Read the following information to answer.
Rathi Udyog, made a profit of 72,000 after charging depreciation of Rs. 17,000 on fixed assets and paid Rs. 10,000 as interim dividend. The goodwill amortized was Rs. 12,000 and profit (Gain) on sale of furniture was Rs. 2,500.
The other informations were :
Trade Payable showed an increase of Rs. 7,000.
Outstanding expenses showed a decrease of Rs. 5,000.
Accrued Income showed an increase of Rs. 8,000.
Trade payable showed a decrease of Rs. 10,000.
Inventories showed a decrease of Rs. 3,000.
On the basis of above information answer the following questions.
We add depreciation in order to find out operating profit before working capital changes :
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → because depreciation being a non-cash expense
Depreciation is charged to the Statement of Profit and Loss, so it reduces the profit. But no cash is paid for it in the year. To turn the profit into cash flow, this non-cash charge is added back.
Option (1) because it is an income — Incorrect. Depreciation is an expense, a part of the cost of a fixed asset charged to the year. It is never an income.
Option (2) because depreciation is a cash expense — Incorrect. No cash leaves the business when depreciation is charged; it is only a book entry. A real cash expense would not be added back.
Option (3) because depreciation being a non-cash expense — Correct. It lowers the profit without any outflow of cash, so the profit understates the cash earned by that amount.
Option (4) because it is given in operating activity proforma — Incorrect. The proforma shows where depreciation is adjusted, but it does not give the reason. Depreciation is added back because it is a non-cash item.
NCERT (2026-27 edition): |