Why Analysis?

To answer these questions related with-The factors responsible for the difference in the owners equity, assets and liabilities of the firm at two consecutive balance sheet dates. The premier financing and investment activities of the firm during this period.

 Are

long term sources adequate to finance fixed assets purchases? Does the firm posses adequate WC? Why did the firm not pay the dividend in spite of adequate profits? How much funds have been generated from operations? Has the liquidity position improved?

FUNDS FLOW STATEMENT

What is FFS? The funds flow statement or statement of changes in financial position is a statement of flows, it measures the changes that have taken place during two balance sheet dates.

A summary of a firms changes in financial position from one period to another; it is also called a sources and uses of funds statement or a statement of changes in financial position.

What are funds?

All of the firms investments and claims against those investments. Extends beyond just transactions involving cash.

Analyzing the Sources and Uses Statement

Sources

Primarily

through net profit from operations and long-term debt increases.

Uses Primarily through an increase in inventories and expenditures on capital assets.

Sources and uses

Source Funds from business operations. Other incomes Sale of non current assets. Long term borrowings Issue of additional share capital. Decrease in WC

Uses Loss from business operations. Purchase pf non current assets. Redemption of debentures or pref. shares. Payment of dividend and tax. Increase in WC

Rule for sources and uses of funds

S U

A +

L + -

Transactions not affecting WC A simultaneous increase in CA and increase in CL does not affect WC. A simultaneous decrease in CL and decrease in CA does not affect WC. A simultaneous increase/ decrease in CA and CL does not affect WC. Eg. Payment of cr. (-cash and Cr.)

General Rules
Transactions affecting WC: An increase in CA Increases WC A decrease in CA- Decreases WC An increase in CL- Decreases WC A decrease in CL Increases WC.

Step 1: Schedule of changes in WC.

Particulars Current Assets e.g. Cash Inventory
A.

Amt. PY

Amt. CY

Inc. Rs 2,000 Nil

Dec. Rs. Nil 4,000

10,000 12,000 22,000 7,000 5,000 12,000 10,000

12,000 8,000 20,000 5,000 8,000 13,000 7.000 3,000 10,000

Total current assets B. Current Liabilities Creditors Bills Payable Total current liabilities Net WC(A-B) Net Increase/ Decrease in WC.

2,000 Nil

Nil 3,000

10,000

3,000 7,000

7,000

Calculation of FFO/FLO
A. Net income as per P&L a/c B. Add: Dep. Expenses Amortization of Goodwill, Patents and other intangibles. Discount on debenture or share. Extraordinary losses. Loss on sale of non current assets. C . Less: Premium on Debenture. Revaluation of non CA. Dividends and interest received.

D. Funds from /lost in Operations: (A+B-C)

Alternative method

A. Sales Revenue B. Less: Expenses

Cost of RM Wages and Salary Manu. Expenses Advt. Exp. Insurance exp. Office exp. other operating exp. interest Income Tax C. Funds form Operations (A-B)

The cash flow statement simultaneously provides an explanation of why a firms cash position has changed between successive balance sheet dates and explains changes that have taken place in the firms noncash asset, liability, and stockholders equity accounts over the same time period.

Revised cash flow AS-3

Net

Cash flow from operating activities. (Cash in flows cash out flows) Net Cash flow from investing activities. (Cash in flows cash out flows) Net Cash flow from financing activities. (Cash in flows cash out flows)

Solution statement of changes in working capital

Particulars 2005 2006
10,000 1,40,000

Inc.
Nil

Dec.
20,000

A. Current Assets: Cash 30,000 A/c s Receivable Stock in Trade 70,000

70,000 Nil 75,000 Nil

1,50,000 2,25,000

Work in Progress Total CA

80,000

90,000

10,000 Nil

3,30,000 4,65,000

B. Current Liabilities Tax Payable

A/cs Payable

2005 77,000
96,000

2006 43,000

Inc. 34,000

Dec. Nil
96,000 8,000 Nil

1,92,000 Nil 45,000 35,000 3,15,000 1,50,000 Nil 15,000

Interest Payable 37,000 Dividend Payable Total CL Net WC (A-B) Net Increase in WC 50,000 2,60,000 70,000 80,000 1,50,000

80,000 1,50,000 2,04,000 2,04,000

Solution statement of changes in working capital

Particulars A. Current Assets: Cash Debtors Stock in trade Total CA Current liabilities Sundry Creditors Total CL Net Working Capital Net Increase in WC 2005 2006 Inc. Dec. 1,10,000 1,60,000 85,000 3,55,000 1,70,000 1,50,000 1,05,000 4,25,000 60,000 Nil 20,000 Nil 10,000 Nil

1,00,000 1,00,000 2,55,000 1,00,000 3,55,000

70,000 70,000 3,55,000 3,55,000

30,000

Nil

1,10,000

1,00,000 1,10,000

Statement of Sources and Application of Funds.

Sources
Issue of Share Capital Funds from Operations

Amt. Rs.

Application

Amt. Rs.

Purchase of Plant 1,00,000 & Machinery 10,000 Purchase of 5,000 15,000 Furniture & Fix. Net increase in 1,00,000 WC

Total

1,15,000

Total

1,15,000

Solution statement of changes in working capital

Particulars
Current Assets: Stock Bank Debtors
A.

2005
3,00,000 20,000 69,000 3,89,000 1,15,000

2006

Inc.

Dec.
Nil Nil 8,000

3,50,000 50,000 40,000 20,000 61,000 Nil 4,51,000 90,000 25,000

Total B. Current Liabilities: Creditors Provision for Doubtful Debts Total Net Working Capital (A-B)

Nil

6,000
1,21,000 2,68,000

3,000
93,000 3,58,000

3,000

Nil

Net Increase in WC

90,000 3,58,000 3,58,000 98,000

90,000 98,000

Provision for Depreciation on P&M A/c

Particulars Amt. Rs Particulars Amt. Rs

To P & M A/c (dep on sold Machinery) To Bal C/d

2,000

35,000
37,000

By Bal b/d By Adj P&L A/c (Balancing Fig)

Total

30,000
7,000

Total

37,000

Provision for Depreciation on Land & Building A/c

Particulars Amt. Rs Particulars Amt. Rs

To Bal C/d

24,000

By Bal B/d 20,000 By Adj P&L A/c 4,000

Total

24,000

Total

24,000

Plant & Machinery A/C

Particulars Amt. Rs Particulars Amt. Rs To Bal B/d 4,00,000 By Cash (sale) 6,000 To Cash By Prov. For (purchases) 3,15,000 Dep 2,000 By Adj P&L a/c 62,000 By Bal C/d 6,45,000 Total 7,15,000 Total 7,15,000

Adjusted P& L A/c

Particulars To Prov for Dep P&M L&B To Pre. Exp W / off To Dividend To loss on sale To Bal C/d Amt. Particulars By Bal B/d 7,000 By FFO 4,000 Amt. 1,25,000 2,49,000

1,000 50,000 62,000 2,50,000 3,74,000 3,74,000

Funds Flow Statement

Sources Issue of Sh. Issue of Debt Sale of Mach. FFO Total Amt.Rs. 2,00,000 1,00,000 6,000 2,49,000 5,55,000 Uses Amt.Rs. Purch. P& M 3,15,000 Purch. L & B 1,00,000 Dividend paid 50,000 Net Inc in WC 90,000 5,55,000

Common Size Income Statement

s.n 1. 2. 3. 4. Particulars Top Rs

%
100 60 40 13.25 1.00 25.75

Ten Rs. 12,00,000 8,00,000 4,00,000 1,97,500 20,000 1,82,500

%
100 66.67 33.33 16.45 1.67 15.21

5.

Sales 10,00,000 -Cost of sales 6,00,000 GP (1-2) 4,00,000 -OP exp 1,32,500 (inc int). Dep 10,000 OPBIT(3-4) 2,57,500

6. 7. 8. 9. 10. 11.

-Int

on Debt 7,500 NPBT(5-6) 2,50,000 -Taxes 1,00,000 Net PAT(7-8) 1,50,000 -Dividend 70,000 -Retained 80,000 Earning(9-10)

0 .75 25.00 10.00 15.00 7.00 8.00

7,500 1,75,000 70,000 1,05,000 75,000 30,000

0.63 14.58 5.83 8.75 6.25 2.50