Accountancy Part BCash Flow Statement

Identify the starting point for working out the Cash Flow from Operat…

Identify the starting point for working out the Cash Flow from Operating Activities.

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Net profit before tax and Extraordinary items

Under the indirect method, cash flow from operating activities starts from net profit before tax and extraordinary items; non-cash and non-operating items and working-capital changes are then adjusted, and income tax paid is deducted last.

Option (1) Net profit before Tax — Incorrect. Extraordinary items must also be kept out of the starting figure.

Option (3) Net cash from operating activities — Incorrect. This is the end result, not the starting point.

Option (4) Cash flows from operating activities before Tax and Extraordinary items — Incorrect. This is an intermediate total reached after the adjustments.

NCERT (2026-27 edition):
Ascertaining Cash Flow from Operating Activities – “… As stated earlier, while working out the cash flow from operating activities, the starting point is the ‘Net profit before tax and extraordinary items’ and not the ‘Net profit as per Statement of Profit and Loss’. Income tax paid is deducted as the last item to arrive at the net cash flow from operating activities.”