Accountancy Part BCash Flow Statement

Identify the correct sequence in calculation of Cash Flow from Operat…

Identify the correct sequence in calculation of Cash Flow from Operating Activities.

(A) Addition and subtraction of Non cash/Non operating items

(B) Payment of income tax

(D) Calculation of net profit/loss before tax and extraordinary items

Choose the correct answer from the options given below :

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → (D), (A), (C), (B)

Under the indirect method, cash flow from operating activities starts from the net profit before tax and works down to the net cash figure:

(D) Calculation of net profit/loss before tax and extraordinary items — the starting point.
(A) Addition and subtraction of Non cash/Non operating items — depreciation, interest and similar items are adjusted.
(C) Calculation of operating profit before working capital changes — the result of those adjustments, after which current assets and liabilities are adjusted.
(B) Payment of income tax — deducted last to reach net cash from operating activities.

Operating profit before working capital changes (C) is the result of step (A), so it can come only after it.

Note: The proforma in the NCERT book has a misprint in the two working-capital lines. It should read “Add: decrease in current assets and increase in current liabilities” and “Less: increase in current assets and decrease in current liabilities”, as the book itself says in the text just before it.

NCERT (2026-27 edition):
Ascertaining Cash Flow from Operating Activities

Extract from the NCERT textbook

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.”