A company made a profit of KSh 500,000 after charging depreciation of KSh 120,000. During the year inventory rose by KSh 40,000, receivables rose by KSh 30,000 and payables rose by KSh 20,000. What is the net cash flow from operating activities?

Answer and explanation

Correct answer: B. KSh 570,000

  1. Step 1: Start with profit and add back the non-cash charge: 500,000 + 120,000 = 620,000. Step 2. Deduct the increase in inventory and receivables, which tie up cash: 620,000 - 40,000 - 30,000 = 550,000. Step 3. Add the increase in payables, which holds cash back: 550,000 + 20,000 = KSh 570,000. Answer: KSh 570,000. Why not the others: KSh 710,000: That adds the increases in inventory and receivables, but they use cash. KSh 330,000: That deducts depreciation, which is a non-cash charge and must be added back. KSh 620,000: That ignores the changes in working capital.

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