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Hallo,
we have to find the cash generated from operations, a given list of items says:
decrease in Inventory
decrease in Receivables
decrease in Prepayments
increase in Payables
decrease in Interest accrualQuestion: which of these items is included in finding the cash generated from operations?
Answer: decrease in inventory – decrease in receivables + decrease in prepayments + increase in payables = cash generated from operations
1. The answer includes all items except the decrease in interest accrual, why is it not included?
2. Decrease in Prepayments is added. Why? How do we know, as it is not mentioned, if this is prepayments we made, or prepayments we received, i.e. is it a cash outflow or a cash inflow?
Thank you!
1. Interest is subtracted from the cash generated from operations in order to arrive at the cash flows from operating activities.
The cash generated from operations is before interest, and so anything to do with interest is not relevant.2. The word ‘prepayments’ on its own refers to prepaid expenses.
The answer to the question as you have typed it is the first four items, but not the last one.
(What you have typed against ‘answer’ is complete nonsense – I cannot believe it is typed like that in whatever book you found the question. Cash generated from operations has to start with profit before tax – I do not see that anywhere in the equation!!)
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