Question

Please no handwritten answers and provide reference if possible.

What amount is added back to the amounts listed in the Operating Activities section when completing the Statement of Cash Flows using the indirect method? Why is this done?

Answer 1

The following items are added to Net income when for calculating Operating profit before working Capital changes
Non-cash and non-operating Items which have already been debited to profit and Loss Account:
Depreciation
Amortisation of intangible assets
Loss on the sale of Fixed assets
Loss on the sale of Long-term Investments
Provision for tax
Dividend paid
The explanation for adding above items are that these are non-cash items which are included in the statement of profits.
But since we are calculating cash flow from operating activities we only have to take cash items.
Hence we will add these non-cash items to eliminate its effect from Net income.
After adding the above items we will get the Operating profit before working Capital changes
Then we will add all the working capital changes which results in decrease in current Assets/increase in current liabilities
Note:The above items mentioned above are just examples, there might be other non-cash items.