10.funds flow analysis
TRANSCRIPT
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Unit 10 Funds Flow Analysis
Structure:
10.1 Introduction
Objectives
10.2 Meaning
Self Assessment Questions 1
10.3 Concept
Self Assessment Questions 2
10.4 Technique
Self Assessment Questions 3
10.5 SourcesSelf Assessment Questions 4
10.6 Increase in funds
Self Assessment Questions 5
10.7 Decrease in Assets
Self Assessment Questions 6
10.8 Increase in Liabilities
Self Assessment Questions 7
10.9 Increase in Networth
Self Assessment Questions 8
10.10 Sources
Self Assessment Questions 9
10.11 Increase in Assets
Self Assessment Questions10
10.12 Decrease in Liabilities
Self Assessment Questions 11
10.13 Networth
Self Assessment Questions 12
10.14 Flow of funds
Self Assessment Questions 13
10.15 Transaction not affecting flow
Self Assessment Questions 14
10.16 Steps in preparation of funds flow statements
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Self Assessment Questions 15
10.17 Computation of changes in working capital
Self Assessment Questions 16
10.18 LayoutSelf Assessment Questions 17
10.19 Treatment of certain items
Self Assessment Questions 18
Terminal Questions
Answer to SAQs and TQs
10.1 Introduction
The usefulness of developing certain financial statements as an aid to evaluate past and / or
present performance of a business concern is unquestionable and beyond any dispute. The
Income Statement reports the revenues earned and expenses incurred or outstanding. The
Balance Sheet conveys about the deployment of funds in various assets and equities The Fund
Flow analysis is a modern technique of analyzing the movement of funds of a concern. The
Fund Flow statement shows the movement of funds between two balance sheet dates. As per
Robert N. Anthony the Funds Flow statement describes the sources from which additional funds
were derived and the use to which these funds were put. Such a statement is becoming more
and more popular and is being increasingly published as part of the annual accounts. Para 20 of
International Accounting Standards 7 reads as follows :A statement of changes in financial position should be included as an integral part of financial
statements. The statement of changes in financial position should be presented for each period
for which the income statement is prepared.
The inclusion of such a statement, therefore, is very helpful to improve the understanding of the
operations and activities of an enterprise for the reporting period.
Learning Objectives:
After studying this unit, you should be able to understand the following
1. Understand the meaning and the concepts of funds flow statement.
2. Familiar with techniques of fund flow statement.
3. Preparation of fund flow statement.
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10.2 Meaning of Fund Flow Statement
Statement of Sources and Uses of Funds is a statement which depicts the sources from which
funds are obtained and the uses to which they are being put. It is essentially derived from the
analysis of changes which have occurred in assets and equities between two Balance Sheets
periods. It is not the end product of accounting records. The statement speaks about the
changes in financial items of Balance Sheets prepared at two different dates. Therefore, the
funds flow indicates the inflows and outflows of funds during a particular accounting period
generally a year. The flow exhibits the movements of funds in both the directions inside and
outside the business. As such, the term flow in the context of funds indicates the transfer of
cash or cash equivalent from asset to equity or one equity to another equity or from one asset to
another asset.
Self Assessment Questions 1
1. Fund flow statement is _________ From _________ Changes in _____ and ____.
2. FFS speaks about changes in _______________________ Balance Sheets.
3. Flow exhibits the flows _______________ And ________________ business.
4. Flow refers to transfer of ___________________ And __________________.
10.3 Concept of Fund
The term funds has been defined in a number of ways in financial circles. The three common
usages of the term are cash , working capita and total financial resources..
Cash: Under this concept, the term funds is used only in the sense of cash. Here, only the
changes in cash are considered. Hence, the statement is called Cash Flow statement. This
statement aims at listing the various items which bring about changes in the cash balance
between two balance sheet dates. Cash planning becomes useful for control purposes.
Using this method has certain disadvantages. Since cash is considered as short term assets,
they are subjected to short term fluctuations. A delay in making payment to suppliers and a
provision of one months credit for making a payment of land purchases may show sufficient cash
flow . They may reflect a satisfactory position. But it is not a reality. Therefore, cash equivalent
concept of fund is useful only for short term financial planning and not for long term or
general financial position assessment.
Working Capital: Working capital is Current asserts minus current liabilities. It is an
alternative measure of the changes in the financial position. All those transactions which increase
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or decrease working capital are included in this statement. It excludes all such items which do
not affect the working capital. The working capital concept of funds is in conformity with normal
accounting procedures. Hence, a funds flow statement based on this concept fits well with the
other statements. Moreover, working capital is also a measure of short term liquidity of the firm.Therefore, an analysis of factors bringing about a change in the amount of net working capital is
useful for decision making by shareholders, creditors and management. Due to these reasons,
the working capital approach to funds is more useful than the cash approach.
Total Financial Resources : The term funds is very often used in the sense of useful financial
resources also. Cash approach and working capital approach both are incomplete and
inadequate to the extent that they omit a few major financial and investment transactions. Such
items do not affect net working capital. But, if they are included, they would certainly provide
qualitative information for the decision making.,
For example issuing equity shares and debentures for purchase of buildings or assets shall not
have any effect on the working capital. But it is a significant financial transaction that should be
disclosed. Therefore, this concept seems to be the best approach to disclose the changes in the
financial position as compared to other concepts. It is in conformity with the statutory regulations
and legal requirements.
Self Assessment Questions 2
1. The three common funds are __________________________.
2. Cash planning is used for ____________________________.
3. Cash equivalent is used for ___________________________.
4. Working capital is __________________________________.
5. Non working capital items are ________________________.
6. Working capital means ______________________________.
7. Total financial resources considers _____________________.
8. Total financial resources provide _______________________.
Objectives:
The main objectives of the funds flow statement is normally based on the purpose its going to be
served. These are :
a) to help in understanding the changes that are likely to take place in the assets and liabilities
portfolio. These may not be readily available from the income statement.
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b) To inform the stakeholders as to how a firm can use the funds which are available at its
disposal.
c) To bring out the financial strengths and weaknesses of the business.
Self Assessment Questions 3
1. The objectives of FFS is to identify ______________ in ______. and ____.
2. FFS is to bring out _______________________.
10.4 Techniques Of Preparing A Funds Flow Statement
Like other accounting statements, the structure of Fund Flow Statement is based on the equality
of financial assets and liabilities including capital. The basic understanding is that the funds are
obtained through profit, external borrowings or by issue of shares. If funds are not available
readily from these sources, the other alternative available is to sell the fixed assets andinvestments. . The preparation of Funds Flow Statement is normally based on the following to
bring to scientific method of preparation.
a) Schedule of working capital changes
b) Statement of Sources and Uses of Fund.
Schedule of Working Capital Changes : It is also known as Comparative change in Working
Capital Statement or Working Capital Variation Statement. The net change in working capital
is projected here in the place of individual changes in all the current assets and current liabilities
in the Funds Flow Statement. The statement indicates the amount of working capital at the end of
two years. It shows the increase or decrease in the individual items of current assets and current
liabilities. The effect of the changes in the individual items of the current assets and current
liabilities on working capital is also presented clearly and precisely. The difference in the amount
of working capital at the end of two years will depict either the increase or decease in working
capital. While ascertaining the increase or decrease in individual items of current assets and
current liabilities and its impact on working capital, the following Rules should be taken into
account.
i) increase in Current Assets will increase the Working Capital
ii) Decrease in Current Assets will decrease the Working Capital
iii) Increase of Current Liabilities will decrease the Working Capital
iv) Decrease in Current Liabilities will increase the Working Capital
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It is, therefore, noted that the changes in the items of current assets are positively correlated to
the changes in the working capital. On the other hand, changes in current liabilities are inversely
related to the changes in the working capital.
Self Assessment Questions 4
1. FFS is based on ___________________________.
2. FFS is prepared based on ___________________.
3. Working capital schedule indicates the ______________________.
4. Increase in current assets ___________________ the Working capital.
5. Decrease in CA _____________________________________ the WC.
6. Increase in CL ______________________________________ the WC.
7. Decrease in CL ______________________________________ the WC.
8. Changes in CA ________________________________ changes in WC.
9. Changes in CL ________________________________ changes in WC.
10.5 Sources of Funds
The transactions that increase the working capital are sources of funds. Following may the
sources of funds in a concern.
Funds from operations : Profit earned by the concern during the current year is deemed to be
the source of funds. It is very important source of funds inflow. Net profit is arrived at by
deducting cost of goods sold and other expenses from total sales revenue. However, the profit so
calculated is seldom equal to the funds from operations because there are many items which are
debited or credited in the Profit and Loss Account which do not affect working capital. Therefore,
in calculating the funds from operations, the following adjustments must be kept in mind:
Items to be added back to net profit :
a. Non fund revenue deductions: These are items which are debited to Profit and Loss
account. These do not cause outflow of funds such as depreciation and depletion on non
current assets, amortization of fictitious and intangible assets, preliminary expenses,
redemption of preference shares or debentures, deferred charges, advertising suspense
account written off. If non fund expenditures does not affect the current assets such as
unexpired insurance, do not add back. So also, all allowances for income tax payable in
future years are excluded.
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b. Non trading charges or losses : These items which were debited to Profit and Loss account
reduce the profits but they do not cause any outflow of funds. Hence, profit should be
corrected by adding back all such charges and losses. These include appropriation of
retained earnings such as general reserve, dividend equalization fund, reserve forcontingencies, sinking fund. In addition the dividend on shares must be added back since it
is an appropriation and not trading charge. The losses arising out of sale of land, buildings,
machinery, long term investments which were written off to the profit and loss account must
be added back. Do not add the loss arising out of sale of a current asset such short term
investments. It is a trading loss and hence it will not require any adjustment. The amount set
aside as provision for current taxation will also be added back. This will be considered only
when the provision for taxation is treated as a charge on profits.
Items to be deducted from Net Profit.
The non fund and non trading revenue receipts or incomes must be deducted
Net profit in order to compute funds from operations. The items are:
(a) Dividend received or receivable: Although this transaction increases the current assets
such as cash and debtors, it is not a trading income. Hence, it should be deducted from the
net profits to determine the funds from operations.
(b) Retransfer of excess provisions: Where the provisions made for taxation, depreciation,
doubtful debts exceed the genuine requirements, the excess amount is transferred back to
the Profit and loss account. It does not create any inflow of funds since it is an accounting
entry. Hence, deduct it.
(c) Profit on sale of non current assets: It is a non trading income. Hence it must be
eliminated from the amount of profit.
(d) Appreciation in fixed assets: The amount of appreciation on revaluation of fixed assets is
normally credited to the profit and loss account. If it is so, deduct it from the profit to compute
the funds from operations.
Self Assessment Questions 5
1. Increase in working capital ____________________.2. Decrease in WC _____________________________.
3. Net profit is ________________________________.
4. Items to be added back to net profit are __________.
5. Some of non fund revenue items _______________.
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6. Non trading losses include ___________________.
10.6 Increse in Funds
In a nutshell, the sources of funds can be observed as follows :
a) increase of fresh shares derived from increase in share capital.
b) Issue of debentures derived from increase in debentures.
c) Raising of new loan derived from increase in long term loans
d) Sale of fixed assets for cash or for other current assets derived from decrease in fixed assets
and additional information.
e) Non trading income
f) Profit from operations before deducting non cash items of expenses and losses and before
additional non cash, non trading incomes.
g) Decrease in working capital derived from the Schedule of Working capital changes.
Self Assessment Questions 6
1. Increase in share capital is ___________________________ of cash.
2. Increase in debentures _______________________________ of cash.
3. Increase in raising loans ______________________________.
4. sale of fixed assets __________________________________.
5. Non trading income is _______________________________.
6. Profit from operations is _____________________________.7. Decrease in working capital is ________________________.
10.7 Decrease in Assets
Decrease in assets is always a source of funds for the business. Decrease may be in many
ways: such as cash received from debtors, sale of goods for cash, Bills realized, sale of assets,
fixed assets through provision for depreciation or amortization of fictitious assets. Decrease in an
item of assets results in either a parallel decrease in some other liabilities or a parallel increase in
some other item of assets example repayment of bank loan.. It should be remembered at the
very outset that the decrease is ascertained by comparing the cost of fixed assets and not by
comparing the written down value i.e cost less depreciation. If fixed assets have been shown not
at cost but at written down value, then cost may be ascertained by adding total depreciation
written off to date (generally known as accumulated depreciation) to the written down value The
decrease in fixed assets results in sale of fixed assets. Specific information is generally given in
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the problem about this. The decrease in fixed assets not on account of depreciation or writing off
is known as sale of fixed assets. It must be noticed that the total sale proceeds and not the cost
of fixed assets sold are shown as source of fund. If the information in respect of sale of fixed
assets is not clearly given, the following steps should be taken to find out the value of saleproceeds.
Cost of Fixed Assets (Previous Year)
Less: Cost of Fixed Assets of Current year ( )
Cost of Fixed Assets x x x x x x x x
ADD : Profit or DEDUCT loss on sale
Sale Proceeds to be treated as source XXXXXXXXXXXXXX
The amount of profit or loss on sale of fixed assets for the above purpose derived from profit and
loss account or from capital reserve or from any specific reserve. This is based on the fact that
such profit or loss are credited or debited or transferred to these accounts in accordance with the
accounting principles. It must be remembered that profit or loss on sale of fixed assets are not
included in profit from operation for the purpose of this Fund Flow Statement.
If such profit or loss has been included in Profit and Loss Account , adjustment has to be made.
If there is profit on sale of assets, the net profit disclosed by Profit and Loss Account is reduced
by the amount of profit earned on the sale of fixed assets. On the other hand, the net profit
shown by Profit and Loss Account is increased by the amount of loss incurred on the sale of fixed
assets.
Example:
The land and buildings account had a balance of Rs.5,00,000on Jan 2007. A piece of land has
been sold . There is no purchase. Rs.30,000 depreciation has been charged in 2007. The profit
on sale has been credited to Capital Reserve Account . The balance stood on January 1, 2007
was Rs.20,000 and Rs.50,000 on December 31. The balance of land and building account as on
December 31 is Rs.4,50,000. Find the sale proceeds.
Solution
Balance of land and building on Jan 1, 2007 5,00,000
LESS : Depreciation charged (30,000)
4,70,000
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LESS: Balance of Land and Building on Dec 31 ( 4,50,000)
Cost of Land sold 20,000
ADD : Profit on sale (derived from capital reserve) 30,000
(closing minus opening balance
Rs.50,000 minus Rs.20,000)
Sale Proceeds 50,000
Self Assessment Questions 7
1. Decrease in assets is _________________________________.
2. Profit or loss on sale of fixed assets ____________________.
10.8 Increase In Liabilities
The increase in liabilities is always a source of funds for the business. It may occur as a result of
many transactions such as equity share capital or / and debentures to the public., purchase of
goods on credit. Outstanding expenses are also considered as source of funds since payments
are postponed and cash saved is parked in the business. A comparison of the amount of the
items of long term liabilities i.e debentures and mortgage and other loans for the current year and
previous year will disclose the increase or decrease in the long term liabilities. Additional
information should also be taken into account for determining the correct amount of increase or
decrease for the purpose of this statement.
Any increase on account of the issue of debentures for consideration other than cash or current
assets for the purchase of fixed assets or redeeming other debentures or preference shares
would not at all be shown in the statement because in such a case there is no flow of fund.
Self Assessment Questions 8
1. Increase in liability is ______________________ .
2. Outstanding expenses is __________________ .
10.9 Increase In Net Worth
There can be only two main channels of increase in net worth or equity :
a) procurement of more funds by issue of additional shares
b) through accumulation of retained earnings or profits in business
As the increased in owned funds is concerned, it happens only when the business has plans for
expansion, diversification, modernization. The increase in paid up equity
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Share capital is not a regular feature. Its occurrence is only sporadic. But profit generated from
operations is a normal feature and is virtually a continuous process from year to year. Profit
earned during an operating period increases the new worth of the business and hence it is
always considered as a source of funds. Sometimes, the premium received on sale of equityshares and credited to share premium account is also a source of funds as it adds to the size of
net worth .
Share capital consists of equity share capital and preference share capital. The change in equity
share capital is always in the form of increase it can never be in the form of decrease. The
increase in equity share capital as per Balance Sheet values must be adjusted in terms of
additional information. If the increase has taken place on account of the issue of fresh shares,
only that portion of increase should be treated as sources which is due to the issue of fresh
shares for cash and other current assets. Increase on account of share issues for consideration
involving the purchase of fixed assets or redemption of preference shares or debentures shall
not partake the character of inflow of funds and hence should not be shown in the statement. If
fresh shares have been issued at premium, the amount of premium must be added to the
increase in share capital for the purpose of showing it as source of fund. If the fresh shares
have been issued at discount, the amount of discount must be deducted from the increase in
share capital because it does not involve inflow of fund.
Example:
The opening and closing balance of Share capital are Rs.6,00,000 and Rs.9,50,000 respectively.
The Preference Share capital included in opening balance is Rs.1,00,000. During the year,
Rs.75,000 worth of Preference shares were redeemed at 8 % premium. Bonus shares at Re.1
for every five equity shares held . In addition, a business was purchased by issue of Rs.90,000
shares at a premium of 10 %. The opening and closing balance in the Premium Account is
Rs.8,00,000 and Rs.14,000 respectively. Calculate the further fresh issue.
Solution:
Share capital at close 9,50,000
DEDUCT : Share capital opening 6,00,000
Less: Redemption of PreferenceShares ( 75,000)
( 5,25,000)
4,25,000
Deduct: Shares issued for non cash items (90,000)
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3,35,000
DEDUCT : Bonus shares ( 1 / 5 x 5,00,000) (1,00,000)
(1/5 of 6,00,000)
2,25,000
ADD: Share premium. (14,000 + 6,000 minus
8,000 minus 9,000) 3,000
Fresh issue of Shares 2,28,000
Self Assessment Questions 9
1. Decrease in net worth is through __________________________.
2. Increase in net worth is needed for ________________________.
3. Profit earned _________________________________ net worth.
4. Premium on shares is __________________________.
5. Change in equity shares is always ________________.
6. Decrease in preference share capital is ____________.
10.10 Sources Of Funds
The use of funds results in cash outflows. The outflows are known as :application of funds. The
uses of funds are mainly concerned with.
a) Redemption of Preference shares in cash derived from decrease in share capital.b) Redemption of debentures in cash derived from decrease in debentures
c) Repayment of loan derived from decrease in long term loans
d) Purchase of fixed assets for consideration other than shares, debentures or long term debt
derived from increase in fixed assets and additional information.
e) Loss from operations
f) Payment of dividend in cash
Self Assessment Questions 10
1. Use of funds result in ________________________.
2. Redemption of Preference shares is _____________.
3. Redemption of debentures is __________________.
4. Redemption of long term loan is _______________.
5. Purchase of fixed asset is _____________________.
6. Loss from operations is ______________________.
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7. Payment of dividend is ______________________.
10. 11 Increase In Assets
The increase in fixed assets is known in the accounting language as Purchase of fixed assets.
In order to find out the increase in fixed assets, cost of fixed assets of previous year as reduced
by the cost of fixed assets sold during the current year is deducted from the cost of fixed assets of
the current year. In other words, the increase in fixed assets is calculated as under :
Cost of Current year fixed assets
DEDUCT Cost of previous fixed assets ..
LESS: Cost of fixed assets sold or
Written off during the
Current year (.) (..)
INCREASE in fixed assets x x x x x x x
Example: The opening and closing written down balances of an asset are Rs.5,00,000 and
Rs.5,50,000. The accumulated depreciation has been Rs.1,50,000 at the beginning and
Rs.1,90,000 at the close. A machine costing Rs.30,000 (accumulated depreciation Rs.18,000)
was sold during the year for Rs.9,500. Calculate the purchase price of the fixed assets.
Solution
Closing cost of asset (closing value + closing accumulated
Depreciation : 5,50,000 + 1,90,000 7,40,000
DEDUCT : Opening cost of Asset (opening
Value + opening accumulated Depreciation
5,00,000 + 1,50,000 6,50,000
Less : Cost of asset sold (30,000)
(6,20,000)
1,20,000
Sometimes, it may happen that the cost figures cannot be ascertained on the basis of information
available. Increase in fixed assets, in this case, has to be found out with reference to the written
down value along with annual depreciation. If no purchase of fixed assets were made during
the current year, then the value of fixed assets shown in the Balance Sheet of the current year
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should be equal to the values of the previous year minus annual depreciation for current year.
The excess of current years value over previous years value minus annual depreciation will be
treated as increase. This will represent the purchase of fixed assets.
Current year written down value of Asset ..
DEDUCT Previous year WDV
of Asset
Less: Current year Depreciation () ( ..)
_______________
Increase in Fixed Asset being Purchases x x x x x x
Example: The written down value of a Machinery at the beginning and at close were Rs.2,00,000
and 1,75,000. An old machine whose written down value was Rs.12,000 was sold for Rs.6,500.
Rs.32,000 depreciation was charged during the current year. Calculate the purchase price.
Solution:
Current year written down value of Machinery 1,75,000
DEDUCT : Previous year written down
Value of Machinery 2,00,000
Less : Current year depreciation ( 32,000)
1,68,000
Less: written down value of machine Sold ( 12,000)
(1,56,000)
Purchase price 19,000
Self Assessment Questions 11
1. Increase in fixed asset is known as _____________________.
2. Purchase is _______________________________________.
3. The excess of current year minus (previous year + Depreciation) is treated as
________________.
10.12 Decrease In LiabilitiesIt implies application which is the flow of funds out of business. Decrease in liability may be done
due increase in one or more liability items or due to decrease in one or more asset items. It may
also be partly due to increase in liability and partly due to decrease in assets. . Any amount of
premium on the redemption of debentures should be adjusted as deduction . Any decrease on
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account of redemption of debentures through the issue of another debentures or preference
shares should also not be shown in the statement.
Example:
On January 1, 2007, the balance of 8 % Debentures Account stood at Rs.5,00,000. Rs.60,000
debentures were repaid at 5 percent premium. Rs.75,000 debentures were purchased at Rs.95
from the market and cancelled. The closing balance of debentures was Rs. 2,00,000. Calculate
the outflow of funds.
Solution:
Opening balance of Debenture Account 5,00,000
LESS: Closing balance of Debenture Account ( 2,00,000)
Decrease 3,00,000
LESS : Discount on cancellation (Rs.75,000 / Face
Value of Rs.100 each or 750 debentures x
Rs.5 each (Rs.100 minus Rs.95) ( 1,250)
2,98,750
ADD: Premium (Rs.60,000 x 5 / 100) 3,000
Outflow of funds 3,01,750
Self Assessment Questions 12
1. Decrease in fixed liabilities ________________________ funds.
2. Premium on redemption of debentures is _____________ .
10.13 Net Worth
It may be used due to (a) loss from operations (b) payment of cash dividend out of accumulated
reserves and (c) return of a part of paid up share capital to shareholders implying reduction of
share capital a rare occurrence. If there is decrease in preference share capital and this
decrease is on account of redemption of these shares in cash or other current assets, such
decrease should be shown as use of fund. But the decrease on account of redemption by the
issue of another preference shares or equity shares or debentures, shall never be shown in the
statement because it will not involve outflow of fund. If the preference shares have been
redeemed at a premium, necessary adjustments should be made
Self Assessment Questions 13
1. New worth is due to _______________________.
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2. Net worth is also due to ___________________.
3. Net worth can be ________________________.
10.14 Flow of FundsIt refers to change in fund. Increase of funds of any transaction is a source and decrease of
funds in any transaction is application or uses of funds. But the transactions which do not result
in any change in the funds is called Non fund. Flow of fund takes place when a business
transaction brings a change in the working capital. Such change may be increase or decrease.
The increase is a positive change and the decrease being the negative. These directions in
change are known as fund elements or fund factors. They are commonly known as inflows and
outflows. The basic rule is :
Flow of fund if a transaction involves :
a) Current assets and fixed assets that is machine sold for cash
b) Current assets and fixed liabilities that is issue of debentures to the public
c) Current assets and owner equity that is issue of shares for cash
d) Current liabilities and fixed assets that is transfer of assets to discharge a claim
e) Current liabilities and fixed liabilities that is conversion of creditors due by issue of
debentures.
f) Current liabilities and capital that is conversion of creditors into owners equity by issue of
equity shares.
Self Assessment Questions 14
1. Flow refers to __________________________.
2. Increase in funds _______________________.
3. Decrease in funds ______________________.
4. Non change is known as _________________.
5. Flow takes place due to __________________ working capital.
6. The increase in fund is a __________________ change.
7. The decrease in fund is a __________________ change.
10.15 Transactions that do not affect the flow of Funds
a) Current assets and current liabilities creditors paid
b) Fixed assets and fixed liabilities purchase of assets for debentures
c) Fixed assets and capital purchase of assets by issue of equity shares.
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Self Assessment Questions 15
1. Transactions not affecting flow are _______________________.
10.16 Steps In Preparation Of Funds Flow Statement
There are three steps involved in the preparation of a Fund Flow Statement (FFS). They are as
follows:
a) Preparation of Statement of changes in working capital or Schedule of changes in working
capital.
b) Preparation of Adjusted Profit and Loss Account (APL)
c) Statement of changes in Financial position as per AS 7
Self Assessment Questions 16
1. First step in preparation of FFS is __________________.2. Second step in the preparation of FFS is _____________.
3. Third step in the preparation of FFS is _______________.
10. 17 Computation of Changes in Working Capital and Funds from Operations
It is a customary practice that only the net changes in working capital should be shown in the
Fund Flow Statement instead of individual changes. Here, the current assets and current
liabilities are considered. For this purpose, a separate statement or schedule is being prepared.
Individual items are entered here. The opening and closing balances are entered one after the
other. The corresponding increase or decrease are entered based on the following rules :
a) Increase in a current asset item increases working capital.
b) Decrease in a current asset item decreases working capital.
c) Increase in a current liability item decreases working capital.
d) Decrease in a current liability item increases working capital .
Insert the total of current asset and current liabilities of both opening and closing periods. Say,
the total of current assets as A and that of total of current liabilities as B. Deduct A minus B. The
answer is known as net Working capital. If the working capital at the end of the current year is
more than the working capital at the end of previous year, the excess is called as increase in
working capital. Otherwise, if previous years working capital is more than the current years
working capital, the difference is called as Decrease in working capital. Increase in working
capital is shown as application of funds and decrease in working capital as source of funds in the
Funds Flow Statement.
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The funds from operation can be found with the help of preparing an Adjusted Profit and Loss
Account.
Self Assessment Questions 17
1. Individual items are projected in ___________________.
2. Working capital equation is _______________________.
3. A is total _____________________________________.
4. B is total ____________________________________.
5. Working capital is _____________________________.
6. Net increase or decrease is ______________________.
10.18 Layout
The layout for schedule of changes in Working Capital is as follows
Balances as on Effect on
Details Last Current Increase Decrease
Year Year
CURRENT ASSETS
Cash in hand
Cash at Bank
Sundry Debtors
Bills ReceivableStock or Inventory
Prepaid expenses
Total Current Assets, Say A
CURRENT LIABILITIES
Sundry Creditors
Bills Payable
Bank Overdraft
Outstanding expenses
Total Current Liabilities, Say B
NET WORKING CAPITAL
A minus B
Increase or Decrease in Working
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Capital (Balancing figure)
Example: DR Ltd provides the following information
Jan 1 Dec 31
In Rupees
Sundry Debtors 65,000 1,05,000
Cash in hand 13,000 20,000
Cash at Bank 15,000 20,000
Bills Receivable 16,000 30,000
Inventory 90,000 84,000
Bills Payables 12,000 8,000
Outstanding expenses 6,000 5,000
Sundry Creditors 30,000 58,000
Bank Overdraft 30,000 42,000
Short term Loans 32,000 36,000
Prepare a schedule of changes in working capital
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Solution
Schedule of changes in Working Capital
Balances as on Effect of WC
Details Jan 1 Dec 31 Increase DecreaseCurrent Assets
Cash in hand 13,000 20,000 7,000
Cash at Bank 15,000 20,000 5,000
Sundry Debtors 65,000 1,05,000 40,000
Bills Receivable 16,000 30,000 14,000
Inventory 90,000 84,000 6,000
Total Current Assets, A 1,99,000 2,59,000
Current Liabilities
Sundry Creditors 30,000 58,000 28,000
Bills Payables 12,000 8,000 4,000
Outstanding expenses 6,000 5,000 1,000Bank Overdraft 30,000 42,000 12,000
Short term loans 32,000 36,000 4,000
Total Current Liabilities, B 1,10,000 1,49,000
Working Capital A minus B 89,000 1,10,000
Net Increase in working capital
(balancing figure) 21,000 21,000
TOTAL 1,10,000 1,10,000 71,000 71,000
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Example :
Prepare a statement of changes in working capital from the following information.
Jan 1 Dec 31In Rupees
Share Capital 50,000 50,000
Retained earnings 14,000 40,000
Fixed Assets at cost 80,000 90,000
Provision for Depreciation on Fixed Assets 22,000 27,000
Investments in shares of subsidiaries 15,000 15,000
8% Debentures (redeemable in 5 equal
annual instalment of Rs.20,000 each,
from the current year) 20,000
Prepaid expenses 21,000 14,000
Outstanding expenses 5,000 12,000
Creditors and Bills Payables 30,000 25,000
Debtors and Bills Receivables 18,000 20,000
Cash and Bank balances 5,000 13,000
Provision for Doubtful Debts 4,000 2,000
Solution
Statement of changes in working capital during the year
DetailsBalances as on Effect on WC
Jan 1 Dec 31 Increase Decrease
Current Assets
Cash and bank balances
Debtors and B.R.
Government Securities
Prepaid expenses
Total, say A
Current Liabilities
8% Debentures
Outstanding expenses
Creditors and B.P.
Provision for Doubtful Debts
5,000
18,000
6,000
21,000
50,000
13,000
20,000
12,000
14,000
59,000
8,000
2,000
6,000
5,000
7,000
20,000
7,000
20,000
5,000
30,000
4,000
20,000
12,000
25,000
2,000
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Total, say B
Working Capital : A minus B
Net increase in working capital
59,000 39,000 3,000
29,000
( 9,000 )
29,000
20,000
20,000 20,000 43,000 43,000
Adjusted Profit and Loss Account
The Layout is as follows:
Dr. Cr.
To By
Depreciation written off Profit and Loss account
Depreciation Provision last year from Balance
Preliminary expenses written Sheet
Off Profit on sale of investments
Goodwill written off Profit on sale of Fixed assets
Discount on issue of shares and Dividend and interest received
Debentures written off from trade investments
Fixed assets discarded or
Written off
Loss on sale of fixed assets FUNDS GENERATED FROM
Loss on sale of trade investments TRADING OPERATIONS
Transfer to General Reserve, (balancing figure) transferred
to Funds Flow Statement as
Sinking Funds, Reserve Funds application of funds
Transfer to other Reserves
Premium on redemption of
Preference Shares
Provision for Tax
Provision for Final or
Proposed Dividend
Interim Dividends
Net Profit as per closing current
Year Profit and Loss Account
TOTAL
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NOTE : If debit total of APL is more than the credit total, the difference is Funds generated from
Operation : Record on the credit side of Adjusted Profit and Loss Account.
If credit total of APL is more than the debit total, the difference is funds lost in operations. Record
on the debit side of Adjusted Profit and Loss Account
The balancing figures should be transferred in opposite direction to Funds Flow statement..
Example 3: Calculate funds from operations from the following Profit and Loss Account
To By
Expenses paid and 3,00,000 Gross Profit 4,50,000
Outstanding
Depreciation 70,000 Gain on sale of land 60,000
Loss on sale of machine 4,000
Discount 200
Goodwill 20,000
Net Profit 1,15,800
5,10,000 5,10,000
Solution:
ADJUSTED PROFIT AND LOSS ACCOUNT
To Rs. By Rs.
Depreciation 70,000 Gain on sale of land 60,000
Goodwill written off 20,000 Funds from operations 1,50,000Discount written off 200 (balancing figure)
Loss on sale of machines 4,000
Net Profit 1,15,800
2,10,000 2,10,000
Example 4: Following are the extracts from the Balance sheets of DR Lt.
31 3 2007 31 3 2008
Rs. Rs.Profit and Loss account 11,100 14,800
General Reserve 7,400 9,250
Goodwill 3,700 1,850
Provision for depreciation on asset 3,700 4,400
Preliminary expenses 2,200 1,500
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During the year, the company sold land whose book value was Rs.50,000 for Rs.54,000 and paid
an interim dividend of Rs.2,000
Calculate funds from operations.
Solution
ADJUSTED PROFIT AND LOSS ACCOUNT
To Rs By Rs.
General Reserve Balance brought down 11,100
(9,250 minus 7,400) 1,850 being opening balance
Goodwill written off Profit on sale of land 4,000
(3,700 minus 1.850) 1,850
Preliminary expenses
Written off 700 Funds generated from
Depreciation written operations (balancing
Off 700 figure) 6,800
Interim dividend paid 2,000
Closing balance of Profit
And Loss account 14,800
21,900 21,900
NOTES:
1. There is an increase in the balance in General Reserve. It implies that some amount has
been transferred to the account from the Profit and Loss account. This is an appropriation of
profit which does not result in any outflow of funds.
2. The balance in Goodwill Account and preliminary expenses account has come down which
indicates tht the difference has been written. This also does not result in an outflow of funds.
3. The increase in provision for depreciation is on account of current years depreciation which
does not result in any outflow of funds.
4. Profit on sale of land and interim dividend being non operating items are to be separately
shown as source and application of funds in the Funds Flow Statement.
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Example 5: The following information is provided :
Opening balance of Plant Rs.1,32,500. Closing balance of Plant Rs.1,97,500. Provision for
Depreciation in Plant at the beginning 45,000 and at close Rs.61,000. During the year
Rs.65,000 worth of Plant was purchased in exchange for fully paid debentures and old Plantcosting Rs.40,000 was sold for Rs.34,000. Depreciation provided Rs.18,000. Calculate the flow
of funds.
Solution:
Plant Account
To By
Opening Balance 1,32,500 Bank : Sale of Plant 34,000
Debenture Account 65,000 Provision for Depreciation
(Plant purchased) Account : Depreciation on
sold 18,000
Adjusted P&L Account
Profit on sale 12,000* Closing balance 1,97,500
Bank Account : Plant
Purchased (balancing
Figure) 40,000
2,49,500 2,49,500
Calculation of Profit on sale : 34,000 minus (40,000 18,000) = 12,000
Provision for Depreciation on Plant Account
To By
Plant Account
:Depreciation Opening Balance 45,000
On plant sold 18,000 APL : Current year
Closing Balance 61,000 Depreciation (bal.figure 34,000
79,000 79,000
Note: For all Asset Account, record the opening balance on the debit side and closing balance on
the credit side of the concerned Asset Account. For all liabilities , record the opening balance on
the credit side and the closing balance on the debit side.
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10.19 TREATMENT OF CERTAIN ITEMS
There are certain items whose treatment is not uniform. Different authors differ differently. But,
in this study material, an uniformity is maintained. The likely arguments have been provided for
treating items on a particular principle. The items are :
Provision for Bad Debts
Sometimes, it is shown as reserve for bad / doubtful debts. Actually, this item is shown as
deduction from total book debts to the asset side of the Balance Sheet. Therefore, this item
should be deducted from the amount of debtors shown in the schedule of working capital
changes. Since such treatment may complicate the calculation work, it is suggested that it should
be shown along with current liabilities, although, it does not belong to that category.
Provision for Tax:
DO not treat this item as a current liability. The Provision has to be made to meet the tax liability
of current year. If there is a Provision for last year, it has to be paid this year. Hence, the last
year Provision actually becomes the current year cash outflow. Hence record it in the Funds flow
statement.
Proposed Dividend
Normally, the proposed dividends are given as Balance Sheet item on the liability side. The
Directors propose the final dividend which needs to be approved by the General Meeting. Hence,
it is fair to assume that the proposed dividend is not a current liability. Do not show in the
schedule of working capital changes. The last year proposed dividend should be paid during the
current year, hence a cash outflow
Investments
It poses problems in its treatment. The Rule is :
a) if the investments are in the form of Government or other marketable securities, treat it as
current assets.
b) If it is mentioned as trade investments, that is investments in shares and debentures of
another companies, treat it as fixed assets.
c) Ifnothing is mentioned specifically, the treatment is :
: if investments have been sold simultaneously, treat it as current assets
: in other cases, treat it as Fixed Assets.
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Depreciation
Normally, the value of deprecation will be provided in the problem as an adjustment items.
Depreciation is a non cash item. It is, therefore, charged to Profit and Loss and recorded in the
concerned Fixed Assets Account. If the depreciation is given as a percentage, calculate thevalue on the opening balance of the concerned account.. If the value of depreciation is not
given, it has to be found out as follows :
Opening balance of Fixed Assets ..
ADD: Purchases .
LESS : Fixed assets sold (.)
LESS : Closing balance of fixed assets (.)
Depreciation charges x x x
If a concern intends to show its fixed assets at its cost price, the periodic annual depreciation is
shown under liabilities side as Provision for Depreciation commonly known as Accumulated
Depreciation Fund Account. If there were to be an Accumulated Depreciation Fund Account in
already in operation, the current year depreciation is charged against this Provision for
accumulated Depreciation Account and not recorded directly into Adjusted Profit and Loss
Account . In other words, the current year depreciation is routed through the Provision Account.
Increase / Decrease in Fixed Assets
The increase or decrease by means of cash is recorded in the FFS. Increase or decrease due to
purchase consideration through shares and debentures are not recorded.
Increase / Decrease in long term liabilities
Compare debentures and mortgages as per the Balance Sheet figures. Only consider if cash is
the main striker to cause the increase or decrease. If the changes were to be due to
consideration other than cash or current assets, do not record it in the FFS..
Hidden Items
Prepare the necessary ledger accounts concerned in the fixed assets, fixed liabilities and share
capital and carry out all the necessary adjustments. The balancing figure, if any, would be the
cash transactions. For all non, cash transactions, concentrate on the Adjusted Profit and Loss
Account.
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Self Assessment Questions 18
1. Provision is shown as _______________________
2. Provision for doubtful debts is _______________ from gross debtors
3. Provision is shown in _______________________4. Provision for tax may be _____________________
5. If Provision for Tax is maintained , treat it in _________________
6. Proposed dividend is shown on ________________ of Balance sheet
7. Proposed dividends are to be approved by _____________________
8. Proposed divided. Is not considered as ________________________
9. Last year proposed dividend is cash __________________________
10. Government investments are _______________________________
11. Investments in shares and debentures are ______________________
12. Depreciation is _____________________
13. Depreciation is a ___________________
14. If Depreciation is given as a percentage, calculate on _____________
15. If Provision for depreciation account is maintained, charge the current depreciation to
_____________ and not to _______________________
16. Depreciation is charged only on _______________________________
Problem 6: The Balance Sheets are given below :
Year (Rs.in lakhs)
2006 2007
Fixed Assets 50 60
Investments 10 20
Current Assets 140 150
Share Capital 100 160
Profit and Loss Account 30 30
Debentures 10 -
Current Liabilities 60 40
Depreciation charges was Rs.6 lakhs. Prepare Fund Flow statement.
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Solution:
Schedule of changes in working capital
2006 2007
Current Assets 140 150
LESS: Current liabilities ( 60 ) (40)
Working Capital : CA minus CL 80 110
Net Increase in working capital transferred to 30
FFS (application)
110 110
Adjusted Profit and Loss Account
To By
Depreciation 6 Opening Balance 30
Closing Balance 30 Funds from Operations 6
36 36
Funds Flow Statement
Sources Applications
Issue of Equity shares 60 Purchase of Fixed Assets 16
Funds from operation 6 Purchase of investment 10
Redemption of debenture 10
Increase in working capital 30
66 66
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Problem 7 : From the following extracts, calculate funds from operations
Year
2006 2007
Profit and Loss account 50,000 80,000
Provision for taxation on 10,000 15,000
Proposed dividends 5,000 10,000
Additional information: Tax paid Rs.2,500. Dividends paid Rs.1,000.. Calculate funds from
operation taking provision for tax and provision for tax and proposed dividend as (a) non current
liabilities and (b) current liabilities.
Solution:
Provision for tax and proposed dividend are taken as non current liabilities
To By
Income tax account 2,500 Opening balance 10,000
Tax paid Profit and loss account 7,500
Closing balance 15,000 provision made (balance
Figure)
17,500 17,500
Proposed Dividend Account
To By
Dividend account being Opening balance 5000
Dividend paid during the Profit and loss account
Year 1,000 proposed dividend 6,000
Closing balance 10,000
11,000 11,000
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Adjusted Profit and Loss Account
To By
Provision for Tax 7,500 Opening balance 50,000
Proposed Dividend 6,000 Funds from operations
Closing balance 80,000 (balancing figure) 43,500
93,500 93,500
c) If Provision of tax and proposed dividend are taken as a current liability, funds from
operations will be the difference in Profit and Loss account at the beginning and the end of
the year.
NOTES
1. In case a) Income tax paid Rs.2,500 and Dividend paid Rs.1,000 are shown as application of
funds in the FFS.
2. In case (b), there is no need to prepare proposed dividend account and provision for tax
account,. However, the opening and closing balances of the two accounts are shown as
current liabilities in the statement of changes in working capital
Problem 8: The book value of trade investments of DR Ltd as on March 1, 2006 and March 31,
2007 was Rs.50,000 and Rs.70,000 respectively. During the year, Rs.5,000 was received as
dividends, of which Rs.2,000 pertained to pre acquisition profits which have been credited to
Investments Account. Investments costing Rs.10,000 have been sold during the year for
Rs.10,000. Find the flow of funds on account of investments.
Solution:
Investments Account
To By
Opening balance 50,000 Dividend Account : Pre
Bank Account : purchase acquisition profit 2,000
Of investments (balance 32,000 Bank : sale of investments 10,000
Closing balance 70,000
82,000 82,000
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Notes:
1) The investments purchased were valued cum dividend. Hence, on receipt of dividends, they
were rightly credited to Investments. Hence there is no need for any further adjustment.
2) The investments sold has been at the book value. There is no profit or loss on account of thetransactions. If the transaction had resulted in profit, it will have to be deducted from net profit
to calculate funds from operations. In case of loss, it would be added to net profit to calculate
funds from operations.
Problem 9: Prepare a fun d flow statement of DR Ltd.
Year
2007 2008
Equity share capital 10,00,000 15,00,000
10 % Preference Share Capital 3,00,000
11 % debentures 8,00,000 6,00,000
Share Premium Account 1,00,000 95,000
Additional information (a) 10 % Preference shares have been redeemed at a premium of 10%,
the premium amount was charged to the share premium account (b) There has been a profit of
Rs.1,000 on the redemption of debentures.
Solution:
Equity Share Capital
To By
Closing Balance 15,00,000 Opening balance 10,00,000
Bank (Fresh issue) 5,00,000
Balancing figure
15,00,000 15,00,000
Preference Share Capital Account
To By
Bank (Redemption) 3,30,000 Opening balance 3,00,000
Premium on redemption 30,000
3,30,000 3,30,000
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Debentures Account
To By
Bank (redemption) 1,99,000 Opening balance 8,00,000
Profit on redemption 1,000Closing balance 6,00,000
8,00,000 8,00,000
Share Premium Account
To By
Preference share 30,000 Opening balance 1,00,000
capital
Closing balance 95,000 Equity share capital * 25,000
1,25,000 1,25,000
STATEMENT SHOWING SOURCES AND APPLICATION OF FUNDS
Equity share capital 5,00,000 Redemption of Preference shares 3,30,000
Share Premium 25,000 Redemption of Debentures 1,99,000
Decrease in working capital 4,000
5,29,000 5,29,000
Problem 10: The following are the summarized Balance Sheets of DR Ltd.
Liabilities 2006 2007
Share Capital 5,00,000 6,00,000
Reserves 1,50,000 1,80,000
Profit and Loss Account 40,000 65,000
Debentures 3,00,000 2,50,000
Creditors for goods 1,70,000 1,60,000
Provision for Income tax 60,000 80,000
12,20,000 12,20,000
Assets
Fixed Assets 10,00,000 11,20,000
Less : Depreciation (3,70,000) (4,60,000)
Stock 2,40,000 3,70,000
Book Debts 2,50,000 2,30,000
Cash 1,00,000 75,000
12,20,000 12,20,000
Prepare a Funds Flow statement
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Solution:
Statement of changes in working capital
Balances as on Effect on W.C
2006 2007 Increase Decrease
Current Assets
Stock 2,40,000 3,70,000 1,30,000 -
Book Debts 2,50,000 2,30,000 20,000
Cash 1,00,000 75,000 25,000 .
Total CA say A 5,90,000 6,75,000
Current Liabilities
Creditors for goods 1,70,000 1,60,000 10,000 -
Provision for income tax 60,000 80,000 20,000
Total CL, say B 2,30,000 2,40,000
Working Capital, A B 3,60,000 4,35,000
Increase in Working capital 75,000 75,000
Total 4,35,000 4,35,000 1,40,000 1,40,000
Adjusted Profit and Loss Account
To By
Reserve 30,000 Opening balance 40,000
Depreciation 90,000 Funds from Operation 1.45,000
Closing balance 65,000 transferred to source
1,85,000 1,85,000
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Statement showing Sources and Application of Funds
Sources Application
Issue of Share capital 1,00,000 Redemption of debentures 50,000
Funds from operation 1,45,000 Purchase of Fixed Assets 1,20,000
Increase in working capital 75,000
2,45,000 2,45,000
Notes:
1) The increase in General Reserve is due to transfer a part of profit of the current year and
hence the difference is transferred to APL since its a non cash item
2) The difference in depreciation is charged to APL, since its a non cash item.
3) Increase in Equity Share capital is assumed to be the fresh issue which is a cash item. It is
recoreded in FFS.
4) The difference is debentures is the redemption. Its a cash item. Hence taken to FFS
5) Purchase of fixed asset is difference between the opening and closing balance of fixed
assets. Its a cash item. Hence taken to FFS .
Problem 11
Prepare a Fund Flow Statement
Balance Sheets
2006 2007 2006 2007
Equity Share capital 50,000 65,000 Cash balances 15,000 9,000
Profit & Loss 14,750 17,000 Debtors 25,000 27,000
Trade Creditors 31,000 29,000 Investment 5,000 -
Mortgage 10,000 15,000 Fixed Assets 70,000 80,000
Short term loans 16,500 15,000 Less: Depreciation (25,250) (7,000)
Accrued expenses 7,500 8,000 Goodwill 5,000 -
1,29,750 1,49,000 1,29,750 1,49,000
Depreciation provided is Rs.4,750. Write off goodwill. Dividend paid Rs.3,500.
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Solution:
Schedule of changes in working capital
Balances as on
2006 2007
Current Assets
Cash 10,000 13,000
Debtors 25,000 27,000
Stock 40,000 35,000
Total current assets, say A 75,000 75,000
Current Liabilities
Trade Creditors 29,000 31,000
Short term loans 15,000 16,500
Accrued expenses 8,000 7,500
Total current liabilities, say B 52,000 55,000
Working capital, A B 20,000 24,000
Net increase in Working capital 4,000
Total 24,000 24,000
Adjusted Profit and Loss Account
To By
Depreciation 1,750 Opening balance 30,000
Goodwill 5,000 Funds generated from
Dividend 3,500 operations 12,500
Closing balance 17,000
27,250 27,250
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Funds Flow statement
Issue of fresh equity 15,000 Purchase of fixed assets 30,000
Sale of investment 5,000 Payments of dividends 3,500
Loan on mortgage 5,000 Increase in working capital 4,000
Funds from operations 12,500
37,500 37,500
Problem 12
The Balance Sheets of DR Ltd
Rupees in 000s
2006 2007 2006 20078
Share capital 50 100 Goodwill 15 25
Debenture 25 Plant 18 96
Profit and Loss 15 25 Stock 40 35
Proposed Dividend 5 6 Debtors 15 32.5
Creditors 20 30 Cash 8 9
Liabilities for expenses 5 3.5 Preliminary exp 4 2.5
100 200 100 200
A business was purchased during the year by the issue of 25,000 shares and 25,000 debentures.
Depreciation Rs.6,000 has been provided in the year. A machine has been sold for Rs.1,50,000,
the written down value being Rs.1,000. The business purchased had the following assets and
liabilities : Machine Rs.20,000, Stock Rs.5,000, Debtors Rs.15,000, Creditors Rs.5,000. Prepare
the Funds Flow Statement.
Solution
In this problem, another business concern was purchased whereby the assets and liabilities come
into business. For this purchase, the payment is through the issue of shares and debentures. If
the payment were to be in excess of assets and liabilities taken over, the excess payment is
known as Goodwill.
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Assets taken over : Machine 20,000
Stock 5,000
Debtors 15,000
40,000
Less Creditors taken over ( 5,000 )
Net assets taken over 35,000
Total payments made : Share capital + Debentures 50,000
Excess payment being treated as Goodwill (50,000 35,000) 15,000
Statement showing changes in working capital:
Balances as on
2006 2007
Current Assets
Stock 40,000 35,000
Debtors 15,000 32,500
Cash 8,000 9,000
Total current assets, say A 63,000 76,500
Current Liabilities
Sundry Creditors 20,000 30,000
Liabilities for expenses 5,000 3,500
Overdraft 5,000 10,500
Total current liabilities, say B 30,000 44,000
Working capital A B 33,000 32,500
Decrease in working capital (source) 500
33,000 33,000
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Adjusted Profit and Loss Account
To By
Goodwill 5,000 Opening balance 15,000
Preliminary expenses 1,500 Profit on sale of Plant 500
Depreciation 6,000 Funds from operations 28,000
Proposed dividend 6,000
Closing balance 25,000
43,500 43,500
Funds Flow Statement
Issue of fresh shares for :
cash for current assets
Stock 5,000
Debtors 15,000
Less: Creditors (5,000) 15,000 Purchase of Plant 65,000
Sale of Plant 1,500 Payment of dividend 5,000
Funds from operations 28,000
Decrease in working
Capital 500
70,000 70,000
Terminal Question
Problem 1: The balance in the Provision for taxation : opening Rs.30,000 and closing
Rs.40,000. Taxes paid during the year was Rs.25,000. Calculate Funds from operation. (b) What
is the provision made during the year?
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Problem 2: Extracts of Balance Sheets are given below :
2006 2007
Profit and Loss appropriation account 30,000 40,000
General Reserve 20,000 25,000
Goodwill 10,000 5,000
Preliminary expenses 6,000 4,000
Provision for Depreciation on Machinery 10,000 12,000
Calculate funds from operation
Problem 3: Calculate funds from operations:
Profit and Loss Account
To By
Expenses 3,00,000 Gross profit 4,50,000
Depreciation 70,000 Gain on sale of land 60,000
Loss on sale of plant 4,000
Discount on Debenture 200
Goodwill 20,000
Net profit 1,15,800
5,10,000 5,10,000
Problem 4: Calculate funds from sale of Plant
Plant (gross) 1,00,000 1,25,000
Additional information:
a) Loss on sale 1,000
b) Depreciation charged 14,000
c) Purchase of Plant 35,000
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Problem: 5. The Balance Sheets are as follows
Capital 25,000 20,000 Cash 4,700 3,000
Profit and Loss 2,300 1,000 Debtors 11,500 12,000Bills Payable 4,500 7,000 Land 6,600 5,000
Stock 9,000 8,000
31,800 28,000 31,800 28,000
Prepare a statement of Sources and uses of funds.
Answer Self Assessment Questions
Self Assessment Questions 1
1. Derived, changes, assets, equities
2. Two
3. Inside and outside
4. Cash and cash equivalents
Self Assessment Questions 2
1. Cash, working capital, total financial resources
2. Control
3. Short term financial planning4. Current assets minus current liabilities
5. Excluded
6. Short term liquidity
7. Both financial and investment transaction
8. Qualitative information
Self Assessment Questions 3
1. Changes, assets and liabilities
2. Financial strengths and weaknesses
Self Assessment Questions 4
1. Financial assets and liabilities including capital
2. Statement of changes in working capital, statement of sources and uses of funds
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3. Net increase or decrease in individual items
4. Increases
5. Decreases
6. Decreases7. Increases
8. Positively co related
9. Inversely related
Self Assessment Questions 5
1. Application
2. Source
3. Gross profit Cost of goods sold + expenses
4. Non fund revenue, non trading changes or losses5. intangible assets and revenue items
6. Appropriation of retained earnings.
Self Assessment Questions 6
1. Inflow
2. Inflow
3. Inflow
4. Inflow
5. Inflow
6. Inflow
7. Inflow
Self Assessment Questions 7
1. Source
2. Excluded from fund flow statement.
Self Assessment Questions 8
1. Source of funds
2. Source of funds
Self Assessment Questions 9
1. Addition of shares, accumulated retained earnings
2. Expansion, diversification and modernization
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3. Increases
4. Source
5. Increases and never decreases
6. Redemption
Self Assessment Questions 10
1. Outflow of cash
2. Outflow of cash
3. Outflow of cash
4. Outflow of cash
5. Outflow of cash
6. Outflow of cash
7. Outflow of cash.
Self Assessment Questions 11
1. Purchase
2. Current year minus previous year
3. Increase in fixed assets
Self Assessment Questions 12
1. Outflow2. Deduction.
Self Assessment Questions 13
1. Loss of operation
2. Payment of cash dividend out of accumulated reserves
3. Part of paid up capital + reserves and surplus.
Self Assessment Questions 14
1. Change of fund
2. Source
3. Application
4. Non fund
5. Change.
6. Positive
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7. Negative.
Self Assessment Questions 15
1. Current assets and Current liabilities.
Self Assessment Questions 16
1. Schedule of changes in working capital
2. Adjusted Profit and Loss account
3. Funds flow statement
Self Assessment Questions 17
1. Two Balance sheet dates2. (b) A minus B
3. (c) Current assets
4. Current liabilities
5. A minus B
6. Balancing figure.
Self Assessment Questions 18
1. Reserve2. Deduction
3. Working capital changes
4. Considered as current liabilities
5. In Provision account
6. Liability
7. General Body Meeting
8. Current liability
9. Outflow
10. Current assets
11. Fixed assets
12. Fall in value
13. Non cash item
14. Opening balance
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15. Provision account and not to Profit and Loss account
16. Fixed assets
Answer for Terminal Questions1: 35,000, (b) Taxes paid is an application of funds.
2. Rs.24,000
3. Rs.1,50,000
4. Fund Rs.45,000 Accumulated Depreciation on plant sold Rs.9,000
5. Funds lost from operations. Rs.1,300, Decrease in WC Rs.4,700)