## Special Case: Cash Flow When Gross Profit is Given

### When Does This Arise?

Some exam problems give a Trading Account (showing Gross Profit) separately from the P&L Account. The GP is already a net figure incorporating sales, purchases, direct wages, and stock changes.

This affects the Indirect Method — specifically, how you compute PBT.

---

### Impact on Indirect Method

Normal scenario: Full P&L is given → read PBT directly.

GP-given scenario:

1. Reconstruct P&L from the GP line downward to derive PBT

2. Trading account items (sales, cost of goods sold, opening/closing stock for COGS) are already netted into GP — do NOT add them again as working capital adjustments

3. Apply standard indirect method adjustments to the PBT you have computed

---

### Format for Reconstructing PBT

```

Gross Profit b/d ₹ XXX

Add: Non-operating / other income XXX (e.g., profit on sale of asset)

Less: Operating expenses (below GP line) (XXX) (admin, selling, distribution)

Less: Depreciation (XXX)

Less: Amortisation (XXX)

Less: Interest expense (XXX)

────────

Profit Before Tax (PBT) XXX

```

---

### Impact on Direct Method

None. The direct method always uses actual cash receipts and payments regardless of how the P&L is structured. You still derive cash from debtors and cash to creditors through T-accounts as normal.

---

### Key Boundary Rule

> GP already captures: opening stock + net purchases − closing stock + direct wages

> Working capital adjustments in indirect method should cover: changes in debtors, creditors, and if the inventory change is separately disclosed and not already in GP, inventory too.

In practice, when GP is given and inventory change caused the difference between purchases and COGS, that inventory change is embedded in GP — so do not also adjust for it in working capital changes unless the question specifically provides separate inventory figures that relate to items outside the trading account.

Worked example

### Example 1

LORI Question – Full Solution (Both Methods)

Given information:

Gross Profit: ₹3,75,000
Profit on sale of asset: ₹20,000
Office expenses: ₹35,000; Selling expenses: ₹15,000
Depreciation – Furniture: ₹40,000; Depreciation – Intangibles: ₹20,000
Interest expense: ₹5,000
Tax paid: ₹55,000
Increase in Inventory: ₹25,000; Decrease in Trade Payables: ₹15,000

---

Step 1: P&L Reconstruction (below GP line) to find PBT

```

Gross Profit b/d 3,75,000

Add: Profit on sale of asset 20,000

Less: Office expenses (35,000)

Less: Selling expenses (15,000)

Less: Depreciation – Furniture (40,000)

Less: Depreciation – Intangibles (20,000)

Less: Interest expense (5,000)

──────────

PBT 2,80,000

```

---

Step 2: Cash Flow from Operating Activities (Indirect Method)

```

PBT 2,80,000

Add: Depreciation (40,000 + 20,000) 60,000

Add: Interest expense 5,000

Less: Profit on sale of asset (20,000)

──────────

Operating profit before WC changes 3,25,000

Working Capital Adjustments:

Less: Increase in Inventory (25,000)

Less: Decrease in Trade Payables (15,000)

──────────

Cash generated from operations 2,85,000

Less: Income Tax paid (55,000)

──────────

Net CFO (Indirect) 2,30,000

```

---

Verification with Direct Method (from the same question):

```

Cash Sales 15,00,000

Less: Payment to Trade Payables (6,10,000)

Less: Wages (5,55,000)

Less: Office expenses (35,000)

Less: Selling expenses (15,000)

──────────

2,85,000

Less: Income Tax paid (55,000)

──────────

Net CFO (Direct) 2,30,000 ✓

```

Both methods yield ₹2,30,000 — confirming the answer.

⚠️ Common exam mistakes

Adjusting for inventory change in working capital section when GP is already given — inventory movement for COGS is embedded in GP; double-adjusting inflates or deflates the CFO
Omitting the profit on sale of asset from the P&L reconstruction — it appears as a Cr entry in P&L, increases PBT, and must be included when building PBT from GP downward
Forgetting to add back both tangible and intangible depreciation in the indirect method — both are non-cash charges regardless of where they appear in the accounts
Re-adjusting for interest expense in working capital changes — it should only appear once as an add-back in Layer 2, not again as a payables adjustment

Reference:

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AS 3 – Special Case: Cash Flow When Only Gross Profit (GP) is Given

Worked example

⚠️ Common exam mistakes