The correct answer is Option (1) → (D), (E), (C), (B), (A)
(D) Net profit before tax and extraordinary items- This is calculated first and adjustments are made.
(E) Adding and Deducting the changes in working capital
(C) Purchase of Machinery- This is investing activity
(B) Repayment of Bank Loan- This is financing activity
(A) Closing Balance of Cash
Net Profit Before Tax and Extraordinary Items (D)- This figure represents the company's earnings before tax, excluding any extraordinary items that could skew the true operational performance. It serves as the starting point for calculating cash flows from operating activities.
Adding and Deducting the Changes in Working Capital (E)- Working capital adjustments are essential for converting net profit into cash flows from operations. Working capital includes current assets (like accounts receivable and inventory) and current liabilities (like accounts payable). Changes in these accounts can either increase or decrease cash. This step ensures the cash flow reflects actual cash available, rather than just accounting profit.
Purchase of Machinery (C) - This falls under investing activities. Cash spent on purchasing machinery is a capital expenditure, reflecting the company's investment. It’s a cash outflow that reduces the overall cash balance but is crucial for future production capacity.
Repayment of Bank Loan (B)- This is part of financing activities. Repaying a bank loan represents a cash outflow as the company pays back borrowed funds. It is essential for managing debt and maintaining a healthy financial position. Like the purchase of machinery, this affects the cash balance. It reduces the cash position as repayment is a cash outflow.
Closing Balance of Cash (A)- Finally, the closing balance of cash is calculated by taking the starting cash balance, adding cash inflows, and subtracting cash outflows from the previous steps. This figure represents the amount of cash available at the end of the period. |
