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Home Questions 8G32CVMA5G
Target Exam

CUET

Subject

Accountancy

Chapter

Cash Flow Statement

Question:

A company has a net profit after tax of ₹560000 in the current year 2022. Company write off the bad debts of ₹5000 during the year. Depreciation charged on fixed assets is ₹40000. Company sold the investments and a gain of ₹10000 arise. The following details are given-

Particulars 2021 (₹) 2022 (₹)
Trade receivables 70000 90000
Trade payables 45000 70000
Outstanding expenses 5000 1000
Prepaid expenses - 2000
Provision for taxation 16000 25000

Calculate the operating profit before working capital changes?

Options:

₹620000

₹614000

₹598000

₹585000

Correct Answer:

₹620000

Explanation:

The correct answer is option 1- ₹620000.

 Cash flow statement

Particulars Amount (₹) Amount (₹)
Net profit before tax (*note 1)
   585000
Adjustments for non-cash and non-operating items    
Add: Dep 40000  
Add: Bad debts written off 5000  
Less: Profit on sale of investments 10000 35000
OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES   620000
Add: Increase in trade payables 25000  
Less: Increase in trade receivables (*Note 3) 25000  
Less: Increase in prepaid expenses 2000  
Less: Decrease in o/s expenses 4000 6000
CASH GENERATED FROM OPERATING ACTIVITIES   614000
Less: Payment of tax (*note 2)   16000
NET CASH FLOW FROM OPERATING ACTIVITIES   598000

 

* Note 1- Provision for tax for the 2022 is added back to profit to calculate the profit before tax. So, profit before tax is 560000 + 25000 = 585000

* Note 2- Provision for tax for the year 2021 means ₹16000 will be treated as payment of tax and deducted from the cash generated from operating activities to calculate the net cash flow from operating activities.

* Note 3- Trade receivables are to be adjusted for the bad debts.  Trade receivables decreased by 25000 (70000 - 5000 - 90000).

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