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CA Intermediate · Advanced Accounting · AS 3 Cash Flow Statement

Kaveri Engineering Ltd. reports net profit before tax and extraordinary items of Rs 6,00,000. Adjustments: depreciation Rs 90,000; interest expense Rs 40,000; profit on sale of machinery Rs 25,000; increase in trade receivables Rs 70,000; increase in trade payables Rs 30,000; decrease in inventories Rs 20,000. Using the indirect method, what is cash generated from operations (before tax paid)?

Cash generated from operations is Rs 6,85,000. Operating profit before working capital changes is 6,00,000 plus 90,000 plus 40,000 less 25,000, i.e. 7,05,000. Net working capital changes reduce cash by 20,000 (receivables up 70,000, payables up 30,000, inventory down 20,000).

  1. ARs 6,85,000Correct
  2. BRs 6,35,000
  3. CRs 6,60,000
  4. DRs 6,10,000

Explanation

Start 6,00,000 + depreciation 90,000 + interest 40,000 - profit on sale 25,000 = 7,05,000 operating profit before working capital changes. Then - receivables 70,000 + payables 30,000 + inventory decrease 20,000 = -20,000, giving 6,85,000. Rs 6,35,000 wrongly deducts interest instead of adding it back in addition to other errors.

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