Question

While calculating operating profit, which will be added to net profit?

Options

• Gain on sale of machinery.

• Increase in general reserves.

• Interest received on investments.

• Decrease in trade payables.

Answer 1

Increase in general reserves.

Explanation:

When we use the Indirect Method to determine the running profit, we start with the net profit and make adjustments. Since adding to general reserves is a use of profit rather than a cash outflow, it is added back to net profit.