Arrange the following steps in the correct sequence while calculating the cash flow from operating activities:

(A) Add in profit deductions already made in the Statement of Profit and Loss on account of non-cash items

(B) Calculate Operating Profit before Working Capital changes

(C) Deduct additions (incomes) made in the Statement of Profit and Loss on Account of Non-operating items

(D) Calculate Net Profit/Loss before Tax and Extraordinary Items

Choose the correct answer from the options given below:

When calculating cash flow from operating activities using the indirect method, we follow a systematic sequence:

Starting with Net Profit/Loss before Tax and Extraordinary Items (D), this forms the base figure from the Statement of Profit and Loss.

Next, we Add back non-cash items (A) that were deducted while calculating profit, such as:

• Depreciation
• Amortization
• Provisions
• Loss on sale of assets

These were expense deductions reducing profit, but involved no actual cash outflow, so they must be added back.

Then, we Deduct non-operating incomes (C) that were added while calculating profit, such as:

• Interest income
• Dividend income
• Profit on sale of investments/fixed assets

These increased profit but are not from operating activities, so they must be removed.

After these adjustments, we arrive at Operating Profit before Working Capital changes (B).

The correct sequence is: D → A → C → B

This represents the logical flow from net profit to operating profit by eliminating non-cash and non-operating items. The working capital changes would be adjusted after step (B) to finally arrive at cash flow from operating activities.

Correct Answer: Option 4: (D), (A), (C), (B)