The net profit of Prabha Limited for the year 2021 after the adjustment of the following items to its Profit & Loss Account stood at Rs. 6,00,000:
Depreciation Rs. 50,000
Goodwill written off Rs. 25,000
Loss on sale of machine Rs. 2,500
Provision for tax Rs. 30,000
Transfer to Ge

Question

The net profit of Prabha Limited for the year 2021 after the adjustment of the following items to its Profit & Loss Account stood at Rs. 6,00,000:
Depreciation Rs. 50,000
Goodwill written off Rs. 25,000
Loss on sale of machine Rs. 2,500
Provision for tax Rs. 30,000
Transfer to General Reserve Rs. 20,000
Refund of tax Rs. 3,500
Gain on sale of furniture Rs. 6,000
With the help of the following additional information, calculate cash from operations:
(31st December) | 2020 | 2021
Cash | 1,00,000 | 1,50,000
Debtors | 2,00,000 | 2,50,000
Bills receivable | 40,000 | 30,000
Outstanding expenses | 2,000 | 3,000
Creditors | 1,00,000 | 1,50,000
Accrued income | 10,000 | 14,500
Prepaid expenses | 5,000 | 8,000
Stock | 15,000 | 25,000
Income received in advance | 2,000 | 500
(10)

Accepted Answer

>

> [!TLDR]
> Net profit Rs.6,00,000 adjusted for non-cash/non-operating items gives operating profit Rs.7,18,000; after working-capital changes Rs.7,10,000; less net tax, Cash from Operations = Rs.6,83,500.
>
> Step 1 - Operating profit before working-capital changes:
> Net Profit 6,00,000
> Add: Depreciation 50,000; Goodwill written off 25,000; Loss on sale of machine 2,500; Provision for tax 30,000; Transfer to General Reserve 20,000 = +1,27,500
> Less: Refund of tax 3,500; Gain on sale of furniture 6,000 = -9,500
> = Rs.7,18,000.
>
> Step 2 - Working-capital changes:
> Add (sources): Decrease in bills receivable 10,000; Increase in outstanding expenses 1,000; Increase in creditors 50,000 = +61,000.
> Less (uses): Increase in debtors 50,000; Increase in accrued income 4,500; Increase in prepaid expenses 3,000; Increase in stock 10,000; Decrease in income received in advance 1,500 = -69,000.
> Net working-capital change = 61,000 - 69,000 = -8,000.
> Cash generated from operations = 7,18,000 - 8,000 = Rs.7,10,000.
>
> Step 3 - Tax: …

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

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)

Item	2020 (Rs.)	2021 (Rs.)	Change	Effect on cash (Rs.)
Debtors	20,000	15,000	Decrease 5,000	+5,000
Creditors	10,000	8,000	Decrease 2,000	−2,000
Bills Receivable	6,000	8,000	Increase 2,000	−2,000
Prepaid expenses	8,000	7,000	Decrease 1,000	+1,000
Net change in working capital				+2,000

Particulars	₹
Net profit (after transfer to general reserve)	75,000
Add: Transfer to General Reserve (appropriation)	15,000

Concept understanding — Cash Flow Calculation

Cash Flow: From Pocket Money to the Cash Flow Statement

Why Cash Flow Matters

The Three Activities of Cash Flow

Accounting Treatment — No Debit/Credit Here

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

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