ICANBusiness, Management and FinanceWorking Capital Management2020

Under IAS 7 (Statement of Cash Flows) as adopted by the Financial Reporting Council of Nigeria (FRCN), an increase in trade receivables during a reporting period is treated as which of the following in the indirect method reconciliation of profit to operating cash flows?

AAn addition to profit because receivables represent future inflows.
BA deduction from profit because cash has not yet been received for the related sales.CORRECT
CA non-cash item that is ignored in the cash flow statement.
DA financing activity because it relates to the company's credit policy decisions.
AI
Toaster Teacher
Why the answer is B, and why the others tempt you.
Under IAS 7, the indirect method starts with profit before tax and adjusts for changes in working capital. An increase in trade receivables means that sales recognised in profit have not yet been collected in cash, so cash inflows are lower than profit. Therefore, the increase is deducted from profit. This is a fundamental working capital adjustment in the operating activities section.
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