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Dear Mike,
How to we deal with increase in provision in statement of Cashflow (indirect method)? Do we add it back to net profit before tax, just like depreciation? or is there so other treatment?
Thanks,
ABIt’s a non-cash expense, just like depreciation, so we add it back to profit before tax, just like depreciation
Beware though, it could be a reduction in the amount of the provision in which case we need to DEDUCT the amount of the reduction from the profit before tax figure
Dear Sir,
I was told by my lecturer to adjust such a provision when adjusting for working capital changes. Is it okay? Or is there a standard way in practice to deal with provisions in preparing cash flow statements ?
The adjustment for the movement in a provision will appear in the section of the statement of cash flow covering Operating Activities
It will be in the same section as the depreciation add-back
If you have a lecturer teaching you these things, why are you asking on this site?
What about the Provisions in the Balance sheet… Is the increase or decrease in those liabilities should be treated as a line item in the cash flow from operations ?
It depends what the provision is.
If it’s a provision for doubtful debts or for depreciation then, no, they won’t appear as line items in the statement of cash flows … those two provisions are dealt with within the changes in working capital and the TNCA figures respectively
If it’s a movement in a provision for, for example, warranties then, yes, it will appear in your answer within the calculation of net cash flow from operating activities
OK?
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