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IAI Actuarial Core Principles · Business Finance · Construction and features of company accounts and reports

A company's cash flow statement shows positive profit before tax but a large negative net cash flow from operating activities. Which one of the following is the most plausible explanation?

A large rise in trade receivables and inventories best explains it. Profit is recognised on sales made, but cash is tied up in unpaid customer balances and stock, so operating cash flow falls below profit. Payables increases and depreciation would instead support operating cash.

  1. AA large increase in trade payables
  2. BA large increase in trade receivables and inventoriesCorrect
  3. CA large depreciation charge for the year
  4. DA large issue of equity shares for cash
  5. A large profit on sale of surplus land

Explanation

Growth in receivables and inventory absorbs cash without reducing profit, so operating cash can turn negative. Higher payables and depreciation add to operating cash relative to profit. Share issue is a financing flow. A profit on land sale is deducted from operating cash and the proceeds go to investing.

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