Anand Ltd., arrived at a net income of Rs. 5,00,000 for the year ended March 31, 2017. Depreciation for the year was Rs. 2,00,000. There was a profit of Rs. 50,000 on assets sold which was transferred to Statement of Profit and Loss account. Trade Receivables increased during the year Rs. 40,000 and Trade Payables also increased by Rs. 60,000. Compute the cash flow from operating activities by the indirect approach.
Cash Flow from Operating Activities = Rs. 6,70,000
Explanation
The indirect method starts with Net Income and adjusts for non-cash items, non-operating items, and changes in working capital. Depreciation is added back as it is a non-cash expense. Profit on sale of assets is deducted as it is a non-operating income. Increase in Trade Receivables (current asset) is deducted as it represents cash tied up. Increase in Trade Payables (current liability) is added as it represents cash saved.
Solution Steps
Step 1: Start with Net Income Net Income = Rs. 5,00,000
Step 2: Add back Depreciation Depreciation is a non-cash expense, hence added back. (+ ) Depreciation = Rs. 2,00,000
Step 3: Deduct Profit on Sale of Assets Profit on sale of assets is a non-operating income, hence deducted. (– ) Profit on sale of assets = Rs. 50,000
Step 4: Adjust for Trade Receivables Increase in Trade Receivables (current asset) results in outflow of cash, hence deducted. (– ) Increase in Trade Receivables = Rs. 40,000
Step 5: Adjust for Trade Payables Increase in Trade Payables (current liability) results in inflow of cash, hence added. (+ ) Increase in Trade Payables = Rs. 60,000
Step 6: Calculate Cash Flow from Operating Activities Net Income: Rs. 5,00,000 (+) Depreciation: Rs. 2,00,000 (–) Profit on sale of assets: Rs. 50,000 (–) Increase in Trade Receivables: Rs. 40,000 (+) Increase in Trade Payables: Rs. 60,000 Cash Flow from Operating Activities = Rs. 6,70,000