Question

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

• A. E, C, D, A, B
• B. E, A, D, B, C
• C. E, A, B, C, D
• D. A, B, C, D, E

Answer 1

The Correct Option is D

Sequence of Steps: Calculating Cash Flows from Operating Activities

Calculating cash flows from operating activities involves a logical sequence of steps based on accounting principles. The direct and indirect methods are most commonly used. Here’s the correct order in the *indirect* method:

1. Net Profit Before Tax: Usually you start with Net Profit Before Tax (NPBT)
2. Amortisation & Depreciation Adjustments (E): Begin by adjusting for non-cash items such as amortisation of intangible assets (like goodwill) and depreciation of tangible assets. These are expenses that reduce profit but do not involve an actual outflow of cash. We *add back* depreciation and amortisation.
3. Operating Profit Before Working Capital Changes (A): Calculate the operating profit *after* adjusting for non-cash expenses (amortization, depreciation etc.). This figure reflects the profit generated from the core business operations before considering changes in current assets and liabilities. This is effectively NPBT adjusted for non-cash items.
4. Adjustments for changes in Working Capital:

Adjustments are made to reconcile profit before tax to net cash flows from operating activities.

• Decrease in Current Assets (other than cash) : Added to the profit.
• Increase in Current Assets (other than cash) : Deducted from the profit.
• Increase in Current Liabilities: Added to the profit.
• Decrease in Current Liabilities : Deducted from the profit.

1. Cash Generated from Operations (B): Adjust for changes in working capital (current assets and current liabilities) to find the cash generated from operations. These changes reflect the cash impact of day-to-day operational activities.
2. Income Tax Paid (C): Deduct the income tax paid to arrive at the actual cash flow. Income taxes represent a cash outflow related to the operating profits.
3. Net Cash Flow from Operating Activities (D): Finally, derive the net cash flow from operating activities. This represents the net cash generated or used by the company’s core business operations during the period.

Therefore, the correct sequence, as implied by your letters provided, is: starting from net profit before tax, then (E), (A), (changes in WC), (B), (C), (D). However note that E and A are effectively combined in practice, with non-cash adjustments leading to the adjusted Operating Profit.

The order may be slightly different if using the *direct* method.

Answer 2

Sequencing Items to Arrive at Net Cash Flow 

In order to determine the net cash flow from a business, specific accounting steps must be followed. These steps, as outlined in accounting standards, help in arriving at accurate values for net cash flow.

Note: Only operating profit is considered in this process. Other profits and related items will be handled in their respective segments.

Items in Sequence

1. (A) Operating Profit
2. (B) Cash Generated
3. (C) Tax Paid
4. (D) Net Cash Flow
5. (E) Goodwill Amortised

Conclusion

The correct sequence, according to standard accounting practices, is:

(A) Operating Profit → (B) Cash Generated → (C) Tax Paid → (D) Net Cash Flow → (E) Goodwill Amortised

This order is reflected in Option 4.