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IAI Actuarial Core Principles · Business Finance · Interpreting company accounting information

In a company's cash flow statement prepared by the indirect method, which one of the following adjustments is made to profit before tax when deriving cash generated from operations?

Depreciation is added back to profit before tax because it is a non-cash charge that reduced profit without any cash leaving the business. The other adjustments are wrong in direction or classification, since sale proceeds are investing flows.

  1. ASubtract depreciation charged for the year
  2. BAdd back depreciation charged for the yearCorrect
  3. CAdd an increase in trade receivables
  4. DSubtract an increase in trade payables
  5. Add proceeds from sale of plant

Explanation

Depreciation is a non-cash expense deducted in arriving at profit, so it is added back. An increase in receivables is deducted, and an increase in payables is added. Sale proceeds of plant belong in investing activities, not in the operating reconciliation.

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