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ANALYSIS OF

FINANCIAL
STATEMENTS

Unit III

Syllabus
Analysis of Financial
Statements
Financial Ratio Analysis
Cash Flow
(as per Accounting Standard 3)
Funds Flow Statement Analysis.

Analysis of Financial
Statements

Financial Statement
Analysis
American Institute of certified public accounts
says financial statements are prepared for
the purpose of presenting a periodical review
or report on the progress by the management
and dealt with
The status of investment in the business and
The result achieved during the period under
review.
A financial statement is an organized
collection of data.

Financial Statement
Types of Financial Statements

Profit and Loss account or


Income statement
Balance Sheet or Statement of
financial position
A surplus statement or retained
earnings statement

Financial Statement
Schedules to financial statements

Schedule of fixed assets


Schedule of debtors
Schedule of creditors
Schedule of investment
Statement of changes in working
capital

Financial Statement
Profit and Loss account or Income statement
It matches the revenue and costs incurred in the
process of earning revenues and shows the net profit
earned or loss suffered during a particular period.
Balance Sheet
It is the statement which shows the assets and
liabilities of the business. It reflects the financial
condition of a business concern as revealed by the
accounting records. It shows the assets owned by the
concern and the source of funds used in the
acquisition of those assets.

Financial Statement
Surplus or Retained earnings statement
It reflects to excess of profit over losses. Such
retained earnings are taken to balance sheet from
the retained earnings statement. It is a link between
the balance sheet and the income statement.
Supplementary schedules
Lists of schedules are used to supplement the data
and details contained in the balance sheet and profit
and loss account. The schedules re considered to be
part and parcel of the financial statements for the
benefit of analysis and interpretation.

Nature of financial
statements
Financial statements are prepared to
check the nature of investment in a
business and result achieved during the
specific time period. Financial statements
shows :Based on recorded facts
Accounting conventions
Postulates (assumptions/suggestions)
Personal judgment

Financial Statement
Limitations
Information shown in financial statements are not
accurate.
It is based on practical experience and
conventions
Do not disclose correct position of the business
Do not disclose the contribution of human
resource towards the efficiency of the business
It is prepared by way of comparing two different
periods
Record only monetary facts

Analysis and Interpretation


Analysis
and
Interpretation
are
inter-related.
Interpretation requires Analysis, while Analysis is
useless without interpretation.
Analysis means methodical classification of the data
given in the financial statements. Interpretation
means explaining the meaning and significance of the
data so simplified/classified.
Analysis may be described as a critical examination of
financial transactions effected during a definite period
of time and Interpretation is drawing of inference
(suggestion or conclusion) and stating what the
figures in the financial statement really mean.

Analysis and Interpretation


According to Kennedy and Muller, the analysis and
interpretation of financial statements are an
attempt to determine the significance and meaning
of the financial statement data so that forecast may
be made of the prospects for future earnings, ability
to pay interest and debt maturities and
chance/probability of a sound dividend policy.
Interpretation includes many processes like
arrangement, analysis, establishing relationship
between available fact and finally making
conclusions.

Objectives
To interpret the profitability and efficiency of
various business activities with the help of profit
and loss account.
To determine the managerial efficiency of the
firm.
To measure short-term and long-term solvency of
the business.
To ascertain earning capacity in future period.
To compare operational efficiency.
To determine profitability of the concern.
To measure the financial stability of the business.

Financial Statement
Analysis
Financial
Statement
Analysis
is
classified below:On the basis of information used
External Analysis
Internal Analysis
On the basis of modus operandi of
analysis
Horizontal Analysis
Vertical Analysis
On the basis of objectives of analysis
Long-term Analysis
Short-term

Financial Statement
Analysis
On the basis of information used
External Analysis
It is made by those who do not have access to
detailed record and depend on published
statements. Such type of analysis is made by
investors, credit agencies, government agencies
and research scholars.
Internal Analysis
It is done on the basis of unpublished records by
the executives. It is very much useful and
significant to employees and management.

Financial Statement
Analysis
On the basis of modus operandi of analysis
Horizontal Analysis
This is made to review and verify the financial
statements of a number of years. This is very useful for
long-term trend analysis and planning. This analysis is
also called as dynamic or trend analysis.
Vertical Analysis
This is made to review and analyze the financial
statements of one particular year only. It is also called
as static analysis or structural analysis. Quantitative
relationship is established between different items
shown in a particular statement.

Financial Statement
Analysis
On the basis of objectives of analysis
Long-term Analysis
This analysis is used for understanding the longterm financial stability, solvency and liquidity as
well as profitability and earning capacity of a
organization.
Short-term Analysis
This analysis is used to determine the short-term
solvency of the business concern. Stability,
liquidity and earning capacity of the business is
also analyzed.

Techniques of
Analysis and Interpretation.
Comparative statements
Common size statements
Fund flow analysis
Cash flow analysis
Ratio analysis
Net working capital analysis
Trend analysis

Comparative
statement analysis
Comparative statement analysis
It is a technique used to analyze the financial
statement. This statement summarizes and presents
related data for a number of years.
These statements are prepared in a way so as to
provide time prospective to the consideration of
various elements of financial position embodied in such
statements.
These statements normally contains comparative
balance sheet and comparative income statement.
Comparative balance sheet is a statement which shows
changes in total capital and changes in working capital

Comparative Statements - specimen


Particulars

2010

Current Assets
(a)
Fixed Assets
(b)
Total Assets
+ b)

(a

Current Liabilities
(a)
Long Term Liabilities
(b)
Total Liabilities
+ b)

(a

Capital and Reserves


Shareholders Funds
(c)

2011

Increase

Decrease

Common Size Statements


Common size statements indicate the relationship
of various items with some common items. It should
be denoted in percentage of common items.
These statements normally contains common size
balance sheet and common size income statement.
Particul
ars

2010

2011

Funds Flow Statement


Funds flow statement indicated the sources and
application of funds. The term funds refer to
changes in working capital. Funds flow
statement clearly shows internal source and
external source of working capital and the way
funds have been used. Funds flow is derived
from analysis of changes which have taken
place in assets and equities between two
balance sheets.
A statement of sources and application of funds
is a technical device designed to analyze the
changes in financial position of a business
concern between two periods.

Cash Flow Statement


Cash flow statement shows the
changes in cash position. It reflects the
inflows and outflows of cash.
This statement is prepared to know
clearly the various items of inflow and
outflow of cash.
It is an essential tool for short-term
financial analysis and is very helpful in
the evaluation of current liquidity of
the business concern.

Ratio Analysis
Ratio analysis refers to the numerical relationship
between two numbers.
An accounting ratio shows the relationship
between the two inter-related accounting figures
as
gross profit to sales, current assets to
current liabilities, loaned capital to owned capital.
Ratio analysis is the process of computing,
determining and presenting the relationship of
items.
It
also
includes
comparison
and
interpretation of ratios and using them as basis
for the figure projection.

Networking Capital Analysis


Normally working capital refers to the difference
between current assets and current liabilities of the
business concern.
Current Assets are cash, bank, debtors, bills
receivable, stock, prepaid expenses, advances and
short term investments.
Current Liabilities are sundry creditors, bills payable,
bank overdraft, outstanding expenses, provisions,
proposed dividend etc.,
Networking capital statement or schedule changes in
working capital is prepared to disclose net changes in
working capital on two specific periods.

Trend Analysis
Trend analysis is an important tool of horizontal
financial analysis. This method plays a vital role
to making a comparative study of the financial
statements of several periods.
Trend analysis is carried out by calculating trend
ratio (%) and plotting the accounting data on
graph sheet or paper.
Trend analysis is significant for forecasting and
budgeting. Trend analysis discloses the changes
in financial and operating data between specific
periods.

Limitations of
Financial Statement Analysis
Historical
nature
of
financial
statements
Reliability of figures
Based on past records
Different interpretation
Change in accounting methods
Single year analysis is not much useful
Price level changes

Ratio Analysis

Ratio Analysis
Accounting ratios are relationships expressed in
mathematical terms between figures which are
connected with each other in some manner.
Accounting ratios can be expressed as
A pure ratio
A rate
A percentage
Ratio analysis stands for the process of determining
and presenting the relationship of items and group
of items in the financial statements. It is an
important method of financial analysis.

Ratio Analysis
Merits
Useful in financial position analysis
Useful in simplifying accounting figures
Useful in assessing the operational
efficiency
Useful in forecasting purposes
Useful in locating the working of the
business
Useful in comparison of performance

Ratio Analysis
Limitations
Practical knowledge and experience
Inter-relationship
Non-availability of standards or norms
Accuracy of financial information
Consistency in preparation of financial
statement
Time delay
Change in price level

Ratio Analysis
Classification of Ratios
Classification by Statements
Balance Sheet, Profit and Loss A/c and Composite
ratios
Classification by users
Ratios for Management, Creditors and Shareholders
Classification by relative importance
Primary, Secondary, Creditors and Growth ratios
Classification of ratios by purpose
Profitability, Turnover and Solvency ratios

Classification of Ratios by
Statements
From Balance Sheet
Liquid Ratio, Current Ratio, Adequate Liquid Ratio,
Proprietary Ratio, Fixed Assets Ratio, Debt Equity Ratio
and Capita Gearing Ratio.
From Profit & Loss
Gross Profit Ratio, Operating Profit Ratio, Net Profit
Ratio and Expenses Ratio.
Composite Ratios
Return on investment, Return on net worth, Stock
Turnover Ratio, Debtors Turnover Ratio, Creditors
Turnover Ratio, Fixed Assets Turnover Ratio, Earning per
Share Ratio and Payout Ratio.

Classification by Users
Ratios for Management
Operating Ratio, Stock Turnover Ratio, Debtors
Turnover Ratio, Fixed Assets Turnover Ratio, Creditors
Turnover Ratio, Working Capital Turnover Ratio, Net
Profit Ratio, Gross Profit Ratio, Operating Profit Ratio,
Short term Solvency Ratio and Long term Solvency
Ratio.
Ratios for Creditors
Fixed charges cover Ratio, Debt Service cover Ratio,
Liquid Ratio, Current Ratio, Debt Equity Ratio, Capital
Gearing Ratio, Solvency Ratio and Creditors Turnover
Ratio.
Ratio for Shareholders
Return on Shareholders fund, Shareholders fund,
Payout ratio, Dividend yield ratio, Dividend cover ratio

Detailed Formulae
for Calculating Ratios
Profitability Ratios
Return on Investment
Operating Profit x 100
Capital Employed
Return on Shareholders fund
Net Profit after tax and interest x 100
Shareholders fund
Return on Equity Shareholders fund
Net Profit after tax and Pref. dividend x 100
Equity Shareholders fund

Detailed Formulae
for Calculating Ratios
Return on Total Assets
Net Profit after tax and interestx 100
Shareholders fund
Gross Profit Ratio
Gross Profit x 100
Net Sales
Operating Profit Ratio
Operating Profit x 100
Net Sales

Detailed Formulae
for Calculating Ratios
Expenses Ratio
Specific expensesx 100
Net Sales
Net Profit Ratio
Net Profit x 100
Net Sales
Earning per share (EPS)
Net Profit after tax and Pref. dividend x 100
No. of equity shares

Detailed Formulae
for Calculating Ratios
Price Earning Ratio
Market price per equity share
Earning per equity share
Payout Ratio
Equity Dividend x 100
Net Profit after tax and Pref. dividend
Retaining Earnings Ratio
Retained Earnings x 100
Net Profit after tax and Pref. dividend

Detailed Formulae
for Calculating Ratios
Interest Cover Ratio
Profit before interest and tax
Fixed interest charges
Fixed Dividend Cover Ratio
Profit after tax
Pref. Dividend
Dividend Yield Ratio
Dividend per share x 100
Market price per share

Detailed Formulae
for Calculating Ratios

Turnover Ratios
Inventory Turnover Ratio
Cost of goods sold
Average Stock
Debtors Turnover Ratio
Net Credit Sales
Average receivable

Detailed Formulae
for Calculating Ratios
Creditors Turnover Ratio
Net credit purchase
Average accounts payable
Working Capital Turnover Ratio
Cost of Sales
Net Working Capital
(Working Capital = Current Assets Current
Liabilities)

Detailed Formulae
for Calculating Ratios
Fixed Assets Turnover Ratio
Cost of Sales
Net Fixed Assets
Capital Turnover Ratio
Cost of Sales
Capital Employed
Owned Capital Turnover Ratio
Cost of Sales
Shareholders Fund

Detailed Formulae
for Calculating Ratios

Solvency Ratios
Current Ratio
Current Assets
Current Liabilities
Liquid Ratio
Liquid Assets
Current Liabilities

Detailed Formulae
for Calculating Ratios
Absolute Liquid Ratio
Cash + Bank + Marketable securities
Current Liabilities
Fixed Assets Ratio
Fixed Assets
Long term funds

Detailed Formulae
for Calculating Ratios
Debt Equity Ratio
Total long term debt
Shareholders funds
Proprietary Ratio
Shareholders fund
Total tangible assets
Capital Gearing Ratio
Long term loan + Debentures + Pref. Capital
Equity Shareholders funds

Profitability Ratios
Profitability refers to the ability to make more
profit from optimum utilization of resources
by a business concern.
Profitability involves study of sales, cost of
goods sold, analysis of gross margin on
sales, analysis of operating expenses,
operating profit and analysis of profit in
relation to capital employed.
Profits are the goals of every business firm.
They indicate a firms progress.

Profitability Ratios
Profitability Ratios are in two models:Profit Margin Ratio
It shows the difference between profits
and sales.
Rate of Return Ratio
It explains the relationship between
profit and capital.

Profitability Ratios
Gross Profit Ratio
Refers to the relationship between gross profit and net sales.
A higher ratio is preferable for showing higher profitability.
Operating Ratio
Reflects the difference between total operating expenses and
net sales. Operating expenses includes cost of goods sold,
administrative expenses and selling expenses but excludes
finance expenses. Net sales means sales sales returns.
Operating Profit Ratio
Explains the operating efficiency of the firm and is a measure
of the managements efficiency in running the business
operations.
Operating profit ratio = Gross profit operating expenses

Profitability Ratios
Expenses Ratio
Useful to support operating ratio and indicates the
effectiveness of the business. Guides management to
ascertain the savings or wastages in different items of
expenses.
Net Profit Ratio
Also called as net profit to sale ratio. Higher the ratio
better is the operational efficiency of the business.
Earning per share (EPS)
Highlights the overall success of the business from
owners. It is calculated by dividing the net profit after
tax and pref. dividend by number of equity shares.

Profitability Ratios
Price Earnings Ratio
P/E ratio is important to prospective investors to decide
whether to invest in the equity shares of a company at
a specific market price or not. Shows earnings per
share reflected by the market price.
Interest cover or Fixed Charges cover Ratio
Reflects the relationship between profit before interest
and tax and fixed interest charges.
Dividend Yield Ratio
Dividend yield ratio based on market value of shares.
The calculation of this ratio related with dividend per
share and market price per share.

Turnover Ratios
Inventory Turnover or Stock Turnover Ratio
Also known as stock velocity ratio. It is effective to determine
the efficiency of the inventory. Shows relationship between
the cost of goods sold and average inventory.
Cost of goods sold means Sales Gross profit
Debtors Turnover ratio
Also called as Account receivable ratio or Debtors velocity
ratio. This ratio indicates the number of times the receivable
are rotated in a year in terms of sales. It shows the efficiency
of credit collection and credit policy.
Creditors Turnover Ratio
Also called as Account payable or Creditors velocity.
Indicates the number of times the payable rotate in a year.

Turnover Ratios
Working Capital Turnover Ratio
Working capital means the relationship between current assets
and current liabilities. This ratio measures the effective
utilization of working capital and the relationship between cost
of sales and
net working capital.
Fixed Assets Turnover Ratio
Determines the efficiency of utilization of fixed assets and
profitability of business concern. Higher ratio indicates efficiency
in utilization and lower ratio indicates under utilization of fixed
assets.
Capital Turnover Ratio
Managerial efficiency is calculated with the help of capital
turnover ratio. It is the relationship between cost of sales and
amount of capital invested in the business.

Solvency Ratios
Current Ratio
The ratio of current assets to current liabilities. This ratio
indicates the ability of a concern to meet its current
obligations as and when they are due for payments.
Current ratio = 2 : 1
Liquid Ratio
Also known as Quick ratio or acid test ratio. It is calculated
by comparison of quick assets and current liabilities.
Absolute Ratio
Also called cash position ratio or super quick ratio.
It measures liquidity in terms of cash and cash
equivalents.

Solvency Ratios
Fixed Assets Ratio
Express the relationship between fixed assets
and long term funds. The benefit of calculating
this ratio is to ascertain the proportion of long
term funds invested in fixed assets.
Debt Equity Ratio
Determining long term solvency position of a
company. Debt equity ratio is calculated in
relationship between external debt and internal
debt. Also called external internal ratio.

Solvency Ratios
Proprietary Ratio
Expresses
the
relationship
between
the
proprietors funds and the total tangible assets. It
shows the soundness of the company. A high ratio
indicates safety to creditors and a low rate shows
greater risk to the creditors.
Capital Gearing Ratio
It is used to analyze the capital structure of the
firm. Establishes relationship between fixed
interest and dividend bearing funds and equity
shareholders fund.

Inter-firm & Intra-firm


Comparison
Inter-firm comparison refers to comparing two or more
firms in the same firm or industry. The main objective
is to analyze the features and effectiveness of the firm
to highlight the location of strength and weakness.
Inter firm comparison is a diagnostic tool which
explains the effect of certain differences in the
features and practices of firms on their performance.
Intra firm comparison is a voluntary, confidential and
anonymous pooling of key management data for the
purpose of providing to the management of each
participating firm with data on its areas of strength
and weakness in relation to other similar firms.

Cash Flow Analysis

Cash Flow Analysis


Cash flow incudes cash inflows and outflows
(cash receipts and cash payments) during a
period. Liquidity and short term solvency of a firm
are dependent on its cash flows.
A fundamental objective of financial management
is to match the inflows and outflows of cash.
A cash flow statement is a statement which
reflects the changes in the cash position between
two accounting periods. It helps in taking short
term financial decision and also in the preparation
of cash budget for the next period.

Cash Flow Analysis


Cash flow analysis can reveal the causes for
even highly profitable firm experiencing
acute cash shortages.
An elaborate study of the sources of cash
helps to improve inflow and analysis of
different application of cash helps to slow
down or decrease the out flow of cash.
The highest benefit can be in getting a clear
insight into the method of matching the
inflows with the outflows.

Cash Flow Analysis


Definitions
Cash flows are inflows and outflows of cash and cash
equivalents.
Cash equivalents are short term, high liquid
investments that are readily convertible into known
amounts of cash and which are subject to an
insignificant risk of changes in value.
Cash consists of cash on hand and demand deposit
with bank.
Investing activities are the acquisition and disposal of
long term assets and other investment not included
in cash equivalent.

Cash Flow Analysis


Benefits
Historical analysis as guide to forecasting.
Effective cash management
Formulation of financial policies
Preparation of cash budgets
Short term financial decision
Liquidity position
Revaluation

Cash Flow Analysis


Limitations
Discloses inflows and outflows of
cash alone
Scope of cash flow statement is
limited
Can be easily altered or more flexible
in nature
Non-cash items of expenses and
incomes are excluded.

Cash Flow Analysis


Cash and Cash Equivalents
Cash equivalents are held for the purpose of
meeting short term cash commitments
rather than for investment or other purposes.
It must be readily convertible to a known
amount of cash and be subjected to an
insignificant risk of changes in value.
Cash management include the investment of
excess cash in cash equivalents.

Cash Flow Statement


Cash flow statement should express
cash flow during the period classified
by operating, investing and financing
activities.
Classification by activity provides
information that allows users to assess
the impact of those activities on the
financial position of the enterprise and
the amount of its cash and cash
equivalents.

Cash Flow Statement


Operating Activities
The amount of cash flows arising from
operating transactions is a key indicator to
the extent to which the operations of the
enterprise have increased sufficient cash
flow to maintain the operating capacity of
the enterprise, pay dividends, repay loans
and make new investments without
recourse to external source of financing.

Cash Flow Statement


Investing Activities
Represent the extent to which expenditures
have been made for resources intended to
generate future incomes and cash flow.
Financial Activities
Cash flow arising from financing activities is
important
because
it
is
useful
in
determining claims on future cash flow by
providers of funds to the enterprise.

Preparation of Cash Flow Statement


Cash flow statement is prepared on the basis of
source and uses of cash. Also based on the
opening and closing balance sheet, profit and loss
account and other relevant information.
Cash flow statement begins with the cash and
bank balances at the commencement of the
period. If there is bank overdraft and cash
balance, the net cash balance or net bank
overdraft becomes the starting point.
The various sources of cash are added to the
opening balance and the application of cash are
subtracted. The balance represents cash or bank
balances at the end of the accounting period. If a

Sources of Cash
Cash from Operations
Refers to a business generating cash inflow
through its normal business operations which
is usually the most important and routine
source of cash.
Computation of Cash from Operations
When all transactions are cash transactions
When all transactions are not cash
transactions

Sources of Cash
When all transactions are cash
transactions
When all expenses, incomes and
revenues are received or paid in cash,
the net profit ascertained by profit and
loss account represents cash from
operations.
Net loss represents cash out flow on
account of operations.

Sources of Cash
When all transactions are not cash transactions
Basically income statements are prepared on accrual
basis, several non-cash items are duly accounted in
the statements.
In such situations, cash from operations is ascertained
in two stages: Calculation of funds from operations
This is be dealt in the next topic Fund Flow
Analysis
Calculation of cash from operations
Will be discussed in detail in this topic

Calculation of Cash from Operations


The cash from operations is essential
to convert the various items affecting
the profit into
cash basis.
Determining funds from operations by
adding back to the net profit all noncash expenses shown in the profit and
loss account and subtracting the noncash incomes.

Calculation of Cash from Operations


Effect of credit sales and debtors
Cash from operations = Net profit + opening
debtors closing debtors (Or)
Cash from operation = Net profit + decrease in
debtors increase in debtors
Effect of credit purchases and creditors
Cash from operations = Net profit + closing
creditors opening creditors (Or)
Cash from operation = Net profit + increase in
creditors decrease in creditors

Calculation of Cash from Operations


Effect of unsold goods in stock on
cash flow
Cash from operation = Net profit +
Opening stock Closing stock (or)
Cash from operation = Net profit +
decrease in stock (or)
Cash from operation = Net profit increase in stock

Calculation of Cash from Operations


Effect of outstanding expenses &
incomes received in advance
Cash from operation = Net profit + closing
outstanding expenses and income received
in advance - opening outstanding expenses
and income received in advance
(or)
Cash from operation = Net profit + increase
in outstanding expenses and income
received in advance - decrease outstanding
expenses and income received in advance

Calculation of Cash from Operations


Effect of prepaid expenses and
accrued incomes
Cash from operation = Net profit +
opening accrued incomes and prepaid
expenses closing accrued incomes
and prepaid expenses
(or)
Cash from operation = Net profit +
decrease accrued incomes and prepaid
expenses increase accrued incomes
and prepaid expenses

Calculation of Cash from Operations


The changes during the accounting period in
current assets and current liabilities other than
cash and bank balances have to be noted. Then
the amount of such changes should be added to
or subtracted from the funds from operations on
the basis of the following principle :Increase in current liability - Increases cash
Decrease in current liability - decreases cash
Increase in current asset - decreases cash
Decrease in current asset - Increases cash

External sources of cash


Fresh issue of shares
Issue of debentures or bonds
Long term borrowings
Sale of fixed assets and investment
Cash outflow on account of operation
Purchase of fixed assets and long
term investment
Payment of tax and dividend

Statement of cash from operations


Particulars
Net profit
Add : Non-operating expenses
Depreciation on fixed assets
Loss on sale of investment
Goodwill written off
Preliminary expenses
Transfer to reserve
Discount on issue of shares
Provision for depreciation
Less : Non-operating incomes
Profit on sale of fixed assets
Profit on sale of investments

Rs.

Rs.

Adjusted Profit and Loss


Account
Particulars

Rs.

Particulars

Rs.

To depreciation on fixed
assets

By Balance B/d

To loss on sale of
investment

By profit on sale of
investment

To loss on sale of fixed


assets

By profit on sale of fixed


assets

To Goodwill written off

By Cash from
Operations

To preliminary expenses
To Balance C/d
Total

Total

Statement of cash from


operations
Particulars

Rs.

Funds from operations


Add : Increase in current liabilities
Decrease in current assets other than cash and
bank
Less : Increase in current assets other than
cash and bank
Decrease in current liabilities
Cash from Operation
Total

Rs.

Cash Flow Statement


for the year ended .
Particulars
Opening balances:

Cash
Bank

Add : Sources of Cash


Cash from operation
Issue of shares
Issue of debentures
Sale of fixed assets
Sale of investment
Increase in current liabilities
Long term loans taken

Rs.

Rs.

Cash Flow Statement


for the year ended .
Particulars
Less : Application of cash
Redemption of preference shares
Redemption of debentures
Loan repaid
Tax paid
Dividend paid
Decrease in current liabilities
Increase in current assets
Loss on sale of fixed assets
Loss on sale of investment
Closing balances :

Cash
Bank

Rs.

Rs.

Cash Flow Statement


Inflow or Sources
of Cash

Amou
nt

Opening balance of
Cash and Bank

XX

Redemption of Pref. shares

XX

Issue of shares

XX

Repayment of Debenture

XX

Issue of debentures

XX

Repayment of loans

XX

Raising of loans

XX

Purchase of fixed assets

XX

Sale of fixed assets

XX

Dividend paid

XX

Dividends received

XX

Income Tax paid

XX

Share Premium
received

XX

Cash from Operations (Loss


in operation)

XX

Cash from Operations

XX

Closing balance of Cash and


Bank

XX

XX

Outflow or Application of Amou


Cash
nt

XX

Extraordinary Items
Foreign Currency cash flow
Unrealized gains and losses arising from changes in
foreign exchange rates are not cash flows.
Interest and Dividend
Cash flow arising from interest paid and interest and
dividend received in the case of financial firm should
classify as cash flows arising from operating activities.
Non-cash transactions
Financing and investing transactions that do not use
cash or cash equivalents should be excluded from a
cash flow statement. E.g., conversion of debt to equity.

Fund Flow Analysis

Funds Flow Analysis


The International Accounting Standard No.7
explains Funds flow as Statement of changes in
financial position. The word fund refers to cash
and cash equivalents or to working capital.
Concept of working capital is divided into two:Gross working capital concept
It refers to the firms investment in current assets
Net working capital concept
It refers to the excess of current assets over
current liabilities.

Funds Flow Analysis


Non-current liabilities
These liabilities are not required to be payable within a year
and paid out of current assets.
Current liabilities
These liabilities are payable within a year and paid out of
current assets.
Non-current assets
These assets are purchased in the business for use over a
long period of time for earning purpose.
Current assets
These assets are easily converted into cash and reasonably
realized in cash or sold or consumed within a year.

Funds Flow Statement


Funds flow statement is a financial statement
which reveals the methods by which the business
has been financed and how it has used its funds
between the opening and closing balance sheet
dates.
The funds flow statement describes the sources
from which additional funds were derived and
the uses to which these funds were put.
It is also called as Statement of Sources and
Application of funds and Statement of Changes
in Working Capital.

Funds Flow Statement


Objectives
Understand the changes in assets
How loans in the business have been used
Revealing financial strength and weakness
Indication of financial results
Distinguishing internal and external
sources
Giving prominence to the dynamic
concept of business.

Funds Flow Statement


Advantages
Provides detailed analysis and understanding
of changes in the distribution of financial
resources between two balance sheet dates.
Shows how funds were obtained and used
during a period
Computation of cost of capital from sources of
funds Indication of weakness and strength in
the financial position of the firm
Actuals compared with relevant budgets to
access usage
Formulating long term financial plan and
policies

Funds Flow Statement


Significance
The sources, amount and timing of
finance
Utilization of funds on priority basis
Amount of dividends through a
consistent dividend policy
Appropriate
decisions
regarding
purchase of assets

Funds Flow Statement


Limitations
Historical in nature
Shows only past happenings
Simply termed as secondary data
Effect of current assets and liabilities
not shown
Ignores transactions between long
term assets and liabilities

Funds Flow Statement


Preparation of Funds flow
statement
Statement of changes in working
capital
Funds flow statement
Funds from operation
Adjusted profit and loss account

Working Capital Statement


Statement of changes in working capital
It is concerned with the current assets and current
liabilities only, as they are shown in the balance sheet of
the current year and the previous year. Non-current assets
and
non-current liabilities, profit and losses,
additional information available are completely omitted.
Increase in current assets - Increases working capital
Decrease in current assets - Decreases working capital
Increase in current liability - Decreases working capital
Decrease in current liability - Increases working capital

Statement of changes
in working capital - specimen
Changes in Working Capital

Particulars
Current Assets
Cash Balance
Bank Balance
Stock
Sundry Debtors
Trading Investment
Prepaid expenses
Bills Receivable
Total (A)

Year

Year

Increas
e

Decrea
se

Statement of changes
in working capital - specimen
Changes in Working Capital

Particulars

Less: Current Liabilities


Creditors
Bills Payable
Outstanding expenses
Short term loans
Bank Overdraft
Total (B)
Working Capital
(Increase / Decrease) (A
B)

Year

Year

Increas
e

Decreas
e

Funds Flow Statement specimen


Funds flow statement for the year ending

Sources of funds
Issue of shares
Issue of debentures
Sale of fixed assets
Investment sold
Funds from operations
Total Sources (A)

Rs.

Funds Flow Statement specimen


Application of funds
Repayment of long term loans
Redemption of preference shares
Redemption of debentures
Purchase of fixed assets
Tax paid
Dividend paid
Investment purchased
Out flow of funds
Total Application (B)
Increase / Decrease in working capital ( A B )

Rs.

Statement of Funds from


Operations
Adjusted Profit & Loss Account

Rs.

Net Profit for the year


Add: Items which do not decrease funds
from operation
Depreciation on fixed assets
Loss on sale of fixed assets
Loss on sale of investment
Goodwill written off
Discount on debentures written off
Provision for tax
Proposed Dividend
Total

Rs.

Statement of Funds from


Operations
Adjusted Profit & Loss Account

Rs.

Less: Items which do not increase funds


from operations
Profit on sale of fixed assets
Profit on sale of investment
Income from investment
Income tax refund
Funds from Operations (Balancing figure)
Total

Rs.