ACCA Applied Knowledge · Financial Accounting · Cash
In preparing a statement of cash flows under IAS 7 using the indirect method, Hale Co reports profit before tax $90,000, depreciation $12,000, profit on disposal of equipment $4,000, interest expense $6,000 (paid in full), increase in receivables $9,000, decrease in inventories $5,000 and increase in payables $3,000. What is cash generated from operations?
Cash generated from operations is $103,000. Start with profit before tax of $90,000, add depreciation and interest, deduct the disposal profit, then adjust for working capital: receivables up $9,000, inventories down $5,000 and payables up $3,000.
- A$103,000Correct
- B$97,000
- C$109,000
- D$93,000
Explanation
90,000 + 12,000 - 4,000 + 6,000 interest add-back = 104,000; receivables -9,000 = 95,000; inventories +5,000 = 100,000; payables +3,000 = 103,000. $97,000 omits the interest add-back. $109,000 adds the profit on disposal instead of deducting it, and $93,000 reverses the working capital changes.
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