Question

For the year ending 31st March, 2025 Gavi Ltd. made a profit of Rs 8,00,000 after charging depreciation of Rs 50,000 on fixed assets and transferring Rs 1,15,000 to general reserve.

Goodwill written off during the year was Rs 75,000. During the year the company sold machinery of the book value of Rs 2,00,000 at a gain of Rs 30,000. During the year, the trade receivables decreased by Rs 20,000 and trade payables increased by Rs 25,000. Prepaid expenses decreased by Rs 1,000 and outstanding rent increased by Rs 5,000.

Calculate Cash flows from operating activities.

Hint:

Add the reserve transfer to get profit before tax. Add depreciation and goodwill, deduct the gain on sale, then add the working capital releases.

Answer 1

Step 1: Understand the method:
Cash flow from operating activities starts with net profit before tax. We then remove non-cash items and non-operating gains, and adjust for working capital.
The profit of Rs. 8,00,000 is stated after a transfer of Rs. 1,15,000 to general reserve. That transfer is an appropriation, so it is added back.

Step 2: Working Note 1: Net Profit before tax:

Particulars	Rs.
Net Profit (as given, after transfer to general reserve)	8,00,000
Add: Amount transferred to General Reserve	1,15,000
Net Profit before tax	9,15,000

Step 3: Adjust for non-cash and non-operating items:
Depreciation Rs. 50,000 and goodwill written off Rs. 75,000 reduced profit but no cash left the company. We add both.
The machine was sold at a gain of Rs. 30,000. The sale proceeds are an investing inflow, so the gain is deducted from profit.
Operating profit before working capital changes = 9,15,000 + 50,000 + 75,000 - 30,000 = Rs. 10,10,000.

Step 4: Adjust for working capital changes:
Trade receivables fell by Rs. 20,000, so customers paid more cash than sales shown. Add Rs. 20,000.
Trade payables rose by Rs. 25,000, so we held back cash. Add Rs. 25,000.
Prepaid expenses fell by Rs. 1,000, so less cash went out than the expense. Add Rs. 1,000. Outstanding rent rose by Rs. 5,000, so rent unpaid is cash saved. Add Rs. 5,000.
Total working capital effect = 20,000 + 25,000 + 1,000 + 5,000 = Rs. 51,000.

Step 5: Present the statement:
Cash Flow from Operating Activities of Gavi Ltd. for the year ended 31st March 2025:

Particulars	Rs.	Rs.
Net Profit before tax (Working Note 1)		9,15,000
Adjustments for:
Add: Depreciation on fixed assets	50,000
Add: Goodwill written off	75,000
Less: Gain on sale of machinery	(30,000)	95,000
Operating Profit before Working Capital Changes		10,10,000
Add: Decrease in Trade Receivables	20,000
Add: Increase in Trade Payables	25,000
Add: Decrease in Prepaid Expenses	1,000
Add: Increase in Outstanding Rent	5,000	51,000
Cash inflow from Operating Activities		10,61,000

Final Answer:
Cash flow from operating activities is Rs. 10,61,000 (inflow). \[ \boxed{\text{Rs. } 10,61,000} \]