ExpertMedium2 marksMultiple Choice
ACCA · Question 25 · Preparing basic financial statements
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?
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?
Answer options:
A.
Increase in trade receivables: Add; Profit on disposal: Deduct
B.
Increase in trade receivables: Deduct; Profit on disposal: Deduct
C.
Increase in trade receivables: Deduct; Profit on disposal: Add
D.
Increase in trade receivables: Add; Profit on disposal: Add
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.
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