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Chapter 18

3.3 Adjustments required when using the indirect method

The following are examples of adjustments which are normally required when
preparing cash flows from operating activities using the indirect method:

 Depreciation – added back to profit before tax because it is a non-cash expense

 Loss on disposal of non-current assets – the loss (a non-cash expense) is
added back to profit before tax; the cash proceeds on the disposal will be
classified as an investing activity cash inflow. Note that a gain on disposal is
deducted from profit before tax

 Interest payable expense – added back to profit before tax because it is not part
of cash generated from operations (the cash payment is deducted elsewhere in
the statement of cash flows)

 Increase/decrease in inventories – inventories represents purchases made in
one accounting period. An increase in inventories is deducted from profit before
tax as it represents a cash outflow to pay for the additional inventories. A
decrease in inventories is added to profit before tax as it represents a cash
inflow from disposing of inventories.

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