Calculate the amount of cash generated from operations from the follo…

Calculate the amount of cash generated from operations from the following information :

Particulars	(Rs.)
Profit before change in working capital	2,00,000
Depreciation on plant and Machinery	20,000
Gain on sale of Building	10,000
Increase in trade Payables	4,500
Increase in trade Receivables	3,500
Interest paid	2,225
Decrease in Inventories	3,750
Redemption of 10% Debentures	80,000

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Rs. 2,04,750

The Rs. 2,00,000 is already the profit before change in working capital, that is, the operating profit before working capital changes. Depreciation and the gain on sale of building are adjusted before this stage, so they are not adjusted again. Only the changes in current assets and current liabilities are left.

Profit before change in working capital = Rs. 2,00,000

Add: Increase in trade payables = Rs. 4,500

Less: Increase in trade receivables = Rs. 3,500

Add: Decrease in inventories = Rs. 3,750

Cash generated from operations = Rs. 2,00,000 + Rs. 4,500 − Rs. 3,500 + Rs. 3,750 = Rs. 2,04,750

Interest paid and redemption of debentures are financing activities. They are shown under financing activities and do not enter cash generated from operations.

NCERT (2026-27 edition):
Indirect Method – “… Other important adjustments relate to changes in working capital which are necessary (i.e., items of current assets and current liabilities) to convert net profit/loss which is based on accrual basis into cash flows from operating activities. Therefore, the increase in current assets and decrease in current liabilities are deducted from the operating profit, and the decrease in current assets and increase in current liabilities are added to the operating profit so as to arrive at the exact amount of net cash flow from operating activities.”