Question

LG Company Limited earned a net profit of ₹ 7,00,000 for the year ended 31.03.2025. Depreciation for the year is ₹ 1,50,000. There was a profit of ₹ 60,000 on assets sold which was transferred to statement of profit and loss.
Trade receivables decreased during the year by ₹ 55,000 and trade payables also decreased by ₹ 45,000.
Compute cash flow from operating activities by indirect method.

Hint:

Rules for Working Capital adjustments:
Decrease in Current Assets $\rightarrow$ ADD
Increase in Current Assets $\rightarrow$ LESS
Increase in Current Liabilities $\rightarrow$ ADD
Decrease in Current Liabilities $\rightarrow$ LESS

Answer 1

Step 1: Understanding the Concept:
The indirect method of calculating Cash Flow from Operating Activities starts with the Net Profit. Adjustments are then made for non-cash items (like depreciation), non-operating items (like profit/loss on sale of assets), and changes in working capital (current assets and current liabilities).

Step 2: Detailed Explanation:
1. Start with Net Profit: ₹ 7,00,000.
2. Adjust Non-Cash \& Non-Operating Items:
- \textit{Depreciation (₹ 1,50,000):} This is a non-cash expense deducted from profit. We must add it back.
- \textit{Profit on sale of assets (₹ 60,000):} This is an investing income included in net profit. We must deduct it to find purely operating profit.
Operating Profit before Working Capital changes = 7,00,000 + 1,50,000 - 60,000 = ₹ 7,90,000.
3. Adjust Changes in Working Capital:
- \textit{Decrease in Trade Receivables (₹ 55,000):} A decrease in current assets means cash was collected. It is an inflow (Add).
- \textit{Decrease in Trade Payables (₹ 45,000):} A decrease in current liabilities means cash was paid off. It is an outflow (Less).
Cash Flow from Operations = 7,90,000 + 55,000 - 45,000 = ₹ 8,00,000.

Step 3: Final Answer: