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CMA Intermediate · Corporate Accounting and Auditing · Cash Flow Statement

Which statement about the indirect method of reporting cash flows from operating activities under Ind AS 7 is correct?

Under the indirect method, profit or loss is adjusted for changes in inventories and operating receivables and payables, for non-cash items like depreciation, provisions and deferred taxes, and for items whose cash effects are investing or financing flows. Gross receipts and payments belong to the direct method.

  1. AProfit or loss is adjusted for changes in inventories and operating receivables and payables, non-cash items, and items whose cash effects are investing or financing flowsCorrect
  2. BGross cash receipts from customers and gross cash payments to suppliers are disclosed as the major classes
  3. COnly changes in cash and cash equivalents are adjusted against profit, with no adjustment for non-cash items
  4. DProfit is adjusted solely for depreciation, since other non-cash items are shown under financing activities

Explanation

Under Ind AS 7 the indirect method adjusts profit or loss for changes in inventories and operating receivables and payables, non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign currency gains and losses, and all items whose cash effects are investing or financing flows. Disclosing gross receipts and payments describes the direct method.

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