Which of the following will be added to operating profit before working capital changes, while preparing the Cash Flow statement from the indirect method?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Decrease in Inventory by ₹50,000
In the indirect method, a decrease in a current asset or an increase in a current liability releases cash, so it is added to operating profit; an increase in a current asset or a decrease in a current liability is deducted.
Why the other options are incorrect
Option (1) Increase in Trade Receivable by ₹80,000 — Incorrect. More is owed by customers, so less cash has come in; it is deducted.
Option (3) Increase in Prepaid Expenses by ₹30,000 — Incorrect. Cash was paid in advance; an increase in a current asset is deducted.
Option (4) Decrease in Trade Payable by ₹20,000 — Incorrect. Suppliers were paid more; a decrease in a current liability is deducted.
NCERT (2026-27 edition): |