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CA Intermediate · Advanced Accounting · AS 3 Cash Flow Statement

Operating profit before working capital changes of Rohan Auto Ltd is ₹6,00,000. During the year, trade receivables increased by ₹70,000, inventories decreased by ₹30,000, trade payables increased by ₹50,000 and prepaid expenses increased by ₹10,000. Income tax paid was ₹90,000. Net cash flow from operating activities is:

Net cash from operating activities is ₹5,10,000. Working capital changes net to zero: receivables rise (-70,000), inventory falls (+30,000), payables rise (+50,000) and prepaids rise (-10,000). Cash generated stays at ₹6,00,000, and deducting the ₹90,000 income tax paid gives ₹5,10,000.

  1. A₹4,10,000
  2. B₹4,50,000
  3. C₹5,10,000Correct
  4. D₹6,00,000

Explanation

Cash generated from operations = 6,00,000 - 70,000 (higher receivables) + 30,000 (lower inventory) + 50,000 (higher payables) - 10,000 (higher prepaid) = 6,00,000. Deducting tax paid of 90,000 gives 5,10,000. Treating the inventory decrease as an outflow gives 4,50,000, which is wrong because falling inventory releases cash. Omitting tax gives 6,00,000.

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