Question

Statement-I: Snow Limited earned a profit of \rupee 2,00,000 after charging depreciation of \rupee 50,000 on machinery. So, operating profit before working capital changes would be \rupee 2,50,000.
Statement-II: Depreciation is added back to net profit as it does not result in any cash flow.
Choose the correct option from the following:

• A. Only Statement-I is true.
• B. Only Statement-II is true.
• C. Both the Statements are false.
• D. Both the Statements are true.

Hint:

Depreciation does not reduce cash, it only affects accounting profit. Always add it back to net profit while calculating operating cash flows.

Answer 1

The Correct Option is D

Statement-I is true: The Operating Profit Before Working Capital Changes (OPBWC) is calculated by adding back non-cash expenses like depreciation to the net profit. Since net profit is \rupee 2,00,000 and depreciation is \rupee 50,000, OPBWC becomes \rupee 2,50,000. Statement-II is also true: Depreciation is a non-cash expense — it reduces accounting profit but does not involve actual cash outflow. Therefore, it must be added back to calculate cash from operations. Hence, both statements are correct and logically consistent with the Cash Flow Statement format prescribed under AS-3.