In the context of the indirect method of determining net cash flow from operating activities, dividends paid is an example of a financial activity that is added back to net profit. Here's why:
Dividend paid: The dividend declared represents the distribution of profits to the company's shareholders. It is a financial activity because it involves transferring funds to the company's owners. Since the determination of net cash flow from operating activities focuses on cash flows directly related to the company's core operations, dividends declared, which is a financial outflow, is added back to the net profit.
Depreciation: Depreciation, on the other hand, is a non-cash expense that is added back to the net profit because it represents the allocation of the cost of tangible assets over their useful lives. It does not involve actual cash outflows during the period.
Goodwill Written-Off: Goodwill written-off is also added to net profit. Goodwill is an intangible asset that represents the value of a company's reputation and customer relationships. Writing off goodwill means recognizing that its value has decreased, which reduces the overall net profit.
Interest Received: Interest received is a part of investing activities, not operating activities. It is subtracted from the net profit as it represents cash flows from investments and not from the primary operations of the company. |
