Preparing basic financial statements — ACCA Practice Question 25

How to approach this question

Think about cash impact. If receivables go up, customers haven't paid you yet, so cash is lower (deduct). Profit on disposal is an accounting gain, not an operating cash flow, so it must be removed (deducted) from profit before tax.

Full Answer

B.Increase in trade receivables: Deduct; Profit on disposal: Deduct✓ Correct

An increase in trade receivables means sales were made on credit and cash has not yet been received, so it is deducted from profit. A profit on disposal is a non-cash/investing item that artificially inflates operating profit, so it must be deducted to arrive at cash generated from operations.

Common mistakes

Thinking an increase in an asset (receivables) is a positive cash flow.

Section A

When preparing a Statement of Cash Flows using the indirect method, how should an increase in trade receivables and a profit on disposal of a non-current asset be treated in the 'Cash flows from operating activities' section?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 1

More questions from this exam

Section A When preparing a Statement of Cash Flows using the indirect method, how should an increase in trade receivables and a profit on disposal of a non-current asset be treated in the 'Cash flows from operating activities' section?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 1

More questions from this exam

Section A

When preparing a Statement of Cash Flows using the indirect method, how should an increase in trade receivables and a profit on disposal of a non-current asset be treated in the 'Cash flows from operating activities' section?