Question

The accountant of Manav Ltd. while preparing Cash Flow Statement added depreciation provided on fixed assets to net profit for calculating cash flow from operating activities. Was he correct in doing so? Give reason.

Answer 1

Yes, the accountant of Manav Ltd. was correct. While preparing a Cash Flow Statement, only those items are considered that result in any cash flow. Since depreciation is a non-cash expense; therefore it has to be added back to the net profit.