Question

X Ltd. made a profit of Rs. 5,00,000 after considering the following items:
$$\begin{array}{cc}\text{I. Goodwill written off}& Rs.5,000\\ \text{II. Depreciation on Fixed Tangible assets}& Rs.50,000\\ \text{III. Loss on sale of Fixed Tangible Assets (Machinery)}& Rs.20,000\\ \text{IV. Provision for Doubtful Debts}& Rs.10,000\\ \text{V. Gain on sale of Fixed Tangible Assets (Land)}& Rs.7,500\end{array}$$

Additional Information :
$$\begin{array}{ccc}\text{Particulars}& \text{31-03-2017}& \text{31-02-2016}\\ & & \\ \text{Trade Receivables}& 78,000& 52,000\\ \text{Prepaid Expenses}& 3,000& 2,000\\ \text{Trade Payables}& 51,000& 40,000\\ \text{Expenses Payable}& 20,000& 34,000\\ & & \end{array}$$
You are required to calculcate cash flow from operating activities.

Answer 1

(a) X Ltd.
Calculation of Cash From Operating Activities
for the year ended 31st March, 2017
$$\begin{array}{ccc}\text{Particulars}& \text{Rs.}& \text{Rs.}\\ \text{Net Profit before Tax}& & 5,00,000\\ \text{Adjustments for non- cash items:}& & \\ (+)\text{Goodwill Written off}& 5,000& \\ (+)\text{Depreciation}& 50,000& \\ (+)\text{Loss on sale of Fixed Tangible Assets (Machinery)}& 20,000& \\ (+)\text{Provision for Doubtful Debts}& \text{10,000}& \\ (-)\text{Gain on Sale of Fixed Tangible Assets (Land)}& \underset{–}{(7,500)}& \underset{–}{77,500}\\ \text{Operating Profit before Working Capital Changes}& & 5,77,500\\ \text{Changes in Working Capital:}& & \\ (+)\text{Increase in Trade Payables}& \text{11,000}& \\ (-)\text{Increase in Trade Receivables}& (26,000)& \\ (-)\text{Increase in Prepaid Expenses}& (1,000)& \\ (-)\text{Decrease in Expenses Payable}& \underset{–}{(14,000)}& \underset{–}{(30,000)}\\ \text{Cash Flow From Operating Activities}& & \underset{–}{5,47,500}\end{array}$$

Note:
While calculating cash from operating activities, provision for doubtful debts is added back to net profit beacause creation of provision does not result in outflow of cash.