Question

For calculating cash flow from operating activities, provision for doubtful debts is ______ the profit made during the year.

Options

• added to

• deducted from

Answer 1

For calculating cash flow from operating activities, provision for doubtful debts is added to the profit made during the year.

Explanation:

Provision for doubtful debts is added to the net profit made during the year when calculating cash flow from operating activities. Creating a provision is a non-cash adjustment that reduces net profit on paper but does not cause any actual outflow of cash from the business. Under the indirect method of a Cash Flow Statement, all non-cash expenses and provisions must be added back to the net profit to reverse their effect and determine the true cash generated from operating activities.