10.funds Flow Analysis

FinancialandManagementAccounting
Unit10
Unit10
FundsFlowAnalysis
Structure:
10.1
Introduction
Objectives
10.2
Meaning
SelfAssessmentQuestions1
10.3
Concept
10.4
Technique
10.5
Sources
10.6
Increaseinfunds
10.7
DecreaseinAssets
10.8
IncreaseinLiabilities
10.9
IncreaseinNetworth
10.10
Sources
10.11
IncreaseinAssets
10.12
DecreaseinLiabilities
10.13
Networth
10.14
Flowoffunds
10.15
Transactionnotaffectingflow
10.16
Stepsinpreparationoffundsflowstatements
SikkimManipalUniversity
184
Unit10
10.17
Computationofchangesinworkingcapital
10.18
Layout
10.19
Treatmentofcertainitems
TerminalQuestions
AnswertoSAQsandTQs
10.1Introduction
The usefulness of developing certain financial statements as an aid to evaluate past and / or
present performance of a business concern is unquestionable and beyond any dispute. The
Income Statement reports the revenues earned and expenses incurred or outstanding. The
BalanceSheetconveysaboutthedeploymentoffundsinvariousassetsandequitiesTheFund
Flow analysis is a modern technique of analyzing the movement of funds of a concern. The
FundFlowstatementshowsthemovementoffundsbetweentwobalancesheetdates.Asper
RobertN.AnthonytheFundsFlowstatementdescribesthesourcesfromwhichadditionalfunds
werederivedandtheusetowhichthesefundswereput.Suchastatementisbecomingmore
andmorepopularandisbeingincreasinglypublishedaspartoftheannualaccounts.Para20of
InternationalAccountingStandards7readsasfollows:
Astatementofchangesinfinancialpositionshouldbeincludedasanintegralpartoffinancial
statements.Thestatementofchangesinfinancialpositionshouldbepresentedforeachperiod
forwhichtheincomestatementisprepared.
Theinclusionofsuchastatement,therefore,isveryhelpfultoimprovetheunderstandingofthe
operationsandactivitiesofanenterpriseforthereportingperiod.
LearningObjectives:
Afterstudyingthisunit,youshouldbeabletounderstandthefollowing
1. Understandthemeaningandtheconceptsoffundsflowstatement.
2. Familiarwithtechniquesoffundflowstatement.
3. Preparationoffundflowstatement.
185
Unit10
10.2MeaningofFundFlowStatement
StatementofSourcesand UsesofFundsisastatementwhichdepictsthesourcesfrom which
funds are obtainedand the uses towhich they are being put.Itis essentially derivedfrom the
analysis of changes which have occurred in assets and equities between two Balance Sheets
periods. It is not the endproduct of accounting records. The statement speaks about the
changes in financial items of Balance Sheets prepared at two different dates. Therefore, the
funds flow indicates the inflows and outflows of funds during a particular accounting period
generallyayear.Theflowexhibitsthemovementsoffundsinboththedirectionsinsideand
outside the business. As such, the term flow in the context of funds indicates the transfer of
cashorcashequivalentfromassettoequityoroneequitytoanotherequityorfromoneassetto
anotherasset.
1. Fundflowstatementis_________From_________Changesin_____and____.
2. FFSspeaksaboutchangesin_______________________BalanceSheets.
3. Flowexhibitstheflows_______________And________________business.
4. Flowreferstotransferof___________________And__________________.
10.3ConceptofFund
Thetermfundshasbeendefinedinanumberof waysinfinancialcircles.Thethreecommon
usagesofthetermarecash,workingcapitaandtotalfinancialresources..
Cash: Underthisconcept,thetermfundsisusedonlyinthesenseofcash.Here,onlythe
changes in cash are considered. Hence, the statement is called Cash Flow statement. This
statementaimsatlistingthevariousitemswhichbringaboutchangesinthecashbalance
betweentwobalancesheetdates. Cashplanningbecomesusefulforcontrolpurposes.
Using this method has certain disadvantages. Since cash is considered as short term assets,
they are subjected to short term fluctuations. A delay in making payment to suppliers and a
provisionofonemonthscreditformakingapaymentoflandpurchasesmayshowsufficientcash
flow.Theymayreflectasatisfactoryposition.Butitisnotareality.Therefore,cashequivalent
concept of fund is useful only for short term financial planningand not for long term or
generalfinancialpositionassessment.
Working Capital: Working capital is Current asserts minus current liabilities. It is an
alternativemeasureofthechangesinthefinancialposition.Allthosetransactionswhichincrease
186
Unit10
ordecrease workingcapitalareincludedinthisstatement.Itexcludesallsuchitemswhichdo
notaffecttheworkingcapital.Theworkingcapitalconceptoffundsisinconformitywithnormal
accountingprocedures.Hence,afundsflowstatementbasedonthisconceptfits well withthe
otherstatements.Moreover,workingcapitalisalsoameasureofshorttermliquidityofthefirm.
Therefore,ananalysisoffactorsbringingaboutachangeintheamountofnetworkingcapitalis
usefulfordecisionmakingbyshareholders,creditorsandmanagement.Duetothesereasons,
theworkingcapitalapproachtofundsismoreusefulthanthecashapproach.
TotalFinancialResources: Thetermfundsisveryoftenusedinthesenseofusefulfinancial
resources also. Cash approach and working capital approach both are incomplete and
inadequatetotheextentthattheyomitafewmajorfinancialandinvestmenttransactions.Such
items do not affect net working capital. But, if they are included, they would certainly provide
qualitativeinformationforthedecisionmaking.,
Forexampleissuingequitysharesanddebenturesforpurchaseofbuildingsorassetsshallnot
haveanyeffectontheworkingcapital.Butitisasignificantfinancialtransactionthatshouldbe
disclosed.Therefore,thisconceptseemstobethebestapproachtodisclosethechangesinthe
financialpositionascomparedtootherconcepts.Itisinconformitywiththestatutoryregulations
andlegalrequirements.
1. Thethreecommonfundsare__________________________.
2. Cashplanningisusedfor____________________________.
3. Cashequivalentisusedfor___________________________.
4. Workingcapitalis__________________________________.
5. Nonworkingcapitalitemsare________________________.
6. Workingcapitalmeans______________________________.
7. Totalfinancialresourcesconsiders_____________________.
8. Totalfinancialresourcesprovide_______________________.
Objectives:
Themainobjectivesofthefundsflowstatementisnormallybasedonthepurposeitsgoingtobe
served.Theseare:
a) tohelpinunderstandingthechangesthatarelikelytotakeplaceintheassetsandliabilities
portfolio.Thesemaynotbereadilyavailablefromtheincomestatement.
187
Unit10
b) To inform the stakeholders as to how a firm can use the funds which are available at its
disposal.
c) Tobringoutthefinancialstrengthsandweaknessesofthebusiness.
1. TheobjectivesofFFSistoidentify______________in______.and____.
2. FFSistobringout_______________________.
10.4TechniquesOfPreparingAFundsFlowStatement
Likeotheraccountingstatements,thestructureofFundFlowStatementisbasedontheequality
offinancialassetsandliabilitiesincludingcapital.Thebasicunderstandingisthat thefundsare
obtained through profit, external borrowings or by issue of shares. If funds are not available
readily from these sources, the other alternative available is to sell the fixed assets and
investments..ThepreparationofFundsFlowStatementisnormallybasedonthefollowingto
bringtoscientificmethodofpreparation.
a)Scheduleofworkingcapitalchanges
b)StatementofSourcesandUsesofFund.
ScheduleofWorkingCapitalChanges: ItisalsoknownasComparativechangeinWorking
CapitalStatementorWorkingCapitalVariationStatement.Thenetchangeinworkingcapital
isprojectedhereintheplaceofindividualchangesinallthecurrentassetsandcurrentliabilities
intheFundsFlowStatement.Thestatementindicatestheamountofworkingcapitalattheendof
twoyears.Itshowstheincreaseordecreaseintheindividualitemsofcurrentassetsandcurrent
liabilities. The effect of the changes in the individual items of the current assets and current
liabilitiesonworkingcapitalisalsopresentedclearlyandprecisely.Thedifferenceintheamount
of working capitalatthe endof twoyears willdepict either theincreaseordeceasein working
capital. While ascertaining the increase or decrease in individual items of current assets and
current liabilities and its impact on working capital, the following Rules should be taken into
account.
i) increaseinCurrentAssetswillincreasetheWorkingCapital
ii) DecreaseinCurrentAssetswilldecreasetheWorkingCapital
iii) IncreaseofCurrentLiabilitieswilldecreasetheWorkingCapital
iv) DecreaseinCurrentLiabilitieswillincreasetheWorkingCapital
188
Unit10
Itis,therefore,notedthatthechangesintheitemsofcurrentassetsarepositivelycorrelatedto
thechangesintheworkingcapital.Ontheotherhand,changesincurrentliabilitiesareinversely
relatedtothechangesintheworkingcapital.
SelfAssessmentQuestions 4
1. FFSisbasedon___________________________.
2. FFSispreparedbasedon___________________.
3. Workingcapitalscheduleindicatesthe______________________.
4. Increaseincurrentassets___________________theWorkingcapital.
5. DecreaseinCA_____________________________________theWC.
6. IncreaseinCL______________________________________theWC.
7. DecreaseinCL______________________________________theWC.
8. ChangesinCA________________________________changesinWC.
9. ChangesinCL________________________________changesinWC.
10.5SourcesofFunds
The transactions that increase the working capital are sources of funds. Following may the
sourcesoffundsinaconcern.
Fundsfromoperations: Profitearnedbytheconcernduringthecurrentyearisdeemedtobe
the source of funds. It is very important source of funds inflow. Net profit is arrived at by
deductingcostofgoodssoldandotherexpensesfromtotalsalesrevenue.However,theprofitso
calculatedisseldomequaltothefundsfromoperationsbecausetherearemanyitemswhichare
debitedorcreditedintheProfitandLossAccountwhichdonotaffectworkingcapital.Therefore,
incalculatingthefundsfromoperations,thefollowingadjustmentsmustbekeptinmind:
Itemstobeaddedbacktonetprofit:
a. Nonfund revenue deductions: These are items which are debited to Profit and Loss
account. Thesedonot cause outflow offunds suchas depreciation anddepletiononnon
current assets, amortization of fictitious and intangible assets, preliminary expenses,
redemption of preference shares or debentures, deferred charges, advertising suspense
account written off. If non fund expenditures does not affect the current assets such as
unexpired insurance, do not add back. So also, all allowances for income tax payable in
futureyearsareexcluded.
189
Unit10
b. Nontradingchargesorlosses:TheseitemswhichweredebitedtoProfitandLossaccount
reduce the profits but they do not cause any outflow of funds. Hence, profit should be
corrected by adding back all such charges and losses. These include appropriation of
retained earnings such as general reserve, dividend equalization fund, reserve for
contingencies,sinkingfund.Inadditionthedividendonsharesmustbeaddedbacksinceit
isanappropriationandnottradingcharge.Thelossesarisingoutofsaleofland,buildings,
machinery,longterminvestmentswhich were writtenofftotheprofitandlossaccountmust
be addedback. Do not add theloss arising out of saleof a current asset such short term
investments.Itisatradinglossandhenceitwillnotrequireanyadjustment.Theamountset
asideasprovisionforcurrenttaxationwillalsobeaddedback.Thiswillbeconsideredonly
whentheprovisionfortaxationistreatedasachargeonprofits.
ItemstobedeductedfromNetProfit.
Thenonfundandnontradingrevenuereceiptsorincomesmustbededucted
Netprofitinordertocomputefundsfromoperations.Theitemsare:
(a) Dividend received or receivable: Although this transaction increases the current assets
suchascashanddebtors,itisnotatradingincome.Hence,itshouldbedeductedfromthe
netprofitstodeterminethefundsfromoperations.
(b) Retransfer of excess provisions: Where theprovisions made for taxation, depreciation,
doubtful debts exceed the genuine requirements, the excess amount is transferred back to
theProfitandlossaccount.Itdoesnotcreateanyinflowoffundssinceitisanaccounting
entry.Hence,deductit.
(c) Profit on sale of non current assets: It is a non trading income. Hence it must be
eliminatedfromtheamountofprofit.
(d) Appreciationinfixedassets: Theamountofappreciationonrevaluationoffixedassetsis
normallycreditedtotheprofitandlossaccount.Ifitisso,deductitfromtheprofittocompute
thefundsfromoperations.
1. Increaseinworkingcapital____________________.
2. DecreaseinWC_____________________________.
3. Netprofitis________________________________.
4. Itemstobeaddedbacktonetprofitare__________.
5. Someofnonfundrevenueitems_______________.
190
Unit10
6. Nontradinglossesinclude___________________.
10.6IncreseinFunds
Inanutshell,thesourcesoffundscanbeobservedasfollows:
a) increaseoffreshsharesderivedfromincreaseinsharecapital.
b) Issueofdebenturesderivedfromincreaseindebentures.
c) Raisingofnewloanderivedfromincreaseinlongtermloans
d) Saleoffixedassetsforcashorforothercurrentassetsderivedfromdecreaseinfixedassets
andadditionalinformation.
e) Nontradingincome
f) Profitfromoperations before deductingnon cash itemsof expensesandlossesand before
additionalnoncash,nontradingincomes.
g) DecreaseinworkingcapitalderivedfromtheScheduleofWorkingcapitalchanges.
1. Increaseinsharecapitalis___________________________ofcash.
2. Increaseindebentures_______________________________ofcash.
3. Increaseinraisingloans______________________________.
4. saleoffixedassets__________________________________.
5. Nontradingincomeis_______________________________.
6. Profitfromoperationsis_____________________________.
7. Decreaseinworkingcapitalis________________________.
10.7DecreaseinAssets
Decrease in assets is always a source of funds for the business. Decrease may be in many
ways:suchascashreceivedfromdebtors,saleofgoodsforcash,Billsrealized,saleofassets,
fixedassetsthroughprovisionfordepreciationoramortizationoffictitiousassets.Decreaseinan
itemofassetsresultsineitheraparalleldecreaseinsomeotherliabilitiesoraparallelincreasein
some otheritemof assets example repayment of bank loan.. Itshould be rememberedat the
very outset that the decrease is ascertainedby comparing thecost of fixed assets and not by
comparingthewrittendownvaluei.ecostlessdepreciation.Iffixedassetshavebeenshownnot
at cost but at written down value, then cost may be ascertained by adding total depreciation
writtenofftodate(generallyknownasaccumulateddepreciation)tothewrittendownvalueThe
decreaseinfixedassetsresultsinsaleoffixedassets.Specificinformationisgenerallygivenin
191
Unit10
theproblemaboutthis.Thedecreaseinfixedassetsnotonaccountofdepreciationorwritingoff
isknownassaleoffixedassets.Itmustbenoticedthatthetotalsaleproceedsandnotthecost
offixed assets soldareshown as sourceoffund. If theinformation in respectof sale offixed
assets is not clearly given, the following steps should be taken to find out the value of sale
proceeds.
CostofFixedAssets(PreviousYear)
Less:CostofFixedAssetsofCurrentyear()
CostofFixedAssets
xxxxxxxx
ADD:ProfitorDEDUCTlossonsale
SaleProceedstobetreatedassourceXXXXXXXXXXXXXX
Theamountofprofitorlossonsaleoffixedassetsfortheabovepurposederivedfromprofitand
lossaccountorfromcapitalreserveorfromanyspecificreserve.Thisisbasedonthefactthat
suchprofitorlossarecreditedordebitedortransferredtotheseaccountsinaccordancewiththe
accountingprinciples.Itmustberememberedthatprofitorlossonsaleoffixedassetsarenot
includedinprofitfromoperationforthepurposeofthisFundFlowStatement.
IfsuchprofitorlosshasbeenincludedinProfitandLossAccount,adjustmenthastobemade.
Ifthereisprofitonsaleofassets,thenetprofitdisclosedbyProfitandLossAccountisreduced
by the amount of profit earned on the sale of fixed assets. On the other hand, the net profit
shownbyProfitandLossAccountisincreasedbytheamountoflossincurredonthesaleoffixed
assets.
Example:
ThelandandbuildingsaccounthadabalanceofRs.5,00,000onJan2007.Apieceoflandhas
beensold.Thereisnopurchase.Rs.30,000depreciationhasbeenchargedin2007.Theprofit
onsalehasbeencreditedtoCapitalReserveAccount.ThebalancestoodonJanuary1,2007
wasRs.20,000andRs.50,000onDecember31.Thebalanceoflandandbuildingaccountason
December31isRs.4,50,000.Findthesaleproceeds.
Solution
BalanceoflandandbuildingonJan1,20075,00,000
LESS:Depreciationcharged(30,000)
4,70,000
192
Unit10
LESS: BalanceofLandandBuildingonDec31(4,50,000)
CostofLandsold20,000
ADD:Profitonsale(derivedfromcapitalreserve)30,000
(closingminusopeningbalance
Rs.50,000minusRs.20,000)
SaleProceeds50,000
1. Decreaseinassetsis_________________________________.
2. Profitorlossonsaleoffixedassets____________________.
10.8IncreaseInLiabilities
Theincreaseinliabilitiesisalwaysasourceoffundsforthebusiness.Itmayoccurasaresultof
many transactions such asequity share capitalor/ and debentures to the public., purchase of
goodsoncredit.Outstandingexpensesarealsoconsideredassourceoffundssincepayments
are postponed and cash savedis parkedin thebusiness. A comparison of the amountof the
itemsoflongtermliabilitiesi.edebenturesandmortgageandotherloansforthecurrentyearand
previous year will disclose the increase or decrease in the long term liabilities. Additional
informationshouldalsobetakenintoaccountfordeterminingthecorrectamountofincreaseor
decreaseforthepurposeofthisstatement.
Anyincreaseonaccountoftheissueofdebenturesforconsiderationotherthancashorcurrent
assets for the purchase of fixed assets or redeeming other debentures or preference shares
wouldnotatallbeshowninthestatementbecauseinsuchacasethereisnoflowoffund.
1. Increaseinliabilityis______________________.
2. Outstandingexpensesis__________________.
10.9IncreaseInNetWorth
Therecanbeonlytwomainchannelsofincreaseinnetworthorequity:
a) procurementofmorefundsbyissueofadditionalshares
b) throughaccumulationofretainedearningsorprofitsinbusiness
Astheincreasedinownedfundsisconcerned,ithappensonlywhenthebusinesshasplansfor
expansion,diversification,modernization.Theincreaseinpaidupequity
193
Unit10
Sharecapitalisnotaregularfeature.Itsoccurrenceisonlysporadic.Butprofitgeneratedfrom
operations is a normal feature and is virtually a continuous process from year to year. Profit
earned during an operating period increases the new worth of the business and hence it is
always considered as a source of funds. Sometimes, the premium received on sale of equity
sharesandcreditedtosharepremiumaccountisalsoasourceoffundsasitaddstothesizeof
networth.
Sharecapitalconsistsofequitysharecapitalandpreferencesharecapital.Thechangeinequity
share capital is always in the form of increase it can never be in the form of decrease. The
increase in equity share capital as per Balance Sheet values must be adjusted in terms of
additional information. If theincrease has takenplaceonaccount ofthe issueoffresh shares,
only that portion of increase should be treated as sources which is due to the issue of fresh
sharesforcashandothercurrentassets.Increaseonaccountofshareissuesforconsideration
involving the purchase offixedassets or redemption ofpreference shares ordebentures shall
notpartakethecharacterofinflowoffundsandhenceshouldnotbeshowninthestatement.If
fresh shares have been issued at premium, the amount of premium must be added to the
increaseinshare capitalforthe purposeof showing itas source offund. If thefreshshares
have been issued at discount, the amount of discount must be deducted from the increase in
sharecapitalbecauseitdoesnotinvolveinflowoffund.
Example:
TheopeningandclosingbalanceofSharecapitalareRs.6,00,000andRs.9,50,000respectively.
The Preference Share capital included in opening balance is Rs.1,00,000. During the year,
Rs.75,000worthofPreferenceshareswereredeemedat8%premium.BonussharesatRe.1
foreveryfiveequitysharesheld.Inaddition,a businesswaspurchasedbyissueofRs.90,000
shares at a premium of 10 %. The opening and closing balance in the Premium Account is
Rs.8,00,000andRs.14,000respectively.Calculatethefurtherfreshissue.
Solution:
Sharecapitalatclose
DEDUCT:Sharecapitalopening
9,50,000
6,00,000
Less:RedemptionofPreference
Shares(75,000)
(5,25,000)
4,25,000
Deduct:Sharesissuedfornoncashitems
(90,000)
194
Unit10
3,35,000
DEDUCT:Bonusshares(1/5x5,00,000)
(1,00,000)
(1/5of6,00,000)
2,25,000
ADD:Sharepremium.(14,000+6,000minus
8,000minus9,000)
FreshissueofShares
3,000
2,28,000
1. Decreaseinnetworthisthrough__________________________.
2. Increaseinnetworthisneededfor________________________.
3. Profitearned_________________________________networth.
4. Premiumonsharesis__________________________.
5. Changeinequitysharesisalways________________.
6. Decreaseinpreferencesharecapitalis____________.
10.10SourcesOfFunds
Theuseoffundsresultsincashoutflows.Theoutflowsareknownas:applicationoffunds.The
usesoffundsaremainlyconcernedwith.
a) RedemptionofPreferencesharesincashderivedfromdecreaseinsharecapital.
b) Redemptionofdebenturesincashderivedfromdecreaseindebentures
c) Repaymentofloanderivedfromdecreaseinlongtermloans
d) Purchaseoffixedassetsfor considerationotherthan shares,debentures orlong term debt
derivedfromincreaseinfixedassetsandadditionalinformation.
e) Lossfromoperations
f) Paymentofdividendincash
1. Useoffundsresultin________________________.
2. RedemptionofPreferencesharesis_____________.
3. Redemptionofdebenturesis__________________.
4. Redemptionoflongtermloanis_______________.
5. Purchaseoffixedassetis_____________________.
6. Lossfromoperationsis______________________.
195
Unit10
7. Paymentofdividendis______________________.
10.11IncreaseInAssets
TheincreaseinfixedassetsisknownintheaccountinglanguageasPurchaseoffixedassets.
Inordertofindouttheincreaseinfixedassets,costoffixedassetsofpreviousyearasreduced
bythecostoffixedassetssoldduringthecurrentyearisdeductedfromthecostoffixedassetsof
thecurrentyear.Inotherwords,theincreaseinfixedassetsiscalculatedasunder:
CostofCurrentyearfixedassets
DEDUCTCostofpreviousfixedassets..
LESS:Costoffixedassetssoldor
Writtenoffduringthe
Currentyear(.)(..)
INCREASEinfixedassetsxxxxxxx
Example: The opening and closing written down balances of an asset are Rs.5,00,000 and
Rs.5,50,000. The accumulated depreciation has been Rs.1,50,000 at the beginning and
Rs.1,90,000 at the close. A machine costing Rs.30,000 (accumulated depreciation Rs.18,000)
wassoldduringtheyearforRs.9,500.Calculatethepurchasepriceofthefixedassets.
Solution
Closingcostofasset(closingvalue+closingaccumulated
Depreciation:5,50,000+1,90,0007,40,000
DEDUCT:OpeningcostofAsset(opening
Value+openingaccumulatedDepreciation
5,00,000+1,50,0006,50,000
Less:Costofassetsold
(30,000)
(6,20,000)
1,20,000
Sometimes,itmayhappenthatthecostfigurescannotbeascertainedonthebasisofinformation
available.Increaseinfixedassets,inthiscase,hastobefoundoutwithreferencetothewritten
downvaluealongwithannualdepreciation.Ifnopurchaseoffixedassetsweremadeduring
thecurrentyear,thenthevalueoffixedassetsshownintheBalanceSheetofthecurrentyear
196
Unit10
should be equal tothe valuesof the previous year minus annual depreciationfor current year.
Theexcessofcurrentyearsvalueoverpreviousyearsvalueminusannualdepreciationwillbe
treatedasincrease.Thiswillrepresentthepurchaseoffixedassets.
CurrentyearwrittendownvalueofAsset..
DEDUCTPreviousyearWDV
ofAsset
Less:CurrentyearDepreciation()(..)
_______________
IncreaseinFixedAssetbeingPurchasesxxxxxx
Example:ThewrittendownvalueofaMachineryatthebeginningandatclosewereRs.2,00,000
and1,75,000.AnoldmachinewhosewrittendownvaluewasRs.12,000wassoldforRs.6,500.
Rs.32,000depreciationwaschargedduringthecurrentyear.Calculatethepurchaseprice.
Solution:
CurrentyearwrittendownvalueofMachinery
1,75,000
DEDUCT:Previousyearwrittendown
ValueofMachinery
Less:Currentyeardepreciation
2,00,000
(32,000)
1,68,000
Less:writtendownvalueofmachineSold
(12,000)
(1,56,000)
Purchaseprice
19,000
1. Increaseinfixedassetisknownas_____________________.
2. Purchaseis_______________________________________.
3. The excess of current year minus (previous year + Depreciation) is treated as
________________.
10.12DecreaseInLiabilities
Itimpliesapplicationwhichistheflowoffundsoutofbusiness.Decreaseinliabilitymaybedone
dueincreaseinoneormoreliabilityitemsorduetodecreaseinoneormoreassetitems.Itmay
alsobepartlyduetoincreaseinliabilityandpartlyduetodecreaseinassets..Anyamountof
premiumontheredemptionofdebenturesshouldbeadjustedasdeduction.Anydecreaseon
197
Unit10
account of redemption of debentures through the issue of another debentures or preference

sharesshouldalsonotbeshowninthestatement.
Example:
OnJanuary1,2007,thebalanceof8%DebenturesAccountstoodatRs.5,00,000.Rs.60,000
debentureswererepaidat5percentpremium. Rs.75,000debentureswerepurchasedatRs.95
fromthemarketandcancelled.TheclosingbalanceofdebentureswasRs.2,00,000.Calculate
theoutflowoffunds.
Solution:
OpeningbalanceofDebentureAccount
LESS:ClosingbalanceofDebentureAccount
5,00,000
(2,00,000)
Decrease
3,00,000
LESS:Discountoncancellation(Rs.75,000/Face
ValueofRs.100eachor750debenturesx
Rs.5each(Rs.100minusRs.95)
(1,250)
2,98,750
ADD:Premium(Rs.60,000x5/100)
Outflowoffunds
3,000
3,01,750
1. Decreaseinfixedliabilities________________________funds.
2. Premiumonredemptionofdebenturesis_____________.
10.13NetWorth
Itmaybeuseddueto(a)lossfromoperations(b)paymentofcashdividendoutofaccumulated
reservesand (c)returnof apart of paid upshare capital to shareholders implying reduction of
share capital a rare occurrence. If there is decrease in preference share capital and this
decrease is on account of redemption of these shares in cash or other current assets, such
decrease shouldbe shown asuse offund. Butthe decrease onaccountof redemption by the
issueofanotherpreferencesharesorequitysharesordebentures,shallneverbeshowninthe
statement because it will not involve outflow of fund. If the preference shares have been
redeemedatapremium,necessaryadjustmentsshouldbemade
1. Newworthisdueto_______________________.
198
Unit10
2. Networthisalsodueto___________________.
3. Networthcanbe________________________.
10.14FlowofFunds
It refers to change in fund. Increase of funds of any transaction is a source and decrease of
fundsinanytransactionisapplicationorusesoffunds.Butthetransactionswhichdonotresult
in any change in the funds is called Nonfund. Flow of fund takes place when a business
transactionbringsachangeintheworkingcapital.Suchchangemaybeincreaseordecrease.
The increase is a positive change and the decrease being the negative. These directions in
changeareknownasfundelementsorfundfactors.Theyarecommonlyknownasinflowsand
outflows.Thebasicruleis:
Flowoffundifatransactioninvolves:
a) Currentassetsandfixedassetsthatismachinesoldforcash
b) Currentassetsandfixedliabilitiesthatisissueofdebenturestothepublic
c) Currentassetsandownerequitythatisissueofsharesforcash
d) Currentliabilitiesandfixedassetsthatistransferofassetstodischargeaclaim
e) Current liabilities and fixed liabilities that is conversion of creditors due by issue of
debentures.
f) Current liabilities and capital that is conversion of creditors into owners equity by issue of
equityshares.
1. Flowrefersto__________________________.
2. Increaseinfunds_______________________.
3. Decreaseinfunds______________________.
4. Nonchangeisknownas_________________.
5. Flowtakesplacedueto__________________workingcapital.
6. Theincreaseinfundisa__________________change.
7. Thedecreaseinfundisa__________________change.
10.15TransactionsthatdonotaffecttheflowofFunds
a) Currentassetsandcurrentliabilitiescreditorspaid
b) Fixedassetsandfixedliabilitiespurchaseofassetsfordebentures
c) Fixedassetsandcapitalpurchaseofassetsbyissueofequityshares.
199
Unit10
1. Transactionsnotaffectingfloware_______________________.
10.16StepsInPreparationOfFundsFlowStatement
TherearethreestepsinvolvedinthepreparationofaFundFlowStatement(FFS).Theyareas
follows:
a) Preparation of Statement of changes in working capital or Schedule of changes in working
capital.
b) PreparationofAdjustedProfitandLossAccount(APL)
c) StatementofchangesinFinancialpositionasperAS7
1. FirststepinpreparationofFFSis__________________.
2. SecondstepinthepreparationofFFSis_____________.
3. ThirdstepinthepreparationofFFSis_______________.
10.17 ComputationofChangesinWorkingCapitalandFundsfromOperations
It isa customary practice that only the net changes in working capital should be shown in the
Fund Flow Statement instead of individual changes. Here, the current assets and current
liabilitiesareconsidered.Forthispurpose,aseparatestatementorscheduleisbeingprepared.
Individualitemsareenteredhere.Theopeningand closingbalancesareenteredone afterthe
other.Thecorrespondingincreaseordecreaseareenteredbasedonthefollowingrules:
a) Increaseinacurrentassetitemincreasesworkingcapital.
b) Decreaseinacurrentassetitemdecreasesworkingcapital.
c) Increaseinacurrentliabilityitemdecreasesworkingcapital.
d) Decreaseinacurrentliabilityitemincreasesworkingcapital.
Insert the total of currentasset andcurrentliabilities of both opening and closingperiods.Say,
thetotalofcurrentassetsasAandthatoftotalofcurrentliabilitiesasB.DeductAminusB.The
answerisknownasnetWorkingcapital.Iftheworkingcapitalattheendofthecurrentyearis
more than the working capital atthe end of previous year, the excessis calledas increasein
working capital. Otherwise, if previous years working capital is more than the current years
working capital, thedifference is called as Decreasein working capital. Increase in working
capitalisshownasapplicationoffundsanddecreaseinworkingcapitalassourceoffundsinthe
FundsFlowStatement.
200
Unit10
Thefundsfrom operation can befound with thehelpof preparing an Adjusted Profit and Loss
Account.
1. Individualitemsareprojectedin___________________.
2. Workingcapitalequationis_______________________.
3. Aistotal_____________________________________.
4. Bistotal____________________________________.
5. Workingcapitalis_____________________________.
6. Netincreaseordecreaseis______________________.
10.18Layout
ThelayoutforscheduleofchangesinWorkingCapitalisasfollows
Balancesason
Effecton
DetailsLastCurrentIncreaseDecrease
YearYear
CURRENTASSETS
Cashinhand
CashatBank
SundryDebtors
BillsReceivable
StockorInventory
Prepaidexpenses
TotalCurrentAssets,SayA
CURRENTLIABILITIES
SundryCreditors
BillsPayable
BankOverdraft
Outstandingexpenses
TotalCurrentLiabilities,SayB
NETWORKINGCAPITAL
AminusB
IncreaseorDecreaseinWorking
201
Unit10
Capital(Balancingfigure)
Example:DRLtdprovidesthefollowinginformation
Jan1Dec31
InRupees
SundryDebtors65,0001,05,000
Cashinhand13,00020,000
CashatBank15,00020,000
BillsReceivable
16,00030,000
Inventory90,00084,000
BillsPayables12,000
8,000
Outstandingexpenses6,0005,000
SundryCreditors30,00058,000
BankOverdraft
30,00042,000
ShorttermLoans32,00036,000
Prepareascheduleofchangesinworkingcapital
202
Unit10
Solution
ScheduleofchangesinWorkingCapital
BalancesasonEffectofWC
DetailsJan1Dec31IncreaseDecrease
CurrentAssets
Cashinhand13,00020,0007,000
CashatBank15,00020,0005,000
SundryDebtors
65,0001,05,00040,000
BillsReceivable16,00030,00014,000
Inventory90,00084,000
6,000
TotalCurrentAssets,A
1,99,0002,59,000
CurrentLiabilities
BillsPayables12,0008,0004,000
Outstandingexpenses6,0005,0001,000
BankOverdraft30,00042,000
Shorttermloans32,00036,000
28,000
12,000
4,000
TotalCurrentLiabilities,B1,10,0001,49,000
WorkingCapital AminusB89,0001,10,000
NetIncreaseinworkingcapital
(balancingfigure)
21,00021,000
TOTAL1,10,0001,10,00071,00071,000
203
Unit10
Example:
Prepareastatementofchangesinworkingcapitalfromthefollowinginformation.
Jan1Dec31
InRupees
ShareCapital
50,00050,000
Retainedearnings14,00040,000
FixedAssetsatcost80,00090,000
ProvisionforDepreciationonFixedAssets22,00027,000
Investmentsinsharesofsubsidiaries15,00015,000
8%Debentures(redeemablein5equal
annualinstalmentofRs.20,000each,
fromthecurrentyear)
20,000
Prepaidexpenses21,00014,000
Outstandingexpenses5,00012,000
CreditorsandBillsPayables30,00025,000
DebtorsandBillsReceivables18,00020,000
CashandBankbalances5,000
13,000
ProvisionforDoubtfulDebts4,0002,000
Solution
Statementofchangesinworkingcapitalduringtheyear
Details
CurrentAssets
Cashandbankbalances
Balancesason
Jan1
EffectonWC
Dec31
Increase
Decrease
5,000
13,000
8,000
18,000
20,000
2,000
6,000
12,000
6,000
Prepaidexpenses
21,000
14,000
7,000
Total,sayA
50,000
59,000
20,000
20,000
20,000
5,000
12,000
7,000
30,000
25,000
5,000
4,000
2,000
DebtorsandB.R.
GovernmentSecurities
CurrentLiabilities
8%Debentures
Outstandingexpenses
CreditorsandB.P.
ProvisionforDoubtfulDebts
204
Total,sayB
WorkingCapital:AminusB
Netincreaseinworkingcapital
Unit10
59,000
39,000
(9,000)
20,000
3,000
29,000
29,000
20,000
20,000
43,000
43,000
AdjustedProfitandLossAccount
TheLayoutisasfollows:
Dr.
Cr.
To
By
DepreciationwrittenoffProfitandLossaccount
DepreciationProvisionlastyearfromBalance
PreliminaryexpenseswrittenSheet
OffProfitonsaleofinvestments
GoodwillwrittenoffProfitonsaleofFixedassets
DiscountonissueofsharesandDividendandinterestreceived
Debentureswrittenofffromtradeinvestments
Fixedassetsdiscardedor
Writtenoff
LossonsaleoffixedassetsFUNDSGENERATEDFROM
LossonsaleoftradeinvestmentsTRADINGOPERATIONS
TransfertoGeneralReserve,(balancingfigure)transferred
toFundsFlowStatementas
SinkingFunds,ReserveFundsapplicationoffunds
TransfertootherReserves
Premiumonredemptionof
PreferenceShares
ProvisionforTax
ProvisionforFinalor
ProposedDividend
InterimDividends
NetProfitasperclosingcurrent
YearProfitandLossAccount
TOTAL
205
Unit10
NOTE:IfdebittotalofAPLismorethanthecredittotal,thedifferenceisFundsgeneratedfrom
Operation:RecordonthecreditsideofAdjustedProfitandLossAccount.
IfcredittotalofAPLismorethanthedebittotal,thedifferenceisfundslostinoperations.Record
onthedebitsideofAdjustedProfitandLossAccount
ThebalancingfiguresshouldbetransferredinoppositedirectiontoFundsFlowstatement..
Example3: CalculatefundsfromoperationsfromthefollowingProfitandLossAccount
To
By
Expensespaidand3,00,000GrossProfit4,50,000
Outstanding
Depreciation70,000Gainonsaleofland60,000
Loss onsaleofmachine4,000
Discount200
Goodwill20,000
NetProfit1,15,800
5,10,0005,10,000
Solution:
ADJUSTEDPROFITANDLOSSACCOUNT
ToRs.ByRs.
Goodwillwrittenoff20,000Fundsfromoperations1,50,000
Discountwrittenoff200(balancingfigure)
Lossonsaleofmachines4,000
NetProfit1,15,800
2,10,0002,10,000
Example4:FollowingaretheextractsfromtheBalancesheetsofDRLt.
31320073132008
Rs.
Rs.
ProfitandLossaccount11,10014,800
GeneralReserve7,4009,250
Goodwill
3,7001,850
Provisionfordepreciationonasset3,7004,400
Preliminaryexpenses2,2001,500
206
Unit10
Duringtheyear,thecompanysoldlandwhosebookvaluewasRs.50,000forRs.54,000andpaid
aninterimdividendofRs.2,000
Calculatefundsfromoperations.
Solution
ADJUSTEDPROFITANDLOSSACCOUNT
To
RsByRs.
GeneralReserveBalancebroughtdown11,100
(9,250minus7,400)1,850beingopeningbalance
GoodwillwrittenoffProfitonsaleofland4,000
(3,700minus1.850)1,850
Preliminaryexpenses
Writtenoff
700Fundsgeneratedfrom
Depreciationwrittenoperations(balancing
Off700figure)
6,800
Interimdividendpaid2,000
ClosingbalanceofProfit
AndLossaccount14,800
21,90021,900
NOTES:
1. There is an increase in the balance in General Reserve. It implies that some amount has
beentransferredtotheaccountfromtheProfitandLossaccount.Thisisanappropriationof
profitwhichdoesnotresultinanyoutflowoffunds.
2. The balancein Goodwill Account and preliminary expenses account has come down which
indicatesthtthedifferencehasbeenwritten.Thisalsodoesnotresultinanoutflowoffunds.
3. Theincreaseinprovisionfordepreciationisonaccountofcurrentyearsdepreciationwhich
doesnotresultinanyoutflowoffunds.
4. Profit on sale of land and interim dividend being nonoperating items are to be separately
shownassourceandapplicationoffundsintheFundsFlowStatement.
207
Unit10
Example5: Thefollowinginformationisprovided:
Opening balance of Plant Rs.1,32,500. Closing balance of Plant Rs.1,97,500. Provision for
Depreciation in Plant at the beginning 45,000 and at close Rs.61,000. During the year
Rs.65,000 worth of Plant was purchasedinexchangefor fully paid debentures andold Plant
costingRs.40,000wassoldforRs.34,000.DepreciationprovidedRs.18,000.Calculatetheflow
offunds.
Solution:
PlantAccount
ToBy
OpeningBalance1,32,500Bank:SaleofPlant34,000
DebentureAccount65,000
ProvisionforDepreciation
(Plantpurchased)Account:Depreciationon
sold18,000
AdjustedP&LAccount
Profitonsale12,000*Closingbalance1,97,500
BankAccount:Plant
Purchased(balancing
Figure)40,000
2,49,500
2,49,500
CalculationofProfitonsale:34,000minus(40,00018,000)=12,000
ProvisionforDepreciationonPlantAccount
ToBy
PlantAccount
:DepreciationOpeningBalance45,000
Onplantsold
18,000APL:Currentyear
ClosingBalance61,000Depreciation(bal.figure34,000
79,000
79,000
Note:ForallAssetAccount,recordtheopeningbalanceonthedebitsideandclosingbalanceon
thecreditsideoftheconcernedAssetAccount.Forallliabilities,recordtheopeningbalanceon
thecreditsideandtheclosingbalanceonthedebitside.
208
Unit10
10.19TREATMENTOFCERTAINITEMS
Therearecertainitemswhosetreatmentisnotuniform.Differentauthorsdifferdifferently.But,
inthisstudymaterial,anuniformityismaintained.Thelikelyargumentshavebeenprovidedfor
treatingitemsonaparticularprinciple.Theitemsare:
ProvisionforBadDebts
Sometimes, it is shown as reserve for bad / doubtful debts. Actually, this item is shown as
deduction from total book debts to the asset side of the Balance Sheet. Therefore, this item
should be deducted from the amount of debtors shown in the schedule of working capital
changes.Sincesuchtreatmentmaycomplicatethecalculationwork,itissuggestedthatitshould
beshownalongwithcurrentliabilities,although,itdoesnotbelongtothatcategory.
ProvisionforTax:
DOnottreatthisitemasacurrentliability.TheProvisionhastobemadetomeetthetaxliability
ofcurrentyear.IfthereisaProvisionforlastyear,ithastobepaidthisyear.Hence,thelast
yearProvisionactuallybecomesthecurrentyearcashoutflow.HencerecorditintheFundsflow
statement.
ProposedDividend
Normally, the proposed dividends are given as Balance Sheet item on the liability side. The
DirectorsproposethefinaldividendwhichneedstobeapprovedbytheGeneralMeeting.Hence,
it is fair to assume that the proposed dividend is not a current liability. Do not show in the
scheduleofworkingcapitalchanges.Thelastyearproposeddividendshouldbepaidduringthe
currentyear,henceacashoutflow
Investments
Itposesproblemsinitstreatment.TheRuleis:
a) if the investments are in the form of Government or other marketable securities, treat it as
currentassets.
b) If it is mentioned as trade investments, that is investments in shares and debentures of
anothercompanies,treatitasfixedassets.
c) Ifnothingismentionedspecifically,thetreatmentis:
:ifinvestmentshavebeensoldsimultaneously,treatitascurrentassets
:inothercases,treatitasFixedAssets.
209
Unit10
Depreciation
Normally, the value of deprecation will be provided in the problem as an adjustment items.
Depreciationisanoncashitem.Itis,therefore,chargedtoProfitandLossandrecordedinthe
concerned Fixed Assets Account. If the depreciation is given as a percentage, calculate the
value on the opening balance of the concerned account.. If the value of depreciation is not
given,ithastobefoundoutasfollows:
OpeningbalanceofFixedAssets..
ADD:Purchases.
LESS:Fixedassetssold
(.)
LESS:Closingbalanceoffixedassets(.)
Depreciationcharges
xxx
Ifaconcernintendstoshowitsfixedassetsatitscostprice,theperiodicannualdepreciationis
shown under liabilities side as Provision for Depreciation commonly known as Accumulated
DepreciationFundAccount.IfthereweretobeanAccumulatedDepreciationFundAccountin
already in operation, the current year depreciation is charged against this Provision for
accumulated Depreciation Account and not recorded directly into Adjusted Profit and Loss
Account.Inotherwords,thecurrentyeardepreciationisroutedthroughtheProvisionAccount.
Increase/DecreaseinFixedAssets
TheincreaseordecreasebymeansofcashisrecordedintheFFS.Increaseordecreasedueto
purchaseconsiderationthroughsharesanddebenturesarenotrecorded.
Increase/Decreaseinlongtermliabilities
ComparedebenturesandmortgagesaspertheBalanceSheetfigures.Onlyconsiderifcashis
the main striker to cause the increase or decrease. If the changes were to be due to
considerationotherthancashorcurrentassets,donotrecorditintheFFS..
HiddenItems
Preparethenecessaryledgeraccountsconcernedinthefixedassets,fixedliabilitiesandshare
capitaland carry out allthe necessary adjustments. The balancingfigure,if any, wouldbe the
cashtransactions. Forall non, cash transactions,concentrateonthe Adjusted Profit and Loss
Account.
210
Unit10
1.
Provisionisshownas_______________________
2.
Provisionfordoubtfuldebtsis_______________fromgrossdebtors
3.
Provisionisshownin_______________________
4.
Provisionfortaxmaybe_____________________
5.
IfProvisionforTaxismaintained,treatitin_________________
6.
Proposeddividendisshownon________________ofBalancesheet
7.
Proposeddividendsaretobeapprovedby_____________________
8.
Proposeddivided.Isnotconsideredas________________________
9.
Lastyearproposeddividendiscash__________________________
10.
Governmentinvestmentsare_______________________________
11.
Investmentsinsharesanddebenturesare______________________
12.
Depreciationis_____________________
13.
Depreciationisa___________________
14.
IfDepreciationisgivenasapercentage,calculateon_____________
15.
If Provision for depreciation account is maintained, charge the current depreciation to

_____________andnotto_______________________
16.
Depreciationischargedonlyon_______________________________
Problem6: TheBalanceSheetsaregivenbelow:
Year(Rs.inlakhs)
20062007
FixedAssets5060
Investments1020
CurrentAssets
140150
ShareCapital100160
ProfitandLossAccount
3030
Debentures10
CurrentLiabilities6040
DepreciationchargeswasRs.6lakhs.PrepareFundFlowstatement.
211
Unit10
Solution:
Scheduleofchangesinworkingcapital
20062007
CurrentAssets140150
LESS:Currentliabilities(60)(40)
WorkingCapital:CAminusCL
80110
NetIncreaseinworkingcapitaltransferredto30
FFS(application)
110110
ToBy
Depreciation6OpeningBalance30
ClosingBalance30FundsfromOperations6
36
36
FundsFlowStatement
Sources
IssueofEquityshares
Applications
60PurchaseofFixedAssets16
Fundsfromoperation6Purchaseofinvestment10
Redemptionofdebenture
10
Increaseinworkingcapital30
66
66
212
Unit10
Problem7:Fromthefollowingextracts,calculatefundsfromoperations
Year
20062007
ProfitandLossaccount50,00080,000
Provisionfortaxationon10,00015,000
Proposeddividends5,00010,000
Additional information: Tax paid Rs.2,500. Dividends paid Rs.1,000.. Calculate funds from
operationtakingprovisionfortaxandprovisionfortaxandproposeddividendas(a)noncurrent
liabilitiesand(b)currentliabilities.
Solution:
Provisionfortaxandproposeddividendaretakenasnoncurrentliabilities
ToBy
Incometaxaccount2,500Openingbalance10,000
Taxpaid
Profitandlossaccount7,500
Closingbalance15,000provisionmade(balance
Figure)
17,50017,500
ProposedDividendAccount
ToBy
DividendaccountbeingOpeningbalance
5000
DividendpaidduringtheProfitandlossaccount
Year1,000proposeddividend6,000
Closingbalance
10,000
11,00011,000
213
Unit10
To
By
ProvisionforTax7,500Openingbalance50,000
ProposedDividend6,000Fundsfromoperations
Closingbalance80,000
(balancingfigure)43,500
93,50093,500
c) If Provision of tax and proposed dividend are taken as a current liability, funds from
operations willbethedifferenceinProfitandLossaccountatthebeginningandtheendof
theyear.
NOTES
1. Incasea)IncometaxpaidRs.2,500andDividendpaidRs.1,000areshownasapplicationof
fundsintheFFS.
2. In case (b), there is no need to prepare proposed dividend account and provision for tax
account,. However, the opening and closing balances of the two accounts are shown as
currentliabilitiesinthestatementofchangesinworkingcapital
Problem8: ThebookvalueoftradeinvestmentsofDRLtdasonMarch1,2006andMarch31,
2007 was Rs.50,000 and Rs.70,000 respectively. During the year, Rs.5,000 was received as
dividends, of which Rs.2,000 pertained to preacquisition profits which have been credited to
Investments Account. Investments costing Rs.10,000 have been sold during the year for
Rs.10,000.Findtheflowoffundsonaccountofinvestments.
Solution:
InvestmentsAccount
To
By
Openingbalance50,000DividendAccount:Pre
BankAccount:purchaseacquisitionprofit2,000
Ofinvestments(balance32,000Bank:saleofinvestments10,000
82,000
82,000
214
Unit10
Notes:
1) Theinvestmentspurchasedwerevaluedcumdividend.Hence,onreceiptofdividends,they
wererightlycreditedtoInvestments.Hencethereisnoneedforanyfurtheradjustment.
2) Theinvestmentssoldhasbeenatthebookvalue.Thereisnoprofitorlossonaccountofthe
transactions.Ifthetransactionhadresultedinprofit,itwillhavetobedeductedfromnetprofit
tocalculatefundsfromoperations.Incaseofloss,itwouldbeaddedtonetprofittocalculate
fundsfromoperations.
Problem9:PrepareafundflowstatementofDRLtd.
Year
20072008
Equitysharecapital10,00,00015,00,000
10%PreferenceShareCapital
3,00,000
11%debentures8,00,0006,00,000
SharePremiumAccount1,00,00095,000
Additionalinformation (a) 10 % Preference shares havebeen redeemedata premium of 10%,
thepremiumamount waschargedtothesharepremiumaccount(b)Therehasbeenaprofitof
Rs.1,000ontheredemptionofdebentures.
Solution:
EquityShareCapital
ToBy
ClosingBalance15,00,000Openingbalance10,00,000
Bank(Freshissue)5,00,000
Balancingfigure
15,00,00015,00,000
PreferenceShareCapitalAccount
ToBy
Bank(Redemption)3,30,000Openingbalance3,00,000
Premiumonredemption30,000
3,30,0003,30,000
215
Unit10
DebenturesAccount
ToBy
Bank(redemption)1,99,000Openingbalance8,00,000
Profitonredemption1,000
Closingbalance6,00,000
8,00,0008,00,000
SharePremiumAccount
ToBy
Preferenceshare30,000Openingbalance1,00,000
capital
Closingbalance95,000Equitysharecapital*25,000
1,25,000
1,25,000
STATEMENTSHOWINGSOURCESANDAPPLICATIONOFFUNDS
Equitysharecapital5,00,000RedemptionofPreferenceshares3,30,000
SharePremium25,000RedemptionofDebentures1,99,000
Decreaseinworkingcapital4,000
5,29,0005,29,000
Problem10:ThefollowingarethesummarizedBalanceSheetsofDRLtd.
Liabilities
20062007
ShareCapital5,00,0006,00,000
Reserves1,50,0001,80,000
ProfitandLossAccount40,00065,000
Debentures
3,00,0002,50,000
Creditorsforgoods1,70,0001,60,000
ProvisionforIncometax
60,00080,000
12,20,00012,20,000
Assets
FixedAssets10,00,000
11,20,000
Less:Depreciation(3,70,000)(4,60,000)
Stock2,40,0003,70,000
BookDebts
2,50,0002,30,000
Cash1,00,00075,000
12,20,00012,20,000
PrepareaFundsFlowstatement
216
Unit10
Solution:
Statementofchangesinworkingcapital
BalancesasonEffectonW.C
20062007IncreaseDecrease
CurrentAssets
Stock
2,40,0003,70,0001,30,000
BookDebts2,50,0002,30,000
20,000
Cash1,00,00075,000
25,000.
TotalCAsayA5,90,0006,75,000
CurrentLiabilities
Creditorsforgoods1,70,000
1,60,00010,000
Provisionforincometax60,00080,000
20,000
TotalCL,sayB2,30,0002,40,000
WorkingCapital,AB3,60,0004,35,000
IncreaseinWorkingcapital75,000
75,000
Total4,35,0004,35,0001,40,0001,40,000
To
By
Reserve30,000Openingbalance40,000
Depreciation90,000FundsfromOperation1.45,000
Closingbalance
65,000transferredtosource
1,85,0001,85,000
217
Unit10
StatementshowingSourcesandApplicationofFunds
SourcesApplication
IssueofSharecapital1,00,000Redemptionofdebentures50,000
Fundsfromoperation1,45,000PurchaseofFixedAssets1,20,000
Increaseinworkingcapital75,000
2,45,000
2,45,000
Notes:
1) Theincreasein General Reserveisdue totransfer apartof profit of the current year and
hencethedifferenceistransferredtoAPLsinceitsanoncashitem
2) ThedifferenceindepreciationischargedtoAPL,sinceitsanoncashitem.
3) IncreaseinEquitySharecapitalisassumedtobethefreshissuewhichisacashitem.Itis
recorededinFFS.
4) Thedifferenceisdebenturesistheredemption.Itsacashitem.HencetakentoFFS
5) Purchase of fixed asset is difference between the opening and closing balance of fixed
assets.Itsacashitem.HencetakentoFFS.
Problem11
PrepareaFundFlowStatement
BalanceSheets
20062007
20062007
EquitySharecapital50,00065,000Cashbalances15,0009,000
Profit&Loss14,75017,000Debtors25,00027,000
TradeCreditors31,00029,000Investment5,000
Mortgage10,00015,000FixedAssets70,00080,000
Shorttermloans16,50015,000Less:Depreciation(25,250)(7,000)
Accruedexpenses7,5008,000Goodwill5,000
1,29,7501,49,000
1,29,7501,49,000
DepreciationprovidedisRs.4,750.Writeoffgoodwill.DividendpaidRs.3,500.
218
Unit10
Solution:
Scheduleofchangesinworkingcapital
Balancesason
20062007
CurrentAssets
Cash10,00013,000
Debtors25,00027,000
Stock
40,00035,000
Totalcurrentassets,sayA
75,00075,000
CurrentLiabilities
TradeCreditors29,00031,000
Shorttermloans
15,00016,500
Accruedexpenses8,0007,500
Totalcurrentliabilities,sayB52,00055,000
Workingcapital,AB
20,00024,000
NetincreaseinWorkingcapital4,000
Total24,00024,000
ToBy
Depreciation
1,750Openingbalance30,000
Goodwill5,000Fundsgeneratedfrom
Dividend3,500operations
12,500
27,25027,250
219
Unit10
FundsFlowstatement
Issueoffreshequity15,000Purchaseoffixedassets30,000
Saleofinvestment5,000Paymentsofdividends3,500
Loanonmortgage5,000
Increaseinworkingcapital4,000
Fundsfromoperations12,500
37,50037,500
Problem12
TheBalanceSheetsofDRLtd
Rupeesin000s
20062007
200620078
Sharecapital50100Goodwill1525
Debenture
25Plant
1896
ProfitandLoss1525Stock4035
ProposedDividend56Debtors1532.5
Creditors2030Cash89
Liabilitiesforexpenses53.5Preliminaryexp42.5
100200100200
Abusinesswaspurchasedduringtheyearbytheissueof25,000sharesand25,000debentures.
DepreciationRs.6,000hasbeenprovidedintheyear.AmachinehasbeensoldforRs.1,50,000,
the writtendown valuebeing Rs.1,000. The businesspurchasedhad thefollowing assetsand
liabilities:MachineRs.20,000,StockRs.5,000,DebtorsRs.15,000,CreditorsRs.5,000.Prepare
theFundsFlowStatement.
Solution
Inthisproblem,anotherbusinessconcernwaspurchasedwherebytheassetsandliabilitiescome
intobusiness.Forthispurchase,thepaymentisthroughtheissueofsharesanddebentures.If
the payment were to be in excess of assets and liabilities taken over, the excess payment is
knownasGoodwill.
220
Unit10
Assetstakenover:Machine20,000
Stock
5,000
Debtors15,000
40,000
LessCreditorstakenover(5,000)
Netassetstakenover35,000
Totalpaymentsmade:Sharecapital+Debentures50,000
ExcesspaymentbeingtreatedasGoodwill(50,00035,000)15,000
Statementshowingchangesinworkingcapital:
Balancesason
20062007
CurrentAssets
Stock
40,00035,000
Debtors15,00032,500
Cash8,000
Totalcurrentassets,sayA
9,000
63,00076,500
CurrentLiabilities
Liabilitiesforexpenses
5,0003,500
Overdraft5,00010,500
Totalcurrentliabilities,sayB
WorkingcapitalAB
Decreaseinworkingcapital(source)
30,00044,000
33,00032,500
500
33,00033,000
221
Unit10
To
By
Goodwill5,000Openingbalance15,000
Preliminaryexpenses1,500ProfitonsaleofPlant
500
Depreciation6,000Fundsfromoperations28,000
Proposeddividend6,000
43,50043,500
FundsFlowStatement
Issueoffreshsharesfor:
cashforcurrentassets
Stock5,000
Debtors15,000
Less:Creditors(5,000)15,000PurchaseofPlant65,000
SaleofPlant1,500Paymentofdividend5,000
Fundsfromoperations
28,000
Decreaseinworking
Capital500
70,00070,000
TerminalQuestion
Problem 1: The balance in the Provision for taxation : opening Rs.30,000 and closing
Rs.40,000.TaxespaidduringtheyearwasRs.25,000.CalculateFundsfromoperation.(b)What
istheprovisionmadeduringtheyear?
222
Unit10
Problem2: ExtractsofBalanceSheetsaregivenbelow:
20062007
ProfitandLossappropriationaccount
30,00040,000
GeneralReserve20,00025,000
Goodwill10,000
5,000
Preliminaryexpenses6,0004,000
ProvisionforDepreciationonMachinery10,00012,000
Calculatefundsfromoperation
Problem3: Calculatefundsfromoperations:
ProfitandLossAccount
ToBy
Expenses3,00,000Grossprofit4,50,000
Lossonsaleofplant
4,000
DiscountonDebenture200
Goodwill20,000
Netprofit1,15,800
5,10,000
5,10,000
Problem4:CalculatefundsfromsaleofPlant
Plant(gross)1,00,0001,25,000
Additionalinformation:
a)Lossonsale
1,000
b)Depreciationcharged
14,000
c)PurchaseofPlant
35,000
223
Unit10
Problem:5. TheBalanceSheetsareasfollows
Capital25,00020,000Cash4,7003,000
ProfitandLoss2,3001,000Debtors11,50012,000
BillsPayable4,5007,000Land6,6005,000
Stock9,0008,000
31,80028,00031,80028,000
PrepareastatementofSourcesandusesoffunds.
AnswerSelfAssessmentQuestions
1. Derived,changes,assets,equities
2. Two
3. Insideandoutside
4. Cashandcashequivalents
1. Cash,workingcapital,totalfinancialresources
2. Control
3. Shorttermfinancialplanning
4. Currentassetsminuscurrentliabilities
5. Excluded
6. Shorttermliquidity
7. Bothfinancialandinvestmenttransaction
8. Qualitativeinformation
1. Changes,assetsandliabilities
2. Financialstrengthsandweaknesses
1. Financialassetsandliabilitiesincludingcapital
2. Statementofchangesinworkingcapital,statementofsourcesandusesoffunds
224
Unit10
3. Netincreaseordecreaseinindividualitems
4. Increases
5. Decreases
6. Decreases
7. Increases
8. Positivelycorelated
9. Inverselyrelated
1. Application
2. Source
3. GrossprofitCostofgoodssold+expenses
4. Nonfundrevenue,nontradingchangesorlosses
5. intangibleassetsandrevenueitems
6. Appropriationofretainedearnings.
1. Inflow
2. Inflow
3. Inflow
4. Inflow
5. Inflow
6. Inflow
7. Inflow
1. Source
2. Excludedfromfundflowstatement.
1. Sourceoffunds
2. Sourceoffunds
1. Additionofshares,accumulatedretainedearnings
2. Expansion,diversificationandmodernization
225
Unit10
3. Increases
4. Source
5. Increasesandneverdecreases
6. Redemption
1. Outflowofcash
2. Outflowofcash
3. Outflowofcash
4. Outflowofcash
5. Outflowofcash
6. Outflowofcash
7. Outflowofcash.
1. Purchase
2. Currentyearminuspreviousyear
3. Increaseinfixedassets
1. Outflow
2. Deduction.
1. Lossofoperation
2. Paymentofcashdividendoutofaccumulatedreserves
3. Partofpaidupcapital+reservesandsurplus.
1. Changeoffund
2. Source
3. Application
4. Nonfund
5. Change.
6. Positive
226
Unit10
7. Negative.
1. CurrentassetsandCurrentliabilities.
1. Scheduleofchangesinworkingcapital
2. AdjustedProfitandLossaccount
3. Fundsflowstatement
1. TwoBalancesheetdates
2. (b)AminusB
3. (c)Currentassets
4. Currentliabilities
5. AminusB
6. Balancingfigure.
1. Reserve
2. Deduction
3. Workingcapitalchanges
4. Consideredascurrentliabilities
5. InProvisionaccount
6. Liability
7. GeneralBodyMeeting
8. Currentliability
9. Outflow
10. Currentassets
11. Fixedassets
12. Fallinvalue
13. Noncashitem
14. Openingbalance
227
Unit10
15. ProvisionaccountandnottoProfitandLossaccount
16. Fixedassets
AnswerforTerminalQuestions
1:35,000,(b)Taxespaidisanapplicationoffunds.
2.Rs.24,000
3.Rs.1,50,000
4.FundRs.45,000AccumulatedDepreciationonplantsoldRs.9,000
5.Fundslostfromoperations.Rs.1,300,DecreaseinWCRs.4,700)
228

10.funds Flow Analysis

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

10.funds Flow Analysis

Uploaded by

Copyright:

Available Formats

FinancialandManagementAccounting

account of redemption of debentures through the issue of another debentures or preference

If Provision for depreciation account is maintained, charge the current depreciation to

You might also like