When preparing the Cash Flow Statement using the indirect method, which of the following adjustments is NOT made to reconcile profit before tax to cash provided by operating activities?
Answer
Subtract cash interest paid
The correct answer is Subtract cash interest paid — Hence the adjustment "Subtract cash interest paid" is NOT made in the operating section.
Step-by-step solution
- Identify adjustments that are added to profit before tax: depreciation (non‑cash expense) and loss on sale of equipment (non‑cash loss).
- Identify working‑capital adjustments that are added or subtracted: increase in trade payables is added because it represents cash retained.
- Recognise that cash interest paid is a cash outflow classified under financing activities, not an operating adjustment.
- Hence the adjustment "Subtract cash interest paid" is NOT made in the operating section.
Common mistake: Treating cash interest paid as an operating‑activity adjustment
Concept tested: Operating‑section adjustments in cash flow (indirect)
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