Prepare Cash flow statement from Operating Activities from following information :

| Particulars | 31-03-18 (₹) | 01-04-17 (₹) |
|---|---|---|
| Balance in Statement of Profit and Loss | 60,000 | 80,000 |
| Debtors | 19,000 | 28,000 |
| Rent Payable | 2,400 | – |
| Prepaid Insur

Question

Prepare Cash flow statement from Operating Activities from following information :

| Particulars | 31-03-18 (₹) | 01-04-17 (₹) |
|---|---|---|
| Balance in Statement of Profit and Loss | 60,000 | 80,000 |
| Debtors | 19,000 | 28,000 |
| Rent Payable | 2,400 | – |
| Prepaid Insurance | 1,600 | 1,200 |
| Inventory (Stock) | 49,000 | 32,000 |
| Creditors | 15,000 | 25,000 |

Additional information :
(a) Depreciation on Machinery ₹ 24,000
(b) Goodwill written off ₹ 6,000
(c) Loss on sale of furniture ₹ 2,000
(d) Gain on sale of Machinery ₹ 4,000

Accepted Answer

>

> [!TLDR]
> Starting from a ₹20,000 net loss, adding back non-cash charges and adjusting for working-capital movements produces a net cash outflow of ₹8,000 from operating activities.
>
> **Step 1 — Net Loss for the year** (Balance in Statement of Profit and Loss decreased from ₹80,000 on 01-04-17 to ₹60,000 on 31-03-18):
> Net Loss = 60,000 − 80,000 = **(₹20,000)**
>
> **Step 2 — Add back non-cash and non-operating items:**
> + Depreciation on Machinery 24,000
> + Goodwill written off 6,000
> + Loss on sale of Furniture 2,000
> − Gain on sale of Machinery (4,000) *(a non-operating gain, deducted here and considered under investing activities instead)*
>
> Operating Profit before Working Capital changes = (20,000) + 24,000 + 6,000 + 2,000 − 4,000 = **₹8,000**
>
> **Step 3 — Adjust for changes in Working Capital:**
> + Decrease in Debtors (28,000 → 19,000): + 9,000 *(a decrease in a current asset releases cash)*
> + Increase in Rent Payable (0 → 2,400): + 2,400 *(an increase in a current liability conserves cash)*
> − Increase in Prepaid Insurance (1,200 → 1,600): − 400 *(an increase in a current asset uses cash)*
> − Increase in Inventory (32,000 → 49,000): − 17,000 *(an increase in a current asset uses cash)*
> − Decrease in Creditors (25,000 → 15,000): − 10,000 *(a decrease in a current liability uses cash)*
>
> **Cash Flow from Operating Activities:**
>
> | Particulars | Amount (₹) |
> |---|---|
> | Net Loss as per Statement of P&L (60,000 − 80,000) | (20,000) | …

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
…

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Why the other two options are wrong

Particulars	31-03-18 (₹)	01-04-17 (₹)
Balance in Statement of Profit and Loss	60,000	80,000
Debtors	19,000	28,000
Rent Payable	2,400	–
Prepaid Insurance	1,600	1,200
Inventory (Stock)	49,000	32,000
Creditors	15,000	25,000

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