Accountancy
Cash Flow Statement: The Six Adjustments That Cost Students the Most Marks
Provision for tax, proposed dividend, and four other adjustments that turn an eight-mark question into a two-mark one. With the treatment for each.
Cash Flow Statement is the most predictable question on the Accountancy paper and simultaneously the one students most reliably get wrong. The structure never changes. What changes are the adjustments, and there are six that account for nearly all the lost marks.
1. Provision for tax
Tax paid during the year is an outflow under operating activities. Provision made during the year is added back to net profit before tax. Students routinely do one and forget the other, which breaks the operating figure by exactly the amount of the provision.
2. Proposed dividend
Proposed dividend of the current year is not a liability until approved, so it does not appear as an outflow. The previous year's proposed dividend, paid this year, does. Read the year label before you touch the figure.
3. Depreciation and asset sale together
When an asset is sold, you need three separate movements: depreciation added back to profit, the profit or loss on sale removed from profit, and the sale proceeds shown as an investing inflow. Prepare the asset account before you start the statement — it takes ninety seconds and removes all three errors at once.
The rest of the list
- Interest on debentures — an outflow under financing, added back to operating profit
- Non-cash items such as goodwill written off — added back, never shown as an outflow
- Bank overdraft — a financing activity, not a reduction of cash and cash equivalents
Work through the last ten years of previous year questions with only these six in mind. By the fourth paper you will stop needing to think about them.
