Practicing Success
Why does the indirect method of ascertaining cash flow from operating activities start with net profit/loss? |
To incorporate non-operating items To simplify the cash flow calculation To match with cash flows from investing activities To highlight extraordinary items |
To incorporate non-operating items |
The indirect method of determining cash flow from operating activities commences with the net profit/loss figure. This approach is chosen because the statement of profit and loss encapsulates the outcomes of all the operating activities undertaken by the enterprise. However, it's important to note that the statement of profit and loss is formulated on an accrual basis, not on a cash basis. Consequently, it encompasses specific non-operational elements, including interest paid and gains/losses from the sale of fixed assets, among others. Additionally, non-cash items like depreciation, goodwill write-offs, and declared dividends are also included. As a result, a need arises to recalibrate the net profit/loss figure, as reported in the statement of profit and loss, to arrive at an accurate representation of cash flows from operating activities. |