Question

Loss on the sale of Fixed Assets will be shown in which part of the cash flow statement, if indirect method is followed?

• Operating Cash Flow
• Financing Cash Flow
• Investing Cash Flow
• None of the above

Answer 1

The correct answer is option 1 - Operating Cash Flow.

An indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. This is because a statement of profit and loss incorporates the effects of all operating activities of an enterprise. It includes certain non-operating items such as interest paid, profit/loss on sale of fixed assets, etc.) and non-cash items (such as depreciation, goodwill to be written-off,), etc.

It becomes necessary to adjust the amount of net profit/loss as shown by Statement of Profit and Loss for arriving at cash flows from operating activities. 

Answer 2

Solution :-

The correct answer of this question is Operating Cash Flow.

While preparing the Cash Flow Statement as per Indirect Method, the net profit or net loss of that period is used as the base and then adjustments are made for items that affected the Income Statement but did not affect the cash.

According to the indirect method, Non Cash and Non Operating charges in the Income Statement are added back to the Net Profits while Non-Cash and Non-Operating Credits are deducted to calculate the Operating Profit before Working Capital changes.