funds flow statement ppt -pka 2003 -higher edu

FUNDS FLOW STATEMENT

BY – Prof. (Dr. ACS, CWA) P. K. AGGARWALCOLLEGE OF MANAGEMENT STUDIES

IILM CMS, GREATER NOIDA

Prof.(Dr. ACS, CWA) P. K.Aggarwal

LECTURE AT A GLANCE

•Meaning and Definition of Funds Flow Statement;•Importance of Funds Flow Statement•Limitations of Funds Flow Statement•Way of preparing Funds Flow Statement•Precautions to be taken while preparing Funds Flow Statement•Few Numerical Questions


PHILOSOPY OF FUNDS FLOW STATEMENT

It is continuous process. The study and control of this funds-flow process (i.e., The uses and sources of funds) is the main objective of financial management to assess the soundness of the solvency of the enterprise.


FUNDS STATEMENT

• The funds statement was also known as a “statement of funds flow” or a “statement of sources and applications of funds”• This statement was deemed to be necessary as the balance sheet and income statement did not present a complete picture of an entity’s economic activities•The statement was seen as necessary to summarise investing and financing activities


MEANING OF FUND FLOW

The term of ‘Funds Flow’ has made up with the two words – Funds and Flow of funds. Let us first we understand these meaning and then we see how funds flow statement is prepared.


THE TREM ‘FUND’ IS USED IN THREE SENSES –

CASH -In narrow sense, the term ‘fund’ is used to mean only the cash and bank balance. Therefore, in this sense, funds flow statement is a statement reflecting the changes in cash and bank balances only. This concept is better for the preparing of ‘Cash Flow Statement’ Therefore, this term is not used in this sense.


TOTAL RESOURCES -In broader sense it includes all resources used in the business whether in the form of men, material, machinery, money and methods etc.


Working Capital – In popular sense, the term ‘Fund’ is used to mean working capital i.e. the excess of current assets over current liabilities. Therefore, in this sense, fund flow statement includes all the transactions affecting current assets and current liabilities.


MEANING OF FLOW IN FUNDS

Before understanding the meaning of flow in funds, it is necessary to classify the balance sheet of a concern into four parts as shown below-


Balance –Sheet1. Non-Current Liability 3. Non-Current Assets Share Capital Goodwill Debentures Land & Buildings Other Long-term loans Plant & Machinery Reserve & Surplus Motor Vehicles Security Premium Long-term Investments Capital Redemption reserve Preliminary Expenses General Reserve Discount on shares Profit & Loss Account Miscellaneous Expenses 2. Current Liabilities 4. Current Assets Creditors Debtors Bills Payable Bills Receivable Short-term loans Advances Bank Overdraft Short-term investments Advance Payment Received Stock in hand Outstanding Expenses Cash in hand Provision for taxation Cash at Bank TOTAL TOTAL

The arrows explain when transaction will constitute flow of funds.Prof.(Dr. ACS, CWA) P. K.Aggarwal

COMPONENTS OF BALANCE-SHEET

1. NON-CURRENT LIABILITIES – These liabilities are not payable within a year and

out of current assets. These liabilities are generally payable either in the long-period or at the close of the business. For example, see item (1) in the above balance-sheet.

Contd..


2. CURRENT LIABILITIES – These liabilities are payable within a year and out of current assets. The values of these liabilities generally changes within one year. For example, see item (2) in the above balance sheet.

Contd…Prof.(Dr. ACS, CWA) P. K.Aggarwal

3. NON-CURRENT ASSETS – Those assets which are obtained in business for use over a long period of time for earning purpose are called non-current assets. These assets are not purchased for the purpose of selling and include tangible, intangible and fictitious


4. CURRENT ASSETS –

These assets are equal to cash or reasonably expected to be realized in cash or sold or consumed within one year or during the normal operating cycle of the business are called current assets. For example, see item (4) in the above balance-sheet.


MEANING OF FLOW

The term ‘Flow’ means changes – incoming and outgoing. When this term is used with funds, it means the changes taking place in funds during a certain period. Whenever there is change in the funds, it is presume that flow in funds has taken place. Transactions that bring working capital into the firm are sources of funds and on the contrary, if the working capital decreases, it is an application of funds.


TRANSACTIONS THAT WILL AFFECT THE FLOW OF FUNDS

The following transactions will bring the change in the working capital –• Current Assets and Non-Current Assets• Current Assets and Non-Current Liabilities• Current Liabilities and Non-Current Liabilities• Current Liabilities and Non-Current AssetsIn brief, it can be said that when one aspect is of non-current category, and the other current category, there will be flow in funds.


TRANSACTIONS THAT WILL NOT AFFECT THE FLOW OF FUNDS

1. Current Assets and Current Liabilities2. Non-Current Assets and Non-Current Liabilities3. Non-Current Liabilities or Non-Current Assets.


MEANING OF FUNDS FLOW STATEMENT

The Funds flow statement (FFS) is a financial statement which reveals the methods by which the business has been financed and how it has used its funds between the opening and closing Balance-Sheet dates. It studies – from where the funds have been received and where the funds have been used.


TO CONCLUDE –We shall include only those transactions in funds flow which affect current assets or current liabilities, on one hand, and a fixed asset or long-term liabilities or owner’s equity on the other.


Following questions are answered by Funds FlowStatement -1. Where the profit is put up?2. Why net current assets are low even though

there is an increase in net profit? In other words, why cash balance has not increased.

3. Why excess dividend was distributed when there were low profits?

4. How is the amount realized from the sale of assets used?

OBJECTS OF FUNDS STATEMENT


Contd._

5. How were the changes in Working Capital6. How were the plant and machinery

expanded?7. How was the amount received from the issue

of shares of debentures used?8. Why the funds were not available for the

purchase of machinery and plant?

11/09/2009 Prof.(Dr. ACS, CWA) P. K.Aggarwal

IMPORTANCE OF FUNDS FLOW STATEMENT

1. Financial Analysis and Control2. Financial Planning and Budget preparation3. Useful to Bankers and Money Lenders4. Helpful in Comparative Study5. Knowledge of Managerial Policies6. Knowledge of Business Problems7. Dividend Policy


LIMITATIONS OF FUNDS FLOW STATEMENT

1. Non-fund transactions and this is why it is less popular than Balance-sheet and Profit & Loss Account;

2. It fails in the disclosure of all changes that have taken place during the ordinary course of business;

3. It is not a substitute of Income Statement or Balance-sheet. It merely provides some additional information relating to the financial position of a firm;Prof.(Dr. ACS, CWA) P. K.Aggarwal

Contd.—

4. It is historical in nature and analyses past events only;

5. It gives only a view about the financial position of business as it does not disclose all the facts;

6. Changes in cash are more important than changes in working capital which is not revealed by fund flow statement.


PREPARATION OF FUNDS FLOW STATEMENT

Funds flow statement can be prepared monthly but usually it is prepared for one, two, three, four or more years. The data for the preparation of this statement are obtained form two balance sheets supplemented by such other information from the accounts as may be needed. It is customary for accompany to use the figures of the balance sheet for the latest year and those on the balance sheet as at the beginning of the period for which this statement is to be prepared.

contd….


Preparation of funds flow statement is divided into two parts.

1. Schedule of Changes in Working Capital;2. Funds from Operation;3. Funds Flow Statement


STATEMENT OF CHANGES IN WORKING CAPITAL

This statement is prepared from current assets and current liabilities in order to calculate the increase or decrease in working capital and is prepared in the Performa given as under.

Contd…


STATEMENT OF CHANGES IN WORKING CAPITAL

11/09/2009Prof.(Dr. ACS, CWA) P. K.Aggarwal

Particulars Previous Year Fig. Rs.(2008)

Current Year Fig. Rs.(2009)

Changes in current assets and liabilitiesIncr-ease

Decre-ase

Current Assets :

CashDebtorsStocksBill ReceivablesAdvance paymentAccrued incomeMarketable Securities or Short-term Investment

Contd..


Previous Year Fig. Rs.(2008)

Current Year Fig. Rs.(2009)

Change in current and liabilities

Particulars

In.(+)

Dec.

(-)

Current Liabilities:

CreditorsBills Payable Bank Overdraft Outstanding Expenses Short-term Loan etc.Increase or Decrease in Working Capital

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

1. An increase in current assets, increases working capital

2. A decrease in current assets, decreases working capital

3. An increase in current liabilities, decreases working capital

4. A decrease in current liabilities, increases working capital


FUNDS FLOW STATEMENT

This statement is usually prepared in “T” form. Left-hand side is for sources of funds and right-

hand side for applications of funds. The items of sources and applications are given as follows:

Contd….


The following are the sources from which funds come: 1. Funds from operations2. Income from investments3. Issue of shares and debentures4. Raising a loan5. Sale of fixed assets and long-term investments6. Receipt of interest on non-trade investment,

dividend, refund of tax etc.7. Decrease in working capital etc.

Sources of Funds:


Uses (or Applications) of funds:

The following are the various purposes for which funds can be used: 1. Funds lost in operations2. Repayment of long-term loans3. Redemption of preference shares and debentures4. Purchase of fixed assets5. Purchase of long-term investments


USES OF FUNDS – Contd…

6. Payment of cash dividends7. Payment of taxes8. Drawing in case of proprietary or partnership

business9. Loss of cash by embezzlement10. Increase in working capital etc.


FUNDS FROM OPERATIONS

It can be calculated in two forms : Particulars

Net Profit for Current YearAdd : Non fund items Depreciation Goodwill, Patents Preliminary Expenses Written

offLESS : Non-fund Items and Non-trading Income ,already Credited to P & L A/c.Dividend Recevied Profit on sale Funds from operations

Amount Rs.

Amount Rs.


Profit and Loss Adjustment A/c

To Depreciation

To Goodwill Written offTo preliminary Expenses written off To Transfer to sinking fund To Loss on sale of fixed Assets

To Closing Balance of P&L Appropriation A/c

By opening Balance of P&L Appropriation A/c

By Dividend Received

By Over provisions Written BackBy Funds from operations

(Balancing Figure)


While preparing funds flow statement, the following rules must be remembered

1. An increase in a fixed assets indicates an application of funds

2.A decrease in a fixed assets indicates a source of funds

3.An increase in a fixed liability indicates a source of funds

4.A decrease in fixed liability indicates an application of funds

5.An increase in share capital indicates a source of funds

6.A decrease in share capital indicates an application of fundsProf.(Dr. ACS, CWA) P. K.Aggarwal

The following will illustrate these rules:

Source of Funds-Fixed Assets+Fixed Liabilities+Share Capital

Application of Funds+Fixed Assets-Fixed Liabilities-Share Capital


PRECAUTIONS TO BE TAKEN WHILE PREPARING FUNDS FLOW STATEMENT

Following points must be kept in mind while preparing funds flow statement –1. Changes in fixed Accounts2. Internal Reserves3. Provision against current Assets4. Changes in current Assets 5. Interim Dividend6. Investments 7. Provision for taxation 8. Proposed dividend9. Profit or Loss on the Sales of Fixed Assets 10. Dividend received 11. Goodwill and Preliminary Expenses written off


IMPORTANT QUESTIONS

Short answer questions 1. State the meaning of Funds flow statement2. How is the schedule of changes in working capital

prepared?3. Discuss the importance of funds flow statement .4. Explain the terms ‘funds items‘ and ‘non funds items.

Give examples.5. Write short notes on application of funds.6. How are the funds from operations calculated?7. Distinguish between the funds flow statement and

Balance-Sheet.11/09/2009 Prof.(Dr. ACS, CWA) P. K.Aggarwal

Long Answer questions 1. Explain the terms ‘Funds’ and ‘Flow in funds ’ in

respect of funds flow statement 2. What is a ‘Funds Flows statement’? How is it

prepared? What are the various sources and uses of funds ?

3. How is a funds flow statement prepared ?Give a Performa of schedule of changes in working capital and funds flow statement.

Contd….


Suggested readings Fundamentals of corporate Accounting By J. R. Monga ( Mayoor Paper books , Noida)Financial Accounting – A Managerial Perspective By Dinabandhu Mukhopadhyay (Asian Books Pvt. Ltd., New Delhi)Financial Accounting By S. N. Maheshwari & S. K. Maheshwari (Vikas Publishing House, New Delhi)Financial Accounting By Ashish K. Bhattachary ( Printce Hall of India, New Delhi) Contd…..11/09/2009 Prof.(Dr. ACS, CWA) P. K.Aggarwal

Accounting and Financial Analysis & Management By Agarwal & Agarwal ( Pragati Prakashan, Meerut)Financial Statement Analysis By John J Wild and Robert F Halsey (Tata Mc Graw Hill, New Delhi)Management Accounting Theory and Practice By M.P. Pandikumar (Excel Books, New Delhi)Management Accounting By M. N. Arora (Vikas Publishing House, New Delhi)


THANK YOU


funds flow statement ppt -pka 2003 -higher edu

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