Q.From the following, calculate the cash flow from operating activities (before tax) using the indirect method:
Net profit ₹50,000; Depreciation ₹12,000; Goodwill written off ₹8,000; Increase in debtors ₹15,000; Decrease in creditors ₹6,000; Increase in stock ₹10,000; Decrease in prepaid expenses ₹3,000.

Under the indirect method, start with net profit, add back non-cash charges, then adjust for the changes in current assets and liabilities.

The indirect method starts from net profit, adds back non-cash charges to get operating profit before working capital changes, and then adjusts for the changes in current assets and current liabilities.

Step 1 — Add back non-cash charges to net profit.

Step 2 — Adjust for changes in working capital. The rule is: an increase in a current asset or a decrease in a current liability is subtracted; a decrease in a current asset or an increase in a current liability is added.

Step 3 — Compute cash from operations. …

The same result can be reached by listing every add-back and adjustment in a single vertical statement: Net profit ₹50,000 + Depreciation ₹12,000 + Goodwill ₹8,000 − Increase in debtors ₹15,000 − Decrease in cr …

The most common error is getting the sign of a working-capital change wrong — an increase in a current asset (debtors, stock) reduces cash, while an increase in a current liability (creditors) increases cash. A decrease in prepaid expenses is a decrease in a current asset and is therefore *ad …