Read the following information to answer.
On the basis of case study given below, answer the question which follows:
"Mikku, an alumnus of IIT Delhi, initiated his start-up "Gajanan Ltd." in the year 2016. His profit in the year 2020-21 after all appropriation was ₹6,25,000. This profit was arrived at after taking the following items into consideration (income tax paid during the year was equal to the provision for tax):
| Loss on Sale of fixed Assets | ₹5,00,000 |
| Goodwill written off | ₹3,80,000 |
| Transfer to reserve | ₹3,55,000 |
| Provision for tax | ₹2,70,000 |
| Interest on Debentures paid | ₹1,65,000 |
| Particulars | 2020(₹) | 2021(₹) |
| Prepaid Expenses | 25,000 | 10,000 |
| Accrued interest | 40,000 | 68,000 |
| Trade payables | 7,00,000 | 4,00,000 |
| Inventories | 6,50,000 | 5,50,000 |
Cash flow from Operating Activities will be:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → ₹18,12,000
Cash flow from operating activities (indirect method) starts from the net profit before tax, adds back non-cash and non-operating items, adjusts for changes in working capital and finally deducts the income tax paid.
Net profit before tax
Profit after appropriations = ₹6,25,000
Add: Transfer to reserve = ₹3,55,000
Add: Provision for tax = ₹2,70,000
Net profit before tax = ₹12,50,000
Operating profit before working capital changes
Add: Loss on sale of fixed assets (non-operating) = ₹5,00,000
Add: Goodwill written off (non-cash) = ₹3,80,000
Add: Interest on debentures (a financing payment) = ₹1,65,000
Operating profit before working capital changes = ₹22,95,000
Changes in working capital
Add: Decrease in prepaid expenses (25,000 − 10,000) = ₹15,000
Less: Increase in accrued interest (68,000 − 40,000) = ₹28,000
Less: Decrease in trade payables (7,00,000 − 4,00,000) = ₹3,00,000
Add: Decrease in inventories (6,50,000 − 5,50,000) = ₹1,00,000
Cash generated from operations before tax = ₹20,82,000
Income tax paid
Less: Income tax paid (equal to the provision) = ₹2,70,000
Cash flow from operating activities = ₹18,12,000