Adjusted Net Profit

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on October 8, 2021

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. In turn, the Adjusted Net Profit is shown as a source in the Cash Flow Statement.

Format of Statement to Compute Adjusted Net Profit

Statement for Adjusted Net Profit

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 is clearly a source of cash. However, the following two points need attention here:

1. Issue of shares against cash at par, 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.

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

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

2. Issue of shares as bonus shares

If a company issues shares as bonus shares, the entries made are a debit to the Profit & Loss Appropriation Account and a credit to the Share Capital Account.

No cash is involved and, therefore, no entry passes through the cash account.

For this reason, the issue of bonus shares does not represent any cash inflow. It should, as a consequence, not be reported in the Cash Flow Statement.

Leave a Comment