Read the following passage ans answer the question.
A company made a profit of ₹1,00,000 after charging a Depreciation of ₹20,000 and a transfer to a General Reserve of ₹30,000. The goodwill written off of ₹7,000 and the gain on the sale of Machinery was ₹3,000.
The other information available (changes in the value of Current Assets and Current Liabilities) is as follows:
* At the end of the year Trade Receivables showed an increase of 6,000
* Trade Payables shows an increase of ₹10,000
* Prepaid Expenses show an increase of ₹200
* Outstanding Expenses show a Decrease of ₹2,000
What is the operating profit before working capital changes?
Answer & explanation
Correct answer: option 2
The correct answer is option 2- ₹1,54,000.
Profit made during the year = 1,00,000
Add: transfer to reserve = 30,000
Net profit before tax = 1,30,000
| Particulars | Amount (₹) | Amount (₹) |
| Net profit before tax | 1,30,000 | |
| Adjustments for non-cash and non-operating items | ||
| Add: Dep | 20,000 | |
| Add: G/W written off | 7,000 | |
| Less: Profit on sale of machinery | 3,000 | 24,000 |
| OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES | 1,54,000 |
Profit after charging items = ₹1,00,000
Add back non-cash and non-operating charges:
-
Depreciation = +₹20,000
-
Goodwill written off = +₹7,000
Add back appropriations (since they are not operating expenses):
-
Transfer to General Reserve = +₹30,000
Less non-operating income:
-
Gain on sale of machinery = −₹3,000
Calculation: ₹1,00,000 + 20,000 + 7,000 + 30,000 - 3,000 = ₹1,54,000
Changes in current assets and current liabilities are working capital changes, so they are not considered at this stage.