Identify the correct sequence of the following steps involved in calculating cash flows from operating activities of a company:
(A) Operating profit before working capital changes
(B) Cash generated from operations
(C) Income tax paid
(D) Net cash flow from operating activities
(E) Goodwill amortised
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is option 3- (E), (A), (B), (C), (D).
(E) Goodwill amortised- Goodwill amortised is a non cash expenditure which does not reduce profit of the company so it is added back to the net profit to prepare the cash flow statement.
(A) Operating Profit before working Capital Change- Operating profit before working capital changes is calculated by adding deductions already made in Statement of Profit and Loss on Account of Non-operating items such as Interest and deducting (incomes) made in Statement of Profit and Loss on Account of Non-operating items such as Dividend received, Profit on sale of Fixed Assets.
(B) Cash generated from operation- After it, increase or decrease in current assets and current liabilities are adjusted to calculate the cash generated from operations before tax and extraordinary items.
(C) Income tax paid- After calculating the cash generated from operations, income tax is paid by the company.
(D) Net Cash flow from Operating Activities- After calculating cash generated from operations and deducting Income Tax that is paid by the company, the figure which comes out is net cash flow from operating activity.
Performa of calculating cash flows from operating activities as per indirect method.
| Particulars | Amount | |
| Net Profit/Loss before Tax and Extraordinary Items | ||
| Add | Deductions already made in Statement of Profit and Loss on account of Non-cash items such as Depreciation, Goodwill to be Written-off. |
|
| Add | Deductions already made in Statement of Profit and Loss on Account of Non-operating items such as Interest. |
|
| Less | Additions (incomes) made in Statement of Profit and Loss on Account of Non-operating items such as Dividend received, Profit on sale of Fixed Assets. |
|
| Operating Profit before Working Capital changes | ||
| Less | in case of increase in current assets (other than cash and cash equivalent) and decrease in current liabilities | |
| Add | in case of decrease in current assets (other than cash and cash equivalent) and increase in current liabilities. | |
| Cash Flows from Operation Activities before Tax and Extraordinary items | ||
| Less | Income Tax Paid | |
| +/– | Effects of Extraordinary Items | |
| Net Cash from Operating Activities |