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CA Intermediate · Advanced Accounting · AS 3 Cash Flow Statement

Kaveri Engineering Ltd reported net profit before tax and extraordinary items of Rs 12,00,000 after charging depreciation Rs 1,80,000 and interest expense Rs 70,000, and after crediting profit on sale of machinery Rs 45,000 and interest income Rs 30,000. Using the indirect method and treating interest paid and received as financing and investing items respectively, what is the operating profit before working capital changes?

Operating profit before working capital changes is Rs 13,75,000. Add back depreciation and interest expense to the profit of Rs 12,00,000, then deduct the profit on sale of machinery and interest income, since these are non-operating items shown in investing or financing sections.

  1. ARs 13,75,000Correct
  2. BRs 14,05,000
  3. CRs 13,05,000
  4. DRs 13,35,000

Explanation

Start with 12,00,000. Add depreciation 1,80,000 and interest expense 70,000 = 14,50,000. Deduct profit on sale 45,000 and interest income 30,000 = 75,000. Result: 13,75,000. Rs 14,05,000 results from forgetting to deduct interest income. Rs 13,05,000 wrongly subtracts the interest expense rather than adding it back.

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