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funds

flow

statement

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2 financial statement

Profit & loss Account

Balance Sheet

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What does these statements

Discloses

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What does these statements

Don’t Disclose

Changes or movement of finances between two periods

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New Statement is Required to show

changes in Assets Liabilities Owners Equity

between dates of two Periods of B Sheet

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Statement of Changes in Financial Position

SCFP

it is calledit is calledit is calledit is called

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Statement of Changes in Financial Position

Changes inAssets &Liabilities

Financial & Investment Decisions Owners’ Equity

Due to

Use in Fin.Resources

Acquiring AssetsPaying DebtsPaying Dividend

During thePeriodIncreases

in Fin.Resources

Selling AssetsRaising CapitalIncreasing Debt

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Statements of Changes in Financial Position

funds flow statement

cash flow statement

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Listed Indian companies are required to include

Cash flow Statement in their annual accounts

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AS-3 ON Changes in Financial Position

also suggested standards for Funds Flow Statement

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Nature of Changes in the Financial Position

XYZ CO.

Balance Sheet Changes March 31,2005 and March 2006

2005 2006 Changes

(Rs 000)

Assets Cash 54 135 +81 Debtors 6750 8235 +1485 Stock 10125 22680 +12555

Total Current Assets 16929 31050 + 14121

Fixed Assets 2970 6075 + 3105Other Assets 945 1890 + 945

Total Assets 20844 39015 + 18171

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Nature of Changes in the Financial Position

XYZ CO.

Balance Sheet Changes March 31,2005 and March 2006

2005 2006 Changes

(Rs 000)

Liabilities & Capital Bank Borrowings 3510 8664 + 5154 Creditors 2835 6615 + 3780 Prov for taxes 270 972 + 702 Accured Exp 810 2700 + 1800Total C Liabilities 7425 18951 +11526Long Term Debt 1944 1404 _ 540Total Liabilities 9369 20355 +10986Paid Up S Capital 8370 8370 Reserves & Surplus 3105 10290 + 7185Total Funds 20844 39015 +18171

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Changes in the Financial Position

Total Assets Increased by ….Rs 18171

Change in Retained Earning…Rs 7185 Change in Outsiders Liab …Rs 10986

What financial impact does these changes make?

These changes may raise few questions……..

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Changes in the Financial Position

Few Questions

Is the Increase in inventory due to growth of Sales or inefficiency?

Why have the fixed Assets increased ?

Though retained Earnings increased but whether the liquidity position is sound ?

Why long term debt is used or not used?

What is the proportional change in dividend?

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Sources & Uses of FundsAmount %

Rs in ‘000

SourcesIncrease in current liabilities Bank Borrowings 5154 27.5 Creditors 3750 20.2 Provisions for Taxes 702 3.8 Accrued Expenses 1890 10.1 Total 11526 61.6Increase in Share H Equity Reserves (Retained Earnings) 7185 38.4 Total Sources 18711 100.0UsesIncrease in Current Assets Cash 81 0.4 Debtors 1485 7.9 Stock (Inventory) 12555 67.1 Total 14121 75.4Increase in Fixed Assets 3105 16.6Increase in Other Assets 945 5.1Decrease in Long Term Debt 540 2.9 Total Uses 18711 100.0

ONEWAYTo assesspercentageChanges

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Changes in Working Capital(Rs 000)

CurrentAssets

less CurrentLiabilities

= Net W Capital

Year end 2005 16929 _ 7425 = 9504

Year end 2006 31050 _ 18951 = 12099

Change 14121 _ 11526 = 2595 183% 390%

FindChangesInWorkingCapital

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another way is to prepare

•Schedule of change in WC•Funds Flow Statement

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What are funds?

Funds may refers to Cash only

Funds may refers to net working Capital

Funds may Refers to total Resources

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Assess Changes in funds?

Changes in firm’s Cash position

Changes in the firm’s W Capital Position

Changes in the firm’s total financial position

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Statement of Changes in Financial Position

Cash Flow Statement

Fund Flow Statement

Total Resources Statement

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Statement of Changes in Financial Position

Statement reporting changes in working capital

NWC affected- if 1 account Current-non current

NWC increases/decreases when a/c are C/NC

NWC Unaffected if both a/c are current

NWC Unaffected if both a/c are Non-Current

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OrdinaryShares

Cash(CurrentAsset)

ShareCapital

Machinery for Cash

CashAccount

MachAccount

Cash fromDebtors

CashAccount

Debtors

Cash toCreditors

CashAccount

Creditors

PurchasesLand

FixedAssets

IssueShare

Changes in Funds

No changesIn Funds

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Current Account

Non-CurrentAccount

Current Account

No-Impact

Impact

Non-CurrentAccount

Impact

No Impact

- +

Effect Of Changes in Accounts on Working Capital

1 NWC + - when transaction involves CA & NCA2 NWC remains unaffected when both are CA’s3 NWC remains unaffected when both are NCA’s

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1 Funds from Operations ( Income Statement) 2 Statement of Sources & Uses (Application) 3 Schedule of Changes in Working Capital

Construction of SCFP

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Funds Flow StatementFunds Flow Statement

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Inflow of Funds

Operations ProfitSale of AssetsSale of InvestmentsIssue of Share Cap.Long term LoansNon-Operating Incomes

Uses Of Funds

Operations LossPurchase of AssetsInvestmentsSC RedemptionDebentures RedPayment of DividendRepayment of Loans

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Sources Of Funds

Increase in Liabilities

Increase in Capital

Decrease in Assets & Investments

Uses Of Funds

Decrease In Liabilities

Decrease in Capital

Increase in NC Assets & Investments

Other way of describing FFS

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Funds Flow Statement (Sources)

funds from Operations (adjusted net income)

+depreciation & Amortization +loss from sale of Assets/Investments + Tax Provisions - Non operating income - Profit on sale of Asset/Investment

sale of Non-Current Assets

sale of long term investments sale of tangible fixed assets sale of intangible fixed assets

long term financing

Long Term borrowings Issuing equity & preference shares

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Funds Flow Statement (Uses)

adjusted net loss from operations Depreciation & Amortization Gain or Loss from NCA

purchase of non-current assets purchase of LT investments purchase of tangible fixed assets purchase of intangible fixed assets

repayment of long term debt redemption of pref shares payment of cash dividend

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Funds Flow Statement (Horizontal)

Sources Amount Uses Amount

Funds From Operations

Issue Of Share Capital

Issue Of Debentures

LT Borrowings

Sale of Assets

Sale Of Investments

Non Operating Incomes

Any other Source

Dec in WC (Balance)

Loss From Operations

Redemption of SC

Redemption Of Deb.

Repayment of Loans

Purchase of AssetsInvestments

Payment of Dividend

Any other Use

Increase in WC (Bal )

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Funds Flow Statement (vertical)

Sources Of Funds

Funds from OperationsIssue of Share CapitalIssue of DebenturesLong Term BorrowingsSale of Assets/InvestmentsNon Operating IncomesAny Other Source Total Sources (A)Uses Of FundsLoss from OperationsRedemption Of Shares/DebRepayment of LoansPurchase Of Assets/InvestmentsPayment of DividendAny other Use Total Uses (B)Increase/Decrease in WC (A-B)

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Funds from OperationsFunds from Operations

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Funds from Operations

FFO refers to the funds provided by regular activities

Difference between profit & FFO due to few transactions

No flow of funds— depreciation, amortization, prelim Exp

Adjustments are required

All exp don’t involve flow of funds- added back to profit

All non operating Profit/income be deducted- sale of assets

All non operating losses be added back- sale of assets

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Calculation of FFO

Net Profit as per IS XXXX

Depreciation *****Amorti. of Intangible Assets *****Loss on Sale of Assets/Invt ***** XXXX

Non Operating Incomes *****Profit on Sale of Assets/Invst***** xxxx

Funds from Operations xxxx

Add

Less

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Calculation of FFO

1 WHEN THE CURRENT YEAR IS GIVEN IN COMPLETE

Approach I Redraft the income statement, starting from Sales taking only those operating items involving flow of funds balancing figure is FFO

Approach II Start from profit and adjust non cash/non-operating items add/deduct items which affected profit but not funds

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Calculation of FFO

Net Profit as per IS XXXX

Depreciation *****Amorti. of Intangible Assets *****Loss on Sale of Assets/Invt ***** XXXX

Non Operating Incomes *****Profit on Sale of Assets/Invst***** xxxx

Funds from Operations xxxx

Add

Less

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Calculation of FFOWhen income statement is not givenP&L adjustment Account is prepared to find FFO

Particulars Amt (Rs) Particulars Amt (Rs)

By Balance b/d(Op Balance of P/Las in last year B/S) XXXX

By Inc. from invt xxxxBy Prof from sale of Assets/ Invst xxxx

By FFO (Balance) xxxxx(Source)

xxxxx

To depreciationTo Loss on Sale of AstTo Loss on Sale of InvTo Amort of intangible To G Reserve (Transfer)To any other ReserveTo Provision of TaxTo Proposed DividendsTo Interim DividendTo Cl Balance of P/L ( end of the year)

xxxxx

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Example

A co. reported current year profit of Rs 70000 after incorporating the following

Loss on sale of equipment 9000 gain from sale of assets 40000

premium on Red of Deb. 1500 Provision for Tax 22000

Discount on issue of Deb 2000 Dividend Income 4000

Depreciation on Machinery 20000 Transfer to G Reserve 5000

Depletion of Natural Res 10000 Preliminary Exp 1000

Interim Dividend 25000 Profit on Revaluation 2500

Loss on Sale of Investment 1000

Find out FFO?

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Calculation of Funds from Operations

Particulars Amt(RS) Amt(Rs)

Current Year Profit 70000

Add Loss on Sale of Equip 9000 Disc on Issue of Deb 2000 Depreciation 20000 Dep of Natural Resources 10000 Goodwill Written off 30000 Provision of Tax 22000 Transfer to G Reserve 5000 Preliminary Expenses 1000 Prem on Red of Deb 1500 Interim Dividend 25000 Loss on sale of Invst 1000 126500 196500Less Profit on Revaluation 2500 Gain from sale of Assets 40000 Dividend Income 4000 46500 Funds from Operations 1,50,000

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Example

From extracts of 2 years Balance sheet. Calculate FFO

As on 31st December

2005 2006

Profit and Loss Account 30000 40000General Reserve 20000 25000Goodwill 10000 5000Preliminary Expenses 6000 4000Prov for Depreciation 10000 12000

Find FFO?

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Profit and Loss account as on 31st dec 2006 40000

Add Transferred to Gn Reserve 5000 Goodwill written Off 5000 Preliminary Exp Written off 2000 Provision for Depreciation 2000

54000 Balance as on 31st December2005 30000

Funds from Operations 24000

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Adjusted Profit and Loss Account

Particulars Amt(Rs) Particulars Amt(Rs)

To transfer to G Reserve 5000To Goodwill written off 5000To Preliminary Exp WO 2000To Prov For Deprec 2000To Balance c/d 40000

54000

By Balance b/d 30000(Op Balance)By FFO 24000

54000

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Special Considerations for Calculating FFO

1 Significant transactions but involving NC Accounts

Issue of shares/deb against purchase of Assets Issues of shares by redeeming/converting debentures Issue of Bonus shares using capital reserve Discharging liability by transferring an assets

These exchange transactions be shown in FFS

2 Provision for Tax As a current Liability- SWC

As a non-current Liability- not shown in SWC Op Balance- provided last year is shown application Cl Balance -considered non-operating for current year added back to Profit

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Special Considerations for Calculating FFO

3 Interim Dividend and Proposed Dividend

though current liability but not treated as CL in FFS

Both are considered application of funds Both are adjusted in FFO added back - if provided after appropriation

4 Hidden information about Fixed Assets

Assets purchased (uses of funds) Assets Sold ( Sources) Depreciation (FFO) Profit/loss on sale (FFO)

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Schedule of Changes in Working CapitalSchedule of Changes in Working Capital

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Schedule of Changes in Working Capital

Op Bal Cl Bal +In WC _ In WC

1 Current Assets

Cash ---- ---- Debtors Stock Mkt Securities Any Other

2 Current Liabilities Creditors Bills Payable Accrued Expenses Bank Overdraft Any Other Total Total Total Total

Net Increase or decrease in WC XX

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Schedule of Changes in Working Capital

Few Observations

+ in CA during the year results in increase in WC

- in CA during the year results in decrease in WC

+ in CL during the year results in decrease in WC

- In CL during the year results in increase in WC

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Forms of Funds Flow Statement

Statement of Changes in Working Capital for the year ended March 31,200x

a) Sources and use of working capital

Sources

Funds from operations 1,20,000 Sale of Machine 30,000 Issuance of debenture 1,00,000 Issuance of equity shares 1,00,000 Funds Provided 3,50,000Uses Purchase of Long term investments 80,000 Payment of long term loans 90,000 Payment of Cash Dividend 60,000 Increase in Working Capital 1,20,000 Funds Applied 3,50,000

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Forms of Funds Flow Statement

Statement of Changes in Working Capital for the year ended March 31,200x

a) Sources and use of working capital

Sources

Funds from operations 1,20,000 Sale of Machine 30,000 Issuance of debenture 1,00,000 Issuance of equity shares 1,00,000 Funds Provided 3,50,000Uses Purchase of LT investments 80,000 Payment of LT loans 90,000 Payment of Dividend 60,000 Increase in Working Capital 1,20,000 Funds Applied 3,50,000

AnotherWay

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b) Schedule of changes in working Capital31 march2005Rs

31 march2006Rs

+Rs

-Rs

Current Assets Cash 80000 125000 45000 Debtors 50000 45000 5000 Inventory 115000 165000 50000

Total 245000 335000 95000 5000Current Liabilities Bills Payable 20000 8000 12000 Creditors 45000 47000 2000 Other C Liab 25000 5000 20000

Total 90000 60000 32000 2000

Working Capital 155000 225000 127000 7000Increase in Working Capital 120000 Total 127000 127000

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Question

The Comparative Balance Sheet as on December 31,2005and 2006 and Profit and loss for the same periods for Acmecompany are given. The additional information is also given

1 Plant costing Rs 50000 (depreciation 20000) was sold

2 Debenture of Rs 30000 converted to share capital at par

3 declared cash dividend of Rs 40000 and bonus shares of Rs 20000

4 Issued 5000 additional share at par value of Rs 10 per share, at a premium of Rs 1 per share

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ACME Company Comparative Balance Sheetsfor the year ended 31 December,2005 & 2006

2006 2005 Change

(Rs)

Current Assets

Cash 70000 50000 + 20000Debtors 40000 45000 + 5000 Inventory 125000 90000 + 35000 Total CA 235000 185000 + 50000

Land & Building 150000 100000 + 50000Plant & Machinery 220000 200000 + 20000Less Acc. Dep. (82000) (80000) - 2000Net F Assets 288000 220000 + 68000

Total Assets 523000 405000 + 118000

Fixed Assets

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ACME Company Comparative Balance Sheetsfor the year ended 31 December,2005 & 2006

2006 2005 Change

(Rs)

Current LiabilitiesCreditors 25000 30000 - 5000 Salaries Payable 15000 10000 + 5000Prov. For Tax 50000 60000 - 10000Prov for Dividend 40000 40000 ---- Total CL 130000 140000 - 10000

Institutional Loan 23000 15000 + 8000Debentures 120000 150000 - 30000 Total LTL 143000 165000 - 22000 Total Liabilities 273000 305000 - 32000

Share Capital 175000 75000 + 100000Share Premium 12500 7500 + 5000Reserves & Surplus 62500 17500 + 45000 Net Worth 250000 100000 + 150000Total Funds 523000 405000 + 118000

Long Term Liabilities

Share Holders’ Equity

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ACME Company

Profit & Loss Accountfor the year ended December 31 2006 (Rs)

SALES 500000 Less COGS 210000 290000 Less Operating Expenses Office & Administration 45000 Selling & Dist 25000 Interest 12000 Depreciation 22000 104000

Operation Profit 186000 Add gain on sale of plant 6000 Profit before Tax 192000 Less Income Tax 87000 Net Profit 105000

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Prepare

Funds Flow Statement Schedule of changes in working capital

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Workings

1 Funds from Operations

Net Profit Rs 105,000 Add Depreciation 22,000 127,000

Less gain on sale of plant 6,000

Funds from operations 121,000

2 Sources of Funds

A) Sale of Plant Plant Cost Rs 50,000 Depreciation 20,000 30,000 Gain 6,000 Sale 36,000

B Increase in Loan Op Balance 15,000 Cl Balance 23,000 Difference 8,000

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Workings

C) ISSUE OF SHARES Issue of 5000 Share @10 50000 Share Premium 5000

Application Of Funds

1 Purchase of Land & Building Rs 50,000

2 Purchase of Plant Plant at the end of Last year 2,00,000 Sale of Plant 50,000 1,50,000 Plant at the end of this year 2,20,000 New Purchases 70,000

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Workings

3 Conversion of Debentures

Converted Rs 30000 debentures to equity shares both non current accounts

4 Payment Of Dividend

Paid Cash dividend of Rs 40000 -use of WC

Issued Bonus share of Rs 20000- Non Current

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ACME Company

Statement of Funds Flowfor the year ended December 31 2006 (Rs)

Sources Funds from operation 121000 Sale of Plant 36000 Institutional Loan 8000 Issue of Ordinary Shares 55000

Funds Provided 220000

Uses Purchase of Land & Building 50000 Purchase of Plant & Machinery 70000 Payment of Cash Dividend 40000 Funds Applied 160000

Increase in Working Capital 60000

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ACME Company

Schedule of Change in Working Capital

2006 2005 + -

(Rs)

Current Assets

Cash 70000 50000 + 20000Debtors 40000 45000 - 5000 Inventory 125000 90000 + 35000 Total (A) 235000 185000 + 55000 - 5000

Creditors 25000 30000 + 5000 Salaries Payable 15000 10000 - 5000Prov. For Tax 50000 60000 + 10000Prov for Dividend 40000 40000 ---- Total (B) 130000 140000 + 15000 - 5000W Capital (A-B) 105000 45000 +70000 - 10000

Increase in W Capital (C) 60000

Total 70000 70000

Current Liabilities

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ACME Company

Statement of Funds Flow (Total Financial Resources Basis)

for the year ended December 31 2006 (Rs)

Sources Working Capital from operation 121000 Sale of Plant 36000 Institutional Loan 8000 Issuance of Ordinary Shares 55000 F Resources Not Affecting WC Issue Of Shares to convert Deb 30000 Issue of Shares as bonus shares 20000 Funds Provided 220000 Uses Purchase of Land & Building 50000 Purchase of Plant & Machinery 70000 Payment of Cash Dividend 40000 Fin. Resources not Affecting WC Payment of Debenture 30000 Payment as Bonus Share 20000

Funds Applied 160000 Increase in Working Capital 60000

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QUESTION

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Comparative Balance Sheet of a Car Painting Workshop

Liabilities 2006 2005 Assets 2006 2005

Share Capital 400000 360000 Fixed Assets 520000 480000

General Reserve 60000 110000 less Depreciation 140000 108000

Profit and Loss A/c 53450 20450 380000 372000

Sundry Creditors 175000 183650 Investments 50000 100000

Proposed Dividend 15000 28800 Debtors 167800 118300

Prov. For Tax 32000 - Stock 90500 55600 Bank 47500 49800

Preliminary Exp - 7200

735800 702900 735800 702900

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Additional Information

1 The NP for the year 2005-06 was Rs 58000(after providing Depreciation of Rs 40000,writing Off Rs 7200 and making Provision for tax of Rs 32000

2 Sold old Machinery costing Rs 9000 for Rs 3000 havingAccumulated depreciation of Rs 8000

3 Paid interim dividend of Rs 10000 and directors declared final dividend of Rs 15000

Prepare SCWC and FF Statement

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Workings

1 Profit from Machinery

Sale proceeds of Machinery 3000 Cost of Machinery 9000 Less Accm Depreciation 8000 1000

Profit on Sale 2000

2 Funds from Operations Net Profit Rs 58000 Add Depreciation 40000 Prelim Exp 7200 Prov For Tax 32000 79200 137200 Less Profit On sale of Mach 2000

Funds from Operations 135200

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Workings

3 Fixed Assets Purchased

Balance on 31,3.2006 Rs 520000

Balance on 31.3.2005 480000Less Cost of Machine sold 9000 471000 49000

4 Provision for Tax is excluded from Current Liabilities

5 The Payment of Interim and final dividend are treated as application of funds

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Schedule of Change in Working Capital

As on 31,3 2005 31.3.2006 + in WC -IN WC

Current Assets

Bank 49800 47500 - 2300Debtors 118300 167800 49500 -Stock 55600 90500 34900 -

Current Liabilities

Creditors 183650 175350 8300

Total 92700 2300

Net Increase in Working Capital 90400

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Funds Flow Statement

Sources Amt (Rs) Uses Amt (Rs)

Funds from Oper 135200 Purchase of Assets 49000

Issue of Shares 40000 Payment of Dividend

Sale of Assets 3000 Interim 10000

Final 28800

Increase in WC 90400

178200 178200

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thanks