The following items are categorized under Operating Activities: A. Pu…

The correct answer is Option (1) → B and D only

Under the indirect method, the operating section starts from the net profit before tax. Items that reduced or raised the profit without being operating cash flows are adjusted there, so they appear under operating activities. Items that are themselves investing or financing cash flows are shown in those sections instead.

A. Purchase of Goodwill — Incorrect. Paying to acquire goodwill is buying an intangible fixed asset, a cash outflow from investing activities.

B. Transfer to General Reserve — Correct. It is an appropriation of profit, not a cash outflow, so it is added back to the profit while working out cash flow from operating activities.

C. Issue of fresh shares — Incorrect. Cash received from issuing shares changes the owners’ capital and is a financing inflow.

D. Gain on sale of machinery — Correct. The gain is included in the profit but the sale proceeds belong to investing activities, so the gain is deducted in the operating section.