Description
Fund flow analysis is the analysis of flow of fund from current asset to fixed asset or current asset to long term liabilities or vise- versa
Financial and Management Accounting
Unit 10
Unit 10
Structure: 10.1 Introduction Objectives 10.2 Meaning Self Assessment Questions 1 10.3 Concept Self Assessment Questions 2 10.4 Technique Self Assessment Questions 3 10.5 Sources Self Assessment Questions 4 10.6 Increase in funds Self Assessment Questions 5 10.7 Decrease in Assets Self Assessment Questions 6 10.8 Increase in Liabilities Self Assessment Questions 7 10.9 Increase in Networth Self Assessment Questions 8 10.10 Sources Self Assessment Questions 9 10.11 Increase in Assets Self Assessment Questions10 10.12 Decrease in Liabilities Self Assessment Questions 11 10.13 Networth Self Assessment Questions 12 10.14 Flow of funds Self Assessment Questions 13 10.15 Transaction not affecting flow Self Assessment Questions 14 10.16 Steps in preparation of funds flow statements
Funds Flow Analysis
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Self Assessment Questions 15 10.17 Computation of changes in working capital Self Assessment Questions 16 10.18 Layout Self Assessment Questions 17 10.19 Treatment of certain items Self Assessment Questions 18 Terminal Questions Answer to SAQs and TQs
10.1 Introduction
The usefulness of developing certain financial statements as an aid to evaluate past and / or present performance of a business concern is unquestionable and beyond any dispute. The Income Statement reports the revenues earned and expenses incurred or outstanding. The Balance Sheet conveys about the deployment of funds in various assets and equities The Fund Flow analysis is a modern technique of analyzing the movement of “funds” of a concern. The Fund Flow statement shows the movement of funds between two balance sheet dates. As per Robert N. Anthony “the Funds Flow statement describes the sources from which additional funds were derived and the use to which these funds were put”. Such a statement is becoming more and more popular and is being increasingly published as part of the annual accounts. Para 20 of International Accounting Standards 7 reads as follows : “A statement of changes in financial position should be included as an integral part of financial statements. The statement of changes in financial position should be presented for each period for which the income statement is prepared”. The inclusion of such a statement, therefore, is very helpful to improve the understanding of the operations and activities of an enterprise for the reporting period. Learning Objectives: After studying this unit, you should be able to understand the following 1. Understand the meaning and the concepts of funds flow statement. 2. Familiar with techniques of fund flow statement. 3. Preparation of fund flow statement.
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10.2 Meaning of Fund Flow Statement
Statement of Sources and Uses of Funds is a statement which depicts the sources from which funds are obtained and the uses to which they are being put. It is essentially derived from the analysis of changes which have occurred in assets and equities between two Balance Sheets periods. It is not the endproduct of accounting records. The statement speaks about the changes in financial items of Balance Sheets prepared at two different dates. Therefore, the funds flow indicates the inflows and outflows of funds during a particular accounting period generally a year. The flow exhibits the movements of funds in both the directions – inside and outside the business. As such, the term ‘flow’ in the context of funds indicates the transfer of cash or cash equivalent from asset to equity or one equity to another equity or from one asset to another asset. Self Assessment Questions 1
1. Fund flow statement is _________ From _________ Changes in _____ and ____. 2. FFS speaks about changes in _______________________ Balance Sheets. 3. Flow exhibits the flows _______________ And ________________ business. 4. Flow refers to transfer of ___________________ And __________________.
10.3 Concept of Fund
The term “funds” has been defined in a number of ways in financial circles. The three common usages of the term are cash , working capita and total financial resources.. Cash: Under this concept, the term “funds” is used only in the sense of cash. Here, only the changes in cash are considered. Hence, the statement is called “Cash Flow statement. This statement aims at listing the various items which bring about changes in the cash balance between two balance sheet dates. Cash planning becomes useful for control purposes. Using this method has certain disadvantages. Since cash is considered as short term assets, they are subjected to short term fluctuations. A delay in making payment to suppliers and a provision of one month’s credit for making a payment of land purchases may show sufficient cash flow . They may reflect a satisfactory position. But it is not a reality. Therefore, cash equivalent concept of fund is useful only for short term financial planning and not for long term or general financial position assessment. Working Capital: Working capital is Current asserts minus current liabilities. It is an alternative measure of the changes in the financial position. All those transactions which increase
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or decrease working capital are included in this statement. It excludes all such items which do not affect the working capital. The working capital concept of funds is in conformity with normal accounting procedures. Hence, a funds flow statement based on this concept fits well with the other statements. Moreover, working capital is also a measure of short term liquidity of the firm. Therefore, an analysis of factors bringing about a change in the amount of net working capital is useful for decision making by shareholders, creditors and management. Due to these reasons, the working capital approach to funds is more useful than the cash approach. Total Financial Resources : The term “funds” is very often used in the sense of useful financial resources also. Cash approach and working capital approach both are incomplete and inadequate to the extent that they omit a few major financial and investment transactions. Such items do not affect net working capital. But, if they are included, they would certainly provide qualitative information for the decision making., For example issuing equity shares and debentures for purchase of buildings or assets shall not have any effect on the working capital. But it is a significant financial transaction that should be disclosed. Therefore, this concept seems to be the best approach to disclose the changes in the financial position as compared to other concepts. It is in conformity with the statutory regulations and legal requirements. Self Assessment Questions 2 1. The three common funds are __________________________. 2. Cash planning is used for ____________________________. 3. Cash equivalent is used for ___________________________. 4. Working capital is __________________________________. 5. Non working capital items are ________________________. 6. Working capital means ______________________________. 7. Total financial resources considers _____________________. 8. Total financial resources provide _______________________.
Objectives: The main objectives of the funds flow statement is normally based on the purpose its going to be served. These are : a) to help in understanding the changes that are likely to take place in the assets and liabilities portfolio. These may not be readily available from the income statement.
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b) To inform the stakeholders as to how a firm can use the funds which are available at its disposal. c) To bring out the financial strengths and weaknesses of the business. Self Assessment Questions 3
1. The objectives of FFS is to identify ______________ in ______. and ____. 2. FFS is to bring out _______________________.
10.4 Techniques Of Preparing A Funds Flow Statement
Like other accounting statements, the structure of Fund Flow Statement is based on the equality of financial assets and liabilities including capital. The basic understanding is that the funds are obtained through profit, external borrowings or by issue of shares. If funds are not available readily from these sources, the other alternative available is to sell the fixed assets and investments. . The preparation of Funds Flow Statement is normally based on the following to bring to scientific method of preparation. a) Schedule of working capital changes b) Statement of Sources and Uses of Fund. Schedule of Working Capital Changes : It is also known as “Comparative change in Working Capital Statement” or “Working Capital Variation Statement”. The net change in working capital is projected here in the place of individual changes in all the current assets and current liabilities in the Funds Flow Statement. The statement indicates the amount of working capital at the end of two years. It shows the increase or decrease in the individual items of current assets and current liabilities. The effect of the changes in the individual items of the current assets and current liabilities on working capital is also presented clearly and precisely. The difference in the amount of working capital at the end of two years will depict either the increase or decease in working capital. While ascertaining the increase or decrease in individual items of current assets and current liabilities and its impact on working capital, the following Rules should be taken into account. i) increase in Current Assets will increase the Working Capital ii) Decrease in Current Assets will decrease the Working Capital iii) Increase of Current Liabilities will decrease the Working Capital iv) Decrease in Current Liabilities will increase the Working Capital
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It is, therefore, noted that the changes in the items of current assets are positively correlated to the changes in the working capital. On the other hand, changes in current liabilities are inversely related to the changes in the working capital. Self Assessment Questions 4 1. FFS is based on ___________________________. 2. FFS is prepared based on ___________________. 3. Working capital schedule indicates the ______________________. 4. Increase in current assets ___________________ the Working capital. 5. Decrease in CA _____________________________________ the WC. 6. Increase in CL ______________________________________ the WC. 7. Decrease in CL ______________________________________ the WC. 8. Changes in CA ________________________________ changes in WC. 9. Changes in CL ________________________________ changes in WC.
10.5 Sources of Funds
The transactions that increase the working capital are sources of funds. Following may the sources of funds in a concern. Funds from operations : Profit earned by the concern during the current year is deemed to be the source of funds. It is very important source of funds inflow. Net profit is arrived at by deducting cost of goods sold and other expenses from total sales revenue. However, the profit so calculated is seldom equal to the funds from operations because there are many items which are debited or credited in the Profit and Loss Account which do not affect working capital. Therefore, in calculating the funds from operations, the following adjustments must be kept in mind:
Items to be added back to net profit : a. Nonfund revenue deductions: These are items which are debited to Profit and Loss account. These do not cause outflow of funds such as depreciation and depletion on non current assets, amortization of fictitious and intangible assets, preliminary expenses, redemption of preference shares or debentures, deferred charges, advertising suspense account written off. If non fund expenditures does not affect the current assets such as unexpired insurance, do not add back. So also, all allowances for income tax payable in future years are excluded.
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b. Nontrading charges or losses : These items which were debited to Profit and Loss account reduce the profits but they do not cause any outflow of funds. Hence, profit should be corrected by adding back all such charges and losses. These include appropriation of retained earnings such as general reserve, dividend equalization fund, reserve for contingencies, sinking fund. In addition the dividend on shares must be added back since it is an appropriation and not trading charge. The losses arising out of sale of land, buildings, machinery, long term investments which were written off to the profit and loss account must be added back. Do not add the loss arising out of sale of a current asset such short term investments. It is a trading loss and hence it will not require any adjustment. The amount set aside as provision for current taxation will also be added back. This will be considered only when the provision for taxation is treated as a charge on profits. Items to be deducted from Net Profit. The non fund and non trading revenue receipts or incomes must be deducted Net profit in order to compute funds from operations. The items are: (a) Dividend received or receivable: Although this transaction increases the current assets such as cash and debtors, it is not a trading income. Hence, it should be deducted from the net profits to determine the funds from operations. (b) Retransfer of excess provisions: Where the provisions made for taxation, depreciation, doubtful debts exceed the genuine requirements, the excess amount is transferred back to the Profit and loss account. It does not create any inflow of funds since it is an accounting entry. Hence, deduct it. (c) Profit on sale of non current assets: It is a non trading income. Hence it must be eliminated from the amount of profit. (d) Appreciation in fixed assets: The amount of appreciation on revaluation of fixed assets is normally credited to the profit and loss account. If it is so, deduct it from the profit to compute the funds from operations. Self Assessment Questions 5 1. Increase in working capital ____________________. 2. Decrease in WC _____________________________. 3. Net profit is ________________________________. 4. Items to be added back to net profit are __________. 5. Some of nonfund revenue items _______________.
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6. Non trading losses include ___________________.
10.6 Increse in Funds
In a nutshell, the sources of funds can be observed as follows : a) increase of fresh shares derived from increase in share capital. b) Issue of debentures derived from increase in debentures. c) Raising of new loan derived from increase in long term loans d) Sale of fixed assets for cash or for other current assets derived from decrease in fixed assets and additional information. e) Non trading income f) Profit from operations before deducting non cash items of expenses and losses and before additional non cash, non trading incomes. g) Decrease in working capital derived from the Schedule of Working capital changes. Self Assessment Questions 6
1. Increase in share capital is ___________________________ of cash. 2. Increase in debentures _______________________________ of cash. 3. Increase in raising loans ______________________________. 4. sale of fixed assets __________________________________. 5. Non trading income is _______________________________. 6. Profit from operations is _____________________________. 7. Decrease in working capital is ________________________.
10.7 Decrease in Assets
Decrease in assets is always a source of funds for the business. Decrease may be in many ways: such as cash received from debtors, sale of goods for cash, Bills realized, sale of assets, fixed assets through provision for depreciation or amortization of fictitious assets. Decrease in an item of assets results in either a parallel decrease in some other liabilities or a parallel increase in some other item of assets example repayment of bank loan.. It should be remembered at the very outset that the decrease is ascertained by comparing the cost of fixed assets and not by comparing the written down value i.e cost less depreciation. If fixed assets have been shown not at cost but at written down value, then cost may be ascertained by adding total depreciation written off todate (generally known as accumulated depreciation) to the written down value The decrease in fixed assets results in sale of fixed assets. Specific information is generally given in
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the problem about this. The decrease in fixed assets not on account of depreciation or writing off is known as sale of fixed assets. It must be noticed that the total sale proceeds and not the cost of fixed assets sold are shown as source of fund. If the information in respect of sale of fixed assets is not clearly given, the following steps should be taken to find out the value of sale proceeds. Cost of Fixed Assets (Previous Year) ……………… Less: Cost of Fixed Assets of Current year ( ………………) Cost of Fixed Assets x x x x x x x x
ADD : Profit or DEDUCT loss on sale ……………………… Sale Proceeds to be treated as source XXXXXXXXXXXXXX The amount of profit or loss on sale of fixed assets for the above purpose derived from profit and loss account or from capital reserve or from any specific reserve. This is based on the fact that such profit or loss are credited or debited or transferred to these accounts in accordance with the accounting principles. It must be remembered that profit or loss on sale of fixed assets are not included in profit from operation for the purpose of this Fund Flow Statement. If such profit or loss has been included in Profit and Loss Account , adjustment has to be made. If there is profit on sale of assets, the net profit disclosed by Profit and Loss Account is reduced by the amount of profit earned on the sale of fixed assets. On the other hand, the net profit shown by Profit and Loss Account is increased by the amount of loss incurred on the sale of fixed assets. Example: The land and buildings account had a balance of Rs.5,00,000on Jan 2007. A piece of land has been sold . There is no purchase. Rs.30,000 depreciation has been charged in 2007. The profit on sale has been credited to Capital Reserve Account . The balance stood on January 1, 2007 was Rs.20,000 and Rs.50,000 on December 31. The balance of land and building account as on December 31 is Rs.4,50,000. Find the sale proceeds. Solution Balance of land and building on Jan 1, 2007 5,00,000 LESS : Depreciation charged (30,000) 4,70,000
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LESS: Balance of Land and Building on Dec 31 ( 4,50,000) Cost of Land sold 20,000 ADD : Profit on sale (derived from capital reserve) 30,000 (closing minus opening balance Rs.50,000 minus Rs.20,000) Sale Proceeds 50,000
Self Assessment Questions 7 1. Decrease in assets is _________________________________. 2. Profit or loss on sale of fixed assets ____________________.
10.8 Increase In Liabilities
The increase in liabilities is always a source of funds for the business. It may occur as a result of many transactions such as equity share capital or / and debentures to the public., purchase of goods on credit. Outstanding expenses are also considered as source of funds since payments are postponed and cash saved is parked in the business. A comparison of the amount of the items of long term liabilities i.e debentures and mortgage and other loans for the current year and previous year will disclose the increase or decrease in the long term liabilities. Additional information should also be taken into account for determining the correct amount of increase or decrease for the purpose of this statement. Any increase on account of the issue of debentures for consideration other than cash or current assets for the purchase of fixed assets or redeeming other debentures or preference shares would not at all be shown in the statement because in such a case there is no flow of fund. Self Assessment Questions 8 1. Increase in liability is ______________________ . 2. Outstanding expenses is __________________ .
10.9 Increase In NetWorth
There can be only two main channels of increase in networth or equity : a) procurement of more funds by issue of additional shares b) through accumulation of retained earnings or profits in business As the increased in owned funds is concerned, it happens only when the business has plans for expansion, diversification, modernization. The increase in paidup equity
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Share capital is not a regular feature. Its occurrence is only sporadic. But profit generated from operations is a normal feature and is virtually a continuous process from year to year. Profit earned during an operating period increases the new worth of the business and hence it is always considered as a source of funds. Sometimes, the premium received on sale of equity shares and credited to share premium account is also a source of funds as it adds to the size of net worth . Share capital consists of equity share capital and preference share capital. The change in equity share capital is always in the form of increase? it can never be in the form of decrease. The increase in equity share capital as per Balance Sheet values must be adjusted in terms of additional information. If the increase has taken place on account of the issue of fresh shares, only that portion of increase should be treated as sources which is due to the issue of fresh shares for cash and other current assets. Increase on account of share issues for consideration involving the purchase of fixed assets or redemption of preference shares or debentures shall not partake the character of inflow of funds and hence should not be shown in the statement. If fresh shares have been issued at premium, the amount of premium must be added to the increase in share capital for the purpose of showing it as source of fund. If the fresh shares have been issued at discount, the amount of discount must be deducted from the increase in share capital because it does not involve inflow of fund. Example: The opening and closing balance of Share capital are Rs.6,00,000 and Rs.9,50,000 respectively. The Preference Share capital included in opening balance is Rs.1,00,000. During the year, Rs.75,000 worth of Preference shares were redeemed at 8 % premium. Bonus shares at Re.1 for every five equity shares held . In addition, a business was purchased by issue of Rs.90,000 shares at a premium of 10 %. The opening and closing balance in the Premium Account is Rs.8,00,000 and Rs.14,000 respectively. Calculate the further fresh issue. Solution: Share capital at close DEDUCT : Share capital opening Less: Redemption of Preference Shares ( 75,000) ( 5,25,000) 4,25,000 Deduct: Shares issued for noncash items
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3,35,000 DEDUCT : Bonus shares ( 1 / 5 x 5,00,000) (1/5 of 6,00,000) 2,25,000 ADD: Share premium. (14,000 + 6,000 minus 8,000 minus 9,000) Fresh issue of Shares Self Assessment Questions 9 1. Decrease in net worth is through __________________________. 2. Increase in net worth is needed for ________________________. 3. Profit earned _________________________________ net worth. 4. Premium on shares is __________________________. 5. Change in equity shares is always ________________. 6. Decrease in preference share capital is ____________. 3,000 2,28,000 (1,00,000)
10.10 Sources Of Funds
The use of funds results in cash outflows. The outflows are known as :application” of funds. The uses of funds are mainly concerned with. a) Redemption of Preference shares in cash derived from decrease in share capital. b) Redemption of debentures in cash derived from decrease in debentures c) Repayment of loan derived from decrease in long term loans d) Purchase of fixed assets for consideration other than shares, debentures or long term debt derived from increase in fixed assets and additional information. e) Loss from operations f) Payment of dividend in cash Self Assessment Questions 10 1. Use of funds result in ________________________. 2. Redemption of Preference shares is _____________. 3. Redemption of debentures is __________________. 4. Redemption of long term loan is _______________. 5. Purchase of fixed asset is _____________________. 6. Loss from operations is ______________________.
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7. Payment of dividend is ______________________.
10. 11 Increase In Assets
The increase in fixed assets is known in the accounting language as “Purchase of fixed assets”. In order to find out the increase in fixed assets, cost of fixed assets of previous year as reduced by the cost of fixed assets sold during the current year is deducted from the cost of fixed assets of the current year. In other words, the increase in fixed assets is calculated as under : Cost of Current year fixed assets ……………… DEDUCT ? Cost of previous fixed assets ……….. LESS: Cost of fixed assets sold or Written off during the Current year (……….) (………………..)
INCREASE in fixed assets x x x x x x x
Example: The opening and closing written down balances of an asset are Rs.5,00,000 and Rs.5,50,000. The accumulated depreciation has been Rs.1,50,000 at the beginning and Rs.1,90,000 at the close. A machine costing Rs.30,000 (accumulated depreciation Rs.18,000) was sold during the year for Rs.9,500. Calculate the purchase price of the fixed assets. Solution Closing cost of asset (closing value + closing accumulated Depreciation : 5,50,000 + 1,90,000 7,40,000 DEDUCT : Opening cost of Asset (opening Value + opening accumulated Depreciation 5,00,000 + 1,50,000 6,50,000 Less : Cost of asset sold (30,000) (6,20,000) 1,20,000
Sometimes, it may happen that the cost figures cannot be ascertained on the basis of information available. Increase in fixed assets, in this case, has to be found out with reference to the written down value along with annual depreciation. If no purchase of fixed assets were made during the current year, then the value of fixed assets shown in the Balance Sheet of the current year
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should be equal to the values of the previous year minus annual depreciation for current year. The excess of current year’s value over previous year’s value minus annual depreciation will be treated as increase. This will represent the purchase of fixed assets. Current year written down value of Asset …………….. DEDUCT ? Previous year WDV of Asset …………… Less: Current year Depreciation (…………) ( ……………..) _______________ Increase in Fixed Asset being Purchases x x x x x x Example: The written down value of a Machinery at the beginning and at close were Rs.2,00,000 and 1,75,000. An old machine whose written down value was Rs.12,000 was sold for Rs.6,500. Rs.32,000 depreciation was charged during the current year. Calculate the purchase price. Solution: Current year written down value of Machinery DEDUCT : Previous year written down Value of Machinery Less : Current year depreciation 2,00,000 ( 32,000) 1,68,000 Less: written down value of machine Sold ( 12,000) (1,56,000) Purchase price Self Assessment Questions 11 1. Increase in fixed asset is known as _____________________. 2. Purchase is _______________________________________. 3. The excess of current year –minus (previous year + Depreciation) is treated as ________________. 19,000 1,75,000
10.12 Decrease In Liabilities
It implies application which is the flow of funds out of business. Decrease in liability may be done due increase in one or more liability items or due to decrease in one or more asset items. It may also be partly due to increase in liability and partly due to decrease in assets. . Any amount of premium on the redemption of debentures should be adjusted as deduction . Any decrease on
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account of redemption of debentures through the issue of another debentures or preference shares should also not be shown in the statement. Example: On January 1, 2007, the balance of 8 % Debentures Account stood at Rs.5,00,000. Rs.60,000 debentures were repaid at 5 percent premium. Rs.75,000 debentures were purchased at Rs.95 from the market and cancelled. The closing balance of debentures was Rs. 2,00,000. Calculate the outflow of funds. Solution: Opening balance of Debenture Account LESS: Closing balance of Debenture Account Decrease LESS : Discount on cancellation (Rs.75,000 / Face Value of Rs.100 each or 750 debentures x Rs.5 each (Rs.100 minus Rs.95) ( 1,250) 2,98,750 ADD: Premium (Rs.60,000 x 5 / 100) Outflow of funds 3,000 3,01,750 5,00,000 ( 2,00,000) 3,00,000
Self Assessment Questions 12 1. Decrease in fixed liabilities ________________________ funds. 2. Premium on redemption of debentures is _____________ .
10.13 Net Worth
It may be used due to (a) loss from operations (b) payment of cash dividend out of accumulated reserves and (c) return of a part of paid up share capital to shareholders implying reduction of share capital – a rare occurrence. If there is decrease in preference share capital and this decrease is on account of redemption of these shares in cash or other current assets, such decrease should be shown as use of fund. But the decrease on account of redemption by the issue of another preference shares or equity shares or debentures, shall never be shown in the statement because it will not involve outflow of fund. If the preference shares have been redeemed at a premium, necessary adjustments should be made Self Assessment Questions 13 1. New worth is due to _______________________.
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2. Net worth is also due to ___________________. 3. Net worth can be ________________________.
10.14 Flow of Funds
It refers to change in fund. Increase of funds of any transaction is a source and decrease of funds in any transaction is application or uses of funds. But the transactions which do not result in any change in the funds is called “Nonfund”. Flow of fund takes place when a business transaction brings a change in the working capital. Such change may be increase or decrease. The increase is a positive change and the decrease being the negative. These directions in change are known as fund elements or fund factors. They are commonly known as “inflows” and “outflows”. The basic rule is : Flow of fund if a transaction involves : a) Current assets and fixed assets that is machine sold for cash b) Current assets and fixed liabilities that is issue of debentures to the public c) Current assets and owner equity that is issue of shares for cash d) Current liabilities and fixed assets that is transfer of assets to discharge a claim e) Current liabilities and fixed liabilities that is conversion of creditors due by issue of debentures. f) Current liabilities and capital that is conversion of creditors into owner’s equity by issue of equity shares. Self Assessment Questions 14 1. Flow refers to __________________________. 2. Increase in funds _______________________. 3. Decrease in funds ______________________. 4. Non change is known as _________________. 5. Flow takes place due to __________________ working capital. 6. The increase in fund is a __________________ change. 7. The decrease in fund is a __________________ change.
10.15 Transactions that do not affect the flow of Funds
a) Current assets and current liabilities creditors paid b) Fixed assets and fixed liabilities purchase of assets for debentures c) Fixed assets and capital purchase of assets by issue of equity shares.
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Self Assessment Questions 15 1. Transactions not affecting flow are _______________________.
10.16 Steps In Preparation Of Funds Flow Statement
There are three steps involved in the preparation of a Fund Flow Statement (FFS). They are as follows: a) Preparation of Statement of changes in working capital or Schedule of changes in working capital. b) Preparation of Adjusted Profit and Loss Account (APL) c) Statement of changes in Financial position as per AS – 7 Self Assessment Questions 16 1. First step in preparation of FFS is __________________. 2. Second step in the preparation of FFS is _____________. 3. Third step in the preparation of FFS is _______________.
10. 17 Computation of Changes in Working Capital and Funds from Operations
It is a customary practice that only the net changes in working capital should be shown in the Fund Flow Statement instead of individual changes. Here, the current assets and current liabilities are considered. For this purpose, a separate statement or schedule is being prepared. Individual items are entered here. The opening and closing balances are entered one after the other. The corresponding increase or decrease are entered based on the following rules : a) Increase in a current asset item increases working capital. b) Decrease in a current asset item decreases working capital. c) Increase in a current liability item decreases working capital. d) Decrease in a current liability item increases working capital . Insert the total of current asset and current liabilities of both opening and closing periods. Say, the total of current assets as A and that of total of current liabilities as B. Deduct A minus B. The answer is known as net Working capital. If the working capital at the end of the current year is more than the working capital at the end of previous year, the excess is called as “increase in working capital”. Otherwise, if previous year’s working capital is more than the current year’s working capital, the difference is called as “Decrease in working capital”. Increase in working capital is shown as application of funds and decrease in working capital as source of funds in the Funds Flow Statement.
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The funds from operation can be found with the help of preparing an Adjusted Profit and Loss Account. Self Assessment Questions 17 1. Individual items are projected in ___________________. 2. Working capital equation is _______________________. 3. A is total _____________________________________. 4. B is total ____________________________________. 5. Working capital is _____________________________. 6. Net increase or decrease is ______________________.
10.18 Layout
The layout for schedule of changes in Working Capital is as follows Balances as on Effect on
Details Last Current Increase Decrease Year Year CURRENT ASSETS Cash in hand Cash at Bank Sundry Debtors Bills Receivable Stock or Inventory Prepaid expenses Total Current Assets, Say A CURRENT LIABILITIES Sundry Creditors Bills Payable Bank Overdraft Outstanding expenses Total Current Liabilities, Say B NET WORKING CAPITAL A minus B Increase or Decrease in Working
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Capital (Balancing figure)
Example: DR Ltd provides the following information Jan 1 Dec 31 In Rupees Sundry Debtors 65,000 1,05,000 Cash in hand 13,000 20,000 Cash at Bank 15,000 20,000 Bills Receivable 16,000 30,000 8,000 Inventory 90,000 84,000 Bills Payables 12,000 Outstanding expenses 6,000 5,000 Sundry Creditors 30,000 58,000 Bank Overdraft 30,000 42,000 Short term Loans 32,000 36,000 Prepare a schedule of changes in working capital
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Solution Schedule of changes in Working Capital Balances as on Effect of WC Details Jan 1 Dec 31 Increase Decrease Current Assets Cash in hand 13,000 20,000 7,000 Cash at Bank 15,000 20,000 5,000 Sundry Debtors 65,000 1,05,000 40,000 Bills Receivable 16,000 30,000 14,000 Inventory 90,000 84,000 – 6,000 Total Current Assets, A 1,99,000 2,59,000 28,000 Current Liabilities Sundry Creditors 30,000 58,000 – Bills Payables 12,000 8,000 4,000 Outstanding expenses 6,000 5,000 1,000 Bank Overdraft 30,000 42,000 – Short term loans 32,000 36,000 – Total Current Liabilities, B 1,10,000 1,49,000 Working Capital A minus B 89,000 1,10,000 Net Increase in working capital (balancing figure) 21,000 21,000 TOTAL 1,10,000 1,10,000 71,000 71,000
12,000 4,000
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Example : Prepare a statement of changes in working capital from the following information.
Jan 1 Dec 31 In Rupees Share Capital 50,000 50,000
Retained earnings 14,000 40,000 Fixed Assets at cost 80,000 90,000 Provision for Depreciation on Fixed Assets 22,000 27,000 Investments in shares of subsidiaries 15,000 15,000 8% Debentures (redeemable in 5 equal annual instalment of Rs.20,000 each, from the current year) 20,000 – Prepaid expenses 21,000 14,000 Outstanding expenses 5,000 12,000 Creditors and Bills Payables 30,000 25,000 Debtors and Bills Receivables 18,000 20,000 Cash and Bank balances 5,000 13,000 Provision for Doubtful Debts 4,000 2,000
Solution Statement of changes in working capital during the year Details Current Assets Cash and bank balances Debtors and B.R. Government Securities Prepaid expenses Total, say A Current Liabilities 8% Debentures Outstanding expenses Creditors and B.P. Provision for Doubtful Debts 20,000 5,000 30,000 4,000 20,000 12,000 25,000 2,000 – – 5,000 20,000 7,000 Balances as on Jan 1 5,000 18,000 6,000 21,000 50,000 Dec 31 13,000 20,000 12,000 14,000 59,000 Effect on WC Increase 8,000 2,000 6,000 – 7,000 Decrease
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Total, say B Working Capital : A minus B Net increase in working capital
59,000 ( 9,000 ) 29,000
39,000 20,000
3,000
29,000 20,000 20,000 43,000 43,000
Adjusted Profit and Loss Account The Layout is as follows: Dr. To By Cr.
Depreciation written off Profit and Loss account Depreciation Provision last year from Balance Preliminary expenses written Sheet Off Profit on sale of investments Goodwill written off Profit on sale of Fixed assets Discount on issue of shares and Dividend and interest received Debentures written off from trade investments Fixed assets discarded or Written off Loss on sale of fixed assets FUNDS GENERATED FROM Loss on sale of trade investments TRADING OPERATIONS Transfer to General Reserve, (balancing figure) transferred to Funds Flow Statement as Sinking Funds, Reserve Funds application of funds Transfer to other Reserves Premium on redemption of Preference Shares Provision for Tax Provision for Final or Proposed Dividend Interim Dividends Net Profit as per closing current Year Profit and Loss Account TOTAL
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NOTE : If debit total of APL is more than the credit total, the difference is Funds generated from Operation : Record on the credit side of Adjusted Profit and Loss Account. If credit total of APL is more than the debit total, the difference is funds lost in operations. Record on the debit side of Adjusted Profit and Loss Account The balancing figures should be transferred in opposite direction to Funds Flow statement.. Example 3: Calculate funds from operations from the following Profit and Loss Account To By Expenses paid and 3,00,000 Gross Profit 4,50,000 Outstanding Depreciation 70,000 Gain on sale of land 60,000 Loss on sale of machine 4,000 Discount 200 Goodwill 20,000 Net Profit 1,15,800 5,10,000 5,10,000 Solution: ADJUSTED PROFIT AND LOSS ACCOUNT To Rs. By Rs. Depreciation 70,000 Gain on sale of land 60,000 Goodwill written off 20,000 Funds from operations 1,50,000 Discount written off 200 (balancing figure) Loss on sale of machines 4,000 Net Profit 1,15,800 2,10,000 2,10,000 Example 4: Following are the extracts from the Balance sheets of DR Lt. 3132007 3132008 Rs. Rs. Profit and Loss account 11,100 14,800 General Reserve 7,400 9,250 Goodwill 3,700 1,850 Provision for depreciation on asset 3,700 4,400 Preliminary expenses 2,200 1,500
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During the year, the company sold land whose book value was Rs.50,000 for Rs.54,000 and paid an interim dividend of Rs.2,000 Calculate funds from operations.
Solution ADJUSTED PROFIT AND LOSS ACCOUNT To Rs By Rs.
General Reserve Balance brought down 11,100 (9,250 minus 7,400) 1,850 being opening balance Goodwill written off Profit on sale of land 4,000 (3,700 minus 1.850) 1,850 Preliminary expenses Written off 700 Funds generated from
Depreciation written operations (balancing Off 700 figure) Interim dividend paid 2,000 Closing balance of Profit And Loss account 14,800 6,800
21,900 21,900
NOTES: 1. There is an increase in the balance in General Reserve. It implies that some amount has been transferred to the account from the Profit and Loss account. This is an appropriation of profit which does not result in any outflow of funds. 2. The balance in Goodwill Account and preliminary expenses account has come down which indicates tht the difference has been written. This also does not result in an outflow of funds. 3. The increase in provision for depreciation is on account of current year’s depreciation which does not result in any outflow of funds. 4. Profit on sale of land and interim dividend being nonoperating items are to be separately shown as source and application of funds in the Funds Flow Statement.
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Example 5: The following information is provided : Opening balance of Plant Rs.1,32,500. Closing balance of Plant Rs.1,97,500. Provision for Depreciation in Plant at the beginning 45,000? and at close Rs.61,000. During the year Rs.65,000 worth of Plant was purchased in exchange for fully paid debentures and old Plant costing Rs.40,000 was sold for Rs.34,000. Depreciation provided Rs.18,000. Calculate the flow of funds. Solution: Plant Account
To By Opening Balance 1,32,500 Bank : Sale of Plant 34,000 Debenture Account 65,000 Provision for Depreciation
(Plant purchased) Account : Depreciation on sold 18,000 Adjusted P&L Account Profit on sale 12,000* Closing balance 1,97,500 Bank Account : Plant Purchased (balancing Figure) 40,000
2,49,500 Calculation of Profit on sale : 34,000 minus (40,000 – 18,000) = 12,000 Provision for Depreciation on Plant Account
2,49,500
To By Plant Account
epreciation Opening Balance 45,000 On plant sold 18,000 APL : Current year
Closing Balance 61,000 Depreciation (bal.figure 34,000
79,000
79,000
Note: For all Asset Account, record the opening balance on the debit side and closing balance on the credit side of the concerned Asset Account. For all liabilities , record the opening balance on the credit side and the closing balance on the debit side.
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10.19 TREATMENT OF CERTAIN ITEMS There are certain items whose treatment is not uniform. Different authors differ differently. But, in this study material, an uniformity is maintained. The likely arguments have been provided for treating items on a particular principle. The items are : Provision for Bad Debts Sometimes, it is shown as reserve for bad / doubtful debts. Actually, this item is shown as deduction from total book debts to the asset side of the Balance Sheet. Therefore, this item should be deducted from the amount of debtors shown in the schedule of working capital changes. Since such treatment may complicate the calculation work, it is suggested that it should be shown along with current liabilities, although, it does not belong to that category. Provision for Tax: DO not treat this item as a current liability. The Provision has to be made to meet the tax liability of current year. If there is a Provision for last year, it has to be paid this year. Hence, the last year Provision actually becomes the current year cash outflow. Hence record it in the Funds flow statement. Proposed Dividend Normally, the proposed dividends are given as Balance Sheet item on the liability side. The Directors propose the final dividend which needs to be approved by the General Meeting. Hence, it is fair to assume that the proposed dividend is not a current liability. Do not show in the schedule of working capital changes. The last year proposed dividend should be paid during the current year, hence a cash outflow Investments It poses problems in its treatment. The Rule is : a) if the investments are in the form of Government or other marketable securities, treat it as current assets. b) If it is mentioned as trade investments, that is investments in shares and debentures of another companies, treat it as fixed assets. c) If nothing is mentioned specifically, the treatment is : : if investments have been sold simultaneously, treat it as current assets : in other cases, treat it as Fixed Assets.
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Depreciation Normally, the value of deprecation will be provided in the problem as an adjustment items. Depreciation is a non cash item. It is, therefore, charged to Profit and Loss and recorded in the concerned Fixed Assets Account. If the depreciation is given as a percentage, calculate the value on the opening balance of the concerned account.. If the value of depreciation is not given, it has to be found out as follows : Opening balance of Fixed Assets …….. ADD: Purchases ……. LESS : Fixed assets sold (…….)
LESS : Closing balance of fixed assets (…….)
Depreciation charges
x x x
If a concern intends to show its fixed assets at its cost price, the periodic annual depreciation is shown under “liabilities” side as Provision for Depreciation commonly known as Accumulated Depreciation Fund Account. If there were to be an Accumulated Depreciation Fund Account in already in operation, the current year depreciation is charged against this Provision for accumulated Depreciation Account and not recorded directly into Adjusted Profit and Loss Account . In other words, the current year depreciation is routed through the Provision Account. Increase / Decrease in Fixed Assets The increase or decrease by means of cash is recorded in the FFS. Increase or decrease due to purchase consideration through shares and debentures are not recorded. Increase / Decrease in longterm liabilities Compare debentures and mortgages as per the Balance Sheet figures. Only consider if cash is the main striker to cause the increase or decrease. If the changes were to be due to consideration other than cash or current assets, do not record it in the FFS.. Hidden Items Prepare the necessary ledger accounts concerned in the fixed assets, fixed liabilities and share capital and carry out all the necessary adjustments. The balancing figure, if any, would be the cash transactions. For all non, cash transactions, concentrate on the Adjusted Profit and Loss Account.
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Self Assessment Questions 18 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Provision is shown as _______________________ Provision for doubtful debts is _______________ from gross debtors Provision is shown in _______________________ Provision for tax may be _____________________ If Provision for Tax is maintained , treat it in _________________ Proposed dividend is shown on ________________ of Balance sheet Proposed dividends are to be approved by _____________________ Proposed divided. Is not considered as ________________________ Last year proposed dividend is cash __________________________ Government investments are _______________________________ Investments in shares and debentures are ______________________ Depreciation is _____________________ Depreciation is a ___________________ If Depreciation is given as a percentage, calculate on _____________ If Provision for depreciation account is maintained, charge the current depreciation to _____________ and not to _______________________ 16. Depreciation is charged only on _______________________________
Problem 6: The Balance Sheets are given below :
Year (Rs.in lakhs) 2006 2007
Fixed Assets 50 60 Investments 10 20 Current Assets 140 150
Share Capital 100 160 Profit and Loss Account 30 30
Debentures 10
Current Liabilities 60 40
Depreciation charges was Rs.6 lakhs. Prepare Fund Flow statement.
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Solution: Schedule of changes in working capital
2006 2007
Current Assets 140 150 LESS: Current liabilities ( 60 ) (40)
Working Capital : CA minus CL
80 110
Net Increase in working capital transferred to 30 FFS (application)
110 110
Adjusted Profit and Loss Account To By Depreciation 6 Opening Balance 30 Closing Balance 30 Funds from Operations 6
36
36
Funds Flow Statement Sources Issue of Equity shares Applications 60 Purchase of Fixed Assets 16
Funds from operation 6 Purchase of investment 10 Redemption of debenture 10
Increase in working capital 30 66 66
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Problem 7 : From the following extracts, calculate funds from operations Year 2006 2007
Profit and Loss account 50,000 80,000 Provision for taxation on 10,000 15,000 Proposed dividends 5,000 10,000
Additional information: Tax paid Rs.2,500. Dividends paid Rs.1,000.. Calculate funds from operation taking provision for tax and provision for tax and proposed dividend as (a) non current liabilities and (b) current liabilities. Solution: Provision for tax and proposed dividend are taken as noncurrent liabilities To By Income tax account 2,500 Opening balance 10,000 Tax paid Profit and loss account 7,500
Closing balance 15,000 provision made (balance Figure) 17,500 17,500
Proposed Dividend Account To By Dividend account being Opening balance Dividend paid during the Profit and loss account Year 1,000 proposed dividend 6,000 Closing balance 10,000 11,000 11,000 5000
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Adjusted Profit and Loss Account To By
Provision for Tax 7,500 Opening balance 50,000 Proposed Dividend 6,000 Funds from operations Closing balance 80,000 (balancing figure) 43,500
93,500 93,500 c) If Provision of tax and proposed dividend are taken as a current liability, funds from operations will be the difference in Profit and Loss account at the beginning and the end of the year.
NOTES 1. In case a) Income tax paid Rs.2,500 and Dividend paid Rs.1,000 are shown as application of funds in the FFS. 2. In case (b), there is no need to prepare proposed dividend account and provision for tax account,. However, the opening and closing balances of the two accounts are shown as current liabilities in the statement of changes in working capital
Problem 8: The book value of trade investments of DR Ltd as on March 1, 2006 and March 31, 2007 was Rs.50,000 and Rs.70,000 respectively. During the year, Rs.5,000 was received as dividends, of which Rs.2,000 pertained to preacquisition profits which have been credited to Investments Account. Investments costing Rs.10,000 have been sold during the year for Rs.10,000. Find the flow of funds on account of investments. Solution: Investments Account To By
Opening balance 50,000 Dividend Account : Pre Bank Account : purchase acquisition profit 2,000 Of investments (balance 32,000 Bank : sale of investments 10,000 Closing balance 70,000 82,000 82,000
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Notes: 1) The investments purchased were valued cumdividend. Hence, on receipt of dividends, they were rightly credited to Investments. Hence there is no need for any further adjustment. 2) The investments sold has been at the book value. There is no profit or loss on account of the transactions. If the transaction had resulted in profit, it will have to be deducted from net profit to calculate funds from operations. In case of loss, it would be added to net profit to calculate funds from operations.
Problem 9: Prepare a fun d flow statement of DR Ltd. Year 2007 2008 Equity share capital 10,00,000 15,00,000 10 % Preference Share Capital 3,00,000
11 % debentures 8,00,000 6,00,000 Share Premium Account 1,00,000 95,000 Additional information (a) 10 % Preference shares have been redeemed at a premium of 10%, the premium amount was charged to the share premium account (b) There has been a profit of Rs.1,000 on the redemption of debentures.
Solution: Equity Share Capital To By Closing Balance 15,00,000 Opening balance 10,00,000 Bank (Fresh issue) 5,00,000 Balancing figure 15,00,000 15,00,000
Preference Share Capital Account To By Bank (Redemption) 3,30,000 Opening balance 3,00,000 Premium on redemption 30,000 3,30,000 3,30,000
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Debentures Account To By Bank (redemption) 1,99,000 Opening balance 8,00,000 Profit on redemption 1,000 Closing balance 6,00,000 8,00,000 8,00,000 Share Premium Account To By Preference share 30,000 Opening balance 1,00,000 capital Closing balance 95,000 Equity share capital * 25,000 1,25,000 1,25,000
STATEMENT SHOWING SOURCES AND APPLICATION OF FUNDS Equity share capital 5,00,000 Redemption of Preference shares 3,30,000 Share Premium 25,000 Redemption of Debentures 1,99,000 Decrease in working capital 4,000 5,29,000 5,29,000
Problem 10: The following are the summarized Balance Sheets of DR Ltd.
Liabilities 2006 2007 Share Capital 5,00,000 6,00,000 Reserves 1,50,000 1,80,000 Profit and Loss Account 40,000 65,000 Debentures 3,00,000 2,50,000 Creditors for goods 1,70,000 1,60,000 Provision for Income tax 60,000 80,000 12,20,000 12,20,000 Assets Fixed Assets 10,00,000 11,20,000 Less : Depreciation (3,70,000) (4,60,000) Stock 2,40,000 3,70,000 Book Debts 2,50,000 2,30,000 Cash 1,00,000 75,000 12,20,000 12,20,000
Prepare a Funds Flow statement
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Solution: Statement of changes in working capital Balances as on Effect on W.C
2006 2007 Increase Decrease Current Assets Stock 2,40,000 3,70,000 1,30,000 20,000 25,000 . Book Debts 2,50,000 2,30,000 Cash 1,00,000 75,000 Total CA say A 5,90,000 6,75,000 Current Liabilities Creditors for goods 1,70,000 1,60,000 10,000 20,000 Provision for income tax 60,000 80,000 Total CL, say B 2,30,000 2,40,000 Working Capital, A – B 3,60,000 4,35,000 Increase in Working capital 75,000 75,000
Total 4,35,000 4,35,000 1,40,000 1,40,000 Adjusted Profit and Loss Account To By
Reserve 30,000 Opening balance 40,000 Depreciation 90,000 Funds from Operation 1.45,000 Closing balance 65,000 transferred to source 1,85,000 1,85,000
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Statement showing Sources and Application of Funds Sources Application Issue of Share capital 1,00,000 Redemption of debentures 50,000 Funds from operation 1,45,000 Purchase of Fixed Assets 1,20,000 Increase in working capital 75,000 2,45,000 2,45,000
Notes: 1) The increase in General Reserve is due to transfer a part of profit of the current year and hence the difference is transferred to APL since it’s a noncash item 2) The difference in depreciation is charged to APL, since it’s a noncash item. 3) Increase in Equity Share capital is assumed to be the fresh issue which is a cash item. It is recoreded in FFS. 4) The difference is debentures is the redemption. It’s a cash item. Hence taken to FFS 5) Purchase of fixed asset is difference between the opening and closing balance of fixed assets. It’s a cash item. Hence taken to FFS .
Problem 11 Prepare a Fund Flow Statement Balance Sheets 2006 2007 2006 2007
Equity Share capital 50,000 65,000 Cash balances 15,000 9,000 Profit & Loss 14,750 17,000 Debtors 25,000 27,000 Trade Creditors 31,000 29,000 Investment 5,000
Mortgage 10,000 15,000 Fixed Assets 70,000 80,000 Short term loans 16,500 15,000 Less: Depreciation (25,250) (7,000) Accrued expenses 7,500 8,000 Goodwill 5,000 1,29,750 1,49,000
1,29,750 1,49,000
Depreciation provided is Rs.4,750. Write off goodwill. Dividend paid Rs.3,500.
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Solution: Schedule of changes in working capital Balances as on 2006 2007 Current Assets Cash 10,000 13,000 Debtors 25,000 27,000 Stock Total current assets, say A Current Liabilities Trade Creditors 29,000 31,000 Short term loans 15,000 16,500 Accrued expenses 8,000 7,500 Total current liabilities, say B 52,000 55,000 Working capital, A – B 20,000 24,000 40,000 35,000 75,000 75,000
Net increase in Working capital 4,000
Total 24,000 24,000
Adjusted Profit and Loss Account To By Depreciation 1,750 Opening balance 30,000
Goodwill 5,000 Funds generated from Dividend 3,500 operations Closing balance 17,000 12,500
27,250 27,250
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Funds Flow statement Issue of fresh equity 15,000 Purchase of fixed assets 30,000 Sale of investment 5,000 Payments of dividends 3,500 Loan on mortgage 5,000 Funds from operations 12,500 Increase in working capital 4,000
37,500 37,500
Problem 12 The Balance Sheets of DR Ltd Rupees in 000s 2006 2007 2006 20078
Share capital 50 100 Goodwill 15 25 Debenture 25 Plant 18 96
Profit and Loss 15 25 Stock 40 35 Proposed Dividend 5 6 Debtors 15 32.5 Creditors 20 30 Cash 8 9 Liabilities for expenses 5 3.5 Preliminary exp 4 2.5
100 200 100 200
A business was purchased during the year by the issue of 25,000 shares and 25,000 debentures. Depreciation Rs.6,000 has been provided in the year. A machine has been sold for Rs.1,50,000, the written down value being Rs.1,000. The business purchased had the following assets and liabilities : Machine Rs.20,000, Stock Rs.5,000, Debtors Rs.15,000, Creditors Rs.5,000. Prepare the Funds Flow Statement. Solution In this problem, another business concern was purchased whereby the assets and liabilities come into business. For this purchase, the payment is through the issue of shares and debentures. If the payment were to be in excess of assets and liabilities taken over, the excess payment is known as “Goodwill”.
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Assets taken over : Machine 20,000 Stock 5,000
Debtors 15,000
40,000 Less Creditors taken over ( 5,000 )
Net assets taken over 35,000
Total payments made : Share capital + Debentures 50,000 Excess payment being treated as Goodwill (50,00035,000) 15,000
Statement showing changes in working capital: Balances as on 2006 2007 Current Assets Stock 40,000 35,000 9,000 Debtors 15,000 32,500 Cash 8,000 Total current assets, say A Current Liabilities Sundry Creditors 20,000 30,000 Liabilities for expenses 5,000 3,500 Overdraft 5,000 10,500 Total current liabilities, say B Working capital A – B Decrease in working capital (source) 30,000 44,000 33,000 32,500 500
63,000 76,500
33,000 33,000
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Adjusted Profit and Loss Account To By
Goodwill 5,000 Opening balance 15,000 Preliminary expenses 1,500 Profit on sale of Plant 500
Depreciation 6,000 Funds from operations 28,000 Proposed dividend 6,000 Closing balance 25,000
43,500 43,500
Funds Flow Statement Issue of fresh shares for : cash for current assets Stock 5,000 Debtors 15,000 Less: Creditors (5,000) 15,000 Purchase of Plant 65,000 Sale of Plant 1,500 Payment of dividend 5,000 Funds from operations Decrease in working Capital 500 28,000
70,000 70,000
Terminal Question Problem 1: The balance in the Provision for taxation : opening Rs.30,000 and closing Rs.40,000. Taxes paid during the year was Rs.25,000. Calculate Funds from operation. (b) What is the provision made during the year?
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Problem 2: Extracts of Balance Sheets are given below : 2006 2007
Profit and Loss appropriation account
30,000 40,000
General Reserve 20,000 25,000 Goodwill 10,000 5,000
Preliminary expenses 6,000 4,000 Provision for Depreciation on Machinery 10,000 12,000
Calculate funds from operation
Problem 3: Calculate funds from operations: Profit and Loss Account To By Expenses 3,00,000 Gross profit 4,50,000 Depreciation 70,000 Gain on sale of land 60,000 Loss on sale of plant 4,000
Discount on Debenture 200 Goodwill 20,000 Net profit 1,15,800
5,10,000
5,10,000
Problem 4: Calculate funds from sale of Plant Plant (gross) 1,00,000 1,25,000 Additional information: a) Loss on sale b) Depreciation charged c) Purchase of Plant 1,000 14,000 35,000
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Problem: 5. The Balance Sheets are as follows
Capital 25,000 20,000 Cash 4,700 3,000 Profit and Loss 2,300 1,000 Debtors 11,500 12,000 Bills Payable 4,500 7,000 Land 6,600 5,000 Stock 9,000 8,000
31,800 28,000 31,800 28,000
Prepare a statement of Sources and uses of funds.
Answer Self Assessment Questions Self Assessment Questions 1 1. Derived, changes, assets, equities 2. Two 3. Inside and outside 4. Cash and cash equivalents Self Assessment Questions 2 1. Cash, working capital, total financial resources 2. Control 3. Short term financial planning 4. Current assets minus current liabilities 5. Excluded 6. Short term liquidity 7. Both financial and investment transaction 8. Qualitative information
Self Assessment Questions 3 1. Changes, assets and liabilities 2. Financial strengths and weaknesses Self Assessment Questions 4 1. Financial assets and liabilities including capital 2. Statement of changes in working capital, statement of sources and uses of funds
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3. Net increase or decrease in individual items 4. Increases 5. Decreases 6. Decreases 7. Increases 8. Positively corelated 9. Inversely related Self Assessment Questions 5 1. Application 2. Source 3. Gross profit – Cost of goods sold + expenses 4. Non fund revenue, non trading changes or losses 5. intangible assets and revenue items 6. Appropriation of retained earnings. Self Assessment Questions 6 1. Inflow 2. Inflow 3. Inflow 4. Inflow 5. Inflow 6. Inflow 7. Inflow Self Assessment Questions 7 1. Source 2. Excluded from fund flow statement.
Self Assessment Questions 8 1. Source of funds 2. Source of funds
Self Assessment Questions 9 1. Addition of shares, accumulated retained earnings 2. Expansion, diversification and modernization
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3. Increases 4. Source 5. Increases and never decreases 6. Redemption
Self Assessment Questions 10 1. Outflow of cash 2. Outflow of cash 3. Outflow of cash 4. Outflow of cash 5. Outflow of cash 6. Outflow of cash 7. Outflow of cash.
Self Assessment Questions 11 1. Purchase 2. Current year minus previous year 3. Increase in fixed assets
Self Assessment Questions 12 1. Outflow 2. Deduction.
Self Assessment Questions 13 1. Loss of operation 2. Payment of cash dividend out of accumulated reserves 3. Part of paid up capital + reserves and surplus. Self Assessment Questions 14 1. Change of fund 2. Source 3. Application 4. Non fund 5. Change. 6. Positive
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7. Negative.
Self Assessment Questions 15
1. Current assets and Current liabilities.
Self Assessment Questions 16
1. Schedule of changes in working capital 2. Adjusted Profit and Loss account 3. Funds flow statement
Self Assessment Questions 17
1. Two Balance sheet dates 2. (b) A minus B 3. (c) Current assets 4. Current liabilities 5. A minus B 6. Balancing figure.
Self Assessment Questions 18 1. Reserve 2. Deduction 3. Working capital changes 4. Considered as current liabilities 5. In Provision account 6. Liability 7. General Body Meeting 8. Current liability 9. Outflow 10. Current assets 11. Fixed assets 12. Fall in value 13. Non cash item 14. Opening balance
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15. Provision account and not to Profit and Loss account 16. Fixed assets
Answer for Terminal Questions 1: 35,000, (b) Taxes paid is an application of funds. 2. Rs.24,000 3. Rs.1,50,000 4. Fund Rs.45,000? Accumulated Depreciation on plant sold Rs.9,000 5. Funds lost from operations. Rs.1,300, Decrease in WC Rs.4,700)
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doc_538195569.pdf
Fund flow analysis is the analysis of flow of fund from current asset to fixed asset or current asset to long term liabilities or vise- versa
Financial and Management Accounting
Unit 10
Unit 10
Structure: 10.1 Introduction Objectives 10.2 Meaning Self Assessment Questions 1 10.3 Concept Self Assessment Questions 2 10.4 Technique Self Assessment Questions 3 10.5 Sources Self Assessment Questions 4 10.6 Increase in funds Self Assessment Questions 5 10.7 Decrease in Assets Self Assessment Questions 6 10.8 Increase in Liabilities Self Assessment Questions 7 10.9 Increase in Networth Self Assessment Questions 8 10.10 Sources Self Assessment Questions 9 10.11 Increase in Assets Self Assessment Questions10 10.12 Decrease in Liabilities Self Assessment Questions 11 10.13 Networth Self Assessment Questions 12 10.14 Flow of funds Self Assessment Questions 13 10.15 Transaction not affecting flow Self Assessment Questions 14 10.16 Steps in preparation of funds flow statements
Funds Flow Analysis
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Self Assessment Questions 15 10.17 Computation of changes in working capital Self Assessment Questions 16 10.18 Layout Self Assessment Questions 17 10.19 Treatment of certain items Self Assessment Questions 18 Terminal Questions Answer to SAQs and TQs
10.1 Introduction
The usefulness of developing certain financial statements as an aid to evaluate past and / or present performance of a business concern is unquestionable and beyond any dispute. The Income Statement reports the revenues earned and expenses incurred or outstanding. The Balance Sheet conveys about the deployment of funds in various assets and equities The Fund Flow analysis is a modern technique of analyzing the movement of “funds” of a concern. The Fund Flow statement shows the movement of funds between two balance sheet dates. As per Robert N. Anthony “the Funds Flow statement describes the sources from which additional funds were derived and the use to which these funds were put”. Such a statement is becoming more and more popular and is being increasingly published as part of the annual accounts. Para 20 of International Accounting Standards 7 reads as follows : “A statement of changes in financial position should be included as an integral part of financial statements. The statement of changes in financial position should be presented for each period for which the income statement is prepared”. The inclusion of such a statement, therefore, is very helpful to improve the understanding of the operations and activities of an enterprise for the reporting period. Learning Objectives: After studying this unit, you should be able to understand the following 1. Understand the meaning and the concepts of funds flow statement. 2. Familiar with techniques of fund flow statement. 3. Preparation of fund flow statement.
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10.2 Meaning of Fund Flow Statement
Statement of Sources and Uses of Funds is a statement which depicts the sources from which funds are obtained and the uses to which they are being put. It is essentially derived from the analysis of changes which have occurred in assets and equities between two Balance Sheets periods. It is not the endproduct of accounting records. The statement speaks about the changes in financial items of Balance Sheets prepared at two different dates. Therefore, the funds flow indicates the inflows and outflows of funds during a particular accounting period generally a year. The flow exhibits the movements of funds in both the directions – inside and outside the business. As such, the term ‘flow’ in the context of funds indicates the transfer of cash or cash equivalent from asset to equity or one equity to another equity or from one asset to another asset. Self Assessment Questions 1
1. Fund flow statement is _________ From _________ Changes in _____ and ____. 2. FFS speaks about changes in _______________________ Balance Sheets. 3. Flow exhibits the flows _______________ And ________________ business. 4. Flow refers to transfer of ___________________ And __________________.
10.3 Concept of Fund
The term “funds” has been defined in a number of ways in financial circles. The three common usages of the term are cash , working capita and total financial resources.. Cash: Under this concept, the term “funds” is used only in the sense of cash. Here, only the changes in cash are considered. Hence, the statement is called “Cash Flow statement. This statement aims at listing the various items which bring about changes in the cash balance between two balance sheet dates. Cash planning becomes useful for control purposes. Using this method has certain disadvantages. Since cash is considered as short term assets, they are subjected to short term fluctuations. A delay in making payment to suppliers and a provision of one month’s credit for making a payment of land purchases may show sufficient cash flow . They may reflect a satisfactory position. But it is not a reality. Therefore, cash equivalent concept of fund is useful only for short term financial planning and not for long term or general financial position assessment. Working Capital: Working capital is Current asserts minus current liabilities. It is an alternative measure of the changes in the financial position. All those transactions which increase
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or decrease working capital are included in this statement. It excludes all such items which do not affect the working capital. The working capital concept of funds is in conformity with normal accounting procedures. Hence, a funds flow statement based on this concept fits well with the other statements. Moreover, working capital is also a measure of short term liquidity of the firm. Therefore, an analysis of factors bringing about a change in the amount of net working capital is useful for decision making by shareholders, creditors and management. Due to these reasons, the working capital approach to funds is more useful than the cash approach. Total Financial Resources : The term “funds” is very often used in the sense of useful financial resources also. Cash approach and working capital approach both are incomplete and inadequate to the extent that they omit a few major financial and investment transactions. Such items do not affect net working capital. But, if they are included, they would certainly provide qualitative information for the decision making., For example issuing equity shares and debentures for purchase of buildings or assets shall not have any effect on the working capital. But it is a significant financial transaction that should be disclosed. Therefore, this concept seems to be the best approach to disclose the changes in the financial position as compared to other concepts. It is in conformity with the statutory regulations and legal requirements. Self Assessment Questions 2 1. The three common funds are __________________________. 2. Cash planning is used for ____________________________. 3. Cash equivalent is used for ___________________________. 4. Working capital is __________________________________. 5. Non working capital items are ________________________. 6. Working capital means ______________________________. 7. Total financial resources considers _____________________. 8. Total financial resources provide _______________________.
Objectives: The main objectives of the funds flow statement is normally based on the purpose its going to be served. These are : a) to help in understanding the changes that are likely to take place in the assets and liabilities portfolio. These may not be readily available from the income statement.
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b) To inform the stakeholders as to how a firm can use the funds which are available at its disposal. c) To bring out the financial strengths and weaknesses of the business. Self Assessment Questions 3
1. The objectives of FFS is to identify ______________ in ______. and ____. 2. FFS is to bring out _______________________.
10.4 Techniques Of Preparing A Funds Flow Statement
Like other accounting statements, the structure of Fund Flow Statement is based on the equality of financial assets and liabilities including capital. The basic understanding is that the funds are obtained through profit, external borrowings or by issue of shares. If funds are not available readily from these sources, the other alternative available is to sell the fixed assets and investments. . The preparation of Funds Flow Statement is normally based on the following to bring to scientific method of preparation. a) Schedule of working capital changes b) Statement of Sources and Uses of Fund. Schedule of Working Capital Changes : It is also known as “Comparative change in Working Capital Statement” or “Working Capital Variation Statement”. The net change in working capital is projected here in the place of individual changes in all the current assets and current liabilities in the Funds Flow Statement. The statement indicates the amount of working capital at the end of two years. It shows the increase or decrease in the individual items of current assets and current liabilities. The effect of the changes in the individual items of the current assets and current liabilities on working capital is also presented clearly and precisely. The difference in the amount of working capital at the end of two years will depict either the increase or decease in working capital. While ascertaining the increase or decrease in individual items of current assets and current liabilities and its impact on working capital, the following Rules should be taken into account. i) increase in Current Assets will increase the Working Capital ii) Decrease in Current Assets will decrease the Working Capital iii) Increase of Current Liabilities will decrease the Working Capital iv) Decrease in Current Liabilities will increase the Working Capital
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It is, therefore, noted that the changes in the items of current assets are positively correlated to the changes in the working capital. On the other hand, changes in current liabilities are inversely related to the changes in the working capital. Self Assessment Questions 4 1. FFS is based on ___________________________. 2. FFS is prepared based on ___________________. 3. Working capital schedule indicates the ______________________. 4. Increase in current assets ___________________ the Working capital. 5. Decrease in CA _____________________________________ the WC. 6. Increase in CL ______________________________________ the WC. 7. Decrease in CL ______________________________________ the WC. 8. Changes in CA ________________________________ changes in WC. 9. Changes in CL ________________________________ changes in WC.
10.5 Sources of Funds
The transactions that increase the working capital are sources of funds. Following may the sources of funds in a concern. Funds from operations : Profit earned by the concern during the current year is deemed to be the source of funds. It is very important source of funds inflow. Net profit is arrived at by deducting cost of goods sold and other expenses from total sales revenue. However, the profit so calculated is seldom equal to the funds from operations because there are many items which are debited or credited in the Profit and Loss Account which do not affect working capital. Therefore, in calculating the funds from operations, the following adjustments must be kept in mind:
Items to be added back to net profit : a. Nonfund revenue deductions: These are items which are debited to Profit and Loss account. These do not cause outflow of funds such as depreciation and depletion on non current assets, amortization of fictitious and intangible assets, preliminary expenses, redemption of preference shares or debentures, deferred charges, advertising suspense account written off. If non fund expenditures does not affect the current assets such as unexpired insurance, do not add back. So also, all allowances for income tax payable in future years are excluded.
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b. Nontrading charges or losses : These items which were debited to Profit and Loss account reduce the profits but they do not cause any outflow of funds. Hence, profit should be corrected by adding back all such charges and losses. These include appropriation of retained earnings such as general reserve, dividend equalization fund, reserve for contingencies, sinking fund. In addition the dividend on shares must be added back since it is an appropriation and not trading charge. The losses arising out of sale of land, buildings, machinery, long term investments which were written off to the profit and loss account must be added back. Do not add the loss arising out of sale of a current asset such short term investments. It is a trading loss and hence it will not require any adjustment. The amount set aside as provision for current taxation will also be added back. This will be considered only when the provision for taxation is treated as a charge on profits. Items to be deducted from Net Profit. The non fund and non trading revenue receipts or incomes must be deducted Net profit in order to compute funds from operations. The items are: (a) Dividend received or receivable: Although this transaction increases the current assets such as cash and debtors, it is not a trading income. Hence, it should be deducted from the net profits to determine the funds from operations. (b) Retransfer of excess provisions: Where the provisions made for taxation, depreciation, doubtful debts exceed the genuine requirements, the excess amount is transferred back to the Profit and loss account. It does not create any inflow of funds since it is an accounting entry. Hence, deduct it. (c) Profit on sale of non current assets: It is a non trading income. Hence it must be eliminated from the amount of profit. (d) Appreciation in fixed assets: The amount of appreciation on revaluation of fixed assets is normally credited to the profit and loss account. If it is so, deduct it from the profit to compute the funds from operations. Self Assessment Questions 5 1. Increase in working capital ____________________. 2. Decrease in WC _____________________________. 3. Net profit is ________________________________. 4. Items to be added back to net profit are __________. 5. Some of nonfund revenue items _______________.
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6. Non trading losses include ___________________.
10.6 Increse in Funds
In a nutshell, the sources of funds can be observed as follows : a) increase of fresh shares derived from increase in share capital. b) Issue of debentures derived from increase in debentures. c) Raising of new loan derived from increase in long term loans d) Sale of fixed assets for cash or for other current assets derived from decrease in fixed assets and additional information. e) Non trading income f) Profit from operations before deducting non cash items of expenses and losses and before additional non cash, non trading incomes. g) Decrease in working capital derived from the Schedule of Working capital changes. Self Assessment Questions 6
1. Increase in share capital is ___________________________ of cash. 2. Increase in debentures _______________________________ of cash. 3. Increase in raising loans ______________________________. 4. sale of fixed assets __________________________________. 5. Non trading income is _______________________________. 6. Profit from operations is _____________________________. 7. Decrease in working capital is ________________________.
10.7 Decrease in Assets
Decrease in assets is always a source of funds for the business. Decrease may be in many ways: such as cash received from debtors, sale of goods for cash, Bills realized, sale of assets, fixed assets through provision for depreciation or amortization of fictitious assets. Decrease in an item of assets results in either a parallel decrease in some other liabilities or a parallel increase in some other item of assets example repayment of bank loan.. It should be remembered at the very outset that the decrease is ascertained by comparing the cost of fixed assets and not by comparing the written down value i.e cost less depreciation. If fixed assets have been shown not at cost but at written down value, then cost may be ascertained by adding total depreciation written off todate (generally known as accumulated depreciation) to the written down value The decrease in fixed assets results in sale of fixed assets. Specific information is generally given in
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the problem about this. The decrease in fixed assets not on account of depreciation or writing off is known as sale of fixed assets. It must be noticed that the total sale proceeds and not the cost of fixed assets sold are shown as source of fund. If the information in respect of sale of fixed assets is not clearly given, the following steps should be taken to find out the value of sale proceeds. Cost of Fixed Assets (Previous Year) ……………… Less: Cost of Fixed Assets of Current year ( ………………) Cost of Fixed Assets x x x x x x x x
ADD : Profit or DEDUCT loss on sale ……………………… Sale Proceeds to be treated as source XXXXXXXXXXXXXX The amount of profit or loss on sale of fixed assets for the above purpose derived from profit and loss account or from capital reserve or from any specific reserve. This is based on the fact that such profit or loss are credited or debited or transferred to these accounts in accordance with the accounting principles. It must be remembered that profit or loss on sale of fixed assets are not included in profit from operation for the purpose of this Fund Flow Statement. If such profit or loss has been included in Profit and Loss Account , adjustment has to be made. If there is profit on sale of assets, the net profit disclosed by Profit and Loss Account is reduced by the amount of profit earned on the sale of fixed assets. On the other hand, the net profit shown by Profit and Loss Account is increased by the amount of loss incurred on the sale of fixed assets. Example: The land and buildings account had a balance of Rs.5,00,000on Jan 2007. A piece of land has been sold . There is no purchase. Rs.30,000 depreciation has been charged in 2007. The profit on sale has been credited to Capital Reserve Account . The balance stood on January 1, 2007 was Rs.20,000 and Rs.50,000 on December 31. The balance of land and building account as on December 31 is Rs.4,50,000. Find the sale proceeds. Solution Balance of land and building on Jan 1, 2007 5,00,000 LESS : Depreciation charged (30,000) 4,70,000
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LESS: Balance of Land and Building on Dec 31 ( 4,50,000) Cost of Land sold 20,000 ADD : Profit on sale (derived from capital reserve) 30,000 (closing minus opening balance Rs.50,000 minus Rs.20,000) Sale Proceeds 50,000
Self Assessment Questions 7 1. Decrease in assets is _________________________________. 2. Profit or loss on sale of fixed assets ____________________.
10.8 Increase In Liabilities
The increase in liabilities is always a source of funds for the business. It may occur as a result of many transactions such as equity share capital or / and debentures to the public., purchase of goods on credit. Outstanding expenses are also considered as source of funds since payments are postponed and cash saved is parked in the business. A comparison of the amount of the items of long term liabilities i.e debentures and mortgage and other loans for the current year and previous year will disclose the increase or decrease in the long term liabilities. Additional information should also be taken into account for determining the correct amount of increase or decrease for the purpose of this statement. Any increase on account of the issue of debentures for consideration other than cash or current assets for the purchase of fixed assets or redeeming other debentures or preference shares would not at all be shown in the statement because in such a case there is no flow of fund. Self Assessment Questions 8 1. Increase in liability is ______________________ . 2. Outstanding expenses is __________________ .
10.9 Increase In NetWorth
There can be only two main channels of increase in networth or equity : a) procurement of more funds by issue of additional shares b) through accumulation of retained earnings or profits in business As the increased in owned funds is concerned, it happens only when the business has plans for expansion, diversification, modernization. The increase in paidup equity
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Share capital is not a regular feature. Its occurrence is only sporadic. But profit generated from operations is a normal feature and is virtually a continuous process from year to year. Profit earned during an operating period increases the new worth of the business and hence it is always considered as a source of funds. Sometimes, the premium received on sale of equity shares and credited to share premium account is also a source of funds as it adds to the size of net worth . Share capital consists of equity share capital and preference share capital. The change in equity share capital is always in the form of increase? it can never be in the form of decrease. The increase in equity share capital as per Balance Sheet values must be adjusted in terms of additional information. If the increase has taken place on account of the issue of fresh shares, only that portion of increase should be treated as sources which is due to the issue of fresh shares for cash and other current assets. Increase on account of share issues for consideration involving the purchase of fixed assets or redemption of preference shares or debentures shall not partake the character of inflow of funds and hence should not be shown in the statement. If fresh shares have been issued at premium, the amount of premium must be added to the increase in share capital for the purpose of showing it as source of fund. If the fresh shares have been issued at discount, the amount of discount must be deducted from the increase in share capital because it does not involve inflow of fund. Example: The opening and closing balance of Share capital are Rs.6,00,000 and Rs.9,50,000 respectively. The Preference Share capital included in opening balance is Rs.1,00,000. During the year, Rs.75,000 worth of Preference shares were redeemed at 8 % premium. Bonus shares at Re.1 for every five equity shares held . In addition, a business was purchased by issue of Rs.90,000 shares at a premium of 10 %. The opening and closing balance in the Premium Account is Rs.8,00,000 and Rs.14,000 respectively. Calculate the further fresh issue. Solution: Share capital at close DEDUCT : Share capital opening Less: Redemption of Preference Shares ( 75,000) ( 5,25,000) 4,25,000 Deduct: Shares issued for noncash items
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3,35,000 DEDUCT : Bonus shares ( 1 / 5 x 5,00,000) (1/5 of 6,00,000) 2,25,000 ADD: Share premium. (14,000 + 6,000 minus 8,000 minus 9,000) Fresh issue of Shares Self Assessment Questions 9 1. Decrease in net worth is through __________________________. 2. Increase in net worth is needed for ________________________. 3. Profit earned _________________________________ net worth. 4. Premium on shares is __________________________. 5. Change in equity shares is always ________________. 6. Decrease in preference share capital is ____________. 3,000 2,28,000 (1,00,000)
10.10 Sources Of Funds
The use of funds results in cash outflows. The outflows are known as :application” of funds. The uses of funds are mainly concerned with. a) Redemption of Preference shares in cash derived from decrease in share capital. b) Redemption of debentures in cash derived from decrease in debentures c) Repayment of loan derived from decrease in long term loans d) Purchase of fixed assets for consideration other than shares, debentures or long term debt derived from increase in fixed assets and additional information. e) Loss from operations f) Payment of dividend in cash Self Assessment Questions 10 1. Use of funds result in ________________________. 2. Redemption of Preference shares is _____________. 3. Redemption of debentures is __________________. 4. Redemption of long term loan is _______________. 5. Purchase of fixed asset is _____________________. 6. Loss from operations is ______________________.
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7. Payment of dividend is ______________________.
10. 11 Increase In Assets
The increase in fixed assets is known in the accounting language as “Purchase of fixed assets”. In order to find out the increase in fixed assets, cost of fixed assets of previous year as reduced by the cost of fixed assets sold during the current year is deducted from the cost of fixed assets of the current year. In other words, the increase in fixed assets is calculated as under : Cost of Current year fixed assets ……………… DEDUCT ? Cost of previous fixed assets ……….. LESS: Cost of fixed assets sold or Written off during the Current year (……….) (………………..)
INCREASE in fixed assets x x x x x x x
Example: The opening and closing written down balances of an asset are Rs.5,00,000 and Rs.5,50,000. The accumulated depreciation has been Rs.1,50,000 at the beginning and Rs.1,90,000 at the close. A machine costing Rs.30,000 (accumulated depreciation Rs.18,000) was sold during the year for Rs.9,500. Calculate the purchase price of the fixed assets. Solution Closing cost of asset (closing value + closing accumulated Depreciation : 5,50,000 + 1,90,000 7,40,000 DEDUCT : Opening cost of Asset (opening Value + opening accumulated Depreciation 5,00,000 + 1,50,000 6,50,000 Less : Cost of asset sold (30,000) (6,20,000) 1,20,000
Sometimes, it may happen that the cost figures cannot be ascertained on the basis of information available. Increase in fixed assets, in this case, has to be found out with reference to the written down value along with annual depreciation. If no purchase of fixed assets were made during the current year, then the value of fixed assets shown in the Balance Sheet of the current year
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should be equal to the values of the previous year minus annual depreciation for current year. The excess of current year’s value over previous year’s value minus annual depreciation will be treated as increase. This will represent the purchase of fixed assets. Current year written down value of Asset …………….. DEDUCT ? Previous year WDV of Asset …………… Less: Current year Depreciation (…………) ( ……………..) _______________ Increase in Fixed Asset being Purchases x x x x x x Example: The written down value of a Machinery at the beginning and at close were Rs.2,00,000 and 1,75,000. An old machine whose written down value was Rs.12,000 was sold for Rs.6,500. Rs.32,000 depreciation was charged during the current year. Calculate the purchase price. Solution: Current year written down value of Machinery DEDUCT : Previous year written down Value of Machinery Less : Current year depreciation 2,00,000 ( 32,000) 1,68,000 Less: written down value of machine Sold ( 12,000) (1,56,000) Purchase price Self Assessment Questions 11 1. Increase in fixed asset is known as _____________________. 2. Purchase is _______________________________________. 3. The excess of current year –minus (previous year + Depreciation) is treated as ________________. 19,000 1,75,000
10.12 Decrease In Liabilities
It implies application which is the flow of funds out of business. Decrease in liability may be done due increase in one or more liability items or due to decrease in one or more asset items. It may also be partly due to increase in liability and partly due to decrease in assets. . Any amount of premium on the redemption of debentures should be adjusted as deduction . Any decrease on
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account of redemption of debentures through the issue of another debentures or preference shares should also not be shown in the statement. Example: On January 1, 2007, the balance of 8 % Debentures Account stood at Rs.5,00,000. Rs.60,000 debentures were repaid at 5 percent premium. Rs.75,000 debentures were purchased at Rs.95 from the market and cancelled. The closing balance of debentures was Rs. 2,00,000. Calculate the outflow of funds. Solution: Opening balance of Debenture Account LESS: Closing balance of Debenture Account Decrease LESS : Discount on cancellation (Rs.75,000 / Face Value of Rs.100 each or 750 debentures x Rs.5 each (Rs.100 minus Rs.95) ( 1,250) 2,98,750 ADD: Premium (Rs.60,000 x 5 / 100) Outflow of funds 3,000 3,01,750 5,00,000 ( 2,00,000) 3,00,000
Self Assessment Questions 12 1. Decrease in fixed liabilities ________________________ funds. 2. Premium on redemption of debentures is _____________ .
10.13 Net Worth
It may be used due to (a) loss from operations (b) payment of cash dividend out of accumulated reserves and (c) return of a part of paid up share capital to shareholders implying reduction of share capital – a rare occurrence. If there is decrease in preference share capital and this decrease is on account of redemption of these shares in cash or other current assets, such decrease should be shown as use of fund. But the decrease on account of redemption by the issue of another preference shares or equity shares or debentures, shall never be shown in the statement because it will not involve outflow of fund. If the preference shares have been redeemed at a premium, necessary adjustments should be made Self Assessment Questions 13 1. New worth is due to _______________________.
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2. Net worth is also due to ___________________. 3. Net worth can be ________________________.
10.14 Flow of Funds
It refers to change in fund. Increase of funds of any transaction is a source and decrease of funds in any transaction is application or uses of funds. But the transactions which do not result in any change in the funds is called “Nonfund”. Flow of fund takes place when a business transaction brings a change in the working capital. Such change may be increase or decrease. The increase is a positive change and the decrease being the negative. These directions in change are known as fund elements or fund factors. They are commonly known as “inflows” and “outflows”. The basic rule is : Flow of fund if a transaction involves : a) Current assets and fixed assets that is machine sold for cash b) Current assets and fixed liabilities that is issue of debentures to the public c) Current assets and owner equity that is issue of shares for cash d) Current liabilities and fixed assets that is transfer of assets to discharge a claim e) Current liabilities and fixed liabilities that is conversion of creditors due by issue of debentures. f) Current liabilities and capital that is conversion of creditors into owner’s equity by issue of equity shares. Self Assessment Questions 14 1. Flow refers to __________________________. 2. Increase in funds _______________________. 3. Decrease in funds ______________________. 4. Non change is known as _________________. 5. Flow takes place due to __________________ working capital. 6. The increase in fund is a __________________ change. 7. The decrease in fund is a __________________ change.
10.15 Transactions that do not affect the flow of Funds
a) Current assets and current liabilities creditors paid b) Fixed assets and fixed liabilities purchase of assets for debentures c) Fixed assets and capital purchase of assets by issue of equity shares.
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Self Assessment Questions 15 1. Transactions not affecting flow are _______________________.
10.16 Steps In Preparation Of Funds Flow Statement
There are three steps involved in the preparation of a Fund Flow Statement (FFS). They are as follows: a) Preparation of Statement of changes in working capital or Schedule of changes in working capital. b) Preparation of Adjusted Profit and Loss Account (APL) c) Statement of changes in Financial position as per AS – 7 Self Assessment Questions 16 1. First step in preparation of FFS is __________________. 2. Second step in the preparation of FFS is _____________. 3. Third step in the preparation of FFS is _______________.
10. 17 Computation of Changes in Working Capital and Funds from Operations
It is a customary practice that only the net changes in working capital should be shown in the Fund Flow Statement instead of individual changes. Here, the current assets and current liabilities are considered. For this purpose, a separate statement or schedule is being prepared. Individual items are entered here. The opening and closing balances are entered one after the other. The corresponding increase or decrease are entered based on the following rules : a) Increase in a current asset item increases working capital. b) Decrease in a current asset item decreases working capital. c) Increase in a current liability item decreases working capital. d) Decrease in a current liability item increases working capital . Insert the total of current asset and current liabilities of both opening and closing periods. Say, the total of current assets as A and that of total of current liabilities as B. Deduct A minus B. The answer is known as net Working capital. If the working capital at the end of the current year is more than the working capital at the end of previous year, the excess is called as “increase in working capital”. Otherwise, if previous year’s working capital is more than the current year’s working capital, the difference is called as “Decrease in working capital”. Increase in working capital is shown as application of funds and decrease in working capital as source of funds in the Funds Flow Statement.
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The funds from operation can be found with the help of preparing an Adjusted Profit and Loss Account. Self Assessment Questions 17 1. Individual items are projected in ___________________. 2. Working capital equation is _______________________. 3. A is total _____________________________________. 4. B is total ____________________________________. 5. Working capital is _____________________________. 6. Net increase or decrease is ______________________.
10.18 Layout
The layout for schedule of changes in Working Capital is as follows Balances as on Effect on
Details Last Current Increase Decrease Year Year CURRENT ASSETS Cash in hand Cash at Bank Sundry Debtors Bills Receivable Stock or Inventory Prepaid expenses Total Current Assets, Say A CURRENT LIABILITIES Sundry Creditors Bills Payable Bank Overdraft Outstanding expenses Total Current Liabilities, Say B NET WORKING CAPITAL A minus B Increase or Decrease in Working
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Capital (Balancing figure)
Example: DR Ltd provides the following information Jan 1 Dec 31 In Rupees Sundry Debtors 65,000 1,05,000 Cash in hand 13,000 20,000 Cash at Bank 15,000 20,000 Bills Receivable 16,000 30,000 8,000 Inventory 90,000 84,000 Bills Payables 12,000 Outstanding expenses 6,000 5,000 Sundry Creditors 30,000 58,000 Bank Overdraft 30,000 42,000 Short term Loans 32,000 36,000 Prepare a schedule of changes in working capital
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Solution Schedule of changes in Working Capital Balances as on Effect of WC Details Jan 1 Dec 31 Increase Decrease Current Assets Cash in hand 13,000 20,000 7,000 Cash at Bank 15,000 20,000 5,000 Sundry Debtors 65,000 1,05,000 40,000 Bills Receivable 16,000 30,000 14,000 Inventory 90,000 84,000 – 6,000 Total Current Assets, A 1,99,000 2,59,000 28,000 Current Liabilities Sundry Creditors 30,000 58,000 – Bills Payables 12,000 8,000 4,000 Outstanding expenses 6,000 5,000 1,000 Bank Overdraft 30,000 42,000 – Short term loans 32,000 36,000 – Total Current Liabilities, B 1,10,000 1,49,000 Working Capital A minus B 89,000 1,10,000 Net Increase in working capital (balancing figure) 21,000 21,000 TOTAL 1,10,000 1,10,000 71,000 71,000
12,000 4,000
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Example : Prepare a statement of changes in working capital from the following information.
Jan 1 Dec 31 In Rupees Share Capital 50,000 50,000
Retained earnings 14,000 40,000 Fixed Assets at cost 80,000 90,000 Provision for Depreciation on Fixed Assets 22,000 27,000 Investments in shares of subsidiaries 15,000 15,000 8% Debentures (redeemable in 5 equal annual instalment of Rs.20,000 each, from the current year) 20,000 – Prepaid expenses 21,000 14,000 Outstanding expenses 5,000 12,000 Creditors and Bills Payables 30,000 25,000 Debtors and Bills Receivables 18,000 20,000 Cash and Bank balances 5,000 13,000 Provision for Doubtful Debts 4,000 2,000
Solution Statement of changes in working capital during the year Details Current Assets Cash and bank balances Debtors and B.R. Government Securities Prepaid expenses Total, say A Current Liabilities 8% Debentures Outstanding expenses Creditors and B.P. Provision for Doubtful Debts 20,000 5,000 30,000 4,000 20,000 12,000 25,000 2,000 – – 5,000 20,000 7,000 Balances as on Jan 1 5,000 18,000 6,000 21,000 50,000 Dec 31 13,000 20,000 12,000 14,000 59,000 Effect on WC Increase 8,000 2,000 6,000 – 7,000 Decrease
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Total, say B Working Capital : A minus B Net increase in working capital
59,000 ( 9,000 ) 29,000
39,000 20,000
3,000
29,000 20,000 20,000 43,000 43,000
Adjusted Profit and Loss Account The Layout is as follows: Dr. To By Cr.
Depreciation written off Profit and Loss account Depreciation Provision last year from Balance Preliminary expenses written Sheet Off Profit on sale of investments Goodwill written off Profit on sale of Fixed assets Discount on issue of shares and Dividend and interest received Debentures written off from trade investments Fixed assets discarded or Written off Loss on sale of fixed assets FUNDS GENERATED FROM Loss on sale of trade investments TRADING OPERATIONS Transfer to General Reserve, (balancing figure) transferred to Funds Flow Statement as Sinking Funds, Reserve Funds application of funds Transfer to other Reserves Premium on redemption of Preference Shares Provision for Tax Provision for Final or Proposed Dividend Interim Dividends Net Profit as per closing current Year Profit and Loss Account TOTAL
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NOTE : If debit total of APL is more than the credit total, the difference is Funds generated from Operation : Record on the credit side of Adjusted Profit and Loss Account. If credit total of APL is more than the debit total, the difference is funds lost in operations. Record on the debit side of Adjusted Profit and Loss Account The balancing figures should be transferred in opposite direction to Funds Flow statement.. Example 3: Calculate funds from operations from the following Profit and Loss Account To By Expenses paid and 3,00,000 Gross Profit 4,50,000 Outstanding Depreciation 70,000 Gain on sale of land 60,000 Loss on sale of machine 4,000 Discount 200 Goodwill 20,000 Net Profit 1,15,800 5,10,000 5,10,000 Solution: ADJUSTED PROFIT AND LOSS ACCOUNT To Rs. By Rs. Depreciation 70,000 Gain on sale of land 60,000 Goodwill written off 20,000 Funds from operations 1,50,000 Discount written off 200 (balancing figure) Loss on sale of machines 4,000 Net Profit 1,15,800 2,10,000 2,10,000 Example 4: Following are the extracts from the Balance sheets of DR Lt. 3132007 3132008 Rs. Rs. Profit and Loss account 11,100 14,800 General Reserve 7,400 9,250 Goodwill 3,700 1,850 Provision for depreciation on asset 3,700 4,400 Preliminary expenses 2,200 1,500
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During the year, the company sold land whose book value was Rs.50,000 for Rs.54,000 and paid an interim dividend of Rs.2,000 Calculate funds from operations.
Solution ADJUSTED PROFIT AND LOSS ACCOUNT To Rs By Rs.
General Reserve Balance brought down 11,100 (9,250 minus 7,400) 1,850 being opening balance Goodwill written off Profit on sale of land 4,000 (3,700 minus 1.850) 1,850 Preliminary expenses Written off 700 Funds generated from
Depreciation written operations (balancing Off 700 figure) Interim dividend paid 2,000 Closing balance of Profit And Loss account 14,800 6,800
21,900 21,900
NOTES: 1. There is an increase in the balance in General Reserve. It implies that some amount has been transferred to the account from the Profit and Loss account. This is an appropriation of profit which does not result in any outflow of funds. 2. The balance in Goodwill Account and preliminary expenses account has come down which indicates tht the difference has been written. This also does not result in an outflow of funds. 3. The increase in provision for depreciation is on account of current year’s depreciation which does not result in any outflow of funds. 4. Profit on sale of land and interim dividend being nonoperating items are to be separately shown as source and application of funds in the Funds Flow Statement.
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Example 5: The following information is provided : Opening balance of Plant Rs.1,32,500. Closing balance of Plant Rs.1,97,500. Provision for Depreciation in Plant at the beginning 45,000? and at close Rs.61,000. During the year Rs.65,000 worth of Plant was purchased in exchange for fully paid debentures and old Plant costing Rs.40,000 was sold for Rs.34,000. Depreciation provided Rs.18,000. Calculate the flow of funds. Solution: Plant Account
To By Opening Balance 1,32,500 Bank : Sale of Plant 34,000 Debenture Account 65,000 Provision for Depreciation
(Plant purchased) Account : Depreciation on sold 18,000 Adjusted P&L Account Profit on sale 12,000* Closing balance 1,97,500 Bank Account : Plant Purchased (balancing Figure) 40,000
2,49,500 Calculation of Profit on sale : 34,000 minus (40,000 – 18,000) = 12,000 Provision for Depreciation on Plant Account
2,49,500
To By Plant Account
epreciation Opening Balance 45,000 On plant sold 18,000 APL : Current year Closing Balance 61,000 Depreciation (bal.figure 34,000
79,000
79,000
Note: For all Asset Account, record the opening balance on the debit side and closing balance on the credit side of the concerned Asset Account. For all liabilities , record the opening balance on the credit side and the closing balance on the debit side.
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10.19 TREATMENT OF CERTAIN ITEMS There are certain items whose treatment is not uniform. Different authors differ differently. But, in this study material, an uniformity is maintained. The likely arguments have been provided for treating items on a particular principle. The items are : Provision for Bad Debts Sometimes, it is shown as reserve for bad / doubtful debts. Actually, this item is shown as deduction from total book debts to the asset side of the Balance Sheet. Therefore, this item should be deducted from the amount of debtors shown in the schedule of working capital changes. Since such treatment may complicate the calculation work, it is suggested that it should be shown along with current liabilities, although, it does not belong to that category. Provision for Tax: DO not treat this item as a current liability. The Provision has to be made to meet the tax liability of current year. If there is a Provision for last year, it has to be paid this year. Hence, the last year Provision actually becomes the current year cash outflow. Hence record it in the Funds flow statement. Proposed Dividend Normally, the proposed dividends are given as Balance Sheet item on the liability side. The Directors propose the final dividend which needs to be approved by the General Meeting. Hence, it is fair to assume that the proposed dividend is not a current liability. Do not show in the schedule of working capital changes. The last year proposed dividend should be paid during the current year, hence a cash outflow Investments It poses problems in its treatment. The Rule is : a) if the investments are in the form of Government or other marketable securities, treat it as current assets. b) If it is mentioned as trade investments, that is investments in shares and debentures of another companies, treat it as fixed assets. c) If nothing is mentioned specifically, the treatment is : : if investments have been sold simultaneously, treat it as current assets : in other cases, treat it as Fixed Assets.
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Depreciation Normally, the value of deprecation will be provided in the problem as an adjustment items. Depreciation is a non cash item. It is, therefore, charged to Profit and Loss and recorded in the concerned Fixed Assets Account. If the depreciation is given as a percentage, calculate the value on the opening balance of the concerned account.. If the value of depreciation is not given, it has to be found out as follows : Opening balance of Fixed Assets …….. ADD: Purchases ……. LESS : Fixed assets sold (…….)
LESS : Closing balance of fixed assets (…….)
Depreciation charges
x x x
If a concern intends to show its fixed assets at its cost price, the periodic annual depreciation is shown under “liabilities” side as Provision for Depreciation commonly known as Accumulated Depreciation Fund Account. If there were to be an Accumulated Depreciation Fund Account in already in operation, the current year depreciation is charged against this Provision for accumulated Depreciation Account and not recorded directly into Adjusted Profit and Loss Account . In other words, the current year depreciation is routed through the Provision Account. Increase / Decrease in Fixed Assets The increase or decrease by means of cash is recorded in the FFS. Increase or decrease due to purchase consideration through shares and debentures are not recorded. Increase / Decrease in longterm liabilities Compare debentures and mortgages as per the Balance Sheet figures. Only consider if cash is the main striker to cause the increase or decrease. If the changes were to be due to consideration other than cash or current assets, do not record it in the FFS.. Hidden Items Prepare the necessary ledger accounts concerned in the fixed assets, fixed liabilities and share capital and carry out all the necessary adjustments. The balancing figure, if any, would be the cash transactions. For all non, cash transactions, concentrate on the Adjusted Profit and Loss Account.
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Self Assessment Questions 18 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Provision is shown as _______________________ Provision for doubtful debts is _______________ from gross debtors Provision is shown in _______________________ Provision for tax may be _____________________ If Provision for Tax is maintained , treat it in _________________ Proposed dividend is shown on ________________ of Balance sheet Proposed dividends are to be approved by _____________________ Proposed divided. Is not considered as ________________________ Last year proposed dividend is cash __________________________ Government investments are _______________________________ Investments in shares and debentures are ______________________ Depreciation is _____________________ Depreciation is a ___________________ If Depreciation is given as a percentage, calculate on _____________ If Provision for depreciation account is maintained, charge the current depreciation to _____________ and not to _______________________ 16. Depreciation is charged only on _______________________________
Problem 6: The Balance Sheets are given below :
Year (Rs.in lakhs) 2006 2007
Fixed Assets 50 60 Investments 10 20 Current Assets 140 150
Share Capital 100 160 Profit and Loss Account 30 30
Debentures 10
Current Liabilities 60 40
Depreciation charges was Rs.6 lakhs. Prepare Fund Flow statement.
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Solution: Schedule of changes in working capital
2006 2007
Current Assets 140 150 LESS: Current liabilities ( 60 ) (40)
Working Capital : CA minus CL
80 110
Net Increase in working capital transferred to 30 FFS (application)
110 110
Adjusted Profit and Loss Account To By Depreciation 6 Opening Balance 30 Closing Balance 30 Funds from Operations 6
36
36
Funds Flow Statement Sources Issue of Equity shares Applications 60 Purchase of Fixed Assets 16
Funds from operation 6 Purchase of investment 10 Redemption of debenture 10
Increase in working capital 30 66 66
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Problem 7 : From the following extracts, calculate funds from operations Year 2006 2007
Profit and Loss account 50,000 80,000 Provision for taxation on 10,000 15,000 Proposed dividends 5,000 10,000
Additional information: Tax paid Rs.2,500. Dividends paid Rs.1,000.. Calculate funds from operation taking provision for tax and provision for tax and proposed dividend as (a) non current liabilities and (b) current liabilities. Solution: Provision for tax and proposed dividend are taken as noncurrent liabilities To By Income tax account 2,500 Opening balance 10,000 Tax paid Profit and loss account 7,500
Closing balance 15,000 provision made (balance Figure) 17,500 17,500
Proposed Dividend Account To By Dividend account being Opening balance Dividend paid during the Profit and loss account Year 1,000 proposed dividend 6,000 Closing balance 10,000 11,000 11,000 5000
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Adjusted Profit and Loss Account To By
Provision for Tax 7,500 Opening balance 50,000 Proposed Dividend 6,000 Funds from operations Closing balance 80,000 (balancing figure) 43,500
93,500 93,500 c) If Provision of tax and proposed dividend are taken as a current liability, funds from operations will be the difference in Profit and Loss account at the beginning and the end of the year.
NOTES 1. In case a) Income tax paid Rs.2,500 and Dividend paid Rs.1,000 are shown as application of funds in the FFS. 2. In case (b), there is no need to prepare proposed dividend account and provision for tax account,. However, the opening and closing balances of the two accounts are shown as current liabilities in the statement of changes in working capital
Problem 8: The book value of trade investments of DR Ltd as on March 1, 2006 and March 31, 2007 was Rs.50,000 and Rs.70,000 respectively. During the year, Rs.5,000 was received as dividends, of which Rs.2,000 pertained to preacquisition profits which have been credited to Investments Account. Investments costing Rs.10,000 have been sold during the year for Rs.10,000. Find the flow of funds on account of investments. Solution: Investments Account To By
Opening balance 50,000 Dividend Account : Pre Bank Account : purchase acquisition profit 2,000 Of investments (balance 32,000 Bank : sale of investments 10,000 Closing balance 70,000 82,000 82,000
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Notes: 1) The investments purchased were valued cumdividend. Hence, on receipt of dividends, they were rightly credited to Investments. Hence there is no need for any further adjustment. 2) The investments sold has been at the book value. There is no profit or loss on account of the transactions. If the transaction had resulted in profit, it will have to be deducted from net profit to calculate funds from operations. In case of loss, it would be added to net profit to calculate funds from operations.
Problem 9: Prepare a fun d flow statement of DR Ltd. Year 2007 2008 Equity share capital 10,00,000 15,00,000 10 % Preference Share Capital 3,00,000
11 % debentures 8,00,000 6,00,000 Share Premium Account 1,00,000 95,000 Additional information (a) 10 % Preference shares have been redeemed at a premium of 10%, the premium amount was charged to the share premium account (b) There has been a profit of Rs.1,000 on the redemption of debentures.
Solution: Equity Share Capital To By Closing Balance 15,00,000 Opening balance 10,00,000 Bank (Fresh issue) 5,00,000 Balancing figure 15,00,000 15,00,000
Preference Share Capital Account To By Bank (Redemption) 3,30,000 Opening balance 3,00,000 Premium on redemption 30,000 3,30,000 3,30,000
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Debentures Account To By Bank (redemption) 1,99,000 Opening balance 8,00,000 Profit on redemption 1,000 Closing balance 6,00,000 8,00,000 8,00,000 Share Premium Account To By Preference share 30,000 Opening balance 1,00,000 capital Closing balance 95,000 Equity share capital * 25,000 1,25,000 1,25,000
STATEMENT SHOWING SOURCES AND APPLICATION OF FUNDS Equity share capital 5,00,000 Redemption of Preference shares 3,30,000 Share Premium 25,000 Redemption of Debentures 1,99,000 Decrease in working capital 4,000 5,29,000 5,29,000
Problem 10: The following are the summarized Balance Sheets of DR Ltd.
Liabilities 2006 2007 Share Capital 5,00,000 6,00,000 Reserves 1,50,000 1,80,000 Profit and Loss Account 40,000 65,000 Debentures 3,00,000 2,50,000 Creditors for goods 1,70,000 1,60,000 Provision for Income tax 60,000 80,000 12,20,000 12,20,000 Assets Fixed Assets 10,00,000 11,20,000 Less : Depreciation (3,70,000) (4,60,000) Stock 2,40,000 3,70,000 Book Debts 2,50,000 2,30,000 Cash 1,00,000 75,000 12,20,000 12,20,000
Prepare a Funds Flow statement
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Solution: Statement of changes in working capital Balances as on Effect on W.C
2006 2007 Increase Decrease Current Assets Stock 2,40,000 3,70,000 1,30,000 20,000 25,000 . Book Debts 2,50,000 2,30,000 Cash 1,00,000 75,000 Total CA say A 5,90,000 6,75,000 Current Liabilities Creditors for goods 1,70,000 1,60,000 10,000 20,000 Provision for income tax 60,000 80,000 Total CL, say B 2,30,000 2,40,000 Working Capital, A – B 3,60,000 4,35,000 Increase in Working capital 75,000 75,000
Total 4,35,000 4,35,000 1,40,000 1,40,000 Adjusted Profit and Loss Account To By
Reserve 30,000 Opening balance 40,000 Depreciation 90,000 Funds from Operation 1.45,000 Closing balance 65,000 transferred to source 1,85,000 1,85,000
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Statement showing Sources and Application of Funds Sources Application Issue of Share capital 1,00,000 Redemption of debentures 50,000 Funds from operation 1,45,000 Purchase of Fixed Assets 1,20,000 Increase in working capital 75,000 2,45,000 2,45,000
Notes: 1) The increase in General Reserve is due to transfer a part of profit of the current year and hence the difference is transferred to APL since it’s a noncash item 2) The difference in depreciation is charged to APL, since it’s a noncash item. 3) Increase in Equity Share capital is assumed to be the fresh issue which is a cash item. It is recoreded in FFS. 4) The difference is debentures is the redemption. It’s a cash item. Hence taken to FFS 5) Purchase of fixed asset is difference between the opening and closing balance of fixed assets. It’s a cash item. Hence taken to FFS .
Problem 11 Prepare a Fund Flow Statement Balance Sheets 2006 2007 2006 2007
Equity Share capital 50,000 65,000 Cash balances 15,000 9,000 Profit & Loss 14,750 17,000 Debtors 25,000 27,000 Trade Creditors 31,000 29,000 Investment 5,000
Mortgage 10,000 15,000 Fixed Assets 70,000 80,000 Short term loans 16,500 15,000 Less: Depreciation (25,250) (7,000) Accrued expenses 7,500 8,000 Goodwill 5,000 1,29,750 1,49,000
1,29,750 1,49,000
Depreciation provided is Rs.4,750. Write off goodwill. Dividend paid Rs.3,500.
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Solution: Schedule of changes in working capital Balances as on 2006 2007 Current Assets Cash 10,000 13,000 Debtors 25,000 27,000 Stock Total current assets, say A Current Liabilities Trade Creditors 29,000 31,000 Short term loans 15,000 16,500 Accrued expenses 8,000 7,500 Total current liabilities, say B 52,000 55,000 Working capital, A – B 20,000 24,000 40,000 35,000 75,000 75,000
Net increase in Working capital 4,000
Total 24,000 24,000
Adjusted Profit and Loss Account To By Depreciation 1,750 Opening balance 30,000
Goodwill 5,000 Funds generated from Dividend 3,500 operations Closing balance 17,000 12,500
27,250 27,250
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Funds Flow statement Issue of fresh equity 15,000 Purchase of fixed assets 30,000 Sale of investment 5,000 Payments of dividends 3,500 Loan on mortgage 5,000 Funds from operations 12,500 Increase in working capital 4,000
37,500 37,500
Problem 12 The Balance Sheets of DR Ltd Rupees in 000s 2006 2007 2006 20078
Share capital 50 100 Goodwill 15 25 Debenture 25 Plant 18 96
Profit and Loss 15 25 Stock 40 35 Proposed Dividend 5 6 Debtors 15 32.5 Creditors 20 30 Cash 8 9 Liabilities for expenses 5 3.5 Preliminary exp 4 2.5
100 200 100 200
A business was purchased during the year by the issue of 25,000 shares and 25,000 debentures. Depreciation Rs.6,000 has been provided in the year. A machine has been sold for Rs.1,50,000, the written down value being Rs.1,000. The business purchased had the following assets and liabilities : Machine Rs.20,000, Stock Rs.5,000, Debtors Rs.15,000, Creditors Rs.5,000. Prepare the Funds Flow Statement. Solution In this problem, another business concern was purchased whereby the assets and liabilities come into business. For this purchase, the payment is through the issue of shares and debentures. If the payment were to be in excess of assets and liabilities taken over, the excess payment is known as “Goodwill”.
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Assets taken over : Machine 20,000 Stock 5,000
Debtors 15,000
40,000 Less Creditors taken over ( 5,000 )
Net assets taken over 35,000
Total payments made : Share capital + Debentures 50,000 Excess payment being treated as Goodwill (50,00035,000) 15,000
Statement showing changes in working capital: Balances as on 2006 2007 Current Assets Stock 40,000 35,000 9,000 Debtors 15,000 32,500 Cash 8,000 Total current assets, say A Current Liabilities Sundry Creditors 20,000 30,000 Liabilities for expenses 5,000 3,500 Overdraft 5,000 10,500 Total current liabilities, say B Working capital A – B Decrease in working capital (source) 30,000 44,000 33,000 32,500 500
63,000 76,500
33,000 33,000
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Adjusted Profit and Loss Account To By
Goodwill 5,000 Opening balance 15,000 Preliminary expenses 1,500 Profit on sale of Plant 500
Depreciation 6,000 Funds from operations 28,000 Proposed dividend 6,000 Closing balance 25,000
43,500 43,500
Funds Flow Statement Issue of fresh shares for : cash for current assets Stock 5,000 Debtors 15,000 Less: Creditors (5,000) 15,000 Purchase of Plant 65,000 Sale of Plant 1,500 Payment of dividend 5,000 Funds from operations Decrease in working Capital 500 28,000
70,000 70,000
Terminal Question Problem 1: The balance in the Provision for taxation : opening Rs.30,000 and closing Rs.40,000. Taxes paid during the year was Rs.25,000. Calculate Funds from operation. (b) What is the provision made during the year?
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Problem 2: Extracts of Balance Sheets are given below : 2006 2007
Profit and Loss appropriation account
30,000 40,000
General Reserve 20,000 25,000 Goodwill 10,000 5,000
Preliminary expenses 6,000 4,000 Provision for Depreciation on Machinery 10,000 12,000
Calculate funds from operation
Problem 3: Calculate funds from operations: Profit and Loss Account To By Expenses 3,00,000 Gross profit 4,50,000 Depreciation 70,000 Gain on sale of land 60,000 Loss on sale of plant 4,000
Discount on Debenture 200 Goodwill 20,000 Net profit 1,15,800
5,10,000
5,10,000
Problem 4: Calculate funds from sale of Plant Plant (gross) 1,00,000 1,25,000 Additional information: a) Loss on sale b) Depreciation charged c) Purchase of Plant 1,000 14,000 35,000
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Problem: 5. The Balance Sheets are as follows
Capital 25,000 20,000 Cash 4,700 3,000 Profit and Loss 2,300 1,000 Debtors 11,500 12,000 Bills Payable 4,500 7,000 Land 6,600 5,000 Stock 9,000 8,000
31,800 28,000 31,800 28,000
Prepare a statement of Sources and uses of funds.
Answer Self Assessment Questions Self Assessment Questions 1 1. Derived, changes, assets, equities 2. Two 3. Inside and outside 4. Cash and cash equivalents Self Assessment Questions 2 1. Cash, working capital, total financial resources 2. Control 3. Short term financial planning 4. Current assets minus current liabilities 5. Excluded 6. Short term liquidity 7. Both financial and investment transaction 8. Qualitative information
Self Assessment Questions 3 1. Changes, assets and liabilities 2. Financial strengths and weaknesses Self Assessment Questions 4 1. Financial assets and liabilities including capital 2. Statement of changes in working capital, statement of sources and uses of funds
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3. Net increase or decrease in individual items 4. Increases 5. Decreases 6. Decreases 7. Increases 8. Positively corelated 9. Inversely related Self Assessment Questions 5 1. Application 2. Source 3. Gross profit – Cost of goods sold + expenses 4. Non fund revenue, non trading changes or losses 5. intangible assets and revenue items 6. Appropriation of retained earnings. Self Assessment Questions 6 1. Inflow 2. Inflow 3. Inflow 4. Inflow 5. Inflow 6. Inflow 7. Inflow Self Assessment Questions 7 1. Source 2. Excluded from fund flow statement.
Self Assessment Questions 8 1. Source of funds 2. Source of funds
Self Assessment Questions 9 1. Addition of shares, accumulated retained earnings 2. Expansion, diversification and modernization
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3. Increases 4. Source 5. Increases and never decreases 6. Redemption
Self Assessment Questions 10 1. Outflow of cash 2. Outflow of cash 3. Outflow of cash 4. Outflow of cash 5. Outflow of cash 6. Outflow of cash 7. Outflow of cash.
Self Assessment Questions 11 1. Purchase 2. Current year minus previous year 3. Increase in fixed assets
Self Assessment Questions 12 1. Outflow 2. Deduction.
Self Assessment Questions 13 1. Loss of operation 2. Payment of cash dividend out of accumulated reserves 3. Part of paid up capital + reserves and surplus. Self Assessment Questions 14 1. Change of fund 2. Source 3. Application 4. Non fund 5. Change. 6. Positive
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7. Negative.
Self Assessment Questions 15
1. Current assets and Current liabilities.
Self Assessment Questions 16
1. Schedule of changes in working capital 2. Adjusted Profit and Loss account 3. Funds flow statement
Self Assessment Questions 17
1. Two Balance sheet dates 2. (b) A minus B 3. (c) Current assets 4. Current liabilities 5. A minus B 6. Balancing figure.
Self Assessment Questions 18 1. Reserve 2. Deduction 3. Working capital changes 4. Considered as current liabilities 5. In Provision account 6. Liability 7. General Body Meeting 8. Current liability 9. Outflow 10. Current assets 11. Fixed assets 12. Fall in value 13. Non cash item 14. Opening balance
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15. Provision account and not to Profit and Loss account 16. Fixed assets
Answer for Terminal Questions 1: 35,000, (b) Taxes paid is an application of funds. 2. Rs.24,000 3. Rs.1,50,000 4. Fund Rs.45,000? Accumulated Depreciation on plant sold Rs.9,000 5. Funds lost from operations. Rs.1,300, Decrease in WC Rs.4,700)
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