\u0027ve been debited."},{"Start":"03:15.500 ","End":"03:19.970","Text":"That means we should have had a closing balance of 28,"},{"Start":"03:19.970 ","End":"03:21.725","Text":"but it isn\u0027t, it\u0027s 12."},{"Start":"03:21.725 ","End":"03:24.700","Text":"You can see we\u0027ve got a missing 16."},{"Start":"03:24.700 ","End":"03:29.360","Text":"That must have been a payment and payments go through the bank account,"},{"Start":"03:29.360 ","End":"03:32.420","Text":"and thus that will appear in our cash flow statement."},{"Start":"03:32.420 ","End":"03:36.605","Text":"Now this is quite an interesting item because"},{"Start":"03:36.605 ","End":"03:42.680","Text":"interest can be reflected in your cash-flow statement under 1 of 2 sections."},{"Start":"03:42.680 ","End":"03:46.685","Text":"It can either appear under your operating activities section"},{"Start":"03:46.685 ","End":"03:52.055","Text":"or it can appear under your financing activities section."},{"Start":"03:52.055 ","End":"03:56.180","Text":"Some people will prefer to put it under the operating activities section on"},{"Start":"03:56.180 ","End":"04:00.575","Text":"the basis that it\u0027s a necessary part of the operations,"},{"Start":"04:00.575 ","End":"04:03.740","Text":"and others like to separate it out and say, well,"},{"Start":"04:03.740 ","End":"04:09.515","Text":"this is part of the cost of how we financed our business."},{"Start":"04:09.515 ","End":"04:12.530","Text":"In this question, we were told just under"},{"Start":"04:12.530 ","End":"04:15.995","Text":"the required there was a note that indicated that"},{"Start":"04:15.995 ","End":"04:18.860","Text":"this company has chosen to reflect"},{"Start":"04:18.860 ","End":"04:23.105","Text":"the interest payments in the financing activities section."},{"Start":"04:23.105 ","End":"04:24.950","Text":"Watch out for that though,"},{"Start":"04:24.950 ","End":"04:28.520","Text":"because the question could quite as easily have told"},{"Start":"04:28.520 ","End":"04:32.030","Text":"us that they put it under the operating activities section,"},{"Start":"04:32.030 ","End":"04:34.085","Text":"in which case we would have ignored it."},{"Start":"04:34.085 ","End":"04:37.910","Text":"It would\u0027ve been what I refer to as a red herring to throw you off,"},{"Start":"04:37.910 ","End":"04:42.090","Text":"and you wouldn\u0027t have included it in the financing activities section."},{"Start":"04:42.100 ","End":"04:49.070","Text":"This is how you would reflect that 16 as a cash outflow from the interest payment."},{"Start":"04:49.070 ","End":"04:55.530","Text":"Let\u0027s move on to the next ledger account given to us in the balance sheet."}],"ID":29724},{"Watched":false,"Name":"Exercise 12 MNO - E - solution - Analysis of the Share Capital account","Duration":"5m 24s","ChapterTopicVideoID":26900,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.170 ","End":"00:04.515","Text":"Now let us analyze our share capital account."},{"Start":"00:04.515 ","End":"00:07.800","Text":"We\u0027ve reconciled the short-term borrowings and long-term borrowings."},{"Start":"00:07.800 ","End":"00:12.255","Text":"We did that as 1 account and we reconcile our interest payable."},{"Start":"00:12.255 ","End":"00:16.095","Text":"We\u0027re now reconciling our share capital account as I say."},{"Start":"00:16.095 ","End":"00:22.650","Text":"So we look at our 20X1 balance was 280 and our 20X2 balance was 300."},{"Start":"00:22.650 ","End":"00:25.875","Text":"Looking at the additional information,"},{"Start":"00:25.875 ","End":"00:30.145","Text":"the second bullet point refers to share capital."},{"Start":"00:30.145 ","End":"00:32.465","Text":"Don\u0027t forget this information as well."},{"Start":"00:32.465 ","End":"00:35.630","Text":"We\u0027ve got shares that we repurchased during the year."},{"Start":"00:35.630 ","End":"00:39.050","Text":"These are shares that we had issued to our shareholders."},{"Start":"00:39.050 ","End":"00:42.425","Text":"They had given us money so we receive the money,"},{"Start":"00:42.425 ","End":"00:44.585","Text":"but now we\u0027re buying them back."},{"Start":"00:44.585 ","End":"00:47.150","Text":"This time we\u0027re going to pay our shareholders"},{"Start":"00:47.150 ","End":"00:50.015","Text":"instead of receiving money from our shareholders."},{"Start":"00:50.015 ","End":"00:52.940","Text":"In so doing, instead of our share capital going up,"},{"Start":"00:52.940 ","End":"00:56.660","Text":"our share capital will be going down."},{"Start":"00:56.660 ","End":"01:00.185","Text":"The third bullet point also refers to share capital."},{"Start":"01:00.185 ","End":"01:03.470","Text":"This third bullet point reads as all movements"},{"Start":"01:03.470 ","End":"01:06.440","Text":"in the share capital account were cash transactions,"},{"Start":"01:06.440 ","End":"01:12.570","Text":"and that is important because we can in fact issue shares and not receive cash."},{"Start":"01:12.570 ","End":"01:17.485","Text":"It\u0027s unlikely that we would buy back shares without paying in cash."},{"Start":"01:17.485 ","End":"01:20.080","Text":"But it is conceivable that you could pay"},{"Start":"01:20.080 ","End":"01:23.530","Text":"your shareholders using another medium other than cash."},{"Start":"01:23.530 ","End":"01:25.090","Text":"Looking at income statement,"},{"Start":"01:25.090 ","End":"01:30.430","Text":"you can see that there is nothing on that income statement that applies to share capital."},{"Start":"01:30.430 ","End":"01:33.130","Text":"I\u0027m going to show you how to reconcile"},{"Start":"01:33.130 ","End":"01:35.305","Text":"your share capital account using the T-account format."},{"Start":"01:35.305 ","End":"01:37.570","Text":"First, if you don\u0027t like this method,"},{"Start":"01:37.570 ","End":"01:40.015","Text":"you can skip this slide and move to the next method."},{"Start":"01:40.015 ","End":"01:44.845","Text":"We have a share capital account and the bank account."},{"Start":"01:44.845 ","End":"01:48.790","Text":"Share capital is an equity account,"},{"Start":"01:48.790 ","End":"01:52.885","Text":"and equity accounts get bigger on the credit side or the right-hand side."},{"Start":"01:52.885 ","End":"01:56.000","Text":"I have an opening balance that was given to us of"},{"Start":"01:56.000 ","End":"02:02.585","Text":"280 and our closing balance was given to us as 300."},{"Start":"02:02.585 ","End":"02:09.500","Text":"The additional information given to us indicated that we had bought back shares."},{"Start":"02:09.500 ","End":"02:14.480","Text":"In other words, we reduced our share capital by buying back share so we\u0027re going"},{"Start":"02:14.480 ","End":"02:19.870","Text":"to debit the share capital and we bought back shares to the value of 10."},{"Start":"02:19.870 ","End":"02:24.630","Text":"The contra entry would have been to bank with 10,"},{"Start":"02:24.630 ","End":"02:28.400","Text":"and the reason is the third bullet point in the additional information"},{"Start":"02:28.400 ","End":"02:32.200","Text":"indicated that all of the share transactions were for cash."},{"Start":"02:32.200 ","End":"02:35.045","Text":"We know that when we bought these shares back,"},{"Start":"02:35.045 ","End":"02:37.210","Text":"we did pay cash."},{"Start":"02:37.210 ","End":"02:41.645","Text":"Payments go on the credit side of our bank."},{"Start":"02:41.645 ","End":"02:43.895","Text":"This is journal number 1."},{"Start":"02:43.895 ","End":"02:46.040","Text":"Now looking at the share capital account,"},{"Start":"02:46.040 ","End":"02:47.975","Text":"have we finished reconciling it?"},{"Start":"02:47.975 ","End":"02:52.465","Text":"Have a look to see if the debits equal the credits and no, they don\u0027t."},{"Start":"02:52.465 ","End":"02:55.220","Text":"Our debits add up to 310,"},{"Start":"02:55.220 ","End":"02:57.469","Text":"but our credits add up to 280,"},{"Start":"02:57.469 ","End":"03:00.275","Text":"so we have a missing credit."},{"Start":"03:00.275 ","End":"03:04.360","Text":"The missing credit is an amount of 30."},{"Start":"03:04.360 ","End":"03:06.795","Text":"This must have been a journal entry,"},{"Start":"03:06.795 ","End":"03:08.300","Text":"and what could this have been?"},{"Start":"03:08.300 ","End":"03:10.085","Text":"Well, this is a share issue."},{"Start":"03:10.085 ","End":"03:16.330","Text":"The first one, the first journal of 10 is a share buyback,"},{"Start":"03:16.330 ","End":"03:21.195","Text":"and the second journal is a share issue."},{"Start":"03:21.195 ","End":"03:24.770","Text":"The third bullet point in the additional information you must"},{"Start":"03:24.770 ","End":"03:27.800","Text":"recall said and in terms of the share issue,"},{"Start":"03:27.800 ","End":"03:30.800","Text":"must remember the third bullet point under"},{"Start":"03:30.800 ","End":"03:36.035","Text":"the additional information indicated that all share transactions were for cash."},{"Start":"03:36.035 ","End":"03:39.950","Text":"We know that this share issue was a cash issue,"},{"Start":"03:39.950 ","End":"03:45.269","Text":"so we\u0027re going to debit our bank with 30. This is a receipt."},{"Start":"03:45.269 ","End":"03:48.645","Text":"Remember, receipts go on the debit side,"},{"Start":"03:48.645 ","End":"03:52.155","Text":"they increase your bank assets."},{"Start":"03:52.155 ","End":"03:55.170","Text":"We\u0027ve got 2 amounts that went through the bank,"},{"Start":"03:55.170 ","End":"03:59.315","Text":"so those 2 amounts must appear in our cashflow statement."},{"Start":"03:59.315 ","End":"04:03.515","Text":"But before I show you how to present those 2 cashflows in the cashflow statement."},{"Start":"04:03.515 ","End":"04:06.230","Text":"Let me show you how to do the analysis"},{"Start":"04:06.230 ","End":"04:09.545","Text":"of your share capital account using the columnar format."},{"Start":"04:09.545 ","End":"04:11.525","Text":"Using the columnar format,"},{"Start":"04:11.525 ","End":"04:14.525","Text":"remember you just put in the opening balance 280,"},{"Start":"04:14.525 ","End":"04:16.970","Text":"then put in your closing balance."},{"Start":"04:16.970 ","End":"04:21.050","Text":"In this case, we had 300 and then the movement."},{"Start":"04:21.050 ","End":"04:22.940","Text":"What do we know about the movement?"},{"Start":"04:22.940 ","End":"04:26.390","Text":"Well, we know that we bought back shares,"},{"Start":"04:26.390 ","End":"04:28.265","Text":"so the shares that were repurchased,"},{"Start":"04:28.265 ","End":"04:31.440","Text":"paid in cash were 10."},{"Start":"04:31.440 ","End":"04:37.250","Text":"That indicates that our share capital account should\u0027ve had a closing balance of 270."},{"Start":"04:37.250 ","End":"04:40.925","Text":"But it doesn\u0027t, we can see we\u0027ve got a closing balance of 300."},{"Start":"04:40.925 ","End":"04:47.735","Text":"That therefore means there\u0027s a missing 30 and that 30 is the new shares that were issued."},{"Start":"04:47.735 ","End":"04:51.440","Text":"We can see that we\u0027ve got 2 share movements here,"},{"Start":"04:51.440 ","End":"04:55.610","Text":"and we were told that all share movements were for cash,"},{"Start":"04:55.610 ","End":"04:57.860","Text":"paid in cash and received in cash."},{"Start":"04:57.860 ","End":"05:01.870","Text":"Both those amounts need to appear separately in our cashflow statement."},{"Start":"05:01.870 ","End":"05:05.915","Text":"Looking at our cash flows from financing activities,"},{"Start":"05:05.915 ","End":"05:11.315","Text":"we\u0027ve got the cash outflows when repurchasing the shares of the 10,"},{"Start":"05:11.315 ","End":"05:18.395","Text":"and then we have cash inflows from the issue of new shares of an amount of 30."},{"Start":"05:18.395 ","End":"05:22.740","Text":"Now let\u0027s reconcile the next line item from the balance sheet."}],"ID":29725},{"Watched":false,"Name":"Exercise 12 MNO - F - solution - Brief explanation of a Retained Earnings account","Duration":"9m 10s","ChapterTopicVideoID":26901,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:06.195","Text":"The final step in this exercise is to analyze our retained earnings account."},{"Start":"00:06.195 ","End":"00:08.370","Text":"Just looking at the question again,"},{"Start":"00:08.370 ","End":"00:11.475","Text":"we were given a balance sheet and there were 5 line items."},{"Start":"00:11.475 ","End":"00:12.750","Text":"We had short-term borrowings,"},{"Start":"00:12.750 ","End":"00:15.555","Text":"long-term borrowings, interest payable, share capital."},{"Start":"00:15.555 ","End":"00:17.020","Text":"What we\u0027ve done so far,"},{"Start":"00:17.020 ","End":"00:19.845","Text":"is we reconstructed the borrowing accounts,"},{"Start":"00:19.845 ","End":"00:21.765","Text":"we combine those into 1,"},{"Start":"00:21.765 ","End":"00:24.180","Text":"we then reconstructed the interest payable,"},{"Start":"00:24.180 ","End":"00:26.325","Text":"and we have reconstructed share capital."},{"Start":"00:26.325 ","End":"00:28.740","Text":"When reconstructing each of those line items,"},{"Start":"00:28.740 ","End":"00:32.930","Text":"we were determining whether it affected bank account and if so, by how much."},{"Start":"00:32.930 ","End":"00:37.140","Text":"The final step is not to look at our retained earnings account,"},{"Start":"00:37.140 ","End":"00:43.330","Text":"reconstruct that, and identify whether there has been any impacts on our bank account."},{"Start":"00:43.330 ","End":"00:46.865","Text":"Before I get into the actual figures in this exercise,"},{"Start":"00:46.865 ","End":"00:49.280","Text":"I\u0027d like to give you a brief explanation as"},{"Start":"00:49.280 ","End":"00:52.400","Text":"to how our retained earnings account comes about,"},{"Start":"00:52.400 ","End":"00:54.890","Text":"and the types of transactions that occur within it."},{"Start":"00:54.890 ","End":"00:59.435","Text":"If you are already comfortable with the workings of retained earnings account,"},{"Start":"00:59.435 ","End":"01:01.625","Text":"you can move on to the next slide."},{"Start":"01:01.625 ","End":"01:06.515","Text":"For those of you to whom this is still new, carry on watching."},{"Start":"01:06.515 ","End":"01:15.540","Text":"During the year, what happens is businesses earn income and they incur expenses."},{"Start":"01:15.540 ","End":"01:20.180","Text":"For example, one might earn income,"},{"Start":"01:20.180 ","End":"01:22.940","Text":"and when earning the income,"},{"Start":"01:22.940 ","End":"01:28.990","Text":"you would either received it in cash or it would be 02,"},{"Start":"01:28.990 ","End":"01:32.300","Text":"in which case, it would affect your receivable account."},{"Start":"01:32.300 ","End":"01:34.715","Text":"Now bank and receivables are assets,"},{"Start":"01:34.715 ","End":"01:37.520","Text":"so they get bigger on the debit side."},{"Start":"01:37.520 ","End":"01:40.835","Text":"Income always gets bigger on the credit side."},{"Start":"01:40.835 ","End":"01:44.885","Text":"You would credit the income and debits bank or"},{"Start":"01:44.885 ","End":"01:50.480","Text":"receivable depending on whether you received it in cash or whether we still 02."},{"Start":"01:50.480 ","End":"01:52.670","Text":"Similarly, during the year,"},{"Start":"01:52.670 ","End":"01:54.965","Text":"you would incur expenses."},{"Start":"01:54.965 ","End":"01:58.670","Text":"Expenses always get bigger on the debit side,"},{"Start":"01:58.670 ","End":"02:00.440","Text":"and when incurring the expense,"},{"Start":"02:00.440 ","End":"02:04.271","Text":"you would either pay for it or you may still owe it,"},{"Start":"02:04.271 ","End":"02:07.825","Text":"in which case, you would credit the payable account."},{"Start":"02:07.825 ","End":"02:11.690","Text":"It\u0027s either an asset that you\u0027re decreasing."},{"Start":"02:11.690 ","End":"02:14.480","Text":"Remember assets get bigger on the debit side,"},{"Start":"02:14.480 ","End":"02:20.170","Text":"but if you have to reduce your asset is going to be made smaller."},{"Start":"02:20.170 ","End":"02:24.440","Text":"Alternatively, you will be crediting a payable,"},{"Start":"02:24.440 ","End":"02:27.740","Text":"and payables get bigger on the credit side."},{"Start":"02:27.740 ","End":"02:30.395","Text":"Either way, you\u0027re going to be crediting it."},{"Start":"02:30.395 ","End":"02:33.390","Text":"You\u0027re either crediting it because you\u0027re reducing your bank,"},{"Start":"02:33.390 ","End":"02:38.030","Text":"or you\u0027re crediting it because you\u0027re increasing your liability."},{"Start":"02:38.030 ","End":"02:43.560","Text":"Either increases in liability or decreases your asset on the credit side."},{"Start":"02:43.560 ","End":"02:45.955","Text":"You would incur the expense,"},{"Start":"02:45.955 ","End":"02:48.020","Text":"and credit bank or payables."},{"Start":"02:48.020 ","End":"02:50.255","Text":"Then at the end of the year,"},{"Start":"02:50.255 ","End":"02:53.795","Text":"you look at all of your income and all of your expense accounts,"},{"Start":"02:53.795 ","End":"02:57.455","Text":"and you\u0027re trying to determine whether you\u0027ve made a profit or a loss."},{"Start":"02:57.455 ","End":"03:00.890","Text":"This brings in our profit or loss account."},{"Start":"03:00.890 ","End":"03:04.775","Text":"Now this profit or loss account is actually a temporary account."},{"Start":"03:04.775 ","End":"03:08.480","Text":"What we do to determine whether we\u0027ve made a profit or loss,"},{"Start":"03:08.480 ","End":"03:12.500","Text":"is we take all of our income accounts and all of our expense accounts and we"},{"Start":"03:12.500 ","End":"03:17.480","Text":"clear them out and we accumulate them in this profit or loss account."},{"Start":"03:17.480 ","End":"03:20.090","Text":"In other words, we\u0027ve got income here on"},{"Start":"03:20.090 ","End":"03:23.360","Text":"the credit side to clear out this account, we would debit it."},{"Start":"03:23.360 ","End":"03:25.085","Text":"The other side of the entry,"},{"Start":"03:25.085 ","End":"03:26.420","Text":"in other words the country entry,"},{"Start":"03:26.420 ","End":"03:29.087","Text":"would go to the profit or loss account,"},{"Start":"03:29.087 ","End":"03:32.935","Text":"so this would be credited with the income."},{"Start":"03:32.935 ","End":"03:35.800","Text":"There is the debit and there is the credit."},{"Start":"03:35.800 ","End":"03:38.169","Text":"Similarly, for the expense accounts,"},{"Start":"03:38.169 ","End":"03:39.655","Text":"you have to clear them out,"},{"Start":"03:39.655 ","End":"03:41.380","Text":"so they will have debit balances."},{"Start":"03:41.380 ","End":"03:43.465","Text":"In order to carry it out, you would credit them,"},{"Start":"03:43.465 ","End":"03:48.085","Text":"and you would debit the profit or loss account with the expenses."},{"Start":"03:48.085 ","End":"03:51.730","Text":"Once we have all of the income accounts and all of the expense"},{"Start":"03:51.730 ","End":"03:56.247","Text":"accounts accumulated or summarized and our profit loss account,"},{"Start":"03:56.247 ","End":"03:59.530","Text":"we then compare the total income with"},{"Start":"03:59.530 ","End":"04:03.925","Text":"a total expenses to identify whether we have a net income,"},{"Start":"04:03.925 ","End":"04:05.945","Text":"in other words, more income than expenses,"},{"Start":"04:05.945 ","End":"04:07.405","Text":"in which case we\u0027ve made a profit,"},{"Start":"04:07.405 ","End":"04:09.020","Text":"or whether we have a net expense."},{"Start":"04:09.020 ","End":"04:11.605","Text":"In other words, our expenses are greater than our income,"},{"Start":"04:11.605 ","End":"04:13.620","Text":"in which case we have a loss."},{"Start":"04:13.620 ","End":"04:17.855","Text":"Let\u0027s say in this example we\u0027ve got more income than expenses."},{"Start":"04:17.855 ","End":"04:19.730","Text":"If this is the case,"},{"Start":"04:19.730 ","End":"04:21.875","Text":"credits will be bigger than our debits."},{"Start":"04:21.875 ","End":"04:23.690","Text":"We add up all the credits,"},{"Start":"04:23.690 ","End":"04:25.205","Text":"wherever they may be,"},{"Start":"04:25.205 ","End":"04:33.050","Text":"we take that total across to the debit side and you subtract all of the debits,"},{"Start":"04:33.050 ","End":"04:36.920","Text":"you then get to a balance, the difference."},{"Start":"04:36.920 ","End":"04:39.170","Text":"This is a balance carried down,"},{"Start":"04:39.170 ","End":"04:41.495","Text":"and it gets brought down back on the credit side."},{"Start":"04:41.495 ","End":"04:44.795","Text":"Sorry, this has been brought down."},{"Start":"04:44.795 ","End":"04:46.550","Text":"Why on the credit side?"},{"Start":"04:46.550 ","End":"04:50.485","Text":"Because your income credits are bigger than your expenses."},{"Start":"04:50.485 ","End":"04:55.690","Text":"As I say, this profit or loss account is actually temporary."},{"Start":"04:55.690 ","End":"04:59.510","Text":"It ultimately gets transferred to retained earnings account."},{"Start":"04:59.510 ","End":"05:02.315","Text":"Retained earnings is an equity account,"},{"Start":"05:02.315 ","End":"05:06.900","Text":"and equity accounts generally get bigger on the credit side."},{"Start":"05:06.900 ","End":"05:09.110","Text":"The retained earnings account indicates"},{"Start":"05:09.110 ","End":"05:12.230","Text":"the profits that have been retained within the business."},{"Start":"05:12.230 ","End":"05:17.180","Text":"This final stiff at the end of the year is to transfer from the profit or loss account."},{"Start":"05:17.180 ","End":"05:19.500","Text":"This profit of X,"},{"Start":"05:19.500 ","End":"05:24.755","Text":"we\u0027ll take it out of this account and we transfer it into our retained earnings account."},{"Start":"05:24.755 ","End":"05:28.940","Text":"Here we have the profit for this current year going into"},{"Start":"05:28.940 ","End":"05:31.440","Text":"our retained earnings account and being added"},{"Start":"05:31.440 ","End":"05:35.045","Text":"to whatever it had retained from prior years."},{"Start":"05:35.045 ","End":"05:39.980","Text":"Opening balance indicates the profits that have accumulated in the past,"},{"Start":"05:39.980 ","End":"05:42.530","Text":"you then add this year\u0027s profit."},{"Start":"05:42.530 ","End":"05:45.785","Text":"Something else that happens in the retained earnings account,"},{"Start":"05:45.785 ","End":"05:52.665","Text":"is transfers from other equity accounts,"},{"Start":"05:52.665 ","End":"05:58.400","Text":"so you could have a transfer from a another equity accounting into retained earnings,"},{"Start":"05:58.400 ","End":"06:02.015","Text":"transfer in, or on the other hand,"},{"Start":"06:02.015 ","End":"06:06.950","Text":"you could have a transfer out of your retained earnings account."},{"Start":"06:06.950 ","End":"06:10.670","Text":"A typical example is a capital redemption reserve fund,"},{"Start":"06:10.670 ","End":"06:13.385","Text":"which is an equity account."},{"Start":"06:13.385 ","End":"06:17.615","Text":"Depending on which country you company operates in,"},{"Start":"06:17.615 ","End":"06:20.390","Text":"your company may be required to do a transfer from"},{"Start":"06:20.390 ","End":"06:23.780","Text":"your retained earnings into capital redemption reserve fund,"},{"Start":"06:23.780 ","End":"06:26.030","Text":"and that would happen if, for example,"},{"Start":"06:26.030 ","End":"06:28.895","Text":"the company was redeeming preference shares."},{"Start":"06:28.895 ","End":"06:32.720","Text":"In that instance, we would debit the retained earnings with"},{"Start":"06:32.720 ","End":"06:36.680","Text":"the amount that needs to be transferred to the capital redemption reserve fund,"},{"Start":"06:36.680 ","End":"06:37.880","Text":"and we would credit"},{"Start":"06:37.880 ","End":"06:42.494","Text":"the capital redemption reserve fund with the transfer from the retained earnings."},{"Start":"06:42.494 ","End":"06:44.423","Text":"It\u0027s the credit and that\u0027s debit,"},{"Start":"06:44.423 ","End":"06:46.235","Text":"the 2 contrary accounts."},{"Start":"06:46.235 ","End":"06:51.485","Text":"Now, another transaction that happens within the retained earnings account is dividends."},{"Start":"06:51.485 ","End":"06:54.470","Text":"A company makes profits and they accumulate them"},{"Start":"06:54.470 ","End":"06:57.230","Text":"in the retained earnings account, but on occasion,"},{"Start":"06:57.230 ","End":"06:58.790","Text":"typically twice a year,"},{"Start":"06:58.790 ","End":"07:03.530","Text":"the company would distribute funds to the shareholders."},{"Start":"07:03.530 ","End":"07:06.785","Text":"These are called contributions to equity participants."},{"Start":"07:06.785 ","End":"07:08.390","Text":"Fancy way of saying,"},{"Start":"07:08.390 ","End":"07:10.970","Text":"dividends declared to the shareholders."},{"Start":"07:10.970 ","End":"07:13.430","Text":"Now, when we debit the retained earnings,"},{"Start":"07:13.430 ","End":"07:18.530","Text":"the contrary account would be to dividends payable,"},{"Start":"07:18.530 ","End":"07:21.220","Text":"which is a liability account,"},{"Start":"07:21.220 ","End":"07:24.420","Text":"and that would occur if you hadn\u0027t paid them."},{"Start":"07:24.420 ","End":"07:29.690","Text":"You would debit the retained earnings account and credit the dividends payable account."},{"Start":"07:29.690 ","End":"07:32.435","Text":"However, if you had paid the dividends,"},{"Start":"07:32.435 ","End":"07:36.050","Text":"you wouldn\u0027t create a dividends payable, you would create a bank."},{"Start":"07:36.050 ","End":"07:39.530","Text":"It would be a debit to retained earnings and accredits"},{"Start":"07:39.530 ","End":"07:43.115","Text":"bank and you wouldn\u0027t credit dividends payable."},{"Start":"07:43.115 ","End":"07:49.460","Text":"That is a basic explanation on the workings of your retained earnings account."},{"Start":"07:49.460 ","End":"07:52.415","Text":"You\u0027ve got your opening balance plus the profit,"},{"Start":"07:52.415 ","End":"07:55.655","Text":"add any transfers in from other equity accounts,"},{"Start":"07:55.655 ","End":"08:00.845","Text":"subtract any transfers out to other equity accounts and subtract the dividends."},{"Start":"08:00.845 ","End":"08:04.910","Text":"If your credits exceed your debits,"},{"Start":"08:04.910 ","End":"08:09.920","Text":"you would add them up, pop them in there, take them across,"},{"Start":"08:09.920 ","End":"08:11.990","Text":"subtract all your debits,"},{"Start":"08:11.990 ","End":"08:15.422","Text":"you get to a balance carried forward,"},{"Start":"08:15.422 ","End":"08:19.370","Text":"you bring that forward on the credit side because in this example,"},{"Start":"08:19.370 ","End":"08:25.975","Text":"I\u0027m assuming your credits exceed your debits balance brought down of X."},{"Start":"08:25.975 ","End":"08:29.734","Text":"Now you understand the workings"},{"Start":"08:29.734 ","End":"08:34.325","Text":"of the retained earnings account and how the retained earnings account came about."},{"Start":"08:34.325 ","End":"08:36.800","Text":"It\u0027s simply your income being closed off,"},{"Start":"08:36.800 ","End":"08:40.130","Text":"and you expense as being closed off to the profit and loss account."},{"Start":"08:40.130 ","End":"08:44.915","Text":"That profit, let\u0027s calculate it in the profit and loss account, being transferred out,"},{"Start":"08:44.915 ","End":"08:48.380","Text":"debited, so therefore the profit or loss account has a 0 balance,"},{"Start":"08:48.380 ","End":"08:51.515","Text":"and that gets pumped into retained earnings account."},{"Start":"08:51.515 ","End":"08:54.755","Text":"At the transfers in, subtract the transfers out,"},{"Start":"08:54.755 ","End":"08:58.235","Text":"subtract the dividends, and you get your closing balance."},{"Start":"08:58.235 ","End":"09:00.890","Text":"Now the next step is to actually put"},{"Start":"09:00.890 ","End":"09:03.920","Text":"the figures that we\u0027re dealing with in this exercise into"},{"Start":"09:03.920 ","End":"09:07.055","Text":"the retained earnings account and ascertain whether we can"},{"Start":"09:07.055 ","End":"09:11.670","Text":"pick up any further cash inflow or outflow."}],"ID":29726},{"Watched":false,"Name":"Exercise 12 MNO - G - solution - Analysis of the Retained Earnings account","Duration":"11m 38s","ChapterTopicVideoID":26902,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:01.130 ","End":"00:06.978","Text":"Now using the figures that are given to us in this exercise,"},{"Start":"00:06.978 ","End":"00:10.755","Text":"let\u0027s see how the retained earnings account developed."},{"Start":"00:10.755 ","End":"00:15.405","Text":"In this example, we were given only 1 income account,"},{"Start":"00:15.405 ","End":"00:19.320","Text":"and the income account had a balance of 423."},{"Start":"00:19.320 ","End":"00:22.425","Text":"We were given multiple expense accounts."},{"Start":"00:22.425 ","End":"00:24.810","Text":"Have a look at the income statement,"},{"Start":"00:24.810 ","End":"00:26.820","Text":"identify all the expense accounts,"},{"Start":"00:26.820 ","End":"00:27.945","Text":"and if you add them up,"},{"Start":"00:27.945 ","End":"00:31.575","Text":"they come to an amount of 342."},{"Start":"00:31.575 ","End":"00:36.200","Text":"Those are the figures that had accumulated in the income and expense accounts."},{"Start":"00:36.200 ","End":"00:39.930","Text":"Rather than me indicating a whole lot of expense accounts individually,"},{"Start":"00:39.930 ","End":"00:44.255","Text":"I\u0027ve just added them together and put it into 1 expense account."},{"Start":"00:44.255 ","End":"00:46.940","Text":"We\u0027re just pretending we only had 1 expense account."},{"Start":"00:46.940 ","End":"00:54.105","Text":"Now, that income account would then get transferred to the profit or loss account."},{"Start":"00:54.105 ","End":"00:57.950","Text":"That expense account, which is actually multiple expense accounts,"},{"Start":"00:57.950 ","End":"01:01.565","Text":"but that expense account would get cleared out"},{"Start":"01:01.565 ","End":"01:06.170","Text":"by crediting it and we would debit that to the profit and loss account."},{"Start":"01:06.170 ","End":"01:08.750","Text":"You then look at all of your income and"},{"Start":"01:08.750 ","End":"01:11.540","Text":"all of your expenses and determine which one\u0027s bigger."},{"Start":"01:11.540 ","End":"01:17.345","Text":"You can see your income is bigger than your expenses, so that\u0027s 423."},{"Start":"01:17.345 ","End":"01:24.260","Text":"We take that down, take it across and subtract the 342."},{"Start":"01:24.260 ","End":"01:30.745","Text":"The difference is an amount of 81 and that\u0027s the profit for the year."},{"Start":"01:30.745 ","End":"01:32.440","Text":"Now that figure was given to you,"},{"Start":"01:32.440 ","End":"01:35.635","Text":"so you did not need to recreate any of that."},{"Start":"01:35.635 ","End":"01:41.060","Text":"I\u0027ve simply recreated it for you so that you can understand it better."},{"Start":"01:41.060 ","End":"01:43.460","Text":"That\u0027s our profit for the year."},{"Start":"01:43.460 ","End":"01:47.650","Text":"The next step is to clear out the profit or loss account because as I say,"},{"Start":"01:47.650 ","End":"01:49.555","Text":"this is just a temporary account."},{"Start":"01:49.555 ","End":"01:53.988","Text":"We then debit this credit balance to get rid of it,"},{"Start":"01:53.988 ","End":"01:55.785","Text":"so we debit it with 81."},{"Start":"01:55.785 ","End":"01:57.730","Text":"Now this account is closed off,"},{"Start":"01:57.730 ","End":"02:01.645","Text":"just like your income accounts closed off and expense account is closed off."},{"Start":"02:01.645 ","End":"02:03.685","Text":"You\u0027re debiting that account,"},{"Start":"02:03.685 ","End":"02:07.680","Text":"and the contra entry goes to your retained earnings."},{"Start":"02:07.680 ","End":"02:14.030","Text":"We were then told that our opening retained earnings was 478."},{"Start":"02:14.030 ","End":"02:18.050","Text":"That was the closing retained earnings at the end of 20X1."},{"Start":"02:18.050 ","End":"02:21.395","Text":"We were told that there were no transfers in and"},{"Start":"02:21.395 ","End":"02:24.895","Text":"transfers out of a retained earnings account."},{"Start":"02:24.895 ","End":"02:28.390","Text":"That was 0 and that was 0."},{"Start":"02:28.390 ","End":"02:34.970","Text":"We were told that our closing balance was 534."},{"Start":"02:34.970 ","End":"02:37.370","Text":"If you add up the credits,"},{"Start":"02:37.370 ","End":"02:42.140","Text":"we get to 559, which is bigger than the debits."},{"Start":"02:42.140 ","End":"02:44.664","Text":"We have a missing debit,"},{"Start":"02:44.664 ","End":"02:48.325","Text":"so we add up all the credits, 559,"},{"Start":"02:48.325 ","End":"02:51.830","Text":"take it across, 559,"},{"Start":"02:51.830 ","End":"02:54.290","Text":"subtract what we have on the debit side,"},{"Start":"02:54.290 ","End":"02:56.720","Text":"and we only have 534."},{"Start":"02:56.720 ","End":"03:00.875","Text":"The missing amount is this dividends amount, 25."},{"Start":"03:00.875 ","End":"03:04.520","Text":"We would then have to have a look at our dividends"},{"Start":"03:04.520 ","End":"03:08.570","Text":"payable balance to see whether our dividends payable grew or not."},{"Start":"03:08.570 ","End":"03:13.235","Text":"To establish how much dividends we actually paid during the year."},{"Start":"03:13.235 ","End":"03:19.400","Text":"In this case, we could establish that the entire 25 was paid for in cash in 2 ways."},{"Start":"03:19.400 ","End":"03:21.710","Text":"Number 1, we were told it was paid in cash,"},{"Start":"03:21.710 ","End":"03:24.963","Text":"but we could also have established by looking at the balance sheet,"},{"Start":"03:24.963 ","End":"03:28.400","Text":"and we see that there is no dividends payable at all during the year,"},{"Start":"03:28.400 ","End":"03:30.575","Text":"so we know that that was paid in cash."},{"Start":"03:30.575 ","End":"03:34.480","Text":"The country entry went to the bank account."},{"Start":"03:34.480 ","End":"03:36.560","Text":"Because it\u0027s in the bank account,"},{"Start":"03:36.560 ","End":"03:39.980","Text":"this belongs in our cash flow statement."},{"Start":"03:39.980 ","End":"03:43.940","Text":"Now, just like interest dividends paid can"},{"Start":"03:43.940 ","End":"03:47.899","Text":"be presented in 1 of 2 places in your cash flow statement."},{"Start":"03:47.899 ","End":"03:52.535","Text":"It can be presented in your cash from operating activities section,"},{"Start":"03:52.535 ","End":"03:57.035","Text":"and it also can be presented in your cash from the financing activities section."},{"Start":"03:57.035 ","End":"03:59.450","Text":"You have a choice of where to present it."},{"Start":"03:59.450 ","End":"04:02.540","Text":"In this case, we\u0027re assuming we\u0027re presenting it in"},{"Start":"04:02.540 ","End":"04:06.630","Text":"the cash from financing activities section."},{"Start":"04:08.290 ","End":"04:13.160","Text":"Now if this T-account format makes sense to you,"},{"Start":"04:13.160 ","End":"04:20.105","Text":"then you can move on to the slide in which I show you how to present the cash flows."},{"Start":"04:20.105 ","End":"04:24.740","Text":"But if you prefer the columnar format or interested in the columnar format,"},{"Start":"04:24.740 ","End":"04:30.635","Text":"I\u0027m going to show that to you now and just remember all of this on the left-hand side,"},{"Start":"04:30.635 ","End":"04:33.485","Text":"this account here, bank receivable,"},{"Start":"04:33.485 ","End":"04:36.995","Text":"bank or payable, the income, the expense account,"},{"Start":"04:36.995 ","End":"04:38.780","Text":"the temporary profit or loss account,"},{"Start":"04:38.780 ","End":"04:41.105","Text":"this little account dividends payable,"},{"Start":"04:41.105 ","End":"04:43.910","Text":"that is totally unnecessary."},{"Start":"04:43.910 ","End":"04:47.330","Text":"I showed that to you purely so that you could"},{"Start":"04:47.330 ","End":"04:51.680","Text":"better understand how eventually reach the retained earnings account."},{"Start":"04:51.680 ","End":"04:55.700","Text":"But when using the T-account format,"},{"Start":"04:55.700 ","End":"05:00.465","Text":"all you needed was to recreate that."},{"Start":"05:00.465 ","End":"05:04.640","Text":"Now I\u0027m going to show you how to recreate the retained earnings account."},{"Start":"05:04.640 ","End":"05:06.470","Text":"Instead of using a T-account format,"},{"Start":"05:06.470 ","End":"05:10.195","Text":"how to lay out a calculation in a columnar format."},{"Start":"05:10.195 ","End":"05:14.080","Text":"There\u0027s your opening balance of 478."},{"Start":"05:14.080 ","End":"05:18.635","Text":"You then put in your closing balance or ending balance of 534."},{"Start":"05:18.635 ","End":"05:22.235","Text":"You then increase your retained earnings with the profit for the year."},{"Start":"05:22.235 ","End":"05:25.220","Text":"Remember, we\u0027re dealing with credit balances here."},{"Start":"05:25.220 ","End":"05:27.500","Text":"Your opening balance of 478 was a credit."},{"Start":"05:27.500 ","End":"05:30.945","Text":"You add your profit for the year which was 81 credit."},{"Start":"05:30.945 ","End":"05:34.240","Text":"Then you adjust for any transfers in or out."},{"Start":"05:34.240 ","End":"05:35.800","Text":"If you had a transfer in,"},{"Start":"05:35.800 ","End":"05:37.930","Text":"it will be added further credit."},{"Start":"05:37.930 ","End":"05:40.700","Text":"If it was transferred out, it will be a debit."},{"Start":"05:40.700 ","End":"05:42.115","Text":"You\u0027d be subtracting it."},{"Start":"05:42.115 ","End":"05:44.800","Text":"We were told there were no transfers in or out."},{"Start":"05:44.800 ","End":"05:48.880","Text":"Then the final entry is the one that we were balancing back"},{"Start":"05:48.880 ","End":"05:53.125","Text":"to and that was the dividend paid that wasn\u0027t given to us."},{"Start":"05:53.125 ","End":"05:56.770","Text":"Incidentally, dividends paid don\u0027t appear in"},{"Start":"05:56.770 ","End":"06:01.675","Text":"the income statement because an income statement only shows income and expenses."},{"Start":"06:01.675 ","End":"06:05.110","Text":"Now, you might think a dividend is an expense,"},{"Start":"06:05.110 ","End":"06:11.135","Text":"but it is expressly excluded from the definition of an expense."},{"Start":"06:11.135 ","End":"06:16.220","Text":"Because the dividend paid is not an expense by very definition,"},{"Start":"06:16.220 ","End":"06:18.320","Text":"it doesn\u0027t appear in the income statement."},{"Start":"06:18.320 ","End":"06:21.640","Text":"Instead, dividends paid,"},{"Start":"06:21.640 ","End":"06:25.925","Text":"dividends declared appear in the statement of changes in equity"},{"Start":"06:25.925 ","End":"06:30.650","Text":"as a distribution to equity shareholders or equity participants."},{"Start":"06:30.650 ","End":"06:33.920","Text":"We had to balance back to the dividends paid because we had"},{"Start":"06:33.920 ","End":"06:37.175","Text":"not been given the statement of changes in the equity."},{"Start":"06:37.175 ","End":"06:40.160","Text":"Had we been given the statement of changes in the equity,"},{"Start":"06:40.160 ","End":"06:42.185","Text":"we would not have had to balance back to it."},{"Start":"06:42.185 ","End":"06:45.230","Text":"We could have simply read it off of the statement of changes in"},{"Start":"06:45.230 ","End":"06:49.915","Text":"equity as it would\u0027ve been a separate line item on that statement."},{"Start":"06:49.915 ","End":"06:53.885","Text":"Now that we have the dividend amount of 25,"},{"Start":"06:53.885 ","End":"06:57.170","Text":"we had to establish whether it was paid or not."},{"Start":"06:57.170 ","End":"07:00.230","Text":"I have indicated here that it is paid and that is"},{"Start":"07:00.230 ","End":"07:04.145","Text":"because we were told that the dividend was paid in cash."},{"Start":"07:04.145 ","End":"07:08.240","Text":"But we could also have established this by simply looking at the balance sheet and"},{"Start":"07:08.240 ","End":"07:12.230","Text":"identifying that we did not have a dividend payable account."},{"Start":"07:12.230 ","End":"07:14.430","Text":"The dividend payable account didn\u0027t exist."},{"Start":"07:14.430 ","End":"07:17.135","Text":"Well, if they had been 1 and the balance hadn\u0027t moved,"},{"Start":"07:17.135 ","End":"07:21.185","Text":"you would\u0027ve been able to establish that the 25 must have been paid in cash."},{"Start":"07:21.185 ","End":"07:23.600","Text":"Now let\u0027s present this in our cash flow statement."},{"Start":"07:23.600 ","End":"07:26.600","Text":"We\u0027ve shown under the cash from financing activities,"},{"Start":"07:26.600 ","End":"07:30.815","Text":"the cash outflows from dividend payments as 25."},{"Start":"07:30.815 ","End":"07:34.500","Text":"Now this is very interesting though because just like interest,"},{"Start":"07:34.500 ","End":"07:39.010","Text":"there is no consensus as to where the payment ought to appear."},{"Start":"07:39.010 ","End":"07:43.480","Text":"A dividend payment can indeed appear in the cash from financing"},{"Start":"07:43.480 ","End":"07:48.580","Text":"activity section or the cash generated from operating activities section."},{"Start":"07:48.580 ","End":"07:51.240","Text":"It is a choice that the business must make."},{"Start":"07:51.240 ","End":"07:52.665","Text":"In some cases,"},{"Start":"07:52.665 ","End":"07:57.985","Text":"equation might indicate where the dividend payment is to be presented."},{"Start":"07:57.985 ","End":"08:03.760","Text":"Sometimes the equation is silent in the interest of scoring as many"},{"Start":"08:03.760 ","End":"08:06.640","Text":"marks as possible in a test situation where"},{"Start":"08:06.640 ","End":"08:09.805","Text":"you\u0027re asked for the cash flow from financing activities."},{"Start":"08:09.805 ","End":"08:13.540","Text":"My suggestion would be to assume that the cash outflow from"},{"Start":"08:13.540 ","End":"08:19.085","Text":"a dividend payment is to be presented in the cash from financing activities section."},{"Start":"08:19.085 ","End":"08:22.100","Text":"In this case, I\u0027ve assumed that the cash outflow and"},{"Start":"08:22.100 ","End":"08:26.150","Text":"the dividend payment is a cash from financing activity line item."},{"Start":"08:26.150 ","End":"08:29.540","Text":"Now before we finalize the cash from financing activities,"},{"Start":"08:29.540 ","End":"08:32.350","Text":"we need to make sure that we\u0027ve taken everything into account."},{"Start":"08:32.350 ","End":"08:36.035","Text":"Go back to your question and make sure you\u0027ve looked at everything."},{"Start":"08:36.035 ","End":"08:39.410","Text":"We have indeed looked at the short-term borrowings and long-term borrowings."},{"Start":"08:39.410 ","End":"08:43.790","Text":"We combined these opening balances and closing balances into 1"},{"Start":"08:43.790 ","End":"08:49.925","Text":"and reconciled or reconstructed the borrowing account as if it was 1 account."},{"Start":"08:49.925 ","End":"08:53.255","Text":"We then reconstructed our interest payable."},{"Start":"08:53.255 ","End":"08:56.735","Text":"We\u0027ve done the borrowings, we\u0027ve reconstructed the interest payable."},{"Start":"08:56.735 ","End":"08:59.135","Text":"We\u0027ve reconstructed share capital."},{"Start":"08:59.135 ","End":"09:02.180","Text":"We\u0027ve now also reconstructed the retained earnings."},{"Start":"09:02.180 ","End":"09:05.315","Text":"In each case we will reconstruct the accounts."},{"Start":"09:05.315 ","End":"09:09.184","Text":"The ultimate aim is to establish whether"},{"Start":"09:09.184 ","End":"09:14.140","Text":"those accounts have impacted the bank account and if so, by how much."},{"Start":"09:14.140 ","End":"09:16.460","Text":"Then looking at the additional information makes"},{"Start":"09:16.460 ","End":"09:19.235","Text":"sure that you have taken to account everything."},{"Start":"09:19.235 ","End":"09:22.310","Text":"The repayment of the borrowings of 55 was taken into"},{"Start":"09:22.310 ","End":"09:25.625","Text":"account when we reconstructed a borrowings account."},{"Start":"09:25.625 ","End":"09:28.760","Text":"The shares repurchased during the year of 10."},{"Start":"09:28.760 ","End":"09:31.640","Text":"The fact that all movements in the share capital account or"},{"Start":"09:31.640 ","End":"09:37.310","Text":"cash transactions were taken into account when we reconstruct the share capital account."},{"Start":"09:37.310 ","End":"09:41.435","Text":"The fact that there were no transfer is in or out of the retained earnings,"},{"Start":"09:41.435 ","End":"09:45.800","Text":"and the fact that all the dividends declared were paid in cash was taken into"},{"Start":"09:45.800 ","End":"09:50.165","Text":"account when we reconstructed our dividends account,"},{"Start":"09:50.165 ","End":"09:52.550","Text":"then looking at our income statement,"},{"Start":"09:52.550 ","End":"09:53.900","Text":"we were given revenue,"},{"Start":"09:53.900 ","End":"09:58.535","Text":"cost of sales general and admin expenses giving us profit before finance."},{"Start":"09:58.535 ","End":"10:02.360","Text":"However, all of those items are taken into account"},{"Start":"10:02.360 ","End":"10:06.845","Text":"in the cash generated from operating activities section."},{"Start":"10:06.845 ","End":"10:09.440","Text":"Operating activities."},{"Start":"10:09.440 ","End":"10:12.230","Text":"The interest expense has been taken into"},{"Start":"10:12.230 ","End":"10:15.360","Text":"account when we reconciled our interest payable accounts,"},{"Start":"10:15.360 ","End":"10:17.220","Text":"so we have taken that into account."},{"Start":"10:17.220 ","End":"10:22.714","Text":"The reason why we took that into account was because we were told that in this company,"},{"Start":"10:22.714 ","End":"10:29.825","Text":"interests payments are to be presented as cash generated from financing activities."},{"Start":"10:29.825 ","End":"10:36.035","Text":"Remember, interest payments could also have been presented as an operating activity."},{"Start":"10:36.035 ","End":"10:39.860","Text":"Profit before tax is simply a subtotal,"},{"Start":"10:39.860 ","End":"10:42.080","Text":"so that\u0027s not applicable."},{"Start":"10:42.080 ","End":"10:44.345","Text":"Then the tax expense,"},{"Start":"10:44.345 ","End":"10:45.980","Text":"this was just a red hearing,"},{"Start":"10:45.980 ","End":"10:49.309","Text":"just like the revenue cost of sales in general and admin expenses."},{"Start":"10:49.309 ","End":"10:52.564","Text":"This you also ignore because that gets presented"},{"Start":"10:52.564 ","End":"10:56.515","Text":"in the operating activities section of a cashless statement."},{"Start":"10:56.515 ","End":"10:58.290","Text":"That\u0027s just a total again,"},{"Start":"10:58.290 ","End":"11:00.705","Text":"so that\u0027s not for you to worry about."},{"Start":"11:00.705 ","End":"11:03.095","Text":"Everything has been taken into account,"},{"Start":"11:03.095 ","End":"11:09.355","Text":"so it\u0027s safe now to finalize our cash from financing activities section."},{"Start":"11:09.355 ","End":"11:12.580","Text":"By finalizing it, I mean simply totaling it."},{"Start":"11:12.580 ","End":"11:17.060","Text":"You add up all the outflows and you subtract all the inflows and you"},{"Start":"11:17.060 ","End":"11:21.720","Text":"will determine that you have more outflows and inflows to the extent of 10,"},{"Start":"11:21.720 ","End":"11:26.015","Text":"so you call it cash used in financing activities."},{"Start":"11:26.015 ","End":"11:28.760","Text":"If you\u0027re inflows had exceeded your outflows,"},{"Start":"11:28.760 ","End":"11:34.505","Text":"it would have been called cash generated from financing activities."},{"Start":"11:34.505 ","End":"11:39.060","Text":"I hope that\u0027s helped you. Bye for now."}],"ID":29727},{"Watched":false,"Name":"Exercise 13 NOP - A - question pages","Duration":"11m 58s","ChapterTopicVideoID":26903,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.690","Text":"Today, we\u0027re going to do an exercise entitled NOP."},{"Start":"00:03.690 ","End":"00:08.925","Text":"First required we\u0027re going to this time prepared using the indirect method,"},{"Start":"00:08.925 ","End":"00:14.205","Text":"a complete cash flow statement for NOP, using information provided."},{"Start":"00:14.205 ","End":"00:16.560","Text":"All of the prior exercises that we\u0027ve done"},{"Start":"00:16.560 ","End":"00:19.680","Text":"together we\u0027ve just done parts of a cashless statement."},{"Start":"00:19.680 ","End":"00:22.950","Text":"This is the first complete comprehensive cash flow statement"},{"Start":"00:22.950 ","End":"00:25.515","Text":"that we\u0027ve been required to do together."},{"Start":"00:25.515 ","End":"00:27.780","Text":"The first piece of information we\u0027re given is"},{"Start":"00:27.780 ","End":"00:30.980","Text":"an income statement and we have the usual line items."},{"Start":"00:30.980 ","End":"00:32.300","Text":"We start with revenue,"},{"Start":"00:32.300 ","End":"00:33.860","Text":"less the costs of sales,"},{"Start":"00:33.860 ","End":"00:36.305","Text":"giving us a gross profit subtotal."},{"Start":"00:36.305 ","End":"00:40.550","Text":"We don\u0027t have to have that presented in the income statement but some companies do,"},{"Start":"00:40.550 ","End":"00:44.390","Text":"operating expenses giving us the profit before interests,"},{"Start":"00:44.390 ","End":"00:47.330","Text":"sometimes called profit before finance charges."},{"Start":"00:47.330 ","End":"00:49.550","Text":"Then the interest expense."},{"Start":"00:49.550 ","End":"00:52.880","Text":"That gives us a subtotal called profit before tax,"},{"Start":"00:52.880 ","End":"00:56.555","Text":"that obviously gives us the tax profit for the year."},{"Start":"00:56.555 ","End":"00:58.580","Text":"Looking at our balance sheet,"},{"Start":"00:58.580 ","End":"01:01.550","Text":"the current year, 31st December 2020,"},{"Start":"01:01.550 ","End":"01:05.710","Text":"and the prior 31st December 2019 now,"},{"Start":"01:05.710 ","End":"01:07.835","Text":"just a brief overview just to remind you,"},{"Start":"01:07.835 ","End":"01:10.130","Text":"the layout of your balance sheet is based on"},{"Start":"01:10.130 ","End":"01:14.240","Text":"the accounting equation and it can be presented vertically or horizontally."},{"Start":"01:14.240 ","End":"01:16.580","Text":"We\u0027ve got 2 formats of our accounting equation."},{"Start":"01:16.580 ","End":"01:21.545","Text":"The 1 is assets equals the total of the liabilities and equity."},{"Start":"01:21.545 ","End":"01:24.830","Text":"Or we could take the liabilities across to"},{"Start":"01:24.830 ","End":"01:28.940","Text":"the other side which then gives us this formula,"},{"Start":"01:28.940 ","End":"01:32.900","Text":"assets minus liabilities equals equity."},{"Start":"01:32.900 ","End":"01:37.790","Text":"In this case, we are presenting our balance sheet using the first equation,"},{"Start":"01:37.790 ","End":"01:42.770","Text":"so total assets equals total liabilities and equity,"},{"Start":"01:42.770 ","End":"01:47.525","Text":"so assets equals liabilities plus equity."},{"Start":"01:47.525 ","End":"01:52.205","Text":"The total liabilities and equity is constituted by 2 sub-totals,"},{"Start":"01:52.205 ","End":"01:55.775","Text":"the total liabilities and the total equity combined."},{"Start":"01:55.775 ","End":"01:58.370","Text":"Let\u0027s have a look at our total assets."},{"Start":"01:58.370 ","End":"02:01.355","Text":"Our total assets are constituted by 2 parts,"},{"Start":"02:01.355 ","End":"02:02.780","Text":"the non-current assets and"},{"Start":"02:02.780 ","End":"02:06.320","Text":"the current assets in our non-current assets were given property,"},{"Start":"02:06.320 ","End":"02:11.585","Text":"plant, and equipment, right of use assets, and intangible assets."},{"Start":"02:11.585 ","End":"02:16.325","Text":"Our current assets, we\u0027ve got inventory and here we have,"},{"Start":"02:16.325 ","End":"02:21.770","Text":"this is simply the measurement at lower of cost or market value."},{"Start":"02:21.770 ","End":"02:26.285","Text":"That information is not normally given on the face of the balance sheet."},{"Start":"02:26.285 ","End":"02:31.295","Text":"Then we\u0027re given accounts receivable once again in brackets here,"},{"Start":"02:31.295 ","End":"02:33.305","Text":"native allowance for doubtful debt."},{"Start":"02:33.305 ","End":"02:36.170","Text":"That is measurement information that\u0027s"},{"Start":"02:36.170 ","End":"02:39.050","Text":"not normally presented on the face of the balance sheet."},{"Start":"02:39.050 ","End":"02:41.990","Text":"Prepayments, these are also called expenses,"},{"Start":"02:41.990 ","End":"02:44.360","Text":"prepaid, and then cash."},{"Start":"02:44.360 ","End":"02:47.810","Text":"Now, let\u0027s look at our total liabilities. We\u0027ve got 2 parts."},{"Start":"02:47.810 ","End":"02:49.835","Text":"Just like with total assets,"},{"Start":"02:49.835 ","End":"02:53.890","Text":"we\u0027ve got non-current liabilities and current liabilities."},{"Start":"02:53.890 ","End":"02:56.720","Text":"We have non-current assets and current assets."},{"Start":"02:56.720 ","End":"02:59.225","Text":"In our non-current liabilities we\u0027ve got a bond,"},{"Start":"02:59.225 ","End":"03:01.625","Text":"there\u0027s payable and lease that is payable."},{"Start":"03:01.625 ","End":"03:04.400","Text":"Now, what is interesting is that under current liabilities,"},{"Start":"03:04.400 ","End":"03:06.875","Text":"we also have a lease payable."},{"Start":"03:06.875 ","End":"03:16.055","Text":"There is an amount that we owe in terms of assets that we are holding under leases,"},{"Start":"03:16.055 ","End":"03:19.565","Text":"and part of it is due within the next year,"},{"Start":"03:19.565 ","End":"03:26.150","Text":"so that is considered to be current and the remaining liability is shown as non-current."},{"Start":"03:26.150 ","End":"03:30.020","Text":"We then have provisions in this case for a warranty."},{"Start":"03:30.020 ","End":"03:34.205","Text":"A provision is a liability of uncertain timing and amount,"},{"Start":"03:34.205 ","End":"03:35.885","Text":"but it\u0027s still a liability."},{"Start":"03:35.885 ","End":"03:38.135","Text":"Then have accounts payable."},{"Start":"03:38.135 ","End":"03:43.670","Text":"Unearned revenue is monies that you have received for work that you\u0027re still"},{"Start":"03:43.670 ","End":"03:48.860","Text":"going to do or for goods that you\u0027re still going to sell that you haven\u0027t yet done."},{"Start":"03:48.860 ","End":"03:51.230","Text":"It\u0027s money that has been received in"},{"Start":"03:51.230 ","End":"03:55.100","Text":"advance often referred to as income received in advance."},{"Start":"03:55.100 ","End":"04:00.440","Text":"It\u0027s shown as a liability because if you do not perform so if you do not sell the goods,"},{"Start":"04:00.440 ","End":"04:03.410","Text":"if you do not hand the goods over or if you do not complete"},{"Start":"04:03.410 ","End":"04:07.940","Text":"the service or whatever it is that you have committed to doing,"},{"Start":"04:07.940 ","End":"04:10.490","Text":"selling in exchange for this money."},{"Start":"04:10.490 ","End":"04:12.785","Text":"That money then obviously needs to be returned."},{"Start":"04:12.785 ","End":"04:15.680","Text":"That\u0027s why it\u0027s shown as a current liability."},{"Start":"04:15.680 ","End":"04:20.495","Text":"Unearned revenue similar to income received and funds."},{"Start":"04:20.495 ","End":"04:22.580","Text":"That\u0027s our total liabilities."},{"Start":"04:22.580 ","End":"04:26.255","Text":"Let\u0027s now look at our total equity."},{"Start":"04:26.255 ","End":"04:29.300","Text":"We\u0027re going to take the total liabilities across to the next page,"},{"Start":"04:29.300 ","End":"04:34.295","Text":"total liabilities brought forward and to do that we\u0027re going to add our total equity."},{"Start":"04:34.295 ","End":"04:38.030","Text":"Equity in this case is made up of share capital and retained earnings."},{"Start":"04:38.030 ","End":"04:45.200","Text":"The 2 combined gives us this grayed-out total of total equity of 12,791 and 10,241,"},{"Start":"04:45.200 ","End":"04:50.760","Text":"we add to the total liabilities of 25,017 and the 19,058."},{"Start":"04:50.760 ","End":"04:56.660","Text":"These 2 figures together give us our total liabilities and equity."},{"Start":"04:56.660 ","End":"05:02.920","Text":"The total liabilities and equity equal the total assets."},{"Start":"05:02.920 ","End":"05:05.059","Text":"Within given additional information,"},{"Start":"05:05.059 ","End":"05:06.965","Text":"there are 6 pieces of information."},{"Start":"05:06.965 ","End":"05:08.255","Text":"Each 1 is numbered."},{"Start":"05:08.255 ","End":"05:12.050","Text":"Number 1, we are given the operating expenses."},{"Start":"05:12.050 ","End":"05:15.665","Text":"Operating expenses, depreciation of PPE,"},{"Start":"05:15.665 ","End":"05:19.820","Text":"loss on disposal, depreciation of a right to use asset."},{"Start":"05:19.820 ","End":"05:22.970","Text":"Just incidentally, I glossed over it when we\u0027re going through the balance sheet,"},{"Start":"05:22.970 ","End":"05:26.525","Text":"but a right to use asset is simply an asset that is held under a lease."},{"Start":"05:26.525 ","End":"05:28.520","Text":"An asset that you are using,"},{"Start":"05:28.520 ","End":"05:30.875","Text":"but you don\u0027t own it out right, you\u0027re leasing it."},{"Start":"05:30.875 ","End":"05:35.990","Text":"That has to be shown in your balance sheet as a separate classification of assets."},{"Start":"05:35.990 ","End":"05:41.990","Text":"But they get depreciated just like your assets that are owned out right,"},{"Start":"05:41.990 ","End":"05:44.065","Text":"like your property, plant, and equipment."},{"Start":"05:44.065 ","End":"05:47.210","Text":"We didn\u0027t have amortization of intangible assets."},{"Start":"05:47.210 ","End":"05:49.820","Text":"Now an intangible asset is treated in"},{"Start":"05:49.820 ","End":"05:54.290","Text":"almost exactly the same way as property, plant, and equipment."},{"Start":"05:54.290 ","End":"05:57.200","Text":"There are some differences in terms of its measurement,"},{"Start":"05:57.200 ","End":"05:59.090","Text":"but the essence is the same."},{"Start":"05:59.090 ","End":"06:02.630","Text":"It would still be depreciated except we don\u0027t call it depreciation,"},{"Start":"06:02.630 ","End":"06:04.625","Text":"we call it amortization."},{"Start":"06:04.625 ","End":"06:08.450","Text":"As a property, plant and equipment is a tangible assets, intangible assets,"},{"Start":"06:08.450 ","End":"06:11.045","Text":"obviously, assets you can\u0027t touch,"},{"Start":"06:11.045 ","End":"06:13.880","Text":"then we have impairments of intangible assets."},{"Start":"06:13.880 ","End":"06:16.490","Text":"Property, plant and equipment could also be impaired."},{"Start":"06:16.490 ","End":"06:19.400","Text":"In this example, property plant and equipment"},{"Start":"06:19.400 ","End":"06:22.820","Text":"is not impaired only the intangible assets have been impaired."},{"Start":"06:22.820 ","End":"06:26.720","Text":"Incidentally, the right to use assets could also be impaired."},{"Start":"06:26.720 ","End":"06:28.925","Text":"Property, plant and equipment,"},{"Start":"06:28.925 ","End":"06:32.764","Text":"right to use assets and intangible assets,"},{"Start":"06:32.764 ","End":"06:37.355","Text":"they all get depreciated or the record of amortization in the case of intangible assets,"},{"Start":"06:37.355 ","End":"06:40.925","Text":"and they are all subject to impairment tests."},{"Start":"06:40.925 ","End":"06:44.195","Text":"Then we get salaries, bad debt expenses,"},{"Start":"06:44.195 ","End":"06:47.810","Text":"repairs, and insurance expense."},{"Start":"06:47.810 ","End":"06:51.290","Text":"That makes up the total of 9,211 operating expenses,"},{"Start":"06:51.290 ","End":"06:54.125","Text":"which we saw on the face of our income statement."},{"Start":"06:54.125 ","End":"06:56.855","Text":"Point Number 2, the right to use asset,"},{"Start":"06:56.855 ","End":"06:59.270","Text":"this is an asset that is held under a lease."},{"Start":"06:59.270 ","End":"07:00.541","Text":"We haven\u0027t bought it outright."},{"Start":"07:00.541 ","End":"07:03.965","Text":"To replace 1 of the buildings it\u0027s sold"},{"Start":"07:03.965 ","End":"07:08.300","Text":"during the year and we\u0027re going to find out more about that in point Number 3,"},{"Start":"07:08.300 ","End":"07:12.980","Text":"NOP entered into a 20 year lease agreement for a similar property,"},{"Start":"07:12.980 ","End":"07:16.165","Text":"and this was affected from the 1st of January 2020."},{"Start":"07:16.165 ","End":"07:18.495","Text":"The first day of our current year,"},{"Start":"07:18.495 ","End":"07:22.340","Text":"the lease requires NOP to make an annual payment of"},{"Start":"07:22.340 ","End":"07:27.170","Text":"402 currency units on 31st December of each year,"},{"Start":"07:27.170 ","End":"07:28.910","Text":"so at the end of every year,"},{"Start":"07:28.910 ","End":"07:33.125","Text":"so in arrears, half of this payment represents interest."},{"Start":"07:33.125 ","End":"07:37.070","Text":"That means if we\u0027re paying 402 at the end of every year,"},{"Start":"07:37.070 ","End":"07:41.000","Text":"201 of that is a payment of interest,"},{"Start":"07:41.000 ","End":"07:46.640","Text":"which means that the remaining 201 is a repayment of the principal sum."},{"Start":"07:46.640 ","End":"07:49.670","Text":"This piece of information is important because in"},{"Start":"07:49.670 ","End":"07:52.760","Text":"terms of the international standard on cash flow statements,"},{"Start":"07:52.760 ","End":"07:58.490","Text":"interests paid can be classified either as"},{"Start":"07:58.490 ","End":"08:04.985","Text":"an operating activity or as a financing activity."},{"Start":"08:04.985 ","End":"08:07.790","Text":"If you were a bank or a financing house,"},{"Start":"08:07.790 ","End":"08:11.974","Text":"you would treat your interest paid as an operating activity always."},{"Start":"08:11.974 ","End":"08:13.714","Text":"But in all other cases,"},{"Start":"08:13.714 ","End":"08:17.060","Text":"companies and businesses have a choice as to"},{"Start":"08:17.060 ","End":"08:20.690","Text":"whether to classified as an operating activity of financing activity."},{"Start":"08:20.690 ","End":"08:25.910","Text":"In this case, NOP is chosen to classify it as a financing activity."},{"Start":"08:25.910 ","End":"08:30.695","Text":"The inception of the lease did not involve any exchange of cash."},{"Start":"08:30.695 ","End":"08:35.105","Text":"Sometimes at the beginning of the lease, cash changes hands."},{"Start":"08:35.105 ","End":"08:38.240","Text":"In other words, we may be required to put down a deposit."},{"Start":"08:38.240 ","End":"08:41.590","Text":"Well, perhaps prepay a lease installment."},{"Start":"08:41.590 ","End":"08:46.360","Text":"The third additional information given to us is the disposal of the building and land,"},{"Start":"08:46.360 ","End":"08:47.890","Text":"so during the current year,"},{"Start":"08:47.890 ","End":"08:50.390","Text":"NOP sold building and related land."},{"Start":"08:50.390 ","End":"08:51.980","Text":"At the time of the disposal,"},{"Start":"08:51.980 ","End":"08:54.995","Text":"the carrying amount of this asset was 4,250."},{"Start":"08:54.995 ","End":"08:57.305","Text":"Now, that\u0027s not a cash."},{"Start":"08:57.305 ","End":"09:00.320","Text":"Some obviously that\u0027s the carrying amount of the assets being sold."},{"Start":"09:00.320 ","End":"09:04.075","Text":"We will have to work out how much we received."},{"Start":"09:04.075 ","End":"09:09.290","Text":"NOP declared, and paid cash dividends during 2020."},{"Start":"09:09.290 ","End":"09:11.300","Text":"That\u0027s important that it\u0027s a cash dividend"},{"Start":"09:11.300 ","End":"09:13.970","Text":"because you can have what is known as a script of it,"},{"Start":"09:13.970 ","End":"09:16.550","Text":"so instead of paying dividends in cash,"},{"Start":"09:16.550 ","End":"09:19.980","Text":"we could issue shares instead."},{"Start":"09:19.980 ","End":"09:26.275","Text":"Similarly, we could give dividends in terms of any other assets other than cash."},{"Start":"09:26.275 ","End":"09:30.070","Text":"What is also important about this statement is that sometimes a company"},{"Start":"09:30.070 ","End":"09:34.390","Text":"declares dividends whether there be cash dividends or scrip dividends,"},{"Start":"09:34.390 ","End":"09:36.760","Text":"but hasn\u0027t yet settled as dividends."},{"Start":"09:36.760 ","End":"09:39.430","Text":"It hasn\u0027t yet paid them over."},{"Start":"09:39.430 ","End":"09:45.325","Text":"In this case, they\u0027ve been both declared and paid and we\u0027re paying it in cash."},{"Start":"09:45.325 ","End":"09:50.275","Text":"The company classifies dividends paid as cash flows from financing activities."},{"Start":"09:50.275 ","End":"09:53.230","Text":"The international standard on cash flow statements,"},{"Start":"09:53.230 ","End":"09:54.565","Text":"just like with interest,"},{"Start":"09:54.565 ","End":"09:56.815","Text":"also allows us to,"},{"Start":"09:56.815 ","End":"09:58.210","Text":"in terms of dividends paid,"},{"Start":"09:58.210 ","End":"10:06.565","Text":"classify the dividend payment as an operating activity or as a financing activity."},{"Start":"10:06.565 ","End":"10:10.460","Text":"NOP just like with its interest paid,"},{"Start":"10:10.460 ","End":"10:15.680","Text":"it has chosen to classify the dividend paid as a financing activity."},{"Start":"10:15.680 ","End":"10:18.380","Text":"If we were a bank or another financing house,"},{"Start":"10:18.380 ","End":"10:21.365","Text":"dividend payments would be treated as an operating activity."},{"Start":"10:21.365 ","End":"10:23.285","Text":"You wouldn\u0027t have a choice there."},{"Start":"10:23.285 ","End":"10:26.215","Text":"Point Number 5, the bond payable."},{"Start":"10:26.215 ","End":"10:28.995","Text":"On the 1st of January 2016,"},{"Start":"10:28.995 ","End":"10:30.735","Text":"so a number of years ago,"},{"Start":"10:30.735 ","End":"10:36.745","Text":"NOP borrowed 17,056 currency units from the owners of NOP."},{"Start":"10:36.745 ","End":"10:40.215","Text":"These owners are 3 brothers of the Litvak family."},{"Start":"10:40.215 ","End":"10:45.785","Text":"In this regard it issued a 10-year bond with a face value of 20,000."},{"Start":"10:45.785 ","End":"10:50.570","Text":"The face value is what 1 basis the coupon interest rate on."},{"Start":"10:50.570 ","End":"10:52.610","Text":"We haven\u0027t been given the coupon rate,"},{"Start":"10:52.610 ","End":"10:54.080","Text":"but we\u0027ve been told that"},{"Start":"10:54.080 ","End":"10:58.490","Text":"the annual coupon was 800 currency units at the end of each year,"},{"Start":"10:58.490 ","End":"11:00.215","Text":"so we didn\u0027t have to work it out."},{"Start":"11:00.215 ","End":"11:02.195","Text":"It was given to us."},{"Start":"11:02.195 ","End":"11:07.400","Text":"The effective interest rate on this bond is 6 per cent so we\u0027ll also apply"},{"Start":"11:07.400 ","End":"11:09.740","Text":"that 6 percent to the 20,000 to work out"},{"Start":"11:09.740 ","End":"11:13.730","Text":"the interest that we\u0027re actually going to recognize as an expense."},{"Start":"11:13.730 ","End":"11:15.950","Text":"It may not be that the interest expense"},{"Start":"11:15.950 ","End":"11:20.120","Text":"equals the coupon of 800 that we\u0027re paying each year."},{"Start":"11:20.120 ","End":"11:24.380","Text":"This interest is also treated as a financing activity and then,"},{"Start":"11:24.380 ","End":"11:27.449","Text":"at the 31st December 2019,"},{"Start":"11:27.449 ","End":"11:29.250","Text":"the taxpayer was 35."},{"Start":"11:29.250 ","End":"11:31.370","Text":"On the 31st December 2020,"},{"Start":"11:31.370 ","End":"11:33.995","Text":"the payable balance stood at 55."},{"Start":"11:33.995 ","End":"11:37.610","Text":"The balances are included within the accounts payable."},{"Start":"11:37.610 ","End":"11:42.125","Text":"It\u0027s actually hidden in the accounts payable line item in your balance sheet."},{"Start":"11:42.125 ","End":"11:44.540","Text":"Let\u0027s have a go at this exercise."},{"Start":"11:44.540 ","End":"11:49.610","Text":"What I\u0027ll do is I\u0027ll create lots of little videos so that you can just watch"},{"Start":"11:49.610 ","End":"11:52.774","Text":"little aspects of the solution"},{"Start":"11:52.774 ","End":"11:57.510","Text":"depending on how much time you have available at any one time."}],"ID":29728},{"Watched":false,"Name":"Exercise 13 NOP - B - operating activities","Duration":"17m 1s","ChapterTopicVideoID":26948,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.770","Text":"Let\u0027s have a go at the exercise NOP."},{"Start":"00:04.770 ","End":"00:07.365","Text":"This is an exercise involving"},{"Start":"00:07.365 ","End":"00:12.750","Text":"the indirect method and I\u0027m going to break it down into little subsections,"},{"Start":"00:12.750 ","End":"00:15.420","Text":"each of which will have its own video."},{"Start":"00:15.420 ","End":"00:17.535","Text":"In this mini video,"},{"Start":"00:17.535 ","End":"00:20.880","Text":"we\u0027re going to deal with the operating activities section."},{"Start":"00:20.880 ","End":"00:23.670","Text":"In it, what I\u0027m going to do is explain"},{"Start":"00:23.670 ","End":"00:27.540","Text":"the overview of the structure of this indirect method."},{"Start":"00:27.540 ","End":"00:31.410","Text":"We\u0027ll then identify the profit before interest and tax,"},{"Start":"00:31.410 ","End":"00:34.080","Text":"which is the first line item that we use when"},{"Start":"00:34.080 ","End":"00:37.410","Text":"using the indirect method for the operating activities section,"},{"Start":"00:37.410 ","End":"00:41.650","Text":"and then we\u0027re going to adjust for the non-cash flow items,"},{"Start":"00:41.650 ","End":"00:45.065","Text":"so that\u0027s all we\u0027re going to cover in this particular mini video."},{"Start":"00:45.065 ","End":"00:50.719","Text":"Our cash flow statement is made up of 3 main sections cash from operating activities,"},{"Start":"00:50.719 ","End":"00:53.330","Text":"financing activities, and investing activities,"},{"Start":"00:53.330 ","End":"00:56.345","Text":"and then it culminates in a little reconciliation"},{"Start":"00:56.345 ","End":"00:59.500","Text":"of what the ultimate movement in cash has been,"},{"Start":"00:59.500 ","End":"01:03.065","Text":"we added to the opening cash balance to get a closing cash balance."},{"Start":"01:03.065 ","End":"01:05.133","Text":"Perhaps they have 4 sections,"},{"Start":"01:05.133 ","End":"01:07.370","Text":"operating activities, financing activities,"},{"Start":"01:07.370 ","End":"01:10.505","Text":"investing activities, and then the fourth being"},{"Start":"01:10.505 ","End":"01:14.765","Text":"this little reconciliation of our bank balance right at the very end."},{"Start":"01:14.765 ","End":"01:20.735","Text":"This mini video, we focusing on operating activities and first, a brief overview."},{"Start":"01:20.735 ","End":"01:23.465","Text":"When using the indirect method,"},{"Start":"01:23.465 ","End":"01:26.030","Text":"we always start with the profit before interest and tax,"},{"Start":"01:26.030 ","End":"01:31.040","Text":"sometimes it\u0027s called profit before finance charges and tax and we reconcile down to"},{"Start":"01:31.040 ","End":"01:34.160","Text":"the figure cash generated in"},{"Start":"01:34.160 ","End":"01:38.380","Text":"operating activities or cash generated from operating activities if you like."},{"Start":"01:38.380 ","End":"01:43.220","Text":"To do that, we adjust for non-cash flow items and also changes in working"},{"Start":"01:43.220 ","End":"01:48.005","Text":"capital that will give us a subtotal called cash generated from operations."},{"Start":"01:48.005 ","End":"01:52.760","Text":"We then adjust that by adjusting for separately disclosed line items and that gives us"},{"Start":"01:52.760 ","End":"01:55.190","Text":"that final line item in this section of"},{"Start":"01:55.190 ","End":"01:59.930","Text":"operating activities called cash generated from operating activities."},{"Start":"01:59.930 ","End":"02:02.300","Text":"Now, the first line item,"},{"Start":"02:02.300 ","End":"02:04.070","Text":"profit before interest and tax,"},{"Start":"02:04.070 ","End":"02:06.550","Text":"we need to identify the correct profit figure,"},{"Start":"02:06.550 ","End":"02:08.765","Text":"so let\u0027s have a look at our income statement."},{"Start":"02:08.765 ","End":"02:10.445","Text":"In our income statement,"},{"Start":"02:10.445 ","End":"02:15.485","Text":"you see we\u0027ve got interest and tax and it has to be the profit before interest and tax,"},{"Start":"02:15.485 ","End":"02:18.020","Text":"so it\u0027s obviously this line item,"},{"Start":"02:18.020 ","End":"02:21.410","Text":"profit before interest because that profit before interest of"},{"Start":"02:21.410 ","End":"02:26.690","Text":"6017 is obviously before interests but obviously also before tax."},{"Start":"02:26.690 ","End":"02:30.710","Text":"Step up that into your cash from operating activities as your first line item."},{"Start":"02:30.710 ","End":"02:35.285","Text":"Then the next thing to do is to adjust for the non-cash flow items."},{"Start":"02:35.285 ","End":"02:37.460","Text":"Looking at that income statement again,"},{"Start":"02:37.460 ","End":"02:39.680","Text":"we\u0027re starting with this line item,"},{"Start":"02:39.680 ","End":"02:44.520","Text":"the profit before interest and before tax of 6017."},{"Start":"02:44.520 ","End":"02:49.235","Text":"What we\u0027re needing to do is identify what\u0027s included in that"},{"Start":"02:49.235 ","End":"02:56.260","Text":"6017 and should it remain in our cash flow statement."},{"Start":"02:56.260 ","End":"03:00.110","Text":"We\u0027re not looking for the non-cash flow items that"},{"Start":"03:00.110 ","End":"03:04.385","Text":"are included in net profit before interest and before tax."},{"Start":"03:04.385 ","End":"03:07.360","Text":"Let\u0027s start up here, revenue."},{"Start":"03:07.360 ","End":"03:11.445","Text":"Now, is revenue a non-cash flow item?"},{"Start":"03:11.445 ","End":"03:14.690","Text":"No, it isn\u0027t because revenue being,"},{"Start":"03:14.690 ","End":"03:18.455","Text":"for example, sales, ultimately affects the bank account."},{"Start":"03:18.455 ","End":"03:23.705","Text":"It may be a credit sale initially but ultimately it will affect the bank account."},{"Start":"03:23.705 ","End":"03:26.450","Text":"Revenue is not a non-cash item,"},{"Start":"03:26.450 ","End":"03:27.800","Text":"so we\u0027ll leave it there for a moment."},{"Start":"03:27.800 ","End":"03:31.280","Text":"We will have to convert it into a cash flow item and we will do that"},{"Start":"03:31.280 ","End":"03:35.270","Text":"by adjusting for working capital changes but that\u0027s coming in the next video."},{"Start":"03:35.270 ","End":"03:37.100","Text":"Then cost of sales."},{"Start":"03:37.100 ","End":"03:39.350","Text":"Is that a non-cash flow item?"},{"Start":"03:39.350 ","End":"03:42.290","Text":"Similarly, it\u0027s not"},{"Start":"03:42.290 ","End":"03:44.780","Text":"a non-cash flow item and we\u0027re going to have to"},{"Start":"03:44.780 ","End":"03:47.960","Text":"leave it in our cash flow statement for the moment."},{"Start":"03:47.960 ","End":"03:53.690","Text":"The reason is, although it doesn\u0027t directly affect our bank account,"},{"Start":"03:53.690 ","End":"03:56.555","Text":"it ultimately will affect our bank account."},{"Start":"03:56.555 ","End":"04:03.000","Text":"Cost of sales is a transaction which emanates from our inventory account,"},{"Start":"04:03.000 ","End":"04:06.230","Text":"so what we do to create cost of sales is we credit"},{"Start":"04:06.230 ","End":"04:10.340","Text":"our inventory and we debit our cost of sales expense."},{"Start":"04:10.340 ","End":"04:15.500","Text":"Now, we do that when the inventory is sold but that inventory that was sold,"},{"Start":"04:15.500 ","End":"04:19.205","Text":"that was taken out of the inventory account by crediting it,"},{"Start":"04:19.205 ","End":"04:21.955","Text":"that inventory was originally purchased,"},{"Start":"04:21.955 ","End":"04:25.429","Text":"so we have to work out how much inventory was purchased,"},{"Start":"04:25.429 ","End":"04:30.680","Text":"and then we do that by balancing back in our inventory account and then we\u0027re going to"},{"Start":"04:30.680 ","End":"04:34.325","Text":"calculate how much of those purchases were actually"},{"Start":"04:34.325 ","End":"04:38.870","Text":"paid for by then looking at our accounts payable."},{"Start":"04:38.870 ","End":"04:42.950","Text":"But nevertheless, be that as it may, both of these,"},{"Start":"04:42.950 ","End":"04:48.500","Text":"revenue and cost of sales don\u0027t immediately affect the bank account necessarily"},{"Start":"04:48.500 ","End":"04:51.770","Text":"but they ultimately will affect the bank account and"},{"Start":"04:51.770 ","End":"04:54.860","Text":"we\u0027ll take care of those when we adjust for working capital changes,"},{"Start":"04:54.860 ","End":"04:56.590","Text":"so that will make more sense later."},{"Start":"04:56.590 ","End":"04:59.840","Text":"Then the gross profit, that\u0027s simply a subtotal, so you can ignore it."},{"Start":"04:59.840 ","End":"05:01.370","Text":"Sometimes it\u0027s on the income statement,"},{"Start":"05:01.370 ","End":"05:04.310","Text":"sometimes it isn\u0027t, it\u0027s not a required subtotal."},{"Start":"05:04.310 ","End":"05:06.500","Text":"Then we get to our operating expenses."},{"Start":"05:06.500 ","End":"05:10.295","Text":"Now, this figure here needs further investigation,"},{"Start":"05:10.295 ","End":"05:13.370","Text":"so we\u0027ll have a look at our additional information."},{"Start":"05:13.370 ","End":"05:15.465","Text":"In our additional information, note Number 1,"},{"Start":"05:15.465 ","End":"05:20.340","Text":"you can see on 9211 and what constitutes that 9211,"},{"Start":"05:20.340 ","End":"05:22.895","Text":"so let\u0027s move through each 1 separately."},{"Start":"05:22.895 ","End":"05:24.860","Text":"Depreciation of PPE."},{"Start":"05:24.860 ","End":"05:28.565","Text":"Is that a non-cash flow item or not?"},{"Start":"05:28.565 ","End":"05:36.500","Text":"This is a debit to depreciation and a credit to accumulated depreciation."},{"Start":"05:36.500 ","End":"05:37.760","Text":"That\u0027s the journal entry,"},{"Start":"05:37.760 ","End":"05:41.929","Text":"it never affects bank and therefore it\u0027s a non-cash flow item."},{"Start":"05:41.929 ","End":"05:44.510","Text":"That is an expense that was deducted in"},{"Start":"05:44.510 ","End":"05:47.455","Text":"order to get to that profit before interest and tax,"},{"Start":"05:47.455 ","End":"05:52.595","Text":"so it shouldn\u0027t be in our cash flow statement if it\u0027s not going to affect our bank ever,"},{"Start":"05:52.595 ","End":"05:54.910","Text":"so, therefore, we need to reverse it."},{"Start":"05:54.910 ","End":"05:58.220","Text":"You can see here, depreciation of property, plant, and equipment."},{"Start":"05:58.220 ","End":"06:01.505","Text":"See we\u0027re adding it because in order to get to the profit,"},{"Start":"06:01.505 ","End":"06:06.185","Text":"that figure of 6017 was made up of income less expenses,"},{"Start":"06:06.185 ","End":"06:09.415","Text":"and one of those expenses was depreciation."},{"Start":"06:09.415 ","End":"06:14.040","Text":"We subtracted an amount of depreciation of 2838 and we shouldn\u0027t,"},{"Start":"06:14.040 ","End":"06:16.200","Text":"obviously, we should have for the purposes of"},{"Start":"06:16.200 ","End":"06:19.940","Text":"the income statement but from the perspective of the cash flow statement,"},{"Start":"06:19.940 ","End":"06:22.280","Text":"which is where we drawing up"},{"Start":"06:22.280 ","End":"06:26.045","Text":"an entirely new statement based on instead of the cruel basis, the cash basis,"},{"Start":"06:26.045 ","End":"06:28.130","Text":"that depreciation doesn\u0027t belong there,"},{"Start":"06:28.130 ","End":"06:29.540","Text":"so we have to reverse it,"},{"Start":"06:29.540 ","End":"06:33.140","Text":"so we adding that 2838 back."},{"Start":"06:33.140 ","End":"06:35.860","Text":"Back to the operating expense note."},{"Start":"06:35.860 ","End":"06:39.350","Text":"We have loss on disposal of the building and land."},{"Start":"06:39.350 ","End":"06:41.600","Text":"Building land is an item of property, plant,"},{"Start":"06:41.600 ","End":"06:44.315","Text":"and equipment, so is this a non-cash flow item?"},{"Start":"06:44.315 ","End":"06:49.490","Text":"Yes, it is because we\u0027re debiting a loss which is"},{"Start":"06:49.490 ","End":"06:54.975","Text":"an expense and we credited a disposal account,"},{"Start":"06:54.975 ","End":"06:57.330","Text":"so it doesn\u0027t affect bank."},{"Start":"06:57.330 ","End":"07:02.248","Text":"That as well is going to be reversed."},{"Start":"07:02.248 ","End":"07:03.910","Text":"You can see here,"},{"Start":"07:03.910 ","End":"07:06.175","Text":"in order to get to the profit before interest and tax,"},{"Start":"07:06.175 ","End":"07:09.820","Text":"we had subtracted a loss to get to the"},{"Start":"07:09.820 ","End":"07:15.205","Text":"6017 so we\u0027re now going to add the loss to reverse it."},{"Start":"07:15.205 ","End":"07:17.860","Text":"Then depreciation of right to use asset."},{"Start":"07:17.860 ","End":"07:22.915","Text":"Remember, a right to use asset is simply an asset that you don\u0027t own outright,"},{"Start":"07:22.915 ","End":"07:25.795","Text":"but an asset that you lease."},{"Start":"07:25.795 ","End":"07:29.500","Text":"Now these assets must also be depreciated so we treat"},{"Start":"07:29.500 ","End":"07:33.040","Text":"them almost identically to the way we treat property, plant and equipment."},{"Start":"07:33.040 ","End":"07:35.275","Text":"Is this a non-cash item,"},{"Start":"07:35.275 ","End":"07:36.810","Text":"well, yes it is,"},{"Start":"07:36.810 ","End":"07:38.470","Text":"so we debit the depreciation,"},{"Start":"07:38.470 ","End":"07:44.530","Text":"and we credit the accumulated depreciation of the right to use assets."},{"Start":"07:44.530 ","End":"07:47.751","Text":"We add that back,"},{"Start":"07:47.751 ","End":"07:53.890","Text":"because we had subtracted 285 to get to the 6017 so now we add it back."},{"Start":"07:53.890 ","End":"07:57.159","Text":"Then, amortization of intangible assets."},{"Start":"07:57.159 ","End":"08:01.300","Text":"Well, intangible assets are treated almost identically to property, plant and equipment."},{"Start":"08:01.300 ","End":"08:02.380","Text":"The only difference is property,"},{"Start":"08:02.380 ","End":"08:04.600","Text":"plant and equipment you can touch and feel,"},{"Start":"08:04.600 ","End":"08:09.240","Text":"whereas an intangible asset is intangible, you cannot touch it."},{"Start":"08:09.240 ","End":"08:14.690","Text":"It is also depreciated except we call that depreciation amortization."},{"Start":"08:14.690 ","End":"08:20.080","Text":"Again, we\u0027re debiting Amortization and we\u0027re crediting"},{"Start":"08:20.080 ","End":"08:26.440","Text":"accumulated amortization so it doesn\u0027t affect bank so we have to add it back,"},{"Start":"08:26.440 ","End":"08:32.320","Text":"because we had subtracted 300 to get to the 6017 so we add it back to reverse it out."},{"Start":"08:32.320 ","End":"08:34.975","Text":"Then the impairment of intangible assets,"},{"Start":"08:34.975 ","End":"08:36.700","Text":"property, plant, and equipment,"},{"Start":"08:36.700 ","End":"08:38.424","Text":"right to use assets,"},{"Start":"08:38.424 ","End":"08:41.650","Text":"and intangible assets can all be impaired as well."},{"Start":"08:41.650 ","End":"08:42.880","Text":"In this particular example,"},{"Start":"08:42.880 ","End":"08:45.865","Text":"you can see we\u0027ve only got one of them being impaired."},{"Start":"08:45.865 ","End":"08:49.660","Text":"It works similarly to depreciation so you debit"},{"Start":"08:49.660 ","End":"08:53.920","Text":"the impairment expense instead of depreciation expense,"},{"Start":"08:53.920 ","End":"08:57.625","Text":"and you credit accumulated impairments."},{"Start":"08:57.625 ","End":"09:00.325","Text":"You could actually credit an account called"},{"Start":"09:00.325 ","End":"09:03.580","Text":"accumulated depreciation and impairment losses so you"},{"Start":"09:03.580 ","End":"09:09.730","Text":"can add the accumulated depreciation to your accumulated impairment losses."},{"Start":"09:09.730 ","End":"09:13.600","Text":"But the point is there\u0027s no bank involved and there never will be,"},{"Start":"09:13.600 ","End":"09:16.000","Text":"so we have to reverse that."},{"Start":"09:16.000 ","End":"09:20.155","Text":"Because we had subtracted the impairment to get to the 6017,"},{"Start":"09:20.155 ","End":"09:21.790","Text":"we now add it."},{"Start":"09:21.790 ","End":"09:24.535","Text":"Back to the operating expenses."},{"Start":"09:24.535 ","End":"09:31.840","Text":"These 3 items here are actually not non-cash flow items,"},{"Start":"09:31.840 ","End":"09:34.540","Text":"because they will affect bank account."},{"Start":"09:34.540 ","End":"09:36.490","Text":"They may have already affected bank account or"},{"Start":"09:36.490 ","End":"09:39.145","Text":"they will affect bank account in the future."},{"Start":"09:39.145 ","End":"09:43.120","Text":"It\u0027s not possible to see by simply looking at each of"},{"Start":"09:43.120 ","End":"09:46.780","Text":"these expenses how much the bank account has been affected."},{"Start":"09:46.780 ","End":"09:49.105","Text":"In other words, how much has actually been paid?"},{"Start":"09:49.105 ","End":"09:51.250","Text":"All of these amounts are amounts that needs to be paid,"},{"Start":"09:51.250 ","End":"09:52.330","Text":"salaries needs to be paid,"},{"Start":"09:52.330 ","End":"09:53.920","Text":"repairs need to be paid for,"},{"Start":"09:53.920 ","End":"09:56.230","Text":"and so does insurance have to be paid for."},{"Start":"09:56.230 ","End":"09:59.410","Text":"But we can determine how much of these expenses have been"},{"Start":"09:59.410 ","End":"10:03.550","Text":"paid by looking at certain working capital accounts,"},{"Start":"10:03.550 ","End":"10:06.835","Text":"for example, a salaries payable account."},{"Start":"10:06.835 ","End":"10:10.150","Text":"Let\u0027s just take salaries just for example."},{"Start":"10:10.150 ","End":"10:14.485","Text":"What might\u0027ve happened is we might have debited"},{"Start":"10:14.485 ","End":"10:21.895","Text":"the salaries expense with 4,900 and credited bank,"},{"Start":"10:21.895 ","End":"10:24.940","Text":"let\u0027s say with 4,000,"},{"Start":"10:24.940 ","End":"10:30.129","Text":"and credited the salaries payable."},{"Start":"10:30.129 ","End":"10:34.150","Text":"Which is a liability with the difference of 900."},{"Start":"10:34.150 ","End":"10:40.825","Text":"In other words, our salaries expense is 4,900 of which 4,000 might\u0027ve been paid,"},{"Start":"10:40.825 ","End":"10:43.045","Text":"and 900 is still payable."},{"Start":"10:43.045 ","End":"10:46.030","Text":"Now it\u0027s not possible by looking at that figure,"},{"Start":"10:46.030 ","End":"10:49.600","Text":"4,900 to know whether that was the journal entry,"},{"Start":"10:49.600 ","End":"10:51.730","Text":"perhaps bank was credited with 3,000,"},{"Start":"10:51.730 ","End":"10:56.005","Text":"and the salaries payable was credited with 1,900."},{"Start":"10:56.005 ","End":"10:59.470","Text":"We wouldn\u0027t know by looking at the 4,900."},{"Start":"10:59.470 ","End":"11:03.970","Text":"However, we could determine the split between how much was credited to"},{"Start":"11:03.970 ","End":"11:06.190","Text":"bank and how much was credited to salaries"},{"Start":"11:06.190 ","End":"11:09.295","Text":"payable by looking at working capital accounts."},{"Start":"11:09.295 ","End":"11:14.050","Text":"Let\u0027s say for example, you might have had a salaries payable account."},{"Start":"11:14.050 ","End":"11:16.870","Text":"If we had a salaries payable account, in other words,"},{"Start":"11:16.870 ","End":"11:22.280","Text":"a liability, we would look at the opening balance compared to the closing balance."},{"Start":"11:22.280 ","End":"11:25.330","Text":"Let\u0027s assume my opening balance was 0 just to make it"},{"Start":"11:25.330 ","End":"11:29.200","Text":"easier and our closing balance was 900,"},{"Start":"11:29.200 ","End":"11:35.945","Text":"so then our ledger account in T-account format would have looked something like this."},{"Start":"11:35.945 ","End":"11:38.985","Text":"That\u0027s our closing balance carried forward,"},{"Start":"11:38.985 ","End":"11:41.100","Text":"and that\u0027s our closing balance brought forward"},{"Start":"11:41.100 ","End":"11:44.440","Text":"back on the credit side because it\u0027s a liability."},{"Start":"11:45.060 ","End":"11:49.150","Text":"By looking at our opening balance and our closing balance,"},{"Start":"11:49.150 ","End":"11:56.170","Text":"we can see that our salaries payable grew by 900 and if it grew by 900,"},{"Start":"11:56.170 ","End":"12:00.820","Text":"well then we can determine that our salaries expense had"},{"Start":"12:00.820 ","End":"12:07.825","Text":"grown by 900 in terms of how much wasn\u0027t paid so that\u0027s one of the entries."},{"Start":"12:07.825 ","End":"12:11.035","Text":"The other entry would have been the actual payment,"},{"Start":"12:11.035 ","End":"12:13.780","Text":"and we know how much the payment would\u0027ve been because we"},{"Start":"12:13.780 ","End":"12:17.155","Text":"know that our total salary expense was 4,900."},{"Start":"12:17.155 ","End":"12:20.830","Text":"We know that because we can see that on our income statement."},{"Start":"12:20.830 ","End":"12:22.870","Text":"We know that the other side of the entry,"},{"Start":"12:22.870 ","End":"12:25.045","Text":"the payment was 4,000,"},{"Start":"12:25.045 ","End":"12:31.190","Text":"and that would have affected our bank account so that would be 4,000."},{"Start":"12:31.190 ","End":"12:34.900","Text":"We can determine this entry."},{"Start":"12:34.900 ","End":"12:38.860","Text":"In other words, this split between how much is credited to bank and how much"},{"Start":"12:38.860 ","End":"12:43.885","Text":"is credited salaries payable by looking at our working capital account,"},{"Start":"12:43.885 ","End":"12:46.615","Text":"opening balance and closing balance."},{"Start":"12:46.615 ","End":"12:49.015","Text":"That\u0027s the only way we would be able to account on."},{"Start":"12:49.015 ","End":"12:54.670","Text":"But the point is salaries will get paid so it is not a non-cash flow item."},{"Start":"12:54.670 ","End":"12:59.320","Text":"We\u0027re not going to make an adjustment for a TH under the non-cash flow items,"},{"Start":"12:59.320 ","End":"13:01.390","Text":"which is what we\u0027re actually adjusting for now."},{"Start":"13:01.390 ","End":"13:04.750","Text":"Similarly, the logic holds for repairs,"},{"Start":"13:04.750 ","End":"13:09.160","Text":"you could just cross out salaries and replace with repairs and similarly for insurance,"},{"Start":"13:09.160 ","End":"13:11.725","Text":"cross out salaries and replace with insurance,"},{"Start":"13:11.725 ","End":"13:13.555","Text":"the same principle applies."},{"Start":"13:13.555 ","End":"13:16.570","Text":"Now let\u0027s consider the bad debt expense."},{"Start":"13:16.570 ","End":"13:19.510","Text":"In summary, these 3 items,"},{"Start":"13:19.510 ","End":"13:21.550","Text":"salaries, repairs, and insurance expense,"},{"Start":"13:21.550 ","End":"13:23.665","Text":"these will get paid,"},{"Start":"13:23.665 ","End":"13:29.740","Text":"so they\u0027re not non-cash flow items so we leave them in for the moment."},{"Start":"13:29.740 ","End":"13:34.000","Text":"Because we are going to convert them into cash payment amounts later."},{"Start":"13:34.000 ","End":"13:38.035","Text":"How are we going to convert them into cash payment amounts?"},{"Start":"13:38.035 ","End":"13:41.860","Text":"By adjusting for the movement in the working capital accounts."},{"Start":"13:41.860 ","End":"13:46.135","Text":"For example, we\u0027ll look at is there an expense prepaid account?"},{"Start":"13:46.135 ","End":"13:47.920","Text":"Is there an expense payable account?"},{"Start":"13:47.920 ","End":"13:50.440","Text":"Is there a provision account, etc."},{"Start":"13:50.440 ","End":"13:52.780","Text":"We\u0027ll look at the opening and closing balances,"},{"Start":"13:52.780 ","End":"13:56.680","Text":"and we will be able to work back to how much was actually paid for."},{"Start":"13:56.680 ","End":"14:00.835","Text":"Those t32hree we\u0027re not going to adjust for just yet."},{"Start":"14:00.835 ","End":"14:04.135","Text":"Then we look at the bad debt expense."},{"Start":"14:04.135 ","End":"14:09.255","Text":"Bad debts actually affects how much is received from our debtors."},{"Start":"14:09.255 ","End":"14:12.740","Text":"It\u0027s not a non-cash flow item so it\u0027s just like salaries,"},{"Start":"14:12.740 ","End":"14:14.135","Text":"repairs, and insurance expense,"},{"Start":"14:14.135 ","End":"14:16.700","Text":"it\u0027s not a non-cash flow item."},{"Start":"14:16.700 ","End":"14:21.590","Text":"We\u0027re going to leave it in, but we\u0027re going to use it because we are going to"},{"Start":"14:21.590 ","End":"14:26.420","Text":"still use it to convert our sales into a cash received amount."},{"Start":"14:26.420 ","End":"14:28.685","Text":"How are we going to do that?"},{"Start":"14:28.685 ","End":"14:30.680","Text":"Just like with salaries,"},{"Start":"14:30.680 ","End":"14:32.000","Text":"repairs, and insurance expense,"},{"Start":"14:32.000 ","End":"14:37.249","Text":"we\u0027re going to adjust it by looking at the movement in our working capital accounts."},{"Start":"14:37.249 ","End":"14:39.290","Text":"In this case with the bad debt expense,"},{"Start":"14:39.290 ","End":"14:41.030","Text":"we\u0027re going to combine it with"},{"Start":"14:41.030 ","End":"14:45.980","Text":"our receivable account to work out how much is actually received in cash."},{"Start":"14:45.980 ","End":"14:47.855","Text":"Here is some hypothetical figures,"},{"Start":"14:47.855 ","End":"14:50.415","Text":"let\u0027s say our sales were a 100,000."},{"Start":"14:50.415 ","End":"14:53.170","Text":"Debit debtors with a 100,000,"},{"Start":"14:53.170 ","End":"14:55.645","Text":"we would debit debtors with a 100,000,"},{"Start":"14:55.645 ","End":"14:58.850","Text":"and we would then add that to whatever our opening balance was."},{"Start":"14:58.850 ","End":"15:02.550","Text":"Let\u0027s say our opening balance was 200,000."},{"Start":"15:02.550 ","End":"15:07.425","Text":"Let\u0027s say our closing balance was 50,000."},{"Start":"15:07.425 ","End":"15:10.355","Text":"Now remember, that\u0027s our closing balance carried forward,"},{"Start":"15:10.355 ","End":"15:12.545","Text":"and we\u0027ll bring that down."},{"Start":"15:12.545 ","End":"15:15.860","Text":"Closing balance brought forward 50,000."},{"Start":"15:15.860 ","End":"15:21.110","Text":"Now before we deduce how much was received in cash,"},{"Start":"15:21.110 ","End":"15:25.605","Text":"we must also consider the impact of our bad debts."},{"Start":"15:25.605 ","End":"15:29.035","Text":"Let\u0027s say our bad debts were 20,000."},{"Start":"15:29.035 ","End":"15:33.665","Text":"We credit that to our debtors and now we can work it out."},{"Start":"15:33.665 ","End":"15:38.170","Text":"We have the debit adds up to 300,000,"},{"Start":"15:38.170 ","End":"15:41.630","Text":"take that across, and we\u0027ve got 2 credits."},{"Start":"15:41.630 ","End":"15:43.730","Text":"We\u0027ve got a 20,000 credit,"},{"Start":"15:43.730 ","End":"15:44.930","Text":"which was bad debt,"},{"Start":"15:44.930 ","End":"15:51.295","Text":"and you\u0027ve got the balance on the credit side of 50,000 so we\u0027ve got 2 credits of 70,000."},{"Start":"15:51.295 ","End":"15:57.710","Text":"That means we are missing 230,000 and that must have been the debit to bank."},{"Start":"15:57.710 ","End":"16:03.600","Text":"In other words, we must have received an amount of 230,000."},{"Start":"16:03.600 ","End":"16:10.925","Text":"Hopefully you can see how which when combined with sales and the debtors balance,"},{"Start":"16:10.925 ","End":"16:14.630","Text":"the difference between the opening balance and the closing balance,"},{"Start":"16:14.630 ","End":"16:19.420","Text":"we\u0027re able to work out how much was received in cash."},{"Start":"16:19.420 ","End":"16:23.120","Text":"You can see the bad debts actually does"},{"Start":"16:23.120 ","End":"16:27.200","Text":"impact the amount that is ultimately received in cash."},{"Start":"16:27.200 ","End":"16:32.255","Text":"We don\u0027t reverse it under the non-cash flow items section."},{"Start":"16:32.255 ","End":"16:35.135","Text":"Going back to our cash from operating activities,"},{"Start":"16:35.135 ","End":"16:37.160","Text":"we\u0027ve gone through all of the items under"},{"Start":"16:37.160 ","End":"16:40.575","Text":"operating expenses that was given to us in the additional information,"},{"Start":"16:40.575 ","End":"16:43.700","Text":"and those are all the non-cash flow items."},{"Start":"16:43.700 ","End":"16:48.230","Text":"The next step is to adjust for the working capital changes."},{"Start":"16:48.230 ","End":"16:51.320","Text":"After working capital changes we\u0027ll adjust for"},{"Start":"16:51.320 ","End":"16:56.510","Text":"separately disclosable items but let\u0027s first focus on the working capital changes."},{"Start":"16:56.510 ","End":"17:00.420","Text":"Working capital changes will be covered in the next video."}],"ID":29729},{"Watched":false,"Name":"Exercise 13 NOP - C-1 - working capital","Duration":"6m 10s","ChapterTopicVideoID":26949,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.160","Text":"Operating activities and working capital changes."},{"Start":"00:05.160 ","End":"00:07.425","Text":"In the last mini-video,"},{"Start":"00:07.425 ","End":"00:11.880","Text":"I showed you how the indirect method required us starting with"},{"Start":"00:11.880 ","End":"00:14.220","Text":"the profit before interest and tax and we went"},{"Start":"00:14.220 ","End":"00:17.115","Text":"through the adjustments for non-cash flow items."},{"Start":"00:17.115 ","End":"00:18.990","Text":"But using the indirect method,"},{"Start":"00:18.990 ","End":"00:24.360","Text":"we also need to adjust for working capital changes and separately disclosable items."},{"Start":"00:24.360 ","End":"00:28.845","Text":"Now in this video, we\u0027re going to be focusing on working capital changes."},{"Start":"00:28.845 ","End":"00:31.395","Text":"When adjusting for working capital changes,"},{"Start":"00:31.395 ","End":"00:34.690","Text":"we\u0027re going to be looking at the balance sheet and specific line items."},{"Start":"00:34.690 ","End":"00:40.180","Text":"Now these line items are most of your current assets and current liabilities."},{"Start":"00:40.180 ","End":"00:43.200","Text":"For example, inventory is working capital,"},{"Start":"00:43.200 ","End":"00:45.450","Text":"so it\u0027s accounts payable, accounts receivable,"},{"Start":"00:45.450 ","End":"00:48.025","Text":"provisions, expenses prepaid,"},{"Start":"00:48.025 ","End":"00:51.215","Text":"expenses payable, and other accruals."},{"Start":"00:51.215 ","End":"00:56.300","Text":"In this mini-video, we\u0027re going to be focusing on inventory and accounts payable."},{"Start":"00:56.300 ","End":"01:01.340","Text":"We\u0027re going to be showing you how to convert the amount of the cost of sales expense,"},{"Start":"01:01.340 ","End":"01:03.560","Text":"which has already been deducted to get to"},{"Start":"01:03.560 ","End":"01:06.260","Text":"that profit line item that our cash flow statement begins"},{"Start":"01:06.260 ","End":"01:09.230","Text":"with into an amount that represents the amount"},{"Start":"01:09.230 ","End":"01:12.200","Text":"of the cash paid for the purchases of inventory."},{"Start":"01:12.200 ","End":"01:15.020","Text":"We\u0027re converting the cost of"},{"Start":"01:15.020 ","End":"01:20.885","Text":"sales expense into the cash paid for the purchases of inventory."},{"Start":"01:20.885 ","End":"01:24.440","Text":"Now we\u0027re going to be doing that by adjusting for the movement in"},{"Start":"01:24.440 ","End":"01:27.670","Text":"the balances of the following working capital accounts."},{"Start":"01:27.670 ","End":"01:33.080","Text":"Inventory, now we use this to convert cost of sales into purchases amount."},{"Start":"01:33.080 ","End":"01:35.600","Text":"We\u0027re going to be using the accounts payable to convert"},{"Start":"01:35.600 ","End":"01:38.225","Text":"the purchases into the cash payment."},{"Start":"01:38.225 ","End":"01:41.495","Text":"I\u0027ll show you the logic behind this in a moment."},{"Start":"01:41.495 ","End":"01:45.920","Text":"Just to recap, we can convert cost of sales into"},{"Start":"01:45.920 ","End":"01:48.410","Text":"the purchases amount by taking into"},{"Start":"01:48.410 ","End":"01:51.590","Text":"account the movement in the inventory account balances."},{"Start":"01:51.590 ","End":"01:54.680","Text":"In other words, when we talk about the movement in the account balances,"},{"Start":"01:54.680 ","End":"01:57.860","Text":"we\u0027re talking about comparing our opening balance with"},{"Start":"01:57.860 ","End":"02:03.155","Text":"our closing balance and determining by how much it increased or decreased."},{"Start":"02:03.155 ","End":"02:06.740","Text":"We can then convert this purchases amount into"},{"Start":"02:06.740 ","End":"02:12.725","Text":"payment amount by taking into account the movement in the payables account balances."},{"Start":"02:12.725 ","End":"02:15.485","Text":"I can prove this to you using the T-accounts."},{"Start":"02:15.485 ","End":"02:21.725","Text":"We have a cost of sales account and we have an inventory account."},{"Start":"02:21.725 ","End":"02:25.970","Text":"Now, cost of sales is an expense and inventory is an asset,"},{"Start":"02:25.970 ","End":"02:29.015","Text":"both of them get bigger on the debit side."},{"Start":"02:29.015 ","End":"02:32.840","Text":"We also have an accounts payable."},{"Start":"02:32.840 ","End":"02:35.029","Text":"Accounts payable is a liability,"},{"Start":"02:35.029 ","End":"02:38.795","Text":"so it gets bigger on the credit side or the right-hand side."},{"Start":"02:38.795 ","End":"02:41.570","Text":"What happens in our inventory account is we"},{"Start":"02:41.570 ","End":"02:45.920","Text":"have certain amount of stock on hand at the beginning of the year."},{"Start":"02:45.920 ","End":"02:50.990","Text":"We then purchase stock during the year to add to that."},{"Start":"02:50.990 ","End":"02:54.080","Text":"Now we have what we had at the beginning plus what we purchased."},{"Start":"02:54.080 ","End":"02:56.180","Text":"We then sell stock,"},{"Start":"02:56.180 ","End":"02:59.530","Text":"that comes out and goes to our cost of sales account."},{"Start":"02:59.530 ","End":"03:04.325","Text":"Whatever is sold is deducted from what we had,"},{"Start":"03:04.325 ","End":"03:07.670","Text":"and that gives us our closing balance of our inventory."},{"Start":"03:07.670 ","End":"03:11.920","Text":"Now, what we purchased goes to our accounts payable account."},{"Start":"03:11.920 ","End":"03:13.985","Text":"In the accounts payable,"},{"Start":"03:13.985 ","End":"03:16.160","Text":"we would have had an opening balance,"},{"Start":"03:16.160 ","End":"03:20.200","Text":"to that, we add the amount that we purchased during the year."},{"Start":"03:20.200 ","End":"03:23.180","Text":"Taking into account how much we owed at the beginning of"},{"Start":"03:23.180 ","End":"03:25.850","Text":"the year plus the new purchases during the year,"},{"Start":"03:25.850 ","End":"03:28.730","Text":"that gives us how much we should owe at the end of the year."},{"Start":"03:28.730 ","End":"03:31.865","Text":"However, we may have paid something during the year."},{"Start":"03:31.865 ","End":"03:33.605","Text":"If we pay something during the year,"},{"Start":"03:33.605 ","End":"03:35.840","Text":"we\u0027re going to debit the accounts payable."},{"Start":"03:35.840 ","End":"03:39.325","Text":"Obviously, we would credit bank."},{"Start":"03:39.325 ","End":"03:42.905","Text":"Payments go through on the credit side or the right-hand side."},{"Start":"03:42.905 ","End":"03:45.500","Text":"The entry would have been credit the bank,"},{"Start":"03:45.500 ","End":"03:47.135","Text":"debit the accounts payable,"},{"Start":"03:47.135 ","End":"03:51.155","Text":"and that would then give us our closing balance on our accounts payable."},{"Start":"03:51.155 ","End":"03:55.250","Text":"Can you see that by using the cost of sales expense which you\u0027ll pick up in"},{"Start":"03:55.250 ","End":"04:01.205","Text":"your income statement and then taking that into account in your inventory account,"},{"Start":"04:01.205 ","End":"04:05.420","Text":"your cost of sales would have been debited and your inventory would\u0027ve been credited."},{"Start":"04:05.420 ","End":"04:07.520","Text":"The slit says Journal number 1."},{"Start":"04:07.520 ","End":"04:10.340","Text":"You compare it with the opening balance and closing balance."},{"Start":"04:10.340 ","End":"04:13.235","Text":"You could actually work backwards to your purchase figure."},{"Start":"04:13.235 ","End":"04:14.870","Text":"Now the purchase figure,"},{"Start":"04:14.870 ","End":"04:17.255","Text":"if you understand the journal entries,"},{"Start":"04:17.255 ","End":"04:20.090","Text":"we would have debited the inventory account with"},{"Start":"04:20.090 ","End":"04:23.795","Text":"the amount that we purchased and credited the accounts payable."},{"Start":"04:23.795 ","End":"04:27.425","Text":"Then taking into account the opening balance and the closing balance,"},{"Start":"04:27.425 ","End":"04:31.100","Text":"we could actually work backwards to the bank entry."},{"Start":"04:31.100 ","End":"04:34.645","Text":"In other words, how much should we actually pay for those purchases?"},{"Start":"04:34.645 ","End":"04:37.820","Text":"This entry in the accounts payable is actually a journal entry which"},{"Start":"04:37.820 ","End":"04:42.110","Text":"was debit the accounts payable and credit the bank."},{"Start":"04:42.110 ","End":"04:45.680","Text":"We can convert the cost of sales into"},{"Start":"04:45.680 ","End":"04:49.445","Text":"purchases amount by using the inventory account balances. This is what we did here."},{"Start":"04:49.445 ","End":"04:50.660","Text":"We took the cost of sales,"},{"Start":"04:50.660 ","End":"04:51.890","Text":"put into the inventory,"},{"Start":"04:51.890 ","End":"04:53.600","Text":"looked at the movement between the opening and"},{"Start":"04:53.600 ","End":"04:56.405","Text":"closing balance and got the purchases figure."},{"Start":"04:56.405 ","End":"04:59.360","Text":"Then we can convert this purchases amount into"},{"Start":"04:59.360 ","End":"05:02.905","Text":"a payment amount by taking into account the movement in the payables account."},{"Start":"05:02.905 ","End":"05:07.150","Text":"You can see the purchases figure going into the accounts payable."},{"Start":"05:07.150 ","End":"05:13.515","Text":"We take the movement in the accounts payable and we work backwards to the payment amount."},{"Start":"05:13.515 ","End":"05:18.715","Text":"We\u0027re focusing on the movement in the inventory accounts and the payables accounts."},{"Start":"05:18.715 ","End":"05:22.090","Text":"We\u0027re simply going to focus on the movement in"},{"Start":"05:22.090 ","End":"05:26.154","Text":"the balances of the inventory and the payables accounts."},{"Start":"05:26.154 ","End":"05:29.455","Text":"We know that there was a third account, cost of sales,"},{"Start":"05:29.455 ","End":"05:33.295","Text":"that we needed to take into account in order to work out the cash payment,"},{"Start":"05:33.295 ","End":"05:36.310","Text":"but we don\u0027t make an adjustment for cost of sales using"},{"Start":"05:36.310 ","End":"05:40.550","Text":"this indirect method because cost of sales is already in the profit figure."},{"Start":"05:40.550 ","End":"05:42.310","Text":"It has really been deducted."},{"Start":"05:42.310 ","End":"05:46.165","Text":"All we\u0027re having to do is make adjustments for the inventory and payables,"},{"Start":"05:46.165 ","End":"05:49.650","Text":"movement in the opening and closing balances."},{"Start":"05:49.650 ","End":"05:53.360","Text":"What I have done is to hopefully provide you with"},{"Start":"05:53.360 ","End":"05:57.290","Text":"sufficient logic and understanding about how cost"},{"Start":"05:57.290 ","End":"06:00.860","Text":"of sales gets adjusted using the inventory balances and"},{"Start":"06:00.860 ","End":"06:05.135","Text":"the payable balances to convert it into a cash payment figure."},{"Start":"06:05.135 ","End":"06:11.190","Text":"The next video, we\u0027re going to apply this logic to the actual question."}],"ID":29730},{"Watched":false,"Name":"Exercise 13 NOP - C-2 - inventory and acc payable","Duration":"11m 7s","ChapterTopicVideoID":26950,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.170 ","End":"00:06.720","Text":"Operating activities and the working capital changes of inventory and accounts payable."},{"Start":"00:06.720 ","End":"00:08.400","Text":"Now, in the previous video,"},{"Start":"00:08.400 ","End":"00:12.510","Text":"I explained the logic behind how we can convert our cost of"},{"Start":"00:12.510 ","End":"00:18.240","Text":"sales using inventory and payables into a cash paid amount."},{"Start":"00:18.240 ","End":"00:21.090","Text":"In this video, I\u0027m going to apply that logic to the information"},{"Start":"00:21.090 ","End":"00:23.955","Text":"provided to us in the question."},{"Start":"00:23.955 ","End":"00:27.540","Text":"The step 1, we can convert cost of sales into"},{"Start":"00:27.540 ","End":"00:32.335","Text":"a purchases figure by taking into account the movement in the inventory account."},{"Start":"00:32.335 ","End":"00:36.935","Text":"Let\u0027s look at the balance sheet for our inventory account balances."},{"Start":"00:36.935 ","End":"00:38.285","Text":"As you can see here,"},{"Start":"00:38.285 ","End":"00:44.740","Text":"we have an opening balance of 1,602 and a closing balance of 1,234."},{"Start":"00:44.740 ","End":"00:47.401","Text":"We put that into our ledger account."},{"Start":"00:47.401 ","End":"00:51.200","Text":"This ledger account is in columnar format as opposed to a T-account format."},{"Start":"00:51.200 ","End":"00:56.075","Text":"Opening balance, 1,602, closing balance,1,234."},{"Start":"00:56.075 ","End":"01:00.440","Text":"What one would do in your inventory account is then to add the inventory"},{"Start":"01:00.440 ","End":"01:04.550","Text":"that you purchased and then we would subtract the inventory that we\u0027d sold,"},{"Start":"01:04.550 ","End":"01:08.885","Text":"which would give us the closing balance of inventory on hand."},{"Start":"01:08.885 ","End":"01:11.165","Text":"Now, the inventory sold,"},{"Start":"01:11.165 ","End":"01:12.650","Text":"which is cost of sales,"},{"Start":"01:12.650 ","End":"01:14.885","Text":"is found in our income statement."},{"Start":"01:14.885 ","End":"01:16.999","Text":"Have a look at your income statement,"},{"Start":"01:16.999 ","End":"01:18.190","Text":"the second line item,"},{"Start":"01:18.190 ","End":"01:21.837","Text":"you\u0027ll see the cost of sales of 4,693,"},{"Start":"01:21.837 ","End":"01:25.735","Text":"so we put that into our ledger account, 4,693."},{"Start":"01:25.735 ","End":"01:28.103","Text":"Now we have only one missing item,"},{"Start":"01:28.103 ","End":"01:30.130","Text":"so we can balance back to that."},{"Start":"01:30.130 ","End":"01:35.170","Text":"Given that our opening balance is 1,602 and our closing balance is 1,234,"},{"Start":"01:35.170 ","End":"01:37.135","Text":"and we\u0027d sold 4,693,"},{"Start":"01:37.135 ","End":"01:41.330","Text":"we must have purchased 4,325."},{"Start":"01:41.330 ","End":"01:46.925","Text":"Now we\u0027ve converted the cost of sales into the purchases figure."},{"Start":"01:46.925 ","End":"01:49.835","Text":"Now, step 2,"},{"Start":"01:49.835 ","End":"01:52.810","Text":"we can convert the purchases amount into"},{"Start":"01:52.810 ","End":"01:57.330","Text":"a cash payment amount by taking into account the movement in the payables account."},{"Start":"01:57.330 ","End":"01:59.285","Text":"Looking at our accounts payable,"},{"Start":"01:59.285 ","End":"02:03.713","Text":"we have opening balance plus whatever you\u0027ve purchased during the year,"},{"Start":"02:03.713 ","End":"02:05.912","Text":"that\u0027s how much you owe at the beginning of the year,"},{"Start":"02:05.912 ","End":"02:09.680","Text":"plus the further purchases means we owe more."},{"Start":"02:09.680 ","End":"02:12.320","Text":"Then if you compare that to your closing balance,"},{"Start":"02:12.320 ","End":"02:16.165","Text":"we would then get to the amount that we must have paid our suppliers."},{"Start":"02:16.165 ","End":"02:18.260","Text":"Let\u0027s have a look at the opening balance."},{"Start":"02:18.260 ","End":"02:19.690","Text":"In our balance sheet,"},{"Start":"02:19.690 ","End":"02:21.500","Text":"we\u0027ve got accounts payable,"},{"Start":"02:21.500 ","End":"02:24.335","Text":"and here we have the opening balance of 822."},{"Start":"02:24.335 ","End":"02:29.195","Text":"However, remember, the additional information that was given to us."},{"Start":"02:29.195 ","End":"02:33.365","Text":"In the additional information point number 6 on tax payable,"},{"Start":"02:33.365 ","End":"02:39.570","Text":"we were told that the tax payable balances were included within the accounts payable."},{"Start":"02:39.920 ","End":"02:44.280","Text":"At the 31st, December 2019,"},{"Start":"02:44.280 ","End":"02:49.115","Text":"that 35 is included in our opening balance of accounts payable."},{"Start":"02:49.115 ","End":"02:52.760","Text":"The opening balance per the balance sheet was 822,"},{"Start":"02:52.760 ","End":"02:55.340","Text":"but we know it includes tax payable of 35,"},{"Start":"02:55.340 ","End":"02:59.495","Text":"so the opening balance of our true accounts payable,"},{"Start":"02:59.495 ","End":"03:04.775","Text":"excluding taxes payable, is 787 times the closing balance."},{"Start":"03:04.775 ","End":"03:06.695","Text":"We have a look at the balance sheet again,"},{"Start":"03:06.695 ","End":"03:09.770","Text":"accounts payable closing balance is 893."},{"Start":"03:09.770 ","End":"03:12.035","Text":"Don\u0027t forget the additional information."},{"Start":"03:12.035 ","End":"03:16.250","Text":"The tax payable at 31st December 2020 was 55,"},{"Start":"03:16.250 ","End":"03:19.100","Text":"and that had been included in the accounts payable."},{"Start":"03:19.100 ","End":"03:21.758","Text":"It\u0027s 893 according to the balance sheet,"},{"Start":"03:21.758 ","End":"03:25.520","Text":"but we must subtract the tax payable of 55 that was included in that."},{"Start":"03:25.520 ","End":"03:30.065","Text":"We get the pure accounts payable to the suppliers of inventory,"},{"Start":"03:30.065 ","End":"03:32.690","Text":"in other words, of 838."},{"Start":"03:32.690 ","End":"03:36.537","Text":"Now we have 3 of the 4 amounts,"},{"Start":"03:36.537 ","End":"03:41.725","Text":"so we can balance to the bank amount, which is 4,274."},{"Start":"03:41.725 ","End":"03:46.340","Text":"We have converted the cost of sales into cash payment figure by taking into"},{"Start":"03:46.340 ","End":"03:51.175","Text":"account the movement in the inventory balances and the accounts payable balances."},{"Start":"03:51.175 ","End":"03:55.250","Text":"Just incidentally, if we were using the direct method,"},{"Start":"03:55.250 ","End":"03:57.080","Text":"which we are not in this question,"},{"Start":"03:57.080 ","End":"04:01.130","Text":"we would include this cash paid amount within the line item,"},{"Start":"04:01.130 ","End":"04:04.639","Text":"cash paid to suppliers and employees."},{"Start":"04:04.639 ","End":"04:07.010","Text":"Using the direct method,"},{"Start":"04:07.010 ","End":"04:09.830","Text":"our first line item would have been cash received from"},{"Start":"04:09.830 ","End":"04:13.280","Text":"customers less cash paid to suppliers and employees."},{"Start":"04:13.280 ","End":"04:21.800","Text":"That would only be 4,274 assuming no other suppliers and no other employees existed,"},{"Start":"04:21.800 ","End":"04:23.210","Text":"which is highly unlikely."},{"Start":"04:23.210 ","End":"04:25.130","Text":"You have suppliers of electricity,"},{"Start":"04:25.130 ","End":"04:28.090","Text":"the people who repair your machinery,"},{"Start":"04:28.090 ","End":"04:30.448","Text":"or suppliers of the repair services,"},{"Start":"04:30.448 ","End":"04:31.610","Text":"and obviously your employees,"},{"Start":"04:31.610 ","End":"04:33.835","Text":"the supplier of the labor."},{"Start":"04:33.835 ","End":"04:38.495","Text":"Just very simplistically, if there were no other accounts involved,"},{"Start":"04:38.495 ","End":"04:42.070","Text":"we would have cash paid to suppliers and employees of 4,274."},{"Start":"04:42.070 ","End":"04:44.157","Text":"We\u0027re using the indirect method,"},{"Start":"04:44.157 ","End":"04:46.310","Text":"and remember using the indirect method,"},{"Start":"04:46.310 ","End":"04:49.400","Text":"the cost of sales is already included in the profit line item in"},{"Start":"04:49.400 ","End":"04:53.430","Text":"our cash flow statement within that operating activity section."},{"Start":"04:53.430 ","End":"04:56.660","Text":"To convert the cost of sales to a cash payment,"},{"Start":"04:56.660 ","End":"04:58.790","Text":"we simply make adjustments for the movement in"},{"Start":"04:58.790 ","End":"05:02.240","Text":"the following working capital accounts: the inventory account balances,"},{"Start":"05:02.240 ","End":"05:04.765","Text":"and the payables account balances."},{"Start":"05:04.765 ","End":"05:09.440","Text":"Let\u0027s have a look at our indirect method cash flow statement at the moment,"},{"Start":"05:09.440 ","End":"05:11.240","Text":"the cash from operating activities,"},{"Start":"05:11.240 ","End":"05:13.535","Text":"which is where the indirect method gets applied."},{"Start":"05:13.535 ","End":"05:17.593","Text":"You\u0027ve got your profit adjusted for these non-cash flow items,"},{"Start":"05:17.593 ","End":"05:20.000","Text":"and now we get to the adjustment for"},{"Start":"05:20.000 ","End":"05:23.090","Text":"inventory and then we\u0027ll do the adjustment for accounts payable."},{"Start":"05:23.090 ","End":"05:24.950","Text":"The adjustment for inventory,"},{"Start":"05:24.950 ","End":"05:26.510","Text":"how would we show this?"},{"Start":"05:26.510 ","End":"05:28.730","Text":"Well, just like we did a moment ago,"},{"Start":"05:28.730 ","End":"05:29.810","Text":"we look at the balance sheet,"},{"Start":"05:29.810 ","End":"05:31.655","Text":"we look at the inventory line item,"},{"Start":"05:31.655 ","End":"05:34.205","Text":"we look at the opening and closing balances,"},{"Start":"05:34.205 ","End":"05:39.258","Text":"and we put them into the workings in our cash from operating activities\u0027 section."},{"Start":"05:39.258 ","End":"05:43.705","Text":"We\u0027ve got the opening balance of 1,602 minus the closing balance of 1,234."},{"Start":"05:43.705 ","End":"05:47.475","Text":"That is a decrease,1,602 decreased to 1,234,"},{"Start":"05:47.475 ","End":"05:49.340","Text":"so it\u0027s a decrease in inventory."},{"Start":"05:49.340 ","End":"05:52.055","Text":"The amount of the decrease is 368."},{"Start":"05:52.055 ","End":"05:57.680","Text":"Now, are we to add this 368 or subtract the 368?"},{"Start":"05:57.680 ","End":"05:59.645","Text":"Well, think about the logic."},{"Start":"05:59.645 ","End":"06:02.090","Text":"A decrease in inventory means that some of"},{"Start":"06:02.090 ","End":"06:05.540","Text":"our opening inventory was sold during the year."},{"Start":"06:05.540 ","End":"06:08.465","Text":"Thus not all the inventory that was sold,"},{"Start":"06:08.465 ","End":"06:11.105","Text":"which is represented by the cost of sales expense,"},{"Start":"06:11.105 ","End":"06:15.335","Text":"had to actually be purchased during the year because we had some in stock."},{"Start":"06:15.335 ","End":"06:19.250","Text":"In other words, the inventory that was purchased during"},{"Start":"06:19.250 ","End":"06:23.630","Text":"the year would have been less than the cost of sales amount."},{"Start":"06:23.630 ","End":"06:27.275","Text":"We would not have purchased the same amount that was sold"},{"Start":"06:27.275 ","End":"06:32.610","Text":"because part of the amount that was sold had come out of our opening balance."},{"Start":"06:33.680 ","End":"06:36.450","Text":"We are going to add the decrease."},{"Start":"06:36.450 ","End":"06:39.214","Text":"Now, why do I say we\u0027re going to add the decrease?"},{"Start":"06:39.214 ","End":"06:43.565","Text":"That\u0027s because it\u0027s going to offset the cost of sales expense."},{"Start":"06:43.565 ","End":"06:49.460","Text":"Remember, the cost of sales expense has been subtracted to get the profit."},{"Start":"06:49.460 ","End":"06:53.530","Text":"You can see here that profit before interest and tax, the 6,017,"},{"Start":"06:53.530 ","End":"06:56.750","Text":"is the sales amount less the cost of sales,"},{"Start":"06:56.750 ","End":"06:59.240","Text":"the 4,693, and less other expenses,"},{"Start":"06:59.240 ","End":"07:01.310","Text":"so subtract the cost of sales."},{"Start":"07:01.310 ","End":"07:04.280","Text":"If you want to reduce your cost of sales,"},{"Start":"07:04.280 ","End":"07:06.575","Text":"you have to add the 368."},{"Start":"07:06.575 ","End":"07:12.365","Text":"The purchases figure is minus the 4,693 plus the 368,"},{"Start":"07:12.365 ","End":"07:17.445","Text":"giving us the 4,325 being our purchases figure."},{"Start":"07:17.445 ","End":"07:19.810","Text":"Cost of sales, 4,693,"},{"Start":"07:19.810 ","End":"07:21.927","Text":"decrease in inventory, 368,"},{"Start":"07:21.927 ","End":"07:23.930","Text":"the two get set off against each other,"},{"Start":"07:23.930 ","End":"07:26.315","Text":"giving us the purchases figure 4,325."},{"Start":"07:26.315 ","End":"07:28.745","Text":"However, the cash paid,"},{"Start":"07:28.745 ","End":"07:30.125","Text":"not the purchases figure,"},{"Start":"07:30.125 ","End":"07:31.644","Text":"but the cash paid."},{"Start":"07:31.644 ","End":"07:33.290","Text":"How much was paid?"},{"Start":"07:33.290 ","End":"07:34.610","Text":"To calculate how much was paid,"},{"Start":"07:34.610 ","End":"07:37.520","Text":"we take into account the accounts payable movement."},{"Start":"07:37.520 ","End":"07:38.840","Text":"We look at the balance sheet,"},{"Start":"07:38.840 ","End":"07:41.000","Text":"look for the line item for accounts payable."},{"Start":"07:41.000 ","End":"07:44.450","Text":"It\u0027s a liability, so you\u0027ll find it under the current liabilities heading."},{"Start":"07:44.450 ","End":"07:46.500","Text":"Opening balance of 822,"},{"Start":"07:46.500 ","End":"07:48.510","Text":"closing balance of 893."},{"Start":"07:48.510 ","End":"07:51.735","Text":"Also remember the additional information."},{"Start":"07:51.735 ","End":"07:53.616","Text":"Remember the tax payable,"},{"Start":"07:53.616 ","End":"07:56.480","Text":"the balances were included within accounts payable,"},{"Start":"07:56.480 ","End":"08:02.320","Text":"and the opening balance of tax payable was 35."},{"Start":"08:02.320 ","End":"08:06.110","Text":"We put this into our cash flow statement workings,"},{"Start":"08:06.110 ","End":"08:08.990","Text":"we\u0027re going to show opening balance was 822,"},{"Start":"08:08.990 ","End":"08:14.090","Text":"but we have to subtract the 35 tax payable that was included in that opening balance."},{"Start":"08:14.090 ","End":"08:17.510","Text":"Then, going back to the additional information on tax payable,"},{"Start":"08:17.510 ","End":"08:19.435","Text":"the balance at 31st December,"},{"Start":"08:19.435 ","End":"08:21.485","Text":"2020 stood at 55."},{"Start":"08:21.485 ","End":"08:25.655","Text":"We\u0027re going to subtract the closing balance of our accounts payable of 893,"},{"Start":"08:25.655 ","End":"08:30.125","Text":"but we\u0027re going to adjust it downwards by 55 because that\u0027s tax payable."},{"Start":"08:30.125 ","End":"08:34.033","Text":"The net accounts payable opening balance was 787,"},{"Start":"08:34.033 ","End":"08:37.905","Text":"and at the end of the year it grew to closing balance of 838."},{"Start":"08:37.905 ","End":"08:40.835","Text":"That\u0027s an increase of 51."},{"Start":"08:40.835 ","End":"08:44.180","Text":"Now, an increase of 51 in accounts payable,"},{"Start":"08:44.180 ","End":"08:46.460","Text":"do we add this or subtract it?"},{"Start":"08:46.460 ","End":"08:49.580","Text":"Well, an increase means that some of our purchases,"},{"Start":"08:49.580 ","End":"08:52.625","Text":"which were 4,325, we\u0027re in credit."},{"Start":"08:52.625 ","End":"08:54.470","Text":"That 4,325, remember,"},{"Start":"08:54.470 ","End":"08:57.110","Text":"was the cost of sales of 4,693,"},{"Start":"08:57.110 ","End":"09:00.190","Text":"which we adjusted for the decrease in inventory."},{"Start":"09:00.190 ","End":"09:02.075","Text":"We set the two off against each other,"},{"Start":"09:02.075 ","End":"09:05.990","Text":"the purchases with the minus 4,693 plus the 368,"},{"Start":"09:05.990 ","End":"09:08.840","Text":"giving us the purchase figure, 4,325."},{"Start":"09:08.840 ","End":"09:11.780","Text":"Part of those purchases must have been on credit because"},{"Start":"09:11.780 ","End":"09:14.405","Text":"it\u0027s actually grown our accounts payable balance."},{"Start":"09:14.405 ","End":"09:18.397","Text":"In other words, not all our purchases were paid in cash,"},{"Start":"09:18.397 ","End":"09:21.110","Text":"so we thus add to the purchases amount of"},{"Start":"09:21.110 ","End":"09:27.705","Text":"4,325 the increase in the accounts payable of 51."},{"Start":"09:27.705 ","End":"09:32.780","Text":"We\u0027ve got a subtracted amount of 4,325 sitting in our cash flow statement at the moment;"},{"Start":"09:32.780 ","End":"09:35.523","Text":"was minus 4,693 plus 368,"},{"Start":"09:35.523 ","End":"09:41.360","Text":"so we\u0027ve got a net deduction of 4,325 and we\u0027re now going to add"},{"Start":"09:41.360 ","End":"09:48.055","Text":"51 in order to further reduce the 4,325 to the lower cash paid amount."},{"Start":"09:48.055 ","End":"09:54.110","Text":"We are adding to the purchases amount of 4,325 the increase in our accounts payable of"},{"Start":"09:54.110 ","End":"09:56.660","Text":"51 because that is going to decrease"},{"Start":"09:56.660 ","End":"10:00.905","Text":"the purchases amount to get to the smaller cash paid amount."},{"Start":"10:00.905 ","End":"10:03.035","Text":"The payments, in other words,"},{"Start":"10:03.035 ","End":"10:07.320","Text":"are the purchases of 4,325 less the 51,"},{"Start":"10:07.320 ","End":"10:08.870","Text":"or put it another way,"},{"Start":"10:08.870 ","End":"10:11.415","Text":"minus 4,325 plus the 51."},{"Start":"10:11.415 ","End":"10:14.000","Text":"The point is we\u0027re going in opposite directions."},{"Start":"10:14.000 ","End":"10:15.800","Text":"The purchases are 4,325,"},{"Start":"10:15.800 ","End":"10:18.566","Text":"but the accounts payable increased by 51,"},{"Start":"10:18.566 ","End":"10:24.110","Text":"so we must have paid for only 4,274. What have we got here?"},{"Start":"10:24.110 ","End":"10:29.090","Text":"We\u0027ve got the minus cost of sales of 4,693 plus the 368,"},{"Start":"10:29.090 ","End":"10:31.774","Text":"which is the decrease in inventory,"},{"Start":"10:31.774 ","End":"10:36.485","Text":"plus the 51, which is the increase in the accounts payable,"},{"Start":"10:36.485 ","End":"10:40.490","Text":"giving us the cash paid of 4,274."},{"Start":"10:40.490 ","End":"10:45.535","Text":"We\u0027ve adjusted our cost of sales to the cash paid amount of"},{"Start":"10:45.535 ","End":"10:48.110","Text":"4,274 by taking into"},{"Start":"10:48.110 ","End":"10:51.365","Text":"account the movement in the inventory and the movement in the accounts payable."},{"Start":"10:51.365 ","End":"10:54.360","Text":"Next step is to look at the sales,"},{"Start":"10:54.360 ","End":"10:55.805","Text":"and to do that,"},{"Start":"10:55.805 ","End":"10:58.430","Text":"we\u0027re going to adjust for the accounts receivable."},{"Start":"10:58.430 ","End":"11:01.040","Text":"To convert sales into a cash receipt amount,"},{"Start":"11:01.040 ","End":"11:04.130","Text":"we have to adjust for the changes in the accounts receivable."},{"Start":"11:04.130 ","End":"11:07.619","Text":"We\u0027ll cover that in the next mini-video."}],"ID":29731},{"Watched":false,"Name":"Exercise 13 NOP - D-1","Duration":"4m 58s","ChapterTopicVideoID":26951,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.460","Text":"The operating activities section of"},{"Start":"00:02.460 ","End":"00:05.775","Text":"our cash flow statement focusing on working capital changes,"},{"Start":"00:05.775 ","End":"00:10.200","Text":"and specifically, we are going to be looking in this video at the accounts receivable."},{"Start":"00:10.200 ","End":"00:14.805","Text":"In this mini-video, we\u0027re going to show you how to convert the sales income amount."},{"Start":"00:14.805 ","End":"00:16.950","Text":"Now remember, the sales income amount has really"},{"Start":"00:16.950 ","End":"00:19.500","Text":"been added to get to the profit line item."},{"Start":"00:19.500 ","End":"00:21.645","Text":"Using this indirect method,"},{"Start":"00:21.645 ","End":"00:24.620","Text":"our very first line item in our cash flow statement is"},{"Start":"00:24.620 ","End":"00:28.190","Text":"the profit before finance charges and before tax."},{"Start":"00:28.190 ","End":"00:30.800","Text":"We\u0027re going to show you how to convert that sales amount,"},{"Start":"00:30.800 ","End":"00:33.650","Text":"which is really in the cash flow statement,"},{"Start":"00:33.650 ","End":"00:37.310","Text":"into an amount that represents the cash received from the sales."},{"Start":"00:37.310 ","End":"00:39.560","Text":"Because obviously we\u0027re doing a cash flow statement,"},{"Start":"00:39.560 ","End":"00:41.840","Text":"so we don\u0027t want sales income included in it,"},{"Start":"00:41.840 ","End":"00:45.215","Text":"we need the cash received from the sales included."},{"Start":"00:45.215 ","End":"00:48.620","Text":"To do that, we\u0027re going to need to adjust for the movement in"},{"Start":"00:48.620 ","End":"00:52.010","Text":"the following working capital accounts: the accounts receivable,"},{"Start":"00:52.010 ","End":"00:54.770","Text":"net of any impairment allowances."},{"Start":"00:54.770 ","End":"00:58.010","Text":"This used to be called doubtful debt allowance and you may still see"},{"Start":"00:58.010 ","End":"01:01.695","Text":"it referred to as doubtful debt allowance some time to come."},{"Start":"01:01.695 ","End":"01:06.010","Text":"Now, a quick explanation of the logic of the interaction of the sales,"},{"Start":"01:06.010 ","End":"01:08.845","Text":"the bad debts, and your net receivables."},{"Start":"01:08.845 ","End":"01:11.550","Text":"These accounts interact as follows."},{"Start":"01:11.550 ","End":"01:14.177","Text":"We have a sales income account,"},{"Start":"01:14.177 ","End":"01:17.035","Text":"income gets bigger on the credit side."},{"Start":"01:17.035 ","End":"01:19.225","Text":"We have a bad debts account."},{"Start":"01:19.225 ","End":"01:24.115","Text":"Bad debts is an expense which gets bigger on the debit side."},{"Start":"01:24.115 ","End":"01:27.160","Text":"We have net receivables which is an asset,"},{"Start":"01:27.160 ","End":"01:30.354","Text":"which gets bigger on the debit side."},{"Start":"01:30.354 ","End":"01:33.940","Text":"Then finally, we\u0027re going to have bank."},{"Start":"01:33.940 ","End":"01:36.445","Text":"This is ultimately what we\u0027re trying to figure out."},{"Start":"01:36.445 ","End":"01:39.730","Text":"We\u0027re trying to figure out how much of ourselves actually converts"},{"Start":"01:39.730 ","End":"01:43.890","Text":"into cash during this particular year."},{"Start":"01:43.890 ","End":"01:47.720","Text":"Let\u0027s say we make a sale during the year or all the sales during the year."},{"Start":"01:47.720 ","End":"01:52.230","Text":"What would have happened is we would have credited sales with the amount of the sale,"},{"Start":"01:52.230 ","End":"01:55.775","Text":"we would have debited to the receivables account."},{"Start":"01:55.775 ","End":"01:57.770","Text":"That\u0027s the first entry."},{"Start":"01:57.770 ","End":"02:00.560","Text":"Then a net receivables would have had"},{"Start":"02:00.560 ","End":"02:04.745","Text":"an opening balance of debtors who owed us from the prior year."},{"Start":"02:04.745 ","End":"02:06.746","Text":"This is how much they owed us for the prior,"},{"Start":"02:06.746 ","End":"02:08.960","Text":"this is how much they\u0027ve owed us in addition,"},{"Start":"02:08.960 ","End":"02:11.360","Text":"for sales on credit during the current year."},{"Start":"02:11.360 ","End":"02:15.575","Text":"This gives us the total amount they owe us, those two together."},{"Start":"02:15.575 ","End":"02:17.480","Text":"We might become aware of some of"},{"Start":"02:17.480 ","End":"02:19.850","Text":"our debtors who aren\u0027t going to be able to pass during the year."},{"Start":"02:19.850 ","End":"02:22.370","Text":"If that happens, then we have to reduce"},{"Start":"02:22.370 ","End":"02:25.550","Text":"the amount of our receivable to indicate to the users of"},{"Start":"02:25.550 ","End":"02:28.160","Text":"financial statements that we\u0027re not"},{"Start":"02:28.160 ","End":"02:32.240","Text":"expecting all of that anymore because some of it has been written off."},{"Start":"02:32.240 ","End":"02:36.485","Text":"We reduce our net receivables by the portion of the amount"},{"Start":"02:36.485 ","End":"02:40.961","Text":"owing by our debtors that we don\u0027t believe we\u0027re going to receive."},{"Start":"02:40.961 ","End":"02:42.815","Text":"We then debit the bad debts."},{"Start":"02:42.815 ","End":"02:45.420","Text":"This is Journal number 2."},{"Start":"02:45.420 ","End":"02:50.040","Text":"Then if we receive cash from our debtors,"},{"Start":"02:50.040 ","End":"02:52.880","Text":"we will then reduce our net receivable by"},{"Start":"02:52.880 ","End":"02:56.770","Text":"the amount that we receive and we would debit that to bank."},{"Start":"02:56.770 ","End":"03:01.200","Text":"Then we would then add our opening balance to"},{"Start":"03:01.200 ","End":"03:05.105","Text":"the credit sales during the year that would give us a total figure."},{"Start":"03:05.105 ","End":"03:06.845","Text":"We take that across,"},{"Start":"03:06.845 ","End":"03:11.450","Text":"and we\u0027d subtract the portion on the credit side to get"},{"Start":"03:11.450 ","End":"03:16.970","Text":"to the extent to which this amount exceeds this amount."},{"Start":"03:16.970 ","End":"03:19.955","Text":"That gives us a closing balance carried forward,"},{"Start":"03:19.955 ","End":"03:22.895","Text":"closing balance brought forward."},{"Start":"03:22.895 ","End":"03:26.915","Text":"We are looking for this figure, the bank figure."},{"Start":"03:26.915 ","End":"03:31.385","Text":"How much did we actually receive from our debtors."},{"Start":"03:31.385 ","End":"03:32.917","Text":"In order to do that,"},{"Start":"03:32.917 ","End":"03:34.130","Text":"we\u0027ve got the sales,"},{"Start":"03:34.130 ","End":"03:35.750","Text":"this is the sales figure,"},{"Start":"03:35.750 ","End":"03:37.825","Text":"and this is the bad debts figure,"},{"Start":"03:37.825 ","End":"03:43.730","Text":"and this is our opening net receivable balance and our closing net receivable balance."},{"Start":"03:43.730 ","End":"03:47.960","Text":"The sales figure and the bad debts are both already"},{"Start":"03:47.960 ","End":"03:52.235","Text":"in profit and that profit is already in our cash flow statement,"},{"Start":"03:52.235 ","End":"03:55.250","Text":"it\u0027s the first line item in our cash flow statement."},{"Start":"03:55.250 ","End":"03:57.230","Text":"That sales list the bad debts,"},{"Start":"03:57.230 ","End":"04:00.410","Text":"those bad debts were included in other expenses,"},{"Start":"04:00.410 ","End":"04:03.570","Text":"so that\u0027s really in the profit line item."},{"Start":"04:03.570 ","End":"04:08.344","Text":"To convert this sales and bad debts amount,"},{"Start":"04:08.344 ","End":"04:10.580","Text":"which is really in our profit because it\u0027s"},{"Start":"04:10.580 ","End":"04:13.640","Text":"the first line item in our cash flow statement,"},{"Start":"04:13.640 ","End":"04:16.790","Text":"to convert that into the bank amount."},{"Start":"04:16.790 ","End":"04:18.935","Text":"In other words, how much we actually received in cash."},{"Start":"04:18.935 ","End":"04:23.540","Text":"All we have to do is to look at the movement between"},{"Start":"04:23.540 ","End":"04:28.880","Text":"the opening balance of a net receivable and our closing balance of a net receivable."},{"Start":"04:28.880 ","End":"04:32.945","Text":"The sales and the bad debts are already in the profit."},{"Start":"04:32.945 ","End":"04:35.720","Text":"This is when we\u0027re looking for the bank figure."},{"Start":"04:35.720 ","End":"04:37.130","Text":"So to work backwards,"},{"Start":"04:37.130 ","End":"04:38.220","Text":"that\u0027s really in there,"},{"Start":"04:38.220 ","End":"04:40.580","Text":"all we then have to take into account is the opening balance and"},{"Start":"04:40.580 ","End":"04:43.835","Text":"closing balance and we can work backwards to the bank figure."},{"Start":"04:43.835 ","End":"04:49.190","Text":"That is a quick summary of the logic behind interaction of the sales,"},{"Start":"04:49.190 ","End":"04:51.290","Text":"bad debts, and the net receivables."},{"Start":"04:51.290 ","End":"04:54.290","Text":"The next video, we\u0027re going to"},{"Start":"04:54.290 ","End":"04:59.130","Text":"apply that logic to the information provided to us in the question."}],"ID":29732},{"Watched":false,"Name":"Exercise 13 NOP - D-2","Duration":"6m 46s","ChapterTopicVideoID":26952,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.020 ","End":"00:04.950","Text":"The operating activities section of the cash flow statement focusing on"},{"Start":"00:04.950 ","End":"00:09.794","Text":"working capital changes with specific emphasis on accounts receivable."},{"Start":"00:09.794 ","End":"00:15.195","Text":"The theory of the movement in the accounts receivable working capital line item,"},{"Start":"00:15.195 ","End":"00:17.775","Text":"was covered in the previous mini video."},{"Start":"00:17.775 ","End":"00:19.260","Text":"In this mini video,"},{"Start":"00:19.260 ","End":"00:21.690","Text":"we\u0027re going to look to apply"},{"Start":"00:21.690 ","End":"00:25.695","Text":"that theory to the information provided to us in the question."},{"Start":"00:25.695 ","End":"00:28.320","Text":"In this video, I\u0027m going to show you how to convert"},{"Start":"00:28.320 ","End":"00:35.205","Text":"the sales amount into an amount that represents the cash received from sales."},{"Start":"00:35.205 ","End":"00:39.080","Text":"To do that, we\u0027re going to adjust for the movement in"},{"Start":"00:39.080 ","End":"00:43.255","Text":"the accounts receivable and impairment loss."},{"Start":"00:43.255 ","End":"00:45.980","Text":"To do that, we\u0027re going to adjust for"},{"Start":"00:45.980 ","End":"00:49.505","Text":"the movement in the following working capital accounts,"},{"Start":"00:49.505 ","End":"00:50.915","Text":"the accounts receivable,"},{"Start":"00:50.915 ","End":"00:53.660","Text":"net of any impairment allowances."},{"Start":"00:53.660 ","End":"00:57.500","Text":"These impairment allowances used to be called doubtful data allowances."},{"Start":"00:57.500 ","End":"01:02.569","Text":"Using the indirect method to prepare the cash from operating activities,"},{"Start":"01:02.569 ","End":"01:05.570","Text":"we always start with the profit before interest and tax."},{"Start":"01:05.570 ","End":"01:09.350","Text":"Now including that profit before interest and tax is the sales figure."},{"Start":"01:09.350 ","End":"01:11.600","Text":"Now we\u0027re trying to convert that sales figure,"},{"Start":"01:11.600 ","End":"01:19.240","Text":"which is income using the accrual basis into a cash receipts from our customers,"},{"Start":"01:19.240 ","End":"01:21.415","Text":"which is the cash basis."},{"Start":"01:21.415 ","End":"01:24.475","Text":"To do that, we\u0027re going to adjust for"},{"Start":"01:24.475 ","End":"01:28.705","Text":"the changes in the balances relating to receivables."},{"Start":"01:28.705 ","End":"01:30.760","Text":"We need to look at the balance sheet for"},{"Start":"01:30.760 ","End":"01:33.760","Text":"the opening and closing balance, of the receivables."},{"Start":"01:33.760 ","End":"01:35.350","Text":"Here\u0027s a balance sheet."},{"Start":"01:35.350 ","End":"01:38.200","Text":"The second line item under the current assets is accounts"},{"Start":"01:38.200 ","End":"01:41.440","Text":"receivable and it\u0027s net of the allowance for doubtful debts."},{"Start":"01:41.440 ","End":"01:47.030","Text":"You can see our opening balance is 610 and our closing balance is 754."},{"Start":"01:47.670 ","End":"01:51.070","Text":"Let\u0027s put that into our cash flow statement."},{"Start":"01:51.070 ","End":"01:53.095","Text":"Opening balance is 610,"},{"Start":"01:53.095 ","End":"01:55.615","Text":"closing balance is 754."},{"Start":"01:55.615 ","End":"02:00.410","Text":"You can see there is an increase of 144."},{"Start":"02:00.470 ","End":"02:05.600","Text":"Do we add this increase of a 144 or do we subtract it?"},{"Start":"02:05.600 ","End":"02:10.235","Text":"Well, this is an increase which means that some of our sales,"},{"Start":"02:10.235 ","End":"02:12.200","Text":"net of bad debts."},{"Start":"02:12.200 ","End":"02:16.990","Text":"Remember, our profit includes sales of 19,921,"},{"Start":"02:16.990 ","End":"02:19.340","Text":"you can pick that from your income statement."},{"Start":"02:19.340 ","End":"02:22.760","Text":"The bad debts doesn\u0027t appear on the face of the income statement,"},{"Start":"02:22.760 ","End":"02:25.350","Text":"but it\u0027s included in other expenses."},{"Start":"02:25.350 ","End":"02:28.205","Text":"If you look at the face of the income statement,"},{"Start":"02:28.205 ","End":"02:32.015","Text":"you\u0027ve got sales, list cost of sales and list other expenses."},{"Start":"02:32.015 ","End":"02:36.110","Text":"Then note number 1 of the additional information indicates that we\u0027ve got"},{"Start":"02:36.110 ","End":"02:40.870","Text":"bad debts of 66 that was included in those other expenses."},{"Start":"02:40.870 ","End":"02:44.135","Text":"Some of our sales net of those bad debts,"},{"Start":"02:44.135 ","End":"02:47.495","Text":"and our net sales is obviously 19,855."},{"Start":"02:47.495 ","End":"02:51.905","Text":"The difference between those 2 months must have been on credit."},{"Start":"02:51.905 ","End":"02:54.665","Text":"Because if they hadn\u0027t been on credit,"},{"Start":"02:54.665 ","End":"02:59.270","Text":"then our accounts receivable opening balance would not have changed."},{"Start":"02:59.270 ","End":"03:02.150","Text":"In other words, that net sale of,"},{"Start":"03:02.150 ","End":"03:03.653","Text":"let\u0027s call it 19,855,"},{"Start":"03:03.653 ","End":"03:08.000","Text":"forget about bad debts just for simplicity, would\u0027ve been done."},{"Start":"03:08.000 ","End":"03:12.345","Text":"We would have credited sales with 19,855."},{"Start":"03:12.345 ","End":"03:15.304","Text":"If we\u0027d received at all in cash,"},{"Start":"03:15.304 ","End":"03:19.805","Text":"we would have debited bank with 19,855."},{"Start":"03:19.805 ","End":"03:22.880","Text":"You can see that our receivables balance,"},{"Start":"03:22.880 ","End":"03:26.405","Text":"opening balance wherever it is,"},{"Start":"03:26.405 ","End":"03:31.685","Text":"610, would have remained unchanged to the end of the year."},{"Start":"03:31.685 ","End":"03:34.190","Text":"However, that wasn\u0027t the case,"},{"Start":"03:34.190 ","End":"03:36.515","Text":"the opening balance did change."},{"Start":"03:36.515 ","End":"03:40.160","Text":"It increased to 754."},{"Start":"03:40.160 ","End":"03:47.620","Text":"That means that not all of our net sales of 19,855 had actually been received in cash."},{"Start":"03:47.620 ","End":"03:54.020","Text":"Thus we\u0027re going to subtract the increase of 144 because that then reduces,"},{"Start":"03:54.020 ","End":"03:59.010","Text":"the net sales amount to give us the smaller cash receipts amount."},{"Start":"03:59.290 ","End":"04:06.040","Text":"In other words, what happened was we had sales."},{"Start":"04:06.040 ","End":"04:08.345","Text":"Well, let\u0027s use the correct figures."},{"Start":"04:08.345 ","End":"04:11.165","Text":"19,921."},{"Start":"04:11.165 ","End":"04:14.330","Text":"That went to accounts receivable,"},{"Start":"04:14.330 ","End":"04:16.660","Text":"which is our asset account."},{"Start":"04:16.660 ","End":"04:18.850","Text":"Co-channel number 1."},{"Start":"04:18.850 ","End":"04:22.595","Text":"These are our sales for the year 19,921."},{"Start":"04:22.595 ","End":"04:25.940","Text":"We then realized that we had certain bad debts."},{"Start":"04:25.940 ","End":"04:27.905","Text":"People who weren\u0027t going to pass."},{"Start":"04:27.905 ","End":"04:30.094","Text":"We reduced our accounts receivable."},{"Start":"04:30.094 ","End":"04:33.720","Text":"We then debit that to our bad debt expense account."},{"Start":"04:33.720 ","End":"04:38.945","Text":"Then we put in our opening balance of our receivables, which is 610."},{"Start":"04:38.945 ","End":"04:43.115","Text":"Our closing balance is 754."},{"Start":"04:43.115 ","End":"04:47.330","Text":"We can work out then how much we actually received in cash."},{"Start":"04:47.330 ","End":"04:50.075","Text":"The debits added to 20,531."},{"Start":"04:50.075 ","End":"04:56.890","Text":"Take that across to the credit side and we subtract the 754 and the 66."},{"Start":"04:56.890 ","End":"05:02.530","Text":"The difference is 19,711."},{"Start":"05:02.530 ","End":"05:09.815","Text":"66 plus 19,711 plus 754 gives us the 20,531."},{"Start":"05:09.815 ","End":"05:11.660","Text":"This is the bank amount."},{"Start":"05:11.660 ","End":"05:13.790","Text":"This is the amount we must have received."},{"Start":"05:13.790 ","End":"05:22.330","Text":"That would\u0027ve been our final entry debit to our bank, 19,711."},{"Start":"05:24.530 ","End":"05:31.880","Text":"The sales of 19,921 and the bad debts is already included in our profit before tax,"},{"Start":"05:31.880 ","End":"05:34.475","Text":"these are sales in our bad debts. It\u0027s already in there."},{"Start":"05:34.475 ","End":"05:37.805","Text":"Then what we\u0027ve done, that\u0027s same figure."},{"Start":"05:37.805 ","End":"05:40.610","Text":"What we\u0027ve done is we\u0027ve now adjusted"},{"Start":"05:40.610 ","End":"05:43.790","Text":"for the opening balance to closing balance movement."},{"Start":"05:43.790 ","End":"05:47.600","Text":"Thereby, we\u0027ve actually got all all of these amounts,"},{"Start":"05:47.600 ","End":"05:51.945","Text":"the 19,921 and the 66 which are the sales and the bad debts."},{"Start":"05:51.945 ","End":"05:56.300","Text":"The movement in the accounts receivable has effectively results in"},{"Start":"05:56.300 ","End":"06:02.560","Text":"our cash flow statement reflecting a cash receipts amount of 19,711."},{"Start":"06:02.560 ","End":"06:09.125","Text":"We\u0027ve got net sales of 19,855 being the sales, list the bad debts,"},{"Start":"06:09.125 ","End":"06:12.830","Text":"subtract the increase in the receivables of 144,"},{"Start":"06:12.830 ","End":"06:14.930","Text":"gives us 19,711,"},{"Start":"06:14.930 ","End":"06:16.595","Text":"which was received in cash."},{"Start":"06:16.595 ","End":"06:20.105","Text":"Now, if we were using the direct method which we aren\u0027t,"},{"Start":"06:20.105 ","End":"06:24.050","Text":"that would actually be our very first line item in our cash flow statement."},{"Start":"06:24.050 ","End":"06:28.895","Text":"It would be described as cash receipts from customers 19,711."},{"Start":"06:28.895 ","End":"06:31.940","Text":"To recap, we\u0027ve now adjusted"},{"Start":"06:31.940 ","End":"06:36.020","Text":"for the movement in our inventory and the movement in our accounts payable."},{"Start":"06:36.020 ","End":"06:40.145","Text":"In this video, we\u0027ve also now adjusted for the receivables."},{"Start":"06:40.145 ","End":"06:41.630","Text":"The next mini videos,"},{"Start":"06:41.630 ","End":"06:46.650","Text":"we\u0027ll explain how to adjust for the remaining working capital line items."}],"ID":29733},{"Watched":false,"Name":"Exercise 13 NOP - E","Duration":"2m 40s","ChapterTopicVideoID":26953,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.725","Text":"Operating activities section of the cash flow statement focusing on"},{"Start":"00:04.725 ","End":"00:11.100","Text":"working capital changes with specific emphasis on unearned revenue."},{"Start":"00:11.100 ","End":"00:13.230","Text":"In the previous many videos,"},{"Start":"00:13.230 ","End":"00:16.935","Text":"we looked at the working capital changes of inventory,"},{"Start":"00:16.935 ","End":"00:19.845","Text":"accounts payable, and receivables."},{"Start":"00:19.845 ","End":"00:24.525","Text":"In this mini video, we\u0027re going to look at the movement in unearned revenue,"},{"Start":"00:24.525 ","End":"00:28.874","Text":"also known as revenue received in advance."},{"Start":"00:28.874 ","End":"00:30.735","Text":"This is a liability,"},{"Start":"00:30.735 ","End":"00:32.655","Text":"so we\u0027re going to look in the balance sheet."},{"Start":"00:32.655 ","End":"00:34.499","Text":"Under the liability section,"},{"Start":"00:34.499 ","End":"00:38.565","Text":"is a current liability and it\u0027s our last line item here."},{"Start":"00:38.565 ","End":"00:41.600","Text":"Unearned revenue, you can see we\u0027ve got an opening balance of"},{"Start":"00:41.600 ","End":"00:45.230","Text":"121 being the 2019 closing balance."},{"Start":"00:45.230 ","End":"00:49.915","Text":"We\u0027ve got the current year\u0027s closing balance of 227."},{"Start":"00:49.915 ","End":"00:54.590","Text":"In our cash from operating activities section under the calculations,"},{"Start":"00:54.590 ","End":"00:58.280","Text":"we\u0027ve got opening balance was 121 minus the closing balance,"},{"Start":"00:58.280 ","End":"01:00.350","Text":"which is now grown to 227."},{"Start":"01:00.350 ","End":"01:02.435","Text":"That\u0027s change of a 106,"},{"Start":"01:02.435 ","End":"01:05.225","Text":"which is an increase of 106."},{"Start":"01:05.225 ","End":"01:10.565","Text":"Do we add this increase in unearned revenue or do we subtract it?"},{"Start":"01:10.565 ","End":"01:13.880","Text":"This is income received before it is earned."},{"Start":"01:13.880 ","End":"01:15.560","Text":"Unearned revenue, as I say,"},{"Start":"01:15.560 ","End":"01:18.710","Text":"is also called income received in advance."},{"Start":"01:18.710 ","End":"01:22.600","Text":"In other words, before it\u0027s been earned."},{"Start":"01:22.600 ","End":"01:26.270","Text":"If it\u0027s received before it is earned,"},{"Start":"01:26.270 ","End":"01:29.975","Text":"it means it will not have been recognized as income."},{"Start":"01:29.975 ","End":"01:32.900","Text":"If it hasn\u0027t been recognized as income,"},{"Start":"01:32.900 ","End":"01:35.705","Text":"it will not yet be included in the profit,"},{"Start":"01:35.705 ","End":"01:37.580","Text":"yet it has been received."},{"Start":"01:37.580 ","End":"01:41.330","Text":"We must remember that we are doing a cash flow statement."},{"Start":"01:41.330 ","End":"01:47.615","Text":"What we\u0027re trying to achieve is to document the cash receipts and the cash payments,"},{"Start":"01:47.615 ","End":"01:50.465","Text":"irrespective of whether those cash receipts"},{"Start":"01:50.465 ","End":"01:54.830","Text":"related to income and as cash payments related to expenses."},{"Start":"01:54.830 ","End":"02:01.105","Text":"An increase must be added because we\u0027re trying to calculate the cash received."},{"Start":"02:01.105 ","End":"02:08.480","Text":"Just to recap, that a 106 represents a receipt that we have not yet earned,"},{"Start":"02:08.480 ","End":"02:12.665","Text":"so we\u0027re treating it as a liability until we\u0027ve earned it."},{"Start":"02:12.665 ","End":"02:14.300","Text":"Because it\u0027s a liability,"},{"Start":"02:14.300 ","End":"02:16.040","Text":"it is not included in profit."},{"Start":"02:16.040 ","End":"02:19.025","Text":"Profit is income less expenses."},{"Start":"02:19.025 ","End":"02:24.000","Text":"This figure here of 6,017 does not include that 106,"},{"Start":"02:24.000 ","End":"02:30.034","Text":"and we\u0027re doing the cash flow statement wherein we must show all cash receipts."},{"Start":"02:30.034 ","End":"02:33.050","Text":"Obviously that a 106 because it isn\u0027t in there,"},{"Start":"02:33.050 ","End":"02:35.905","Text":"and yet it has been received we must add it."},{"Start":"02:35.905 ","End":"02:39.840","Text":"An increase in unearned revenue gets added."}],"ID":29734},{"Watched":false,"Name":"Exercise 13 NOP - F","Duration":"2m 55s","ChapterTopicVideoID":26954,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.260 ","End":"00:04.470","Text":"Operating activities section of the cash flow statement,"},{"Start":"00:04.470 ","End":"00:09.375","Text":"working capital changes focusing on prepayments."},{"Start":"00:09.375 ","End":"00:11.340","Text":"In the previous mini videos,"},{"Start":"00:11.340 ","End":"00:14.310","Text":"we have prepared the cash from"},{"Start":"00:14.310 ","End":"00:18.690","Text":"operating activities section where we identify the profit before interest and tax."},{"Start":"00:18.690 ","End":"00:22.200","Text":"We adjusted for the non-cash flow items and"},{"Start":"00:22.200 ","End":"00:26.790","Text":"the working capital changes that we have processed so far as the inventory,"},{"Start":"00:26.790 ","End":"00:29.400","Text":"accounts payable, receivables, and unearned revenue."},{"Start":"00:29.400 ","End":"00:33.105","Text":"In this video, we\u0027re going to look at prepayments."},{"Start":"00:33.105 ","End":"00:36.284","Text":"Another name for a prepayment is an expense prepaid."},{"Start":"00:36.284 ","End":"00:39.435","Text":"An expense prepaid or a prepayment is an asset."},{"Start":"00:39.435 ","End":"00:44.360","Text":"We will find the opening and closing balances in the balance sheet under assets."},{"Start":"00:44.360 ","End":"00:48.001","Text":"Here we have our balance sheet in the asset section,"},{"Start":"00:48.001 ","End":"00:49.550","Text":"look at the current assets,"},{"Start":"00:49.550 ","End":"00:52.385","Text":"and here the third line item is the prepayment."},{"Start":"00:52.385 ","End":"00:58.070","Text":"We have an opening balance of 40 and a closing balance at the end of 2020 of 50."},{"Start":"00:58.070 ","End":"01:00.815","Text":"In our cash from operating activities section,"},{"Start":"01:00.815 ","End":"01:03.110","Text":"we say in the calculations,"},{"Start":"01:03.110 ","End":"01:08.210","Text":"an opening balance of 40 leaves the closing balance of 50 gives us a difference of 10."},{"Start":"01:08.210 ","End":"01:10.685","Text":"That\u0027s an increase, increase of 10."},{"Start":"01:10.685 ","End":"01:13.190","Text":"Now, are we going to add this,"},{"Start":"01:13.190 ","End":"01:14.990","Text":"or we\u0027re going to subtract it?"},{"Start":"01:14.990 ","End":"01:17.570","Text":"Well, you have to understand what a prepayment is."},{"Start":"01:17.570 ","End":"01:22.825","Text":"Prepayment is an expense that was paid before it was incurred."},{"Start":"01:22.825 ","End":"01:27.980","Text":"It\u0027s technically not an expense yet and if it isn\u0027t an expense yet,"},{"Start":"01:27.980 ","End":"01:30.410","Text":"it hasn\u0027t been recognized as an expense,"},{"Start":"01:30.410 ","End":"01:32.990","Text":"is being recognized instead as an asset."},{"Start":"01:32.990 ","End":"01:35.090","Text":"So instead of debiting an expense,"},{"Start":"01:35.090 ","End":"01:36.955","Text":"we\u0027re debiting an asset."},{"Start":"01:36.955 ","End":"01:38.914","Text":"Now because it\u0027s not an expense,"},{"Start":"01:38.914 ","End":"01:42.200","Text":"it hasn\u0027t yet been included in profit because profit is"},{"Start":"01:42.200 ","End":"01:45.965","Text":"calculated as income-less expenses."},{"Start":"01:45.965 ","End":"01:50.795","Text":"The problem is it has been paid and a cash flow statement is supposed to capture"},{"Start":"01:50.795 ","End":"01:52.430","Text":"all cash inflows and"},{"Start":"01:52.430 ","End":"01:57.670","Text":"all cash outflows irrespective of whether they are income or expenses."},{"Start":"01:57.670 ","End":"01:59.445","Text":"Because it has been paid,"},{"Start":"01:59.445 ","End":"02:02.510","Text":"we\u0027re going to have to subtract this increase of 10"},{"Start":"02:02.510 ","End":"02:06.485","Text":"because we\u0027re trying to calculate the total cash paid in the year."},{"Start":"02:06.485 ","End":"02:13.780","Text":"Remember including that 6,017 is the income less the expenses."},{"Start":"02:13.780 ","End":"02:20.420","Text":"This amount of 10 is an increase in the payments that we"},{"Start":"02:20.420 ","End":"02:23.030","Text":"made during the year that did not meet the definition of"},{"Start":"02:23.030 ","End":"02:26.540","Text":"an expense so that it was treated as an asset instead."},{"Start":"02:26.540 ","End":"02:28.370","Text":"But yet it is a payment."},{"Start":"02:28.370 ","End":"02:30.710","Text":"Therefore, we must subtract this 10 as well,"},{"Start":"02:30.710 ","End":"02:35.315","Text":"because to get the 6,107 we subtract only the expenses but we must"},{"Start":"02:35.315 ","End":"02:41.320","Text":"also subtract the payments that did not meet the definition of an expense yet,"},{"Start":"02:41.320 ","End":"02:43.815","Text":"so we subtract the 10."},{"Start":"02:43.815 ","End":"02:46.519","Text":"When you have an increase in a prepayment,"},{"Start":"02:46.519 ","End":"02:49.130","Text":"you would subtract that increase and obviously,"},{"Start":"02:49.130 ","End":"02:50.300","Text":"the opposite would be true."},{"Start":"02:50.300 ","End":"02:55.110","Text":"If you had a decrease in the prepayment you will then add the decrease."}],"ID":29735},{"Watched":false,"Name":"Exercise 13 NOP - G","Duration":"5m 19s","ChapterTopicVideoID":26955,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.290 ","End":"00:03.119","Text":"We\u0027re looking at the cash flow statements,"},{"Start":"00:03.119 ","End":"00:05.880","Text":"operating activities section focused on"},{"Start":"00:05.880 ","End":"00:10.920","Text":"the working capital changes, and specifically provisions."},{"Start":"00:10.920 ","End":"00:13.545","Text":"Now in the previous mini videos,"},{"Start":"00:13.545 ","End":"00:16.200","Text":"what we have done is we\u0027ve made adjustments for"},{"Start":"00:16.200 ","End":"00:18.840","Text":"the working capital, changes for inventory,"},{"Start":"00:18.840 ","End":"00:22.350","Text":"accounts payable receivables, unearned revenue, and prepayments."},{"Start":"00:22.350 ","End":"00:26.325","Text":"In this video, we\u0027re going to look at the provisions line item."},{"Start":"00:26.325 ","End":"00:29.940","Text":"Just to recap, the inventory is an asset."},{"Start":"00:29.940 ","End":"00:32.115","Text":"Accounts payable is a liability."},{"Start":"00:32.115 ","End":"00:39.240","Text":"Receivables is an asset unearned revenue or revenue received in advance is a liability,"},{"Start":"00:39.240 ","End":"00:41.904","Text":"and prepayments are assets."},{"Start":"00:41.904 ","End":"00:44.885","Text":"Now provisions are liabilities."},{"Start":"00:44.885 ","End":"00:50.555","Text":"A provision is in fact defined as a liability of uncertain timing."},{"Start":"00:50.555 ","End":"00:54.365","Text":"In other words, we\u0027re not quite sure when we\u0027re going to have to pay it."},{"Start":"00:54.365 ","End":"00:58.010","Text":"Or uncertain amount. In other words,"},{"Start":"00:58.010 ","End":"01:00.545","Text":"we\u0027re not quite sure how much we are going to pay."},{"Start":"01:00.545 ","End":"01:03.925","Text":"Or it could be both uncertain timing and amount."},{"Start":"01:03.925 ","End":"01:08.794","Text":"We have already looked at 2 of our liability line items,"},{"Start":"01:08.794 ","End":"01:11.345","Text":"and we\u0027re now going to do a third one."},{"Start":"01:11.345 ","End":"01:13.490","Text":"To find the opening, closing balance,"},{"Start":"01:13.490 ","End":"01:17.810","Text":"we\u0027re going to have to look in the balance sheet and the liabilities."},{"Start":"01:17.810 ","End":"01:20.180","Text":"Here\u0027s our balance sheet and we\u0027re looking at"},{"Start":"01:20.180 ","End":"01:23.895","Text":"the liabilities and we look under current liabilities."},{"Start":"01:23.895 ","End":"01:24.995","Text":"As you can see here,"},{"Start":"01:24.995 ","End":"01:29.585","Text":"we\u0027ve already dealt with accounts payable and dealt with unearned revenue."},{"Start":"01:29.585 ","End":"01:31.790","Text":"Today we\u0027re going to look at the provisions,"},{"Start":"01:31.790 ","End":"01:34.609","Text":"which is in this case an allowance for a warranty."},{"Start":"01:34.609 ","End":"01:37.145","Text":"Incidentally, this lease payable,"},{"Start":"01:37.145 ","End":"01:38.915","Text":"although it is a current liability,"},{"Start":"01:38.915 ","End":"01:41.390","Text":"is not working capital."},{"Start":"01:41.390 ","End":"01:43.505","Text":"Because it\u0027s not working capital,"},{"Start":"01:43.505 ","End":"01:47.330","Text":"it\u0027s not going to be in the operating activities section."},{"Start":"01:47.330 ","End":"01:49.635","Text":"This is not working capital,"},{"Start":"01:49.635 ","End":"01:51.320","Text":"and the reason is it\u0027s actually simply"},{"Start":"01:51.320 ","End":"01:56.485","Text":"the current portion of the non-current liability called a lease payable."},{"Start":"01:56.485 ","End":"01:59.990","Text":"Sometimes you have non-current liabilities that are split"},{"Start":"01:59.990 ","End":"02:03.275","Text":"between the non-current portion and the current portion."},{"Start":"02:03.275 ","End":"02:07.365","Text":"This lease payable belongs with the lease payable."},{"Start":"02:07.365 ","End":"02:11.900","Text":"These 2, the lease payable long-term portion or non-current portion,"},{"Start":"02:11.900 ","End":"02:17.045","Text":"and the current portion will be dealt with under financing activities,"},{"Start":"02:17.045 ","End":"02:19.810","Text":"not under operating activities."},{"Start":"02:19.810 ","End":"02:21.860","Text":"But the rest of these liabilities and"},{"Start":"02:21.860 ","End":"02:26.225","Text":"the current liabilities are all considered to be working capital."},{"Start":"02:26.225 ","End":"02:27.950","Text":"This is working capital,"},{"Start":"02:27.950 ","End":"02:29.585","Text":"that is working capital,"},{"Start":"02:29.585 ","End":"02:33.060","Text":"and that is also working capital."},{"Start":"02:33.060 ","End":"02:38.630","Text":"Looking at our cash flow statement and the cash from operating activities section,"},{"Start":"02:38.630 ","End":"02:41.030","Text":"we\u0027ve got something in provisions,"},{"Start":"02:41.030 ","End":"02:42.860","Text":"increase or decrease in provisions."},{"Start":"02:42.860 ","End":"02:46.145","Text":"We need to look at the opening balance and closing balance."},{"Start":"02:46.145 ","End":"02:48.860","Text":"As we were looking just now in the balance sheet,"},{"Start":"02:48.860 ","End":"02:51.155","Text":"the line item is under current liabilities."},{"Start":"02:51.155 ","End":"02:54.320","Text":"Opening balance was 72, closing balance 83."},{"Start":"02:54.320 ","End":"02:56.960","Text":"In the solution under the calculations,"},{"Start":"02:56.960 ","End":"03:00.785","Text":"we show opening balance of 72 minus the closing balance of 83."},{"Start":"03:00.785 ","End":"03:02.945","Text":"That gives us a difference of 11,"},{"Start":"03:02.945 ","End":"03:06.485","Text":"which clearly is an increase in the provisions."},{"Start":"03:06.485 ","End":"03:11.120","Text":"Do we add the increase in a provision or do we subtract it?"},{"Start":"03:11.120 ","End":"03:14.960","Text":"We have to understand what a provision is and how it arises."},{"Start":"03:14.960 ","End":"03:19.100","Text":"A provision represents an expense that has been incurred,"},{"Start":"03:19.100 ","End":"03:21.605","Text":"but it\u0027s not yet been paid."},{"Start":"03:21.605 ","End":"03:25.760","Text":"Provision, as we know now is actually a specific liability."},{"Start":"03:25.760 ","End":"03:30.080","Text":"But the point is, it\u0027s simply an expense that has been incurred."},{"Start":"03:30.080 ","End":"03:31.460","Text":"It\u0027s not yet been paid,"},{"Start":"03:31.460 ","End":"03:34.105","Text":"so we\u0027re crediting it to a liability,"},{"Start":"03:34.105 ","End":"03:37.650","Text":"a special kind of liability."},{"Start":"03:37.650 ","End":"03:41.495","Text":"The journal entry would have been debit expense credit the liability,"},{"Start":"03:41.495 ","End":"03:43.780","Text":"and in this case, the provision."},{"Start":"03:43.780 ","End":"03:45.695","Text":"We didn\u0027t create a bank,"},{"Start":"03:45.695 ","End":"03:48.455","Text":"so it hasn\u0027t been paid and that\u0027s the point."},{"Start":"03:48.455 ","End":"03:49.715","Text":"But as you can see here,"},{"Start":"03:49.715 ","End":"03:51.290","Text":"we have debited the expense,"},{"Start":"03:51.290 ","End":"03:53.839","Text":"so it has been recognized as an expense."},{"Start":"03:53.839 ","End":"03:56.495","Text":"Therefore, it has been included in profit."},{"Start":"03:56.495 ","End":"04:00.350","Text":"This profit before interest and tax of 6,107 it"},{"Start":"04:00.350 ","End":"04:05.510","Text":"includes all the income less all of the expenses."},{"Start":"04:05.510 ","End":"04:09.305","Text":"Including those expenses is an amount of 11."},{"Start":"04:09.305 ","End":"04:16.115","Text":"We have subtracted the 11 and yet we know that we did not credit bank."},{"Start":"04:16.115 ","End":"04:18.895","Text":"We credited the provision instead."},{"Start":"04:18.895 ","End":"04:21.015","Text":"Because we didn\u0027t credit bank,"},{"Start":"04:21.015 ","End":"04:23.175","Text":"we know it hasn\u0027t been paid."},{"Start":"04:23.175 ","End":"04:27.570","Text":"Remember, we\u0027re doing a cash flow statement so"},{"Start":"04:27.570 ","End":"04:31.595","Text":"if we\u0027re doing a cash flow statement and it hasn\u0027t affected cash,"},{"Start":"04:31.595 ","End":"04:34.265","Text":"it shouldn\u0027t be in our cash flow statement."},{"Start":"04:34.265 ","End":"04:37.295","Text":"That means we got to add it back."},{"Start":"04:37.295 ","End":"04:40.835","Text":"We have to reverse it to calculate the cash paid."},{"Start":"04:40.835 ","End":"04:43.880","Text":"We\u0027re going to add it to our profit."},{"Start":"04:43.880 ","End":"04:47.495","Text":"Remember, profit for interest in taxes, income."},{"Start":"04:47.495 ","End":"04:50.030","Text":"We\u0027ve subtracted the expense,"},{"Start":"04:50.030 ","End":"04:53.780","Text":"including those expenses is this amount of 11."},{"Start":"04:53.780 ","End":"04:58.205","Text":"We\u0027ve subtracted the 11 and here we\u0027re adding it back"},{"Start":"04:58.205 ","End":"05:02.840","Text":"because we know we debited an expense and we credited instead of bank,"},{"Start":"05:02.840 ","End":"05:04.430","Text":"we credited the provision."},{"Start":"05:04.430 ","End":"05:06.019","Text":"Because it hasn\u0027t affected bank,"},{"Start":"05:06.019 ","End":"05:08.285","Text":"it must not be in a cash flow statement."},{"Start":"05:08.285 ","End":"05:13.780","Text":"To recap, we\u0027ve got an increase in a provision and we added the increase."},{"Start":"05:13.780 ","End":"05:15.290","Text":"The opposite would be true."},{"Start":"05:15.290 ","End":"05:17.570","Text":"If we had a decrease in the provisions,"},{"Start":"05:17.570 ","End":"05:20.490","Text":"we would subtract the decrease."}],"ID":29736},{"Watched":false,"Name":"Exercise 13 NOP - H","Duration":"7m 6s","ChapterTopicVideoID":26956,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.630","Text":"This video, we are looking at the cash flow statements,"},{"Start":"00:03.630 ","End":"00:08.249","Text":"operating activities section focusing on the working capital changes."},{"Start":"00:08.249 ","End":"00:12.720","Text":"In this video we\u0027re looking at how to know when we\u0027re"},{"Start":"00:12.720 ","End":"00:17.084","Text":"finished adjusting for all the working capital changes."},{"Start":"00:17.084 ","End":"00:20.220","Text":"Just a very brief overview of the indirect method."},{"Start":"00:20.220 ","End":"00:21.570","Text":"When using the indirect method,"},{"Start":"00:21.570 ","End":"00:25.095","Text":"it affects only the cash from operating activities section,"},{"Start":"00:25.095 ","End":"00:28.230","Text":"we always start with profit before interest and tax."},{"Start":"00:28.230 ","End":"00:30.584","Text":"We then adjustment on cash flow items,"},{"Start":"00:30.584 ","End":"00:33.410","Text":"the changes in working capital and that gives us"},{"Start":"00:33.410 ","End":"00:37.520","Text":"a subtotal called cash generated from operations within,"},{"Start":"00:37.520 ","End":"00:40.550","Text":"adjust for the separately disclosed items and get to"},{"Start":"00:40.550 ","End":"00:44.210","Text":"the cash generated from operating activities."},{"Start":"00:44.210 ","End":"00:48.260","Text":"Now so far, what we\u0027ve done is we\u0027ve identified the profit"},{"Start":"00:48.260 ","End":"00:52.355","Text":"before interest and tax we\u0027ve adjusted for the non cash flow items."},{"Start":"00:52.355 ","End":"00:55.460","Text":"We\u0027ve also adjusted for working capital changes."},{"Start":"00:55.460 ","End":"00:58.055","Text":"The question is, are we done yet?"},{"Start":"00:58.055 ","End":"01:03.360","Text":"In other words, can I provide the total"},{"Start":"01:03.360 ","End":"01:09.850","Text":"null for cash generated from operations?"},{"Start":"01:09.850 ","End":"01:14.400","Text":"The question is, are we done yet?"},{"Start":"01:16.450 ","End":"01:22.370","Text":"The way to determine whether you have adjusted for all the working capital changes is to"},{"Start":"01:22.370 ","End":"01:25.640","Text":"methodically work through every line item"},{"Start":"01:25.640 ","End":"01:29.030","Text":"in your balance sheet and know whether you have adjusted for EH,"},{"Start":"01:29.030 ","End":"01:33.760","Text":"or not, or whether it is going to be adjusted in another section."},{"Start":"01:33.760 ","End":"01:35.360","Text":"Let\u0027s look at our balance sheet."},{"Start":"01:35.360 ","End":"01:37.250","Text":"We\u0027ve got non-current assets,"},{"Start":"01:37.250 ","End":"01:39.890","Text":"the non-current assets of property, plant, and equipment,"},{"Start":"01:39.890 ","End":"01:42.530","Text":"right of use assets and intangible assets are all"},{"Start":"01:42.530 ","End":"01:45.349","Text":"assets that involve investing activities,"},{"Start":"01:45.349 ","End":"01:48.215","Text":"so they don\u0027t affect operating activities at all."},{"Start":"01:48.215 ","End":"01:50.570","Text":"We then move on to the current assets."},{"Start":"01:50.570 ","End":"01:54.395","Text":"We have already adjusted for inventory. Let\u0027s just check."},{"Start":"01:54.395 ","End":"01:57.080","Text":"Here\u0027s our cash from operating activities and you"},{"Start":"01:57.080 ","End":"01:59.300","Text":"can see here we\u0027ve got a decrease in inventory,"},{"Start":"01:59.300 ","End":"02:01.835","Text":"so we\u0027ve already adjusted for that movement."},{"Start":"02:01.835 ","End":"02:04.415","Text":"We say done or you can tick it off."},{"Start":"02:04.415 ","End":"02:06.200","Text":"Then you look at the next line, item,"},{"Start":"02:06.200 ","End":"02:09.319","Text":"accounts receivable, needs of the doubtful debt allowance."},{"Start":"02:09.319 ","End":"02:11.510","Text":"Have we adjusted for that?"},{"Start":"02:11.510 ","End":"02:13.640","Text":"Have a look at your cash flow statement."},{"Start":"02:13.640 ","End":"02:15.200","Text":"There we have it,"},{"Start":"02:15.200 ","End":"02:17.300","Text":"we\u0027ve got an increase in receivables."},{"Start":"02:17.300 ","End":"02:19.610","Text":"So we\u0027ve already adjusted for that."},{"Start":"02:19.610 ","End":"02:21.790","Text":"Mark that off on your balance sheet."},{"Start":"02:21.790 ","End":"02:23.915","Text":"Then move onto prepayments."},{"Start":"02:23.915 ","End":"02:25.475","Text":"Have we adjusted for that?"},{"Start":"02:25.475 ","End":"02:27.245","Text":"Look at your cash flow statement."},{"Start":"02:27.245 ","End":"02:29.180","Text":"Here you can see in our cash flow statement,"},{"Start":"02:29.180 ","End":"02:31.265","Text":"we\u0027ve got an increase in the prepayment."},{"Start":"02:31.265 ","End":"02:35.015","Text":"We have. Mark that off on your balance sheet, done."},{"Start":"02:35.015 ","End":"02:37.130","Text":"Well cash isn\u0027t an operating activity,"},{"Start":"02:37.130 ","End":"02:39.530","Text":"financing activity, or investing activity."},{"Start":"02:39.530 ","End":"02:43.775","Text":"It is the net results of all 3 categories of activities."},{"Start":"02:43.775 ","End":"02:47.330","Text":"It is essentially the cash flow statement"},{"Start":"02:47.330 ","End":"02:51.215","Text":"is in fact a reconciliation of the cash account."},{"Start":"02:51.215 ","End":"02:55.010","Text":"After presenting the cash from operating activities,"},{"Start":"02:55.010 ","End":"02:57.380","Text":"investing activities and financing activities,"},{"Start":"02:57.380 ","End":"02:59.705","Text":"you actually have a fourth section."},{"Start":"02:59.705 ","End":"03:05.420","Text":"You then take the net cash flows from all 3 categories of activities and add to that"},{"Start":"03:05.420 ","End":"03:11.210","Text":"the opening balance of your cash and at hopefully comes to the closing balance,"},{"Start":"03:11.210 ","End":"03:14.755","Text":"in which case you have successfully reconciled your cash account."},{"Start":"03:14.755 ","End":"03:17.420","Text":"Cash you ignore for the moment,"},{"Start":"03:17.420 ","End":"03:22.580","Text":"that\u0027s going to be the fourth section of your cash flow statement."},{"Start":"03:22.580 ","End":"03:24.830","Text":"Moving onto the liabilities,"},{"Start":"03:24.830 ","End":"03:27.260","Text":"let\u0027s look at the non-current liabilities."},{"Start":"03:27.260 ","End":"03:30.050","Text":"We\u0027ve got a bond payable and a lease payable."},{"Start":"03:30.050 ","End":"03:32.375","Text":"Those are financing activities."},{"Start":"03:32.375 ","End":"03:34.970","Text":"Now interestingly, under the current liabilities,"},{"Start":"03:34.970 ","End":"03:36.380","Text":"you also have a lease payable."},{"Start":"03:36.380 ","End":"03:40.550","Text":"This is the current portion of the non-current lease liability."},{"Start":"03:40.550 ","End":"03:43.580","Text":"That\u0027s current portion of the lease payable also"},{"Start":"03:43.580 ","End":"03:48.125","Text":"belongs in the financing activities section. Moving on."},{"Start":"03:48.125 ","End":"03:50.870","Text":"Provisions. Let\u0027s have a look to"},{"Start":"03:50.870 ","End":"03:53.960","Text":"see if we have accounted for that in our cash flow statement."},{"Start":"03:53.960 ","End":"03:57.545","Text":"Provisions here we have it Increase in provisions, it\u0027s done."},{"Start":"03:57.545 ","End":"03:59.780","Text":"Mark it off, tick it off, all right done."},{"Start":"03:59.780 ","End":"04:02.585","Text":"Accounts payable is the next 1."},{"Start":"04:02.585 ","End":"04:04.565","Text":"Have a look in your cash flow statement."},{"Start":"04:04.565 ","End":"04:08.120","Text":"Do we have it in here? Yes. We\u0027ve got the accounts payable accounted for."},{"Start":"04:08.120 ","End":"04:09.965","Text":"Mark that off is done."},{"Start":"04:09.965 ","End":"04:13.684","Text":"But just remember, in additional information,"},{"Start":"04:13.684 ","End":"04:16.655","Text":"we were told that the accounts payable included tax payable."},{"Start":"04:16.655 ","End":"04:19.760","Text":"We excluded the tax payable from those accounts"},{"Start":"04:19.760 ","End":"04:21.890","Text":"payable balances when we accounted"},{"Start":"04:21.890 ","End":"04:24.455","Text":"for the movement and accounts payable and that is correct."},{"Start":"04:24.455 ","End":"04:27.470","Text":"The reason is the tax payable relates to"},{"Start":"04:27.470 ","End":"04:31.310","Text":"the tax expense which we are going to use to calculate the tax payment,"},{"Start":"04:31.310 ","End":"04:33.620","Text":"and that is a separately disclosable item."},{"Start":"04:33.620 ","End":"04:37.280","Text":"Yes, it is going to be part of the operating activity section,"},{"Start":"04:37.280 ","End":"04:40.825","Text":"but it doesn\u0027t fall under the working capital changes."},{"Start":"04:40.825 ","End":"04:44.640","Text":"We must always account for our tax payable separately."},{"Start":"04:44.640 ","End":"04:47.300","Text":"It\u0027s not a working capital change."},{"Start":"04:47.300 ","End":"04:50.960","Text":"It is a balance that needs to be taken into account when"},{"Start":"04:50.960 ","End":"04:55.815","Text":"calculating separately disclosable item being the tax paid."},{"Start":"04:55.815 ","End":"04:59.070","Text":"Then we have unearned revenue."},{"Start":"04:59.080 ","End":"05:02.000","Text":"In the cash flow statement, you can see we\u0027ve got"},{"Start":"05:02.000 ","End":"05:05.060","Text":"an increase in unearned revenues that have been taken into account."},{"Start":"05:05.060 ","End":"05:07.415","Text":"You mark that off, done."},{"Start":"05:07.415 ","End":"05:11.810","Text":"So far, we\u0027ve accounted for all of our assets and all of our liabilities with"},{"Start":"05:11.810 ","End":"05:15.695","Text":"either accounted for in the cash flow statements, operating activities section,"},{"Start":"05:15.695 ","End":"05:19.805","Text":"or we\u0027ve identified, for example,"},{"Start":"05:19.805 ","End":"05:25.055","Text":"that it doesn\u0027t affect operating activities but financing activities instead."},{"Start":"05:25.055 ","End":"05:29.110","Text":"Then the third section of our balance sheet is the equity section."},{"Start":"05:29.110 ","End":"05:31.265","Text":"Here we have the equity."},{"Start":"05:31.265 ","End":"05:34.100","Text":"We\u0027ve got share capital and retained earnings and"},{"Start":"05:34.100 ","End":"05:36.890","Text":"both of those form part of financing activities."},{"Start":"05:36.890 ","End":"05:40.255","Text":"Those don\u0027t affect operating activities."},{"Start":"05:40.255 ","End":"05:43.595","Text":"That said, in the retained earnings account,"},{"Start":"05:43.595 ","End":"05:47.570","Text":"you may balance back to a dividends declared figure,"},{"Start":"05:47.570 ","End":"05:52.310","Text":"which is a separately disclosable item under operating activities or"},{"Start":"05:52.310 ","End":"05:59.000","Text":"the dividends declared might be classified instead of as an operating activity,"},{"Start":"05:59.000 ","End":"06:02.830","Text":"might be classified as a financing activity."},{"Start":"06:02.830 ","End":"06:07.640","Text":"It\u0027s the choice of the company unless the company is a financing company, like a bank,"},{"Start":"06:07.640 ","End":"06:13.610","Text":"in which case the dividends paid would have to be presented as an operating activity,"},{"Start":"06:13.610 ","End":"06:17.870","Text":"but it would be not under working capital changes,"},{"Start":"06:17.870 ","End":"06:20.090","Text":"but as a separately disclosable item."},{"Start":"06:20.090 ","End":"06:26.230","Text":"Either way, the retained earnings is not going to affect working capital changes."},{"Start":"06:26.230 ","End":"06:29.315","Text":"All right, so everything has been accounted for here."},{"Start":"06:29.315 ","End":"06:33.694","Text":"We know that we have accounted for all of the working capital changes."},{"Start":"06:33.694 ","End":"06:36.590","Text":"Let\u0027s look at our cash flow statement."},{"Start":"06:36.590 ","End":"06:39.680","Text":"We\u0027ve got the profit before interest in tax."},{"Start":"06:39.680 ","End":"06:41.705","Text":"We have all the cash,"},{"Start":"06:41.705 ","End":"06:44.555","Text":"we have all the non-cash flow items."},{"Start":"06:44.555 ","End":"06:46.550","Text":"We have the adjustments in working"},{"Start":"06:46.550 ","End":"06:49.460","Text":"capital and we\u0027ve established that we\u0027ve accounted for all of them."},{"Start":"06:49.460 ","End":"06:52.190","Text":"We can now put in the subtotal,"},{"Start":"06:52.190 ","End":"06:55.525","Text":"which is cash generated from operations."},{"Start":"06:55.525 ","End":"06:58.970","Text":"We have the non-cash flow items,"},{"Start":"06:58.970 ","End":"07:00.311","Text":"the working capital changes,"},{"Start":"07:00.311 ","End":"07:06.750","Text":"and the last step is going to account for the separately disclosable items."}],"ID":29737},{"Watched":false,"Name":"Exercise 13 NOP - I","Duration":"5m 20s","ChapterTopicVideoID":26957,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.955","Text":"In this video, we\u0027re looking at the cash flow statements,"},{"Start":"00:02.955 ","End":"00:08.085","Text":"operating activity section, focusing on separately disclosable items."},{"Start":"00:08.085 ","End":"00:12.225","Text":"Examples of separately disclosable items include taxes paid,"},{"Start":"00:12.225 ","End":"00:15.345","Text":"interest paid, dividends paid."},{"Start":"00:15.345 ","End":"00:17.590","Text":"In terms of separately disclosable items,"},{"Start":"00:17.590 ","End":"00:21.870","Text":"it\u0027s worth noting that this part of the operating activities section of"},{"Start":"00:21.870 ","End":"00:24.240","Text":"the cash flow statement is the same whether we use"},{"Start":"00:24.240 ","End":"00:27.400","Text":"the direct method or the indirect method."},{"Start":"00:27.400 ","End":"00:33.965","Text":"The indirect method simply affects how we get to the cash generated from operations."},{"Start":"00:33.965 ","End":"00:36.305","Text":"In this question, we only have"},{"Start":"00:36.305 ","End":"00:40.595","Text":"tax payments that will be presented as separately disclosable items."},{"Start":"00:40.595 ","End":"00:41.840","Text":"Now in the question,"},{"Start":"00:41.840 ","End":"00:46.100","Text":"you may have noticed that we also have interest expense."},{"Start":"00:46.100 ","End":"00:49.505","Text":"Therefore, there is undoubtedly an interest payment."},{"Start":"00:49.505 ","End":"00:53.510","Text":"However, the question tells us that this company has chosen to"},{"Start":"00:53.510 ","End":"00:58.639","Text":"present interest payments as a financing activity."},{"Start":"00:58.639 ","End":"01:01.325","Text":"Now unless you are financing a house,"},{"Start":"01:01.325 ","End":"01:02.990","Text":"you actually have a choice."},{"Start":"01:02.990 ","End":"01:05.900","Text":"You can present your interest payments as"},{"Start":"01:05.900 ","End":"01:09.700","Text":"either an operating activity or financing activity."},{"Start":"01:09.700 ","End":"01:13.415","Text":"This company has chosen to present it as a financing activity."},{"Start":"01:13.415 ","End":"01:18.695","Text":"Similarly, you will find in this question that there are actually also dividends."},{"Start":"01:18.695 ","End":"01:24.675","Text":"Now the dividends paid are also going to be presented as financing activities,"},{"Start":"01:24.675 ","End":"01:29.675","Text":"since the company has chosen not to present them as operating activities."},{"Start":"01:29.675 ","End":"01:34.805","Text":"If this company had been a financing business such as a bank,"},{"Start":"01:34.805 ","End":"01:40.835","Text":"then the dividend payments would have to be presented as an operating activity."},{"Start":"01:40.835 ","End":"01:44.300","Text":"The operating activities section of our cash flow statement"},{"Start":"01:44.300 ","End":"01:48.800","Text":"involving separately disclosable items in this question involves only taxes paid."},{"Start":"01:48.800 ","End":"01:52.085","Text":"This is how far we\u0027ve got with our cash flow statements."},{"Start":"01:52.085 ","End":"01:54.170","Text":"Operating activities section,"},{"Start":"01:54.170 ","End":"01:58.880","Text":"we\u0027ve reached the cash generated from operations, of 10,322."},{"Start":"01:58.880 ","End":"02:01.730","Text":"Now we need to adjust for the tax payment."},{"Start":"02:01.730 ","End":"02:03.290","Text":"To work out the tax payment,"},{"Start":"02:03.290 ","End":"02:06.064","Text":"we need to first look at our income statement."},{"Start":"02:06.064 ","End":"02:09.155","Text":"Here we have in the income statement,"},{"Start":"02:09.155 ","End":"02:13.820","Text":"second to last line item is the tax expense of 1,184."},{"Start":"02:13.820 ","End":"02:17.945","Text":"Now we need to convert that into a tax payment."},{"Start":"02:17.945 ","End":"02:22.160","Text":"We can convert the tax expense into a tax paid amount by taking into"},{"Start":"02:22.160 ","End":"02:26.600","Text":"account the movement in the tax payable account balances."},{"Start":"02:26.600 ","End":"02:32.420","Text":"Now, the tax payables account balances would be found in the balance sheet."},{"Start":"02:32.420 ","End":"02:35.420","Text":"Let\u0027s look at our balance sheet and look in"},{"Start":"02:35.420 ","End":"02:39.605","Text":"the total liabilities and current liabilities."},{"Start":"02:39.605 ","End":"02:42.035","Text":"You can see, if you look carefully,"},{"Start":"02:42.035 ","End":"02:45.470","Text":"we have no tax payable."},{"Start":"02:45.470 ","End":"02:50.510","Text":"Converting the tax expense accounts into a tax paid amount"},{"Start":"02:50.510 ","End":"02:57.000","Text":"involves taking into account the movement in the tax payables account."},{"Start":"02:57.000 ","End":"02:59.140","Text":"What we have here,"},{"Start":"02:59.140 ","End":"03:00.950","Text":"in the tax payable account,"},{"Start":"03:00.950 ","End":"03:02.315","Text":"we\u0027d have our opening balance."},{"Start":"03:02.315 ","End":"03:05.270","Text":"We would add the tax expense for the current year,"},{"Start":"03:05.270 ","End":"03:07.145","Text":"subtract the amount that we paid,"},{"Start":"03:07.145 ","End":"03:09.620","Text":"and that would then give us the closing balance."},{"Start":"03:09.620 ","End":"03:13.870","Text":"In other words, the amount we still owe the tax authorities at the end of the year."},{"Start":"03:13.870 ","End":"03:15.365","Text":"Looking at our balance sheet,"},{"Start":"03:15.365 ","End":"03:18.620","Text":"we look for the total liabilities section."},{"Start":"03:18.620 ","End":"03:20.990","Text":"In the current liabilities section,"},{"Start":"03:20.990 ","End":"03:23.360","Text":"1 should find the tax payable."},{"Start":"03:23.360 ","End":"03:24.695","Text":"However, in this case,"},{"Start":"03:24.695 ","End":"03:27.355","Text":"there\u0027s no line item for tax payable."},{"Start":"03:27.355 ","End":"03:30.875","Text":"The reason was that in the additional information,"},{"Start":"03:30.875 ","End":"03:35.605","Text":"we were told that the accounts payable included the tax payable."},{"Start":"03:35.605 ","End":"03:39.800","Text":"If you go to note number 6 under the additional information of your question,"},{"Start":"03:39.800 ","End":"03:44.860","Text":"you can see here it says that the tax payable is included within accounts payable."},{"Start":"03:44.860 ","End":"03:48.380","Text":"At 31st December 2019, so the end of last year,"},{"Start":"03:48.380 ","End":"03:50.210","Text":"the tax payable was 35,"},{"Start":"03:50.210 ","End":"03:51.905","Text":"that\u0027s our opening balance."},{"Start":"03:51.905 ","End":"03:56.975","Text":"Then 31st of December 2020, it had grown to 55."},{"Start":"03:56.975 ","End":"04:03.185","Text":"We put that in, opening balance was 35 and our closing balance was 55."},{"Start":"04:03.185 ","End":"04:07.010","Text":"We then go back to our income statement and pick up that tax expense,"},{"Start":"04:07.010 ","End":"04:08.990","Text":"which was 1,184,"},{"Start":"04:08.990 ","End":"04:12.155","Text":"and we pop that into our tax payable account."},{"Start":"04:12.155 ","End":"04:14.675","Text":"If you take those 2 figures,"},{"Start":"04:14.675 ","End":"04:18.545","Text":"you get to 1,219."},{"Start":"04:18.545 ","End":"04:23.360","Text":"At the end of the year, our closing balance should have been 1,219."},{"Start":"04:23.360 ","End":"04:25.625","Text":"However, it\u0027s 55."},{"Start":"04:25.625 ","End":"04:30.770","Text":"That means we must have paid the tax authorities an amount of 1,164."},{"Start":"04:30.770 ","End":"04:36.785","Text":"We put in to our cash from operating activities section the tax paid of 1,164."},{"Start":"04:36.785 ","End":"04:39.290","Text":"You can present this calculation instead of using"},{"Start":"04:39.290 ","End":"04:42.995","Text":"the columnar format of the major account that we\u0027ve just done,"},{"Start":"04:42.995 ","End":"04:44.720","Text":"you can present it as follows."},{"Start":"04:44.720 ","End":"04:45.800","Text":"From the income statement,"},{"Start":"04:45.800 ","End":"04:47.555","Text":"you have your tax expense,"},{"Start":"04:47.555 ","End":"04:49.640","Text":"and then from the balance sheet you have"},{"Start":"04:49.640 ","End":"04:54.095","Text":"the movement in your opening balance to closing balance."},{"Start":"04:54.095 ","End":"04:59.600","Text":"You can see we\u0027ve got the opening balance was 35 and closing balance was 55."},{"Start":"04:59.600 ","End":"05:05.465","Text":"You\u0027re effectively subtracting the increase of 20."},{"Start":"05:05.465 ","End":"05:09.475","Text":"You\u0027re subtracting the increase in your tax payable."},{"Start":"05:09.475 ","End":"05:13.460","Text":"The cash from operating activities section is quite"},{"Start":"05:13.460 ","End":"05:18.320","Text":"often considered to be the most difficult part of the cash flow statement."},{"Start":"05:18.320 ","End":"05:20.940","Text":"Well done on completing it."}],"ID":29738},{"Watched":false,"Name":"Exercise 13 NOP - J","Duration":"3m 51s","ChapterTopicVideoID":26958,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.600","Text":"The investing activities section of the cash flow statement,"},{"Start":"00:03.600 ","End":"00:05.460","Text":"a very brief overview."},{"Start":"00:05.460 ","End":"00:09.045","Text":"The cash flow statement is made up of 4 sections essentially."},{"Start":"00:09.045 ","End":"00:12.225","Text":"We\u0027ve got the cash from operating activities Section 1,"},{"Start":"00:12.225 ","End":"00:14.310","Text":"investing activities Section 2,"},{"Start":"00:14.310 ","End":"00:17.400","Text":"and financing activities of Section 3."},{"Start":"00:17.400 ","End":"00:21.030","Text":"Those basically cover all the activities of a business."},{"Start":"00:21.030 ","End":"00:25.590","Text":"With then net cash flows from each of these activities against one another and we get"},{"Start":"00:25.590 ","End":"00:31.065","Text":"the net cash inflow or outflow of the business for that period."},{"Start":"00:31.065 ","End":"00:33.540","Text":"We then add to the opening bank balance at"},{"Start":"00:33.540 ","End":"00:36.235","Text":"the beginning of the period to give us a closing bank balance."},{"Start":"00:36.235 ","End":"00:39.310","Text":"That last section is Section 4,"},{"Start":"00:39.310 ","End":"00:43.040","Text":"basically a bank reconciliation."},{"Start":"00:43.040 ","End":"00:47.810","Text":"We\u0027re focusing on the investing activities section for the moment."},{"Start":"00:47.810 ","End":"00:50.330","Text":"Now the investing activities section is the same"},{"Start":"00:50.330 ","End":"00:53.045","Text":"whether we use the direct method or the indirect method."},{"Start":"00:53.045 ","End":"00:57.320","Text":"Remember, the direct or indirect method only affects the cash generated from"},{"Start":"00:57.320 ","End":"01:03.740","Text":"operations line item within the operating activity section of the cash flow statement."},{"Start":"01:03.740 ","End":"01:08.270","Text":"Now in doing the investing activity section of the cash flow statement,"},{"Start":"01:08.270 ","End":"01:12.650","Text":"we generally focus on the non-current assets only."},{"Start":"01:12.650 ","End":"01:17.240","Text":"Let\u0027s look at the total assets page of the balance sheet."},{"Start":"01:17.240 ","End":"01:19.730","Text":"Now we\u0027re going to focus on non-current assets,"},{"Start":"01:19.730 ","End":"01:21.620","Text":"but let\u0027s have a look first at the current assets"},{"Start":"01:21.620 ","End":"01:24.170","Text":"as to why we\u0027re not looking at them at the moment."},{"Start":"01:24.170 ","End":"01:27.705","Text":"The inventory accounts receivable and prepayments are all being"},{"Start":"01:27.705 ","End":"01:31.505","Text":"taken into consideration when doing the operating activities section."},{"Start":"01:31.505 ","End":"01:33.118","Text":"They\u0027re all done."},{"Start":"01:33.118 ","End":"01:35.030","Text":"The cash that\u0027s going to be taken into"},{"Start":"01:35.030 ","End":"01:37.880","Text":"consideration in the fourth section of our cash flow statement,"},{"Start":"01:37.880 ","End":"01:40.460","Text":"which is effectively a cash reconciliation."},{"Start":"01:40.460 ","End":"01:45.950","Text":"That leaves us with a non-current assets section of a balance sheet."},{"Start":"01:45.950 ","End":"01:48.875","Text":"Your PPE, right of use assets,"},{"Start":"01:48.875 ","End":"01:51.740","Text":"and intangible assets are all going to impact on"},{"Start":"01:51.740 ","End":"01:55.070","Text":"the investing activities section of the cash flow statement."},{"Start":"01:55.070 ","End":"01:57.200","Text":"Now let\u0027s look at the income statement."},{"Start":"01:57.200 ","End":"01:59.855","Text":"Let\u0027s go through each of these line items."},{"Start":"01:59.855 ","End":"02:03.650","Text":"The revenue and the cost of sales were both taken into consideration within"},{"Start":"02:03.650 ","End":"02:07.275","Text":"the operating activities section are the cash flow statement,"},{"Start":"02:07.275 ","End":"02:10.520","Text":"the interest expense is going to be taken to"},{"Start":"02:10.520 ","End":"02:15.200","Text":"consideration in either operating activities or financing activities section."},{"Start":"02:15.200 ","End":"02:19.040","Text":"If you are a financing house like a bank,"},{"Start":"02:19.040 ","End":"02:24.395","Text":"then the interest expense would be classified within the financing activities section."},{"Start":"02:24.395 ","End":"02:28.730","Text":"However, all other businesses can choose"},{"Start":"02:28.730 ","End":"02:34.745","Text":"whether to classify their interest expense under operating or financing activities."},{"Start":"02:34.745 ","End":"02:40.885","Text":"The tax expense falls within the operating activities section for cash flow statement."},{"Start":"02:40.885 ","End":"02:44.915","Text":"There\u0027s only one other line item that we haven\u0027t looked at yet."},{"Start":"02:44.915 ","End":"02:52.190","Text":"Operating expenses, now that is a whole conglomerate of a variety of other expenses."},{"Start":"02:52.190 ","End":"02:54.090","Text":"Some of them will affect operating,"},{"Start":"02:54.090 ","End":"02:55.694","Text":"some will affect investing,"},{"Start":"02:55.694 ","End":"02:58.700","Text":"and some will affect the financing activities section."},{"Start":"02:58.700 ","End":"03:01.310","Text":"We have to look at the additional information given to"},{"Start":"03:01.310 ","End":"03:04.940","Text":"us regarding these operating expenses."},{"Start":"03:04.940 ","End":"03:09.290","Text":"In the additional information given to us, operating expenses included,"},{"Start":"03:09.290 ","End":"03:14.170","Text":"for example, the depreciation of PPE and the loss on disposal of building and land."},{"Start":"03:14.170 ","End":"03:17.840","Text":"Building and land is just one of the items of PP\u0026E."},{"Start":"03:17.840 ","End":"03:22.340","Text":"Both of those are going to fall within the investing activities section."},{"Start":"03:22.340 ","End":"03:25.640","Text":"The depreciation of the right to use asset,"},{"Start":"03:25.640 ","End":"03:29.150","Text":"that\u0027s also going to affect our investing activities section."},{"Start":"03:29.150 ","End":"03:32.300","Text":"The amortization and impairment of intangible assets will"},{"Start":"03:32.300 ","End":"03:36.140","Text":"also affect the investing activities section."},{"Start":"03:36.140 ","End":"03:38.090","Text":"The salaries, bad debts, repairs,"},{"Start":"03:38.090 ","End":"03:40.700","Text":"and insurance expense have already been taken into"},{"Start":"03:40.700 ","End":"03:43.940","Text":"consideration within the operating activities section."},{"Start":"03:43.940 ","End":"03:46.250","Text":"We\u0027ll start with the property plant and equipment"},{"Start":"03:46.250 ","End":"03:51.420","Text":"section and this is covered in the next mini video."}],"ID":29739},{"Watched":false,"Name":"Exercise 13 NOP - K","Duration":"6m 17s","ChapterTopicVideoID":26959,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.105","Text":"Investing activities section of our cash flow statement,"},{"Start":"00:03.105 ","End":"00:06.555","Text":"focusing on property plant and equipment."},{"Start":"00:06.555 ","End":"00:08.460","Text":"To account the impact that property,"},{"Start":"00:08.460 ","End":"00:11.455","Text":"plant and equipment could have on our cash flow statement,"},{"Start":"00:11.455 ","End":"00:14.085","Text":"we need to reconstruct the PPE account."},{"Start":"00:14.085 ","End":"00:16.740","Text":"We\u0027re going to take into consideration accounts that are affected it,"},{"Start":"00:16.740 ","End":"00:18.780","Text":"such as the depreciation,"},{"Start":"00:18.780 ","End":"00:21.720","Text":"impairments, profit loss and sales, etc."},{"Start":"00:21.720 ","End":"00:25.635","Text":"Why? In order to calculate any missing information,"},{"Start":"00:25.635 ","End":"00:29.535","Text":"and in this case it\u0027s a carrying amount of the PPE sold."},{"Start":"00:29.535 ","End":"00:33.865","Text":"Let\u0027s look at the reconstruction of our PPE account."},{"Start":"00:33.865 ","End":"00:35.870","Text":"Well, we\u0027d have an opening balance and"},{"Start":"00:35.870 ","End":"00:38.195","Text":"closing balance which we pick up from our balance sheet."},{"Start":"00:38.195 ","End":"00:40.655","Text":"If you have a look at the balance sheet our PPE,"},{"Start":"00:40.655 ","End":"00:45.925","Text":"opening balance is 24,727 and our closing balance is 17,639."},{"Start":"00:45.925 ","End":"00:50.450","Text":"We pop that into our PPE account,"},{"Start":"00:50.450 ","End":"00:55.295","Text":"opening balance 2,477, closing balance 17,639."},{"Start":"00:55.295 ","End":"00:58.684","Text":"We then have a look at our operating expenses for more information."},{"Start":"00:58.684 ","End":"01:02.134","Text":"The first line item is depreciation of PPE."},{"Start":"01:02.134 ","End":"01:06.760","Text":"That amount to 238 effects are carrying amount of the PPE."},{"Start":"01:06.760 ","End":"01:09.350","Text":"The loss on disposal of the building and land of"},{"Start":"01:09.350 ","End":"01:13.520","Text":"250 actually does not affect the carrying amount of the PPE."},{"Start":"01:13.520 ","End":"01:16.010","Text":"However, we\u0027re going to need to know"},{"Start":"01:16.010 ","End":"01:19.381","Text":"the carrying amount of that building and land that was sold."},{"Start":"01:19.381 ","End":"01:21.380","Text":"Why would we need to know that?"},{"Start":"01:21.380 ","End":"01:24.290","Text":"Because we need to work out how much we sold it for."},{"Start":"01:24.290 ","End":"01:26.240","Text":"We\u0027ll do that by comparing"},{"Start":"01:26.240 ","End":"01:29.060","Text":"the carrying amount of the building and the land that was sold,"},{"Start":"01:29.060 ","End":"01:30.590","Text":"with the loss on disposal."},{"Start":"01:30.590 ","End":"01:32.150","Text":"We\u0027ll do that in a moment."},{"Start":"01:32.150 ","End":"01:35.180","Text":"We also have depreciation of the right to use assets and"},{"Start":"01:35.180 ","End":"01:38.345","Text":"amortization and impairments of intangible assets."},{"Start":"01:38.345 ","End":"01:41.290","Text":"They don\u0027t affect PPE of course."},{"Start":"01:41.290 ","End":"01:44.150","Text":"Let us look at the depreciation of PPE being"},{"Start":"01:44.150 ","End":"01:47.245","Text":"the only line item that directly affects the carrying amount."},{"Start":"01:47.245 ","End":"01:49.845","Text":"In the PPE account,"},{"Start":"01:49.845 ","End":"01:56.345","Text":"you\u0027ll see the depreciation being subtracted from the opening balance of 2,477,"},{"Start":"01:56.345 ","End":"01:59.270","Text":"and that is because the carrying amount represents"},{"Start":"01:59.270 ","End":"02:03.380","Text":"cost is your accumulated depreciation to date,"},{"Start":"02:03.380 ","End":"02:06.080","Text":"less the accumulated payment losses to date."},{"Start":"02:06.080 ","End":"02:10.310","Text":"What we\u0027re doing now is we\u0027re subtracting any further depreciation for the current year,"},{"Start":"02:10.310 ","End":"02:13.105","Text":"and any further impairment losses for the current year."},{"Start":"02:13.105 ","End":"02:18.440","Text":"The depreciation for the current year is 2,838."},{"Start":"02:18.440 ","End":"02:20.765","Text":"Would subtract impairments."},{"Start":"02:20.765 ","End":"02:24.770","Text":"However, the list of operating expenses didn\u0027t include any impairments of property,"},{"Start":"02:24.770 ","End":"02:27.305","Text":"plant and equipment, so there\u0027s no evidence of that."},{"Start":"02:27.305 ","End":"02:30.500","Text":"You will then add any purchases of property, plant, and equipment."},{"Start":"02:30.500 ","End":"02:32.150","Text":"So we would have to be told this,"},{"Start":"02:32.150 ","End":"02:35.330","Text":"you either get told the cost of the purchases or you get told"},{"Start":"02:35.330 ","End":"02:40.153","Text":"the carrying amount of the assets that we sold, one of the 2."},{"Start":"02:40.153 ","End":"02:42.845","Text":"In this case, we didn\u0027t have any purchases,"},{"Start":"02:42.845 ","End":"02:47.915","Text":"then you would add the cost of any purchases and there was no evidence of that."},{"Start":"02:47.915 ","End":"02:49.870","Text":"Now, this incidentally,"},{"Start":"02:49.870 ","End":"02:54.080","Text":"you would have to within the additional information be given the cost"},{"Start":"02:54.080 ","End":"02:58.190","Text":"of any purchases or the carrying amount of any sales,"},{"Start":"02:58.190 ","End":"03:02.463","Text":"you wouldn\u0027t be able to balance back to both."},{"Start":"03:02.463 ","End":"03:05.570","Text":"If they were purchases and the were sales,"},{"Start":"03:05.570 ","End":"03:09.260","Text":"the question would have to give you one of those bits of"},{"Start":"03:09.260 ","End":"03:14.345","Text":"information because you can only ever balance back to 1 missing amount."},{"Start":"03:14.345 ","End":"03:17.390","Text":"Looking at what we have so far,"},{"Start":"03:17.390 ","End":"03:21.035","Text":"our closing balance in ought to be 21,889,"},{"Start":"03:21.035 ","End":"03:23.825","Text":"but it isn\u0027t it\u0027s 17,639."},{"Start":"03:23.825 ","End":"03:27.025","Text":"So we\u0027re missing an amount of 4,250,"},{"Start":"03:27.025 ","End":"03:30.465","Text":"and that is the carrying amount of the item that was sold,"},{"Start":"03:30.465 ","End":"03:33.178","Text":"that\u0027s the building and its related land."},{"Start":"03:33.178 ","End":"03:35.180","Text":"Now we know the carrying amount to the property plant,"},{"Start":"03:35.180 ","End":"03:36.515","Text":"and equipment that was sold,"},{"Start":"03:36.515 ","End":"03:40.310","Text":"we can now calculate the proceeds on the sale. How do we do that?"},{"Start":"03:40.310 ","End":"03:44.480","Text":"By reconstructing our property plant and equipment disposal account."},{"Start":"03:44.480 ","End":"03:48.665","Text":"We will compare the carrying amount of the items sold,"},{"Start":"03:48.665 ","End":"03:52.700","Text":"4,250 with the profit or loss on sale,"},{"Start":"03:52.700 ","End":"03:55.190","Text":"which you would find in the income statement."},{"Start":"03:55.190 ","End":"03:57.635","Text":"Let\u0027s have a look at the PPE disposal account."},{"Start":"03:57.635 ","End":"04:01.850","Text":"You\u0027d have the bank with cash received from the sale proceeds,"},{"Start":"04:01.850 ","End":"04:06.005","Text":"less the carrying amount of the items sold,"},{"Start":"04:06.005 ","End":"04:09.335","Text":"and that would then give you a profit or a loss on sale."},{"Start":"04:09.335 ","End":"04:11.840","Text":"If you had, let\u0027s say for example,"},{"Start":"04:11.840 ","End":"04:16.082","Text":"received cash of a 100 and the carrying amount was 80,"},{"Start":"04:16.082 ","End":"04:19.670","Text":"you receive more than the item was worth to you."},{"Start":"04:19.670 ","End":"04:22.190","Text":"It was worth 80 in terms of your carrying amount,"},{"Start":"04:22.190 ","End":"04:23.930","Text":"so you\u0027d make a profit."},{"Start":"04:23.930 ","End":"04:28.565","Text":"However, if you\u0027d sold it for 70 and the carrying amount was 80,"},{"Start":"04:28.565 ","End":"04:31.205","Text":"you\u0027d make a loss of 10."},{"Start":"04:31.205 ","End":"04:34.010","Text":"Let\u0027s have a look at the figures that we were given."},{"Start":"04:34.010 ","End":"04:38.462","Text":"We\u0027re looking for the cash received from the sale we don\u0027t know that amount,"},{"Start":"04:38.462 ","End":"04:41.455","Text":"you then subtract the carrying amount of the PPE sold,"},{"Start":"04:41.455 ","End":"04:42.850","Text":"and that\u0027s a 4,250,"},{"Start":"04:42.850 ","End":"04:46.719","Text":"which we picked up from the reconstruction of our PPE account."},{"Start":"04:46.719 ","End":"04:50.870","Text":"Then we look to whether we made a profit loss on sale."},{"Start":"04:50.870 ","End":"04:53.975","Text":"That was given to us within the list of operating expenses,"},{"Start":"04:53.975 ","End":"04:55.130","Text":"the loss on disposal,"},{"Start":"04:55.130 ","End":"04:57.140","Text":"a building and land of 250,"},{"Start":"04:57.140 ","End":"04:59.339","Text":"so we put that in 250."},{"Start":"04:59.339 ","End":"05:03.650","Text":"Obviously it means that we received less than the carrying amount."},{"Start":"05:03.650 ","End":"05:06.530","Text":"It means we must have sold it for 4,000,"},{"Start":"05:06.530 ","End":"05:11.550","Text":"so those are the proceeds that we received on the sale of our PPE."},{"Start":"05:11.550 ","End":"05:15.000","Text":"In the cash from investing activities section of our cash flow statement,"},{"Start":"05:15.000 ","End":"05:19.140","Text":"we can now say cash received from disposal of PPE was 4,000."},{"Start":"05:19.140 ","End":"05:22.220","Text":"You could also show these workings as follows."},{"Start":"05:22.220 ","End":"05:24.515","Text":"The carrying amount of the asset disposed of,"},{"Start":"05:24.515 ","End":"05:26.480","Text":"plus the profit on disposal,"},{"Start":"05:26.480 ","End":"05:28.670","Text":"or minus a loss on disposal."},{"Start":"05:28.670 ","End":"05:31.040","Text":"The carrying amount of the asset disposed off,"},{"Start":"05:31.040 ","End":"05:33.660","Text":"was 450, and we worked it out."},{"Start":"05:33.660 ","End":"05:35.720","Text":"You\u0027d have to show this information."},{"Start":"05:35.720 ","End":"05:37.970","Text":"The opening balance is 2,477,"},{"Start":"05:37.970 ","End":"05:40.055","Text":"we subtracted the depreciation,"},{"Start":"05:40.055 ","End":"05:42.124","Text":"there was no impairment that was subtracted."},{"Start":"05:42.124 ","End":"05:43.910","Text":"There were no purchases that were added."},{"Start":"05:43.910 ","End":"05:49.565","Text":"So, we simply then subtract the closing balance of 17,639,"},{"Start":"05:49.565 ","End":"05:53.600","Text":"and then we subtract it from that carrying amount of 4,250."},{"Start":"05:53.600 ","End":"05:57.560","Text":"The loss that we made on the disposal of 250."},{"Start":"05:57.560 ","End":"06:02.720","Text":"That gives us the 4,000 that we deduce we received."},{"Start":"06:02.720 ","End":"06:04.745","Text":"PPE is done."},{"Start":"06:04.745 ","End":"06:07.070","Text":"We now only have right-of-use assets and"},{"Start":"06:07.070 ","End":"06:10.310","Text":"intangible assets left under non-current asset section."},{"Start":"06:10.310 ","End":"06:12.860","Text":"The right-of-use assets, we\u0027re going to come back to that one."},{"Start":"06:12.860 ","End":"06:17.880","Text":"I wanted to do the intangible assets next because they\u0027re very similar to PPE."}],"ID":29740},{"Watched":false,"Name":"Exercise 13 NOP - L","Duration":"3m 26s","ChapterTopicVideoID":26960,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.550","Text":"This is the investing activities section of"},{"Start":"00:02.550 ","End":"00:07.170","Text":"a cash-flow statement and now we\u0027re going to look at the intangible assets line item."},{"Start":"00:07.170 ","End":"00:08.820","Text":"If we look at the balance sheet,"},{"Start":"00:08.820 ","End":"00:11.444","Text":"under non-current assets, we\u0027ve dealt with the PPE,"},{"Start":"00:11.444 ","End":"00:13.830","Text":"and we now have right-of-use assets,"},{"Start":"00:13.830 ","End":"00:15.490","Text":"which we\u0027ll come back to in a moment,"},{"Start":"00:15.490 ","End":"00:18.360","Text":"and we\u0027re currently busy with intangible assets."},{"Start":"00:18.360 ","End":"00:21.809","Text":"We need to reconstruct our intangible assets account,"},{"Start":"00:21.809 ","End":"00:25.245","Text":"and we\u0027re going to take into consideration the accounts that affected it,"},{"Start":"00:25.245 ","End":"00:26.910","Text":"such as amortization,"},{"Start":"00:26.910 ","End":"00:29.550","Text":"which we subtract, impairments,"},{"Start":"00:29.550 ","End":"00:31.124","Text":"which we also subtract."},{"Start":"00:31.124 ","End":"00:32.895","Text":"The reason for that, of course,"},{"Start":"00:32.895 ","End":"00:37.470","Text":"is this is our intangible assets carrying amount account."},{"Start":"00:37.470 ","End":"00:43.830","Text":"The carrying amount is the cost of the intangible assets that we own,"},{"Start":"00:43.830 ","End":"00:45.260","Text":"so how much we pay for them,"},{"Start":"00:45.260 ","End":"00:48.275","Text":"less the accumulated depreciation to date,"},{"Start":"00:48.275 ","End":"00:50.930","Text":"less the accumulated impairment losses to date."},{"Start":"00:50.930 ","End":"00:54.200","Text":"What we\u0027re doing is we\u0027re subtracting the depreciation."},{"Start":"00:54.200 ","End":"00:58.085","Text":"We call this amortization, so accumulated amortization."},{"Start":"00:58.085 ","End":"00:59.600","Text":"When you deal with intangible assets,"},{"Start":"00:59.600 ","End":"01:01.265","Text":"we don\u0027t refer to depreciation,"},{"Start":"01:01.265 ","End":"01:03.505","Text":"we refer to amortization."},{"Start":"01:03.505 ","End":"01:09.520","Text":"We\u0027re now subtracting the current year\u0027s amortization and the current year\u0027s impairments."},{"Start":"01:09.520 ","End":"01:11.660","Text":"We will then work towards any missing information,"},{"Start":"01:11.660 ","End":"01:15.820","Text":"such as the cost of any purchases and the carrying amount of any sales."},{"Start":"01:15.820 ","End":"01:19.850","Text":"We would add any purchases at their cost and we would subtract"},{"Start":"01:19.850 ","End":"01:24.050","Text":"the sale of any intangible assets that we might have sold at"},{"Start":"01:24.050 ","End":"01:25.370","Text":"its carrying amount being"},{"Start":"01:25.370 ","End":"01:29.180","Text":"its cost less the accumulated amortization"},{"Start":"01:29.180 ","End":"01:33.550","Text":"and the accumulated impairment losses on a particular asset that was sold."},{"Start":"01:33.550 ","End":"01:36.650","Text":"Let\u0027s look at the opening balance and closing balance."},{"Start":"01:36.650 ","End":"01:38.390","Text":"We need to pick that up from the balance sheet."},{"Start":"01:38.390 ","End":"01:41.480","Text":"In the balance sheet, you see the line item for intangible assets,"},{"Start":"01:41.480 ","End":"01:47.560","Text":"2100 as our opening balance and 1550 as our closing balance."},{"Start":"01:47.560 ","End":"01:52.955","Text":"We put that in. Opening balance 2100, closing balance 1550."},{"Start":"01:52.955 ","End":"01:58.925","Text":"Now let\u0027s look at the operating expenses section of the additional information."},{"Start":"01:58.925 ","End":"02:04.505","Text":"You see here we\u0027ve got 2 line items that affected intangible assets;"},{"Start":"02:04.505 ","End":"02:08.780","Text":"amortization of 300 and impairments of 250."},{"Start":"02:08.780 ","End":"02:12.410","Text":"We put that into our intangible assets carrying amount account,"},{"Start":"02:12.410 ","End":"02:14.570","Text":"we subtract the amortization 300,"},{"Start":"02:14.570 ","End":"02:17.135","Text":"and we subtract the impairments of 250."},{"Start":"02:17.135 ","End":"02:20.255","Text":"Now, so far, that means that our carrying amount,"},{"Start":"02:20.255 ","End":"02:21.500","Text":"if it was just that,"},{"Start":"02:21.500 ","End":"02:23.690","Text":"ought to be 1550."},{"Start":"02:23.690 ","End":"02:25.860","Text":"You can see it actually is."},{"Start":"02:25.860 ","End":"02:28.135","Text":"The closing balance is 1550."},{"Start":"02:28.135 ","End":"02:34.405","Text":"That therefore means that we don\u0027t have any purchases and we didn\u0027t sell any asset."},{"Start":"02:34.405 ","End":"02:37.230","Text":"There were no cash movements."},{"Start":"02:37.230 ","End":"02:38.750","Text":"If we\u0027d purchased an asset,"},{"Start":"02:38.750 ","End":"02:40.618","Text":"that would have been a cash outflow,"},{"Start":"02:40.618 ","End":"02:42.305","Text":"and if we\u0027d sold any asset,"},{"Start":"02:42.305 ","End":"02:45.560","Text":"that would have been a cash inflow relating to intangible assets."},{"Start":"02:45.560 ","End":"02:51.455","Text":"But we can see that just by taking into account the amortization and the impairments,"},{"Start":"02:51.455 ","End":"02:55.385","Text":"we\u0027ve already established how we got to the carrying amount of 1550,"},{"Start":"02:55.385 ","End":"02:58.325","Text":"so there\u0027s no missing information here."},{"Start":"02:58.325 ","End":"03:02.180","Text":"That then means that when you look at the cash from investing activities, well,"},{"Start":"03:02.180 ","End":"03:06.740","Text":"there we have a cash impact from property plant and equipment of 4000,"},{"Start":"03:06.740 ","End":"03:07.992","Text":"which was a cash inflow."},{"Start":"03:07.992 ","End":"03:11.675","Text":"With regard to cash from intangible assets, there is nothing."},{"Start":"03:11.675 ","End":"03:13.310","Text":"Now, obviously, with the cash flow statement,"},{"Start":"03:13.310 ","End":"03:16.805","Text":"you wouldn\u0027t actually put in a line item saying 0."},{"Start":"03:16.805 ","End":"03:18.965","Text":"You don\u0027t put it in it all."},{"Start":"03:18.965 ","End":"03:22.004","Text":"We\u0027ve finished with PPE and intangible assets."},{"Start":"03:22.004 ","End":"03:27.480","Text":"The next item to look at is the right of use assets."}],"ID":29741},{"Watched":false,"Name":"Exercise 13 NOP - M-1","Duration":"7m 23s","ChapterTopicVideoID":26961,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.235","Text":"Investing activities."},{"Start":"00:02.235 ","End":"00:07.500","Text":"We\u0027re looking at right-of-use assets in this video."},{"Start":"00:07.500 ","End":"00:12.120","Text":"In this video, I\u0027m going to give an overview of the information provided"},{"Start":"00:12.120 ","End":"00:18.210","Text":"and a brief explanation of right-of-use assets and lease liabilities."},{"Start":"00:18.210 ","End":"00:20.250","Text":"Now in doing investing activities,"},{"Start":"00:20.250 ","End":"00:22.620","Text":"we\u0027re focused on non-current assets."},{"Start":"00:22.620 ","End":"00:24.525","Text":"We\u0027ve already done PPE,"},{"Start":"00:24.525 ","End":"00:25.815","Text":"property plant and equipment,"},{"Start":"00:25.815 ","End":"00:27.330","Text":"and intangible assets,."},{"Start":"00:27.330 ","End":"00:33.675","Text":"We\u0027re now focusing on the last of the 3 non-current assets, right-of-use assets."},{"Start":"00:33.675 ","End":"00:38.505","Text":"If you have a look at the 31st December 2019, the prior year,"},{"Start":"00:38.505 ","End":"00:41.160","Text":"we didn\u0027t have right-of-use assets,"},{"Start":"00:41.160 ","End":"00:44.880","Text":"and at the end of this year we have 5,415."},{"Start":"00:44.880 ","End":"00:47.925","Text":"So the right of use asset is a new thing for this company."},{"Start":"00:47.925 ","End":"00:51.390","Text":"Let\u0027s look at the additional information that we were given."},{"Start":"00:51.390 ","End":"00:54.720","Text":"To replace 1 of the buildings that sold during the year,"},{"Start":"00:54.720 ","End":"00:57.840","Text":"NOP entered into a 20 year lease agreement for"},{"Start":"00:57.840 ","End":"01:02.505","Text":"a similar property effective from the 1st of the 1st 2020,."},{"Start":"01:02.505 ","End":"01:05.040","Text":"That\u0027s the beginning of our current year."},{"Start":"01:05.040 ","End":"01:12.210","Text":"The lease requires NOP to make an annual payment of 402 on 31st December of each year."},{"Start":"01:12.210 ","End":"01:14.805","Text":"Our lease installments are in arrears."},{"Start":"01:14.805 ","End":"01:17.610","Text":"Half of this payment represents interest,"},{"Start":"01:17.610 ","End":"01:22.395","Text":"which means that the remaining half is the principal sum that we\u0027re paying off."},{"Start":"01:22.395 ","End":"01:25.110","Text":"Interest paid is classified within the cash from"},{"Start":"01:25.110 ","End":"01:28.530","Text":"financing activities section of the cash flow statement."},{"Start":"01:28.530 ","End":"01:32.370","Text":"Now, remember this company has a choice as to whether to classify"},{"Start":"01:32.370 ","End":"01:36.840","Text":"the interest as an operating activity or a financing activity,"},{"Start":"01:36.840 ","End":"01:40.425","Text":"and it\u0027s chosen to classify interest as a financing activity."},{"Start":"01:40.425 ","End":"01:44.835","Text":"The inception of the lease did not involve any exchange of cash."},{"Start":"01:44.835 ","End":"01:46.890","Text":"Now, that can happen."},{"Start":"01:46.890 ","End":"01:49.185","Text":"In fact, it often happens."},{"Start":"01:49.185 ","End":"01:50.460","Text":"At the beginning of a lease,"},{"Start":"01:50.460 ","End":"01:57.390","Text":"1 is often required to put down either deposit or to prepay a lease installment."},{"Start":"01:57.390 ","End":"02:01.410","Text":"In any event, this company was not required to do so."},{"Start":"02:01.410 ","End":"02:05.340","Text":"Now, this is quite a new standard, still relatively new."},{"Start":"02:05.340 ","End":"02:08.670","Text":"Let me give you a brief overview of the interactions of the"},{"Start":"02:08.670 ","End":"02:12.360","Text":"right-to-use asset and lease liability,"},{"Start":"02:12.360 ","End":"02:15.015","Text":"just in case you haven\u0027t come across it before."},{"Start":"02:15.015 ","End":"02:17.160","Text":"If you do understand how it works,"},{"Start":"02:17.160 ","End":"02:19.285","Text":"then we can move on to the next mini video."},{"Start":"02:19.285 ","End":"02:25.970","Text":"We have a few ledger accounts which I\u0027ve constructed in T-account format."},{"Start":"02:25.970 ","End":"02:28.160","Text":"We\u0027ll start with the right-of-use asset,"},{"Start":"02:28.160 ","End":"02:29.420","Text":"which is an asset."},{"Start":"02:29.420 ","End":"02:31.250","Text":"It gets bigger on the debit side,"},{"Start":"02:31.250 ","End":"02:34.150","Text":"in other words, the left-hand side and the bank."},{"Start":"02:34.150 ","End":"02:40.560","Text":"If 1 enters into a lease agreement and is required to make a payment upfront."},{"Start":"02:40.560 ","End":"02:42.600","Text":"What would happen is we would credit the bank"},{"Start":"02:42.600 ","End":"02:44.625","Text":"because payments go through on the credit side,"},{"Start":"02:44.625 ","End":"02:48.300","Text":"the right-hand side and we would debit the asset,"},{"Start":"02:48.300 ","End":"02:50.490","Text":"the right of use asset."},{"Start":"02:50.490 ","End":"02:53.640","Text":"Then we\u0027d have to recognize"},{"Start":"02:53.640 ","End":"02:56.715","Text":"the lease liability because we\u0027ve just entered into a lease agreement,"},{"Start":"02:56.715 ","End":"02:58.770","Text":"and that lease agreement requires that we are going to pay"},{"Start":"02:58.770 ","End":"03:05.025","Text":"certain lease installments over a certain period of time, the lease period."},{"Start":"03:05.025 ","End":"03:10.245","Text":"We calculate the total of the future lease payments and then the present value thereof."},{"Start":"03:10.245 ","End":"03:14.940","Text":"We credit the lease liability with the present value or the future lease payments,"},{"Start":"03:14.940 ","End":"03:17.835","Text":"and we debit that to the right-of-use asset."},{"Start":"03:17.835 ","End":"03:21.030","Text":"Now the right of use asset is shown at its cost,"},{"Start":"03:21.030 ","End":"03:24.480","Text":"which is made up of the amount that you\u0027ve already paid in cash and"},{"Start":"03:24.480 ","End":"03:27.975","Text":"the amount that you\u0027re going to pay off over a period of time."},{"Start":"03:27.975 ","End":"03:29.910","Text":"Then over time,"},{"Start":"03:29.910 ","End":"03:33.090","Text":"we\u0027re going to recognize interest on this liability."},{"Start":"03:33.090 ","End":"03:34.980","Text":"So as time goes on,"},{"Start":"03:34.980 ","End":"03:39.990","Text":"our lease liability is increased to reflect the interest on the liability,"},{"Start":"03:39.990 ","End":"03:42.720","Text":"and we recognize that as an interest expense."},{"Start":"03:42.720 ","End":"03:47.295","Text":"Now remember, expenses get bigger on the debit side, the left-hand side."},{"Start":"03:47.295 ","End":"03:51.300","Text":"Then at the end of every year or the beginning of every year,"},{"Start":"03:51.300 ","End":"03:53.250","Text":"or might be monthly,"},{"Start":"03:53.250 ","End":"03:57.540","Text":"lease installments are paid and as a lease installment are paid,"},{"Start":"03:57.540 ","End":"04:02.172","Text":"we credit the bank and debit the lease liability to reduce the liability."},{"Start":"04:02.172 ","End":"04:06.840","Text":"Over time, that lease liability will eventually be paid off."},{"Start":"04:06.840 ","End":"04:09.420","Text":"Then we look at the right of use asset."},{"Start":"04:09.420 ","End":"04:13.965","Text":"It is treated almost the same as any other non-current asset,."},{"Start":"04:13.965 ","End":"04:17.550","Text":"We depreciate it and we check for payments."},{"Start":"04:17.550 ","End":"04:20.490","Text":"So this is just a very brief explanation."},{"Start":"04:20.490 ","End":"04:23.700","Text":"So what I\u0027ve done here is that right-of-use asset account,"},{"Start":"04:23.700 ","End":"04:26.857","Text":"I\u0027ve reflected it at carrying amount."},{"Start":"04:26.857 ","End":"04:29.025","Text":"Normally we showed at cost and we have"},{"Start":"04:29.025 ","End":"04:33.870","Text":"a separate accumulated depreciation on right-of-use asset account."},{"Start":"04:33.870 ","End":"04:39.390","Text":"But in this case I\u0027m combining the cost and the accumulated depreciation,"},{"Start":"04:39.390 ","End":"04:42.350","Text":"so that the right-of-use asset that"},{"Start":"04:42.350 ","End":"04:46.250","Text":"you see in front of you is measured at carrying amount."},{"Start":"04:46.250 ","End":"04:50.190","Text":"With that of the way, a right-of-use asset,"},{"Start":"04:50.190 ","End":"04:52.470","Text":"we would depreciate over its useful life,"},{"Start":"04:52.470 ","End":"04:54.390","Text":"and we would then debit"},{"Start":"04:54.390 ","End":"04:59.790","Text":"the depreciation expense and we reduce the carrying amount of the asset."},{"Start":"04:59.790 ","End":"05:03.435","Text":"We would then also look for impairments and if there was an impairment,"},{"Start":"05:03.435 ","End":"05:06.375","Text":"we would reduce the carrying amount of the asset for the impairment"},{"Start":"05:06.375 ","End":"05:09.660","Text":"and we would debit the payment loss expense."},{"Start":"05:09.660 ","End":"05:15.351","Text":"So you can see here that we have 2 accounts that affect the balance sheet."},{"Start":"05:15.351 ","End":"05:17.460","Text":"1 is the right-of-use asset,"},{"Start":"05:17.460 ","End":"05:20.040","Text":"and the other 1 is the lease liability,"},{"Start":"05:20.040 ","End":"05:22.380","Text":"the depreciation, the impairment loss,"},{"Start":"05:22.380 ","End":"05:23.970","Text":"and the interest are all expenses."},{"Start":"05:23.970 ","End":"05:27.255","Text":"So they affect the income statement."},{"Start":"05:27.255 ","End":"05:31.110","Text":"Obviously, the bank is also an account that affects the balance sheet,"},{"Start":"05:31.110 ","End":"05:34.455","Text":"but that\u0027s ultimately what we\u0027re reconciling to."},{"Start":"05:34.455 ","End":"05:38.580","Text":"So we have 2 accounts that are our focus of attention,"},{"Start":"05:38.580 ","End":"05:41.085","Text":"the right-of-use asset and the lease liability."},{"Start":"05:41.085 ","End":"05:46.410","Text":"Now, the right-of-use asset and non-current asset obviously forms part of"},{"Start":"05:46.410 ","End":"05:49.095","Text":"our investing activity and"},{"Start":"05:49.095 ","End":"05:55.800","Text":"the lease liability is how we financed the acquisition of that right-of-use asset."},{"Start":"05:55.800 ","End":"05:58.470","Text":"Therefore, since it\u0027s how we finance it,"},{"Start":"05:58.470 ","End":"06:01.500","Text":"it belongs under financing activities."},{"Start":"06:01.500 ","End":"06:04.800","Text":"We\u0027re actually focusing on investing activities at the moment."},{"Start":"06:04.800 ","End":"06:10.485","Text":"We\u0027re only at this stage going to look at this right of use asset."},{"Start":"06:10.485 ","End":"06:12.825","Text":"Now looking at that right-of-use asset,"},{"Start":"06:12.825 ","End":"06:15.015","Text":"just to recap,"},{"Start":"06:15.015 ","End":"06:19.650","Text":"you can see that we have a cash payment on the debit side and we"},{"Start":"06:19.650 ","End":"06:24.435","Text":"have the present value of the future lease payments."},{"Start":"06:24.435 ","End":"06:27.360","Text":"In other words, the initial amount that got credited to"},{"Start":"06:27.360 ","End":"06:31.320","Text":"the lease liability gets debited to the right of use assets."},{"Start":"06:31.320 ","End":"06:32.340","Text":"On the left-hand side,"},{"Start":"06:32.340 ","End":"06:34.455","Text":"you\u0027ve got the cash paid upfront,"},{"Start":"06:34.455 ","End":"06:39.075","Text":"and then the total of that lease liability on inception,"},{"Start":"06:39.075 ","End":"06:42.540","Text":"and that makes up the cost of our right-of-use asset."},{"Start":"06:42.540 ","End":"06:45.090","Text":"On the right-hand side or the credit side,"},{"Start":"06:45.090 ","End":"06:51.195","Text":"we reduce that carrying amount with any depreciation and any impairments."},{"Start":"06:51.195 ","End":"06:53.580","Text":"Looking at the lease liability,"},{"Start":"06:53.580 ","End":"06:55.410","Text":"on the right-hand side of the liability,"},{"Start":"06:55.410 ","End":"06:57.030","Text":"you can see we\u0027ve got the present value of"},{"Start":"06:57.030 ","End":"06:59.820","Text":"the future lease payments that initially goes in you."},{"Start":"06:59.820 ","End":"07:01.485","Text":"Then over the years,"},{"Start":"07:01.485 ","End":"07:05.235","Text":"we will add interest every year and then over the years,"},{"Start":"07:05.235 ","End":"07:07.590","Text":"we will also debit the lease liability"},{"Start":"07:07.590 ","End":"07:10.845","Text":"every time you make a payment of a lease installment."},{"Start":"07:10.845 ","End":"07:15.990","Text":"That\u0027s the brief explanation of the right to use assets and lease liability."},{"Start":"07:15.990 ","End":"07:19.350","Text":"Now you can move to the next mini video where we will"},{"Start":"07:19.350 ","End":"07:23.650","Text":"apply this knowledge to the information given to us."}],"ID":29742},{"Watched":false,"Name":"Exercise 13 NOP - M-2","Duration":"8m 52s","ChapterTopicVideoID":26962,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.810","Text":"We\u0027re looking at the investing activities section of our cash flow statement,"},{"Start":"00:03.810 ","End":"00:06.300","Text":"specifically the right-of-use assets."},{"Start":"00:06.300 ","End":"00:09.510","Text":"In this mini video, we\u0027ll do the actual calculations."},{"Start":"00:09.510 ","End":"00:13.665","Text":"The previous mini video dealt with the theory behind it."},{"Start":"00:13.665 ","End":"00:15.780","Text":"We\u0027re looking at the balance sheet."},{"Start":"00:15.780 ","End":"00:18.045","Text":"When doing investing activities,"},{"Start":"00:18.045 ","End":"00:21.134","Text":"we look specifically at non-current assets."},{"Start":"00:21.134 ","End":"00:23.925","Text":"We\u0027ve done PPE and intangible assets."},{"Start":"00:23.925 ","End":"00:27.060","Text":"We\u0027re focusing on right-of-use assets now."},{"Start":"00:27.060 ","End":"00:30.325","Text":"We\u0027re going to reconstruct the right-of-use asset account."},{"Start":"00:30.325 ","End":"00:33.560","Text":"We\u0027ll be take into consideration the accounts that are affected it,"},{"Start":"00:33.560 ","End":"00:34.820","Text":"or aspects that affected it,"},{"Start":"00:34.820 ","End":"00:38.390","Text":"such as cash paid at inception of the lease."},{"Start":"00:38.390 ","End":"00:40.500","Text":"Those get credited, obviously,"},{"Start":"00:40.500 ","End":"00:43.985","Text":"to bank because the payment will go through on the credit side of the bank."},{"Start":"00:43.985 ","End":"00:46.965","Text":"Present value of lease installments"},{"Start":"00:46.965 ","End":"00:50.675","Text":"where the credit entry will then go to the lease liability account,"},{"Start":"00:50.675 ","End":"00:54.745","Text":"depreciation, and impairments."},{"Start":"00:54.745 ","End":"00:57.770","Text":"When reconstructing our right-of-use asset,"},{"Start":"00:57.770 ","End":"01:00.770","Text":"we\u0027re trying to work towards any missing information."},{"Start":"01:00.770 ","End":"01:02.500","Text":"In this example,"},{"Start":"01:02.500 ","End":"01:05.520","Text":"it will be the present value of the lease installments."},{"Start":"01:05.520 ","End":"01:08.930","Text":"What we\u0027re looking for is the cost incurred on"},{"Start":"01:08.930 ","End":"01:12.985","Text":"acquisition that was credited to the lease liability."},{"Start":"01:12.985 ","End":"01:16.562","Text":"The reconstruction of the right-of-use asset account,"},{"Start":"01:16.562 ","End":"01:18.560","Text":"this goes through each of the line items in"},{"Start":"01:18.560 ","End":"01:22.595","Text":"this ledger account that\u0027s been presented in columnar format."},{"Start":"01:22.595 ","End":"01:24.770","Text":"You have the opening balance,"},{"Start":"01:24.770 ","End":"01:28.040","Text":"which would be a debit balance because it\u0027s an asset."},{"Start":"01:28.040 ","End":"01:32.210","Text":"We would then add the cost of any acquisitions."},{"Start":"01:32.210 ","End":"01:34.040","Text":"When you enter into a lease,"},{"Start":"01:34.040 ","End":"01:39.645","Text":"you may be required to pay some upfront sum through cash,"},{"Start":"01:39.645 ","End":"01:42.590","Text":"in which case it would be a credit entry to the bank."},{"Start":"01:42.590 ","End":"01:45.025","Text":"The bank is your contra account."},{"Start":"01:45.025 ","End":"01:48.950","Text":"You would then also debit the right-of-use asset with"},{"Start":"01:48.950 ","End":"01:53.255","Text":"the present value of the future lease installments."},{"Start":"01:53.255 ","End":"01:59.020","Text":"That will then be credited to the lease liability account."},{"Start":"01:59.020 ","End":"02:02.330","Text":"You would add the cost of the acquisitions to"},{"Start":"02:02.330 ","End":"02:06.245","Text":"the right-of-use asset by debiting the right-of-use asset."},{"Start":"02:06.245 ","End":"02:08.480","Text":"You would be crediting bank if there was"},{"Start":"02:08.480 ","End":"02:12.640","Text":"a cash payment upfront and you\u0027d credit the lease liability."},{"Start":"02:12.640 ","End":"02:15.450","Text":"Then over time, your right-of-use asset will be"},{"Start":"02:15.450 ","End":"02:19.185","Text":"depreciated and you\u0027d also test for impairments."},{"Start":"02:19.185 ","End":"02:20.615","Text":"If your asset was impaired,"},{"Start":"02:20.615 ","End":"02:23.539","Text":"you would also reduce the carrying amount for impairments."},{"Start":"02:23.539 ","End":"02:27.320","Text":"That then gives us the subtotal of the carrying amount,"},{"Start":"02:27.320 ","End":"02:31.579","Text":"before taking to account any disposals of your right-of-use"},{"Start":"02:31.579 ","End":"02:37.415","Text":"assets to give you the closing carrying amount of your right-of-use asset."},{"Start":"02:37.415 ","End":"02:39.320","Text":"Looking at our balance sheet,"},{"Start":"02:39.320 ","End":"02:44.270","Text":"you can see we had no right-of-use asset in 2019"},{"Start":"02:44.270 ","End":"02:49.930","Text":"and we have a right-of-use asset with the carrying out of 5,415 in 2020."},{"Start":"02:49.930 ","End":"02:52.820","Text":"We put that into our right-of-use asset account,"},{"Start":"02:52.820 ","End":"02:57.965","Text":"opening balance, 0, closing balance, 5,415."},{"Start":"02:57.965 ","End":"03:00.290","Text":"Then looking at the additional information,"},{"Start":"03:00.290 ","End":"03:05.750","Text":"the very last point in that additional information regarding the right-of-use asset,"},{"Start":"03:05.750 ","End":"03:08.390","Text":"we\u0027re told that the inception of the lease did"},{"Start":"03:08.390 ","End":"03:11.330","Text":"not involve any exchange of cash, which means,"},{"Start":"03:11.330 ","End":"03:13.625","Text":"we were not required to put down a cash deposit,"},{"Start":"03:13.625 ","End":"03:18.965","Text":"and we were not required to make a pre-payment of any lease installment."},{"Start":"03:18.965 ","End":"03:22.010","Text":"The next line item in our right-of-use asset account,"},{"Start":"03:22.010 ","End":"03:28.440","Text":"add acquisitions at the cost with a contra entries bank would obviously be 0."},{"Start":"03:28.440 ","End":"03:31.620","Text":"Now, what about the acquisitions at"},{"Start":"03:31.620 ","End":"03:35.640","Text":"cost with a contra entry would be the lease liability."},{"Start":"03:35.640 ","End":"03:37.580","Text":"Well, that\u0027s not given to us directly,"},{"Start":"03:37.580 ","End":"03:39.995","Text":"but we could work backwards to it."},{"Start":"03:39.995 ","End":"03:44.465","Text":"Let\u0027s then look at the depreciation and impairments."},{"Start":"03:44.465 ","End":"03:47.390","Text":"Under your operating expenses in"},{"Start":"03:47.390 ","End":"03:52.520","Text":"the income statement will be depreciation of all of your non-current assets,"},{"Start":"03:52.520 ","End":"03:56.090","Text":"including the depreciation of the right-to-use asset."},{"Start":"03:56.090 ","End":"03:58.220","Text":"As you can see in the additional information,"},{"Start":"03:58.220 ","End":"04:02.945","Text":"the depreciation of our right-to-use asset was 285."},{"Start":"04:02.945 ","End":"04:05.210","Text":"If you scan through those operating expenses,"},{"Start":"04:05.210 ","End":"04:09.650","Text":"you can see we don\u0027t have an impairment of a right-to-use asset."},{"Start":"04:09.650 ","End":"04:12.200","Text":"We do have an impairment of an intangible asset,"},{"Start":"04:12.200 ","End":"04:15.440","Text":"but no impairments of right-to-use assets."},{"Start":"04:15.440 ","End":"04:18.960","Text":"We put that information into our right-of-use asset accounts."},{"Start":"04:18.960 ","End":"04:21.680","Text":"We\u0027ve reduced the carrying amount by the depreciation."},{"Start":"04:21.680 ","End":"04:24.085","Text":"You see we\u0027re subtracting 285."},{"Start":"04:24.085 ","End":"04:26.870","Text":"For the impairments, we\u0027ve got it as 0,"},{"Start":"04:26.870 ","End":"04:30.670","Text":"because there was no evidence given to us of any impairment."},{"Start":"04:30.670 ","End":"04:34.700","Text":"That would give us a sub-total that we\u0027re not sure of because at the stage,"},{"Start":"04:34.700 ","End":"04:40.205","Text":"we don\u0027t know what the lease liability would have been credited with,"},{"Start":"04:40.205 ","End":"04:42.455","Text":"so we don\u0027t know our sub-total."},{"Start":"04:42.455 ","End":"04:45.050","Text":"But we also have a look at our additional information."},{"Start":"04:45.050 ","End":"04:50.510","Text":"You\u0027ll see there is no evidence given that we got rid of any right-to-use asset."},{"Start":"04:50.510 ","End":"04:55.070","Text":"Since our closing balance is 5,415 and there was no sale,"},{"Start":"04:55.070 ","End":"04:59.105","Text":"it must mean that our sub-total was 5,415."},{"Start":"04:59.105 ","End":"05:02.450","Text":"Therefore, given that we didn\u0027t have anything at the beginning,"},{"Start":"05:02.450 ","End":"05:05.525","Text":"we didn\u0027t pay anything in cash upfront,"},{"Start":"05:05.525 ","End":"05:07.790","Text":"we\u0027ve depreciated by 285 and impaired,"},{"Start":"05:07.790 ","End":"05:13.055","Text":"that missing figure must be an amount of 5,700."},{"Start":"05:13.055 ","End":"05:17.215","Text":"Incidentally, now, you may not know this,"},{"Start":"05:17.215 ","End":"05:19.700","Text":"depends on whether you\u0027ve studied this or not,"},{"Start":"05:19.700 ","End":"05:26.295","Text":"but a right-of-use asset is generally depreciated on the straight-line basis."},{"Start":"05:26.295 ","End":"05:31.070","Text":"If one assumes that this asset was depreciated on a straight-line basis,"},{"Start":"05:31.070 ","End":"05:34.490","Text":"we were told that our depreciation was 285."},{"Start":"05:34.490 ","End":"05:38.330","Text":"You could take the 285 currency units,"},{"Start":"05:38.330 ","End":"05:40.715","Text":"which is the depreciation per year,"},{"Start":"05:40.715 ","End":"05:42.440","Text":"or at least in that first year,"},{"Start":"05:42.440 ","End":"05:44.885","Text":"and if we assume that we\u0027re using straight-line basis,"},{"Start":"05:44.885 ","End":"05:49.655","Text":"then it means that the depreciation would have been 285 every year."},{"Start":"05:49.655 ","End":"05:53.165","Text":"We know that this is a lease for 20-year period."},{"Start":"05:53.165 ","End":"05:57.800","Text":"That generally indicates that the useful life is 20 years."},{"Start":"05:57.800 ","End":"06:00.755","Text":"If you multiply 285 by 20,"},{"Start":"06:00.755 ","End":"06:04.615","Text":"you would also get that 5,700."},{"Start":"06:04.615 ","End":"06:08.000","Text":"It\u0027s because the total cost on"},{"Start":"06:08.000 ","End":"06:11.930","Text":"initial acquisition is what you depreciate over the useful life."},{"Start":"06:11.930 ","End":"06:13.465","Text":"You take the cost,"},{"Start":"06:13.465 ","End":"06:15.705","Text":"using the straight-line method,"},{"Start":"06:15.705 ","End":"06:18.530","Text":"you would then divide that by the useful life."},{"Start":"06:18.530 ","End":"06:24.935","Text":"Our cost was 0 plus 5,700 divide by useful life of 20 years,"},{"Start":"06:24.935 ","End":"06:28.890","Text":"gives us 285 per year."},{"Start":"06:28.940 ","End":"06:32.495","Text":"Let\u0027s look at that right-of-use asset though."},{"Start":"06:32.495 ","End":"06:36.875","Text":"How does it affect our cash from investing activities?"},{"Start":"06:36.875 ","End":"06:39.290","Text":"Because in our cash from investing activities,"},{"Start":"06:39.290 ","End":"06:41.150","Text":"we\u0027ve dealt with the property, plant,"},{"Start":"06:41.150 ","End":"06:43.670","Text":"and equipment, now we\u0027re looking at the right-of-use asset."},{"Start":"06:43.670 ","End":"06:49.160","Text":"Has there been any cash received or cash paid with regard to that right-of-use asset?"},{"Start":"06:49.160 ","End":"06:54.540","Text":"What one would look at is the acquisitions and how it affected our bank account,"},{"Start":"06:54.540 ","End":"06:58.820","Text":"did we actually have to pay any cash upfront on acquisition?"},{"Start":"06:58.820 ","End":"07:02.570","Text":"Also the sale, whether there was a sale."},{"Start":"07:02.570 ","End":"07:07.190","Text":"Now, obviously this is a carrying amount at this stage."},{"Start":"07:07.190 ","End":"07:09.410","Text":"You would only see the carrying amount coming out of"},{"Start":"07:09.410 ","End":"07:12.655","Text":"your right-of-use asset if you did sell one."},{"Start":"07:12.655 ","End":"07:14.560","Text":"If you had sold one,"},{"Start":"07:14.560 ","End":"07:17.180","Text":"we would then go to our disposal account,"},{"Start":"07:17.180 ","End":"07:18.785","Text":"we would reconstruct that,"},{"Start":"07:18.785 ","End":"07:22.940","Text":"and we\u0027d use that carrying amount together with any profit or loss on"},{"Start":"07:22.940 ","End":"07:27.185","Text":"disposal to work backwards to whether we had received any cash."},{"Start":"07:27.185 ","End":"07:30.230","Text":"However, we don\u0027t have a sale,"},{"Start":"07:30.230 ","End":"07:31.740","Text":"so we don\u0027t have to worry about that."},{"Start":"07:31.740 ","End":"07:35.300","Text":"We definitely did not receive any cash from the right-of-use asset."},{"Start":"07:35.300 ","End":"07:38.630","Text":"You can see here, although we did acquire a right-of-use asset,"},{"Start":"07:38.630 ","End":"07:41.575","Text":"there was no impact on our bank."},{"Start":"07:41.575 ","End":"07:44.750","Text":"In terms of the cashflow statement,"},{"Start":"07:44.750 ","End":"07:49.195","Text":"our right-of-use asset clearly does not affect our cashflow statement."},{"Start":"07:49.195 ","End":"07:54.050","Text":"Cash received or paid with regard to the right-of-use asset, there is nothing."},{"Start":"07:54.050 ","End":"07:58.130","Text":"Obviously, we don\u0027t actually write that into a cashflow statement."},{"Start":"07:58.130 ","End":"08:00.730","Text":"We just don\u0027t say anything at all."},{"Start":"08:00.730 ","End":"08:03.675","Text":"We\u0027ve now finished the right-to-use assets."},{"Start":"08:03.675 ","End":"08:05.540","Text":"You can see under non-current assets,"},{"Start":"08:05.540 ","End":"08:08.345","Text":"all 3 have now been done."},{"Start":"08:08.345 ","End":"08:13.460","Text":"That therefore means that we have accounted for all aspects"},{"Start":"08:13.460 ","End":"08:16.070","Text":"of our investing activities and we can"},{"Start":"08:16.070 ","End":"08:19.340","Text":"finalize the cash from investing activities section."},{"Start":"08:19.340 ","End":"08:21.350","Text":"Your cash from investing activities,"},{"Start":"08:21.350 ","End":"08:22.880","Text":"you can see PPE,"},{"Start":"08:22.880 ","End":"08:24.065","Text":"there was an impact."},{"Start":"08:24.065 ","End":"08:25.985","Text":"Our intangible assets had no impact."},{"Start":"08:25.985 ","End":"08:28.145","Text":"Our right-of-use assets had no impact."},{"Start":"08:28.145 ","End":"08:30.755","Text":"Obviously, with regards to those two,"},{"Start":"08:30.755 ","End":"08:36.100","Text":"we\u0027re not going to show it as 0 and 0. Just delete that."},{"Start":"08:36.130 ","End":"08:40.975","Text":"The cash generated from investing activities is 4,000."},{"Start":"08:40.975 ","End":"08:45.040","Text":"Looks better that way without all the items crossed off."},{"Start":"08:45.040 ","End":"08:48.020","Text":"We\u0027ve now finished the investing activities,"},{"Start":"08:48.020 ","End":"08:52.860","Text":"so we\u0027ll move on to cash from financing activities next."}],"ID":29743},{"Watched":false,"Name":"Exercise 13 NOP - N","Duration":"7m 25s","ChapterTopicVideoID":26963,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.355","Text":"Financing activities."},{"Start":"00:02.355 ","End":"00:04.230","Text":"A very brief overview."},{"Start":"00:04.230 ","End":"00:06.120","Text":"If we look at the cash flow statement,"},{"Start":"00:06.120 ","End":"00:09.000","Text":"remember we\u0027ve got 4 sections: operating, investing,"},{"Start":"00:09.000 ","End":"00:11.520","Text":"and financing being the first 3,"},{"Start":"00:11.520 ","End":"00:16.320","Text":"and then the 4th section being the reconciliation of the cash."},{"Start":"00:16.320 ","End":"00:21.480","Text":"We take the net cash inflow or outflow from the 3 different categories of activities,"},{"Start":"00:21.480 ","End":"00:25.830","Text":"add the opening bank balance to give us our closing bank balance."},{"Start":"00:25.830 ","End":"00:30.765","Text":"We\u0027re focusing on the financing activities section in this mini video."},{"Start":"00:30.765 ","End":"00:34.260","Text":"Now, the financing activity section is the same whether we"},{"Start":"00:34.260 ","End":"00:37.990","Text":"use the direct method or the indirect method."},{"Start":"00:37.990 ","End":"00:42.838","Text":"The direct method and indirect method is only used to calculate or present, rather,"},{"Start":"00:42.838 ","End":"00:48.020","Text":"the cash generated from operations under the operating activity section."},{"Start":"00:48.020 ","End":"00:53.212","Text":"It does not affect financing activities and it doesn\u0027t affect investing activities."},{"Start":"00:53.212 ","End":"00:55.880","Text":"When doing the financing activity section,"},{"Start":"00:55.880 ","End":"00:58.115","Text":"we need only look, generally,"},{"Start":"00:58.115 ","End":"01:04.520","Text":"at the line items in the balance sheet for non-current liabilities and equity."},{"Start":"01:04.520 ","End":"01:08.350","Text":"Let\u0027s look at our balance sheet\u0027s total asset page just to recap."},{"Start":"01:08.350 ","End":"01:12.410","Text":"The non-current assets are generally all investing activities."},{"Start":"01:12.410 ","End":"01:14.300","Text":"The current assets, inventory,"},{"Start":"01:14.300 ","End":"01:16.895","Text":"accounts receivable, and prepayments, in this case,"},{"Start":"01:16.895 ","End":"01:19.720","Text":"are all operating activities generally,"},{"Start":"01:19.720 ","End":"01:24.785","Text":"and our cash is what we\u0027re reconciling to in our cash flow statement."},{"Start":"01:24.785 ","End":"01:27.435","Text":"Then looking at total liabilities."},{"Start":"01:27.435 ","End":"01:29.390","Text":"Under the non-current liabilities,"},{"Start":"01:29.390 ","End":"01:31.565","Text":"we\u0027ve got two, bond payable and lease payable."},{"Start":"01:31.565 ","End":"01:34.580","Text":"That\u0027s going to be classified as financing activities."},{"Start":"01:34.580 ","End":"01:36.980","Text":"But notice that we\u0027ve got two lease payables."},{"Start":"01:36.980 ","End":"01:41.170","Text":"One is under non-current liabilities and one under current liabilities."},{"Start":"01:41.170 ","End":"01:44.720","Text":"These two lease payables need to be treated as one."},{"Start":"01:44.720 ","End":"01:49.520","Text":"In this case, our financing activities include the two line items under"},{"Start":"01:49.520 ","End":"01:55.085","Text":"non-current liabilities as well as that first line item under current liabilities."},{"Start":"01:55.085 ","End":"01:58.130","Text":"It\u0027s the current portion of the lease payable."},{"Start":"01:58.130 ","End":"01:59.390","Text":"Then we have provisions,"},{"Start":"01:59.390 ","End":"02:01.310","Text":"accounts payable, and unearned revenue."},{"Start":"02:01.310 ","End":"02:04.775","Text":"Those were all taken into account under operating activities."},{"Start":"02:04.775 ","End":"02:07.440","Text":"Then we move on to the equity section of our balance sheet."},{"Start":"02:07.440 ","End":"02:10.285","Text":"Here we have share capital and retained earnings."},{"Start":"02:10.285 ","End":"02:12.650","Text":"In this exercise, these are going to be"},{"Start":"02:12.650 ","End":"02:15.890","Text":"taken into account under the financing activity section."},{"Start":"02:15.890 ","End":"02:17.570","Text":"When we look at retained earnings,"},{"Start":"02:17.570 ","End":"02:21.589","Text":"you\u0027ll see that we\u0027ll balance back to the dividends declared."},{"Start":"02:21.589 ","End":"02:25.940","Text":"Now, it\u0027s just worth pointing out that dividends can"},{"Start":"02:25.940 ","End":"02:30.875","Text":"be classified under financing activities or under operating activities."},{"Start":"02:30.875 ","End":"02:40.430","Text":"This section potentially combines operating activities and financing activities."},{"Start":"02:40.430 ","End":"02:42.800","Text":"Looking at these liabilities again,"},{"Start":"02:42.800 ","End":"02:46.820","Text":"we\u0027re going to deal with the highlighted liabilities,"},{"Start":"02:46.820 ","End":"02:49.435","Text":"the bond payable and lease payable,"},{"Start":"02:49.435 ","End":"02:53.140","Text":"both non-current and current portion,"},{"Start":"02:53.140 ","End":"02:56.360","Text":"but the bond payable we\u0027ll come back to in a moment."},{"Start":"02:56.360 ","End":"03:00.185","Text":"I want us to first start with the lease payable."},{"Start":"03:00.185 ","End":"03:05.060","Text":"Now, the reason I want to start with lease payable is that we\u0027ve just touched"},{"Start":"03:05.060 ","End":"03:09.680","Text":"upon this when we reconstructed our right-of-use asset account."},{"Start":"03:09.680 ","End":"03:11.390","Text":"Just to remind you,"},{"Start":"03:11.390 ","End":"03:16.325","Text":"this is what our reconstructed right-of-use asset account look like."},{"Start":"03:16.325 ","End":"03:18.415","Text":"As you can see highlighted there,"},{"Start":"03:18.415 ","End":"03:22.490","Text":"we acquired a right-of-use asset during 2020."},{"Start":"03:22.490 ","End":"03:26.090","Text":"The cash cost of the acquisition was nil,"},{"Start":"03:26.090 ","End":"03:30.548","Text":"but the liability cost was 5,700."},{"Start":"03:30.548 ","End":"03:35.180","Text":"That right-of-use asset account was debited with 5,700 and it"},{"Start":"03:35.180 ","End":"03:40.505","Text":"was credited to the liability account, the lease liability."},{"Start":"03:40.505 ","End":"03:46.220","Text":"Then we\u0027re going to look at this liability account to see whether it affected bank."},{"Start":"03:46.220 ","End":"03:49.520","Text":"We\u0027re going to reconstruct the lease liability, and when we do this,"},{"Start":"03:49.520 ","End":"03:53.330","Text":"we\u0027re going to take into consideration certain things that affected it such"},{"Start":"03:53.330 ","End":"03:57.515","Text":"as new lease liabilities that might have taken place during the year,"},{"Start":"03:57.515 ","End":"03:59.465","Text":"any interest incurred,"},{"Start":"03:59.465 ","End":"04:02.855","Text":"and we\u0027re going to work backwards to any missing information,"},{"Start":"04:02.855 ","End":"04:05.270","Text":"usually the payment amounts."},{"Start":"04:05.270 ","End":"04:08.525","Text":"This is what our lease liability account is going to look like."},{"Start":"04:08.525 ","End":"04:10.280","Text":"We start with opening balance."},{"Start":"04:10.280 ","End":"04:11.885","Text":"Let\u0027s look at our balance sheet."},{"Start":"04:11.885 ","End":"04:19.200","Text":"Opening balance for the non-current portion and the current portion, it was nil."},{"Start":"04:19.200 ","End":"04:21.445","Text":"Let\u0027s pop that in. It was 0."},{"Start":"04:21.445 ","End":"04:24.290","Text":"Now let\u0027s look at our closing balance."},{"Start":"04:24.290 ","End":"04:26.450","Text":"31st December, 2020,"},{"Start":"04:26.450 ","End":"04:28.310","Text":"we\u0027ve got 5,291 as"},{"Start":"04:28.310 ","End":"04:33.200","Text":"a non-current portion of our lease payable and 208 as the current portion."},{"Start":"04:33.200 ","End":"04:39.590","Text":"We add those two together and our closing balance is 5,499."},{"Start":"04:39.590 ","End":"04:46.100","Text":"The next line item is the right-of-use asset acquired through the lease liability."},{"Start":"04:46.100 ","End":"04:52.043","Text":"We have to go back to the right-of-use asset to see how much we debited the asset with"},{"Start":"04:52.043 ","End":"04:59.960","Text":"because we debited the right-of-use asset and credited the lease liability."},{"Start":"04:59.960 ","End":"05:04.205","Text":"This is the credit entry that we\u0027re showing here."},{"Start":"05:04.205 ","End":"05:09.920","Text":"Now, it\u0027s worth pointing out at this stage that when we"},{"Start":"05:09.920 ","End":"05:12.890","Text":"reconstruct our retained earnings account and if we"},{"Start":"05:12.890 ","End":"05:15.950","Text":"discover there are dividends declared,"},{"Start":"05:15.950 ","End":"05:20.660","Text":"those dividends declared could be classified as"},{"Start":"05:20.660 ","End":"05:26.165","Text":"an operating activity or could be classified as a financing activity."},{"Start":"05:26.165 ","End":"05:29.330","Text":"Many businesses have that option."},{"Start":"05:29.330 ","End":"05:33.860","Text":"It\u0027s only if your business is in the business of providing finance that"},{"Start":"05:33.860 ","End":"05:40.250","Text":"your dividends declared might have to be presented as an operating activity instead."},{"Start":"05:40.250 ","End":"05:43.625","Text":"Since this company has chosen to present"},{"Start":"05:43.625 ","End":"05:47.810","Text":"its dividends declared as part of its financing activities,"},{"Start":"05:47.810 ","End":"05:52.940","Text":"it means that any movement in the share capital and the retained earnings"},{"Start":"05:52.940 ","End":"06:00.920","Text":"account that may affect bank would all be classified as financing activities."},{"Start":"06:00.920 ","End":"06:05.810","Text":"There wouldn\u0027t be a possibility of some of"},{"Start":"06:05.810 ","End":"06:10.810","Text":"the movement being presented under operating activities as well."},{"Start":"06:10.810 ","End":"06:16.235","Text":"Now, looking at our total liabilities section of our balance sheet,"},{"Start":"06:16.235 ","End":"06:20.315","Text":"you\u0027ll see we\u0027ve got three highlighted line items."},{"Start":"06:20.315 ","End":"06:23.450","Text":"The bond payable, I want us to come back to this one."},{"Start":"06:23.450 ","End":"06:26.540","Text":"I want us to focus on the lease payable for the moment,"},{"Start":"06:26.540 ","End":"06:28.520","Text":"the non-current and current portion."},{"Start":"06:28.520 ","End":"06:31.340","Text":"The reason for that is because we\u0027ve just touched upon"},{"Start":"06:31.340 ","End":"06:35.375","Text":"it when we reconstructed our right-of-use asset."},{"Start":"06:35.375 ","End":"06:39.200","Text":"If you have a look at our right-of-use asset that we had reconstructed,"},{"Start":"06:39.200 ","End":"06:42.830","Text":"you see we\u0027ve got two line items that have been highlighted there."},{"Start":"06:42.830 ","End":"06:44.840","Text":"We\u0027ve got the acquisition,"},{"Start":"06:44.840 ","End":"06:50.300","Text":"which has been split into the cash portions, in other words,"},{"Start":"06:50.300 ","End":"06:53.495","Text":"the cost of acquisition that we\u0027ve paid for in cash,"},{"Start":"06:53.495 ","End":"06:55.690","Text":"we would credit bank,"},{"Start":"06:55.690 ","End":"07:00.110","Text":"and then the cost of the acquisition that we haven\u0027t yet paid for,"},{"Start":"07:00.110 ","End":"07:03.235","Text":"where we would credit a liability instead."},{"Start":"07:03.235 ","End":"07:09.515","Text":"You can see we didn\u0027t have a cash payment to acquire this particular right-of-use asset."},{"Start":"07:09.515 ","End":"07:11.300","Text":"Everything was unpaid,"},{"Start":"07:11.300 ","End":"07:16.410","Text":"so everything was credited to a liability."},{"Start":"07:16.750 ","End":"07:19.640","Text":"We\u0027re going to, in the next mini video,"},{"Start":"07:19.640 ","End":"07:25.620","Text":"actually look at this lease liability and see how it affects the bank account."}],"ID":29744},{"Watched":false,"Name":"Exercise 13 NOP - O","Duration":"6m 56s","ChapterTopicVideoID":26964,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.020","Text":"Financing activities and the lease liability."},{"Start":"00:04.020 ","End":"00:06.480","Text":"Looking at our total liabilities page,"},{"Start":"00:06.480 ","End":"00:09.360","Text":"you can see we\u0027ve dealt with some of these liabilities already."},{"Start":"00:09.360 ","End":"00:12.090","Text":"This was done in the operating activities section."},{"Start":"00:12.090 ","End":"00:14.175","Text":"The bond payable will come back to"},{"Start":"00:14.175 ","End":"00:17.855","Text":"and what we\u0027re going to do in this mini video is the lease payable."},{"Start":"00:17.855 ","End":"00:19.880","Text":"Remember, there are 2 parts to it,"},{"Start":"00:19.880 ","End":"00:22.280","Text":"the non-current and the current portion."},{"Start":"00:22.280 ","End":"00:25.820","Text":"The other aspect we need to consider is the right of use asset."},{"Start":"00:25.820 ","End":"00:29.750","Text":"Now we reconstruct that previously but here\u0027s just a reminder,"},{"Start":"00:29.750 ","End":"00:32.420","Text":"if you have a look at the acquisitions,"},{"Start":"00:32.420 ","End":"00:37.220","Text":"we have 2 parts of the acquisitions part of the acquisition gets paid for in"},{"Start":"00:37.220 ","End":"00:41.840","Text":"cash and part of it is not paid for unless is credited not to bank,"},{"Start":"00:41.840 ","End":"00:44.660","Text":"but a lease liability instead."},{"Start":"00:44.660 ","End":"00:50.840","Text":"Now in this case, we had no cash payment to acquire this particular asset."},{"Start":"00:50.840 ","End":"00:57.550","Text":"The cost of the acquisition was entirely a liability that would get paid off over time."},{"Start":"00:57.550 ","End":"01:01.570","Text":"Remember that amount of 5,700 because that amount"},{"Start":"01:01.570 ","End":"01:05.500","Text":"is obviously going to feature in the lease liability account."},{"Start":"01:05.500 ","End":"01:09.730","Text":"Because this is the right to use asset account so this is"},{"Start":"01:09.730 ","End":"01:14.200","Text":"a debit and the lease liability will be"},{"Start":"01:14.200 ","End":"01:18.550","Text":"credited with this 5,700 to increase it"},{"Start":"01:18.550 ","End":"01:23.300","Text":"because liabilities increase on the credit side or the right-hand side."},{"Start":"01:23.300 ","End":"01:26.065","Text":"Let\u0027s reconstruct the lease liability account,"},{"Start":"01:26.065 ","End":"01:28.480","Text":"taking into account the aspects that were affected,"},{"Start":"01:28.480 ","End":"01:34.555","Text":"such as any new lease liability entered into which obviously we have in 2020,"},{"Start":"01:34.555 ","End":"01:39.745","Text":"and any interest incurred and then we work backwards to any missing information,"},{"Start":"01:39.745 ","End":"01:42.860","Text":"and that is usually the repayment."},{"Start":"01:42.860 ","End":"01:45.800","Text":"We start with lease liability."},{"Start":"01:45.800 ","End":"01:48.635","Text":"We start with the opening balance."},{"Start":"01:48.635 ","End":"01:52.054","Text":"We go to our balance sheet and we pick it up the opening balance."},{"Start":"01:52.054 ","End":"01:58.700","Text":"Remember we\u0027ve got the non-current liability and the current liability portions."},{"Start":"01:58.700 ","End":"02:01.825","Text":"They happen to both be 0 so we pop it in this 0."},{"Start":"02:01.825 ","End":"02:03.725","Text":"We then look at the closing balance."},{"Start":"02:03.725 ","End":"02:05.870","Text":"The closing balance, remember the 2 parts,"},{"Start":"02:05.870 ","End":"02:15.515","Text":"5,291 plus 208 that\u0027s our closing balance and that comes to 5,499."},{"Start":"02:15.515 ","End":"02:20.225","Text":"We then go to our right of use asset account to find out the cost of any acquisitions,"},{"Start":"02:20.225 ","End":"02:24.320","Text":"and we can see there was nothing affected the bank,"},{"Start":"02:24.320 ","End":"02:27.170","Text":"but 5,700 is what gets"},{"Start":"02:27.170 ","End":"02:30.740","Text":"credited to the lease liability so that\u0027s what we\u0027re looking for here is,"},{"Start":"02:30.740 ","End":"02:35.045","Text":"how much was credited to the lease liability account?"},{"Start":"02:35.045 ","End":"02:40.950","Text":"Right of use asset acquired through the lease liability, 5,700."},{"Start":"02:41.050 ","End":"02:44.045","Text":"Now we\u0027re looking at the interest."},{"Start":"02:44.045 ","End":"02:45.845","Text":"How much interest are we charged?"},{"Start":"02:45.845 ","End":"02:48.710","Text":"This is the additional information that we were given,"},{"Start":"02:48.710 ","End":"02:53.750","Text":"and the lease requires NOP to make an annual payment of 402 on"},{"Start":"02:53.750 ","End":"02:59.639","Text":"31st December of each year and half of this payment represents interest."},{"Start":"02:59.639 ","End":"03:00.650","Text":"There we have it,"},{"Start":"03:00.650 ","End":"03:03.735","Text":"1/2 of 402 is our interest."},{"Start":"03:03.735 ","End":"03:07.655","Text":"We add the interest that\u0027s accrued over the year."},{"Start":"03:07.655 ","End":"03:14.150","Text":"That then gives us our subtotal so this is how much we owe at the end of the year."},{"Start":"03:14.150 ","End":"03:15.830","Text":"We owe that at the beginning,"},{"Start":"03:15.830 ","End":"03:24.020","Text":"we add the interest that accrues on this liability over the year so we owe 5,901."},{"Start":"03:24.020 ","End":"03:27.470","Text":"Then we subtract the payment."},{"Start":"03:27.470 ","End":"03:34.205","Text":"Now we are told that the annual payment is 402 but we need to split this into 2."},{"Start":"03:34.205 ","End":"03:36.710","Text":"Now we know that interest was 1/2 of"},{"Start":"03:36.710 ","End":"03:40.360","Text":"that payment so we credit the lease liability with 201,"},{"Start":"03:40.360 ","End":"03:46.390","Text":"and the balance of the payment another 201 must have been repayment of principal."},{"Start":"03:46.390 ","End":"03:55.770","Text":"Now, obviously, we do not debit the lease liability with 2 separate amounts 201 and 201,"},{"Start":"03:55.770 ","End":"04:01.020","Text":"we would in fact debit our lease liability with 402,"},{"Start":"04:01.020 ","End":"04:06.055","Text":"but I\u0027ve separated it out purely for disclosure purposes in the cashflow statement."},{"Start":"04:06.055 ","End":"04:08.785","Text":"Just using the T-account for a moment,"},{"Start":"04:08.785 ","End":"04:12.400","Text":"what is happening in here is remember the liability gets"},{"Start":"04:12.400 ","End":"04:17.660","Text":"bigger on the credit side so these here are all credits."},{"Start":"04:18.900 ","End":"04:24.650","Text":"So far we\u0027ve got 5,901 that\u0027s accumulation on the credit side."},{"Start":"04:24.650 ","End":"04:32.780","Text":"What 1 would do is actually debited with 402 and credit that to our bank because"},{"Start":"04:32.780 ","End":"04:37.160","Text":"remember the payment would decrease our liabilities that why we\u0027re putting on"},{"Start":"04:37.160 ","End":"04:41.570","Text":"the debit side because if you wanted to increase your liability,"},{"Start":"04:41.570 ","End":"04:43.670","Text":"you put it on the credit side."},{"Start":"04:43.670 ","End":"04:47.029","Text":"Remember, with regard to payments,"},{"Start":"04:47.029 ","End":"04:51.620","Text":"payments always go through on the credit side of your bank account."},{"Start":"04:51.620 ","End":"04:54.020","Text":"Now, the reason I separated"},{"Start":"04:54.020 ","End":"04:59.510","Text":"these 2 amounts out is because they\u0027re separately disclosable,"},{"Start":"04:59.510 ","End":"05:03.250","Text":"or should I say the interest is separately disclosable."},{"Start":"05:03.250 ","End":"05:08.945","Text":"The principal repayment is the 201 and the interest repayment is 201."},{"Start":"05:08.945 ","End":"05:12.950","Text":"The 402 is actually given to us as was"},{"Start":"05:12.950 ","End":"05:18.010","Text":"the interest capital split which was given to us as 50/50."},{"Start":"05:18.010 ","End":"05:25.920","Text":"Half of the payment was interests thus remaining 1/2 was principal capital, if you like."},{"Start":"05:25.990 ","End":"05:29.840","Text":"The reason that I mentioned this here,"},{"Start":"05:29.840 ","End":"05:32.450","Text":"the fact that the 402 is actually given,"},{"Start":"05:32.450 ","End":"05:35.630","Text":"as well as the interest capital split being"},{"Start":"05:35.630 ","End":"05:40.215","Text":"a 1/2 interest a 1/2 capital principal if you like,"},{"Start":"05:40.215 ","End":"05:45.695","Text":"is because that means we actually didn\u0027t have to do this entire working here."},{"Start":"05:45.695 ","End":"05:49.190","Text":"I\u0027ve done it purely for your information so that you"},{"Start":"05:49.190 ","End":"05:52.910","Text":"have a complete solution but we could have gone"},{"Start":"05:52.910 ","End":"06:00.360","Text":"directly to the cashflow statement and simply said 402 divide by 2 is our interest,"},{"Start":"06:00.360 ","End":"06:04.830","Text":"and 402 divide by 2 is the principal repayment."},{"Start":"06:04.830 ","End":"06:11.375","Text":"We\u0027ve worked out the cash payments the 201 and the 201 so cash from financing activities,"},{"Start":"06:11.375 ","End":"06:13.520","Text":"the payment of the lease liability,"},{"Start":"06:13.520 ","End":"06:16.505","Text":"the principal repayment is the 201."},{"Start":"06:16.505 ","End":"06:19.664","Text":"Then we also have payment of the interest."},{"Start":"06:19.664 ","End":"06:22.085","Text":"You\u0027ll see I haven\u0027t put anything"},{"Start":"06:22.085 ","End":"06:26.750","Text":"here and the reason for that is because I know that we also have a bond."},{"Start":"06:26.750 ","End":"06:28.760","Text":"I haven\u0027t forgotten we have a bond."},{"Start":"06:28.760 ","End":"06:33.804","Text":"Bonds also accrue interest so we\u0027re going to have to add the interest on the bond."},{"Start":"06:33.804 ","End":"06:37.870","Text":"How much do we pay in terms of bond interest?"},{"Start":"06:37.870 ","End":"06:42.095","Text":"We\u0027ll add that to the interest on the lease liability,"},{"Start":"06:42.095 ","End":"06:45.980","Text":"and we\u0027ll get to figure that we currently don\u0027t yet know."},{"Start":"06:45.980 ","End":"06:48.335","Text":"Looking at the total liabilities,"},{"Start":"06:48.335 ","End":"06:53.870","Text":"you can see we\u0027ve done most of them the only 1 that\u0027s remaining is the bond payable,"},{"Start":"06:53.870 ","End":"06:56.760","Text":"which we\u0027ll do in the next mini video."}],"ID":29745},{"Watched":false,"Name":"Exercise 13 NOP - P","Duration":"8m 37s","ChapterTopicVideoID":26965,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.275","Text":"Financing activities and the bond payable."},{"Start":"00:04.275 ","End":"00:08.130","Text":"If we look at our balance sheet and the total abilities,"},{"Start":"00:08.130 ","End":"00:13.485","Text":"you can see that we\u0027ve done all the liabilities with the exception of the bond payable."},{"Start":"00:13.485 ","End":"00:16.800","Text":"Let\u0027s look at the additional information regarding the bond payable."},{"Start":"00:16.800 ","End":"00:19.035","Text":"On the 1st of January 2016,"},{"Start":"00:19.035 ","End":"00:23.286","Text":"NOP borrowed 17,056 currency units from the owners of NOP,"},{"Start":"00:23.286 ","End":"00:26.475","Text":"being 3 brothers of the Litvak family."},{"Start":"00:26.475 ","End":"00:33.735","Text":"In this regard, it issued a 10-year bond with a face value of 20,000 currency units."},{"Start":"00:33.735 ","End":"00:38.730","Text":"The bond paid an annual coupon of 800 at the end of each year."},{"Start":"00:38.730 ","End":"00:45.035","Text":"A coupon of 800 currency units equates to a coupon interest rate of 4 percent,"},{"Start":"00:45.035 ","End":"00:47.480","Text":"which he then applied to the face value."},{"Start":"00:47.480 ","End":"00:51.160","Text":"The effective interest rate on this bond is 6 percent."},{"Start":"00:51.160 ","End":"00:54.410","Text":"An interest paid is classified in the cash from"},{"Start":"00:54.410 ","End":"00:58.100","Text":"financing activities section of the cash flow statement."},{"Start":"00:58.100 ","End":"01:01.280","Text":"Remember, most businesses have a choice"},{"Start":"01:01.280 ","End":"01:05.660","Text":"between classifying it as an operating or financing activity."},{"Start":"01:05.660 ","End":"01:08.675","Text":"We\u0027re going to reconstruct the bond liability account,"},{"Start":"01:08.675 ","End":"01:11.510","Text":"taking to consideration the aspects that are affected"},{"Start":"01:11.510 ","End":"01:14.627","Text":"such as raising of new bond liabilities,"},{"Start":"01:14.627 ","End":"01:17.500","Text":"interest incurred, and then the payments."},{"Start":"01:17.500 ","End":"01:21.155","Text":"In this example, the payment was missing information."},{"Start":"01:21.155 ","End":"01:25.115","Text":"The reconstruction of the bond liability account will look something like this."},{"Start":"01:25.115 ","End":"01:30.020","Text":"We\u0027ll have an opening balance and closing balance. Here they are."},{"Start":"01:30.020 ","End":"01:36.280","Text":"It was 18,033 at the end of last year and 18,315 at the end of this year."},{"Start":"01:36.280 ","End":"01:40.240","Text":"We pop them in 18,033 and 18,315."},{"Start":"01:40.240 ","End":"01:42.800","Text":"Now, before we continue with this reconstruction,"},{"Start":"01:42.800 ","End":"01:46.720","Text":"I\u0027d like just to check how they get to this 18,033."},{"Start":"01:46.720 ","End":"01:48.060","Text":"I think it\u0027s a good exercise."},{"Start":"01:48.060 ","End":"01:50.540","Text":"If you know how to do it, don\u0027t worry, move on."},{"Start":"01:50.540 ","End":"01:53.870","Text":"But this is just for those of you who perhaps are unsure of how to"},{"Start":"01:53.870 ","End":"01:57.640","Text":"measure this particular financial instrument."},{"Start":"01:57.640 ","End":"02:00.350","Text":"For your interest, the opening balance of"},{"Start":"02:00.350 ","End":"02:05.185","Text":"this bond liability account of 18,033 can be recalculated."},{"Start":"02:05.185 ","End":"02:14.105","Text":"We\u0027re told that the initial loan is 17,056 and that was as at the 1st of January 2016."},{"Start":"02:14.105 ","End":"02:19.720","Text":"What happened here was we debited our bank and we"},{"Start":"02:19.720 ","End":"02:25.945","Text":"credited this bond liability with 17,056."},{"Start":"02:25.945 ","End":"02:28.970","Text":"Remember, we are dealing with the liability here."},{"Start":"02:28.970 ","End":"02:33.650","Text":"These amounts, 17,056 without brackets are indicating credits."},{"Start":"02:33.650 ","End":"02:37.130","Text":"We then add the effective interest at 6 percent."},{"Start":"02:37.130 ","End":"02:40.160","Text":"Now you apply the effective interest rate to the opening balance."},{"Start":"02:40.160 ","End":"02:43.040","Text":"Our opening balance is now 17,056."},{"Start":"02:43.040 ","End":"02:49.490","Text":"Interest at 6 percent for 2016 is 17,056 times 6 percent giving you 1,023."},{"Start":"02:49.490 ","End":"02:53.825","Text":"We then subtract the amount that we\u0027re paying on this bond."},{"Start":"02:53.825 ","End":"03:00.560","Text":"Now, obviously there\u0027s a coupon rate of 4 percent or coupon interest of 4 percent,"},{"Start":"03:00.560 ","End":"03:05.360","Text":"4 percent percent is then applied to the face value which we were given at 20,000."},{"Start":"03:05.360 ","End":"03:08.030","Text":"So 20,000 currency units being the face value,"},{"Start":"03:08.030 ","End":"03:09.845","Text":"times the coupon rate of 4 percent,"},{"Start":"03:09.845 ","End":"03:13.625","Text":"gave us this coupon payment of 800."},{"Start":"03:13.625 ","End":"03:16.505","Text":"That\u0027s how much we have to pay our bond holders."},{"Start":"03:16.505 ","End":"03:22.040","Text":"That gives us a closing balance at the end of 2016 of 17,279."},{"Start":"03:22.040 ","End":"03:25.070","Text":"We repeat the process for 2017."},{"Start":"03:25.070 ","End":"03:27.064","Text":"We add the interest,"},{"Start":"03:27.064 ","End":"03:29.510","Text":"the effective interest at 6 percent."},{"Start":"03:29.510 ","End":"03:35.805","Text":"That\u0027s applied to the opening balance is 17,279 times 6 percent, gives us 1,037."},{"Start":"03:35.805 ","End":"03:38.790","Text":"We subtract the coupon payment of 800."},{"Start":"03:38.790 ","End":"03:40.760","Text":"That\u0027s the coupon interest rate,"},{"Start":"03:40.760 ","End":"03:42.215","Text":"not the effective interest rate,"},{"Start":"03:42.215 ","End":"03:43.850","Text":"apply to the face value,"},{"Start":"03:43.850 ","End":"03:45.530","Text":"not to the opening balance."},{"Start":"03:45.530 ","End":"03:49.640","Text":"That then gives us the closing balance at the end of 2017."},{"Start":"03:49.640 ","End":"03:54.770","Text":"Just to recap, the interest that we add to the loan is"},{"Start":"03:54.770 ","End":"04:00.995","Text":"the effective interest rate times by the opening balance."},{"Start":"04:00.995 ","End":"04:07.720","Text":"The payment is the coupon rate times by the face value."},{"Start":"04:08.000 ","End":"04:11.675","Text":"Now we\u0027re going to repeat the process for 2018."},{"Start":"04:11.675 ","End":"04:18.595","Text":"The closing balance at the end of 2017 becomes our opening balance in 2018, 17,516."},{"Start":"04:18.595 ","End":"04:23.584","Text":"We add the effective interest at 6 percent 1,7516 at 6 percent,"},{"Start":"04:23.584 ","End":"04:28.700","Text":"less the payment of 800 gives us the closing balance of 17,767."},{"Start":"04:28.700 ","End":"04:31.220","Text":"Do the same for 2019,"},{"Start":"04:31.220 ","End":"04:34.834","Text":"apply the effective interest rate to the opening balance,"},{"Start":"04:34.834 ","End":"04:36.555","Text":"gives us 1,066,"},{"Start":"04:36.555 ","End":"04:38.720","Text":"less our coupon payment of 800,"},{"Start":"04:38.720 ","End":"04:43.190","Text":"gives us a closing balance end of 2019 of 18,033."},{"Start":"04:43.190 ","End":"04:47.520","Text":"That is the opening balance in our current year."},{"Start":"04:47.900 ","End":"04:53.660","Text":"Here we go. This is where we were a moment ago before I said we could check that 18,033."},{"Start":"04:53.660 ","End":"04:55.280","Text":"We got 18,033,"},{"Start":"04:55.280 ","End":"04:56.450","Text":"we\u0027re going to add the interest."},{"Start":"04:56.450 ","End":"05:00.770","Text":"Remember the effective interest rate is applied to the opening balance and"},{"Start":"05:00.770 ","End":"05:06.305","Text":"effective interest rate is 6 percent multiplied by the opening balance of 18,033."},{"Start":"05:06.305 ","End":"05:11.479","Text":"We then subtract the coupon interest or coupon payment of 800,"},{"Start":"05:11.479 ","End":"05:17.000","Text":"and that gives us our closing balance of 18,315."},{"Start":"05:17.000 ","End":"05:22.670","Text":"Incidentally, that payment of 800 is all a payment of interest."},{"Start":"05:22.670 ","End":"05:25.370","Text":"The reason I say that is because what we\u0027re"},{"Start":"05:25.370 ","End":"05:28.460","Text":"paying here is less than the effective interest."},{"Start":"05:28.460 ","End":"05:31.720","Text":"The effective interest is 1,082,"},{"Start":"05:31.720 ","End":"05:34.295","Text":"and what we\u0027re paying is 800."},{"Start":"05:34.295 ","End":"05:39.260","Text":"It\u0027s less than the interest that is accruing on this liability."},{"Start":"05:39.260 ","End":"05:41.675","Text":"When we account for this 800,"},{"Start":"05:41.675 ","End":"05:45.350","Text":"we\u0027re going to treat it as purely a payment of interest,"},{"Start":"05:45.350 ","End":"05:48.560","Text":"not a payment of interest and principle,"},{"Start":"05:48.560 ","End":"05:51.435","Text":"not a payment just principle, instead,"},{"Start":"05:51.435 ","End":"05:55.105","Text":"it is a payment of interest only."},{"Start":"05:55.105 ","End":"06:01.040","Text":"Something else I need to point out is that we\u0027re actually told that the payment was 800."},{"Start":"06:01.040 ","End":"06:03.800","Text":"But we still have to do this reconciliation"},{"Start":"06:03.800 ","End":"06:06.245","Text":"just to be sure that we haven\u0027t missed anything."},{"Start":"06:06.245 ","End":"06:11.645","Text":"For example, we might have raised another liability during the period."},{"Start":"06:11.645 ","End":"06:14.510","Text":"We might have redeemed particular bond,"},{"Start":"06:14.510 ","End":"06:17.390","Text":"in other words, repaid another bond."},{"Start":"06:17.390 ","End":"06:20.000","Text":"You have to actually do this reconciliation to"},{"Start":"06:20.000 ","End":"06:22.805","Text":"make sure that we haven\u0027t missed out on anything."},{"Start":"06:22.805 ","End":"06:28.625","Text":"But here you can see the payment of 800 is the only payment."},{"Start":"06:28.625 ","End":"06:29.690","Text":"There is nothing else missing."},{"Start":"06:29.690 ","End":"06:31.625","Text":"The whole thing reconciles perfectly."},{"Start":"06:31.625 ","End":"06:35.300","Text":"18,033 plus interest of 1,082,"},{"Start":"06:35.300 ","End":"06:40.900","Text":"minus the payment that they told us about of 800 is 18,315."},{"Start":"06:40.900 ","End":"06:43.460","Text":"We didn\u0027t have to bend this back to their payment,"},{"Start":"06:43.460 ","End":"06:44.720","Text":"we had been told it."},{"Start":"06:44.720 ","End":"06:48.530","Text":"But as I say, we actually do have to reconstruct"},{"Start":"06:48.530 ","End":"06:54.175","Text":"this account in order to be sure that there isn\u0027t something that we\u0027ve missed."},{"Start":"06:54.175 ","End":"06:58.100","Text":"We get to the cash flow statement"},{"Start":"06:58.100 ","End":"07:01.790","Text":"and we\u0027re looking at the section called cash from financing activities."},{"Start":"07:01.790 ","End":"07:05.405","Text":"You can see the highlighted line item, payment of interest."},{"Start":"07:05.405 ","End":"07:08.540","Text":"This is where we\u0027d left it previously when we"},{"Start":"07:08.540 ","End":"07:13.280","Text":"calculated the interest on the lease liability of 201,"},{"Start":"07:13.280 ","End":"07:17.555","Text":"and we realized that the payment of interest wasn\u0027t just the 201,"},{"Start":"07:17.555 ","End":"07:20.750","Text":"it would also include the bond interest paid."},{"Start":"07:20.750 ","End":"07:24.380","Text":"Well, now we\u0027ve worked out that the bond interest paid was 800."},{"Start":"07:24.380 ","End":"07:26.930","Text":"In other words, we were told that the payment was 800."},{"Start":"07:26.930 ","End":"07:29.930","Text":"But when you compare the payment of 800 with"},{"Start":"07:29.930 ","End":"07:33.860","Text":"the effective interest that accrued on that account during the year,"},{"Start":"07:33.860 ","End":"07:37.235","Text":"the payment of 800 was less than the interest."},{"Start":"07:37.235 ","End":"07:41.000","Text":"That means that we were still just paying interest."},{"Start":"07:41.000 ","End":"07:44.420","Text":"If the payment was greater than the interest,"},{"Start":"07:44.420 ","End":"07:50.660","Text":"then the excess of the payment over the interest that had"},{"Start":"07:50.660 ","End":"07:57.740","Text":"accrued for the period would begin to reduce the principal owing on this liability."},{"Start":"07:57.740 ","End":"08:01.220","Text":"The bond interest of 800 gets added to the 201,"},{"Start":"08:01.220 ","End":"08:05.870","Text":"and we now have a payment of interest in total of 1,021."},{"Start":"08:05.870 ","End":"08:08.300","Text":"If we look at the balance sheet on the total liabilities,"},{"Start":"08:08.300 ","End":"08:11.750","Text":"you can see all of the other liabilities have been done,"},{"Start":"08:11.750 ","End":"08:14.850","Text":"and all the bond payable\u0027s also been done."},{"Start":"08:14.860 ","End":"08:22.190","Text":"We have now reconstructed all our asset accounts and now also all the liability accounts."},{"Start":"08:22.190 ","End":"08:26.090","Text":"The last thing for us to do is to look at our equity accounts."},{"Start":"08:26.090 ","End":"08:28.760","Text":"If we look at the equity section of our balance sheet,"},{"Start":"08:28.760 ","End":"08:30.680","Text":"we can see there are 2 line items."},{"Start":"08:30.680 ","End":"08:33.335","Text":"The share capital and retained earnings."},{"Start":"08:33.335 ","End":"08:37.620","Text":"We\u0027re going to start with the share capital in the next mini video."}],"ID":29746},{"Watched":false,"Name":"Exercise 13 NOP - Q","Duration":"3m 22s","ChapterTopicVideoID":26966,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.210","Text":"We\u0027re looking at the financing activities section of"},{"Start":"00:03.210 ","End":"00:08.760","Text":"our cash flow statement and specifically how share capital may have affected our cash."},{"Start":"00:08.760 ","End":"00:12.450","Text":"You\u0027ll find the share capital section under equity in the balance sheet."},{"Start":"00:12.450 ","End":"00:14.550","Text":"Now as is all the other line items,"},{"Start":"00:14.550 ","End":"00:16.079","Text":"what we do is we reconstruct"},{"Start":"00:16.079 ","End":"00:18.550","Text":"the share capital account and we\u0027re going"},{"Start":"00:18.550 ","End":"00:21.435","Text":"to take into consideration aspects that may have affected it."},{"Start":"00:21.435 ","End":"00:25.680","Text":"For example, our share capital could have increased,"},{"Start":"00:25.680 ","End":"00:28.065","Text":"in which case, that would be a share issue,"},{"Start":"00:28.065 ","End":"00:29.670","Text":"or it could have decreased,"},{"Start":"00:29.670 ","End":"00:31.750","Text":"in other words, there was a share buy-back."},{"Start":"00:31.750 ","End":"00:34.920","Text":"We could\u0027ve had a share issue for cash."},{"Start":"00:34.920 ","End":"00:38.320","Text":"A share issue for cash is where we debit"},{"Start":"00:38.320 ","End":"00:41.580","Text":"our bank with the amount that we receive because remember,"},{"Start":"00:41.580 ","End":"00:44.900","Text":"we put receipts on the debit side of our bank and we"},{"Start":"00:44.900 ","End":"00:48.280","Text":"would credit our share capital account, thus increasing it."},{"Start":"00:48.280 ","End":"00:53.750","Text":"Remember, share capital is equity and equity gets bigger on the credit side."},{"Start":"00:53.750 ","End":"00:55.800","Text":"We also have capitalization issues."},{"Start":"00:55.800 ","End":"00:59.195","Text":"A capitalization issue is slightly different to a share issue."},{"Start":"00:59.195 ","End":"01:01.460","Text":"They also increase your share capital,"},{"Start":"01:01.460 ","End":"01:03.410","Text":"but instead of it being a debit to bank,"},{"Start":"01:03.410 ","End":"01:10.655","Text":"it\u0027s to another equity account such as a reserve,"},{"Start":"01:10.655 ","End":"01:15.140","Text":"which has a balance in here that you want to reduce."},{"Start":"01:15.140 ","End":"01:16.880","Text":"The balance is x, x."},{"Start":"01:16.880 ","End":"01:20.345","Text":"We take a portion of that equity out and we convert it into shares."},{"Start":"01:20.345 ","End":"01:22.760","Text":"That\u0027s a capitalization issue."},{"Start":"01:22.760 ","End":"01:24.740","Text":"Then we could also have share buy-backs,"},{"Start":"01:24.740 ","End":"01:28.150","Text":"that is where we reduce our share capital."},{"Start":"01:28.150 ","End":"01:32.820","Text":"Here we would have a share capital balance of whatever it is,"},{"Start":"01:32.820 ","End":"01:35.570","Text":"it says x, x, and we buy some of those shares back,"},{"Start":"01:35.570 ","End":"01:37.445","Text":"so we\u0027re reducing our share capital."},{"Start":"01:37.445 ","End":"01:39.874","Text":"Remember share capital is equity,"},{"Start":"01:39.874 ","End":"01:42.430","Text":"which gets bigger on the credit side."},{"Start":"01:42.430 ","End":"01:48.770","Text":"A share buy-back involves crediting our bank with the payment because remember,"},{"Start":"01:48.770 ","End":"01:50.465","Text":"payments go through on the credit side,"},{"Start":"01:50.465 ","End":"01:54.680","Text":"and debiting the share capital with the shares that are purchased,"},{"Start":"01:54.680 ","End":"01:56.920","Text":"so it\u0027s called treasury shares."},{"Start":"01:56.920 ","End":"02:02.345","Text":"Then ultimately, we\u0027re working towards anything that may be missing information."},{"Start":"02:02.345 ","End":"02:04.895","Text":"Let\u0027s reconstruct our share capital account."},{"Start":"02:04.895 ","End":"02:06.800","Text":"The opening balance and closing balance,"},{"Start":"02:06.800 ","End":"02:08.840","Text":"you\u0027ll find in your balance sheet,"},{"Start":"02:08.840 ","End":"02:10.615","Text":"under equity, share capital."},{"Start":"02:10.615 ","End":"02:15.070","Text":"Last year\u0027s balance was 6,000 and this year\u0027s closing balance is 8,000."},{"Start":"02:15.070 ","End":"02:19.460","Text":"We put them in opening balance 6,000, closing balance 8,000."},{"Start":"02:19.460 ","End":"02:22.545","Text":"Then we subtract any share buy-back."},{"Start":"02:22.545 ","End":"02:25.790","Text":"If you have a look at the information given to you in the question,"},{"Start":"02:25.790 ","End":"02:28.100","Text":"there is absolutely no evidence of a share buy-back,"},{"Start":"02:28.100 ","End":"02:31.645","Text":"so we assume that must be 0, they\u0027re not very common."},{"Start":"02:31.645 ","End":"02:34.920","Text":"Then we would add a share issue."},{"Start":"02:34.920 ","End":"02:37.130","Text":"If there wasn\u0027t a share buy-back,"},{"Start":"02:37.130 ","End":"02:39.100","Text":"this must be a share issue."},{"Start":"02:39.100 ","End":"02:41.430","Text":"Missing amount is 2,000."},{"Start":"02:41.430 ","End":"02:42.710","Text":"In this particular case,"},{"Start":"02:42.710 ","End":"02:45.570","Text":"I\u0027m going to assume it was for cash. In other words, the contra entry was bank."},{"Start":"02:45.570 ","End":"02:52.985","Text":"In other words, we\u0027re going to credit our share capital and we\u0027re debiting our bank."},{"Start":"02:52.985 ","End":"02:55.850","Text":"There was no information given to us either way."},{"Start":"02:55.850 ","End":"02:59.390","Text":"Once again, we\u0027re simply assuming it\u0027s for cash."},{"Start":"02:59.390 ","End":"03:01.130","Text":"Looking at the cash flow statement,"},{"Start":"03:01.130 ","End":"03:03.080","Text":"the cash from financing activities,"},{"Start":"03:03.080 ","End":"03:07.435","Text":"we will see here a cash received from the share issue of"},{"Start":"03:07.435 ","End":"03:14.360","Text":"2,000 and that is the opening balance of 6,000 less the closing balance of 8,000."},{"Start":"03:14.360 ","End":"03:17.191","Text":"We\u0027ve reconciled our share capital and"},{"Start":"03:17.191 ","End":"03:20.405","Text":"the next step is to reconcile our retained earnings,"},{"Start":"03:20.405 ","End":"03:22.980","Text":"which we\u0027ll do in the next mini video."}],"ID":29747},{"Watched":false,"Name":"Exercise 13 NOP - R","Duration":"8m 53s","ChapterTopicVideoID":26967,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.440","Text":"We\u0027re looking at the financing activities section of our cash flow statement"},{"Start":"00:04.440 ","End":"00:09.495","Text":"and specifically whether the retained earnings has affected our bank account."},{"Start":"00:09.495 ","End":"00:13.920","Text":"We find our retained earnings in the equity section of our balance sheet,"},{"Start":"00:13.920 ","End":"00:17.025","Text":"and we\u0027ll reconstruct the retained earnings account."},{"Start":"00:17.025 ","End":"00:20.300","Text":"It has an opening balance and a closing balance."},{"Start":"00:20.300 ","End":"00:26.760","Text":"To that, we add our profit for the year or you might have made a loss,"},{"Start":"00:26.760 ","End":"00:29.430","Text":"in which case, our equity will decrease."},{"Start":"00:29.430 ","End":"00:33.720","Text":"Remember, what happens with our profit or loss, well,"},{"Start":"00:33.720 ","End":"00:35.775","Text":"take 1 step further back,"},{"Start":"00:35.775 ","End":"00:39.530","Text":"we have income and we have expenses."},{"Start":"00:39.530 ","End":"00:42.090","Text":"Let\u0027s assume we only had 1 income account and"},{"Start":"00:42.090 ","End":"00:44.460","Text":"1 expense account, at the end of the year,"},{"Start":"00:44.460 ","End":"00:47.450","Text":"what happens is we take all of our income accounts and we"},{"Start":"00:47.450 ","End":"00:51.500","Text":"accumulate them into 1 account called the profit or loss account."},{"Start":"00:51.500 ","End":"00:55.490","Text":"You put all the income on the credit side, the right-hand side,"},{"Start":"00:55.490 ","End":"00:59.045","Text":"and we take all our expenses out of the expense accounts"},{"Start":"00:59.045 ","End":"01:02.765","Text":"and accumulate these into our profit or loss account."},{"Start":"01:02.765 ","End":"01:09.755","Text":"Profit or loss account has income on the credit side and expenses on the debit side."},{"Start":"01:09.755 ","End":"01:11.210","Text":"We have only 1 account,"},{"Start":"01:11.210 ","End":"01:13.980","Text":"and you see our income accounts closed off, it\u0027s got nothing in it,"},{"Start":"01:13.980 ","End":"01:19.300","Text":"all of our expense accounts have also been closed off and have nothing in them."},{"Start":"01:19.300 ","End":"01:21.620","Text":"Here, we have a profit or loss accounts,"},{"Start":"01:21.620 ","End":"01:24.980","Text":"so we can compare all of our income and all of"},{"Start":"01:24.980 ","End":"01:29.285","Text":"our expenses to determine whether we made a profit or a loss."},{"Start":"01:29.285 ","End":"01:31.415","Text":"Let\u0027s assume that our income is say,"},{"Start":"01:31.415 ","End":"01:34.340","Text":"100, and our expenses are say, 80,"},{"Start":"01:34.340 ","End":"01:37.965","Text":"in other words, our income exceeded our expenses,"},{"Start":"01:37.965 ","End":"01:39.965","Text":"so that means we\u0027ve made a profit."},{"Start":"01:39.965 ","End":"01:44.350","Text":"We would balance this by taking the 100 across,"},{"Start":"01:44.350 ","End":"01:46.170","Text":"100 less 80,"},{"Start":"01:46.170 ","End":"01:47.610","Text":"gives us 20,"},{"Start":"01:47.610 ","End":"01:49.310","Text":"and we carry that down."},{"Start":"01:49.310 ","End":"01:51.935","Text":"The balance brought down, 20,"},{"Start":"01:51.935 ","End":"01:54.890","Text":"and that\u0027s a profit because it\u0027s on the right-hand side."},{"Start":"01:54.890 ","End":"01:58.783","Text":"Remember, the right-hand side represents the income."},{"Start":"01:58.783 ","End":"02:01.490","Text":"So if it\u0027s on the right-hand side or the credit side,"},{"Start":"02:01.490 ","End":"02:06.800","Text":"that must mean your income exceeded your expenses and thus he had a profit."},{"Start":"02:06.800 ","End":"02:09.440","Text":"Then after having established that,"},{"Start":"02:09.440 ","End":"02:12.905","Text":"we then take that profit out of the profit/loss account."},{"Start":"02:12.905 ","End":"02:17.210","Text":"It was 20, so we\u0027d actually debit that with 20 and we would put"},{"Start":"02:17.210 ","End":"02:21.230","Text":"that into our retained earnings account."},{"Start":"02:21.230 ","End":"02:24.250","Text":"So retained earnings is the accumulated profits that"},{"Start":"02:24.250 ","End":"02:27.860","Text":"the company has made and retained in the business."},{"Start":"02:27.860 ","End":"02:30.050","Text":"We\u0027d have wherever the opening balance was,"},{"Start":"02:30.050 ","End":"02:32.240","Text":"we add this year\u0027s profit and that then"},{"Start":"02:32.240 ","End":"02:34.645","Text":"gives us retained earnings at the end of the year,"},{"Start":"02:34.645 ","End":"02:37.775","Text":"assuming that there were no other adjustments."},{"Start":"02:37.775 ","End":"02:41.380","Text":"We could\u0027ve had a situation where we had a loss,"},{"Start":"02:41.380 ","End":"02:44.815","Text":"in other words, expenses were bigger than the income,"},{"Start":"02:44.815 ","End":"02:49.190","Text":"and that instead of there being a balance carried down on the right-hand side,"},{"Start":"02:49.190 ","End":"02:52.385","Text":"we had a balance carried down there on the left-hand side,"},{"Start":"02:52.385 ","End":"02:54.980","Text":"in which case we had a loss."},{"Start":"02:54.980 ","End":"03:02.075","Text":"We would then take the 20 and we would debit the retained earnings instead."},{"Start":"03:02.075 ","End":"03:05.060","Text":"Other things that affect your retained earnings include transfers"},{"Start":"03:05.060 ","End":"03:08.000","Text":"to or from other equity accounts, so this is just,"},{"Start":"03:08.000 ","End":"03:10.730","Text":"we could take part of our retained earnings and transfer"},{"Start":"03:10.730 ","End":"03:13.340","Text":"to an equity reserve or we could have taken"},{"Start":"03:13.340 ","End":"03:19.525","Text":"something from an equity reserve and transferred it into the retained earnings account."},{"Start":"03:19.525 ","End":"03:23.630","Text":"So you\u0027d either add the transfers from other equity accounts or"},{"Start":"03:23.630 ","End":"03:27.260","Text":"subtract the transfers to other equity accounts."},{"Start":"03:27.260 ","End":"03:30.625","Text":"Then finally, we would have dividends declared."},{"Start":"03:30.625 ","End":"03:35.735","Text":"Now, the way dividends declared happens is that when there is a dividend declaration,"},{"Start":"03:35.735 ","End":"03:43.260","Text":"we would debit an account called dividend declaration or dividends declared,"},{"Start":"03:43.260 ","End":"03:47.190","Text":"and we would credit dividends payable."},{"Start":"03:47.190 ","End":"03:49.810","Text":"Let\u0027s assume it was an amount of 100."},{"Start":"03:49.810 ","End":"03:53.630","Text":"Dividend declaration is an equity distribution account,"},{"Start":"03:53.630 ","End":"03:55.220","Text":"it is not an expense,"},{"Start":"03:55.220 ","End":"03:58.400","Text":"so it does not appear in the income statement, in fact,"},{"Start":"03:58.400 ","End":"04:04.340","Text":"it appears in the statement of changes in equity."},{"Start":"04:04.340 ","End":"04:07.940","Text":"Now, we weren\u0027t given the statement of changes in equity, but if we had,"},{"Start":"04:07.940 ","End":"04:10.445","Text":"we should be able to pick up the dividends as"},{"Start":"04:10.445 ","End":"04:14.370","Text":"a separate line item in that statement of changes in equity."},{"Start":"04:14.780 ","End":"04:16.980","Text":"Just by a way of examples,"},{"Start":"04:16.980 ","End":"04:20.760","Text":"so let\u0027s say we have declared a dividend during the year of 100,"},{"Start":"04:20.760 ","End":"04:22.745","Text":"so we debit the dividend declaration,"},{"Start":"04:22.745 ","End":"04:24.980","Text":"which is an equity distribution account,"},{"Start":"04:24.980 ","End":"04:26.495","Text":"credit the dividend payable,"},{"Start":"04:26.495 ","End":"04:29.570","Text":"which is a liability, and then at some stage,"},{"Start":"04:29.570 ","End":"04:32.355","Text":"we pay for these dividends,"},{"Start":"04:32.355 ","End":"04:35.300","Text":"in which case we would credit our bank with 100 and"},{"Start":"04:35.300 ","End":"04:38.480","Text":"we debit the dividend payable and the liability goes away."},{"Start":"04:38.480 ","End":"04:43.325","Text":"Now, this dividend declaration gets closed off to retained earnings account."},{"Start":"04:43.325 ","End":"04:45.845","Text":"Let\u0027s put the retained earnings account here."},{"Start":"04:45.845 ","End":"04:47.300","Text":"We\u0027ve got our opening balance and"},{"Start":"04:47.300 ","End":"04:50.570","Text":"the retained earnings plus the profit we made for the current year,"},{"Start":"04:50.570 ","End":"04:53.990","Text":"and then what we do is we take the 100 that we\u0027ve declared to"},{"Start":"04:53.990 ","End":"04:58.290","Text":"our shareholders and we close it off to the retained earnings,"},{"Start":"04:58.290 ","End":"05:01.670","Text":"so now there\u0027s no dividend declaration any longer"},{"Start":"05:01.670 ","End":"05:06.400","Text":"and our retained earnings is reduced by that 100."},{"Start":"05:06.400 ","End":"05:10.700","Text":"What gets left in the retained earnings is the accumulated profit over"},{"Start":"05:10.700 ","End":"05:15.185","Text":"the years less what we gave to our shareholders."},{"Start":"05:15.185 ","End":"05:17.030","Text":"So let\u0027s have a look,"},{"Start":"05:17.030 ","End":"05:20.875","Text":"we\u0027ve got retained earnings at the end of last year, 4,241,"},{"Start":"05:20.875 ","End":"05:25.390","Text":"and it\u0027s grown slightly to 4,791 at the end of the current year,"},{"Start":"05:25.390 ","End":"05:30.060","Text":"so we pop those in, opening balance 4,241 and a closing balance 4,791."},{"Start":"05:30.060 ","End":"05:35.110","Text":"We then look at our income statement for the profit, the profit for the year,"},{"Start":"05:35.110 ","End":"05:38.720","Text":"the final line item in that income statement is 3,550,"},{"Start":"05:38.720 ","End":"05:41.935","Text":"so we add the profit of 3,550,"},{"Start":"05:41.935 ","End":"05:43.760","Text":"we then need to establish whether there were"},{"Start":"05:43.760 ","End":"05:47.120","Text":"any transfers to or from other equity accounts."},{"Start":"05:47.120 ","End":"05:51.035","Text":"There was no information given regarding transfers,"},{"Start":"05:51.035 ","End":"05:53.170","Text":"so we assume that it must be 0."},{"Start":"05:53.170 ","End":"05:58.265","Text":"That then means that if we look at the opening balance plus the profit with no transfers,"},{"Start":"05:58.265 ","End":"06:02.030","Text":"our closing balance ought to be 7,791,"},{"Start":"06:02.030 ","End":"06:04.915","Text":"but it isn\u0027t, it\u0027s 4,791."},{"Start":"06:04.915 ","End":"06:10.235","Text":"We have a missing amount of 3,000 that has disappeared from this account,"},{"Start":"06:10.235 ","End":"06:14.330","Text":"so that must be dividends declared of 3,000."},{"Start":"06:14.330 ","End":"06:17.585","Text":"Now, I\u0027m going to assume that it was cash paid,"},{"Start":"06:17.585 ","End":"06:19.850","Text":"and I\u0027m making that assumption based on the fact"},{"Start":"06:19.850 ","End":"06:22.130","Text":"that there are no dividends payable in the balance sheets."},{"Start":"06:22.130 ","End":"06:24.650","Text":"If you go to your balance sheet and look under liabilities,"},{"Start":"06:24.650 ","End":"06:28.010","Text":"you\u0027ll see there were no dividends payable, so in other words,"},{"Start":"06:28.010 ","End":"06:30.665","Text":"although as the dividends get declared,"},{"Start":"06:30.665 ","End":"06:34.610","Text":"what we do is we debit the dividend declared account,"},{"Start":"06:34.610 ","End":"06:36.410","Text":"that\u0027s the equity distribution account,"},{"Start":"06:36.410 ","End":"06:40.070","Text":"remember, we would then credit the dividend payable."},{"Start":"06:40.070 ","End":"06:43.115","Text":"That dividend payable has disappeared."},{"Start":"06:43.115 ","End":"06:45.710","Text":"That dividend declaration has been taken out to"},{"Start":"06:45.710 ","End":"06:47.480","Text":"the retained earnings account and has been"},{"Start":"06:47.480 ","End":"06:49.580","Text":"debited against the retained earnings account,"},{"Start":"06:49.580 ","End":"06:50.945","Text":"so this is a debit, remember,"},{"Start":"06:50.945 ","End":"06:53.075","Text":"this is a credit because retained earnings is"},{"Start":"06:53.075 ","End":"06:57.325","Text":"equity and equity increases on the credit side."},{"Start":"06:57.325 ","End":"07:00.890","Text":"We\u0027ve got the opening balance, gets bigger with the profit for the year,"},{"Start":"07:00.890 ","End":"07:03.920","Text":"and it gets smaller when we declare our dividend,"},{"Start":"07:03.920 ","End":"07:09.605","Text":"so that dividend declaration was taken out and debited to the retained earnings account."},{"Start":"07:09.605 ","End":"07:15.185","Text":"Retained earnings had an opening balance plus we added profit during the year."},{"Start":"07:15.185 ","End":"07:19.190","Text":"But that dividend payable no longer exists,"},{"Start":"07:19.190 ","End":"07:22.380","Text":"it\u0027s not in our balance sheet under the liabilities."},{"Start":"07:22.380 ","End":"07:27.650","Text":"Now, we know that the dividend payable no longer exists by looking at our balance sheet,"},{"Start":"07:27.650 ","End":"07:29.870","Text":"there is no dividend payable under liabilities,"},{"Start":"07:29.870 ","End":"07:34.390","Text":"so that must mean that we had credited our bank,"},{"Start":"07:34.390 ","End":"07:36.860","Text":"remember payments go through on the credit side,"},{"Start":"07:36.860 ","End":"07:43.955","Text":"so we must have credited our bank and debited the dividend payable with that 3,000."},{"Start":"07:43.955 ","End":"07:47.900","Text":"So once we\u0027ve established that it must have affected our bank account,"},{"Start":"07:47.900 ","End":"07:50.570","Text":"so we can pop that into our cash flow statement."},{"Start":"07:50.570 ","End":"07:54.515","Text":"In our cash flow, from financing activities,"},{"Start":"07:54.515 ","End":"07:56.420","Text":"we add another line item,"},{"Start":"07:56.420 ","End":"08:00.810","Text":"cash paid on dividend declarations, 3,000."},{"Start":"08:00.810 ","End":"08:04.050","Text":"You can show those workings like this instead,"},{"Start":"08:04.050 ","End":"08:11.670","Text":"opening balance 4,241 plus your profit for the year and subtract your closing balance,"},{"Start":"08:11.670 ","End":"08:14.705","Text":"and that gives us the missing dividend declaration."},{"Start":"08:14.705 ","End":"08:19.865","Text":"Now, we\u0027ve obviously reconciled now all of our liability and all our equity accounts."},{"Start":"08:19.865 ","End":"08:23.540","Text":"So we can now calculate the total on our financing activities section,"},{"Start":"08:23.540 ","End":"08:28.105","Text":"because financing activity sections only involve liabilities and equity,"},{"Start":"08:28.105 ","End":"08:30.590","Text":"so that comes to 2,202."},{"Start":"08:30.590 ","End":"08:35.285","Text":"The final step in our cash flow statement is to reconcile our bank account,"},{"Start":"08:35.285 ","End":"08:37.820","Text":"which was the last remaining asset."},{"Start":"08:37.820 ","End":"08:38.960","Text":"If you have a look at your balance sheet,"},{"Start":"08:38.960 ","End":"08:41.030","Text":"everything else should be ticked off by now."},{"Start":"08:41.030 ","End":"08:43.235","Text":"I\u0027ve written down on my slides."},{"Start":"08:43.235 ","End":"08:46.040","Text":"You could just tick it off. The last item that weren\u0027t had"},{"Start":"08:46.040 ","End":"08:49.220","Text":"been reconciled yet is your bank account."},{"Start":"08:49.220 ","End":"08:51.900","Text":"That, we\u0027ll cover in the next mini video."}],"ID":29748},{"Watched":false,"Name":"Exercise 13 NOP - S","Duration":"2m 56s","ChapterTopicVideoID":26968,"CourseChapterTopicPlaylistID":261504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.985","Text":"The final step in our cash flow statement is to reconcile our cash."},{"Start":"00:05.985 ","End":"00:10.680","Text":"We have reconciled the 3 sections of our cash flow statement involving operating,"},{"Start":"00:10.680 ","End":"00:14.025","Text":"investing, and financing activities."},{"Start":"00:14.025 ","End":"00:17.835","Text":"Now, we complete the fourth section of the cash flow statement,"},{"Start":"00:17.835 ","End":"00:21.150","Text":"which is the reconciliation of the cash account."},{"Start":"00:21.150 ","End":"00:24.630","Text":"This cash account is our last remaining asset account in"},{"Start":"00:24.630 ","End":"00:29.635","Text":"the balance sheet that has not yet been reconciled or reconstructed."},{"Start":"00:29.635 ","End":"00:31.505","Text":"If you have a look at our balance sheet,"},{"Start":"00:31.505 ","End":"00:34.850","Text":"everything else we\u0027d ticked off or as I\u0027ve done here,"},{"Start":"00:34.850 ","End":"00:39.985","Text":"I\u0027ve just marked done, and cash is the last one that I had not yet looked at."},{"Start":"00:39.985 ","End":"00:43.040","Text":"Now looking at the cash flow statement,"},{"Start":"00:43.040 ","End":"00:49.445","Text":"we\u0027ve got cash from operating activities and we worked out a figure of 9,158."},{"Start":"00:49.445 ","End":"00:50.944","Text":"That\u0027s an inflow."},{"Start":"00:50.944 ","End":"00:57.320","Text":"Then we\u0027ve got cash from investing activities of 4,000 and that is an inflow as well."},{"Start":"00:57.320 ","End":"01:00.680","Text":"Then we\u0027ve got cash from financing activities,"},{"Start":"01:00.680 ","End":"01:01.940","Text":"which is an outflow."},{"Start":"01:01.940 ","End":"01:04.645","Text":"You see it\u0027s in brackets 2,202."},{"Start":"01:04.645 ","End":"01:08.345","Text":"The next step is to work out the net cash flow."},{"Start":"01:08.345 ","End":"01:11.600","Text":"Our net increase in cash, we work it out."},{"Start":"01:11.600 ","End":"01:17.060","Text":"It\u0027s the operating activities of 9,158 plus the investing activities of"},{"Start":"01:17.060 ","End":"01:23.630","Text":"4,000 minus the financing activities outflow of 2,202."},{"Start":"01:23.630 ","End":"01:26.800","Text":"That gives us 10,956."},{"Start":"01:26.800 ","End":"01:29.840","Text":"We then add that to the beginning balance of our cash."},{"Start":"01:29.840 ","End":"01:33.425","Text":"In other words, our opening cash balance at the beginning of the year."},{"Start":"01:33.425 ","End":"01:37.555","Text":"If we have look at the balance sheet, was 210,"},{"Start":"01:37.555 ","End":"01:42.060","Text":"we put that into our cash flow statement and based on the fact that we had"},{"Start":"01:42.060 ","End":"01:47.600","Text":"210 at the beginning of the year and we believe it\u0027s increased by 10,956,"},{"Start":"01:47.600 ","End":"01:52.750","Text":"we believe then that our closing balance should be 11,166."},{"Start":"01:52.750 ","End":"01:55.450","Text":"Then the last step is to simply go to"},{"Start":"01:55.450 ","End":"01:58.090","Text":"the balance sheet and make sure that our cash balance at the end of"},{"Start":"01:58.090 ","End":"02:03.940","Text":"the year was indeed 11,166 failing which we\u0027ve made a mistake somewhere along the line."},{"Start":"02:03.940 ","End":"02:08.675","Text":"There we go, in our balance sheet, it\u0027s 11,166."},{"Start":"02:08.675 ","End":"02:11.430","Text":"We\u0027ve completed our cash flow statement,"},{"Start":"02:11.430 ","End":"02:16.300","Text":"and just to be absolutely sure that you have taken everything into account."},{"Start":"02:16.300 ","End":"02:20.350","Text":"Remember, you are looking at the balance sheet and making sure that everything has"},{"Start":"02:20.350 ","End":"02:25.020","Text":"been ticked off or marked as done or reconstructed."},{"Start":"02:25.020 ","End":"02:27.850","Text":"You see our balance sheet I\u0027d marked everything done"},{"Start":"02:27.850 ","End":"02:30.520","Text":"including the cash [inaudible] Under the liabilities,"},{"Start":"02:30.520 ","End":"02:33.670","Text":"you see I\u0027ve marked off everything as having been done,"},{"Start":"02:33.670 ","End":"02:36.990","Text":"as I\u0027ve reconstructed all of those accounts."},{"Start":"02:36.990 ","End":"02:40.475","Text":"Then the two line items for equity,"},{"Start":"02:40.475 ","End":"02:42.340","Text":"I\u0027ve marked them done as well."},{"Start":"02:42.340 ","End":"02:43.865","Text":"Once everything\u0027s marked done,"},{"Start":"02:43.865 ","End":"02:46.520","Text":"you\u0027ve taken to account everything and you should\u0027ve picked up"},{"Start":"02:46.520 ","End":"02:49.595","Text":"any impact on the bank account."},{"Start":"02:49.595 ","End":"02:52.850","Text":"Well done, that was quite a big exercise to get"},{"Start":"02:52.850 ","End":"02:57.030","Text":"through so you can give yourself a pat on the back. Well done."}],"ID":29749}],"Thumbnail":null,"ID":261504}]

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