Adjusted Net Profit

Definition and Explanation

After the adjustments shown above, we arrive at the Adjusted Net Profit which appears as the first item on the sources side of the Cash Flow Statement. One can show these adjustments within the body of the Cash Flow Statement, or prepare a separate statement to compute the Adjusted Net Profit and then show only the Adjusted Net Profit as a source in the Cash Flow Statement.

Format of statement to compute adjusted net profit

Adjusted Net Profit Example

Increase in share capital as a source of cash

If a company issues fresh shares during the year, the amount of cash received against such an issue would obviously be a source of cash. However, the following two points need attention here:

Issue of Shares against cash, at par, at premium or discount

If a company issues shares for cash at par, the amount of cash received will be equal to the increase in paid up share capital. This is relatively simple to handle. The amount of increase in share capital is shown as a source of cash in the Cash Flow Statement.

If the company issues shares for cash at a premium, the amount of cash received will be more than the increase in paid up share capital. There will therefore also be an increase in the amount of Capital Reserves or Share Premium Account. T

he total of these two increases (i.e. increase in paid up share capital and increase in share premium account) represents the amount of cash inflow on account of issue of shares. This can be shown in the Cash Flow Statement as two separate items, or just as one item. It is preferable to show them as two items (namely share capital and share premium) to avoid confusion.

While theoretically, it is possible to issue shares at a discount, this is a very rare occurrence. The way to handle issue of shares at a discount in a Cash Flow Statement is to:

  • Show the amount of net proceeds of issue of share as a source in the CFS.
  • If the amount of discount has been debited to Profit & Loss Account, it should be added back to the Net Profit figure as part of adjustments (as shown earlier for non-operational items)
  • If the amount of discount has been debited to Profit & Loss Appropriation Account (or to a reserve account like share premium account), no adjustment to the net profit figure is necessary.

Issue of Shares as Bonus Shares

If a company issues shares as bonus shares, the entries made are a debit to Profit & Loss Appropriation Account and a credit to Share Capital Account. No cash is involved and therefore no entry passes through the cash account. Hence, issue of bonus shares does not represent any cash inflow and should therefore not be reported in the Cash Flow Statement.

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