Question 3 of 22intermediate🔧 ApplyVery Short3 marks

While computing cash from operating activities, indicate whether the following items will be added or subtracted from the net profit- if not to be considered, write NC. Items: Treatment (a) Increase in the value of creditors (b) Increase in the value of patents (c) Decrease in prepaid expenses (d) Decrease in income received in advance (e) Decrease in value of inventory (f) Increase in share capital (g) Increase in the value of trade receivables (h) Increase in the amount of outstanding expenses (i) Conversion of debentures into shares (j) Decrease in the value of trade payables (k) Increase in the value of trade receivables (l) Decrease in the amount of accrued income.

Correct Answer

((a) Increase in the value of creditors) Added

((b) Increase in the value of patents) NC

((c) Decrease in prepaid expenses) Added

((d) Decrease in income received in advance) Subtracted

((e) Decrease in value of inventory) Added

((f) Increase in share capital) NC

((g) Increase in the value of trade receivables) Subtracted

((h) Increase in the amount of outstanding expenses) Added

((i) Conversion of debentures into shares) NC

((j) Decrease in the value of trade payables) Subtracted

((k) Increase in the value of trade receivables) Subtracted

((l) Decrease in the amount of accrued income) Added

Exercise: Test your Understanding – II | Q: 2 | (Page 18)
For More Understanding

Explanation

As per the context, the rules for adjusting current assets and current liabilities are: (1) Increase in current assets and decrease in current liabilities are deducted from net profit. (2) Increase in current liabilities and decrease in current assets are added to net profit. Items related to investing or financing activities (like patents, share capital, conversion of debentures) are marked as NC (Not Considered) as they do not pertain to operating activities.

Solution Steps

  1. Step 1: Identify whether each item is a current asset, current liability, or non-operating item.

  2. Step 2: Apply the rule - Increase in current liabilities (creditors, outstanding expenses) = Added; Decrease in current liabilities (income received in advance, trade payables) = Subtracted.

  3. Step 3: Apply the rule - Decrease in current assets (prepaid expenses, inventory, accrued income) = Added; Increase in current assets (trade receivables) = Subtracted.

  4. Step 4: Mark investing/financing items (patents, share capital, conversion of debentures) as NC.

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