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ACCA Applied Knowledge · Financial Accounting · Statement of cash flows (excluding partnerships)

Harlow Co reported a profit before tax of $84,000 for the year. The statement of profit or loss included depreciation of $18,000, a profit on disposal of a non-current asset of $6,000 and finance costs of $5,000. Over the year inventories increased by $9,000, trade receivables decreased by $4,000 and trade payables increased by $7,000. What is cash generated from operations using the indirect method?

Cash generated from operations is $103,000. Profit before tax of $84,000 is adjusted for depreciation (+18,000), the disposal profit (-6,000) and finance costs (+5,000), then for working capital: inventory increase (-9,000), receivables decrease (+4,000) and payables increase (+7,000).

  1. A$93,000
  2. B$103,000Correct
  3. C$98,000
  4. D$88,000

Explanation

Start with profit before tax 84,000. Add depreciation 18,000 = 102,000. Deduct profit on disposal 6,000 = 96,000. Add back finance costs 5,000 = 101,000. Inventory increase -9,000 = 92,000. Receivables decrease +4,000 = 96,000. Payables increase +7,000 = 103,000. Check: 84+18-6+5-9+4+7 = 103. Option $93,000 results from failing to add back finance costs and also mishandling working capital; $98,000 omits the finance cost add-back and... ignoring it gives 98,000, which is wrong because finance costs are shown separately.

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