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CA Intermediate · Advanced Accounting · AS 3 Cash Flow Statement

For the year, Mehta Foods Ltd reported net profit before tax and extraordinary items of Rs 12,00,000 after charging depreciation Rs 2,00,000 and interest expense Rs 80,000, and after crediting profit on sale of a machine Rs 50,000 and dividend income Rs 30,000. Using the indirect method, with interest and dividend classified under financing and investing respectively, what is the operating profit before working capital changes?

Operating profit before working capital changes is Rs 13,70,000. Add back depreciation and interest expense to the profit of Rs 12,00,000, then deduct the profit on sale of the machine and the dividend income, as these belong to investing activities.

  1. ARs 13,70,000Correct
  2. BRs 13,00,000
  3. CRs 13,20,000
  4. DRs 12,70,000

Explanation

Start with 12,00,000. Add depreciation 2,00,000 and interest 80,000 = 14,80,000. Deduct profit on sale 50,000 and dividend income 30,000 = 13,70,000. Rs 13,00,000 results if the interest is not added back, which is wrong since interest is a financing item here.

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