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IAI Actuarial Core Principles · Business Finance · Construction and features of company accounts and reports

Under the indirect method of preparing a company's cash flow statement from operating activities, which one of the following adjustments to profit before tax is correct?

A loss on sale of a fixed asset is added back to profit before tax. It is a non-cash charge, and the actual sale proceeds are shown under investing activities. Depreciation is also added back, profits on sale are deducted, and working capital changes follow the opposite direction.

  1. ADeduct depreciation charged for the year
  2. BAdd back a profit on sale of a fixed asset
  3. CAdd back a loss on sale of a fixed assetCorrect
  4. DAdd an increase in trade receivables during the year
  5. Deduct an increase in trade payables during the year

Explanation

A loss on disposal is a non-cash charge in profit and the sale proceeds belong to investing activities, so the loss is added back. Depreciation is added back, not deducted. A profit on sale is deducted. An increase in receivables reduces cash and an increase in payables raises cash.

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