Question

While preparing Cash Flow statement of Sharda Ltd. 'Depreciation provided on fixed assets' was added to net profit to calculate cash flow from operating activities. Was the accountant correct in doing so? Give reason.

Answer 1

Depreciation of fixed assets is the non-cash expense. It must have been deducted from Net Profit while preparing Profit and Loss Account. Therefore; in Cash Flow Statement it must be added back to Net Profit before taxation and extraordinary items under Cash Flow from Operating Activities. Thus, the accountant of Sharda Ltd. is correct.