If the net profits made during the year are Rs. 50,000 and the bills receivables have decreased by Rs. 10,000 during the year, then the cash flow from operating activities will be equal to:
If the net profits made during the year are Rs. 50,000 and the bills receivables have decreased by Rs. 10,000 during the year, then the cash flow from operating activities will be equal to:
Solution
When calculating Cash Flow from Operating Activities using the indirect method, we start with net profit and adjust for changes in current assets and liabilities.
Given:
- Net Profit = Rs. 50,000
- Bills Receivable decreased by Rs. 10,000
Bills Receivable is a current asset. When it decreases during the year, it means bills have been collected and converted into cash. This represents a cash inflow.
Adjustment Rule:
Decrease in Current Assets → Add to Net Profit
Calculation:
Cash Flow from Operating Activities = Net Profit + Decrease in Bills Receivable
= Rs. 50,000 + Rs. 10,000
= Rs. 60,000
The decrease in bills receivable indicates that cash has been realized from debtors, which increases the cash available from operations beyond the net profit figure.
Answer: Option 1 - Rs. 60,000
Related questions:
2022: 20 Aug Shift 2