Read the following passage and answer the question.
A company has a net profit after tax of ₹5,60,000 in the current year 2022. Company write off the bad debts of ₹5,000 during the year. Depreciation charged on fixed assets is ₹40,000. Company sold the investments and a gain of ₹10,000 arise. The following details are given-
| Particulars | 2021 (₹) | 2022 (₹) |
| Trade receivables | 70,000 | 90,000 |
| Trade payables | 45,000 | 70,000 |
| Outstanding expenses | 5,000 | 1,000 |
| Prepaid expenses | - | 2,000 |
| Provision for taxation | 16,000 | 25,000 |
What is the net cash flow from operating activities?
Answer & explanation
Correct answer: option 1
The correct answer is option 1- ₹5,98,000.
Cash flow statement
| Particulars | Amount (₹) | Amount (₹) |
| Net profit before tax (*note 1) |
5,85,000 | |
| Adjustments for non-cash and non-operating items | ||
| Add: Dep | 40,000 | |
| Add: Bad debts written off | 5,000 | |
| Less: Profit on sale of investments | 10,000 | 35,000 |
| OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES | 6,20,000 | |
| Add: Increase in trade payables | 25,000 | |
| Less: Increase in trade receivables (*Note 3) | 25,000 | |
| Less: Increase in prepaid expenses | 2,000 | |
| Less: Decrease in o/s expenses | 4,000 | 6,000 |
| CASH GENERATED FROM OPERATING ACTIVITIES | 6,14,000 | |
| Less: Payment of tax (*note 2) | 16,000 | |
| NET CASH FLOW FROM OPERATING ACTIVITIES | 5,98,000 |
* Note 1- Provision for tax for the 2022 is added back to profit to calculate the profit before tax. So, profit before tax is 5,60,000 + 25,000 = 5,85,000
* Note 2- Provision for tax for the year 2021 means ₹16,000 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 25,000 (70,000 - 5,000 - 90,000).