In the course of preparing a company's statement of cash flows, the following figures are to be

In the course of preparing a company's statement of cash flows, the following figures are to be included in the calculation of net cash from operating activities. $Depreciation charges 980,000Profit on sale of non-current assets 40,000Increase in inventories 130,000Decrease in receivables 100,000Increase in payables 80,000What will the net effect of these items be in the statement of cash flows? A. Addition to operating profit $890,000 B. Subtraction from operating profit $890,000 C. Addition to operating profit $1,070,000 D. Addition to operating profit $990,000

To determine the net effect of these items on operating cash flows using the indirect method, we adjust operating profit by accounting for non-cash expenses, non-operating gains, and changes in working capital. Here's the breakdown:

Key Adjustments Explained

Depreciation ($980,000): A non-cash expense deducted in calculating operating profit. Since no cash outflow occurs, it is added back to operating profit.

Profit on sale of non-current assets ($40,000): A non-operating gain included in operating profit. As it does not relate to core operations, it is subtracted from operating profit.

Increase in inventories ($130,000): Represents cash spent to acquire more inventory, a cash outflow. This is subtracted from operating profit.

Decrease in receivables ($100,000): Indicates cash collected from customers, a cash inflow. This is added to operating profit.

Increase in payables ($80,000): Reflects delayed supplier payments, conserving cash. This is added to operating profit.

Net Effect Calculation

Total Adjustment

Summing these:
\(980,000 - \)40,000 - \(130,000 + \)100,000 + \(80,000 = **\)990,000**

The net effect is an addition to operating profit of $990,000.

Answer: D