seminar ffs

8/6/2019 Seminar FFS

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Financial StatementsFinancial Statements

Profit and Loss A/cProfit and Loss A/c

Balance SheetBalance Sheet

Discloses the financial position of theDiscloses the financial position of thebusiness on a particular date.business on a particular date.

Dont Disclose the changes or theDont Disclose the changes or themovement of the funds between two periods.movement of the funds between two periods.


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For ExampleFor Example

If Fixed Asset of Rs. 5,00,000 is purchased byIf Fixed Asset of Rs. 5,00,000 is purchased by

raising Share Capital of Rs. 5,00,000.raising Share Capital of Rs. 5,00,000.

Balance Sheet will simply show higher F.A.Balance Sheet will simply show higher F.A.value and higher Share Capital.value and higher Share Capital.

If loan is raised for Rs. 2,00,000 and is paid inIf loan is raised for Rs. 2,00,000 and is paid in

accounting year.accounting year.

It will not find place in the Balance Sheet.It will not find place in the Balance Sheet.


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To Know the answersTo Know the answers

W

here have the funds come fromW

here have the funds come from Where they have been usedWhere they have been used


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FundFund

FlowFlowStatementStatement


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FundFund

Working CapitalWorking Capital

Excess of Current Assets over CurrentExcess of Current Assets over CurrentLiabilitiesLiabilities

(Current Assets(Current Assets-- Current Liabilities)Current Liabilities)


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Flow of FundFlow of Fund

When fund is working capital flow of fundWhen fund is working capital flow of fund

means movement of funds which cause ameans movement of funds which cause a

change in working capital of the organisation.change in working capital of the organisation. The flow of fund only takes place only if aThe flow of fund only takes place only if a

current account is involved to identify a flowcurrent account is involved to identify a flow

journalise the transaction identify the twojournalise the transaction identify the two

accounts involved as current and non currentaccounts involved as current and non current

and apply the general ruleand apply the general rule


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Transaction that involve oneTransaction that involve one currentcurrent and oneand one

non currentnon current account result in a flow of fundaccount result in a flow of fund

Eg. When shares are issued for cashEg. When shares are issued for cash

Bank A/c Dr.Bank A/c Dr.

To Share Capital A/cTo Share Capital A/c


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Transaction that involves onlyTransaction that involves only currentcurrent

accountsaccounts do not result in a flowdo not result in a flow

Eg. When debtors are realisedEg. When debtors are realisedBank A/c Dr.Bank A/c Dr.

To Sundry Debtors A/cTo Sundry Debtors A/c


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Transaction that involves onlyTransaction that involves only nonnon--currentcurrent

accountsaccounts do not result in a flowdo not result in a flow

Eg. When shares are issued for purchase ofEg. When shares are issued for purchase ofbuildingbuilding

Building A/c Dr.Building A/c Dr.

To Share Capital A/cTo Share Capital A/c


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Steps in preparing Fund FlowSteps in preparing Fund Flow

StatementStatement

Statement or Schedule of Changes in WorkingStatement or Schedule of Changes in Working

Capital.Capital. Fund from OperationFund from Operation

Statement of Sources and Uses of Funds orStatement of Sources and Uses of Funds or

Funds Flow Statement.Funds Flow Statement.


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Schedule or Statement of changes in working capitalSchedule or Statement of changes in working capital

It discloses the changes in the individual item ofIt discloses the changes in the individual item of

current asset and current liability between two periodscurrent asset and current liability between two periods

and their effect on working capital. Working capitaland their effect on working capital. Working capital

will increasewill increase when there is an increase in current assetwhen there is an increase in current assetand decrease in current liabilities, whereas, workingand decrease in current liabilities, whereas, working

capital will decrease when there is a decrease incapital will decrease when there is a decrease in

current asset & increase in current liabilities.current asset & increase in current liabilities.

Net increase in working capital is treated as use ofNet increase in working capital is treated as use of

funds & the net decrease in working capital is treatedfunds & the net decrease in working capital is treated

as source of funds.as source of funds.


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Statement of changes in working capitalStatement of changes in working capitalParticularsParticulars Current YearCurrent Year PreviousPrevious

YearYear

Increase inIncrease in


Decrease in Working CapitalDecrease in Working Capital

Current AssetsCurrent Assets::

Cash at bankCash at bank

Cash in handCash in hand

Stock in tradeStock in trade

DebtorsDebtors

Bills receivableBills receivable

Advance paymentAdvance payment

Short term investmentShort term investment

Prepaid expensePrepaid expense

Accrued incomeAccrued income

Total Current AssetsTotal Current Assets xxxxxx xxxxxx

Current LiabilitiesCurrent Liabilities

(1) Short term loans(1) Short term loans

(2) Bank overdraft(2) Bank overdraft

(3) Creditors(3) Creditors

(4) Bills payable(4) Bills payable(5) Outstanding expenses(5) Outstanding expenses

(6) Unclaimed dividend(6) Unclaimed dividend

Total Current LiabilitiesTotal Current Liabilities xxxxxx xxxxxx

Net Working CapitalNet Working Capital

Net Increase/Decrease in WorkingNet Increase/Decrease in WorkingCapitalCapital

xxxxxx

xxxxxx

xxxxxx

xxxxxx


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Fund From OperationFund From Operation

Fund from operation means the netFund from operation means the net

working capital provided by the operatingworking capital provided by the operating

activities of the business.activities of the business.

Direct methodDirect method::

Indirect methodIndirect method::


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Direct MethodDirect Method

Profit & Loss Adjustment A/cProfit & Loss Adjustment A/cParticularParticular Amount(Rs.)Amount(Rs.) ParticularParticular Amount(Rs.)Amount(Rs.)

DepreciationDepreciation

Loss on sale of fixedLoss on sale of fixed

assetsassets

Under writingUnder writing

commissionscommissions

Discount on issue ofDiscount on issue ofshares &shares &

debenturesdebentures

Preliminary expensePreliminary expense

written offwritten off

Deferred revenueDeferred revenue

expensesexpensesGoodwill written offGoodwill written off

Patent or trademarkPatent or trademark

Provision for taxesProvision for taxes

(If treated non current(If treated non current))

Profit or gain on saleProfit or gain on sale

ofof

fixed assetfixed asset

Dividend receivedDividend received

Interest received ofInterest received of

investmentinvestmentProfit on revaluationProfit on revaluation

of assetof asset

Fund from operationFund from operation


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Indirect MethodIndirect Method

Net Profit earned during the yearNet Profit earned during the year xxxxxxxxAdd: Non Fund and Non Operating Items (which are already debited to P/L A/c)Add: Non Fund and Non Operating Items (which are already debited to P/L A/c)

Depreciation on Fixed Assets xxxxDepreciation on Fixed Assets xxxx

Goodwill Written Off xxxxGoodwill Written Off xxxx

Discount on issue of Shares Written Off xxxxDiscount on issue of Shares Written Off xxxx

Preliminary Expense Written Off xxxxPreliminary Expense Written Off xxxx

Patents Written Off xxxxPatents Written Off xxxx

Transfer to General Reserve xxxxTransfer to General Reserve xxxx

Loss on sale of Fixed Assets xxxx xxxxLoss on sale of Fixed Assets xxxx xxxx

________________

Less : Non Fund and Non Operating Items (which are credited to P/L A/c)Less : Non Fund and Non Operating Items (which are credited to P/L A/c)

Profit on sale of Fixed Assets xxxProfit on sale of Fixed Assets xxx

Profit on revaluation of assets xxxxProfit on revaluation of assets xxxx

Rent received xxxxRent received xxxx

Refund on Income Tax xxxxRefund on Income Tax xxxx

Dividend Received xxxDividend Received xxx xxxxxxxx

________________

Fund From OperationFund From Operation xxxxxxxx


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Fund Flow StatementFund Flow Statement

While preparing a fund flow statement current assets and current liabilities are to beWhile preparing a fund flow statement current assets and current liabilities are to beignored. Attention is given to changes in fixed assets and fixed liabilities.ignored. Attention is given to changes in fixed assets and fixed liabilities.

This fund flow statement has two parts:This fund flow statement has two parts:

Sources of fundSources of fund

Application of fundApplication of fund

The difference between these two parts that is sources & uses of funds representsThe difference between these two parts that is sources & uses of funds represents

Net changes in working capital.Net changes in working capital.

TheThe excess of sourcesexcess of sources of funds over uses of fund is the net increase in workingof funds over uses of fund is the net increase in workingcapital &capital & excess of usesexcess of uses over sources of fund is net decrease in working capital.over sources of fund is net decrease in working capital.

The amount of net increase or decrease as shown in fund flow statement should beThe amount of net increase or decrease as shown in fund flow statement should beequal to the amount shown by schedule of working capital changes.equal to the amount shown by schedule of working capital changes.


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Fund Flow StatementFund Flow StatementSources of FundSources of Fund Amount(Rs.)Amount(Rs.) Uses of FundsUses of Funds Amount(Rs.)Amount(Rs.)

Fund from operationFund from operationIssue of shareIssue of share

Issue of debentureIssue of debenture

long term loanslong term loans

Sale of fixed assets /Sale of fixed assets /

InvestmentInvestment

Non trading receiptsNon trading receipts

Decrease in workingDecrease in working

capitalcapital

(if any)(if any)

Loss from operationLoss from operationRedemption ofRedemption of

preference sharespreference shares

Redemption ofRedemption of

debenturesdebentures

Repayment ofRepayment of

long term loanslong term loans

Purchase of fixedPurchase of fixed

assetsassets

/ Investments/ Investments

Payment of dividendPayment of dividend

& taxes& taxes

Increase in workingIncrease in workingcapitalcapital

(if any)(if any)


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QQ-- Following is the summarized Balance sheet of X Ltd. As on 31stFollowing is the summarized Balance sheet of X Ltd. As on 31st

December 2004 and 2005. You are required to prepare a fund flowDecember 2004 and 2005. You are required to prepare a fund flow

statement for the year ended 31st December 2005.statement for the year ended 31st December 2005.

LiabilitiesLiabilities 2004(Rs.)2004(Rs.) 2005(Rs.)2005(Rs.) AssetsAssets 2004(Rs.)2004(Rs.) 2005(Rs.)2005(Rs.)

Share CapitalShare Capital

General ReserveGeneral Reserve

Profit and LossProfit and Loss

A/cA/c

Bank LoanBank Loan

(Long Term)(Long Term)CreditorsCreditors

Provision for taxProvision for tax

1,00,0001,00,000

25,00025,000

15,25015,250

35,00035,000

75,00075,000

15,00015,000

1,25,0001,25,000

30,00030,000

15,30015,300

67,60067,600

----

17,50017,500

GoodwillGoodwill

BuildingBuilding

PlantPlant

StockStock

DebtorsDebtors

BankBank

CashCash

----

1,00,0001,00,000

75,00075,000

50,00050,000

40,00040,000

----

250250

2,5002,500

95,00095,000

84,50084,500

37,00037,000

32,10032,100

4,0004,000

300300

2,65,2502,65,250 2,55,4002,55,400 2,65,2502,65,250 2,55,4002,55,400

Additional InformationAdditional Information

Dividend of Rs. 11,500 was paid.Dividend of Rs. 11,500 was paid.

Depreciation written off on plant Rs. 7,000 and on building Rs. 5000.Depreciation written off on plant Rs. 7,000 and on building Rs. 5000.

Provision for tax was made during the year Rs. 16,500Provision for tax was made during the year Rs. 16,500..


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Schedule of Changes in Working CapitalSchedule of Changes in Working CapitalItemsItems 2004Amount(2004Amount(

Rs.)Rs.)

2005Amount(2005Amount(

Rs.)Rs.)

Increase inIncrease in


Decrease inDecrease in


Current AssetsCurrent Assets

CashCash

BankBank

DebtorsDebtors

StockStock

250250

----

40,00040,000

50,00050,000

300300

4,0004,000

3210032100

37,00037,000

5050

4,0004,000

7,9007,900

13,00013,000Total CurrentTotal Current

Assets (A)Assets (A)

90,25090,250 73,40073,400

CurrentCurrent

Liabilities:Liabilities:--

CreditorsCreditors

75,00075,000 ---- 75,00075,000

Total CurrentTotal Current

Liabilities (B)Liabilities (B)

75,00075,000 ----

Working capitalWorking capital

(A(A--B) Net IncreaseB) Net Increase

in Working Capitalin Working Capital

15,25015,250

58,15058,150

73,40073,400

73,40073,400 73,40073,400 79,05079,050 79,05079,050


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Calculation of Fund From OperationCalculation of Fund From Operation

Net Profit earned during the year (15,300 Net Profit earned during the year (15,300--15,250) 5015,250) 50Add: Non Fund and Non Operating Items (which are already debited to P/L A/c)Add: Non Fund and Non Operating Items (which are already debited to P/L A/c)

Depreciation on: Building 5,000Depreciation on: Building 5,000

Plant 7,000Plant 7,000

Transfer to General Reserve 5,000Transfer to General Reserve 5,000

Provision for Tax 16,500Provision for Tax 16,500Dividends Paid 11,500 45,000Dividends Paid 11,500 45,000

______________

Less: Non Fund and Non Operating Items (which are credited to P/L A/c)Less: Non Fund and Non Operating Items (which are credited to P/L A/c) ----

______________

Fund from OperationFund from Operation 45,05045,050

______________


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Fund flow statementFund flow statement

Sources of fundSources of fund Amount (Rs.)Amount (Rs.) Application of Application of

fundfund

Amount (Rs.)Amount (Rs.)

Fund fromFund from

OperationsOperations

Issue of SharesIssue of Shares

Bank LoanBank Loan

45,05045,050

25,00025,000

32,60032,600

Purchase of PlantPurchase of Plant

Income Tax PaidIncome Tax Paid

Dividend PaidDividend Paid

Goodwill PaidGoodwill Paid

Net increase inNet increase in


16,50016,500

14,00014,000

11,50011,500

2,5002,500

58,15058,150

1,02,6501,02,650 1,02,6501,02,650


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Provision for Taxation A/cProvision for Taxation A/c

ParticularParticular Amount(Rs.)Amount(Rs.) ParticularsParticulars Amount (Rs.)Amount (Rs.)

To Income Tax A/cTo Income Tax A/c(tax paid)(tax paid)

To balance c/dTo balance c/d

14,00014,000

17,50017,500

By balance b/dBy balance b/d

By Profit & LossBy Profit & Loss

A/cA/c

15,00015,000

16,50016,500

31,50031,500 31,50031,500


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Land and Building A/cLand and Building A/c


To balanceTo balance

b/db/d

1,00,0001,00,000 By Profit and Loss A/cBy Profit and Loss A/c

(Depreciation)(Depreciation)


5,0005,000

95,00095,000

1,00,0001,00,000 1,00,0001,00,000


To balance b/dTo balance b/dTo Bank A/cTo Bank A/c

75,00075,00016,50016,500

By Profit and Loss A/cBy Profit and Loss A/c(Depreciation)(Depreciation)


7,0007,00084,50084,500

91,50091,500 91,50091,500

Plant A/cPlant A/c


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UsersUsers Owner or ShareholdersOwner or Shareholders

Owner or Shareholders are interested in ascertaining the financial position of business. Funds FlowOwner or Shareholders are interested in ascertaining the financial position of business. Funds Flow

statement helps them to find out:

statement helps them to find out:

Whether the business has enough funds to pay them dividends at reasonable rate?Whether the business has enough funds to pay them dividends at reasonable rate?

Whether the business is in a position to meet its present liabilities in time?Whether the business is in a position to meet its present liabilities in time?

Whether the management is making effective use of funds at their disposal?Whether the management is making effective use of funds at their disposal?

Financial institutionsFinancial institutions:: The financial institutions are interested in the safety of their funds. A careful analysis of the fund flowThe financial institutions are interested in the safety of their funds. A careful analysis of the fund flow

statement will help them in ascertaining :statement will help them in ascertaining :

Overall creditworthiness of the enterprise:Overall creditworthiness of the enterprise:

The resources from which the enterprise will be in a position to make repayments of the loan taken.The resources from which the enterprise will be in a position to make repayments of the loan taken.

Is the business generating sufficient funds from its normal business operations?Is the business generating sufficient funds from its normal business operations?

EmployeesEmployees:: The employees also have a stake in the business. Their growth and security of job depend on theThe employees also have a stake in the business. Their growth and security of job depend on the

profitability of the firm which is directly related to the effective utilisation of the funds. The funds shouldprofitability of the firm which is directly related to the effective utilisation of the funds. The funds shouldbe managed in a manner that the business is in a position to make payments of salaries to the employeesbe managed in a manner that the business is in a position to make payments of salaries to the employeesin time beside meeting other business costs.in time beside meeting other business costs.


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LimitationLimitation Not a substitute for an income statement. The fund flow statementNot a substitute for an income statement. The fund flow statement

simply tells about the working capital position of the business. It doessimply tells about the working capital position of the business. It does

not explain how much profit the business has really earned. This can benot explain how much profit the business has really earned. This can befound out only by an income statement.found out only by an income statement.

It is not an original statement it is only a rearrangement of data given inIt is not an original statement it is only a rearrangement of data given infinancial statement.financial statement.

It is essentially historic in nature. A projected fund flow statement, onIt is essentially historic in nature. A projected fund flow statement, onthe basis of it can not be prepared with much accuracy. It does notthe basis of it can not be prepared with much accuracy. It does notestimate the sources and application of funds of the near future.estimate the sources and application of funds of the near future.

I

t cannot reveal continuous changes.I

t cannot reveal continuous changes.

Misleading the fund flow statement may prove to be misleading. AMisleading the fund flow statement may prove to be misleading. Aheavy balance of working capital does not necessarily mean that theheavy balance of working capital does not necessarily mean that the

business has made large profits. Similarly, lower amount of workingbusiness has made large profits. Similarly, lower amount of workingcapital does not necessarily mean that the business has suffered a heavcapital does not necessarily mean that the business has suffered a heavloss.loss.


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Thank YouThank You


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Submitted BySubmitted By

Anuradha NimeshAnuradha Nimesh

MBA SemMBA Sem--II

Roll No. 15Roll No. 15

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