Question
Solstice SA had the following 2027 income statement.
Sales Revenue 240,000
Cost of Goods Sold 144,000
Gross profit 96,000
Operating Expenses (includes
depreciation of $25,200) 60,000
Net Income 36,000
The following accounts increased during 2027: Accounts Receivable $14,400, inventory $13,200, and Accounts Payable $15,600. Prepare the Cash flows from operating activities section of Solstice SA's 2027 statement of cash flows using the Indirect method.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 7 — Statement of Cash Flows
Start from profit, then undo everything in it that was not cash. Add back non-cash charges such as depreciation and amortisation, remove gains and losses that belong to investing activities, and then adjust for the movement in each working-capital account. The reconciliation is finished only when the closing cash figure agrees with the balance sheet.
Common mistakes
- Getting the sign of a working-capital movement backwards — a rise in a current asset consumes cash, a rise in a current liability provides it.
- Leaving a gain on disposal inside operating cash flow as well as showing the full proceeds under investing, which counts it twice.
- Classifying the purchase of non-current assets as operating rather than investing.
IFRS vs US GAAP: IFRS permits interest and dividends paid to be shown as operating or financing; US GAAP fixes interest paid in operating.
Further readingDirect vs indirect method cash flow