Question

If net profit made during the year are ₹ 50,000 and the bills receivables have decreased by ₹10,000 during the year then the cash flow from operating activities will be:

• A. ₹40000
• B. ₹60000
• C. ₹30000
• D. ₹20000

Answer 1

The Correct Option is B

Step 1: Start with Net Profit

The net profit given is ₹50,000. This is our starting point because the indirect method adjusts the net profit (calculated on an accrual basis) to reflect actual cash flows.

Step 2: Adjust for Changes in Bills Receivable

We’re told that bills receivable decreased by ₹10,000. Let’s break this down:

• Bills receivable are amounts owed to the business by customers, often in the form of promissory notes.
• A decrease in bills receivable means the business collected cash from its debtors. So, ₹10,000 of bills receivable turned into cash.
• In cash flow calculations, a decrease in a current asset (like bills receivable) means more cash came in, so we add this amount to the net profit.

Adjustment: +₹10,000

Step 3: Calculate Cash Flow from Operating Activities

Now, let’s compute:

• Net profit: ₹50,000
• Add: Decrease in bills receivable: ₹10,000
• Cash flow from operating activities = ₹50,000 + ₹10,000 = ₹60,000

Step 4: Match with the Options

The options are:

• Option 1: ₹40,000
• Option 2: ₹60,000
• Option 3: ₹30,000
• Option 4: ₹20,000

Our calculated cash flow of ₹60,000 matches Option 2.

Final Answer

The cash flow from operating activities is ₹60,000.