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

Kestrel Co reported profit before tax of $84,000. It included depreciation of $22,000, a profit on disposal of equipment of $6,000 and interest expense of $4,000. Inventory increased by $9,000, receivables decreased by $5,000 and payables increased by $3,000. What is cash generated from operations using the indirect method?

Cash generated from operations is $103,000. Adjust profit before tax of $84,000 by adding depreciation $22,000 and interest $4,000, deducting the disposal profit $6,000, deducting the inventory increase $9,000, adding the receivables decrease $5,000, and adding the payables increase $3,000.

  1. A$103,000Correct
  2. B$99,000
  3. C$107,000
  4. D$95,000

Explanation

Start with 84,000; add depreciation 22,000 = 106,000; deduct profit on disposal 6,000 = 100,000; add interest expense 4,000 = 104,000; inventory increase -9,000 = 95,000; receivables decrease +5,000 = 100,000; payables increase +3,000 = 103,000. Not adding back interest gives 99,000, the key distractor.

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