Under the indirect method, what is the starting point for determining cash flows from operating activities while preparing cash flow statement of a company?

Net profit before taxation and extraordinary items

The correct answer is option 4- Net profit before taxation and extraordinary items.

As per AS-3, an enterprise should report cash flows from operating activities either by using :

* Direct method whereby major classes of gross cash receipts and gross cash payments are disclosed;

* or Indirect method whereby net profit or loss is duly adjusted for the effects of (1) transactions of a non-cash nature, (2) any deferrals or accruals of past/future operating cash receipts, and (3) items of income or expenses associated with investing or financing cash flows.

It is important to mention here that under indirect method, the starting point is net profit/loss before taxation and extraordinary items as per Statement of Profit and Loss of the enterprise. Then this amount is for non-cash items, etc., adjusted for ascertaining cash flows from operating activities.