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RESEARCH METHODOLOGY:Research simply means search for knowledge.

According to Rodman and Mory, research is systemized effort to gain new knowledge. Some people consider research as a movement from known to unknown; it is actually a voyage of discovery. According to Clifford Woody, research includes defining and redefining problem, formulating hypothesis or the suggested solutions, collecting organizing and evaluating data, reaching conclusions and at last carefully testing the conclusions to determine whether they fit to the formulated hypothesis or not. Research methodology has many dimensions, it includes not only the research methods but also consists the logic behind the methods used in the context of the study and explains why only a particular method of technique had been used so that search lend themselves to proper evaluation. Thus in a way it is a written game plan for concluding research. The term research refers to search of something new that can solve a problem. Research must have a specific objective which is called research problem. On the basis of the problem, researcher sets hypothesis. The goal of the research process is to produce new knowledge, which takes three main forms:

Exploratory research:- which structures and identifies new problems Constructive research:- which develops solutions to a problem Empirical research:- which tests the feasibility of a solution using empirical evidence Casual research:- which is related to day to day problems or for casual problem.

RESEARCH DESIGN:The research design used here is Exploratory Research Design .I has to study the Fund flow statement .So I need to enquire about financial activities and funds involved in them. So availability of fund flows is collected by people related with company financial sector and based on the reports I have to explore the factors that really help me in analysis of fund flow statement. Since the major emphasis was on the discovery of ideas and insights into the facts, the research design most appropriate must be flexible enough to permit the consideration of many different aspects of a phenomenon. The methods used in context of this research design are:
(1) The survey of concerning literature

(2) Experience Survey. The important features of this research design are listed as follows: The sampling design used is Non-Probability Sampling design and it is flexible in nature. There is a no pre-planned design for the analysis.
There is structured instrument for the collection of the data i.e. company

fund flow statement No fixed decisions about the operational procedures.

DRAFTING QUESTIONNAIRE:The questionnaire is considered as the most important thing in a survey operation. Hence it should be carefully constructed. Structured questionnaire consist of only fixed alternative questions. Such type of questionnaire is inexpensive to analysis and easy to administer. All questions are closed ended.

SAMPLING DESIGN:-

1.

Sampling Unit It defines the unit of target population that will be sampled i.e. it answers who is to be surveyed. Sampling unit in my study will be individual employees of Wahid Sandhar Sugar Ltd. who are indulging in making financial activities.

2.

Sampling Techniques This refers to the procedure by which the respondents should be chosen. In this study, Non Probability sampling of the following type is used: Convenience sampling Sample Size: It indicates the number of people to be surveyed. Through large sample give more reliable results than small samples but due to constraints of time and money the sample size was restricted to few respondents.

Area of Study
Though other methods are important, but this method is given prime significance in modern research because of its extensive use to study the relationship of different factors, attitudes and practices of society and to explore the problems that cannot be treated by experiment methods.

SOURCES OF DATA COLLECTION:


The data can be collected from secondary sources. The basic premises of my study are supplemented with the secondary data.
1. Primary Data:-

The primary data are those, which are collected afresh and for the first time and thus happen to be original in character. The primary data were collected through well-designed and structured questionnaires based on the objectives.

Personal Investigation Observation Method Information from correspondents Information from superiors of the organization
2. Secondary Data:-

The secondary data are those, which have already been collected by someone else and passed through statistical process. The secondary data required of the research was collected through various newspapers, and Internet etc.

Unpublished Sources such as Company Internal reports prepare


by them given to their analyst & trainees for investigation.

Websites like Indonesian official site, some other sites are also
searched to find data.

STEPS OF METHODOLOGY

COLLECTION OF DATA

ORGANISATION OF DATA

INTERPRETAT -ION OF DATA

PRESENTATIO -N OF DATA

ANALYSIS OF DATA

Objective of the study:


As a trainee I joined the Wahid Sandhar Sugar Ltd. I choose the topic of Analysis of Fund Flow Statement for the preparation and submission of report required for the partial fulfillment of Bachelor of Business Administration. An Objective of the study refers to the various purposes of conducting the study in particular aspect. It reflects certain targets that we want to achieve through our study. Whenever a study a conducted, it is done on the basis of certain objectives kept in mind. A successful completion of a project is based on the objective of the study. The various objective of this Research Project are as follows:
1. To know the changes in Working Capital during the last few years in the company and the reason for the changes in Working Capital. 2. To know the various sources from which the funds are raised and the application of those funds in the company. 3. To know the Financial and Working Capital position of the company. 4. To know the present operating efficiency and suggest suitable recommendations. 5. To give necessary suggestions that can be made by making a thorough study on the financing and flow of funds on Wahid & Sandhar Sugar Ltd. 6. To know whether the concern is able to keep a balance between profitability and liquidity. 7. To provide reliable information about the resources of the business firm. 8. To know whether the main objective i.e. profitability is being fulfilled or not. 9. To know about the creation and distribution of added value of the firm. 10. To know the operational efficiency of the concern as a whole and of its various parts of departments. 11. To judge the solvency position. 12. To judge the liquidity position. 13. To judge the profitability position.

SCOPE OF THE STUDY

This study is going to help, in identifying the causes of satisfaction or dissatisfaction regarding company financial activities. This study also describes certain factors that explain measures that how we can make financial system more effective. It is helpful in doing short term planning as it provides information regarding the sources and utilization of cash during a period, so it became easier for management to assess whether it will have adequate cash to meet day to day expenses and pay creditors in time. It is also useful in preparing cash budget for the future period as it informs the management about surplus or deficit periods of cash. So it is helpful in planning the investment of surplus cash in short term investments and to plan short term credit in advance for deficit periods. This study is also helpful in knowing trends and speed at which the current assets and current liabilities are being paid. It also reveals how the companies take help of fund flow statement to ascertain the position of funds generated from operating activities which can be used for payment of dividend.

Company Details:Name of industrial concern Date of incorporation/ Registration Date of commencement of Business Change to joint stock co Sector Location Web site E- Mail Address Installed Capacity Licensed Capacity Installed Crushing Capacity Setup by Founder of mill Working capital Profits Registered office Bankers Auditors Export Countries Main suppliers of raw Materials Wahid Sandhar Sugar Ltd in the year 1993 16 September 2000 Private G T Road Phagwara www.wahidsandharsugar.com wahidsandharsugars@hotmail.com 4000 tone cane per day 4500 tone cane per day 400 ton per day Narang group formally known as Jagjit sugar ltd Dr. Gokal Chand Narang 30 crore 75 lakhs Wahid Sandhar Sugar Ltd Phagwara , Kapurthala State Bank of India 765, Hargobind nagar phg. M/S Arora & Associates Charted Accountants Lud. America,Canada,England,Pakistan Local farmers phg. Sugarcane

Introduction about Wahid Sandhar Sugar Ltd:There are 507 sugars industries in the India, 23 in Punjab and only one in Phagwara namely Wahid Sandhar Sugars Ltd., Phagwara is a leading company in the sugars, molasses and other by products. The Sugar Plant originally established in 1933 by Narang Group of Industries formally known as Jagatjit Sugar Mill Company Ltd., in the year which was later on taken over by Oswal Group in 1989. The Oswal Group had expanded the crushing capacity of Plant for sugar cane from 1500 Ton per day to 4500 Ton per day with the latest state of art technology. The Plant was later on taken over by Wahid and Sandhar Group in the year 2000 and commenced its operation under the Flagship of M/s Wahid Sandhar Sugars Ltd. Since incorporation the promoters are running the business very successfully. The raw material is sugarcane is supplied directly to the factory by local farmers. By Product in Wahid Sandhar Sugar Ltd. 1. 2. 3. 4. 5. 6. 4 tones of Molasses 3 tones of Press & Mud 0.3 tones of Furnance 30-32 tones of Bag gasses 1.5 KW Power 30 tones of case top 6 leaves

Total sugar industries are:


In India 566 In Punjab 23 In Phagwara-first setup by Narang Group

Human Resourses: In season total strength of workers are 473 In off season total of workers are 349

Historical Background of the Company:Sugar industry is very well established India has been producing Gur and Khandsari since long time .but the modern sugar industry came in to existence in 1903. When first sugar factory was installed in Bihar. But the advert of modern sugar processing industry in India began in 1930. Thus 1930-31 there were 30 sugar mills and in 1935-36 the number of sugar mills. Increased up to 139 and during the same period the production increased from 1.20 lakh tones to 9.34 lakh tones. After partition of the country 67% of sugar mills came in the share of India. India is the second largest producer of sugar in the world. The Wahid Sandhar Sugar Ltd Phg is a leading co in the sugars which is engaged in the production of sugar, molasses and other by products. The co is really good examples of a great progress in very less time as we can list in milestones in the following manner:1. There is only one sugar industry in Phg. that is Wahid Sandhar Sugar Ltd Which was setup by Narang group formally known as Jagatjit sugar mill co ltd. The initial crushing capacity of company was 400 tons per day which was increased to 1000 tons per day in the 1933 by Dr.Gokal Chand Narang was the founder member of this mill. 2. In 1987 the Oswal group took over the management of this mill under the chairman of Sh. Abhey Oswal and increased the capacity to 4000 tons per day in 1989. 3. In 1989 they setup new plant in sugar mill. 4.

In 16 September 2000. It was taken over by Wahid Sandhar group and increased the crushing capacity to 4500 tons per day.

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Vision of the Wahid Sandhar Sugars Ltd.:-

The main aim of Wahid Sandhar Sugars Ltd. is to serve customers satisfaction by cutting cost & improving quality.

Need of the Study


Wahid Sandhar ltd is a well famous company for its quality products. The companies occupies a good position and enjoy an excellent credit worthiness and goodwill among suppliers, customers, creditors, and bankers. It has been enjoying excellent labour management relations from last many years. It is one of the famous and renowned company of India the company is able to enhance its installed capacity from 400 tones cane per day to 4500 cane per day. The company is also well aware of its social responsibilities.

Quality policy of Wahid Sandhar Sugars Ltd.


The main motto of the companys quality policy is consumers total satisfaction. They commit themselves to produce and deliver such material, so as to meet the consumers quality expectations. This is achieved by identifying the customers requirement and translating them into products and continuous up dating to reflect customers changing requirement.
Satisfaction of Customers

Updating the Quality Quality Policy Continuous Improvements

Identification of Customers

Confirm the Defined standards 11

Phagwara

Production pattern to Wahid Sandhar Sugar Ltd.:Main Products:1. Sugar

3. Molasses

2. Baggasse

4. Press Mud

Sugar:Production of sugar is seasonal. The production starts from the 1 st Nov. to 3oth April. It is used as a row material for alcohol producing distilleries & in the cattle feed industry.
It is used in making paper board & as a fuel boiler. It is used as fertilizer in the field for bio compost making.

Molasses:It is use as raw material for alcohol producing in distilleries and in cattle feed industries. It is also in casting. Bag gasses:It is used in Paper Board Making and as full in boiler. Press Mud:12

It is used as fertilizer in field and for bio-comfort making.

Main power in Wahid Sandhar Ltd.


There are mainly three kinds of labour:1. Permanent seasonal:-Those who are permanent but work only in season. 2. Permanent:-These who work in season & off-season also. 3. Temporary:-These who are not permanent but work in as well as in offseason also.

In the season, total strength of workers is 473. in off season, only 349 pays to the chose labour that work in the season only as retaining allowance.

Trust:
Mill has its own trust named Jagatjit trust. The trust has established in the year 1946. The entire provident fund cut from the employees salary is deposited in this trust. Mill gives the annually record of this provident fund to the Govt.

LOGO:PhagwaraTM

WS
SUGAR
Wahid Sandhar Sugars Ltd. Also use a logo, Logo means a trade mark or a symbol inserted into the firms letters & use for advertising purpose. The main aim of the logo of Wahid Sandhar Ltd. is given below: Logo of Wahid Sandhar Ltd. shows a two members partnership. They believe that every company has a different sign in the market. Logo of Wahid Sandhar Sugars Ltd. is mainly the name of the company.
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Crushing Capacity & Recovery Percentage:Years Percentage Total quantity of cane crushed in Qtls. 30.02 lacs 41.15 lacs 40.62 lacs 23.28 lacs 20.39 lacs 34.15 lacs 40.20 lacs 45.12 lacs 38.55 lacs 45.00 lacs

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

09.04 08.84 10.55 10.20 10.32 09.48 10.40 10.25 10.18 10.22

Socio Economic Development


Sugar mill contribute to the socio-economic development state by offering. He remunerative cane manager promoting joint action by the farmers in the management actuaries of the mills. Providing employment to a large number of people including landless labours and farmers. Today cooperative mills or other sugar mills directly/indirectly employment to over the 1000 employees and the wages paid in the sugar mills are best as compare to any other state of country mobilizing rural saving for industrial purpose. Preserving individual states of farmers while confirming the advantages of large sized industry. Accounts selection takes area for making invoices and receiving. The payment of all the bill of purchase and other expenses are entered in the payment register

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and respective accounts heads .this selection is responsible employees and parties dealing with Wahid Sandhar sugar ltd.

List of Directors:-

S. Soukhbir Singh Sandhar (Chairman)

S. Jaswinder Singh Bains (Vice-Chairman)

S Jarnail Singh Wahid ( Managing Director)

S Sandeep Singh Wahid ( Director)

Promoters:The Plant was taken over by Wahid and Sandhar Group with equal contribution. S. Soukhbir Singh Sandhar the Chairman of the Company is an NRI and experienced business man. S. Jaswinder Singh Bains Vice chairman of the Company is an agriculturist. S. Jarnail Singh Wahid, Managing Director of the group is a Law Graduate and heading the farmer community before the takeover. Besides this he is now also an experienced Industrialist. The Board comprises of equal number of Directors from both the groups. Mr. Jarnail Singh Wahid is also the Chairman of Markfed, which is the largest cooperative society in the Asia.

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Competent and Qualified Staff:The Company has very competent and qualified staff. All the functions like procurement, production, marketing, Sales, Finance, Technical, and Personnel are handled and headed by the professionals. Beside above the management has also hired the good professionals from outside on regular basis to use their expertise in the relevant fields.

Co-generation:Wahid Sandhar Sugar is a leading organization in the North India. This mill has developed its strength in power generation and raw sugar processing in addition to the production of white sugar in this mill from decade. We have capability to generate 12 MW with single turbine and export power to grid up to 8MW. Moreover, we have taken initiative to use biomass as fuel, which has given direct boost to the farmers economy. Farmers have started to supply fuel to this mill rather than to burn in their field, which ultimately has increased their revenue.

Contribution towards Society:1. Two schools are opened by Wahid Sandhar Ltd. 2. A Club is also opened by Wahid Sandhar Ltd. Is known as Dev Club. 3. A sewing Centre has been also opened by Wahid Sandhar Ltd.

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Departmental Heads:-

Name
Mr. Kulwant Singh Mr. Vaneet Nanda K.A. Gaur B.S Garewal Mr. R.P. Dubey Mr. Rajesh Sharma Commercial Mr. Umesh Sharma Mr. Parvinder Singh Mr. S.K. Dubey Mr. J.S. Gill Mrs. Nisha Mr. Tirlok Singh S. Charanjit Singh Wahid Mgr) Mr.S.K. Chawala Mr. Lajpat Roy

Designation
Chief Executive Finance Controller General Manager Cane G.M.(Tech.) General Manager (Production ) Assist General Manager Assist General Manager Purchase Assist General Manager(E.D.P ) Dy. Manager Lab Chief Engineer Manager A/cs Cash Officer G.M. Cane (Senior Chief Cane Assist Data Officer Assist Security Officer

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Why I select Wahid Sandhar Sugar Ltd.

WAHID SANDHAR LTD IS REPUTED CONCERN AND LEADING COMPANY IN SUGAR INDUSTRIES:o It is situated outside the city Phagwara so there is no such Problem which causes pollution.

o The way of working and taking with staff members is very well means its sound relation with its employees & others.
o Good management of staff members. o The good and quality of the sugar manufacturing in factory. o The waste products of the factory are carefully disposed off.

o The workers are given facility in this factory


o Awareness of social responsibility o The Wahid Sandhar sugar ltd Phagwara is was established sugar mill in the state.

o The main reason for choosing due to its reputation.


o There are 493 sugar industries in India in which 23 in Punjab and only one sugar industry in Phagwara.

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Organizational Structure:-

Board of Directors

Chairman Managing Director

Director Production

Director Marketing

Director Personnel

Director (finance) or Vice President

Treasurer

Controller

Cash Manager

Credit Portfolio Manager Manager

Auditing

Financial Accounting Manager

Cost Accounting Manager

Planning and Budgeting Manager

Tax Manager

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Structure of Accounts Departments:-

Finance Controller

Accounts Officer

Assistance Accountant Officer

Accountant

Assistant Accountant

Accounts selection takes area for making invoices and receiving. The payment, all the bills of purchase & other expenses are entered in the payment registrar and respective accounts heads. This selection is responsible employees and parties dealing with Wahid Sandhar Sugar Ltd.

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Financial SWOT analysis:Strengths: Good reputation among customers. Effective inventory control. Adequate production facilities. Sound and suitable management practices. Good industrial relations. All departments perform their work in right time. Staff involved in management is efficiently performing their all work in effective manner. There are good relationship between management and workers. Company working capital position is sound as its current assets are sufficient enough to meet its current liabilities.

Weakness: Increase in cost of raw material due to inflation in economy. Indirect expenses of company increases at rapid rate. Sales of company decreases as compare to last year which is mainly due to unavailability as raw-material. A profit of a company has decreased due to decrease in cost.

Opportunities:

No better system of recruitment and selection.

To control its operating expenses and cost of goods sold. To expand its export market. To improve its net profitability condition. Start more labour welfare schemes for benefit for labour. To develop the manpower and try to utilize their full capacity. To concentrate on sales promotion programs.

Threats: More cost in production process. New competitive technology. Reduction of the concession. 21

Increased trade barriers.

Introduction about Fund Flow Statement:The basic financial statement, i.e., the balance sheet & profit & loss account or document or income statement of business, reveal the net effect of the various transactions on the operational and financial position of the company. The balance sheet gives a summary of the assets and liabilities of an undertaking at a particular point of time. It reveals the financial state of company the assets side of a balance sheet shows the deployment of resources of an undertaking while the liabilities side indicates its obligations, i.e., the manner in which these resources were obtained. The profit and loss account reflects the result of business operations of a period of time it contains a summary of expenses incurred and the revenue realized in an accounting period. Both these statement provide the essential basic information on the financial activities of the business, but their usefulness is limited for analysis and planning process the balance sheet gives a static view of the resources of a business and the uses to which these resources have been put at a certain point of time. It does not disclose the causes for changes in the assets and liabilities between two different points of time. The profit and loss account, in a general way, indicates the resources provided by operations. But there are many transactions that take places in an undertaking and which do not operate through profit and loss account. Thus, another statement has to be prepared to show the change in the assets and liabilities from the end of the one period of time to the end of one period of time to the another period of time. The statement is called a statement of changes in financial positions or a fund flow of a statement. The funds flow statement is a statement which shows the movement of funds and is a report of the financial operations of the business undertaking. It indicates various means by which funds were obtained during a particular period and the ways in which these funds were employed. In simple words, it is a statement of sources and application of funds.

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Meaning and concept of funds:The term funds has been defined in a number ways.

Funds

In a narrow sense
(a) In a narrow sense,

in a popular sense

in a broader sense

It means cash only and a funds flow statement prepared on this basis is called a cash flow of a statement. Such a statement enumerates net effects of the various business transactions on cash and takes into account receipts and disbursements of cash.

(b)In a popular sense,


The term funds, means working capital, i.e., the excess of current over current liabilities. The working capital concept of funds has emerged due to the fact that total resources of a business are invested partly in fixed assets in the form of fixed capital and partly kept in form of liquid or near liquid form as working capital.

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The narrower concept of funds, i.e., cash or working capital concept, fails to reveal the changes in the total financial resources of a business. Some significant items, such as purchase of building in exchange of shares or payment of bonus in the form of shares, which do not directly affect cash or working capital are not revealed from the analysis based on these concept. However, the concept of funds as working capital is the most popular one and in this chapter we shall generally refers to funds as working capital and as funds flow statement as a statement of sources and application of funds.
(c) In a broader sense,

The term funds, refers to money values in


whatever form it may exist. Here funds, means all financial resources, used in business whether in the form of men, material, money, machinery &others.

Meaning and concept of funds of flow of funds:The term flow means:Movement and include both inflow and outflow. The term flow of funds means Transfer of economic values from one assets of equity to another. Flow of funds is said to have taken place when any transaction make changes in the amount of funds available before happening of the transaction. If the effect of transaction result in the increase of funds, it is called sources of funds and if it results in the decrease of funds, it is known as an application of funds. According to the working capital concept of funds, The term flow of funds, refers to the movement of funds in the working of capital. If any truncation results in the increase in working capital, it is said to be a sources or inflow of funds and if it result in the decrease of working capital, it is said to be an application or out flow of funds.

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Rule
The flow of funds occurs when a truncation changes on the one hand a non-current account and on the other a current account and viceversa. When a change in a non-current account e.g., fixed assets, long term liabilities, reserves and surplus, fictitious assets, etc., is followed by a change in another non-current account, it does not amount to flow of funds. This is because of the fact that in such cases neither the working capital increase nor decrease. Similarly, when a change in one current account, it does not affect funds. Funds move from non-current to current transaction or vice- versa only. In simple language funds move when a transaction affects (1) A current asset and a fixed assets, or (2) A fixed and a current liabilities, or (3) A current asset and a fixed liabilities, or (4) A fixed liabilities and current liabilities; and funds do not move when the truncation affects fixed assets and fixed liabilities or current assets and current liabilities.

Current and Non-Current Accounts


To understand flow of funds, it is essential to classify various accounts and balance sheet items into current and non-current categories. Current account can either be current assets or current liabilities. Current assets are those assets which in the ordinary course of business can be or will be converted into cash within a short period of normally one accounting year. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets or the income of the business. The following is the list of current or working capital accounts:

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LIST OF CURRENT OR WORKING CAPITAL ACCOUNTS Current Liabilities 1. Bills Payable 2. Sundry Creditors or Accounts Payable 3. Accrued or Outstanding Payable 4. Dividends Payable Current Assets 1. Cash in hand 2. Cash at bank

3. Bills Receivable 4. Sundry Debtors or Accounts Receivable 5. Bank Overdraft 5. Short- term loans & advances 6. Short-term loans advances & 6. Temporary or Marketable deposits Investments 7. provision for taxation, if it does not 7. Prepaid Expenses amount to appropriation of profits 8.Proposed Dividend ( May be a 8. Accrued Incomes current or a non-current liability) 9. Provision against Current Assets 9. Inventories or stocks such as (a) Raw materials (b) Work-in-process (c) Stores and Spares (d) Finished Goods

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LIST OF NON-CURRENT OR PERMANENT CAPITAL ACCOUNTS


Non- current or permanent assets

Non- current or permanent Liabilities

1. Equity Share Capital 2. Preference Share Capital 3. Redeemable Preference Share Capital 4. Debentures 5. Long-term Loans 6. Share Premium Account 7. Share Forfeited Account 8. Profit & Loss Account( balance of profit, i.e., credit balance) 9.Capital Reserves 10. Capital Redemption Reserves 11. Provision for depreciation against fixed assets 12. Appropriation of Profits: (a) General Reserve (b) Dividend Equalization Fund (c) Insurance Fund (d) Compensation Fund (e) Sinking Fund (f) Investment Fluctuation Fund (g) Provision for Taxation (h) Proposed Dividend 13. No other expenses

1. Goodwill 2. Land 3. Building 4. Plant and Machinery 5. Furniture and Fittings 6. Trade Marks 7. Patent Rights 8. Long-term investment 9. Debit Balance of Profit & Loss Account 10. Discount on Issue of Shares 11. Discount on Issue of Debentures 12. Preliminary Expenses

13. Other Deferred Expenses

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Procedure for knowing whether a transaction result in the flow of funds or not:(1) Analayse the transaction and find out the two accounts involved.

(2) Make journal entry of the transaction. (3) Determine whether the accounts involved in the transaction are current or non-current (4) If both the accounts involved are non-current i.e., either current assets or current liabilities, it does not result in the flow of funds. (5) If both the account involved are non-current, i.e., either permanent assets or liabilities, it still does not result in the flow of funds.
(6) If the accounts involved are such that one is a current account while the other is a non-current account, i.e., current asset and permanent liabilities, or current assets and fixed assets, or current liability and fixed asset, current liability &permanent liability then it result in the flow of funds.

Example:(A) Transaction which involve only the current accounts and hence do not result is the flow of funds -

(1) Cash collected from debtors. (2) Bills receivables realized. (3) Cash paid to creditors of bill payable. (4) Payment or discharge of bills payable. (5) Issued bills payable to trade creditors. (6) Received acceptances from customers. (7) Raising of short time loans.
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(8) Sale of temporary or marketable investments. (9) Goods purchased for cash or credit.

Analysis of the above transaction:1. Cash collected from debtors; the journal entry shall be: Cash A/C Dr. To sundry A/C Both cash A/C and sundry debtor A/c are current accounts and hence do not effect funds. The transaction result increase in cash but at the same time an equal decrease in debtors. The total current assets and current liabilities remain unchanged and consequentially the working capital remains the same. In the same way following also do not result in the flow of funds.

Flow of funds

No

Yes

When both current and non-current accounts are involved

When one current and other noncurrent accounts are involved

DIAGRAMS DEPICTING FLOW OF FUNDS

(Contd...)

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Flow of funds? NO
CURRENT ASSETS
CURRENT LIABILITIES

YES YES YES


NON-CURRENT ASSETS

NO

NON-CURRENT LIABILITIES

2. Bills receivable realized: Cash A/c To bills receivable A/c 3. Cash paid to creditors: Sundry creditors A/c To cash a/c

Dr.

(Current asset) (current asset) (Current liability) (current asset)

Dr.

The transaction results in decrease in creditors (current liability) on the one hand and at the same an equal decrease in cash (current assets): and hence the difference between the two (C.A. C.L.) or working capital remains unchanged. 4. Payment or discharge of bills payable: Bills payable A/c Dr. To cash a/c 5. Issued bills payable to trade creditors: Sundry Creditors Dr. To bills payable a/c 6. Received acceptance from customers : Bills receivable a/c Dr. To short-term loan a/c 7. Raising of short term loans: (current liability) (current asset) (Current liability) (current liability) (Current asset) (current liability)

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Cash or Bank a/c To short-term loans a/c

Dr.

(Current asset) (current liability)

8. Sale of temporary or marketable investments: Cash a/c Dr. (Current asset) To temporary investment a/c (current asset) 9. Goods purchased for cash or credit: Purchases a/c Dr. To cash a/c Or To sundry creditors a/c (Current) (current asset) (current liability)

(B) Transactions which involve only non- current accounts and hence do not result in the flow of funds: 1. Purchase of one new machine in exchange of two old machines. 2. Purchase of building or furniture in exchange of land. 3. Conversion of debentures into shares. 4. Redemption of preference shares in exchange of debentures.
5. Transfers to general reserves, etc.

6. Payment of bonus in the form of shares. 7. Purchase of fixed assets in exchange of shares, debentures, bonds or long-term loans. 8. Writing off of fictitious assets.
9. Writing off of accumulated losses or discount on issue of shares, etc.

Analysis of the above transactions: 1. purchase of new machine in exchange of two old machines :the journal entry shall be : New machinery a/c Dr. To old machinery a/c
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Both new machinery a/c and old machinery a/c are non-current accounts and hence the transaction does not affect funds. The current assets and current liabilities remain unchanged and consequently the working capital also remains the same. Similarly, the following transactions do not result in the flow of funds: 2. Purchase of building or furniture in exchange of land : Building / Furniture a/c Dr. (Non-current) To land a/c (non-current) 3. Conversion of debentures into shares : Debentures A/c Dr. To share capital a/c (Non-current) (non-current)

4. Redemption of preference shares in exchange of debentures : Preference shares capital a/c Dr. (Non-current) To debentures a/c (non-current) 5. Transfer to general reserves: Profit and loss (app.) a/c To general reserves a/c Dr. (Non-current) (non-current) (Non-current) (non-current)

6. Payment of bonus in the form of shares: Profit and loss (app.) a/c Dr. To share capital a/c

7. Purchase of fixed assets against issue of shares or debentures: Fixed assets a/c Dr. (Non-current) To share capital a/c (non-current) Or To debentures a/c (non-current) 8. Writing off of fictitious assets, say goodwill: Profit and loss a/c Dr. (Non-current) To goodwill a/c (non-current) 9. Writing off discount on issue of shares: Profit and loss a/c Dr. (Non-current) To discount on issue of shares a/c (non-current)

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(C) Transactions which involve both current and non-current accounts and hence result in the flow of funds : 1. Issue of share of cash. 2. Issue of debentures for cash. 3. Raising of long term loans. 4. Sale of fixed assets on cash or credit. 5. Sale of trade investment. 6. Redemption of preference of shares. 7. Redemption of debentures. 8. Purchase of fixed assets on cash or credit. 9. Purchase of long term /trade investments.

10. Payment of bonus of cash. 11. Repayment of long term loans. 12. Issue of shares against purchase of stock on trade. 1. Issue of share of cash., the journal entry will be: Cash/bank a/c Dr. (Current asset) To share capital a/c (non-current liability) To share premium a/c (non-current liability) As one of the accounts involved is a current account and the other is a noncurrent account, the transactions results in the flow of funds. When cash a/c is debited, the total of cash balance or current assets will increase while the current liabilities remain the same. It will amount to an increase in working capital to the funds: in the same way, the following transactions also involve the flow of funds:
2. Issue of debentures for cash. Cash a/c Dr. (Current assets) 33

To debentures a/c

(non-current liability)

3. Raising of long term loans: Cash/ bank a/c Dr. To loan a/c

(Current assets) (non-current liability)

4. Sale of fixed assets on cash or credit: Cash a/c or Debtors a/c Dr. (Current asset) To fixed assets a/c (non-current asset) 5. Sale of trade investment: Cash a/c Dr. To long-term investment a/c (Current asset) (non-current asset)

6. Redemption of preference of shares: R.P.S. capital a/c Dr. (Non-current liability) To bank a/c (current asset) 7. Redemption of debentures Debentures a/c Dr. To bank a/c (Non-current liability) (current asset)

8. Purchase of fixed assets on cash or credit: Fixed asset a/c Dr. (non-current asset) To cash/ creditors a/c (current asset/liability) 9. Purchase of long term /trade investments: Long-term investment a/c Dr. (non-current asset) To cash a/c (current asset) 10. Payment of bonus of cash: (i) profit and loss (app.) a/c To bonus to shareholders a/c (ii) bonus to shareholders a/c To cash/bank a/c (iii) profit and loss (app.) a/c To cash/bank a/c Dr. Dr. Dr. (Non-current liability) (current asset) (Non-current liability) (current assets)

11. Repayment of long term loans: Loans a/c Dr. To cash a/c

12. Issue of shares against purchase of stock on trade


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Stock-in-trade a/c To share capital a/c

Dr.

(Current asset) (non-current liability)

SUMMARY OF TRANSCTIONS SHOWING NO FLOW OF FUNDS


Transaction Journal entry Category of debit account Dr. Dr. Dr. Dr. Dr. Dr. 3 Current Current Current Current Current Current Category of credit account 4 Current Current Current Current Current Current Resultflow of funds or not 5 No No No No No No

1 1. cash collected from debtors 2. bills receivable realized 3. cash paid to trade creditors 4. payment or discharge of bills payable 5. issued bills payable to trade creditors 6. received acceptances from customers 7. raising of short term loans 8. sale of temporary or marketable investments 9. goods purchased for cash or credit 10. Purchase of one new machine in exchange of

2 Cash a/c To sundry debtors a/c Cash a/c To B/R a/c Sundry creditors a/c To cash a/c B/P a/c To cash a/c Sundry creditors a/c To B/P a/c B/R a/c To sundry debtors a/c Cash/bank a/c To short term loan a/c

Dr.

Current Current

Current Current

No No

Cash a/c Dr. To temporary investment a/c Purchases a/c To cash/creditors a/c New machinery a/c To old machinery a/c Dr.

Current

Current

No

Dr.

Noncurrent

Noncurrent

No

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two old machines.

11. Purchase of building or furniture in exchange of land. 12. conversion of debentures into shares 13.Redemption of preference shares in exchange of debentures 14. Transfer to general reserves 15. Payment of bonus in the form of shares 16. Purchase of fixed assets against issue of shares or debentures 17. Writing off of fictitious assets, say goodwill 18. Writing off discount on issue of shares

Building / Furniture a/c Dr. To land a/c

Noncurrent

Noncurrent

No

Debentures A/c To share capital a/c R.P.S capital a/c To debentures a/c

Dr. Dr.

Noncurrent Noncurrent

Noncurrent Noncurrent

No No

P/Loss (app.) a/c To general reserves a/c P/L (app.) a/c To share capital a/c Fixed assets a/c To share capital a/c

Dr. Dr. Dr.

Noncurrent Noncurrent Noncurrent

Noncurrent Noncurrent Noncurrent

No No No

P/L a/c To goodwill a/c

Dr.

Noncurrent

Noncurrent

No

P/L a/c To discount on issue of shares a/c

Dr.

Noncurrent

Noncurrent

No

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SUMMARY OF TRANSCTIONS SHOWING FLOW OF FUNDS


Transaction Journal entry Category of Debit account 3 Current Current Current Current Current Noncurrent Noncurrent Noncurrent Noncurrent Noncurrent Noncurrent Category of Credit account 4 Noncurrent Noncurrent Noncurrent Noncurrent Noncurrent Current Current Current Current Result flow of funds or not 5 Yes Yes Yes Yes Yes Yes Yes Yes Yes

1 1. issue of shares at premium 2. issue of debentures 3. raising of long term loans 4. sale of fixed assets on cash or credit 5. sale of longterm trade investments 6. redemption of preference shares 7. redemption of debentures 8. purchase of fixed asset on cash or credit 9. purchase of long-term trade investments 10. payment of bonus in cash 11. repayment of long-term loans

2 Cash/bank a/c Dr. To share capital a/c To share premium a/c Cash/bank a/c Dr. To debentures a/c Cash/bank a/c Dr. To loan a/c Cash a/c Debtors A/c To fixed assets a/c Dr.

Cash a/c Dr. To long term investments a/c R.P.S capital a/c To bank a/c Dr.

Debentures a/c Dr. To bank a/c Fixed assets a/c Dr. To cash/ creditors a/c Long-term investment a/c Dr. To cash a/c P/L (app.) a/c Dr. To cash a/c Loans a/c Dr. To cash a/c

Current Current

Yes Yes

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12. issue of shares against purchase of stock-in-trade

Stock-in-trade a/c Dr. To share capital a/c

Current

Noncurrent

Yes

Meaning and definition of funds flow statement


Funds flow statement is a method by which we study changes in the financial position of a business enterprise between beginning and ending financial statement dates. It is a statement showing sources and uses of funds for a period of time.

Definition:A statement of sources and application of funds is a technical device designed to analyses the changes in the financial condition of a business enterprise between two dates. --By Foulke The funds flow statement describes the sources from which additional funds were derived and the use to which these sources were put. --By Anthony Funds flow statement is a statement prospective or retrospective, setting out of the sources and the application of funds of an enterprise. The purpose of the statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same. -- By I.C.W. management accounting Thus, funds flow statement is a statement which indicates various means by which the funds have been obtained during a certain period and the ways to which these funds have been used during that period. The term funds used here means working capital, i.e. the excess of current assets over current liabilities. Funds flow statement is called by various names such as Sources and Application of funds: statement of changes in financial position: sources and uses of funds: summary of financial operations: where came in and where gone out statement: where got, where gone statement: movement of working capital statement: movement of funds statement : funds received and disbursed statement: funds generated and expended statement: sources of increase and application of decrease: funds statement, etc.

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Flow of working capital:Fund flow statement is the statement in financial position, prepared to determine only the sources and uses of working capital between dates of two balance sheets. Working capital is defined as the difference between current assets and current liabilities and determines the liquidity position of the firm. A statement reporting the changes in working capital is useful in addition to the financial statements. A projected statement of changes in working capital is immediately useful in the firms long-range planning. Management, for example, wants to anticipate the working capital flow in order to plant the repayment schedules of its long-term debt. For a fast growth and expansion, a firm needs larger amount of working capital. Therefore estimates, of working capital on a long-term basis are also required to determine whether or not adequate working capital will be generated to meet the firms expansion. If not, the firm can make arrangements in advance to procure funds from outside to meet its needs. The working capital flow or fund arises when the net effect of a transaction is to increase or decrease the amount of working capital. Normally, a firm will have some transactions that will change net working capital and some that will cause no change in net working capital. Transactions which change net working capital include most of the items of the profit and loss account and those business events which simultaneously affect both current and non-current balance sheet items. On the other hand, transactions which do not increase or decrease working capital include those which affect only current accounts or only non-current accounts. For example: suppose that a company issues ordinary shares for cash. Two accounts are involved in this case- the cash amount, which is a current (asset) account and the share capital account, which is a non-current account. The company receives cash against the owners increased claims. Thus, there occurs a net increase in working capital. Company purchases machinery for cash: again two accounts the cash account which is a current (asset) account and the machinery account, which is a non-current assets account, are affected. The company acquires a fixed asset by passing cash. This has the effect of decreasing working capital.

39

Some transactions do not change working capital. If a company receives cash from its debtors, it represents increase of cash as a current asset account and decrease of debtors again a current asset account. Thus there will be no net change In the amount of working capital although the composition of working capital will be affected. If the company pays cash to its creditors, two current accounts will be affected. The cash account, being a current asset account decreases and the creditors account, being a current liability account also decreases. Working capital will also not be affected if both accounts involved are non-current. Suppose that the company purchases land and makes payment by issuing shares to the landowner. Both accounts are non-current in nature and do not at all affect current asset and current liability. Therefore working capital will remain unaffected. Similarly, if the company converts loan or debentures into equity, it will have no effect on working capital. In the profit and loss account the revenue items increase cash or receivables and therefore, increase working capital: the expenses items reduce cash or create current liabilities and, therefore, decrease working capital. But there are certain items in the profit and loss account that are non-current and thus they have no effect on the net flow of working capital. Depreciation is an example. It reduces fixed assets but does not increase or decrease working capital. Therefore, in determining the net flow of working capital from operations, the amount of depreciation is added to net profit to set right the effect of depreciation deduction. We may conclude that a transaction will cause net flow of working capital only when one of the accounts affected is a current account ( current assets or current liability) and another account is a non-current account (long-term assets or long-term liability). The concept of working capital flow may be summarized as follows: The net working capital increase or decreases when a transaction involves a current account and a non-current account. The net working capital remains unaffected when a transaction involves only current accounts. The net working capital remains unaffected when a transaction involves only non-current accounts. The concept of the flow of working capital is further illustrated as below:-

Decrease s

Increase

Current Account Non-Current Account

Current Account No Impact Impact

Non-current Account Impact No Impact


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Effect of change in accounts on working capital

Sources of working capital:The typical sources of working capital are summarized below: Funds from operation (adjusted net income) Sale of non-current assets Sale of long term investment (shares, bonds/ debentures etc.) Sale of tangible fixed assets like land building plant Sale of intangible fixed assets like goodwill, patents, or copyright.

1. long term financing:


Long term borrowings (institutional loans, debentures, bonds etc.) Issuance of equity and preference shares. 2. Short term financing such as bank borrowings. In the following paragraphs we explain the measurement of funds from operations, since it usually involves an adjustment.

Funds from operations:


The major sources of working capital is the firms net profit from operations the ultimate success of a company depends upon it ability to earn profits. However, the profit and loss account contains certain items which do not affect working capital. Therefore in determining the amount of working capital from operations, the figure of the net profit, as shown in the profit and loss account should be adjusted. The expense items which do not involve working capital should be added to net profit. Let us take example of deprecation to illustrate the point. ** Deprecation: the most common example of the expense which does not affect working capital is deprecation. All expense reduces owners equity, so does deprecation. While most of other expenses also reduces current assets (cash) or create current liability it reduces non-current assets without affecting cash. Because the combination of accounts influenced by it is only non-current it does not working capital. It should, therefore be added to net profit if it is not added to net profit the amount of working capital generated

41

from operations would be understated. Some logic applies to amortized expenses such a goodwill written off. Gain or loss from sale of non-current assets the net profit figure should also be adjusted for any gain or loss from the sale of noncurrent assets. The loss should be added to subtracted from the net profit this is done because the sale of non-current assts. The loss should be added to, while the gain should be subtracted from the net profit. This is done because the sale of non-current assets is listed separately as a source of working capital. The total inflow of cash on the sale of non-current assets as shown as a sources of working capital if the gain or loss is not adjusted is the net profit, this will amount to double counting as the cash realization from the sale of the non-current assets include gain or loss. Firms also meet their working capital requirements by raising funds externally. They can issue shares or borrow from capital markets on short or long term basis.

Uses of working capital:The typical uses of working capital are as follows: 1. adjusted net loss from operations 2. purchase of non-current assts Purchase of long term investments like shares, bonds/debentures etc. Purchase of tangible fixed assets like land building, plant, machinery, equipment etc. Purchase of intangible fixed assets like goodwill, patents, copyright etc. 3. repayment of long term debt (debentures or bounds) 4. redemption of redeemable preference shares 5. Payment of cash dividend.

Adjust net loss


The loss from operations consumes the firms capital. Loss arise when expense. That involves application of working capital, exceed revenues that generate working capital, as with net profit, the expense and revenue items revolving no working capital should be adjusted to net loss (shown with negative sign) will reduce its magnitude. The gain or loss on the sale of non-current assets should also be adjusted to net loss. A firm applies its working capital funds for acquiring non-current assets such as land and building, plant and machinery,
42

or equipments. Working capital will also be applied when the firm retires its borrowing and redeemable preference shares, i.e. preference shares on payable on maturity. A profitable firm usually rays cash dividend to its equity and preference of shareholders.

Forms of funds flow statement:-

Forms

Causes of the change in Working capital

Analysis of changes in working capital

The statement of changes in working or capital or funds flow summery of the sources and the use of working capital, this statement may be presented in two part as: The first part explains the causes of the change in the amount of working capital from the end of one period to another. It gives a list of sources which a provided working capital and uses to which working capital was applied. the second part of the statement contains an analysis of the changes in the working capital items, this part of the statement show items of the current assets and current liability at the beginning and at the end of the accounting period and the effect of their changes between two periods in the working capital.

43

WORKING CAPTIAL FROM OPERATIONS:The major source of working capital is a firms profitable operations. Working capital from operations is not necessarily equal to the net profit. The item of the income statement which does not involve working capital should be adjusted to the net profit figure/ the net profit for 2005 of Rs 105000 includes the effect of a deprecation dl junction of Rs 22000. As depreciation does not reduce working capital it should be added back to net profit. The gain on the sale off the plant, Rs 6000 will be deducted from net profit because the total amount received from the sale of the plant, will be shown as the separate source of working capital. This amount includes both the recovery of the net value (original cost less accumulated depreciation) and the gain it if the amount gain is not deducted from the net income, it would amount to double counting. Thus, the working capital from operations will be as given below All the information can be revealed when we prepare funds flow statement involving a comprehensive analysis for the change in working capital position.

Importance of Fund Flow Statements:


Helps in analyzing financial position. Provides reliable figures of profit and loss of an organization. Helps to know that funds are properly used or not. Helps in preparing the budget for the next period. Helps in proper allocation of resources.
44

Helps an organization in borrowing operations.

Funds flow statement, Income statement & Balance sheet

Funds flow statement is not a substitute of an income statement, i.e., a profit and loss account, and a balance sheet. The profit and loss account is a document which indicates the extent of success achieved by a business in earning profit. It reports the result of business activities and indicates the reason for the profitability or lack thereof. The profit and loss account does not highlight the changes in the financial position of a business. It does not reveal the inflows and outflows of funds in business during a particular period of a time. A balance sheet is a statement of financial position or status of a business on a given date. It is prepared at the accounting period. The balance sheet depicts various resources of an undertaking and the deployment of these resources in various assets on a particular date; it is static in nature; while funds statement is a dynamic cone. Funds statement tells us many financial facts which a balance sheet cannot tell. Balance sheet dose not disclose the cause for change in the assets and liabilities between two different points of time. Again, while balance sheet is the result of all accounting operations for a period of a time, funds flow statement is essential a post balance sheet exercise. It is prepared to show various sources from which the funds came into business and various applications where they have been used. Hence, funds flow statement is not complementary to financial statement. The funds statement provides additional information as regards changes in working capital, derived from financial statement as two points of time. It is tool of management for financial analysis and helps in making decisions.

45

Objectives/ Advantages/ Purpose of preparing Income Statement:1. To ascertain the earnings capacity or profitability.

2. To know the solvency of an organization.


3. To make a comparative study with other firms. 4. To ascertain the financial strength.

5. To know the capability of payment of interest and dividend. 6. To know the trend of an organization, i.e., sales, profit, cost of production etc. 7. To provide useful information to the management.

Limitations of Income Statement:1. Lack of qualitative analysis. 2. Difficulty in forecasting or historical in nature. 3. Difference in accounting policies. 4. Ignore changes in price level or ignore inflation. 5. Window dressing. i.e., just to show but actually different.
46

Difference between Funds Flow Statement and Income Statement:Difference Between Funds Flow Statement and Income Statement Funds Flow Statement Income Statement It highlights the changes in the It does not reveal the inflows and financial position of a business and outflows of funds depict the items of indicates the various means by which expenses and incomes arrive at the funds were obtained during a figure of profit or loss. particular period and the ways to which these funds were employed. It is complementary to income Income statement is not prepared from statement. Income statement helps the funds flow statement. preparations of funds flow statement. While preparing funds flow statement Only revenue items are considered. both capital revenue items are considered. There is no prescribed format for It is prepared in a prescribed format. preparing a funds flow statement.

Difference Between funds flow statement and Balance Sheet:Difference Between funds flow statement and Balance Sheet Funds Flow Statement Balance Sheet It is a statement of changes in financial It is a statement of financial position on position and hence is dynamic in a particular date and hence is static in nature. nature. It shows the sources and uses of funds It depicts the assets and liabilities at a in a particular period of time. particular point of time. It is a tool of management for financial It is not of much help to management analysis and helps in making decisions. in making decisions. Usually, schedule of changes in No such schedule of changes in
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working capital has to be prepared working capital is required. Rather before preparing funds flow statement. profit and loss account is prepared.

Uses, significance and importance of funds flow statement:A funds flow statement is an essential tool for the financial analysis and is of primary importance to the financial management. Now- days, it is being widely used by the financial analysts, credit granting institution and financial managers. The purpose of a funds flow statement is to reveal the changes in the working capital on the two balance sheet dates. It also describes the sources from which additional working capital has been financed and the uses to which working capital has been applied. Such a statement is particularly useful in assessing the growth of the firm, it resulting the financial needs and determining the best way of financing these needs. By making use of projected funds flow statement, the management can come to know the adequacy or inadequacy of working capital even in advance. One can plan the intermediate and long-term financing of the firm, repayment of long-term debts, expansion of the business, allocation of resources , etc. the significance or importance of fund flow statement can be well followed from its various uses given below:

6. H in elps app ng raisi t use he wo of r cap king ital

1 Helps in analysis of financial stateme nts

2. ps I n l He wing kno the dit cre thin r wo ess

USES OF FUND FLOW STATEMENT


3. in Hel ps fo io rmu l d n ivi of at po den d l ic y

ts Ac 5. a as ture fu ide gu

4. Helps in proper allocatio n of resource s

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Uses /significance:1. It helps in the analysis of financial operations:The financial statements reveal the net effect of various transactions on the operational and financial position of a concern. The balance sheet gives a static view of the resources of a business and the uses to which these resources have been put at a certain point of time. But it does not disclose the causes for changes in the assets and liabilities between two different points of time. The fund flow statement explains the causes for such changes and also the effect of these changes on the liquidity position of the company. Sometimes the concern may operate profitably and yet its cash position may become more and worse. The fund flow statement gives a clear answer to such a situation explaining what has happened to the profits of the firm. 2. It throws light on many perplexing questions of general interest:Which otherwise may be difficult to be answered, such as: Why were the net current assets lesser in spite of higher profits and viceversa? Why more dividends could not be declared in spite of available profits? How was it possible to distribute more dividends than the present earnings? What happened to the net profit? Where did they go? What happened to the proceeds of sale of fixed assets or issue of shares, debentures, etc.? What are the sources of the repayment of debt? How was the increase in working capital financed and how will it be financed In future? 3. It helps in the formation of a realistic dividend policy:Sometimes a firm has sufficient profits available for the distribution as dividend but yet it may not be advisable to distribute dividend for lack of liquid or cash resources. In such cases, a fund flow statement helps in the formation of a realistic dividend policy. 4. It helps in the proper allocation of resources:The resources of a concern are always limited and it wants to make the best use of these resources. A projected funds flow statement
49

constructed for the future helps in making managerial decisions. The firm can plan the deployment of its resources and allocate them among various applications.

5. It acts as a future guide:A projected funds flow statement also acts as a guide for future to the management. The management can come to know the various problems it is going to face in near future for want of funds. The firms future needs of funds can be projected well in advance and also the timing of these needs. The firm can arrange to finance these needs more effectively and avoid future problems. 6. It helps in appraising the use of working capital:A funds flow statement helps in explaining how efficiently the management has used its working capital and also suggests ways to improve working capital position of the firm. 7. It helps in knowing the overall credit worthiness of a firm:The financial institutions and banks such as State Financial Institutions, Industrial Development Corporation, Industrial Finance Corporation Of India, Industrial Development Bank of India, etc. all ask for funds flow statement constructed for a number of years before granting loans to know the credit worthiness and paying capacity of the firm. Hence, a firm seeking financial assistance from these institutions has no alternative but to prepare funds flow statements.

Limitations of funds flow statement:The funds flow state4ment has a number of uses; however, it has certain limitations also, which are listed below:
It should be remembered that a funds flow statement is not a substitute of an income statement or a balance sheet. It provides only some additional information as regards changes in working capital. It can not reveal continuous changes. It is not an original statement but simply is arrangement of data given in financial statements. It is essentially histories in nature and projected funds flow statement cannot be prepared with much accuracy.

50

Changes in cash are more important and relevant For financial management than a working capital.

Procedure for preparing a funds flow statement:-

Preparation of fund flow statement

Schedule of change in Working capital

Sources and applications of funds

Report Form

an Account

Funds flow statement is a method by which we study changes in the financial positions of the business enterprise between beginning and ending financial statement dates. Hence, the funds flow statement is prepared by comparing two balance sheets and with the help of such other information derived from the accounts as may be needed. Broadly speaking, the preparation of a funds flow statement consists of two parts.
1. Statement or schedule of change in working capital. 2. Statement or sources and applications of funds.

1. Statement or schedule of changes in working capital:-

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Working capital means the excess of current assets over current liabilities. Statement of changes in working capital is prepared to show the changes in the working capital between the two balance sheet dates. This statement is prepared with the help of current assets and current liabilities derived from the two balance sheets. As,

Working capital = Current Assets - Current Liabilities.


So, An increase in current assets increases working capital. A decrease in current assets decreases, working capital An increase in current liabilities decreases working capital A decrease in current liabilities increases working capital The change in the amount of any current assets or current liabilities in the current balance sheet as compared to that of the previous balance sheet either results in increase or decrease in working capital. The difference is recorded for each individual current asset and current liability. In case a current asset in the current period is more than in the previous period, the effect is an increase in working capital and it is recorded in the increase column. But if a current liability in the current period is more than in the previous period, the effect is decrease in working capital and it is recorded in the decrease column or vice- versa. The total increase and the total decrease are compared and the difference shows the net increase or net decrease in working capital. It is worth nothing that schedule of changes in working capital is prepared only from current assets and current liabilities and the other information is not of any use for preparing this statement. A typical form of statement or schedule of changes in working capital is as follows:-

52

Statement of schedule of changes in Working Capital Effect on Working Capital


Particulars Previous Year Current Year Increase Decrease

Current assets:Cash In Hand Cash In Bank Bills Receivable Sundry Debtors Temporary Investments Stocks/ Inventories Prepaid Expenses Accrued Incomes Total Current Assets
Current liabilities :Bills Payable Sundry Creditors Outstanding Expenses Bank Overdraft Short- term Advances Dividends Payable Proposed Dividends * Provision for taxation * Total Current Liabilities Working Capital (CA-CL) Net Increase or Decrease In working Capital

53

2. Statement of Sources and Application of Funds:Funds flow statement is a statement which indicates various sources from which funds (working capital) have been obtained during a certain period and the uses or applications to which these funds have been put during that period. Generally, this statement is prepared in two formats:(A). Report Form (b). T Form or an Account Form or Self Balancing Type.

54

Specimen of Report Form of Funds Flow Statement


Rs. Sources of Funds:Funds from operations Issue of share capital Raising of long- term loans Receipts from partly paid shares, called up Sales of non- current (fixed) assets Non-trading receipts, such as dividends received Sale of Investments(long-term) Decrease in working capital (as per schedule of changes in W.C.) Total Applications or Uses of Funds:Funds lost in operations Redemption of preferences share capital Redemption of debentures Repayment of long-term loans Purchase of non- current (fixed) assets Purchase of long term investment Non- trading payments Payments of dividends * Payment of tax * T Form or An Account Form or Self Balancing Type Increase in working capital (as per schedule Statementin W.C.) Funds Flow of changes Total (for the year ended.) Sources Funds from operations Issue of Share Capital Issue of Debentures Raising of Long- term loans Receipts from partly paid shares called up Sale of non-current assets Non- trading receipts such as dividends Sale of long- term investments Net Decrease in Working Capital Rs. Applications Funds lost in operations Redemption of Preference Shares Redemption of Debentures Repayment of long- term loans Purchase of non- current assets Purchase of long term investments Non- trading payments Payment of Dividends * Payment of tax * Net increase in Working Capital Rs.

Note. Payment of dividend and tax will appear as an application of funds when these items are appropriations of profits and not current liabilities.

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SOURCES AND APPICATIONS OF FUNDS:-

Funds from Operations

Funds lost in operations

Issue of Share Capital

Redemption of preference share capital

Issue of Debentures and Raising of long-term loans FUNDs

Repayment of long term loans and redemption of debentures

Sales of non-current assets

Purchase of non-current assets

Non-trading receipts

Payment of dividend & tax

Decrease in WC

Non-trading payments 56

Sources of Funds:The following are the sources from which funds generally flow (come), into the business:
1. Funds From Operations or Trading Profits.-

Trading profits or the profits from operations of the business are the most important and major source of funds. Sales are the main sources of inflows of funds into the business as they increase current assets (cash, debtors or bills receivables) but at the same time funds flow out of business for expenses and cost of goods sold. Thus, the net effect of operations will be a source of funds if inflow from sales exceeds the outflow for expenses and cost of goods sold and vice- versa. The examples of such items on the debit side of a profit and loss accounts are: amortization of fictitious and intangible assets such as goodwill, preliminary expenses and discount on the issue of shares and debentures written off: Appropriation of retained earnings, such as transfers to reserves etc. depreciation and depletion : loss on sale of fixed assets: payment of dividend , etc. The non-fund items are those which may be operational expenses but they do not affect funds of the business, e.g., for depreciation charged to profit and loss account, funds really do not move out of business. Non- operating items are those which although may result in the outflow of funds but are not related to the trading operations of the business, such as loss on sale of machinery or payment of dividends. The methods of calculating funds from operations have been discussed in the following pages. Basically there are two methods of calculating funds from operations: (a). the first method is to prepare the profit and loss account afresh by taking into considerations only fund and operational items which involve funds and are

57

related to the normal operations of the business. The balancing figure in this case will be either funds generated from operations or funds lost in operations depending upon whether the income or credit side of profit and loss account exceeds the expenses or debit side of profit and loss account or vice- versa. (b). the second method ( which is generally used) is to proceed from the figure of net profit or net loss as arrived at from the profit and loss account already (a) operations by this method can be calculated prepared. Funds fromCalculation of Funds From Operations as under:
Closing Balance of P & L a/c or retained earnings( as given in balance sheet) Add :non-fund and non-operating items which have been already debited to P&L a/c: 1. Depreciation and Depletion 2. Amortization of fictitious and intangible assets such as: Goodwill Patents Trade marks Preliminary Expenses Discount on issue of shares, etc. 3. Appropriation of retained earnings, such as: Transfer to General reserve Dividend Equailisation fund Transfer to sinking fund Contingency reserve, etc. 4. Loss on sale of any non-current (fixed )assets such as: Loss on sale of land and building Loss on sale of machinery Loss on sale of furniture Loss on sale of long- term investments, etc. 5. Dividends including: Interim dividend Proposed dividend Provision for taxation Any other non-fund/operating items which have been debited to P&L a/c Total (A) Less : Non-fund/ non-operating items which have already been credited to P&L a/c 1. profit/gain from the sale of non-current assets such as: profit on sale of land and building profit on sale of plant and machinery profit on sale of long-term investments, etc. 2. Appreciation in the value of fixed assets , such as increase in the value of land if it has been credited to P&L A/c 3. Dividends Received 4. Excess provision retransferred to P&L A/c or written off 5. Ay other non-operating item which has been credited to P&L A/c 6. Opening balance of P&L A/c or retained earnings (as given in balance sheet) 58 Total (B) Total (A) Total (B)= funds generated by operations

Rs

(b) Funds From operations can also be calculated by Preparing Adjusted Profit & Loss Account as follows Adjusted Profit and Loss Account Rs. To Depreciation & Depletion or Amortization of fictitious and intangible assets, such as: Goodwill, patents, trade mark, Preliminary Expenses etc. To Appropriation of retained Earnings, such as: transfers to General reserves, dividend Equailisation fund, sinking Fund etc. To loss on sale of any non current Or fixed assets. To Dividends (including interim dividend ) To proposed dividend (if not Taken as a current liabilities To provision for taxation (if not Taken as a current liability) To closing balance To funds lost in operation (balancing figure, in case credit side exceeds the debit side By Opening Balance (of P&L A/c) By Transfers from excess provisions By Appreciation in the values of fixed assets By Dividends received By Interest in investment Rs.

By Profit on sale of fixed or non-current assets By funds from operations (balancing figure in case debit side exceeds credit side)

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1.

Issue of Share Capital:-

If during the year there is any increase in the share capital, whether preference or equity, it means capital has been raised during the year. Issue of shares is a source of funds as it constitutes inflow of funds. Even the calls received from partly paid shares constitutes as inflow of funds. It should also be remembered that it is the net proceeds from the issue of share capital which amounts to a source of funds and hence in case shares are issued at premium, even the amount of premium collected shall become a source of funds. The same is true when shares are issued at discount: it will not be the nominal value of shares but the actual realization after deducting discount that shall amount to inflow of funds. But sometimes shares are issued otherwise than in cash; the following rules must be followed: Issue of shares or making of partly paid shares as fully paid out of accumulated profits in the form of bonus shares is not a source of funds. Issue of shares for considerations other than current assets such as against purchase of land, machines, etc. does not amount to inflow of funds. Conversion of debentures or loans into shares also does not amount to inflow of funds. In all the above three cases mentioned, both the amounts involved are non-current and don not involve any current assets or funds.

2. Issue of debentures and raising of loans, etc.:


Issue of debentures or rising of loans (long term), whether secured or unsecured results in the flow of funds into the business. The inflow of funds is the actual proceeds from the issue of such debentures or rising of loans, i.e., including the amount of premium or excluding discount, if any.

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However, loans raised for considerations other than a current asset, such as for purchase of building, will not constitute inflow of funds because in that case the accounts involved are only fixed or non-current.

3. Sale of fixed (non-current) assets and long term or trade investments:


When any fixed or non-current asset like land, building, plant and machinery, furniture, long term investments, etc. are sold it generates funds and becomes a source of funds. However, it must be remembered that if one fixed asset is exchanged for another fixed asset, it does not constitute an inflow of funds because no current assets are involved.
4. Non-Trading Receipts:

Any non-trading receipts like dividend received, refund of tax, rent received, etc. also increases funds and is treated as a source of funds because such an income is not included in the funds from operations.

5. Decrease in Working Capital:If the working capital decreases during the current period as compared to the previous period, it means that there has been a release of funds from working capital and it constitutes a source of funds.

Applications or Uses of Funds:1. Funds lost in operations:Sometimes the result of trading in a certain year is a loss and some funds are lost during that period in trading operations, such as loss of funds in trading amounts to an outflow of funds and are treated as an application of funds.

2. Redemption of preference share capital:61

If during the year any preference shares are redeemed, it will result in the outflow of funds, and is taken as an application of funds. When the shares are redeemed at premium or discount, it is the net amount paid (including premium or excluding discount, as the case may be.). However, if shares are redeemed in exchanges of some other type of shares or debentures, it does not constitute an outflow of funds as no current account in that case.

3. Repayment of loans or redemption of debentures, etc.:In the same way as redemption of preference share capital, redemption of debentures or repayments of loans also constitute an application of funds.

4. Purchase of any non-current or fixed asset:When any fixed or non-current asset like land, building, plant and machinery, furniture, long term investments, etc. are purchased, funds outflow from the business. However, if fixed assets are purchased for a consideration of issue of shares or debentures or if some fixed asset is exchanged for another, it does not involve any funds and hence not an application of funds.

5. Payments of Dividends and tax:Payments of dividends and tax are also applications of funds. It is the actual payment of dividend (may be interim dividend) and tax which should be taken as an outflow of funds and not the mere declaration of dividend or creating of a provision for taxation.

6. Any other non-trading payment:Any payment or expense not related to the trading operations of the business amounts to outflow of funds and is taken as an application of funds. The examples could be drawings in case of sole trader or partnership firms, loss of cash, etc.

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Some Typical Items Which Require Particular Care:The following items require particular care while preparing a fund flow statement:-

Items of Fund flows

Digging Investments Provision Out for Hidden Taxation Information

Proposed Interim Dividends Dividend

Provision Against Current Assets

Temporary Investments

Current Appropriation Liability of Profit Permanent Current Appropriation Investments Liability of Profit

1. Digging out Hidden Information:While preparing a funds flow statement, one has to analyse the given balance sheets. Items relating to current accounts, i.e.,
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current assets and current liabilities have to be shown in the schedule of changes in working capital. But the non-current assets and non-current liabilities have to be further analyzed to find out the hidden information in regard to sale or purchase of non- current assets, issue or redemption of share capital, raising or repayment of long-term loans, transfers to reserves and provisions etc. The hidden information can be digged out either by preparing working notes in the statement form or preparing concerned accounts of noncurrent assets and non-current liabilities.

2. Investments:The treatment of investments while preparing funds flow statement depends upon their nature, i.e., whether they are current assets or fixed (long term) or non- current assets. If the investments represent surplus funds temporarily invested in marketable or short-term securities, they are to be treated as current assets. But if investments are long-term, permanent or trade investments, these should be treated as fixed assets. (a) Temporary Investments:When the surplus funds are temporarily invested in marketable securities, they are treated as current assets and hence shown in the schedule of changes in working capital. Temporary investments do not require any further treatment while preparing fund flow statement like all other current assets. (b) Long-term, Permanent or Non- Current Investments :If the investments are of non-current nature, there should not be shown in the schedule of changes in working capital because they are not current assets. However, in this case, an investment account should be prepared as it is prepared in the books of accounts to find out the cost of investments purchased or sold during the year and the profit or loss on sale of such investments, if any. Sometimes, the investments are purchased-cumdividend and the pre-acquisition dividend received is credited to the investments accounts. If there is a loss on sale of such investments and it has been debited to P/L A/c, it should be added back while finding funds from operations or shown on the debit side of adjusted profit and loss account (depending upon which method is followed) for the reason that such loss is not an operating loss. However, for the same reason, if a profit on sale of such investments has been credited to profit and loss account, it should be

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deducted while funds from operations or shown on the credit side of adjusted profit and loss account, as the case may be. The purchase of non-current or trade investments s an application of funds while the proceeds realized from the sale of such investments are a source of funds.
3. Provision for Taxation :There are two ways of dealing with provisions for taxation:

As a current liability As an appropriation of profit ## As a current liability. Provision for taxation may be treated as a current liability as it, generally, represents an immediate obligation of the company pay tax to the government. When it is treated as a current liability, provision for taxation will appear in the schedule of changes in working capital like all other current liabilities and no further treatment is required while preparing the funds flow statement. In the case, there is no need to prepare the provision for taxation account and the payment of tax made during the year shall not be shown as an application of funds because in that case both the account involved for the payment of tax shall be current accounts, e.g. the entry of tax paid during the shall be: Provision for taxation A/c dr. (Already taken as current liability) To cash A/c (current assets) It is clear from the above entry that only the current account are involved and there is no movement of funds (working capital).\ ## As an appropriation of profits. When the provision for taxation is treated as an appropriation of profit and not as current liabilities, than it shall not appear in the schedule of changes in working capital. Provision for taxation made during the year than shall be the appropriation of profits made during the year and will have to be added back while finding funds from operations being a non-fund item. If an adjusted profit and loss account is prepared, provision for taxation made during the year shall appear on the debit side for the same reasons. Moreover, the taxes paid during the shall be an application of funds (not been a current liability) and will have to be shown in the funds flow statement and application side.

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A provision for taxation account may have also prepared in case of hidden information, i.e. when the provision for taxation made during the year or the tax paid during the year are not given. However the student may not that it is preferable to assume provision for taxation is the current liability as generally it is an immediate obligation of the company to pay it and it really represents on appropriation of profits.
4. Proposed Dividends:

Proposed dividend though shown on the liability side of a balance sheet is not a liability in real sense until it is formally declared to be paid to the shareholders in the annual general meeting of the company. Till such declaration of the dividends, it simply represents an appropriation of profits and is like a reserve or surplus. But generally, declarations of dividends proposed by the director are accepted on the shareholders meeting. In the case, proposed dividend cannot be said to be an appropriation of profits as thee become payable with in short time after they are proposed. So there are two alternatives to deal with this item:(i) As a current liability:

When proposed dividends is treated as current liability it represents an obligation of the company is payable in a short period. Hence, it is shown in the schedule of changes in working capital as a current liability and it requires no further treatment. (ii) As an appropriation of profits: When proposed dividend is treated as an appropriation of profits it is not a current liability and hence will not be shown in the schedule of changes in working capital. In the case, dividends proposed during the year, being appropriation, are added back (or shown on the debit side of adjusted profit and loss account) while finding funds from operations. Thus, dividends paid during the year represent an application of funds and have to be shown on the application side of funds flow statement. In the absence of any information, proposed dividends for the previous year may be assumed to be paid during the year, being an appropriation, may be added while finding funds from operations.

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In any case, the student may not that the treatment is proposed dividends is much similar to the provision foe taxation.
5. Interim Dividend:

The expression interim dividend denotes dividends paid to the members of the company during a financial year, before the finalization of annual accounts. The dividends paid or declared in between the two annual general meeting, i.e. interim dividend, should be added back (or debited in the adjusted profit and loss account) while calculating funds from operations. However, if the figure of profit is taken prior to the debit of interim dividends this adjustment is required. The interim dividends is also an application of funds has to appear on the application side of funds flow statement
6. Provision against Current Assets:-

Provision against current assets, such as, provision for bad and doubtful debts, provision for loss on stock, etc. may be treated be any following of the methods: (a) the opening and closing balance of the current assets should be deducted from the respective opening and closing balance of the current assets should then shown in the schedule of changes in working capital. It does not require any further treatment in the funds flow statement.
(b) The amount of the opening and closing balance assets may be taken as gross in the schedule of changes in working capital, i.e. without deducting the amount of the provision. But, then, the opening and closing balance of the provision against current assets shall has to be taken as a current liability in the schedule of changes in working capital and it will not need any further treatment in the funds statement. (c) If the excess provision has been created, it may be treated as an appropriation of profit and should be added while calculating funds flow operations. The amount o the excess the provision will not be shown in the schedule of changes in the working capital.

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Depreciation as a source of funds


Depreciation may be regarded as the capital on cost of any assets allocated over the life of the assets in simple language; it means the gradual decrease in the value of the assets due to wear and tear, use and passage of time. In real sense, deprecation is simply a book entry having the effect of reducing the book value of the assets and the profit current year for the same amount, it does not affect the current asset or current liabilities and does not result in the flow of funds or to say to mare precisely it is non-funds item hence, although depreciation is an operating cost there is no actual out flow of cash and the sum of amount of the depreciation charged during the year is added to back to profits while finding funds from operations. But, then, is depreciation a source of funds? There cannot be any definite answer yes or no to this question as there are differences of opinion on this important point but it can be said with certainty that depreciation, directly at least does not amount the to a source of funds however, under taken circumstance depreciation helps the business concern to effect on saving in payment of tax and dividends and amount to withholding a part of the funds generated through normal trading operations. It is this in sense that depreciation can be regarded as an indirect source of funds however, it is not even an indirect source of fund under all circumstances, say, for example, a company is running into losses and there are no profits, then any amount of depreciation charged to profit and loss account will neither affect tax liability nor ant payment of dividends, as there are no profits. In this case, depreciation does not amount to withholding of funds and hence is not a source of funds at all. On the other hand, if a concern earns sufficient profit the amount of depreciation charged to profit and loss account will affect savings in the payment of tax as well as dividend and shall help in the generation of funds. In case a concern earns a huge profit and excessive depreciation than permitted under the income-tax Act is charged to profit and

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loss account, it shall still result in the generation of funds through savings in the payment of dividends. To conclude, it may be said that to the extent depreciation helps in effecting savings in the payment of tax and dividends, it may be regarded as a source of funds.

COMPARISON BETWEEN FUNDS FLOW STATEMENT & CASH FLOW STATEMENT:The term funds has a variety of meanings. In a narrow sense it means cash and the statement of changes in the financial position prepared on cash basis is called a cash flow statement. In the most popular sense, the term funds refers to working capital and a statement of changes in the financial position prepared on this basis is called a funds flow statement. A cash flow statement is much similar to a funds flow statement as both are prepared to summarize the causes of changes in the financial position of a business. However, following are the main differences between a funds and a cash flow statement. Funds flow statement is based on a wider concept of funds i.e., working capital, while cash flow statement is based on the narrow concept of funds, i.e., cash( and cash equivalents) only, which is only one element of working capital, the other being debtors, stock, bills receivables, prepaid expenses etc. Funds flow statement is based on accrual basis of accounting while cash flow statement is based on cash basis of accounting. In cash flow statement while calculating cash flows from operating activities, adjustments for prepaid and outstanding expenses and incomes as well as changes in current assets ( other than cash and cash equivalents) and liabilities are made to convert the data from accrual basis to cash basis: but no such adjustments are required to be made while preparing a funds flow statement. A funds flow statement does not reveal changes in current assets and current liabilities, rather these appear separately in a schedule of changes in working capital. No such schedule of changes in working capital is prepared for a cash flow statement and changes in all assets and liabilities fixed as well as current, are summarizes In the cash flow statement.

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A cash flow statement is prepared by classifies all cash flows and outflows in term of operating and investing and financing activities. The net cash flow provide by each of the three main activities of a form is high lighted and the net is increase and decrease in cash and cash equivalents is determined to reconcile in opening and closing balance of cash and cash equivalents. No such classification is made in a funds flow statement. The net difference between sources and application of funds does not represents cash rather it revels the net increase or decrease on working capital. Funds flow statement explains the reason for the changes in working capital whereas cash flow statement explains the reasons for change in cash and cash equivalents. Funds flow statement is useful in planning intermediate and long term financing while a cash flow statement is more useful for shortterm analysis and cash planning of the business. Difference Between Fund Flow Statement and Cash Flow Statement Basis of Difference Funds Flow Statement Cash Flow Statement Basis of concept It is based on a wider It is based on a narrow concept of funds. i.e., concept of funds. i.e., working Capital cash. Basis of Accounting It is based on accrual It is based on cash basis basis of accounting. of accounting. Schedule of changes in It is prepared to show the No such schedule of working capital changes in current assets changes in working and current liabilities. capital is required. Method of preparing It reveals the sources and It is prepared by applications of funds. classifying all cash The net difference inflows and outflows in between sources and terms of operating, applications of funds investing, and financing represents net increase activities. The net or decrease in working difference represents the capital. net increase or decrease in cash and cash equivalents. Basis of usefulness It is useful in planning It is more useful for intermediate and longshort-term analysis and term financing. cash planning of the business. Basis of improvement Improvement in Improvement in cash funds(WC) position of a position results in
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Cash and cash equivalents

firm does not necessarily lead to improvement in cash position. The opening and closing balances of cash are included in the schedule of changes in working capital.

improvement of funds (working capital) position of the firm. The balances of cash and cash equivalents at the beginning and at the end of the period are shown in the cash flow statement.

Comprehensive funds flow statement : financial resources basis :The statement of funds flow can be expended also be disclose all those transactions which significantly influence the firms financial positions but do not increase or decrease or working capital. This is significant event as it changes the companys debt-equity position. This transaction should be disclose in the statement similarly, the insurance of bonus shares (stock dividend) does not involve working capital, but increase the paid up share capital. The comprehensive statement of changes in financial position listing all changes in more useful as it disclose more information. The truncation not affecting working capital are shown. The conversion of debentures into equity is a sources of financial resources because shareholders equity increase. But at the same time, it is an application of the financial resources towards the retirement of a long term liability, i.e. debentures thus, the working capital is not changed by these transactions, but the overall financial position is affected.

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BALANCE SHEET OF WAHID SANDHAR SUGARS LTD. G.T. ROAD, PHAGWARA AS ON YEAR ENDING 31ST MARCH 2005-04

Liabilities Share Capital Reserves Secured loans Unsecured loans Current liab. Other liab.

31st March 2004 2005 Rs. Rs. 120,000,800 10,953,451 124,121,957 72,700,000 52,209,580 13,361,620 393,347,408

Assets

31st March 2004 2005 Rs. Rs. 156,019,328 2,000,000 211,455,877 3,109,272 5,747,083 15,015,848 393,347,408 196,259,403 2,000,000 258,455,284 1,852,815 2,215,609 18,772,792 479,555,903

120,000,800 Fixed assets 25,351,569 Investments 191,903,657 Inventories 96,814,712 Debtors 33,726,296 Cash & bank bal. 11,794,869 Loans & advances 479,555,903

Schedule of changes in Working Capital 2005-04

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Schedule of changes in Working Capital 2004 Rs. Current Assets Loans & advances Debtors Cash & bank bal. Inventories 15,015,848 3,109,272 5,747,083 211,455,877 235,328,080 Current Liabilities Current Liabilities & provisions Working Capital Net increase in working capital 52,209,580 183,118,500 64,451,704 247,570,204 2005 Rs. 18,772,792 1,852,815 2,215,609 258,455,284 281,296,500 33,726,296 247,570,204 64,451,704 247,570,204 69,239,635 69,239,635 18,483,284 Effect on W.C. Increase Decrease Rs. 3,756,944 1,256,457 3,531,474 46,999,407 Rs.

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Statement of sources and Application of Funds Flow Statement for year ending 2005-04

Statement of sources and Application of Funds Flow Statement Sources Rs. Applications paid of fixed assets Net increase in working capital Rs. 40,240,074 64,451,704 104,691,778

Loans raised 67,781,700 Funds from operations 12,795,366 104,691,778

Adjusted Profit and Loss A/c for 2005-04 Rs. To provision for taxation 2,184,244 By Funds from operations By Balance b/d 10,611,122 (balancing figure) 12,795,366 Rs. 12,795,366 12,795,366

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Interpretation for the year ending 2004-05


The statement shows that fixed assets are increased by Rs.

40,240,074 and long term loans have been increased by Rs. 90,329,861. it means that some of fixed assets may be financial from long term loans.
The current assets have been increased by Rs. 45,968,420. The current liabilities are decreased by Rs. 18,483,284 , as it

shows that firm has paid some of its liabilities.


Provision for tax is increased by Rs. 1,210,814. Reserves & surplus in increased by 110,438, so the company has

expansion plans..
The proportion of current assets in total assets is more as

compare to fixed assets. Current assets have also been financed by long term funds. The mill rely more on long term loans as comparison to shareholders funds for financing its operations. From above we can conclude that overall performance of the concern is satisfactory.

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BALANCE SHEET OF WAHID SANDHAR SUGARS LTD. G.T. ROAD, PHAGWARA AS ON YEAR ENDING 31ST MARCH 2005-06

Liabilities Share Capital Reserves Secured loans Unsecured loans Current liab. Other liab.

31st March 2006 2005 Rs. Rs. 120,000,800 25,426,007 215,267,045 82,999,712 79,848,163 11,908,089 535,449,816

Assets

31st March 2006 2005 Rs. Rs. 198,597,349 2,000,000 305,084,382 2,787,597 4,982,502 21,997,986 535,449,816 196,259,403 2,000,000 258,455,284 1,852,815 2,215,609 18,772,792 479,555,903

120,000,800 Fixed assets 25,351,569 Investments 191,903,657 Inventories 96,814,712 Debtors 33,726,296 Cash & bank bal. 11,794,869 Loans & advances 479,555,903

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Schedule of changes in Working Capital for year ending 2005-06 Schedule of changes in Working Capital 2006 Rs. Current Assets Loans & advances Debtors Cash & bank bal. Inventories 21,997,986 2,787,597 4,982,502 305,084,382 334,852,467 Current Liabilities Current Liabilities & provisions Working Capital Net increase in working capital 79,848,163 255,004,304 7,434,100 255,004,304 2005 Rs. 18,772,792 1,852,815 2,215,609 258,455,284 281,296,500 33,726,296 247,570,204 7,434,100 255,004,304 53,555,967 53,555,967 46,121,867 Effect on W.C. Increase Decrease Rs. 3,225,194 934,782 2,766,893 46,629,098 Rs.

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Statement of sources and Application of Funds Flow Statement for year ending 2005-06

Statement of sources and Application of Funds Flow Statement Sources Rs. Applications paid loans paid of fixed assets Net increase in working capital Rs. 13,815,000 2,337,946 7,434,100 23,587,046

Loans raised 23,363,388 Funds from operations 223,658 23,587,046

Adjusted Profit and Loss A/c for 2005-06 Rs. To provision for taxation 3,084,103 3,084,103 By Funds from operations By Balance c/d Rs. 223,658 2,860,445 3,084,103

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Interpretation for the year ending 2005-06: The statement shows that

fixed assets are increased by Rs. 2,337,946 and long term loans have been increased by Rs. 9,661,608. it means that some of fixed assets may be financial from long term loans as shareholders funds have been increased only by Rs. 110,438.

The current assets have been increased by Rs. 53,555,967. The current liabilities are increased by Rs. 46,121,867 , as it shows

that firms creditors and other liabilities are increased by Rs. 27,252,922. but in actual fig. current assets can cover current liabilities but drastic increase in current liabilities may be dangerous for coming years.
Reserves & surplus in increased by 110,438, so the company has

expansion plans..
Provision for tax is increased by Rs. 904,860.

The proportion of current assets in total assets is more as compare to fixed assets . current assets have also been financed by long term funds. The mill rely more on long term loans as comparison to shareholders funds for financing its operations.
From above we can conclude that overall performance of the

concern is satisfactory but liquidity position may be danger in future.

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BALANCE SHEET OF WAHID SANDHAR SUGARS LTD. G.T. ROAD, PHAGWARA AS ON YEAR ENDING 31ST MARCH 2007-06

Liabilities Share Capital Reserves Secured loans Unsecured loans Current liab. Other liab.

31st March 2007 2006 Rs. Rs. 132,500,800 102,052,403 229,723,244 49,232,382 105,729,600 12,756,392 631,994,821

Assets

31st March 2007 2006 Rs. Rs. 199,269,559 2,000,000 371,495,820 696,248 12,606,685 45,926,509 631,994,821 198,597,349 2,000,000 305,084,382 2,787,597 4,982,502 21,997,986 479,555,903

120,000,800 Fixed assets 25,426,007 Investments 215,267,045 Inventories 82,999,712 Debtors 79,848,163 Cash & bank bal. 11,908,089 Loans & advances 479,555,903

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Schedule of changes in Working Capital for year ending 2006-07 Schedule of changes in Working Capital 2007 Rs. Current Assets Loans & advances Debtors Cash & bank bal. Inventories 45,926,509 696,248 12,606,685 371,495,820 430,725,262 Current Liabilities Current Liabilities & provisions 105,729,600 2006 Rs. 21,997,986 2,787,597 4,982,502 305,084,382 334,852,467 79,848,163 25,881,437 Effect on W.C. Increase Decrease Rs. 23,928,523 2,091,349 7,624,183 66,411,438 Rs.

Working Capital Net increase in working capital

324,995,662

255,004,304 69,991,358 324,995,662 97,964,144

69,991,358 97,964,144

324,995,662

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Statement of sources and Application of Funds Flow Statement for year ending 2007-06

Statement of sources and Application of Funds Flow Statement Sources Rs. Applications paid loans paid of fixed assets Net increase in working capital Rs. 33,767,330 672,210 69,991,358 104,430,898

Loans raised 14,456,199 Funds from operations 89,974,699 104,430,898

Adjusted Profit and Loss A/c for 2007-06 Rs. To provision for taxation 7,318,495 By Funds from operations By Balance b/d 82,656,204 (balancing figure) 89,974,699 Rs. 89,974,699 89,974,699

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Interpretation for the year ending 2006-07: The statement shows that

fixed assets are increased by Rs. 672,210 and long term loans have been increased by Rs. 70,663,568. it means that some of fixed assets may be financial from long term loans as shareholders funds have been increased only by Rs. 89,126,396.

The current assets have been increased by Rs. 95,872,795. The current liabilities are increased by Rs. 25,881,437 , as it shows

that firms creditors and other liabilities are increased by Rs. 848,303. but in actual fig. current assets can cover current liabilities but drastic increase in current liabilities may be dangerous for coming years.
Reserves & surplus in increased by 76,626,396,so the company has

expansion plans.. The proportion of current assets in total assets is more as compare to fixed assets . current assets have also been financed by long term funds. The mill rely more on long term loans as comparison to shareholders funds for financing its operations.
From above we can conclude that overall performance of the

concern is satisfactory but liquidity position may be danger in future.

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BALANCE SHEET OF WAHID SANDHAR SUGARS LTD. G.T. ROAD, PHAGWARA AS ON YEAR ENDING 31ST MARCH 2008-07

Liabilities

31st March 2008 2007 Rs. Rs.

Assets

31st March 2008 2007 Rs. Rs. 608,717,545 2,000,000 420,732,290 5,215,295 63,400,823 81,224,466 1,181,290,419 199,269,559 2,000,000 371,495,820 696,248 12,606,685 45,926,509 631,994,821

Share Capital 137,500,800 Reserves 123,336,128 Secured loans 739,025,671 Unsecured loans 67,732,382 Current liab. 100,631,226 Other liab. 13,064,392 1,181,290,419

132,500,800 Fixed assets 102,052,403 Investments 229,723,244 Inventories 49,232,382 Debtors 105,729,600 Cash & bank bal. 12,756,392 Loans & advances 631,994,821

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Schedule of changes in Working Capital for year ending 2008-07

Schedule of changes in Working Capital 2008 Rs. Current Assets Loans & advances Debtors Cash & bank bal. Inventories 81,224,466 5,215,295 63,400,823 420,732,290 570,572,874 Current Liabilities Current Liabilities & provisions Working Capital Net increase in working capital 100,631,226 469,941,648 469,941,648 2007 Rs. 45,926,509 696,248 2,215,609 371,495,820 430,725,262 105,729,600 324,995,662 144,945,986 469,941,648 5,098,374 Effect on W.C. Increase Decrease Rs. 49,236,470 4,519,047 50,794,138 35,297,957 Rs.

144,945,986 144,945,986 144,945,986

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Statement of sources and Application of Funds Flow Statement for year ending 2008-07

Statement of sources and Application of Funds Flow Statement Sources Rs. Applications Rs. 409,447,986 144,945,986 554,393,972

Loans raised 527,802,427 paid of fixed assets Funds from operations 26,591545 Net increase in working capital 554,393,972

Adjusted Profit and Loss A/c for 2008-07

Rs. To provision for taxation 2,750,000 By Funds from operations By Balance b/d 23,841,545 (balancing figure) 26,591,545

Rs. 26,591,545 26,591,545

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Interpretation for the year ending 2007-08: The statement shows that

fixed assets are increased by Rs. 409,447,986 and long term loans have been increased by Rs. 70,663,568. it means that some of fixed assets may be financial from long term loans as shareholders funds have been increased only by Rs. 21,283,725.

The current assets have been increased by Rs. 139,847,612. The current liabilities are increased by Rs. 5,098,374, as it shows

that firms creditors and other liabilities are increased , but in actual fig. current assets can cover current liabilities but drastic increase in current liabilities may be dangerous for coming years.
Reserves & surplus in increased by 21,283,725, so the company

has expansion plans.. The proportion of current assets in total assets is more as compare to fixed assets . current assets have also been financed by long term funds. The mill rely more on long term loans as comparison to shareholders funds for financing its operations.
From above we can conclude that overall performance of the

concern is satisfactory but liquidity position may be danger in future.

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BALANCE SHEET OF WAHID SANDHAR SUGARS LTD. G.T. ROAD, PHAGWARA AS ON YEAR ENDING 31ST MARCH 2009-08

Liabilities

31st March 2009 2008 Rs. Rs.

Assets

31st March 2009 2008 Rs. Rs.

Share Capital 137,500,800 Reserves 141,385,785 Secured loans 836,407,147 Unsecured loans 66,232,382 Current liab. 357,539,849 Other liab. 14,837,818 1,553,903,781

137,500,800 Fixed assets 635,866,367 608,717,545 123,336,128 Investments 2,000,000 2,000,000 739,025,671 nventories 474,855,660 420,732,290 67,732,382 Debtors 1,595,892 5,215,295 100,631,226 Cash & bank bal. 184,246,764 63,400,823 13,064,212 Loans & advances 255,639,414 81,224,466 1,181,290,419 1,553,903,781 1,181,290,419

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Schedule of changes in Working Capital for the year ending 2009-08

Schedule of changes in Working Capital 2009 Rs. Current Assets Loans & advances Debtors Cash & bank bal. Inventories 255,639,414 1,595,892 184,246,764 474,855,660 916,037,414 Current Liabilities Current Liabilities & provisions Working Capital Net increase in working capital 357,539,849 558,497,565 558,497,565 2008 Rs. 81,224,466 5,215,295 63,400,823 420,732,290 570,572,874 100,631,226 469,941,648 88,555,917 558,497,565 256,908,623 Effect on W.C. Increase Decrease Rs. 174,414,632 3,619,403 120,845,941 53,823,370 Rs.

88,555,917 349,083,943 349,083,943

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Statement of sources and Application of Funds Flow Statement for year ending 2009-08

Statement of sources and Application of Funds Flow Statement Sources Rs. Applications paid loans paid of fixed assets Net increase in working capital Rs. 1,500,000 27,148,822 88,555,917 117,204,739

Loans raised 97,381,476 Funds from operations 19,823,263 117,204,739

Adjusted Profit and Loss A/c for 2009-08

Rs. To provision for taxation 2,738,941 By Funds from operations By Balance b/d 17,084,322 (balancing figure) 19,823,263

Rs. 19,823,263 19,823,263

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Interpretation for the year ending 2008-09: The statement shows that

fixed assets are increased by Rs. 27,148,822 and long term loans have been increased by Rs. 95,881,473. it means that some of fixed assets may be financial from long term loans as shareholders funds have been increased only by Rs. 18,049,657.

The current assets have been increased by Rs. 345,464,540. The current liabilities are increased by Rs. 256,908,623, as it shows

that firms creditors and other liabilities are increased , but in actual fig. current assets can cover current liabilities but drastic increase in current liabilities may be dangerous for coming years.
Reserves & surplus in increased by 18,049,657, so the company

has expansion plans.. The proportion of current assets in total assets is more as compare to fixed assets . current assets have also been financed by long term funds. The mill rely more on long term loans as comparison to shareholders funds for financing its operations.
From above we can conclude that overall performance of the

concern is satisfactory but liquidity position may be danger in future.

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Findings :1. Increase in cost of raw material due to inflation in economy. 2. Indirect expenses of company increases at rapid rate. 3. Sales of company decreases as compare to last year which is mainly due to unavailability as raw-material. 4. Profits of a company has decreased due to decrease in cost. 5. All departments perform their work in right time. 6. Staff involved in management is efficiently perform their all work in effective manner. 7. There are good relationship between management and workers. 8. Company working capital position is sound as its current assets are sufficient enough to meet its current liabilities. 9. The company turned out to be a profitable venture but to increase more profitability its has to control its COGS. 10. The company has good financial planning as in the modern economic world companies depends more on outsiders funds for financing. 11. Wahid Sandhar Sugar Ltd. Manufacturers sugar as main product and sub products like molasses, baggasse and press mud . 12. The basic raw material for all types of products is cane. Cane is generally produced in state of Utter Pradesh, Punjab, West Bengal and TamilNadu. 13. The company consists of good quality control lab. The awareness of the company about the quality of its products is very good. 14. There is also awareness of the health and safety in the company. 15. The company maintains its accounts properly as per the provisions of the law.

Testing of Hypothesis:
As indicated by the fund flow statement analysis of the company, the profitability of company is good, its liquidity position is sound and overall

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financial position, working capital is satisfactory. So we reject the null Hypothesis and accept the alternative Hypothesis.

Suggestions:Although I do not find myself in capacity of suggesting something extra ordinary to such well establishing and efficiently managed company, after under going training for 45 days period in the company. Yet I have tried to form opinion about the whole company. I hope my suggestions will help the company at least to the same extent to improve its working performance. 1. concern should try to control its operating expenses and cost of goods sold. 2. concerns should expand its export market. 3. concerns should try to concentrate on sales promotion programs. 4. concerns should start more labour welfare schemes for benefit for labour. 5. there should be workers participation in management. 6. concerns should have to develop the manpower and try to utilize their full capacity. 7. concern should try to improve its net profitability condition. 8. there should be proper effective utilization of working capital in the concern. 9. concern should try to reduce its current. Liabilities.
10. there should be internal control procedure regarding purchase of raw material, stores and with regard to sales of goods. 93

11. concern should try to adopt proper safety measure to control pollution. 12. there is no better system of recruitment and selection.

LIMITATIONS OF THE STUDY

Various hindrances occurred while carrying out the research. The limitation of the study includes the weak points that are not covered during the study. A person cant analyze all aspects of the study. Sometimes he forgot some factors or sometimes he is not able to study the impact of these factors because of time constraints or limited recourses. Limitations of the study are: Employees are not available as are busy in their work Atrocious weather condition disturbing the tour plan. There was a problem in taking appointments from the managers. Sources were confounded some time to give proper information. Limited time to complete my project.

All the people from whom I collected the data are not cooperative. The office area was very congested.

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Proper financial data and financial supervision did not provided to me due to shortage of time to the trainer.

Conclusion:

In the end it would be desire able to have a re look at various aspects of this study discussed under different chapters to be able to put together the important points by way of conclusion. This chapter proposes to throw a fresh light on the major observations. In summarized form. Financial statement analysis is a device to determine the financial strengths the and weakness of the company by establishing strategic relationship between the items of the data profitability conditions of the company is good but by controlling COGS fruitful results can be obtained. Company has potential to increase the profitability through efficient management and better control. I am very thankful to owners, officers and employees of the company who give me proper guidance of every thing and make my study work lighter. I wish for the success the company.

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