Preparing Basic Financial Statements — ACCA Practice Question 24

How to approach this question

Think about cash flow. If receivables go up, customers haven't paid you yet (less cash). If payables go down, you have paid your suppliers (less cash). Both reduce operating cash flow.

Full Answer

C.Deduct the increase in receivables; deduct the decrease in payables.✓ Correct

Under the indirect method, working capital changes are adjusted against profit. An increase in trade receivables means sales were made on credit and cash has not yet been received, so it is deducted from profit. A decrease in trade payables means the company has paid cash to suppliers to reduce its debt, so it is also deducted from profit.

Common mistakes

Reversing the logic and adding increases in assets.

When preparing a Statement of Cash Flows using the indirect method, how should an increase in trade receivables and a decrease in trade payables be treated when reconciling profit before tax to cash generated from operations?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 4

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