Cash Flow's Profit Adjustments Navigator

Do the endless adjustments for 'Net Profit Before Tax and Extraordinary Items' and 'Operating Profit Before Working Capital Changes' in your Cash Flow Statement leave you confused? Master them effortlessly!

Subject: Accountancy • Classes: 12–12 • Difficulty: advanced

The Trick

This trick provides a systematic two-step approach to correctly calculate the initial figures for your Cash Flow from Operating Activities (Indirect Method). It ensures you don't miss crucial non-cash or non-operating items that need to be added back or subtracted from your Net Profit for accurate cash flow determination, making complex problems simpler and faster to solve.

Step-by-Step

  1. Step 1: Determine Net Profit Before Tax & Extraordinary Items (NPBT & EI) — Start with the difference between the closing and opening balances of 'Surplus i.e., Balance in Statement of Profit & Loss'. Then, systematically add back or deduct items: - ADD: Proposed Dividend (of previous year), Interim Dividend (of current year), Provision for Tax (of current year), Transfer to Reserves, Extraordinary Losses. - DEDUCT: Extraordinary Gains, Refund of Tax.
  2. Step 2: Calculate Operating Profit Before Working Capital Changes (OPBWCC) — Use the NPBT & EI figure from Step 1. Now, adjust for non-cash and non-operating items: - ADD: Non-Cash/Non-Operating Expenses like Depreciation, Amortisation (Goodwill/Patents written off), Interest on Borrowings, Loss on Sale of Fixed Assets/Investments. - DEDUCT: Non-Operating Incomes like Interest Received, Dividend Received, Rent Received, Profit/Gain on Sale of Fixed Assets/Investments.

Frequently Asked Questions

Why do we add back depreciation when calculating OPBWCC?
Depreciation is a non-cash expense. It reduces net profit but does not involve an actual outflow of cash, so it must be added back to find the cash generated from operations.
Should 'Dividend Paid' be considered in Step 1?
No, 'Dividend Paid' is a financing activity. Only 'Proposed Dividend' (of previous year) and 'Interim Dividend' (of current year) are added back in Step 1 as they are appropriations of profit, not actual cash outflows from operations.

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