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

Which statement about the indirect method of calculating cash generated from operations under IAS 7 is correct?

An increase in trade payables is added to profit, because costs were expensed in the income statement but not yet paid in cash. Receivables increases are deducted, inventory decreases are added, and dividends paid are a financing item outside the operations reconciliation.

  1. AAn increase in trade payables is added to profit because less cash has been paid out than expensedCorrect
  2. BAn increase in trade receivables is added to profit because sales have risen
  3. CA decrease in inventory is deducted from profit because stock has been used
  4. DDividends paid are deducted in arriving at cash generated from operations

Explanation

If payables rise, expenses were recognised but not yet paid, so cash is higher than profit implies and the increase is added. A receivables increase and an inventory decrease have the opposite effect to those stated. Dividends paid are a financing flow and are not part of operations reconciliation.

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