CS Executive · Corporate Accounting and Financial Management · Cash Flows
Under the indirect method, which of the following adjustments to net profit is correct for reaching the net cash flow from operating activities?
An increase in trade receivables is deducted from net profit under the indirect method because profit includes sales for which cash has not yet been received. The other options reverse the treatment of payables or inventories, so they are incorrect.
- AAdd increase in trade receivables
- BDeduct increase in trade payables
- CDeduct increase in trade receivablesCorrect
- DDeduct decrease in inventories
Explanation
An increase in trade receivables means sales were recorded as profit but cash was not yet collected, so it is deducted. An increase in payables is added, and a decrease in inventories is added, since less cash was spent on stock.
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