Question

From the following information extracted from the books of Kant Ltd., calculate ‘Cash Flows from Operating Activities’.

Hint:

While using the indirect method, always add back non-cash and non-operating expenses.
Adjust increases in current assets and decreases in current liabilities negatively.

Answer 1

Step 1: Start with Net Profit
\(\Rightarrow\) Net Profit during the year = 1,95,000
Step 2: Add Non-Cash and Non-Operating Expenses
Depreciation on Machinery = 50,000
Goodwill written off = 30,000
Loss on Sale of Machinery = 10,000
Transfer to General Reserve = 1,05,000
\(\Rightarrow\) Total added back = \( 50,000 + 30,000 + 10,000 + 1,05,000 = 1,95,000 \)
Step 3: Operating Profit before Working Capital Changes
\[ = 1,95,000 + 1,95,000 = 3,90,000 \] Step 4: Adjust for Changes in Working Capital
Trade Receivables increased by 2,00,000
\(\Rightarrow\) Cash Outflow (negative adjustment)
Trade Payables decreased by 10,000
\(\Rightarrow\) Cash Outflow (negative adjustment)
Total adjustments = \( -2,00,000 - 10,000 = -2,10,000 \)
Step 5: Net Cash Flow from Operating Activities
\[ = 3,90,000 - 2,10,000 = 1,80,000 \] \(\Rightarrow\) Cash Flows from Operating Activities = 1,80,000