Description
Fund flow statements
Funds :
The term Fund means Working Capital i.e. the difference between current assets and current liabilities.
Any increase or decrease in Working Capital means “Flow of Funds”.
Funds flow statement shows working capital flow rather than cash flow
Examples of Current Assets 1. Cash in hand
2. Cash at Bank
3. Short term Investments (marketable securities) 4. Sundry debtors
5. Bills Receivable
6. Accrued income 7. Prepaid expenses 8. Stock-in-trade 9. Advance tax 10.Short term loans and advances
Examples of Current Liabilities 1. Sundry Creditors 2. Bills Payable 3. Outstanding expenses
4. Income received in advance
5. Bank Overdraft 6. Cash credit
7. Short term loan
Schedule of Changes in Working Capital
Amount Particulars A. Current Assets Cash in hand Cash at bank Marketable Securities Bills Receivable Debtors(Gross) Stock Prepaid Expenses B. Current Liabilities Creditors Bills Payable Income received in advance Provision for bad and doubtful debts Outstanding expenses 2008 2009 Change in Working Capital Increase Decrease (Debit) (Credit)
5,000 12,000 7,000 4,000 2,000 200 5,000 35,200 8,000 3,000 4,000 500 1,000 16,500 18,700 7,600 26,300
7,000 11,000 9,000 3,000 1,500 300 8,000 39,800 6,000 2,000 3,000 700 1,800 13,500 26,300
2,000 1,000 2,000 1,000 500 100 3,000
2,000 1,000 1,000 200 800
C. Working Capital ( A - B ) D. Increase in Working Capital
7,600 26,300 11,100 11,100
Funds from Operation
The Net Profit disclosed by the P&L A/C may not generate an equal amount of funds to the business . A business making a substantial profit may not have adequate funds at the end of the accounting period. On the contrary, a business may have enough funds at its disposal though it has incurred a substantial loss.
Reason -> P&L A/C records expenses that should have been paid and records income that should have been received . It takes into account all prepayments and accruals. Moreover, the charging of depreciation or amortization of intangible or fictitious items do not require any use of funds in the current period.
In short, the P&L does not make any distinction between any funds flow and non-funds flow items.
Net Profit as per P&L A/C Add: Expenses not resulting in application of funds Depreciation Discount written off Goodwill written off Preliminary Expenses written off Transfers to Reserves Add: Expenses being Non-business expenses Loss on sale of fixed assets Loss on redemption of debentures Income being Non business incomes Dividend received Interest received Profit on sale of fixed assets Profit on redemption of debentures
Less
Funds from Operations
Alternate way of calculation of Funds from Operation
Dr. Particulars To Net Loss To Depreciation To Loss on sale of fixed assets To discount on issue of shares written off To Goodwill written off To Preliminary Exp. Written off To Proposed Dividend To General Reserve To Funds used in Operation (Bal. fig.)
Adjusted P&L A/C Amount Particulars By Net Profit By Profit on sale of fixed assets By Dividend Received By Funds from operations (Bal fig)
Cr. Amount
Funds Flow Statement
Sources of Funds Decrease in Working Capital Funds from Operation Issue of shares and debentures Increase in Share Capital,Share Premium Increase in Debentures, loans etc Sale of Fixed asset Dividends Received Interest Received Donation , gifts and compensation received Amount Application of Funds Increase in Working Capital Funds used in Operation Redemption of Preference Shares and Debentures Decrease in Share Capital Decrease in Debentures , loans etc Purchase of Fixed asset Dividends paid Interest paid Income Tax paid Amount
Why is “Increase in Working Capital” an “Application of Funds” ?
Working Capital = Current Assets –
Current Liabilities
Working Capital =
Current Assets – Current Liabilities
Why is “Decrease in Working Capital” a “Source of Funds” ?
Current Assets – Current Liabilities
Working Capital =
Working Capital = Current Assets –
Current Liabilities
From the following Balance sheet of --- prepare the statement of changes in WC
2004 Assets Goodwill Cash Debtors Closing Stock Long term investment Land Preliminary Expenses Liabilities Trade creditors Bills payable Short term loan Share capital Profit & loss A/C 5000 70000 90000 120000 10000 27000 3000 45000 35000 20000 150000 75000
2003 10000 25000 98000 87000 15000 15000 5000 50000 20000 125000 60000
Calculate Funds From operations from the following Information
Income Statement
To Rent 25000 To Salaries Paid 100000 To Provisions for Depreciation 50000 To commission Paid 5000 To Provision for taxation 150000 To General Reserve 3000 To loss on sale of investment 10000 To cost of issue of shares 2000 To Provision for legal Damages 5000 To net Income 165000
By Gross Income 500000 By Profit on sale of vehicle 3000 By refund of tax 2000 By Dividend Received 10000
515000
515000
Treatment of Proposed Dividends
When Proposed Dividend is taken as a non-current liability : Treatment: In such a case proposed dividend for the current year will be added back to the current year’s profits in order to find out “Funds from operation” . Payment of dividend will be shown as an “ Application of Funds”
Treatment of Proposed Dividend when NO adjustment is given
Liabilities
2008
Balance Sheet 2009 Assets
2008
2009
Share Capital 1,00,000 1,50,000 Plant and Machinery Proposed Dividend 10,000 15,000 Debtors Provision for taxation 20,000 30,000 Creditors 25,000 37,500
1,00,000 2,00,000 55,000 32,500
1,55,000
2,32,500
1,55,000
2,32,500
?This will be treated as Dividend Paid during the year. ? Shown as an “ Application of Funds”
?This will be treated as Dividend Provided during the year. ?Added back to the current year’s profits in order to find out “Funds from operation” .
Treatment of Proposed Dividend when adjustment is given
Balance Sheet 2009 Assets
Liabilities
2008
2008
2009
Share Capital 1,00,000 1,50,000 Plant and Machinery Proposed Dividend 10,000 15,000 Debtors Provision for taxation 20,000 30,000 Creditors 25,000 37,500
1,00,000 2,00,000 55,000 32,500
1,55,000
2,32,500
1,55,000
2,32,500
Adjustments • • Tax paid during the year 2009 was Rs.25,000 Dividend paid during the year was Rs. 12,000.
Treatment of Proposed Dividend when adjustment is given
To Cash
Proposed Dividend 12,000 By Balance b/d
10,000
To Bal. c/d
15,000 By P&L (Bal. Fig) 27,000
17,000 27,000
?This will be treated as Dividend Paid during the year. ? Shown as an “ Application of Funds”
This will be treated as Dividend Provided during the year. Added back to the current year’s profits in order to find out “Funds from operation” .
Treatment of Provision for Taxation
Treatment of Provision for Tax when NO adjustment is given
Balance Sheet 2009 Assets
Liabilities
2008
2008
2009
Share Capital 1,00,000 1,50,000 Plant and Machinery Proposed Dividend 10,000 15,000 Debtors Provision for taxation 20,000 30,000 Creditors 25,000 37,500
1,00,000 2,00,000 55,000 32,500
1,55,000
2,32,500
1,55,000
2,32,500
?This will be treated as Tax Paid during the year. ?Shown as an “ Application of Funds”
?This will be treated as Tax Provided during the year. ?Added back to the current year’s profits in order to find out “Funds from operation” .
Treatment of Provision for Tax when adjustment is given
Liabilities
2008
Balance Sheet 2009 Assets
2008
2009
Share Capital 1,00,000 1,50,000 Plant and Machinery Proposed Dividend 10,000 15,000 Debtors Provision for taxation 20,000 30,000 Creditors 25,000 37,500
1,00,000 2,00,000 55,000 32,500
1,55,000
2,32,500
1,55,000
2,32,500
Adjustments • • Tax paid during the year 2009 was Rs.25,000 Dividend paid during the year was Rs. 12,000.
To Cash
Provision for Tax A/c 25,000 By Balance b/d
20,000
To Balance c/d
30,000 ByP&L (Bal. Fig) 55,000
35,000 55,000
?This will be treated as Tax Paid during the year. ? Shown as an “ Application of Funds”
This will be treated as Tax Provided during the year. Added back to the current year’s profits in order to find out “Funds from operation” .
doc_400479679.pptx
Fund flow statements
Funds :
The term Fund means Working Capital i.e. the difference between current assets and current liabilities.
Any increase or decrease in Working Capital means “Flow of Funds”.
Funds flow statement shows working capital flow rather than cash flow
Examples of Current Assets 1. Cash in hand
2. Cash at Bank
3. Short term Investments (marketable securities) 4. Sundry debtors
5. Bills Receivable
6. Accrued income 7. Prepaid expenses 8. Stock-in-trade 9. Advance tax 10.Short term loans and advances
Examples of Current Liabilities 1. Sundry Creditors 2. Bills Payable 3. Outstanding expenses
4. Income received in advance
5. Bank Overdraft 6. Cash credit
7. Short term loan
Schedule of Changes in Working Capital
Amount Particulars A. Current Assets Cash in hand Cash at bank Marketable Securities Bills Receivable Debtors(Gross) Stock Prepaid Expenses B. Current Liabilities Creditors Bills Payable Income received in advance Provision for bad and doubtful debts Outstanding expenses 2008 2009 Change in Working Capital Increase Decrease (Debit) (Credit)
5,000 12,000 7,000 4,000 2,000 200 5,000 35,200 8,000 3,000 4,000 500 1,000 16,500 18,700 7,600 26,300
7,000 11,000 9,000 3,000 1,500 300 8,000 39,800 6,000 2,000 3,000 700 1,800 13,500 26,300
2,000 1,000 2,000 1,000 500 100 3,000
2,000 1,000 1,000 200 800
C. Working Capital ( A - B ) D. Increase in Working Capital
7,600 26,300 11,100 11,100
Funds from Operation
The Net Profit disclosed by the P&L A/C may not generate an equal amount of funds to the business . A business making a substantial profit may not have adequate funds at the end of the accounting period. On the contrary, a business may have enough funds at its disposal though it has incurred a substantial loss.
Reason -> P&L A/C records expenses that should have been paid and records income that should have been received . It takes into account all prepayments and accruals. Moreover, the charging of depreciation or amortization of intangible or fictitious items do not require any use of funds in the current period.
In short, the P&L does not make any distinction between any funds flow and non-funds flow items.
Net Profit as per P&L A/C Add: Expenses not resulting in application of funds Depreciation Discount written off Goodwill written off Preliminary Expenses written off Transfers to Reserves Add: Expenses being Non-business expenses Loss on sale of fixed assets Loss on redemption of debentures Income being Non business incomes Dividend received Interest received Profit on sale of fixed assets Profit on redemption of debentures
Less
Funds from Operations
Alternate way of calculation of Funds from Operation
Dr. Particulars To Net Loss To Depreciation To Loss on sale of fixed assets To discount on issue of shares written off To Goodwill written off To Preliminary Exp. Written off To Proposed Dividend To General Reserve To Funds used in Operation (Bal. fig.)
Adjusted P&L A/C Amount Particulars By Net Profit By Profit on sale of fixed assets By Dividend Received By Funds from operations (Bal fig)
Cr. Amount
Funds Flow Statement
Sources of Funds Decrease in Working Capital Funds from Operation Issue of shares and debentures Increase in Share Capital,Share Premium Increase in Debentures, loans etc Sale of Fixed asset Dividends Received Interest Received Donation , gifts and compensation received Amount Application of Funds Increase in Working Capital Funds used in Operation Redemption of Preference Shares and Debentures Decrease in Share Capital Decrease in Debentures , loans etc Purchase of Fixed asset Dividends paid Interest paid Income Tax paid Amount
Why is “Increase in Working Capital” an “Application of Funds” ?
Working Capital = Current Assets –
Current Liabilities
Working Capital =
Current Assets – Current Liabilities
Why is “Decrease in Working Capital” a “Source of Funds” ?
Current Assets – Current Liabilities
Working Capital =
Working Capital = Current Assets –
Current Liabilities
From the following Balance sheet of --- prepare the statement of changes in WC
2004 Assets Goodwill Cash Debtors Closing Stock Long term investment Land Preliminary Expenses Liabilities Trade creditors Bills payable Short term loan Share capital Profit & loss A/C 5000 70000 90000 120000 10000 27000 3000 45000 35000 20000 150000 75000
2003 10000 25000 98000 87000 15000 15000 5000 50000 20000 125000 60000
Calculate Funds From operations from the following Information
Income Statement
To Rent 25000 To Salaries Paid 100000 To Provisions for Depreciation 50000 To commission Paid 5000 To Provision for taxation 150000 To General Reserve 3000 To loss on sale of investment 10000 To cost of issue of shares 2000 To Provision for legal Damages 5000 To net Income 165000
By Gross Income 500000 By Profit on sale of vehicle 3000 By refund of tax 2000 By Dividend Received 10000
515000
515000
Treatment of Proposed Dividends
When Proposed Dividend is taken as a non-current liability : Treatment: In such a case proposed dividend for the current year will be added back to the current year’s profits in order to find out “Funds from operation” . Payment of dividend will be shown as an “ Application of Funds”
Treatment of Proposed Dividend when NO adjustment is given
Liabilities
2008
Balance Sheet 2009 Assets
2008
2009
Share Capital 1,00,000 1,50,000 Plant and Machinery Proposed Dividend 10,000 15,000 Debtors Provision for taxation 20,000 30,000 Creditors 25,000 37,500
1,00,000 2,00,000 55,000 32,500
1,55,000
2,32,500
1,55,000
2,32,500
?This will be treated as Dividend Paid during the year. ? Shown as an “ Application of Funds”
?This will be treated as Dividend Provided during the year. ?Added back to the current year’s profits in order to find out “Funds from operation” .
Treatment of Proposed Dividend when adjustment is given
Balance Sheet 2009 Assets
Liabilities
2008
2008
2009
Share Capital 1,00,000 1,50,000 Plant and Machinery Proposed Dividend 10,000 15,000 Debtors Provision for taxation 20,000 30,000 Creditors 25,000 37,500
1,00,000 2,00,000 55,000 32,500
1,55,000
2,32,500
1,55,000
2,32,500
Adjustments • • Tax paid during the year 2009 was Rs.25,000 Dividend paid during the year was Rs. 12,000.
Treatment of Proposed Dividend when adjustment is given
To Cash
Proposed Dividend 12,000 By Balance b/d
10,000
To Bal. c/d
15,000 By P&L (Bal. Fig) 27,000
17,000 27,000
?This will be treated as Dividend Paid during the year. ? Shown as an “ Application of Funds”
This will be treated as Dividend Provided during the year. Added back to the current year’s profits in order to find out “Funds from operation” .
Treatment of Provision for Taxation
Treatment of Provision for Tax when NO adjustment is given
Balance Sheet 2009 Assets
Liabilities
2008
2008
2009
Share Capital 1,00,000 1,50,000 Plant and Machinery Proposed Dividend 10,000 15,000 Debtors Provision for taxation 20,000 30,000 Creditors 25,000 37,500
1,00,000 2,00,000 55,000 32,500
1,55,000
2,32,500
1,55,000
2,32,500
?This will be treated as Tax Paid during the year. ?Shown as an “ Application of Funds”
?This will be treated as Tax Provided during the year. ?Added back to the current year’s profits in order to find out “Funds from operation” .
Treatment of Provision for Tax when adjustment is given
Liabilities
2008
Balance Sheet 2009 Assets
2008
2009
Share Capital 1,00,000 1,50,000 Plant and Machinery Proposed Dividend 10,000 15,000 Debtors Provision for taxation 20,000 30,000 Creditors 25,000 37,500
1,00,000 2,00,000 55,000 32,500
1,55,000
2,32,500
1,55,000
2,32,500
Adjustments • • Tax paid during the year 2009 was Rs.25,000 Dividend paid during the year was Rs. 12,000.
To Cash
Provision for Tax A/c 25,000 By Balance b/d
20,000
To Balance c/d
30,000 ByP&L (Bal. Fig) 55,000
35,000 55,000
?This will be treated as Tax Paid during the year. ? Shown as an “ Application of Funds”
This will be treated as Tax Provided during the year. Added back to the current year’s profits in order to find out “Funds from operation” .
doc_400479679.pptx