Charles Ltd. made a profit of ₹1,00,000 after charging depreciation of ₹20,000 on assets and a transfer to general reserve of ₹30,000. The goodwill amortised was ₹7,000 and gain on sale of machinery was ₹3,000. The changes in the value of current assets and current liabilities are as follows:
| Item | Change | Amount (₹) |
|---|---|---|
| Trade receivables | Increase | 3,000 |
| Trade payables | Increase | 6,000 |
| Prepaid expenses | Increase | 200 |
| Outstanding expenses | Decrease | 2,000 |
Ascertain cash flow from operating activities.
Additional Information:
| Particulars | March 31, 2017 (₹) | March 31, 2016 (₹) |
|---|---|---|
| Trade Receivables | 20,00,000 | 40,00,000 |
| Trade Payables | 20,00,000 | 10,00,000 |
| Other Expenses payable (administrative) | 10,000 | 20,000 |
| Prepaid Administrative Expenses | 20,000 | 10,000 |
| Outstanding Trading Expenses | 20,000 | 40,000 |
| Advance Trading Expenses | 40,000 | 20,000 |
| Provision for Taxation | 10,00,000 | 12,00,000 |
Ascertain Cash from Operations. Show your workings clearly.
You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
Start your 14-day free trial to unlock the full solution →Adding back the transfer to general reserve gives Net Profit before Tax of ₹1,30,000; after adding depreciation and goodwill amortised, removing the gain on sale of machinery, and adjusting for working-capital changes, Net Cash from Operating Activities is ₹1,54,800.
Concept
A transfer to general reserve is an appropriation of profit, not an expense — it is added back to the profit figure to arrive at Net Profit before Tax. Depreciation and goodwill amortised are non-cash charges (added back); the gain on sale of machinery is a non-operating income (deducted, as it belongs to investing activities).
Working Note — Net Profit before Tax
Profit ₹1,00,000 + Transfer to General Reserve ₹30,000 = ₹1,30,000.
Solution — Cash Flows from Operating Activities
| Particulars | Amount (₹) |
|---|---|
| Net Profit before Taxation | 1,30,000 |
| Add: Depreciation | 20,000 |
| Add: Goodwill amortised | 7,000 |
| Less: Gain on sale of machinery | (3,000) |
| Operating Profit before Working Capital Changes | 1,54,000 |
| Less: Increase in Trade Receivables | (3,000) |
| Add: Increase in Trade Payables | 6,000 |
| Less: Increase in Prepaid Expenses | (200) |
| Less: Decrease in Outstanding Expenses | (2,000) |
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.