Question

Statement-I: Snow Limited earned a profit of Rs 2,00,000 after charging depreciation of Rs 50,000 on machinery. So, operating profit before working capital changes would be Rs 2,50,000. 
Statement-II: Depreciation is added back to net profit as it does not result in any cash flow. 

Hint:

In the indirect method for Cash Flow from Operations: Start with Net Profit Before Tax. Add back non-cash expenses (like Depreciation, Amortisation, Loss on Sale of Asset) and non-operating expenses charged to P\ (like Interest). Deduct non-cash incomes (like Profit on Sale of Asset) and non-operating incomes credited to P\. The result is Operating Profit Before Working Capital Changes.

Answer 1

Both statements are correct and logically connected. Here's why:

Statement-I is Correct:
Operating profit before working capital changes focuses on the profitability of core operations before considering investments in working capital. Since depreciation is a non-cash expense, it's deducted in the income statement but doesn't represent an actual cash outflow. Therefore, to arrive at the operating profit before working capital changes, we add back the depreciation to the profit after depreciation. In this case:

Operating Profit before Working Capital Changes = Profit after Depreciation + Depreciation

= Rs 2,00,000 + Rs 50,000 = Rs 2,50,000

Statement-II is Correct:
Depreciation is a non-cash expense. It represents the allocation of the cost of an asset over its useful life, but it doesn't involve an actual outflow of cash during the accounting period. When calculating cash flow from operations using the indirect method, we add depreciation back to net income because it was previously deducted to arrive at net income but did not affect cash.

Conclusion:
Statement I is correct and statement II is also correct and provides a clear explanation of why depreciation is added back in such calculations.