Operating profit before working capital charges amounted to Rs.85,000. The following further information is given
| 31.3.2020 (Rs.) | 31.3.2019 (Rs.) | |
|---|---|---|
| Cash | 36,000 | 30,000 |
| Trade receivable | 18,000 | 12,000 |
| Provision for tax | 9,000 | 8,000 |
| Trade payables | 20,000 | 16,000 |
| Bank over draft | 18,000 | - |
The Net cash flow from operating activities after tax is.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Rs.75,000
Start from the operating profit before working capital changes, adjust the changes in current assets and current liabilities that relate to operations, and then deduct the income tax paid. Cash is what is being explained, and the bank overdraft is a short-term borrowing, so neither is a working capital adjustment.
Operating profit before working capital changes = Rs. 85,000
Less: Increase in trade receivables (Rs. 18,000 − Rs. 12,000) = Rs. 6,000
Add: Increase in trade payables (Rs. 20,000 − Rs. 16,000) = Rs. 4,000
Cash generated from operations = Rs. 85,000 − Rs. 6,000 + Rs. 4,000 = Rs. 83,000
Less: Income tax paid = Rs. 8,000
Net cash flow from operating activities = Rs. 83,000 − Rs. 8,000 = Rs. 75,000
Tax paid: the provision of Rs. 8,000 made at the end of the previous year is paid during the current year, while the closing provision of Rs. 9,000 is the tax for the current year, still unpaid on 31.3.2020. So the tax paid during the year is Rs. 8,000, not Rs. 9,000 (deducting Rs. 9,000 would give Rs. 74,000).