NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis
Under the indirect method of preparing a cash flow statement, which adjustment is made to net profit when calculating cash flow from operating activities?
Depreciation is added back to net profit under the indirect method because it is a non-cash expense that reduced profit without any cash leaving the business. Share issue proceeds and dividends belong to financing activities, not operating cash flow.
- ASubtract depreciation because it is a cash outflow
- BAdd back depreciation because it is a non-cash expenseCorrect
- CAdd the proceeds from issue of shares
- DSubtract dividends paid to shareholders
Explanation
Depreciation reduces profit but involves no cash outflow, so it is added back to net profit. Share issue proceeds and dividends paid are financing flows, not operating adjustments.
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