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I understand that object of cash flows is to get from profit before tax to cash flow but can you explain why the below is the case?
depreciation is added to profit – as this is not a cash flow why does it need to be added back to the profit?
profit/loss on sale of asset – don’t understand why a loss is added and a sale is deducted from profit. sale of asset is cash flow in, no?
change in inventory I understand – increase is a negative as you’ve spent money to acquire new inventory
increase in receivables – why deduct from profit?
These might be alarming questions but I’m just not grasping the above.
Appreciate your help.
depreciation is added to profit becox it was already deducted from profit while doing income statement. As it is non cash expense it should be added back.
depreciation is added to profit because it was considered an expense in the statement of profits and loss, but in reality, no cash was spent.
profit/loss on sale of asset. Let’s say your asset is worth $100 and you sell it for $50, in the SFP that’s put down as $50 lost but in reality you got $50 cash in.
increase in receivables. If someone owes you money, that’s cash you should have but don’t, it was put in the IS as income, but you didn’t get the cash yet.
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