funds flow statement by dr. suresh vadde

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CHAPTER – IV FUNDS FLOW SATEMENT

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Page 1: Funds flow statement by Dr. Suresh vadde

CHAPTER – IVFUNDS FLOW SATEMENT

Page 2: Funds flow statement by Dr. Suresh vadde

Flow of Fund means the inward and outward movement of a fund of an enterprise.

For the purpose, Fund refers to Working Capital and flow means movement or changes.

Therefore, Flow of Fund means movement of or changes in the Working Capital (i.e., current) items.

MEANING OF FLOW OF FUND

Page 3: Funds flow statement by Dr. Suresh vadde

Flow of Fund is identified by the means of inward or outward movement of Current Assets and Current Liabilities.

When Current Assets increase or Current Liabilities decrease—Inflows of Fund.

Cont’d..,

Working Capital

Current Assets

Current Liabilities

Page 4: Funds flow statement by Dr. Suresh vadde

The Funds flow statement contain all the details of the financial resources which have became available during an accounting period.

This statement discloses the amounts raised from various sources of finance during a period.

It explains that how finance has been used in the business.

It is a very useful tool in analysis of financial statements which analyses the changes taking place between two balance sheet dates.

The Funds flow statement

Page 5: Funds flow statement by Dr. Suresh vadde

Fund Flow Statement acts as an important tool for financial analysis and shows the brief reasons for change in the Working Capital between two Balance Sheet dates.

Fund Flow Statement explains how the financial position has changed from the beginning of an accounting period to the end of that period.

It acts as an important instrument for allocation of resources of a concern.

It can be used in planning a sound dividend policy.

It is useful in forecasting the flow of funds and in projecting the working capital requirements.

What are the uses of the funds flow statement?

Page 6: Funds flow statement by Dr. Suresh vadde

Fund Flow Statement is not a basic Financial Statement,

but is a supplementary statement. It does not

disclose any new fact which is not reflected in the

Income Statement and the Balance Sheet.

It provides a partial financial information to the

management.It cannot present the

continuous changes in the financial position.

It does not indicate the structural change of an

asset or a liability.

It is prepared on the basis of historical data.It exhibits the changes in

the Fund position, but does not indicate the changes in the cash position, which is most important for every

business concern.

LIMITATIONS OF FUND FLOW STATEMENT

Page 7: Funds flow statement by Dr. Suresh vadde

The changes which occurred in the current accounts as a result flow of fund are reflected in a statement known as ‘schedule of changes in working capital’ .

The similar changes in non current accounts are shown in ‘Fund Flow Statement’.

Therefore, following two statements under this techniques .1. Statement or Schedule of Changes in Working Capital.2. Statement of Sources and Uses of Funds or Funds Flow Statement.

Preparation of Fund Flow Statement

Page 8: Funds flow statement by Dr. Suresh vadde

A funds flow statement

depicts change in working

capital. It will, therefore, be better for the students to

prepare first a Schedule of Changes in

Working Capital before

preparing a funds flow statement.The primary purpose

of the statement is to explain the net

change in Working Capital, as arrived in

Funds Flow Statement.

It can be prepared by

comparing the current assets

and the current liabilities of two

periods.

Technique for preparing a funds flow statement

Page 9: Funds flow statement by Dr. Suresh vadde

Item

(A) Current AssetsCash at bank Cash in handStock in tradeDebtorsBills receivableAdvance paymentShort term investmentPrepaid expenseAccrued incomeTotal (A) (B) Current Liabilities (1) Short term loans (2) Bank overdraft (3) Creditors (4) Bills payable (5) Outstanding expenses (6) Unclaim dividend Total (B)Net Working Capital (A-B)Incraese / Decrease in Working

Capital Total

Previous Year Current Year Effect on

Incraese Rs.

Working captialDecrease Rs.

Statement or Schedule of Changes in Working Capital.

Page 10: Funds flow statement by Dr. Suresh vadde

The following rules may be applied to current assets and current liabilities for preparing this statement:

Page 11: Funds flow statement by Dr. Suresh vadde

In order to prepare a Funds Flow Statement, it is necessary to find out the “sources” and “applications” of funds.

While preparing a funds flow statement, current assets and current liabilities are to be ignored.

Consider the changes in Fixed Assets and Fixed Liabilities.

PREPARATION OF FUNDS FLOW TATEMENT

Page 12: Funds flow statement by Dr. Suresh vadde

Sources of Funds Amount Application of Funds Amount

Issue of share capital ……. Redemption of pref. share ……..

Issue of debenture ……. Redemption of debenture ……..

Raising of long term loan ……. Payment of long term loan ……..

Sales of fixed assets ……. Purchase of fixed assets ……..

Interest received ……. Interest paid ……..

Dividend received ……. Dividend paid .…….

Refund of Taxes ……. Payment of Taxes ……..

Decrease in working capital

……. Increase in working capital ……..

Fund from operation …….

TOTAL …….. TOTAL ……..

Format of Fund Flow Statement (As on…………..)

Page 13: Funds flow statement by Dr. Suresh vadde

Calculation of Fund from operation It can be calculated by preparing

Profit & loss Adjustment a\c

Particular Amount

DepreciationLoss on sale of fixed assetsUnder writing commissionsDiscount on issue of shares & debenturesPreliminary expense written offDeferred revenue expenses Goodwill written off Patent or trademarkProvision for taxes (If treated non current)

Particular Amount

Profit or gain on sale of fixed assetDividend received Interest received ofinvestmentProfit on revaluation

of asset Fund from operation

Page 14: Funds flow statement by Dr. Suresh vadde

Balance Sheet of M/s ______

Liabilities as on 31stMarch

Assets as on 31stMarch

2006 2007 2006 2007

Capital Profit/Loss Appropriation Bank Loan Bills Payable Sundry Creditors Reserve for Taxation

18,50,000 14,78,000 12,00,000 4,00,000 14,00,000 2,00,000 

21,00,000 17,64,000 9,00,0000 6,80,000

12,20,000 1,80,000 

Goodwill (at Cost) Land and Buildings Plant and Machinery Furniture and Fittings Stock/Inventories Sundry Debtors Bills Receivable Bank Cash

6,00,000 18,50,000 4,74,000 1,94,000 8,26,000 12,00,000 8,00,000 5,00,000 84,000 

6,00,000 22,00,000 5,24,000 1,94,000 7,24,000

12,80,000 7,21,000 4,83,000 1,18,000 

TOTAL 65,28,000 68,44,000 TOTAL 65,28,000 68,44,000

Example:- From the following information preparei) A Schedule of Changes in Working Capital ii) A Funds Flow Statement

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Balance Sheet of M/s ______

Liabilities as on 31stMarch

Assets as on 31stMarch

2006 2007 2006 2007

CapitalProfit/Loss AppropriationBank LoanBills PayableSundry CreditorsReserve for Taxation

18,50,000

14,78,000

12,00,000

4,00,000 14,00,000

2,00,000 

21,00,000 17,64,000 9,00,0000 6,80,000 12,20,000 1,80,000 

Goodwill (at Cost)Land and BuildingsPlant and MachineryFurniture and FittingsStock/InventoriesSundry DebtorsBills ReceivableBankCash

6,00,000 18,50,000 4,74,000 1,94,000 8,26,000 12,00,000 8,00,000 5,00,000 84,000 

6,00,000 22,00,000

5,24,000 1,94,000 7,24,000 12,80,000

7,21,000 4,83,000 1,18,000 

TOTAL 65,28,000 68,44,000 TOTAL 65,28,000 68,44,000

Solution : Working NotesIdentify the Current and Non-Current accounts from within the balance sheet distinctly.

Current ItemsNon-Current Items

Page 16: Funds flow statement by Dr. Suresh vadde

Schedule/Statement of Changes in Working Capital for the period from 31/03/06 to 31/03/07

Particulars/AccountBalance as on 31st March Working Capital Change

2006 2007 Increase Decrease

a) CURRENT ASSETS

1) Stock/Inventories 2) Sundry Debtors 3) Bills Receivable 4) Bank 5) Cash

826,000 1,200,000 800,000 500,000 84,000 

724,000 1,280,000 721,000 483,000 118,000 

80,000

34,000 

102,000

79,000 17,000  

TOTAL 3,410,000 3,326,000 114,000 198,000

b) CURRENT LIABILITIES

1) Bills Payable 2) Sundry Creditors 3) Provision for Taxation

400,000 1,400,000 200,000 

680,000 1,220,000 180,000 

180,000 20,000 

280,000

 

TOTAL 2,000,000 2,080,000 200,000 280,000

Working Capital [(a) - (b)] 1,410,000 1,246,000

TOTAL 314,000 478,000

Net Change in Working Capital 164,000

I- Statement/Schedule of Changes in Working Capital

Page 17: Funds flow statement by Dr. Suresh vadde

There is a decrease in working capital to the extent of 164,000.

The net change can also be obtained from the working capital figures relating to the two balance sheet dates.

Change in Working Capital = Working Capital as on 31/03/07 - Working Capital

as on 31/03/06 = 1,246,000 – 1,400,000

= - 164,000 Negative value indicates a decrease in working

capital.

Cont’d..,

Page 18: Funds flow statement by Dr. Suresh vadde

When there is no additional data apart from the balance sheets and we are sure that there are no other transactions that have affected the non-current accounts.

Therefore, we may derive the inflow/outflow by comparing the opening and closing figures.

II - Statement of Changes in Non-Current accounts (or) A Funds Flow Statement

Page 19: Funds flow statement by Dr. Suresh vadde

Statement of changes in Non-Current Accounts

Account

Balance as on 31st Dec Change

Type Result

2006 2007 Amount Direction

Capital Profit/Loss Appropriation Bank Loan Land and Building Plant and Machinery

18,50,000 14,78,000 12,00,000 18,50,000 4,74,000 

21,00,000 17,64,000 9,00,000

22,00,000 5,24,000 

2,50,000 2,86,000 3,00,000 3,50,000

50,000 

Increase Increase Decrease Increase Increase

Liability Liability Liability Assets Assets

Inflow Inflow outflow outflow outflow

Working notes

Page 20: Funds flow statement by Dr. Suresh vadde

Statement of Sources and Applications of Funds for the period from 31/03/06 to 31/03/07

Sources/Inflows of Funds Amount Applications/Outflows of Funds Amount

Capital Funds from Operations [P/L Appropriation a/c]

2,50,000 2,86,000

Land and Buildings Plant and Machinery Bank Loan

3,50,000 50,000

3,00,000

5,36,000 7,00,000

Change in Fund (Working Capital) 1,64,000

Funds Flow Statement for the period from 31/03/06 to 31/03/07

Since the Applications/outflows are more than the Sources/Inflows of Funds there is a Net decrease in Fund (Working Capital) = 700,000 – 536,000 = 164,000

Page 21: Funds flow statement by Dr. Suresh vadde

Example: Reading Assignment

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Balance Sheet of M/s ___

Liabilities As on 31st December

Assets As on 31st December

2004 2005 2004 2005

Share Capital Profit and Loss Appropriation account Long Term Loan Sundry Creditors Bills Payable

10,000

5,000 4,000 8,000 5,000

15,000

8,000 6,000 12,000 3,000

Cash Debtors Stock Machinery Land

5,000 10,000 10,000 3,000 4,000

8,000 15,000 12,000 5,000 4,000

32,000 44,000 32,000 44,000

Individual Assignment From the following information preparei) A Schedule of Changes in Working Capital ii) A Funds Flow Statement

Page 25: Funds flow statement by Dr. Suresh vadde

By

Dr.Suresh VaddeM.Com;MFA;MBA;M.Phil;Ph.D

Associate ProfessorDept. of Management

Samara University, Ethiopia.