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CMA Intermediate · Financial Management and Business Data Analytics · Cash Flow Statement - Preparation and Analysis

While preparing the cash flow statement of Kaveri Traders Ltd. under the indirect method, which of the following adjustments to net profit before tax is made by ADDING it back?

Depreciation is added back under the indirect method because it is a non-cash charge that reduced profit without any cash leaving the business. Gains on sale and investment income are deducted, and a fall in payables reduces operating cash.

  1. AProfit on sale of a machine
  2. BInterest income received on investments
  3. CDepreciation on plant and machineryCorrect
  4. DDecrease in trade payables

Explanation

Depreciation is a non-cash expense that was deducted in arriving at profit, so it is added back. Profit on sale of a machine and interest income are deducted because they belong to investing activities. A decrease in trade payables is a cash outflow and is deducted, not added.

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