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.
Choose the correct option from the following:

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

Statement-I Analysis: The profit given (Rs 2,00,000) is 'Net Profit' (presumably after interest and tax, although not explicitly stated, but it's after depreciation). When calculating 'Operating Profit before Working Capital Changes' for a Cash Flow Statement (Indirect Method), we start with Net Profit before Tax and add back non-cash and non-operating expenses. Depreciation (Rs 50,000) is a non-cash operating expense. Adding it back to the profit *after* depreciation gives the profit *before* depreciation. Assuming the Rs 2,00,000 is Net Profit Before Tax (or adjusting it appropriately if it were After Tax), adding back depreciation would indeed lead towards calculating operating profit. Profit before Depreciation = 2,00,000 + 50,000 = 2,50,000. This figure represents operating profit before depreciation and working capital changes (assuming no other non-cash/non-operating items). So, Statement-I is conceptually correct in the context of cash flow adjustments. Statement-II Analysis: Depreciation is an accounting expense that allocates the cost of an asset over its useful life. It reduces accounting profit but does not involve an actual outflow of cash in the period it is recorded. Therefore, when calculating cash flow from operations using the indirect method, depreciation is added back to net profit because the profit has been reduced by this non-cash charge. Statement-II is factually correct. Since both statements are true based on accounting principles related to cash flow analysis, Option (D) is correct. (Note: Statement I's precise definition might vary slightly depending on context, but the calculation step shown is standard in CFS preparation).