Calculate Operating Net Profit from the following Profit & Loss Account.
Particulars (Amount) : Expenses paid (1,50,000); Depreciation (35,000); Loss on sale of Machine (2,000); Goodwill (10,000); Net Profit (6,33,000); Total (8,30,000).
Particulars (Amount) : Gross profit (8,00,

Question

Calculate Operating Net Profit from the following Profit & Loss Account.
Particulars (Amount) : Expenses paid (1,50,000); Depreciation (35,000); Loss on sale of Machine (2,000); Goodwill (10,000); Net Profit (6,33,000); Total (8,30,000).
Particulars (Amount) : Gross profit (8,00,000); Profit on Sale of Land (30,000); Total (8,30,000).

Accepted Answer

>

> [!TLDR]
> Starting from the Net Profit of Rs. 6,33,000, adding back non-operating losses and removing the non-operating gain gives Operating Net Profit of Rs. 6,15,000.
>
> Operating Net Profit measures profit purely from the firm's core, recurring business operations. The reported Net Profit, however, already includes certain NON-operating items that must be adjusted out:
>
> - **Loss on Sale of Machine (Rs. 2,000)** — relates to disposal of a fixed asset, an investing matter, not an operating expense: ADD BACK (it reduced Net Profit but isn't an operating cost).
> - **Goodwill written off (Rs. 10,000)** — a non-cash, non-operating write-off of an intangible asset: ADD BACK.
> - **Profit on Sale of Land (Rs. 30,000)** — an investing gain, not operating income: DEDUCT. …

Transaction	Debit	Credit
Cash sale	Cash A/c	Sales A/c
Credit sale (later collected)	Cash A/c	Debtors A/c
Cash purchase	Purchases A/c	Cash A/c
Payment to supplier (credit purchase)	Creditors A/c	Cash A/c
Salary paid	Salary A/c	Cash A/c
Rent paid	Rent A/c	Cash A/c
Interest received (if operating)	Cash A/c	Interest Income A/c
Tax paid	Tax A/c	Cash A/c

Cash Flow from Operating Activities	Amount (₹)
Net Profit before Tax and Extraordinary Items	XXX
Adjustments for non-cash/non-operating items:
Add: Depreciation	XXX
Add: Goodwill amortised	XXX
Add: Loss on sale of asset	XXX
Less: Profit on sale of asset	(XXX)
Less: Interest income (if investing)	(XXX)
Operating Profit before Working Capital Changes	XXX
Changes in Working Capital:
Add: Decrease in Current Assets (e.g., Debtors)	XXX
Less: Increase in Current Assets	(XXX)
Add: Increase in Current Liabilities (e.g., Creditors)	XXX
Less: Decrease in Current Liabilities	(XXX)
Cash Generated from Operations	XXX
Less: Tax Paid	(XXX)
Net Cash Flow from Operating Activities	XXX

Item	Why it is NOT added to Net Profit under Operating Activities
Purchase of Machinery	A cash outflow under Investing Activities, not a non-cash item added to operating profit
Sale of Furniture	A cash inflow under Investing Activities; any profit/loss on sale is adjusted separately, the sale itself isn't an "add-back"
Goodwill written off	A non-cash, non-operating expense already deducted in arriving at Net Profit — must be added back
…

Concept understanding — Operating Activities Classification

Operating Activities Classification — A First Look

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A Simple Example to Tie It Together

Why the other two options are wrong

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