If the net profits earned during the year is Rs. 50,000 and the amount of debtors at the beginning and the end of the year is Rs. 10,000 and Rs. 20,000 respectively, then the cash from operating activities will be equal to:
If the net profits earned during the year is Rs. 50,000 and the amount of debtors at the beginning and the end of the year is Rs. 10,000 and Rs. 20,000 respectively, then the cash from operating activities will be equal to:
Solution
When calculating cash from operating activities, net profit needs to be adjusted for changes in current assets and current liabilities.
Given Information:
- Net Profit = Rs. 50,000
- Opening Debtors = Rs. 10,000
- Closing Debtors = Rs. 20,000
Change in Debtors:
Change in Debtors = Closing Debtors - Opening Debtors
Change in Debtors = Rs. 20,000 - Rs. 10,000 = Rs. 10,000 (Increase)
Treatment of Increase in Debtors:
An increase in debtors indicates that sales have been recorded in the profit but the cash has not yet been received. Since we need to convert accrual-based profit to cash-based profit, this increase must be subtracted from net profit.
Calculation:
Cash from Operating Activities = Net Profit - Increase in Debtors
Cash from Operating Activities = Rs. 50,000 - Rs. 10,000
Cash from Operating Activities = Rs. 40,000
The increase in debtors by Rs. 10,000 means that out of the Rs. 50,000 profit, Rs. 10,000 is still locked in credit sales and has not been received as cash.
Related questions:
2026: 31 May Shift 1
2022: 30 Aug Shift 2