Compute cash from operations from the following figures: (i) Profit for the year 2016-17 is a sum of Rs. 10,000 after providing for depreciation of Rs. 2,000. (ii) The current assets and current liabilities of the business for the years ended March 31, 2016 and March 31, 2017 are as follows: | Particulars | 31st March 2016 (₹) | 31st March 2017 (₹) | | --- | --- | --- | | Trade Receivables | 14,000 | 15,000 | | Provision for Doubtful Debts | 1,000 | 1,200 | | Trade Payables | 13,000 | 15,000 | | Inventories | 5,000 | 8,000 | | Other Current Assets | 10,000 | 12,000 | | Expenses payable | 1,000 | 1,500 | | Prepaid Expenses | 2,000 | 1,000 | | Accrued Income | 3,000 | 4,000 | | Income received in advance | 2,000 | 1,000 |

> [!TLDR] > Cash from operations for the year 2016-17 is ₹7,700, computed by adjusting the profit of ₹10,000 for non-cash items (depreciation added back) and changes in working capital (increase in current assets reduces cash, increase in current liabilities increases cash). ## Concept and Treatment The question asks us to compute **Cash from Operations** using the **indirect method** of the Cash Flow Statement (AS-3). The logic is straightforward: we start with the net profit as per the Profit & Loss account, then adjust it for two things: 1. **Non-cash and non-operating items** that were already deducted or added in the P&L but did not involve actual cash flow. Here, depreciation of ₹2,000 is a non-cash expense — it reduced profit but no cash went out. So we **add it back** to profit. 2. **Changes in working capital** (current assets and current liabilities). The rule is simple: - An **increase** in a current asset (other than cash) means cash was used up — subtract from profit. - A **decrease** in a current asset means cash was released — add to profit. - An **increase** in a current liability means cash was saved (we delayed payment) — add to profit. - A **decrease** in a current liability means cash was paid out — subtract from profit. > [!WARNING] > A common mistake is to treat **Provision for Doubtful Debts** as a current liability. It is not — it is a **contra-asset** (reduces Trade Receivables). Its change must be considered along with Trade Receivables, not separately as a liability. Also, **Prepaid Expenses** and **Accrued Income** are current assets; **Expenses Payable** and **Income Received in Advance** are current liabilities. Get the classification right. We will compute the net change in each working capital item, then apply the rule above. ## Solution ### Step 1: Start with Profit and Add Back Depreciation | Particulars | Amount (₹) | |---|---| | Profit for the year (after depreciation) | 10,000 | | Add: Depreciation (non-cash

Compute cash from operations from the following figures: (i) Profit for the year 2016-17 is a sum of Rs. 10,00

Numerical Questions · Q5

Compute cash from operations from the following figures: (i) Profit for the year 2016-17 is a sum of Rs. 10,000 after providing for depreciation of Rs. 2,000. (ii) The current assets and current liabilities of the business for the years ended March 31, 2016 and March 31, 2017 are as follows:

Particulars	31st March 2016 (₹)	31st March 2017 (₹)
Trade Receivables	14,000	15,000
Provision for Doubtful Debts	1,000	1,200
Trade Payables	13,000	15,000
Inventories	5,000	8,000
Other Current Assets	10,000	12,000
Expenses payable	1,000	1,500
Prepaid Expenses	2,000	1,000
Accrued Income	3,000	4,000
Income received in advance	2,000	1,000

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Concept understanding — Cash Flow Calculation

Cash Flow: From Pocket Money to the Cash Flow Statement

Think of your own pocket money. You get ₹500 from your parents. You spend ₹200 on snacks, ₹100 on a movie ticket, and save ₹200. At the end of the month, your cash in hand has increased by ₹200. That's a cash inflow. If you had spent ₹600 instead, your cash would have decreased by ₹100 — a cash outflow.

Now imagine you run a small business. You sell goods worth ₹10,000, but the customer pays you next month. You also pay rent ₹2,000 in cash today. Your profit might be ₹8,000, but your cash actually went down by ₹2,000. Cash flow is the difference between cash coming in and cash going out during a period. It is not the same as profit.

Why Cash Flow Matters

A business can be profitable on paper yet run out of cash. This is called insolvency — the inability to pay bills when they fall due. Cash flow tells you whether the business has enough liquid money to survive day-to-day operations. The Cash Flow Statement (CFS) is a mandatory financial statement under AS-3 (Accounting Standard 3) for listed companies. It shows why cash changed during the year.

The Three Activities of Cash Flow

The NCERT textbook classifies all cash flows into three buckets:

Activity	What it includes	Example
Operating Activities	Main revenue-producing activities	Cash from selling goods, cash paid to suppliers, salaries
Investing Activities	Purchase/sale of long-term assets	Buying machinery, selling land, loans given
Financing Activities	Changes in equity and borrowings	Issue of shares, repayment of bank loan, dividend paid

Important

The net increase or decrease in cash during the year = Operating cash flow + Investing cash flow + Financing cash flow. This must match the change in cash balance shown in the Balance Sheet.

Accounting Treatment — No Debit/Credit Here

The Cash Flow Statement is not a journal entry. It is a statement — a report that rearranges information already recorded in the books. You do not debit or credit any account while preparing it. Instead, you analyse the Balance Sheet and Statement of Profit & Loss to identify cash movements.

For example, if the Balance Sheet shows:

Debtors increased from ₹50,000 to ₹70,000 → cash inflow from debtors is less than sales. So you deduct the increase from operating profit.
Creditors increased from ₹30,000 to ₹40,000 → you delayed paying suppliers → cash outflow is less than purchases. So you add the increase to operating profit.

The Proforma of a Cash Flow Statement (as per NCERT)

Below is the standard format. All figures are illustrative — do not treat them as real data.

Cash Flow Statement for the year ended 31st March 20XX

Particulars	Amount (₹)
A. Cash Flow from Operating Activities
Net Profit before Tax (from P&L)	1,00,000
Adjustments for non-cash items:
Add: Depreciation	20,000
Add: Loss on sale of asset	5,000
Less: Profit on sale of asset	(3,000)
Changes in Working Capital:
Increase in Debtors	(10,000)
Decrease in Stock	8,000
Increase in Creditors	6,000
Net Cash from Operating Activities	1,26,000
B. Cash Flow from Investing Activities
Purchase of Machinery	(50,000)
Sale of Land	30,000
Net Cash used in Investing Activities	(20,000)
C. Cash Flow from Financing Activities
Issue of Share Capital	40,000
Repayment of Loan	(15,000)
Dividend Paid	(10,000)

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We compute Cash from Operations for the year ended 31 March 2017 by the indirect method: start with the profit for the year, add back depreciation (a non-cash charge), and adjust for the changes in working capital.

Step 1 - Profit before working capital changes

Particulars	Amount (₹)
Profit for the year (after depreciation)	10,000
Add: Depreciation (non-cash)	2,000
Funds from operations	12,000

Step 2 - Changes in working capital

We compare 31 March 2016 (previous year) with 31 March 2017 (current year). An increase in a current asset reduces cash; an increase in a current liability increases cash (and the reverse).

Note

Provision for Doubtful Debts is a contra-asset, not a current liability - it is a deduction from Trade Receivables. Its change is therefore considered together with Trade Receivables, using the net receivables figure, not added separately as a liability:

Net Trade Receivables 2016: 14,000 - 1,000 = 13,000
Net Trade Receivables 2017: 15,000 - 1,200 = 13,800
Net increase = 800 (a use of cash, subtracted).

Item	2016 (₹)	2017 (₹)	Change (₹)	Effect on Cash
Net Trade Receivables (after Provision for Doubtful Debts)	13,000	13,800	+800	Subtract 800
Inventories	5,000	8,000	+3,000	Subtract 3,000
Other Current Assets	10,000	12,000	+2,000	Subtract 2,000
Prepaid Expenses	2,000	1,000	-1,000	Add 1,000
Accrued Income	3,000	4,000	+1,000	Subtract 1,000

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Cash from operations for the year 2016-17 is ₹7,700, computed by adjusting the profit of ₹10,000 for non-cash items (depreciation added back) and changes in working capital (increase in current assets reduces cash, increase in current liabilities increases cash).

Concept and Treatment

The question asks us to compute Cash from Operations using the indirect method of the Cash Flow Statement (AS-3). The logic is straightforward: we start with the net profit as per the Profit & Loss account, then adjust it for two things:

Non-cash and non-operating items that were already deducted or added in the P&L but did not involve actual cash flow. Here, depreciation of ₹2,000 is a non-cash expense — it reduced profit but no cash went out. So we add it back to profit.
Changes in working capital (current assets and current liabilities). The rule is simple:
- An increase in a current asset (other than cash) means cash was used up — subtract from profit.
- A decrease in a current asset means cash was released — add to profit.
- An increase in a current liability means cash was saved (we delayed payment) — add to profit.
- A decrease in a current liability means cash was paid out — subtract from profit.

Watch out

A common mistake is to treat Provision for Doubtful Debts as a current liability. It is not — it is a contra-asset (reduces Trade Receivables). Its change must be considered along with Trade Receivables, not separately as a liability. Also, Prepaid Expenses and Accrued Income are current assets; Expenses Payable and Income Received in Advance are current liabilities. Get the classification right.

We will compute the net change in each working capital item, then apply the rule above.

Solution

Step 1: Start with Profit and Add Back Depreciation

Particulars	Amount (₹)
Profit for the year (after depreciation)	10,000
Add: Depreciation (non-cash expense)	2,000
Funds from Operations	12,000

Step 2: Compute Changes in Working Capital

We compare the figures for March 31, 2016 (previous year) and March 31, 2017 (current year). Increase/decrease is calculated as (2017 figure minus 2016 figure).

Item	2016 (₹)	2017 (₹)	Change (₹)	Effect on Cash
Trade Receivables	14,000	15,000	+1,000	Decrease (subtract)
Provision for Doubtful Debts	1,000	1,200	+200	See note below
Inventories	5,000	8,000	+3,000	Decrease (subtract)
Other Current Assets	10,000	12,000	+2,000	Decrease (subtract)
Prepaid Expenses	2,000	1,000	-1,000	Increase (add)
Accrued Income	3,000	4,000	+1,000	Decrease (subtract)
Trade Payables	13,000	15,000	+2,000	Increase (add)
Expenses Payable	1,000	1,500	+500	Increase (add)
Income Received in Advance	2,000	1,000	-1,000	Decrease (subtract)

Note

Treatment of Provision for Doubtful Debts: This provision is deducted from Trade Receivables in the balance sheet. The net Trade Receivables are:

2016: 14,000 - 1,000 = 13,000
2017: 15,000 - 1,200 = 13,800 Net increase in Trade Receivables = 13,800 - 13,000 = +800. This is the effective increase in receivables (after considering the provision). We will use this net figure. Alternatively, you can adjust Trade Receivables and Provision separately — the net effect is the same. Here, we show the combined treatment.

Step 3: Net Adjustment for Working Capital Changes …

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Concept and Treatment

Solution

Step 1: Start with Profit and Add Back Depreciation

Step 2: Compute Changes in Working Capital

Step 3: Net Adjustment for Working Capital Changes …

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