A company's operating profit before working capital changes includes a profit on disposal of non-current assets of £3,000. How is this treated when reconciling operating profit to cash generated from operations?
Answer and explanation
Correct answer: A. Deducted from operating profit, because the cash proceeds are shown in investing activities
- Step 1: The statement of profit or loss includes the profit on disposal, but the actual proceeds are an investing inflow.
- Step 2: To avoid counting the gain in operations, deduct £3,000 from operating profit.
- Step 3: So the profit is removed in the reconciliation and the full proceeds go in investing.
Answer
Deducted from operating profit, because the cash proceeds are shown in investing activities.
Why not the others: The profit is non-cash in the operating section, and adding it would double count it. Profit on disposal is included in profit, so it must be removed in the reconciliation. The profit has nothing to do with financing activities.
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