Professional Documents
Culture Documents
,,v1aly5l5 157
ps f/OW
fil~ F ds Flow Statement is an importa t · d'
ubt, un . n in 1cator of financial analysis and
~o d0 It helps to determine how the funds are financed.
,~-
c00 • s of Funds Flow Statement
.
fiplttOP
1 -4
I
MODULE J)t d' g
------------ t,.ccor 10 to Robert. N. Anthony . '
"the F d Fl
un s ow Statement 1.s a statement
. h describes the sources from which additional funds were derived and the uses
FUNDS FLOW ANALYSIS 1~btC . h these funds were put".
10
wh1c
t,.ccording to_Roy. ~ - Foulke," A statement of sources and app li cations of fund
chnical device designed to analyse the changes in the financi al condition of a
. ate enterprise . between
Accounting is generally concerned with the control ofif three types of flows, 1s . two dates".
business
namely, income flows , fund flows and cash flows . The Pro 1t and Loss Account is
concerned with the flow of income. It is a financial statement of an enterprise which fro[ll the above definitions it is clear that the Funds Flow Statement is a financial
shows the profit or loss on business activities. A Balance sheet is a statement of ment which reveals th e me th ods by which the business has been financed and
5131e
assets, liabilities and capital of an enterprise as on a particular date, which gives a boW it has use d its
. fu d b t
n s ~ ween the opening ·
and closing Balance sheet dates.
true and fai r view of the state of affairs of the business. 3 funds flow statement 1s a report on movement of funds explaining where from
TbUS, . . . .
working capital ongrnates and where into the same goes during an accounting period.
The purpose of Funds Flow Statement is to reconcile between the two Balance
Sheets relating to the respective accounting period by describing the sources from ~eaning of Fund
which additional funds were mobilised and the uses to which these funds were In a narrow sense, the term 'fund ' means cash. In a broader sense, the term
deployed. The Profit and Loss Account or Balancesheet is unable to provide such 'fund ' refers to the economic values expressed in monetary measurements. These
information . Fund flow Analysis measures the changes in assets and liabilities of a
are the two extreme opinions. In accounting, the term 'fund ' has a very restricted
company. The changes in current assets and current liabilities are shown in the
meaning. It means the "Net Working Capital" (ie, The excess of Current Assets
Schedule of Changes in Working Capital and the changes in Non-Current assets
over Current Liabilities) .
and Non-Current liabilities are shown in the Funds Flow Statement.
Under the working capital concept of fund, all material transactions that result
Meaning of Funds Flow Statement
in a change in the working capital are reported. There are two concepts of working
A Funds Flow Statement is a statement of sources and application s of fund. It capital, namely, gross concept and net concept. Gross working capital refers to the
is a statement prepared to analyse the reasons for changes in the financial position firm's investment in current assets, while the term 'Net Working Capital' means
of a company between two Balance Sheet dates. It shows the inflow and outflow of excess of current assets over current liabilities.
fund or sources and applications of fund for a particular period. In other words, a
Funds Flow Statement is prepared to explain the changes in the Working Capital The International Accounting Standard (IAS - 7) on 'Statement of Changes in
position of a company between two Balance Sheet dates. Financial Positi on' also recognises the absence of a single, generally accepted
definition of the term "Fund". According to the standard, the term "Fund" generally
Funds Flow Statement is a statement which discloses the analytical information
refers to cash and cash equivalents, or to working capital. In brief, for accounting
about the different sources of fund and application of the same in an accounting
cycle. It deals with the transactions which change either the amount of Current purposes, the ter m fund means "Net Working Capital".
assets and Current liabilities or Non-current assets and Non-current liabilities The meaning of the two terms Current Assets and Current Liabilities have
including ownership fund . It is also called "Statement of Sources and Applications already been explained in the preceding chapter. However fo r the sake of ready
of Fund", "Movement of Funds Statement" or "Where got Where gone statement". reference, the meaning of these two terms are given below besides explaining non-
current assets and non-current liabilities.
1ss-----------------MANAGEM£Nr Acc
0
¾c dSf/OW
,,v,a1Y515 159
f~~ current Assets
1. Current Assets ~oo·
3• ti assets other th an current assets come with in the category of non-current
The term 'current assets' includes assets which. are required with th e •nte
.
.
of convertm
. g them in to cash during the normal
.
bus mess
..
operations of the lllto
co 111 0 A such assets are bought wi th th e intention of using them, for a long period of
or with in 8 period of one year. Accordmg to Grady, Current assets includ Pan~ Sets- t . I d fi d ·
•.5 e. ]lion-current as~e s me u e ixe tangible assets like Land and Building, Plant
and other assets or resources co~only identified as th_ose, which are reas:n:ash 11(11 •'acbinel)', Furniture a
nd fixture s , Long-term investments or Trade investments
ted to be realised in cash dunng the normal operatmg cycle of the bu . bi~ dJY• l"k ,
ex pec . . s1ne 88,, BJ! d Intangible assets 1 e goodwill, patent rights, trade marks, etc. Fictitious
Current assets include the followmg: · IC all . . d"
e like prehmmary expense s, iscount on issue of shares and debentures, Profit
I . Cash and Cash Equivalents (Cash in hand, Cash at bank, Marketabl ssets d b" b I
a dLoss account e it a ance, etc will also come under this category.
securities, etc). e
2. Trade Receivables (Bills Receivables and Sundry Debtors, less prov· .
1s1 00
,.
BJ! ~on-Current Liabilities
for bad debts). All liabilities other than current liabilities come withi n the category of Non-
3. Inventory (stock of raw materials, work-in-progress, and finished goods) current liabilities. They include share capital, debentures, long-term loans, securities
4. Current investments or Temporary investments iul11 reserve, Profit and Loss account credit balance Revenue and Capital
prem '
5. Prepaid expenses, accrued incomes, short term loans given or advances reserves, etc.
recoverable. Meaning of 'Flow of Fund'
2. Current Liabilities
The term 'Flow' means change and tberefore, the term ' Flow of Funds ' means
Current liabilities are those liabilities which are payable with in a period of 'Change in Funds' or 'Change in Working Capital' . In other words, any increase or
twelve months from the date of Balance sheet or with in the operating cycle, out of
decrease in working capital means ' Flow offunds '. Flow ofFund takes place when
the use of existing current assets or the creation of other current liabilities. Any
changes in net working capital (current assets - current Liabilities) are caused by
non-current liability payable with in twelve months of the following accounting
year should always be treated as current liabilities. Current liabilities include the the changes in non-working capital items.
following: 1n a business, several transactions take place during an accounting period. Flow
I. Trade payables (Trade creditors and Bills payable) of fund takes place when one aspect of a transaction belongs to current asset or
2. Outstanding expenses current liability and the other part belongs to non-current asset or non-current
3. Bank overdraft and short-term loans from banks. liability. For example, cash received from debtors and cash paid to creditors are
4. Advance payments received or income received in advance. non fund items. In this case, there is no flow of fund because such transactions
5. Current maturities of long-term loans (ie, long-term debts due within one change only the current assets and current liabilities. Similarly, Conversion of
year or instalments due within one year in respect of these loans) Debentures in to Equity shares or purchase of land and building by issuing equity
6. Short term provisions (Provision for Tax and Proposed Dividend) shares or debentures etc are non-fund items since it affects only non-current items.
Provision for Doubtful Debts Is treated as current liability as it tends to Flow of fund takes place only when one aspect of a transaction belongs to the
~= .
r ~ tbe amount of sundry debtors.Alternatively, provision for doubtful debts
_deda~ from 1undry debtors. Similar treatment is followed for other
ti VlldiIOIU apmst current assets such as provision for loss of stock, provision
current category and the other aspect belongs to the non-current category. Purchase
of Land and Buildings for cash, issue of shares or debentures for cash, sale of land
80d
buildings for cash, redemption of preference shares or debentures, etc are
or SCOWlt oadcbt.ors, etc.
exarnples of flow of funds because they affect current as well as non-current items.
J60 MANAGEMENT ,4,ia/ysls---------------------161
Acco· JS f/OW
To General Reserve I
10 re"e\e sources and uses of fund. It helps in planning, deployment and controlling
(There will be no change in working ~.apital as both the aspects belong t
,evealsdt year after year. The following are the benefits or uses of funds flow
same category "Reserves and Surplus /Shareholders Fund/Capital) othe of fun s
............................ Dr (Current Asset) Flow of F tatefllent.
5
(7) Ban k Alc. ..... .... _ und hows the changes in the financial position of the company between two
The Share capital (Capital) (Inflow) It s .
1- accounting periods.
(Issue of shares for cash is an inflow of fund, since current assets . It helps in analysing the reasons for changes in the financial position of the
. b·1 · . ) Wtl\ b
increased without affecting current l1a 1 1t1es . e 2- cornpany.
It shows the working capital position of the company. This helps to test if
. when·a trans action
From the above it is clear that there will be a flow of fund .
3· working capital has been effectively used or not.
takes place between: · · ' ~
projected funds flow statement can be used for putting up necessary controls
( 1) Current Asset and Non-Current Asset 4. and budgetary al locations.
(2) Current Asset and Non-Current Liability/Capital
_ An effectively managed fund flow activity of the firm can help the company to
(3) Current Liability and Non-Current ~sset 5
build a good reputation for itself with respect to its efficiency and credit
(4) Current Liability and Non-Current Liability/Capital worthiness.
. It shows how the funds were obtained and used during a period.
6
Objectives of Funds Flow Statement 7. It gives an indication of any weakness or strength in the general financial
The main objectives of Funds Flow Statement are: ~ of a firm.
lnspite of these limitations, Funds flow Statement provides a 'Birds eye view'•
of the financial history of a firm between two balance sheet dates . It is an effective
tool in the hands of a financial manager for fund management.
----
STATEMENT
SI.
-~
Funds Flow Statement Income Statement
is the statement Income Statement is a summary of total
I. F unds Flow Statement
of changes in financial position. income, and total expenses and losses of
DISTINCTION BE~WEEN FUND FLOW STATEMENT AND BALANCE a particular period.
SHEET
-2. The main objective of Funds Flow The main obj ective of an income
SI. Statement is to show the sources and statement is to determine the net profit or
No. Funds Flow Statement Balance sheet
application of fund during a particular net loss of the business during a particular
I. Funds flow statement is a statement Balance sheet is a statement of financial year. year.
of change s in financial position . position as on a particular date. Hence it
Hence it is dynamic in nature. is static in nature. 3. Funds flow statement is prepared on the Income statement is prepared on the basis
basis ofBalancesheet. of nominal accounts.
2. It is prepared for a particu lar It is prepared as on particular date.
accounting period. 4. Funds flow statement is helpful in Income statement is helpful in measuring
3. It is prepared with the help of Profit determining the net changes in working the profitability of a firm.
It is prepared with the help of Trial
and Loss account and Balance sheet capital.
Balance.
of two consecutive years. 5. The preparation of Funds flow It is compulsory to prepare an income
4. It is a statement showing changes in It is a statement of assets, liabilities and statement is optional. statement.
~
working capital of a business during capital as on a particular date. 6. It is mainly concerned with flow of It is not concerned with flow of funds.
an accounting period.
5. It is a too l for financial analysis,
It is the end product of the accounting
generall y useful to the management.
cycle, and meant for general purpose. _
- fund.
7. ~t records both capital and revenue It records only revenue items.
6. The preparation of Fund Flow The preparation of Balance sheet is t--- ~ms.
Statement is only optional. 8. Funds flow statement has wider scope. Income statement has limited scope.
.____
compulsory. ~
166 MANAGEMfNrA ,4nafysls 167
ccotJN-ri dS f/OW
DISTINCTION BETWEEN FUNDS FLOW STATEMENT AND sea /./c f~" e is a decrease in the current asset enter the difference in the decrease
OF CHANGES IN WORKING CAPITAL £1)lJtt Jftber '
1u01n,
SI. Funds Flow Statement Schedule of changes in Workfn · co t'fy the current liabilities and enter it unde·r "current liabilities" (B)
No. Jden I • . •. • •
g Capft•I 4. Enter the amount of
I. A Funds Flow Statement is prepared on A Schedule of changes i n ~ , current hab1ht1es in the respective columns 'previous year'
ingca . 5. d 'current year .
the basis of Non-Current Assets and is prepared with the help of Curr Pila[ an
• entt\
Non-Current Liabilities. and Current Liabilities. ssets ompare the current year 's figure with the previous year's figure. If there is
6. C increase in the current liability, enter the difference in the decrease
2. It shows the sources and applications It shows the changes in c~ ao . d .
and Current Liabilities. ssets coluntn, If there 1s a ecrease m the current liability, enter the difference in
of fund of the business.
the increase column.
3. It is prepared with the help of Income It is prepared
.
with the h e ~
tWQ Total the current assets and current liabilities of the previous year and current
Statement, two consecutive Balance Consecutive Balance Sheets. 7· ear columns.
sheets and Additional information. y . .
Calculate the workmg capital of the previous year and current year (A - B) =
4. It is prepared in order to show the It is prepared to work out the n e t ~ 8
· Total current assets - Total current liabilities.
overall inflow and outflow of working or decrease in working capital.
Calculate the difference in working capital as obtained in step (8). If the working
capital during a period of time. 9
- · capital of the current year is more than the working capital of the previous
· year, the difference is "Increase in Working Capital" and enter the amount in
the previous year column. If the working capital of the current year is less than
Funds Flow Statement is prepared with the help of a company's Balance sheet the working capital of the previous year, the difference is "Decrease in Working
at the beginning and at the end of the period for which it is being prepared. The Capital" and enter the amount in the current year column.
following steps are generally adopted for preparing a funds flow statement: JO. Total all the columns, previous year column, current year column, increase
1. Schedule of Changes in Working Capital column and decrease column.
Firstly, prepare a schedule of changes in working capital. This statement shows The proforma of schedule of changes in working capital is given below:
the net change in working capital. In other words, it is prepared to measure the net SCHEDULE OF CHANGES IN WORKING CAPITAL ~
Calculation of Funds from Operations 4. lroposed Dividend: It is an appropriation of profit and doesnot affect the
; flow of fund . So it must be added back to current year 's profit.
Profit and Loss closing balance xx 5. Non-operating expenses and losses: Loss on sale of fixed assets, loss on sale
(Surplus account closing balance) of investments, premium on redemption of shares and debentures should
Less: Profit and Loss opening balance xx
(Surplus account opening balance) xx also be added back to current year's profit.
Current Year's Profit 6, Other Appropriations: Transfer to General Reserve, Sinking fund, Interim
Add: l. Depreciation and Depletion xx
2· A_m~~ization of Goodwill/Patent Right
dividend paid, etc are appropriations of profit. These appropriations should
xx
3. F1ct1tious assets written off also be added back to current year's profit inorder to find out fund from
(Preliminary Expense Written off) xx operations.
172 - - - - - - - - - - - - -- - - - - - M'ANAGEJ,{FJvr
Acco Analysts - - - - - -- -- - -- - -- - - -- - -- - I 73
JJ f /O W
PaperlniWCtions, Appropriations, Boole Transfers, NoIH>l)CraUn ' fll~ ( Eq uity shares and Preference shares
1 1,sue o
or 1o11es, Provisioa for 'Ju. Proposed dividend, Interim dividend
1114 . an ex ternal source of fund . Increase in share capital increases fun d. But
opcnlillg iacoma sbou)d be adjusted in die Net profit to ascertain [I ,s 'd . h
opentioa. · fiutd &Q . ed for cons• erat1on ot er than cash or any other current asset do not
S 1sSU
sJ!&fe "' nd and hence not a source of fund.
rate 1u ,
,oe .
The follo,.,i■g items 1•o■ld be deducted from current year's p ro fiIt: B of Debentures or Raising Long Term Borro wings
issue
I . Non--Tracliq Gai■1: Profit on sale of fixed assets, profi t on sale of I
nvesttn
J. of Debentures, Long term borrowings, Accepting public deposits, etc
profit 011 revaJuation of fixed asset, etc should be deducted from current cnts' [sSUe
. an increase of fund . But Debentures issued for consideration other than
profit as it bas already been credited to profit and loss accoun t. Year•, re5olt iJI
anY other current asset do not generate fun d.
2. Noa-Trading Iacomes: Interest and Dividend on long term in vestments
Tax refund, and other non-operating incomes are shown separately ' Iocol!Jc
.
of fund 111
current year 's profit.
.
the Funds Flow Statement. So such Items must be deducted ce
-~ fro!IJ
,asb or
4. S•1e
of Non-Curren t Assets
W}Jen any non-current assets like land, building, machinery, furni ture or non-
t ilJvestments are sold, then cash balance or current asset is increased without
· ,urrenng current liability and hence there is an inflow of fund.
• .
Calc:alatioa ofFaads from Operation when profit made during the yea r is 8tfectt
gtven
Non-Trading Receipts
Sometimes profit made during the year is g iven as an additional info .
· nna1100
;.
. . .
Non-Trading Receipts like income tax refund, dividend recei ved, rent received,
This profit ~ould be ad1usted m the follo wing marmer in order to calcula te fun ~
from operati on: . e from investments are other external sources of fun d.
10coDI
Calculation of funds from operation Applications of Fund
~ f
- funds mobilised or received from various sources may be applied for different
Net profit made during the year xx purposes. The fo llowing are the usual applications of fun d:
Add: 1. Depreciation on Fixed Assets xx
I. Redemption of Preference shares and Buy back of Equity shares.
2. Loss on Sale of Fixed Assets xx
Redemption of Debentures .
2.
3. Loss on sale of Investments xx
4. Goodwill written off xx 3. Repayment of Bank loan and_other long- term borrowi ngs.
5. Preliminary Expenses written off xx
4. Purchase of No n-current ass ets like land and buildings, plant and machinery,
6. Discount on issue of shares or debentures written off xx
7. Provision for Tax xx xx furnitu re and fixtures , etc.
xx 5. Purchase of Non-current In vestments.
Less: 1. Profit on Sale of Fixed Assets xx
xx
6. Payment of Interim Di vi dend.
2. Profit on Sale of Investments
3. Dividend Recei ved xx xx 7. Payment of Income Tax an d Final Dividend.
Funds from operati on xx 8. Amount withdrawn by the proprietor fo r his personal use (ie, Draw ings) . This
is an app licati on of fund only in case of sole trader or partn ership and not fo r
N.B: Since ' Net Profit made during the year' refers to the Net profit after Tax,
llat before any appropriation is made, Items like Dividend proposed, Transfer compani es.
to Reserve, Interim Dividend paid etc: are not adjusted back. 9. Outflo w of fu nd on account of operational loss (fu nds los t in operation).
;1na/ysls - - - -- -- - - -- -- - -- - - - - - - 1 7 5
1(- 4 - - - - - - - - - - - - - -----MANAGEMfNrA f/OW
rco~c
TREATMENT OF SOME IMPORTANT ITEMS fl'~J.im this account, income tax paid is obtained which is shown as an
fro '
b) Jjcation of fund .
1. Provision for Taxation apP . .
i he Provision. for tax made
.
durmg the year has to be added back to current
There are two methods for dealing with provision for taxation. c) 's profit, m order to get true fund from operation
~~ .
(i) Provision for Taxation is treated as Current Liability: Provision for Tax Account
1n this case it is shown in. the "Schedule of changes
•
in Working C .
ap11a1~
~ ~
The payment of tax made dunng the current year will not appear as an appt· . , nco me Tax paid xx By Balance bid xx
the obv1ous
.
reason that such•cation
xx
of fund in the "Funds Flow Statement " 1or c
. (opening)
c T
will affect two current category items (Prov1s1on 1or ax an dC ash).
. . Heins By Profi t and Loss ale xx
(Provision made during the year)
xx xx
It is should be noted that while calcufating fund from operation no adjustllle
is required to be made. That m~ans Provision for Tax need not be added :
·Jt is clear that Provision for tax account may yield tax paid or provision
current year's profit.
made .U1
. the current year as balancing figure.
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___,
(ii) Provision for Taxation is treated as a Non-current Liability:
In this case Provision for Taxation is not shown in the schedule of changes fips to Reroem.ber
in working capital. The payment of tax made during the current year will be shown · It should be carefully noted that th~ P:~vision for tax account is opened only
as an application of fund in the "Funds Flow Statement". Similarly provision for l. when it is treat~d as Non-Current ltab1Lity.
tax created during the current year has to be added back to current year's profit Ifit is treated as current liability, then it goes to the schedule only and no such
2· account
for ascertaining funds from operation. is to be prepared in the work sheet.
A detailed explanation is given below: If provision for taxation is given under current Liabilitie~, then i~ can be_treated as
3
· current liability and goes to the schedule of changes m working capital. Once
(i) If provision of tax is given in the adjustments alone and nothing is given in the it is taken in the schedule, it will not find any place in the funds flow statement.
Balance sheets, the given amount should be added to current year's profit in
order to find out funds from operation. Similarly it is also shown as an 4. If provision for taxation is not specifically classified as current liability, then
this item may be taken as non-current liability. In this case:
application of fund in Funds Flow Statement. It is presumed that provision is
(i) Tax paid during the year is shown as an application of fund ; and
made and payment of tax is also made immediately.
(ii) Provision made during the year is to be added back to current year 's profit,
(ii) If provision for tax is given in the Balance sheet only and nothing is mentioned to find out funds from operation.
under adjustments:
The ideal ~ption is to treat provision for Tax as Non-Current Liability, unless
a) In this case the opening balance of provision for tax can be assumed to otherwise mentioned.
have been paid in cash during the current year. The opening balance is
5. Advance payment of tax is treated as a current asset, which is to be shown in
shown as an application of fund in the Funds Flow Statement.
the schedule of changes in working capital.
b) The closing balance of provision should be added to current year's profit,
to find out funds from operation. 2. Proposed Dividend
It is the dividend recommended by the directors of a company for ap~roval by
(iii) If provision for tax is given in the Balance sheet as well as in adjustments:
itsshareholders at the annual general meeting. Just like provision oftaxat10n, there
a) In this case it is better to prepare provision for tax account. are two alternative methods of dealing with proposed divide nd ·
176 MANAGEMENT A ffoW ;1na fysls - - -- - : - -- - - - - - - -- - - - - - - - - 1 7 7
ccouN"t, fll~tfS - - -.- . - .- -- - - - -- - - -- - -- - - - - - - - - - - - .
Tbt same procedure is followed In respect of proposed dividend ash "'c ayable and Dividend payable given in the Balance sheet are treated H
given for provision for taxation. Detailed explanation is not given. as be,11 faS: p t liabilities. '
c11rrell
0
1 1 8 - - - - - - -- - - - -- -- - -- MANAGEMENJ· Ana/ySls - - - - -- -- - -- - - -- - - ----179
. Accou isf/OW
Fixed Asset Ale N??tvc f~''"' Provision for Depreciation A/c
~
xx By Depreciation xx xx
To Balance b/d By Balance b/d
xx By Bank-Sales xx By Pro fi t & Loss Ale xx
To Bank-purchases
(Balancing figure) (Balancing figure) (Depreciation written oft)
By Balance c/d (Bal. Fig.)
xx xx xx
•If credit total is higher than the debit total, then the difference is l<)(
al Entries
. h h d'f~ . purcha Jourl'I .
fixed asset and vice versa, t en t e 1 1erence 1s sale of fixed asset. se of
the sale of Fixed Asset:
(I) F0 r .
(ii) When opening balance, closing balance,. depreciation written off, assets J3ank Afc ... .. ............... .... ..... ... ... Dr (CA - infl ow of fun d)
1
profit or loss on. sale of asset are given, then the amount of fixed asset PUrchasod, provision for Depreciation ale... .... .. Dr (Non CC - No Flow)
may be ascertamed as : sed
profit and Loss alc ...... ......... .. ..... ...Dr (Non CC - No Flow)
Fixed Asset Ale
To Fixed Asset ale (Non CA)
t {
To Balance b/d
xx By Depreciation xx (Z) for the purchase of Fixed Asset:
To Profit & Loss Ale xx By Cash-Sale xx fixed Asset a/c. •••••..... .. ....... ..... ... ...Dr (Non CA)
- Profi t on sale By Profit & Loss Ale Xx
To Bank (CA - Out fl ow of fund)
To Bank-Purchases xx - Loss on sale
(Balancing figure) By Balance c/d xx ( ) For Depreciation provided during the current year.
xx
3
xx profit and Loss alc ... ...... ... .......... ... .Dr (Non CC) No Flow
(iii) When opening balance, closing balance, Depreciation wri tten off, assets sold To Provision for Depreciation (Non CC) No Flow
profit or loss on sale of asset and "Accumulated Depreciation" or "Provisi ' (4) For Profit on Sale of Fixed Asset:
for Depreciation" are given, then the fixed asset account should be _shown:~
fixed Asset a/c ... .... .. ............ .. .. .. ....Dr (Non CA)
g~oss value or original cost (Balance sheet value + Provision for depreciation
To Profit and Loss ale (Non CC)
given as per adjustment), and provision for depreciation account is prepared
separately. Students are advised to prepare both these accounts simultaneously. *Non-CC: Non-Current Category
These accounts will appear as follows : *Depreciation provided during the current year and loss on sale of asset should be
added to current year 's profit while calculating funds from operation. Similarly,
Fixed Asset A/c
profit on sale of asset should be deducted from current year's profit.
t t
To Balance bid xx By Bank-Sale xx 7. On the Assets side of the given Balance sheets
(Gross Value) By Provision for Depreciation (i) Any decrease in intangible and fictitious assets like goodwill, preliminary
To · Bank - Purchases xx - Depreciation on asset sold xx expenses, patents, discount on issue of shares and debentures, etc should
(Balancing figure) By Profit & Loss a/c - i be assumed as "amortisation" and should be added back to current year's
To Profit & Loss Ale - xx Loss on sale xx
profi t if they were already debited to profit and loss account.
Profit on Sale By Balance c/d xx
(Gross value) (ii) Any decrease in investment can be taken as sa.le and ~ncrease ~ay. be
I
xx xx taken as purchase. The fonner is a source, but the latter 1s an apphcatton
• If provision for depreciation is given in the Balance sheet then it need not be of fund .
(iii) Any increase in fixed asset is usually ~u~ to purchase and decrease in
~dded_ to the Balance sheet value of fixed asset, as the Balance sheet value
itself 1s the original cost. fi xed asset can be due to sale or depreciation.
1B O - - - -- - - - - - - - - - - - - - MANAGEMENT Accotfrv-ri Analysis - - - - - - - - - -- - -- - - -- - - - - - 181
., f/OW
8. On the Liability side of the given Balance sheets Ne f~fl"s
·ation a Source of Fund?
Increase in share capital or debentures is due to issue of fre 1 s peprcc• . .
(i) . . . . d s 1 sha 1 eciation means reduction in the value of a fixed tangi ble asset due to wear
debentures . Increase in security premtum 1s ue to premium res oepr ,
co Ileci 0t lapse oft1me, obsolescence, ex haustion or accident. It is a non-cash expense
fresh issue of shares. Both are sources o f fu nd. ed on
d tear, fi d L
shares or Debentures is b afl ged to Pro it an oss account, even no sale occurs during the period.
(ii) Decrease in Redeemable. preference d char . .
redemption. It is an app I1cat1on of fiun d .
. ecaus a11 depreci ation itself doesnot generate fund. Although depreciation is an
~ of
is a source of fund, where a d ·1-1ence_ g cost, there is no actual flow of cash. Deprec iation is added with current
(iii) Increase in long-term. borrowings
. an app 11cat1on
· . of fiun d. s ecre•asc eraun
0P , rofit in Funds Flow Statement because it has been deducted to calculate the
in Jong-tenn borrowings 1s
ears p
(iv) Increase in General Reserve or Reserve Fund is an appropriation f Y fit So it cannot be treated as a source of fond.
net pro .
·
.
o Pr fi1
It should be added back to current year's profit while calcuiatin
gfu%
1. ° While the amount of depreciation expense is not a source of cash, it does reduce
from operation.
or oration's taxable income. That in tum reduces a profitab' corporation 's cash
9. Drawings a c p nts for income
· tax. Th e savmgs
· of mcome
· tax payments is equfvaleot to a
Paymee of cash. However, it. 1.s not even a source of fund when the company is
The amount drawn by the proprietor for his personal use is an application of fu sourc . .
nd
and as such it will be shown as an application of fund in the Funds Flow State running at a loss. In such a s1tuat1on there arises no problem of tax payment.
' . . nient
This treatment is applicable only in case of sole trader and partnership firms. ·
The accounting entries for depreciation are:
Drawings will be posted to the debit side of capital account and profit ea
rned (i) Depreciation A/c ........ .. ... ..... Dr
will be the balancing figure of the capital account. The form of capital account is
given below: To Fixed Asset
Proprietor's Capital Account (ii) Profit and Loss Ale ....... ....... Dr
~
xx
t -- To Depreciation
To Cash-Drawings By Balance b/d xx
(Opening capital) Thus, effectively Profit and Loss account is debited and Fixed Asset account is
To Balance c/d xx By Profit & Loss a/c xx credited with the amount of depreciation. Since both Profit and Loss account and
(Closing capital) (Current year 's profi t)
(Bal. Fig.) fixed Asset account are non-current accounts, there is no flow of fund. [n other
xx xx words, it is a non-fund item. It is neither a source nor an application of fund.
10. Treatment of Interest on Debenture Illustration 2
While preparing Cash Flow Statement, we have to add "interest on debenture" Sree Ram Ltd . has provided the following details relating to its working for the
to calculate Cash Flow from operating activities. But we donot do this while year 2019 and you are required to ascertain the ' Funds from operation' for the year.
calculatin~ Funds from operations in Funds Flow. Similarly, in cash flow
statement, mterest on debenture is shown as an application of cash under Cash ~
Flow from financing activities. But we donot show interest on debenture as an Profit and Loss balance on 1.1.2019 4,00,000
application offund in Funds Flow. The simple reason is that interest on debenture Profit and Loss balance on 31.12.2019 6,00,000
is not an appropriation of profit, but it is charge on profit. Profit on sale of land 80,000
Loss on sale of machinery 2,00,000
While calculating funds from operations, interest on debenture need not be 60.000
Inco me from investment s
added back to current year's profit. Similarly it is not shown as an 40,000
~ application of fund in Funds Flow Statement. Preliminary expenses written off
Goodwill written off 1,00,000
- - - -- - -- - - - - - -- - MANAGEMENT Ac ,4na/ysls - - - - -- - -- - - -- -- - - - -- - 1 83
182 cou r}S f /OIV
IV'i11vc f~'f Proposed Dividend A/c
Transfers and appropriations were:
t 1,50,000
( 1) To the General Reserve
t 1,00,000 13ank-
Dividend paid 65,000 By Balance b/d 80,000
(2) To the Sinking Fund
f 2,00,000 (!3al. fig.) By Surplus A/c 85,000
(3) Proposed Dividend ee c/d l 00 000 (P & L Appropriation a/c)
t 1,00,000 I n
13a a
(4) Provision for Tax 1,65,000 1,65,000
~ 1,80,000
(5) Depreciation on Fixed Assets · n4
tr11t1° . £ .
Solution 11111sfrot11 the followi?g
.
m ?':11ation calculate the amou nt to be debited to the Profit
Statement showing computation of Funds from Operation d Loss Account as Prov1s10n for Tax' and explain its treatment.
~ -~ gll
~
Profit and Loss Closing balance ~ . sion for Income Tax on l.l.2019
pro VI 3,00,000
Less: Profit and Loss opening balance
Current Year's Profit ~
2,00,000
provision for Income Tax on 3 1.12.2019 4,00,000
1,50,000 Jncorne Tax oft 2,50,000 was paid during the year 2019.
Add: I. Transfer to General Reserve
2. Transfer to Sinking Fund 1,00,000
Provision for Tax A/c
3. Proposed Dividend 2,00,000 so tutioD t
1,00,000 t
4. Provision for Tax
5. Depreciation on Fixed Assets
1,80,000 ~ Income Tax paid 2,50,000 By Balance b/d 3,00,000
To a
2,00,000 4,00,000 By Profit and Loss Ale 3,50,000
6. Loss on sale of Machinery To Balance c/d
7. Preliminary expenses written off 40,000 (Bal. Fig.)
8. Goodwill written off J,00,000 I 0,70.&QQ_ 6,50,000 6,50,000
12,10,000 ~
8. Current Liabilities
-~c
co, f~
11
ds f/OW
Ana/ysIs - -- -- -- - -- - - --------187
(4) Calculation of Funds from Operation
Sundry creditors
1,53,000 1,90,000 - 37,ooo
Bills payable
40,000 50,000
5,000
- 10.ooo
L ss closing balance
profi 1 a;~ofi~ and Loss opening balance
1,60,000
7,000 2,000 1,00,000
Dividend payable
Tax payable 10 000 5 000 5,000 -- 1,ess: current Year's Profit 60,000
(8) Total 2 10 000 2 50 000 -- . Transfer to General R~serve (70,000 - 50,000)
,Add, funds from operation
20,000
80,000
c. Working Capital (A - 8)
Net Increase in Working Capital
(D) Total
70,000
40 000
1,10,000
1, 10,000
-
1,10,000
1,12,000
1,12,000 ~
------
72,000
tration 7
~ JIIUSCalculate fund from operation from the information given below as on
N•B•• 0 1vt
. 'd en d. payable and Tax payable are always treated as current liab't• .
I tties 31.12.2019:
II. HONEY BEEL TD et profit for the year ended 31.12.2019, t 6,50,000.
FUNDS FLOW STATEMENT 1· :rofit on sale of Land and Buildings, t 35,500.
for the year ended 31.12.2019 2
· Goodwill appears in the Books at t 1,80,000; It has been decided to write off
---
Sources f Applications 3· O% of Goodwill.
~ 1
I. Proceeds from the issue of 3,00,000 I. Purchase of Land and Old machinery worth t 8,000 bas been sold fort 6,500 during the year.
shares (8,00,000 - 5,00,000) Buildings (1,20,000- 80,000) 40,000 4.
80,000 2. Purchase of Plant and Machinery f 1,25,000 have been transferred to General Reserve.
2. Funds from operation 3,oo,ooo 5
(8,00,000 - 5,00,000) - · Depreciation provided on Machinery t 80,000 and on Furniture t 50,000.
6.
Net Increase in Working Capital
7. Provision for Tax created during the year t 1,20,000.
40,000
3,80,000 3,80,000 s. Dividend on shares proposed, t 80,000.
(1) Land and Buildings A/c
Workin_g Notes: 9_ Interim Dividend paid t 10,000.
f ~ 10. Preliminary Expenses written off t 11 ,000.
To Balance b/d 80,000 ti. Interest and Dividend received from investment t 20,000.
To Bank - Purchase 40,000 By Balance c/d 1,20,000
Solution
(Bal. Fig.)
Statement showing Calculation of Funds from operation
1,20,000 1,20,000
(2) Plant and Machinery Ale Net profit for the year 6,50,000
Add: (1) Transfer to General Reserve 1,25,000
f ~ -
(a) Fixed Assets: Tangible 41,000 40,000 To Balance bid 41 ,000 By Cash - Sale (Bal. fig. ) l.000
Less: Accumulated Depreciation ( I I 000) (15 000)
30,000 By Balance c/d 40,000
25,000
(b) intangible - - 41 ,000 41,000
(2) Current Assets -
Inventory 20,000 44,000 (4) Accumulated Deprecia tion Ale
Trade Receivables 30,000 25,000
Cash and Cash Equivalents-- Cash at Bank
Other Current Assets - Prepaid expense
- --
1,200
'.l/l/l
4,500
'iOO
t
By Balance bid
~
I 1.000
Total 81 500 99 000
To Balance c/d 15,000 By Pro fit & Loss Ale 4.000
(Bal. Fig..)
Solution VYSHALI LTD
15.000 15,000
I. SCHEDULE OF CHANGES IN WORKING CAPITAL
for the year ended 31.12.2019 (? in lakhs) (5) Calculation of Funds from Operation
Effect on Working Capital t
Particulars 2018 2019 Increase Decrease 1,200
Profit and Loss closing balance
t t t t Less: Profit and Loss opening balance 1,000
A. Current Assets
Inventory Current Year's Profit 200
20,000 44,000 24,000
Trade Receivables 30,000 5,000 Add: (I) Transfer to Genera l Rese rve (3.000 - 1,000
Cash at Bank 25,000 2.000)
1,200 4,5 00 3,300 4,000
Prepaid Expense 300 (2) Accumulat ed Depreciat ion
500 200 5,2 00
(A)Total 51 ,500 Funds from operation
74,000
, .. ..
190-------------------
II.
Sources
I. Proceeds from the issue of
FUNDS FLOW STATEMENT
for the year ended 31.12.2019
t
10,000
Applications
MANAGEJ.t fNr
4
ccou~
c ~
9•
,,e
cud- rs
ere I 10
,,al>'sfS
,,,A
il'o 111 l, t•bllitleS
·tal
-----
(8) Tota
I
l,o9, 700
I 0(1,,;i OO
I 00~ '1 00
ti(N,Jou
1,1n,2110
i.lk ,1011 1
I I
11
- Total 9,60,000 9,60,000 3,90,000 3,90,000
- -- - - -- - - -- - -- - - MANAGEMENT ACco(JN',,. ,4na/ysls - - - -- -- -- - - -- - - - - - - - - 1 9 5
1~ .•,% dSf /0.,.,
fl'~
Working Notes NATARAJ LTD
.. . treated as a "non-current liability". FUNDS FLOW STATEMENT
1. Prov1S1on for Tax is for the year ended 31.12.2019
(2) Provision for Tax Ale
Jssue
res '
1,00,000
Applications
I. Income Tax paid
('
50,000
To Bank • Income Tax paid 1- OO ooo - 6,00,000) 2. Di vidend paid
(1 , ' 40,000
(Bal.fig.)
40,000 By Profit and Loss A/c n from S81 1,60,000 3. Purchase of [nvestment 50,000
To Balance c/d 2·
[.,08
90,000 of fixed asset 30,000 Net Increase in Working Capital 3,35,000
3 sa1e
· . of [nvestment 22,000
(3) Fixed Assets Ale 4. Sae 1 .
1,63,000
s. fun ds from operation
To Balance b/d
-
5,000
By Bank - Sale
By Depreciation
(Bal. Fig.)
By Balance c/d
~
--.:.._
~
30,000
7s,o00 ---
111ustratlon 4
4,75,000
5,05,000
Liabilities ·
BALANCE SHEET
31.3.2018 31.3.2019 Assets 31.3.2018 31.3.2019
To Balance b/d
'
50,000 By Bank - Sale
'-
22,000 Share Capital '
1,80,000 '
2,00,000 No■-CIU"ftllt Assets ' '
To Profit and Loss Ale - 2,000 By Balance c/d 80,000 General Reserve 28,000 36,000 Goodwill 24,000 20,000
Profit on Sale
(22,000 - 20,000) Profit and Loss Ale 39,000 24,000 Buildings 80,000 72,000
To Bank - Purchase 50,000 Provision for Tax 32,000 34,000 Machinery 74,000 72,000
(Bal. Fig.) Current Liabilities Investments 20,000 22,000
1,02,000 1,02,000
Trade creditors 16,000 10,800 Current Assets
(5) Calculation of Funds from operation Bank overdraft 12,400 2,600 Inventories 60,000 50,800
Provision for 3,800 4,200 Debtors 40.000 44,400
Profit and Loss balance on 31.12.2019
Less: Profit and Loss balance on 31. 12.2018
' '
1,20,000 Doubtful debts Cash in hand 13,200 30,400
1,00,000 3,11 ,200 3, 11 ,600 3,11 ,200 3,11 ,600'
Current Year's Profit 20,000
Add: (I) Transfer to General Reserve (4,20,000 - 4,00,000)
20,000 · Additional Information:
(2) Dividend paid
40,000 I. Depreciation charged on machinery , 10,000 and on Buildings~ 8,000.
(3) Provision for Tax made during the year 15,000
(4) Depreciation on Fixed Assets 2. Investments sold during the year f 3,000.
75 ,000 1,50,00_Q_
3, Interim Dividend paid during 2018-19 ? 15,000.
1,70,000
Less: (I ) Profit on sale ofFixed Asset 4. Income Tax paid during 2018-19 f 30,000.
5,000
(2) Profit on sale of Investment
2,000 7,0~ . Prepare: (i) A schedule of Changes in Working Capital; and (ii) A Funds Flow
Funds from operation
1,63,000 Statement
n P Mt:;;t ;~
1 9 6 - - - - - - - -- - - - -- ----MANAGfMEJvr
Accou
Solution ABB LTD N)iNc - - - - -- - --~--197
I. SCHEDULE OF CHANGES IN WORKING CAPITAL (5) Calculation ofF und8 f
rom o peration
for the year ended 31.03.2019
~ oss closing balance t t
1 24,000
pro • profi t and Loss opening balance
Particulars 31.3.2018 31.3.2019 5 39,000
1.,es · Cu rrent Year's Loss
BALANCE SHEET
82,000 82,000 Note 2018 2019
Particulars
No. t t
(3) Investment A/c
I. EQUITY AND LIABILITIES
To Balance b/d
To Bank-Purchases
'
20,000 By Bank-Sale
?
3,000
(1) Shareholders ' Fund:
(a) Share capital I 4,50,000 5,00,000
5,000 By Balance c/d 22,000 (b) Reserves and Surplus 2 70,000 1,18,000
(Bal. fig .)
25,000 25,000 (2) Share Application Money Pending Allotment
(3) Non-Current Liabilities - -
(4) Provision for Tax A/ C (4) Cu rrent Liabilities:
f (a) Trade payables 3 45,000 63 ,000
To Bank-Income Tax paid
To Balance c/d
'
30,000
34,000
By Balance b/d 32,000
32,000
(b) Other Current Liabilities:
Outstanding Expense 30,000 36,000
By Profit and Loss ale
4 82 000 I 00.000
64,000
(Bal. fig.) - 64,000
(c) Short-Tenn Provisions
Total 6 77 000 8 17 000
)
--- -
I
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _L ~2~s.~oo~oJ__!!l8,00o 2,20,000
--
,4,ia/ysls 201
- - -- - - -- - - - - - - - - -- MANAGEMENy Acc
0 f /()W
200 - (l) Plant and Machinery Ale ¾c f11 'i' • 55 umed that Income tn and dividend for the last year have been
,(I) 1•,.:~ durl~g the c~.rr~n.t year 2019.
To Balance bid
'
80,000
1,42,000
By Bank - Sale of Machinery
By Profit and Loss Ale - (ii)
P. ·dend includes D1v1dend on Preference shares" also.
v1v•
(8) Calculation of Funds from Operation
To Bank - Purchase ~f Loss on sale
t
(Bal. fig.)
Machinery By Depreciation
By Balance c/d 2 10,000 ~ closing balance " 48,000
oo ooo profi.t a;,ofit and Loss, opening balance 30 000
2,22.000 2,22,000 1,esS· current Year's Profit 18,000
(3) Investment Ale (I) Transfe.r t~ General Reserve 10,000
;.dd: (Z) Deprec1at1on on plant and Machinery 10,000
(3) Loss on sale of Machinery 2,000
20,000 By Dividend Received
To BaJance b/d · l,OOQ (4) Provision for Tax 50,000
11,000 By Balance c/d
To Bank - Purchase 30,000 (5) Proposed Dividend 50,000
(Bal. fig. ) (6) Interim Dividend 20,000
31,000 31 ,000
(7) Amortization of Goodwill 25 000 l 67.000
1,85,000
(4) Pnvisioa for Tu and Proposed Dividend are treated as "Non-curreQt
Dividend Received (3,000 - 1,000) 2.000
liabilities", as these are appropriation of profit. 1,ess:
l ,83,000
Funds from operation
received from pre-acquision profit is treated as ,
capital rec ~~
(5) Any di vidend . . L---
and it should be credited to investment account. Out of d1v1dend received II. INDIA BULLS LTD
FUNDS FLOW STATEMENT
(' 3,000),, 1,000 have been credited to investment account and the remaining
, 2,000 have been credited to profit and loss account. Interest credited in the
profit and loss account should be deducted from current year's profit while
calculating funds from operation. The Journal Entries are:
- Sources
Ussue of Equity shares
2. Sale of Land
for the year ended 31.12.2019
'
1,00,000
50,000
Application
1. Redemption of Preference shares
2. Income Tax paid
'
50,000
40,000
3,000 3. Sale of Machinery 10,000 3. Final Dividend paid 42,000
(i) Bank a/c........................ ....Dr
3,000 4. Dividend received 3,000 4. Interim Dividend paid 20,000
To Dividend Received
5. Fund from operations 1,83,000 5. Purchase of Machinery 1,42,000
(ii) Dividend Received a/c ...... Dr 3,000
6. Purchase of Investment 11,000
To Investment 1,000
Net Increase in Working Capital 41,000
To Profit and Loss 2,000
3,46,000 3,46,000
(6) Provision for Tax Ale
Illustration 6
To Bank - Income Tax paid '
40,000 By Balance b/d
'
40,000 Following are the summarised Balance Sheets of Geethanjali Ltd as on
To Balance c/d 50,000 By Profit and Loss Ale 50,000 31.12.2018 and 2019.
(Bal. fig.) BALANCE SHEET
90,000 90,000 Note 2018 2019
Particulars
(7) Proposed Dividend Ale
I. EQUITY AND LIABILITIES
No. '
'
(I) Shareholders ' Fund
42,000 2,00,000 2,50,000
To Bank - Final dividend paid 42,000 By Balance b/d (a) Share capital
To Balance c/d 50,000 By Profit and Loss Ale 50,000 (b) Reserves and Surplus:
50,000 60,000
(Bal. fig.) General Reserve
30,500 30,600
Profit and Loss
r - - - - - - - _ J _ ~9::.:2,~00~0_1__ _ _ _ _ _.:.__L!!:.:.92,ooo
- - - - - - - - - - - - - - - MANAGEMENT v,a/ysls - - - -- - - - - - - - - - - - - - - - - 2 0 3
~2 4~ 1
JS f/Oll'
A pllcatlon Money Pendln1 Allotment f~"
(2) Sllart P ~c 611
(l) Noa-Current Liabilities 50111t1 GEETHANJALI LTD
Long Term Borrowings 10,000 J SCHEDULE OF CHANGES IN WORKING CAPITAL
(10% Bank Loan)
' 2018
Effect on Working Capital
~
(4) Curre■t L11bllltit1 2019 Increase Decrease
Trade payables (Sundry creditors)
Short Term Provisions:
1,50,000
1,35,20() ent
curr A11ets
" ' '- '
/.· ventories 1,00,000 74,000 26,000
Provision for Tax 30,000 In d Receivables 80,000 64,200 - 15,800
fra e
Total 5,30,500-
~
. 5,10,800
cash in hand
cash at bank
500
-
600
8,000
100
8,000
-
-
11. ASSETS ~ (A) Total l 80 500 1 46800
(1) No■-Carrent Assets: current Li~bllltie•
9. S ndTY creditors 1,50,000
(I) Fixed Assets: u (B) Total 1 50000
1,35,200 14,800 -
l 35 200
(a) Tangible Assets:
W rldng Capital (A-B) 30,500 11 ,600 22,900 41,800
Land and Buildings 2,00,000
I,9o,000 c. :rease in Working Capital - 18 900 18,900 -
Plant and Machinery 1,50,000 De (D) Total 30,500 30,500 41,800 41,800
1,69,00Q
(b) lntangible Assets: ~
Working Notes
Goodwill - (1) Land and Buildings Ale
5,000
(ii) Non-current lnvestments
(2) Current Assets
L---
To Balance bid '
2,00,000 By Depreciation '
10,000
By Balance c/d 1,90,000
Inventories (stock)
--
1,00,000 74,000 2,00,000 2,00,000
Trade Receivables (Debtors) 80,000 64,200 (2) Plant and Machinery Ale
Cash and Cash Equivalents:
t t
Cash in Hand 500 600 -To Balance b/d 1,50,000 By Depreciation 14,000
Cash at Bank - 8,000 25,000
To Share capital
Total 5,30,500 5,1.0,800 To Bank - Purchase 8,000 By Balance c/d 1,69,000
1,83,000 1,83,000
Additional information
(3) Provision for Tax Ale
1. During 2019, assets of another company were purchased for a consideration of t
" 50,000 payable in shares. Assets consisted of the following: To Balance - Income Tax paid 28,000 By Balance b/d 30,000
Stock f 20,000 To Balance c/d 35,000 By Profit and Loss 33,000
(Bal. fig.) ·
Machinery f 25,000 63 000 63 000
2. In addition, a new Machinery was purchased for f 8,000. (4) Journal Entry h h
3. Depreciation written off during the year 2019: (I) When shares are issued for consideration other t • 0 cas
20' 000 (CA) Fund Flow (Inflow)
·0n Building f 10,000 Stock a/c ....... .... ........Dr CA) N0 Effect
M h. a/ D 25 000 (Non.
On Machinery f 14,000 ac mery c... ..... ... r ' CA) No Effect
Goodwill a/c ..... ... .....Dr 5,000 (Non.
Dividend off 23,000 and income tax off 28,000 were paid during 2019. (Bal. fig.)
50,000 (Capital) No Effect
To Share capital
;tria/ys/s - - -- -- - - - - -- - - - - - - - - - - 205
~ - - - - - - - - - - MANAGEMEN; f/OW
204 . Accou f~ ,iJS 20 18 20 19
particulars
t and share capital is a Non current liability. Hen . ~c f f
(Stock is a current a~se ·t I ) ce tt is tr
f working cap, a · tat ~ D LIABILITIES
as a source o 8 000 (Non-CA) Flow of F ed . I
b' ale Dr • Und f, Q . share capita 2,00,000 2,40,000
(ii) Mac mery ......... .. 8,000 (CA) (Outflow) I, i3qu1tY 50,000 -
vebentures
To Bank . med as "Non-current L',ab'J'1 1ty" . 1:Zo/o . . q premium Reserve
ur1ue, - 10,000
. ")
(111 Provision for Tax 1s presu . . 50,000
d not be considered as 1t 1s a charge on profit sec eral _Reserve 30,000
(iv) Interest on Bank loan nee . ae 11
p 0 (1t an
d Loss Account
. . 48,000 68,000
(5) Caltuladon of Funds From Operation r .. n for Deprec1at1on:
ov1s10 .
pr plant and Machinery 1,40,000 l,50,000
furniture 6,000 4,000
Profit and Loss account, closing balance
sed Dividend 20,000 24,000
Less: Profit and Loss, opening balance propO .
sundf'Y creditors 1,30,000 1,50,000
Carnnt Year's Profit Total 6,24,000 6,96,000
Add: (I) Transfer to General Reserve (60,000 - 50,000) I 0,000
ss£TS
(2) Depreciation on Buildings 10,000 Jl, ~ d and Buildings (cost) 1,05,000 1,50,000
(3) Depreciation on Machinery 14,000 Lant and Machinery (cost) 2,90,000 3,20,000
2 3,000 plan
(4) Dividend paid furniture (cost) 9,000 10,000
(5) Provision for Income Tax created 33,000 90,00() inventories 1,30,000 1,05 ,000
sundry Debtors 75 ,000 85,000
L - - -------~F_u_n_d_f_ro_m_o.c..p_er_a_tl_o_n_ _ _~----.i.__90,Ioo
Cash at Ban1c 15,000 26,000
U.GEETHANJALILTD TotaJ 6,24,000 6,96,000
FUNDS FLOW STATEMENT L---
for the year ended 31.12.2019 .4dditional information .
furniture which.cost f 5,000, written down value? 1,000 was sold for f 2,000
Sources f Applications 1· during 2019.
I . Issue of shares for stock 20,000 I. Purchase of Machinery s,ooo plant and Machinery whic~ c_o st? 20,000 and _in respect of which? 13,000 had
90,1 00 2. Dividend paid 2· been written off as depreciation was sold dunng the year for f 3,000.
2. Funds from operation 23,000
3. Income Tax paid 28,000 _ The dividend of 2018 was paid during 2019.
3
4. Repayment of Bank Loan 70,000 4_ 12% Debentures were redeemed at a premium of 10%.
Net Decrease in Working Capital 18,900 You are requfred to prepare:
1,29,000 1,29,000 (i) A Schedule of Changes in Working Capital, and
(ii) A Funds Flow Statement
(6) Share Capital Ale
Solution
MIND TREE LTD
By Balance b/d 2,00,000
I. SCHEDULE OF CHANGES IN WORKING CAPITAL
for the year ended 31.12.2019
By Stock 20,000 Effect on Working Capital
By Building 25,000 Particulars 2018 2019 Increase Decrease
?
To Balance c/d 2,50,000
2,50,000
By Goodwill (Bal. fig .) 5,000
2,50,000
A. Current Assets
~
1,30,000
'
1,05,000
' 25,000
Inventories
Illustration 7 Sundry Debtors 75,000 85,000 10,000
Cash at bank 15,000 26,000 11,000
The following are the summarised Balance sheets of Mind Tree Ltd as on 2 20 000 2 16 000
31.12.2018 and 2019 (A) Total
204
(Stock is a current asse
as a source of wor
_
. I)
k"1ng capita .
8 000 (Non-CA)
MANAGEJ.1£Nr
.
t and share capital is a Non current liability. Henc .
Flow of F
4cco
e tt is tr
,c
ca1
11
f~ll
Jsfl0
wAna/ysls
Particulars 2018
~
2019
~
205
.
(ii) Machinery a/c..... ......Dr ' 8,000 (CA) (Outflow) Und f;QVITY AND ~I ABILI TJES
I, ·ty Share capita1
f;qUI 2,00,000 2,40,000
To Bank . d "Non-current Liability".
.. . . for Tax is presume 85 . . JZo/o Debenture~ 50,000
(i 11) Provmon
iv) Interest on Bank loan nee
d t be considered as tt ts a charge on profit
no . . Premium Reserve
securitie~ 10,000
( General Reserve
(S) Calculation of Funds From Operation 30,000 50,000
profit and Loss Acco~n~ 48,000 68,000
. ,...
Sundry c ,tors I 30 000 I SO 000 20,000
(B) Total 1 ,:ntrle•
. Working CapitaJ (A-8) . 90,000 66,000 21,000 Jo 911nk a/c ... ... .... .... .... ..... .. ... ... ..... .. .Dr 2,000
C CapItat 24,000 24,000
Net [)ecreaSe in Working 90=--",::-:oo=-=o:--t- - '4::...:..i..:::::..:::.-1
--+---=-
L - -- 000 (i) provision for Depreciation a/c ...... Dr 4,000
(D) Total 90, s,ooo To furniture
6,000
furniture a/c .............. ... .... ..... ....... Dr 1,000
World•I Notes (I) Plant and Machinery Ale (ii) To Profit and Loss ale
1,000
To Balance bid
"
2,90,000 By Banlc - Sale
(6)
C1ICII 1
,tton of Lo11 on Sale of Plant and Machinery
.
f Plant and Machmery Sold = 20 000
By Provision for Depreciation cost O • • •
To Bank - Purchase . peprec1at10n = 13 000
S0,000 By Profit and Loss Ale
(Bal. fig.) - Loss on Sale r,ess. WOY --L._
4,00() = 7,000
By Balance c/d
3,20,000 • sale price =~
3,40,000 3,4o, 1,esS·
000 Loss on Sale = 4,000
(2) Provision for Depreciation on Plant and Machinery Ale Journal Entry
sank a/c ..................... .. ...... ... .......... Dr 3,000
To Plant and Machinery 13,000 By Balance b/d 1,40,000 provision for Depreciation alc ... .. ....Dr 13,000
To Balance c/d l,S0,000 By Profit and Loss ale 23,00o profit and Loss ale ........ ................ ...Dr 4,000
(Bal. fig.)
To Plant and Machinery 20,000
1,63,000 1,63,00o
(3) Furniture Ale
"
,~- (7) Proposed Dividend A/c
To Balance bid 9,000 By Bank - Sale 2,000 "roaank - Dividend paid 20,000 By Balance b/d 20,000
To Profit and Loss ale By Provision for Depreciation 4,000 To Balance c/d 24,000 By Profit and Loss a/c 24,000
- Profit on sale 1,000 By Balance c/d 10,000 (Bal. fig.)
To Bank - Purchase 6,000 44,000 44,000
(Bal. fig.)
16,000 16,000 (8) Calculation of Funds from operation
f
(4) Provision for Depreciation on Furniture A/c Profit and Loss closing balance 68,000
\' Less: Profit and Loss, opening balance 48,000
To Furniture
"
4,000 By Balance b/d 6,000 Current Year's Profit
20,000
20,000
To Balance c/d 2,000 Add: (I) Transfer to General Reserve (50,000 - 30,000)
4,000 By Profit and Loss ale
(2) Premium on Redemption of Debentures 5,000
(Bal. fig.)
(3) Provision for Depreciation on Plant & Machinery 23,000
8,000 8,000
(4) Provision for Depreciation on Furniture 2,000
(S) C1lcul1tioa of Profit on sale of Furniture (5) Loss on sale of Machinery 4,000
Cost of Furniture sold 5,000 (6) Proposed Dividend 24.000 78.000
Less: Depreciation 98,000
(S,000 - 1,000) Less: Profit on Sale of Furniture 1 000
97ono
Written Down Value 1,000 Funds from operation
·---- - - - -
20s--- ---- - ----- ----- MANAGEMcNJ·AccovNi Jsf10w
Ana/ysls- - -- - - - - - - - - - - -- - - - - - - -
209
II. MIND TREE LTD live
fil~ current Auets ----, - r-- --"-T""-- -~
(l) ventories
FUNDS FLOW STATEMENT 1n de Receivables 60,000 50,800
(Debtors)
for the year ended 31.12.2019 fra 40,000 44,400
provision for Doubtful Debts
A lications cash and Cash Equivalents: (3 ,800) (4,200)
Sources
40,000 I . Redemption of Debentures Cash at Bank
I. Issue of shares
10,000 (50,000 + 5,000) Total
2. Securities Premium Collected 13 200 30 400
2,000 2. Dividend paid 1~ ~ - ~ - - - - - - - . : : : : : ' . _- 1 _ 1 _ ~
3.0~
3. Sale ofFumiture 1~.40~0__1_~3,s~1~
,4o~
o
3,000 3. Purchase of Machinery 20,000
4. Sale of Machinery
97,000 4. Purchase of Furniture so,ooo . . al information
4d1taOD
~
5. Funds from operations . .
5. Purchase of Land & Buildings 6,000 /. Depreciat1on charged on Machinery f Io 000 and on 8 . d. "'
4s,o00 ' u11 mgs , 8 000
Net Decrease in Working Capital 24 ,000 I, strnents of f 3,000 were sold for~ 5 000 '
1nve , . ·
1,76,000
z. Interim dividend paid f 15,000.
Illustration 8 J. Income Tax provision created during the year t 32,000_
The following is the Comparative Balance sheets of Bajaj Electricals Ltd 4.
as on
31 12 2018 and 2019 prepare: . .
(i) A Schedule of Changes m Working Capital ; and
--
Note 20 18 20i9
Paniculars No. · ~ '
~
m Application Money pending Allotment I t t f t
(3) Non-Cnrrent Liabilities A, current Assets
Long Term Borrowings - 50,000
Inventories 60,000 50,800 - 9,200
( I 0% Debentures)
Long term provisions: Debtors 40,000 44,400 4,400 -
Provision for Tax 32,000 34,000 Cash at Bank 13,200 30,400 17,200 -
(4) Current Liabilities (A) Total 1,13 200 1.25 600
Trade creditors 16,000 10,800
B. Current Liabilities
Other Current Liabilities:
Bank overdraft 12,400 2,600 Creditors 16,000 10,800 5,200 -
Total 3,07 ,400 3,57,400 Bank overdraft 12,400 2,600 9,800 -
U. ASSETS Provision for Doubtful Debts 3,800 4,200 - 400
'
-
s2,ooo
2· pepreciation on Non-Current
3
4
· Interim dividend paid
Fixed Assets charged during the year : f 17,500
f 35,000
· t J,00,000 Shares were issued to debenture holders at the time of redemption and
To Balance b/d
f
20,000
2,000
By Bank - Sale
\'
5,000 - s. t S0,000 shares were issued for cash.
A Machinery was purchased for f 3,00,000 in exchange for Non-Current investment of
To Profit and Loss ale 6· f S0,000, loan on
mortgage f 1,50,000 and the balance f 1,00,000 was paid in cash.
- Profit on Sale
To Bank - Purchase 5,000 By Balance c/d 22,000
(Bal. Fig.) Solution
27,000 27,000
- working Notes
(S) Calculation of Funds from o eration 1 Calculation of Funds from Operation
f f
Profit and Loss balance on 31.12.2019
Less: Profit and Loss balance on 31.12.2018
24,000
39,000 Net Profit for the year '
1,07,500
Current Year'• Loss (15,000) Add: (1) Depreciation on Fixed Assets 17,500
Add: (I) Transfer to General Reserve (40,000 - 38,000) 2,000 (2) Interim dividend paid 35,000
(2) Preliminary Expenses written off 6,000 1,60,000
Fund from operation
(3) Amortization of Goodwill 4,000
(4) Provision for Tax created 32,000 2. When shares are issued to debenture holders at the time of redemption (ie,
(5) Depreciation on Building 8,000 conversion of debentures into shares), it will not affect the flow of fund. But when
(6) Depreciation on Machinery 10,000 shares are issued for cash, it makes an inflow or source of fund.
(7) Interim Dividend paid 15,000 77,000
62,000 Debenture A/c ............. Dr (Non CL) - No Effect
Less: Profit on Sale of Investment 2,000 Bank A/c ............ ....... .. Dr (CA) - Fund Flow ((Inflow)
Funds from operation 60,000 To Share Capital (Capital)
- - - -- - -- --- -21 3
MANA GEM_f:Nr Acco w ArtalySls - - - -- - - - -
212 . Jsf/O
t mveshtment and ' ~" are required to prepare: .
. ery purchased in exchange for non-c
h
urren
. . · 1oan O f 1111
3. Mac hm affect the flow of fund . 8 ut w en it 1s pure ased for cash .n llton )'oLI
. A schedule of Changes m Worki ng Capit
al
will not ' It lllake~agc Statement for 2019.
outflow or application of fund. ao ~;;) A fund Flow
(Non CA) - No Effec t
Machinery A/c................. ...Dr t
(Non CA) - No Effec ABHlRAMI LTD
To lnvestment 501 11 tfol1
(Non CL) - No Effect KJNG CAP ITAL
To Loan on Mortgage J. SCHEDULE OF CHANGES IN WOR
(CA) - Fund Flow (outflow) for the year ended 31 12 20 19
To Bank/Cash
Effect on Working Capital
FUNDS FLOW STATEMENT Decrease
se _j_ J~
: 8_-
--,--=20il..'.'.. 20!jl~9-
f--~ +-__ l.!~~
Increa
Application particu:::la:.::rs_ _ __ _ 1 t t t
Source ~ t
50,000 I. Interim dividend paid
J. Issue of shares for cash 2. Machinery purchased for cash current Assets
10,000 -
1,60,000 ;.. 80,000 90,000
2. Funds from operation Net Increase in Working Capital stock 90,000 1,20,000 30,000 -
pebtors 40 nnn 40 000 - -
2,10,000
cash at Bank
(A) Total 2 JO 000 2 50 000
)
Illustration 10 (With Income Statement current Liabilities 15,000
rami Ltd are given below. 65,00 0 80 000 -
The Comparative Balance sheets of Abhi
8· current Liabilities
(B) Total 65,000 80,00 0
BALANCE SHEET
40,000 15,000
2019 Assets I 2018 I 2019 . 1,45,000 1,70,000
r
Liabilities I 2018
t t
T
t r--r-- C. Working Capita(
Net Increase in Working Capital 25,00 0 _
-+- --=
,1~0,700=-=0
l'-;-1,--;;;7n'o,~oo~o-t-- --:1--=
4 -
40,000 I
25,000
.!:::!..i.
40,000
1,00,000 1,00,000 Non-Current Assets (D) Total
Share capital Fixed Assets 1,00,000 1,10,000
Raervr1 ud Sarplus
80,000 90,000 Current Assets working Notes: (1) Fixed Asset Ale
Profit and Loss 80,000 90,000
Stock
No■ c■ mat liabili.ties 90,000 1,20,000
60,000 75,000 Debtors 20,000
Bw Loan 40,000 40,000 1,00,000 By Depreciation
65,000 80,000 Cash at Bank To Balance b/d 1,10,000
Current liabilities 15,000 10,000 30,000 By Balance c/d
20,000 25,000 Preliminary Expenses To Bank - Purchase
Provision for Tax
3,25,000 3,70,000 I 3,25,ooo I 3,70,00~ (Bal. fig.) 1,30,0 00
1,30,000
Statement of Profit and Loss for 2019 (2) Provision for Tax Ale
I f I f
5,00,000
I. Revenue from operation (sales) - 17,000 By Balance b/d
20,000
II. Other Income To Balance - Income Tax paid 22,000
5,00,000 By Profit and Loss ale
Total (Bal. fig.)
3,00,000 To Balance c/d 25 000
(i) Less: Cost of Goods sold 42,000
42,000
(ii) Opera ting Expenses:
Administration expenses 70,00Q (3) Calculation of Dividend paid
Depreciation 20,000 (3 ,90,000)
plus)
Operating Profit 1,10,000 Profit and Loss Appropriation Ale (Sur
(iii) Non operating Expen ses: ·80,000
Preliminary Expenses 5,000 (5,000) 73,000 By Balan ce b/d
1,05,000 To Bank - Dividend paid By Profit and Loss
83,000
Profit Before Tax
(22,000)_ (Bal. fig.)
(iv) Provision for Tax 90,000
To Balance c/d 1,63 ,000
~ Profit After Tu ~ 83,~ 1,63,000
·-- - --
21 4- --- --- --- --- --M AN
AG fM £!. rr~ Cc o~
'Ilic
,4na/ysls - - -- - - -- -- -- -- -- -- 21 5
c======~~~:.;;~~~~~::::-f::,
dsf/oW
(4) Calculation of Funds from operation f~"
50JlltfoD KJNG CAPITAL
J. SCHEDULE OF CHANGES fN WOR
Profit & Loss Account closing balance for the year ended 3112 2019
ce
Less: Profit and Loss ale opening balan Effect on Working Capital
Current Year's Profit Decrease
1. 1.2019 31.12.2019 Increase
Add: Dividend paid
~ {' {' {' {'
Profit After Tax
Add: (I) Provision for Tax 22,000 rent Assets
off
/. cur 10,000 7,000 - 3,000
(2) Preliminary Expenses Written s,ooo . cash in band
20,000 -
30,000 50,000
(3) Depreciation 20 ooo Debtors - 10,000
35,000 25,000
Funds from Operation Stock
(A) Total 75,000 82,000
II. ABHIRAMI LTD s. current Llabillties
- 4,000
40 000 44 000
FUNDS FLOW STATEMENT Creditors
40 000 44,00 0
(B) Total
· for the year 2019
38,00 0 20,000 17,00 0
{' Application Working Capital 35,000
Sources 3000
I . Loan from Bank I. Fixed Assets purchased
---J_ ~~t Increa se in Working Capital 3,000
20,000
(75,000 - 60,000) 15,000 2. Dividend paid
30,00o (D) Total 38,000 38,000 I 20,000 I
73,00o L.---
2. Fund from operation 1,30,000 3. Income Tax paid 17,00o Working Notes:
Net Increase in Working Capital ~ (1) Capital Account
1,45,000 1,45,ooo ?