Unit - IV

Financial Accounting & Analysis
Unit IV Working capital Definition of Working Capital " Working capital is an excess of current assets over current liabilities. In other words, The amount of current assets which is more than current liabilities is known as Working Capital. If current liabilities are nil then, working capital will equal to current assets. Working capital shows strength of business in short period of time . If a compan have some amount in the form of working capital , it means Compan have liquid assets, with this mone compan can face ever crises position in market. " Formula of Calculating Working Capital Working Capital = Current Assets - Current Liabilities Current Assets Current assets are those assets which can be converted into cash within One year or less then one year . In current assets, we includes cash, bank, debtors, bill receivables, prepaid expenses, outstanding incomes . Current Liabilities Current Liabilities are those liabilities which can be paid to respective parties within one year or less than one year at their maturity. In current liabilities, we includes creditors, outstanding bills, bank overdraft, bills payable and short term loans, outstanding expenses, advance incomes . Other names of Working Capital Some ro!essional accountants kno" "orking capital as operating capital# operating li$ui%ity# positi&e "orking capital' Important things about Working Capital 1. orking Capital can be negative. !t that time, e add one word " deficiency" in the back of working capital . It means if Current Liabilities are more than current assets, it is known as working capital deficiency or inverse working capital or negative working capital. #. orking capital can be easily ad$usted, if !ccounts manager knows different techni%ues of managing working capital . &e can try to get short term loan or he can increase working capital by proper management of inventory and outstanding incomes and debtors .
By K.Arjun Goud 'Assistant Professor(
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). orking capital can also change by Changing in Cash Conversion period. Cash conversion period is a period in which company changes current assets into cash or bank. *. orking capital can also positive by increasing growth rate of company. If company does not invest more money and increase profit, the same amount will increase in the cash position of company and with cash company can increase their working capital position. Importance of Working Capital +ome time, If creditors demands their money from company, at this time company,s high working capital saves company from this situation . -ou know that selling of current assets are easy in small period of time but Company can not sell their fixed assets with in small period of time. +o, If Company have sufficient working capital , Company can easily pay off the creditors and create his reputation in market . .ut If a company have /ero working capital and then company can not pay creditors in emergency time and either company becomes bankrupt or takes loan at higher rate of Interest . In both condition , it is very dangerous and always Company,s !ccount 0anager tries to keep some amount of working capital for creating goodwill in market . 1ositive working capital enables also to pay day to day expenses like wages, salaries, overheads and other operating expenses. .ecause sufficient working capital can not only pay maturity liabilities but also outstanding liabilities without any more delay. One of advantages of positive working capital that Company can do every risky work without any tension of self security Concept of working capital includes meaning of working capital and its nature. is the investment in current assets. orking capital
ithout this investment, we can not operate our fixed assets
properly. 2or getting good profits from fixed assets, we need to buy some current assets or pay some expenses or invest our money in current assets. 2or example, we keep some of cash which is the one of ma$or part of working capital. !t any time, our machines may need repair. 3epair is revenue expense but without cash, we can not repair our machines and without machines, our production may delay. Like this, we need inventory or to invest in debtors and other short term securities. On the basis of Concept, we can divide our working capital into two parts4
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(' )ross Working Capital In this concept of working capital, we study gross working capital. e do not deduct current
liabilities in this concept but we use current liabilities as source of fund. +uppose, if we buy goods on credit, it means our save our cash and we can use this as working capital for paying other expenses. *' +et Working Capital
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5nder this concept we use net working capital. 2or this, we first deduct all our current liabilities from our current assets. 6xcess of current assets over current liabilities will be current assets. e have to maintain minimum level of working capital in our business for operation of business activities. 7his concept is also used for preparation of balance sheet. In the vertical form of balance sheet, we show excess of current assets over current liabilities. ,perating Cycle Concept o! Working Capital In this concept of working capital, we make the operating cycle. In this cycle, we calculate inventory conversion period. 7o know this, we can estimate when we need cash for buying our inventory. e also calculate debtor or receivable conversion period. 7o know this, we can estimate when we receive cash from our debtors. If inventory conversion period is less than debtor conversion period, we have to manage other sources for buying our inventories. If we buy good on credit, we also take care creditors, conversion period
,ptimum le&el o! "orking capital Optimal level of working capital is that level where company is capable to pay day to day expenses and company has enough cash to buy the stocks in case if it does not receive money from debtors on the time. 7his level is achieved by thinking and using the techni%ues of working capital management. e all know that both low level or over level of working capital is harmful for development of business. If company has not enough cash to repay its liability, it will create the risk of solvency and li%uidity and company may go for li%uidation. In case, company has over working capital, it will be misuse of money because that money is not gaining any earning and its opportunity cost will suffer by shareholders and ultimately it will decrease the value of share in share market. +o, as finance manager, you should try to create e%uilibrium or optimal or optimum level of working capital.
Working Capital Forecasts orking capital forecasts means to estimate the value of working capital in one year. 2ollowing are main items which are estimated in working capital forecasts.
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(' Future ,perating Costs e estimated our future operating cost, more future operating cost means more need of cash and cash is the part of working capital. It means, we need more working capital in that situation. 2or estimating this, w analy/e past income statements of company.
*' Forecast -e&enue )ro"t. .y sales and other revenue,s trend analysis, we can forecast revenue growth. 7his will tell us, how will working capital manage from revenue in future.
/' C.anges o! Working Capital 7o analy/e the past working capital changes is useful for working capital future forecast. orking capital is difference between current assets and current liabilities. If we check two years, working capital changes, we can estimate what changes in working capital in next year.
(' Small or Large 0usiness It is the first determinant of working capital that it is affected with the nature of business. .usiness may be small or large. In small business, company need high working capital because, small business is relating to trading of goods, for starting small business, you need very small fixed capital but need high working capital for paying day to day expenses. .ut in large business, we re%uire more fixed capital than working capital for purchasing fixed asset.
By K.Arjun Goud 'Assistant Professor( Page 5
*' Small or Large 1eman% 8ature of demand also absolutely affects the working capital need. +ome product can be easily sold by businessman, in that business9 you need small amount of working capital because your earned money from sale can easy fulfill the shortage of working capital. .ut, if demand is very less, it is re%uired that you have to invest large amount of working capital because your all fixed expenses must be paid by you. 2or paying fixed capital you need working capital.
/' ro%uction olicy 1roduction policy is also main determinant of working capital re%uirement. :ifferent company may different production policy. +ome companies stop or decrease the production level in off seasons, in that time, company may also reduce the number of employees or decrease the purchasing of new raw material, so, it will certainly decrease the amount of working capital but on the side, some company may continue their productions in off season, in that case, they need definitely large amount of working capital. 2' Cre%it olicy Credit policy is relating to purchasing and selling of goods on credit basis. If company purchases all goods on credit and sells on cash basis or advance basis, then it is certainly company need very low amount of working capital. .ut if in company, goods are purchased on cash basis, and sold on credit basis, it means, our earned money will receive after sometime and we re%uire large amount of working capital for continuing our business. 3' 1i&i%en% olicy :ividend policy also effect working capital re%uirement. Company can distribute ma$or part of net profit. .ut, if there is no reserve, we have to invest large amount in working capital because, lacking of reserve will affect on adversely on fulfill our liabilities. In that case, we have to yield working capital by taking short term loan for paying uncertain liability. 4' Working Capital Cycle orking capital cycle shows all steps which starts from cash purchasing of raw material and then this converted into finished product, after this it is converted into sale, if it is credit sale, debtors will also the part of working capital cycle and when we gets money from our debtors, it is the final part of working capital cycle. If we receive fastly from our debtors, we need small
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amount working capital. Otherwise, for purchasing new raw material, we need more amount of working capital. 5' 6anu!acturing Cycle 0anufacturing cycle means the process of converting raw material into finished product. Long manufacturing cycle will create the situation in which we re%uire large amount of working capital. +uppose, we have to construct the building, for constructing colony of buildings, it may consume the time more than ; years, so according to this we need working capital. 7' 0usiness Cycle 7here are two main part of business cycle, one is boom and other is recession. In boom, we need high money or working capital for development of business but in recession, we need only low amount of working capital. 8' rice Le&el C.anges If there is increasing trend of products prices, we need to store high amount of working capital, because next time, it is precisely that we have to pay more for purchasing raw material or other service expenses. Inflation and deflation are two ma$or factors which decide the next level of working capital in business. (9' :!!ect o! :;ternal 0usiness :n&ironmental Factors 7here are many external business environmental factors which affect the need of working capital like fiscal policy, monetary policy and bank policies and facilities
Introduction of Working Capital Management Working capital management is the device of finance. It is related to manage of current assets and current liabilities. After learning working capital management, commerce students can use this tool for fund flow analysis. Working capital is very significant for paying day to day expenses and long term liabilities. Meaning and Concept of Working Capital and its management Working capital is that part of companys capital which is used for purchasing raw material and involve in sundry debtors. We all know that current assets are very important for proper working of fixed assets. Suppose, if you have invested your money to purchase machines of company and if you have not any more money to buy raw material, then your machinery will no use for any production without raw material. rom this example, you can understand that working capital is very useful for operating any business organi!ation. We can also take one more li"uid item of current assets that is cash. If you have not cash in hand, then you can not pay for
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different expenses of company, and at that time, your many business works may delay for not paying certain expenses. If we define working capital in very simple form, then we can say that working capital is the excess of current assets over current liabilities. Types of Working Capital
1. Gross working capital: #otal or gross working capital is that working capital which is
used for all the current assets. #otal value of current assets will e"ual to gross working capital.
2. Net Working Capital: $et working capital is the excess of current assets over current liabilities. Net Working Capital = Total Current ssets ! Total Current "ia#ilities
#his amount shows that if we deduct total current liabilities from total current assets, then balance amount can be used for repayment of long term debts at any time.
$. %ermanent Working Capital: %ermanent working capital is that amount of capital which must be in cash or current assets for continuing the activities of business. &. Temporary Working Capital: Sometime, it may possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, then this excess amount will be temporary working capital. In normal working of business, we dont need such capital. In working capital management' we analy(e following t)ree points
Ist %oint W)at is t)e need for working capital* After study the nature of production, we can estimate the need for working capital. If company produces products at large scale and continues producing goods, then company needs high amount of working capital. 2nd %oint W)at is optimum le+el of Working capital in #usiness* &ave you achieved the optimum level of working capital which has invested in current assets' (ecause high amount of working capital will decrease the return on investment and low amount of working capital will increase the risk of business. So, it is very important decision to get optimum level of working capital where both profitability and risk will be balanced. or achieving optimum level of working capital, finance manager should also study the factors which affects the re"uirement of working capital and
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different elements of current assets. If he will manage cash, debtor and inventory, then working capital will automatically optimi!e.
$rd %oint W)at are main Working capital policies of #usinesses* %olicies are the guidelines which are helpful to direct business. inance manager can also make working capital policies. ,st Working capital policy "i-uidity policy )nder this policy, finance manager will increase the amount of li"uidity for reducing the risk of business. If business has high volume of cash and bank balance, then business can easily pays his dues at maturity. (ut finance manger should not forget that the excess cash will not produce and earning and return on investment will decrease. So li"uidity policy should be optimi!ed. 2nd Working Capital %olicy %rofita#ility policy )nder this policy, finance manger will keep low amount of cash in business and try to invest maximum amount of cash and bank balance. It will sure that profit of business will increase due to increasing of investment in proper way but risk of business will also increase because li"uidity of business will decrease and it can create bankruptcy position of business. So, profitability policy should make after seeing li"uidity policy and after this both policies will helpful for proper management of working capital
Working capital 7here is difference of opinion among different authors about the definition of working capital. Considering the ob$ectives and scope of working capital, it can be defined in two ways4
'i( <ross Concept 'ii( 8et Concept
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<i= )ross Concept>- !ccording to the gross concept, working capital means total of all the current assets of a business. It is also called gross working capital.
)ross Working Capital= ?otal Current Assets
<ii= +et Concept>- !ccording to the net concept of working capital, net working capital means the excess of current assets over current liabilities. If current assets are e%ual to current liabilities then according to this concept working capital will be /ero and in case current liabilities are more than current assets, the working capital will be called negative working capital. +et Working Capital= Current Assets-Current Liabilities
Current assets are those assets which are converted into cash within one accounting period, for example, stock, debtors, bills receivables, prepaid expenses, cash and bank balance. +imilarly, current liabilities are those liabilities which have to be paid within an accounting year, for example, creditors bills payables, short term loans etc. 8et working capital can also be defined in another manner. 8et working capital is the part of current assets which has been financed from long term funds. It is, therefore also called circulating capital. <ross concept and net concept of working capital have their own significance. hen individual current assets are to be managed, gross concept of working capital is used. 8et concept of working capital emphasi/es on how much current assets have been financed out of long term funds. 5nder this concept the relationship between current assets and current liabilities is established or their li%uidity is determined. 7he difference between gross working capital and net working capital can be understood with the help of following illustration.
ILLUS?-A?I,+ I'
2rom the following balance sheet, you are re%uired to calculate the amount of <ross Capital and 8et orking Capital4=
orking
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0alance S.eet 3s 3s
+hare Capital
1>,>>,>>>
Land and .uilding
1>,>>,>>>
3eserves
1,>>,>>>
1lant and 0achinery
#,?>,>>>
:ebentures
*,>>,>>>
Cash and .ank .alance
1>,>>>
+hort=term Loan
;>,>>>
0arketable +ecurities
?>,>>>
7rade Creditors
*>,>>>
7rade :ebtors
1,>>,>>>
.ills 1ayable
1>,>>>
.ills 3eceivable
*>,>>>
Inventory
@>,>>>
1A,>>,>>>
1A,>>,>>>
Solution > <ross orking capitalB Cash and .ank .alanceC 0arketable +ecuritiesC 7rade :ebtorsC .ills 3eceivableC Inventory B 3s. 1>,>>>C3s?>,>>>C3s1,>>,>>>C3s*>,>>>C3s@>,>>> B 3s. ),1>,>>> 8et orking CapitalB Current !ssets= Current Liabilities
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B 3s1>,>>> C 3s ?>,>>> C 1,>>,>>> C 3s *>,>>> C 3s@>,>>>= 3s;>,>>> D 3s *>,>>> D 3s 1>,>>> B 3s ),1>,>>>= rs 1,>>,>>> B 3s #,1>,>>> llustration> ?.e !ollo"ing are t.e summari@e% 0alance S.eets o! An%erson Lt%' Liabilities +hare Capital 3eserves 1 F L !ccount :ebentures Creditors 1rov. for I7 *994 ;,>>,>>> 1,;>,>>> *>,>>> ),>>,>>> 1,@>,>>> A>,>>> 1#,#>,>>> *995 A,>>,>>> 1,E>,>>> A;,>>> #,;>,>>> 1,A>,>>> E>,>>> 1),);,>>> Asset 2ixed !ssets Less 4 :ep +tock .ook :ebts Cash *994 1>,>>,>>> '),@>,>>>( #,*>,>>> #,;>,>>> 1,>>,>>> 1#,#>,>>> *995 11,#>,>>> '*,A>,>>>( ),@>,>>> #,)>,>>> @;,>>> 1),);,>>>
1repare a 2unds 2low statement 2ollowing is the .alance +heet of 0Gs +rinivas Ltd. -ou are re%uired to prepare a 2und 2low +tatement articulars *994 6%uity +hare;>,>>> capital 1rofit F Loss 1*,@;> 7rade Creditors #?,>>> 0ortgage 1>,>>> +hort term loans 1;,>>> !ccrued expensesE,>>> 7otal *995 A;,>>> 1@,>>> )1,>>> 1;,>>> 1A,;>> @,;>> articulars Cash balances :ebtors Investment 2ixed !ssets Less4 :epreciation <oodwill +tock 7otal *994 1>,>>> #;,>>> ;,>>> ;>,>>> ';,#;>( ;,>>> )@,>>> 1, #A,@;> *995 1),>>> #@,>>> nil E>,>>> '@>>>( nil )?,>>> 1, ;#,>>>
1, #A,@;> 1, ;#,>>>
A%%itional In!ormation> 1. :epreciation provided is 3s.1@;>. #. rite off goodwill.
). :ividend paid 3s.);>>.
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Illustration
A%%itional In!ormation> :uring the year ended )1st :ecember,1??E 1. :ividend of 3s.#),>>> was paid #. !ssets of another company were purchased for a consideration of 3s.;>,>>> payable in shares. 7he assets include +tock 3s.#>>>>, 0achinery 3s.#;,>>> ). 0achinery was further purchased for 3s.E>>> *. :epreciation written off on machinery 3s.1#,>>> ;. Income tax provided during the year 3s.)),>>> A. 0achinery worth 3s.#>>> was sold for 3s.1E>>. Loss on sale of machinery 3s.#>> was transferred to general reserve. -ou are re%uired to prepare +chedule of changes in orking Capital and 2unds 2low +tatement
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Fun%s Flo" Analysis Intro%uction 2inancial statements as an aid to evaluate past and G or present performance of a business concern is un%uestionable and beyond any dispute. 7he Income +tatement reports the revenues earned and expenses incurred or outstanding. 7he .alance +heet conveys about the deployment of funds in various assets and e%uities. International !ccounting +tandards @ reads as4 H! statement of changes in financial position should be included as an integral part of financial statements. 7he statement of changes in financial position should be presented for each period for which the income statement is preparedI. 7he 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.
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,bAecti&es> A!ter stu%ying t.is unit you s.oul% be able to4 1. 6xplain the meaning and the concepts of funds flow statement. #. !scertain transactions that involve flow of funds and those that does not involve flow of funds. ). Jnow the techni%ues of preparing fund flow statement. 6eaning o! Fun% Flo" Statement 2unds 2low +tatement is essentially derived from the analysis of changes which have occurred in assets and e%uities between two accounting periods. 2unds 2low +tatement being a toll of 0anagement accountant can be prepared at point in time. 7his statement does not form a part of financial statement but acts as a valuable tool for the management in decision making. 2unds flow statement is very useful in working capital management, deciding the capital structure of the firm, financial planning and forecasting. !ccording to the International !ccounting +tandard @, the term K2undL refers to cash, to cash and cash e%uivalent, or to working capital. 7he term KflowL refers to change and therefore the term K2unds flowI refers to Kchange in fundsL or Kchange in working capitalL. In other words, any increase or decrease in working capital means Kflow of fundsL. 2und 2low +tatement enables us to identify and recogni/e the changes in assets and asset sources which are not readily evident in the income statement or financial statement. It reveals how funds were obtained to pay off its long term debts, how the firm managed to pay regular dividends during volatile period, how the funds from e%uity issue were utili/ed etc. &owever 2unds flow statement is not a substitute to comprehensive income statement '1rofit and Loss account( and statement of 2inancial 1osition '.alance +heet(. It facilitates additional information regarding movement of funds during a particular period. 7here are two concepts of working capital D gross concept and net concept. <ross working capital refers to the firmLs investment in current assets. 8et working capital means excess of current assets over current liabilities. Working capital = Current Assets Current Liabilities
Current assets are those which are held or receivable within a year or within the operating cycle of the business. 7hey are intended to be converted into cash within a short period of time.
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Current liability is that obligation which has to be satisfied within a year. 6xamples of current assets and current liabilities are4
CU--:+? ASS:?S M Cash and bank balances M Inventory M +undry :ebtors M 7emporary investments M 1re=paid expenses M Outstanding incomes M !ccounts receivables M .ills receivables
CU--:+? LIA0ILI?I:S M !ccounts payable M +undry creditors M .ank overdraft M 5nclaimed dividends M 1rovision for taxation M 1roposed dividends M +hort term loans
+on-Current Assets refers to those assets other than current assets that are reali/able in cash or sold or consumable after one year or after a considerable period of time. 2ictitious assets are those expenses which could not be written off during the period of their incidence. 2or example, promotional expenses of a company which could not be treated as expenditure in the year of incidence are shown as fictitious asset. +on-current Liabilities refers to all those obligations other than current liabilities that are likely to mature after one year period. 6xamples of non=current asset and non=current liabilities are4 8O8 C533687 LI!.ILI7I6+ 8O8 C533687 !++67+ M +hare capital M 2ixed assets M Long term loans M :ebentures M Long term investments M +hare premium aGc M 1rofit F loss aGc 'debit bal( M 2orfeited shares aGc M :iscount on issue of shares F M 2ictitious assets like goodwill, patents, copyrights, trademarks.
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M 1rofit F loss aGc 'credit bal( M !ppropriation of profits M 1rovision for taxation M 1rovision for depreciation M Capital reserve
debentures M :eferred expenditures like preliminary expenses, advertising expenses.
+tatement of +ources and 5ses of 2unds or 2unds 2low +tatement is a statement which depicts the sources from which funds are obtained and how they have been utili/ed. hen a transaction results in increase of funds it is termed as BSource o! Fun%C and when it results in decrease of fund it is termed as BApplication o! Fun%C. &owever there are certain transactions that do not result in either increase or decrease of fund. +uch transactions are termed as 8on fund 7ransaction. 6g4 If the funds are 3s.1>>>> and a fixed asset of 3s.;>>> is purchased by issuing shares of 3s.;>>> the funds position will not change and therefore this transaction will be taken as a non=fund transaction. 7here are certain transactions which are not apparent and are hidden. +uch transactions have to be located in order to know their effect on the funds. In such circumstances the relevant ledger accounts should be prepared for all non=current assets and liabilities to find out the hidden information. Ascertainment o! Flo" o! Fun%s 7he flow of fund can be ascertained from .alance +heet, 1rofit and Loss account and from the hidden information. ! few in%epen%ent transactions are given below and the effect of each of the transaction on flow of funds is determined.
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Computation o! Working capital>
1. ?.e company reali@es -s'*9999 !rom its %ebtors' :ebtors will reduce from 3s.E>>>> to 3s.A>>>> Cash balance will increase from 3s. #>>>> to 3s.*>>>>
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#. ?.e company pays to its cre%itors a sum o! -s'(9999 out o! t.e cas. balance' M Cash balance gets reduced from 3s.#>,>>> to 3s.1>,>>> M +undry creditors will stand reduced from 3s.;>,>>> to 3s.*>,>>> ). ?.e company purc.ases !urniture o! -s'(9999 by raising long-term loans o! -s'(9999.
*. ?.e company re%eems pre!erence s.ares o! -s'(99999 by issuing (*D %ebentures o! -s'(99999'
;. ?.e company raises -s'39#999 in cas. by issue o! ne" s.ares' M 7his transaction will increase the cash balance of the company from 3s.#>,>>> to 3s.@>,>>>. 7he working capital position will be4
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A. ?.e company sells its buil%ing .a&ing a book &alue o! -s'39#999 !or a sum o! -s'49#999' M 7his transaction will increase the cash balance with the company from 3s.#>,>>> to 3s.E>,>>>.
8ote4 6ach transaction is independent and not linked to the previous example. From t.e abo&e# t.e !ollo"ing general rules can be !orme%> (' ?.ere "ill be !lo" o! !un%s i! a transaction in&ol&es> M Current assets and fixed assets, e.g. purchase of building for cash M Current assets and capital, e.g., issue of shares for cash M Current assets and fixed liabilities, e.g. redemption of debentures in cash M Current liabilities and fixed liabilities, e.g. Creditors paid off in debentures M Current liabilities and capital, e.g., creditors paid off in shares. M Current liabilities and fixed assets, e.g. building transferred to creditors in satisfaction of their claims *' ?.ere "ill be no !lo" o! !un%s i! a transaction in&ol&es'
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M Current assets and current liabilities, e.g., payment made to creditors through cash M 2ixed assets and fixed liabilities, e.g., building purchased and payments made in debentures. M 2ixed assets and capital, e.g. building purchased and payment made in shares
?ec.ni$ues o! reparing a Fun%s Flo" Statement Like other accounting statements, the structure of 2und 2low +tatement is based on the e%uality of financial assets and liabilities including capital. 7he basic understanding is that the funds are obtained through profit, external borrowings or by issue of shares. If funds are not available readily from these sources, the other alternative available is to sell the fixed assets and investments. Steps in reparation o! Fun%s Flo" Statement 7here are three steps involved in the preparation of a 2und 2low +tatement '22+(. 7hey are as follows4 a( 1reparation of +tatement of changes in working capital or +chedule of changes in working capital. b( 1reparation of !d$usted 1rofit and Loss !ccount '!1L(
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c( +tatement of changes in 2inancial position as per !+ D @ Sc.e%ule o! C.anges in Working Capital It is also known as HComparative change in orking Capital +tatementI or H orking Capital Nariation +tatementI. 7he net change in working capital is pro$ected here in the place of individual changes in all the current assets and current liabilities in the 2unds 2low +tatement. 7he 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. 7he effect of the changes in the individual items of the current assets and current liabilities on working capital is also presented clearly and precisely. 7he difference in the amount of working capital at the end of two years will depict either the increase or decrease in working capital. hile ascertaining the increase or decrease in individual items of current assets and current liabilities and its impact on working capital, the following 3ules should be taken into account. -ules !or preparing t.e Sc.e%ule o! C.anges in Working Capital>
Format o! Sc.e%ule o! C.anges in Working Capital
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O ro&ision !or ?a;ation> It can be treate% in t"o "ays> 1. ?reate% as current liability4 when there is no income tax paid or additional provision made it is treated as current liability. It can be taken to schedule of changes in working capital. 8o further treatment is re%uired. #. ?reate% as non-current liability4 ! ledger account '1rovision for taxation aGc( is prepared. +ometimes we may have to arrive at income tax paid during the year from the given information. 7hese are hidden transactions which are not apparent and are hidden. O ropose% 1i&i%en%> It can be treate% in t"o "ays> (' ?reate% as current liability4 1roposed dividend may be taken as Current liability since declaration of dividends by share holders is simply a formality. It is taken to schedule of changes in working capital with no further treatment. *' ?reate% as non-current liability> 1roposed dividend can be taken as an appropriation of profit. In such a case, proposed dividend for the current year will be added back to current yearLs profit in order to find out funds from operations if such amount of dividend has already been charged to profit. 1ayment of dividend will be shown as an application of fund.
A%Auste% ro!it an% Loss account
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3evenue transactions such as depreciation, amorti/ation, 1rofitGLoss on sale of assets etc appearing in 1rofit and Loss account does not belong to either current or non=current category. !ll such non=operating incomes and non=operating expenses appear in !d$usted 1rofit and Loss account to ascertain the K2unds from OperationsI. Fun%s !rom ,perations> 1rofit earned by the concern during the current year is deemed to be the source of funds. It is very important source of funds inflow. 8et profit is arrived at by deducting cost of goods sold and other expenses from total sales revenue. &owever, the profit so calculated is seldom e%ual to the funds from operations because there are many items which are debited or credited in the 1rofit and Loss !ccount which do not affect working capital. 7herefore, in calculating the funds from operations, the following ad$ustments must be kept in mind4 Items to be a%%e% back to +et ro!it> a. +on-!un% re&enue %e%uctions> 7hese are items which are debited to 1rofit and Loss account. 7hese do not cause outflow of funds such as depreciation and depletion on non=current assets, amorti/ation of fictitious and intangible assets, preliminary expenses, redemption of preference shares or debentures, deferred charges, advertising suspense account written off. If non fund expenditures do not affect the current assets such as unexpired insurance, do not add back. +o also, all allowances for income tax payable in future years are excluded. b. +on-tra%ing c.arges or losses4 7hese items which were debited to 1rofit and Loss account reduce the profits but they do not cause any outflow of funds. &ence, profit should be corrected by adding back all such charges and losses. 7hese include appropriation of retained earnings such as general reserve, dividend e%uali/ation fund, and reserve for contingencies, sinking fund. In addition the dividend on shares must be added back since it is an appropriation and not trading charge. 7he losses arising out of sale of land, buildings, machinery, long term investments which were written off to the profit and loss account must be added back. :o not add the loss arising out of sale of a current asset such short term investments. It is a trading loss and hence it will not re%uire any ad$ustment. 7he amount set aside as provision for current taxation will also be added back. 7his will be considered only when the provision for taxation is treated as a charge on profits. Items t.at are to be %e%ucte% !rom +et ro!it> 7he non fund and non trading revenue receipts or incomes must be deducted from net profit in order to compute funds from operations. 7he items are4 'a( 1i&i%en% recei&e% or recei&able> !lthough this transaction increases the current assets such as cash and debtors, it is not a trading income. &ence, it should be deducted from the net profits to determine the funds from operations. 'b( -etrans!er o! e;cess pro&isions> here the provisions made for taxation, depreciation, doubtful debts exceed the genuine re%uirements, the excess amount is transferred back to the
Page 26
1rofit and loss account. It does not create any inflow of funds since it is an accounting entry. &ence, deduct it. 'c( ro!it on sale o! non current assets> It is a non trading income. &ence it must be eliminated from the amount of profit. 'd( Appreciation in !i;e% assets> 7he 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. A%Auste% ro!it an% Loss aEc ?o :epreciation written off 1reliminary exp written off <oodwill written off :iscount on issue of shares Loss on sale of fixed assets Loss on sale of trade investments 7ransfer to <eneral 3eserve 1rovision for 7ax 1rovision for 1roposed :ividend .alance cGd '8et 1rofit( Closing balance ?otal +,?:> M If debit total of !d$usted 1rofit and Loss aGc is more than the credit total, the difference is 2unds generated from Operation M If credit total of !d$usted 1rofit and Loss aGc is more than the debit total, the difference is funds lost in operations. 0y .alance bGd 'Opening bal ( 1rofit on sale of investments 1rofit on sale of 2ixed assets :ividend and interest received Fun%s !rom ,perations <bal !ig=
?otal
Fun%s Flo" Statement
Page 27
7his forms the final step in funds flow analysis. It consist of two components D the source of funds and the application of funds. 7his statement reveals the overall creditworthiness of the enterprise. ! 2unds 2low +tatement differs from an Income +tatement in the following aspects4 1. 2unds flow statement reveals how the funds were obtained and how they were utili/ed whereas the income statement discloses the results of the business activity. #. ! funds flow statement matches the Kfunds raisedL with Kfunds utili/edL ). Income statement which discloses the results of operations cannot accurately furnish funds from operations because non=fund items such as depreciation, writing off fictitious assets etc are included in it. F,-6A? ,F FU+1S FL,W S?A?:6:+? S,U-C:S ,F FU+1S -s' 2unds from Operations 8on=trading incomes Issue of +hares Issue of :ebentures .orrowing of loans !cceptance of deposits +ale of fixed assets +ale of Investments :ecrease in orking Capital A LICA?I,+ ,F FU+1S 2unds lost in Operations 8on=operating expenses 3edemption of 1reference shares 3edemption of debentures 3epayment of loans 3epayment of deposits 1urchase of fixed assets 1urchase of long term instruments Increase in orking Capital -s'
Illustration1: XYZ Ltd provides the following information
+undry :ebtors Cash in hand
Fanuary ( A;,>>> 1),>>>
1ecember /( 1,>;,>>> #>,>>>

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Cash at .ank .ills 3eceivable Inventory .ills 1ayables Outstanding expenses +undry Creditors .ank Overdraft +hort term Loans
1;,>>> 1A,>>> ?>,>>> 1#,>>> A,>>> )>,>>> )>,>>> )#,>>>
#>,>>> )>,>>> E*,>>> E,>>> ;,>>> ;E,>>> *#,>>> )A,>>>
1repare a schedule of changes in working capital Solution +chedule of changes in orking Capital
llustration *> ?.e !ollo"ing are t.e summari@e% 0alance S.eets o! An%erson Lt%' 0ALA+C: SG::? AS ,+HH' Liabilities +hare Capital 3eserves 1 F L !ccount :ebentures *994 ;,>>,>>> 1,;>,>>> *>,>>> ),>>,>>> *995 A,>>,>>> 1,E>,>>> A;,>>> #,;>,>>> Asset 2ixed !ssets Less 4 :ep +tock .ook :ebts *994 1>,>>,>>> '),@>,>>>( #,*>,>>> #,;>,>>> *995 11,#>,>>> '*,A>,>>>( ),@>,>>> #,)>,>>>
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Creditors 1rov. for I7
1,@>,>>> 1,A>,>>> A>,>>> E>,>>> 1#,#>,>>> 1),);,>>>
Cash
1,>>,>>> 1#,#>,>>>
@;,>>> 1),);,>>>
1repare a 2unds 2low statement Solution>
+otes> 1( 7he increase in <eneral 3eserve is due to transfer a part of profit of the current year and hence the difference is transferred to !d$usted 1rofit and Loss account since itLs a non=cash item #( 7he difference in depreciation is charged to !d$usted 1FL, since itLs a non=cash item.
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)( Increase in 6%uity +hare capital is assumed to be the fresh issue which is a cash item. It is recorded in 2unds 2low +tatement as source. *( 7he difference is debenture is the redemption. It is taken to 2unds 2low +tatement as application of funds. ;( 1urchase of fixed asset is difference between the opening and closing balance of fixed assets. It is application of funds and taken to 2unds 2low +tatement.
Illustration /> 2ollowing is the .alance +heet of 0Gs +rinivas Ltd. -ou are re%uired to prepare a 2und 2low +tatement articulars *994 6%uity +hare;>,>>> capital 1rofit F Loss 1*,@;> 7rade Creditors #?,>>> 0ortgage 1>,>>> +hort term loans 1;,>>> !ccrued expensesE,>>> 7otal *995 A;,>>> 1@,>>> )1,>>> 1;,>>> 1A,;>> @,;>> articulars Cash balances :ebtors Investment 2ixed !ssets Less4 :epreciation <oodwill +tock 7otal *994 1>,>>> #;,>>> ;,>>> ;>,>>> ';,#;>( ;,>>> )@,>>> 1, #A,@;> *995 1),>>> #@,>>> nil E>,>>> '@>>>( nil )?,>>> 1, ;#,>>>
1, #A,@;> 1, ;#,>>>
A%%itional In!ormation> 1. :epreciation provided is 3s.1@;>. #. rite off goodwill.
). :ividend paid 3s.);>>. Solution>
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Illustration 2> 2ollowing is the balance sheet of 0Gs 0ahaveer 6nterprise for the year 1??A and 1??@.
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A%%itional In!ormation> :uring the year ended )1st :ecember,1??E 1. :ividend of 3s.#),>>> was paid #. !ssets of another company were purchased for a consideration of 3s.;>,>>> payable in shares. 7he assets include +tock 3s.#>>>>, 0achinery 3s.#;,>>> ). 0achinery was further purchased for 3s.E>>> *. :epreciation written off on machinery 3s.1#,>>> ;. Income tax provided during the year 3s.)),>>> A. 0achinery worth 3s.#>>> was sold for 3s.1E>>. Loss on sale of machinery 3s.#>> was transferred to general reserve. -ou are re%uired to prepare +chedule of changes in orking Capital and 2unds 2low +tatement
Page 33
Page 34
I Issue of shares which involves current assets alone has to be taken here. Illustration 3> 2rom the following .alance +heet of 0Gs. 3ao .ros Ltd prepare +tatement of Changes in orking Capital and 2unds 2low +tatement
Page 35
A%%itional In!ormation> 1. 1reference +hares were redeemed at a premium of ;P during the year 1??1. #. :ividend at 1;P on 6%uity +hare for the year 11?> and 1reference dividend for 1??> were paid. ). 7he 1rovision for :epreciation stood at 3s.1;>>>> and 3s.1?>>>> for the year 1??> and 1??1 respectively. *. ! machine costing 3s.@>>>>, depreciation written off 3s.)>>>> was disposed off for 3s.#;>>>. Solution>
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I 2ixed asset should be shown as gross amount. &ence 1rovision for depreciation is added to 2ixed !sset '8et(.
Cash Flow Analysis

Intro%uction 7he funds flow analysis deal with the flow of funds within and outside the organi/ation. &owever the main focus of funds flow statement is to explain the changes which have taken place in net working capital during the period under consideration. It fails to explain the changes in cash balance. 7he movement of cash is of vital importance to the management. 7he organi/ation may become directionless if the cash inflows are not sufficient to meet the cash outflows. 0any a time, a management is posed with the paradox of huge profits and yet impossible to pay dividends or even taxes. 7his is due to the ground realities that cash is either not received or the cash received is drained out in other items. &ence, it has become a necessity to have a cash flow analysis on periodic intervals say every %uarter. 7he statement shows the items resulting in cash inflows and cash outflows. ,bAecti&es>
Page 37
A!ter stu%ying t.is unit# you s.oul% be able to> 1. 6xplain the meaning of cash flow statement. #. :escribe the broad classification of cash flow statement ). 3ecall the revised !+ ) format of cash flow statement *. !c%uaint with steps in preparation of C2+. ;. Compute the Cash 2low +tatement A. :istinguish between Cash 2low +tatement and 2unds 2low +tatement 6eaning o! Cas. Flo" Statement Cash flow statement, also known as H+tatement !ccounting for variations in cashI, K here <ot here <one +tatementL. It shows the movement of cash and their causes during the period under consideration. 7he statement is significant to the stakeholders of the company and is prepared to show the impact of financial policies and procedures on the cash position. It takes into account all the transactions that have a direct impact upon cash and cash e%uivalent. urpose o! Cas. Flo" Statement !ccording to !ccounting +tandard ), it is mandatory to prepare and present Cash flow statement along with +tatement of financial 1osition and +tatement of Income position at the end of accounting period. 5nlike 2und 2low statement, cash flow statement explains in depth the inflow and outflow of cash and cash e%uivalent in three categories vi/ 8et cash flow from operating activities, 8et cash flow investment activities and 8et cash flow from financing activities. It answers some of the important %uestions on the company such as4 M &ow much cash has been spent on investment activities such as purchase of new plant and machinery, purchase of landQ M &ave long=term source of cash both internally generated plus raised externally ade%uate to finance purchase of new long term fixed assetsQ M hat is the li%uidity position of the companyQ &as it improvedQ
M &ow the company is handling large dividend paymentQ Is it managing with its reserves or is it borrowingQ reparation o! Cas. Flo" Statement
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!ccording to !ccounting +tandard ) '3evised( method cash flow statement is sub divided into three parts D 'i( cash flow from operating activities 'ii( cash flow from investing activities 'iii( cash flow from financing activities. (' Cas. !lo" !rom ,perating Acti&ities> Operating activities are the principal revenue producing activities of the enterprise. 7herefore, they generally result from the transactions and other events that enter into the determination of net profit or loss. 7he amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans and make new investments without recourse to external source of financing. Information about the specific components of future operating cash flows is useful in con$unction with other information in forecasting future operating cash flows. Computation o! ,perating ro!it be!ore Working capital c.anges> 7he 8et 1rofit shown in the 1rofit and Loss !ccount will have to be ad$usted for non=cash items for find out operating profit before working capital changes. +ome if these items are as follows4 i. 1epreciation> :epreciation does not result in outflow of cash and, therefore, net profit will have to be increased by the amount of depreciation or development rebate charged, in order to find out the real cash generated from operations. ii. Amorti@ation o! intangible assets> <oodwill, preliminary expenses, etc., when written off should therefore, be added back to profits to find out the cash from operations. iii. Loss on Sale o! !i;e% assets> It does not result in outflow of cash and, therefore, should be added back of profits. iv. )ains !rom sale o! !i;e% assets> +ince a sale of fixed assets is taken as a separate source of cash, it should be deducted from net profits. v. Creation o! reser&es> If profit for the year has been arrived at after charging transfers to reserves, such transfers should be added back to profits. If cash operations show a net loss, such net loss after making ad$ustments for non=cash items will be shown as an application of cash. 7hus cash from operations is computed on the pattern of computation of K2undsL from operations. Cas. generate% !rom ,perations 7o find the cash from operations, ad$ustments will have to be made for KchangesL in current assets and current liabilities arising on account of operations.
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M !ny decrease in current assets or any increase in current liabilities between two periods should be added back to Operating profit before working capital changes. M Likewise any increase in current assets or any decrease in current liabilities should be deducted from Operating profit before working capital changes to arrive at cash generated from Operations.
Computation o! +et Cas. Flo" !rom ,perating Acti&ities> 2rom cash generated from operations Income tax paid, cash flow from extraordinary items 'if any( should be ad$usted 'subtracted( to arrive at 8et cash flow from operating activities. #. Cas. Flo" !rom In&esting Acti&ities 7ransactions like purchase or sale of fixed assets, proceeds from sale of e%uipments, Interest on Investment received, :ividends received are recorded. ). Cas. Flo" !rom Financing Acti&ities 7ransactions such as proceeds from issue of shares, debentures, proceeds from long term loans, repayment of long term loans, Interest paid on debentures, dividend payment to e%uity, preference share holders are shown to arrive at net cash used in financing activities. 1urchase of plant and machinery on lease or hire purchase should be shown separately as deferred credit. &owever the cost of machinery purchased will be shown as application of cash. Computation o! +et Increase in Cas. an% Cas. :$ui&alent 7he net cash flow from operating, investing and financing activities are added to arrive at net increase in cash and cash e%uivalent. 7o this cash and cash e%uivalent at the beginning of the period is added to get cash and cash e%uivalent at the end of the period.
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Format o! CASG FL,W S?A?:6:+? JAS /> <-e&ise%= 6et.o%K CASG FL,W S?A?:6:+? <In%irect 6et.o%= for the year ending onRR (' Cas. !lo" !rom ,perating Acti&ities 8et 1rofit before taxation and extraordinary items4 !d$ustments for M :epreciation M 2oreign 6xchange loss M Interest Income M :ividend Income M Interest expenses ,perating c.anges ro!it be!ore Working Capital
'C(:ecreaseG'=(Increase in +undry :ebtors 'C(:ecreaseG'=(Increase in Inventories '=(:ecrease G'C( Increase in +undry Creditors Cas. generate% !rom operations Income 7ax 1aid Cash flow from extraordinary items 1roceeds from earth%uake disaster settlement +et Cas. !lo" !rom ,perating acti&ities <i=
Cas. Flo" !rom In&esting Acti&ities

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1urchase of 2ixed !ssets 1roceeds from sale of e%uipment Interest received :ividends received +et cas. !lo" !rom in&esting acti&ities <ii=
Cas. !lo" !rom Financing Acti&ities 1roceeds from issuance of share capital 1roceeds from long term borrowings 3epayment of long term loans Interest 1aid :ividends 1aid +et cas. use% in !inancing acti&ities <iii= +et increase in cas. & cas. e$ui&alent <i=L<ii=L <iii= <L= Cas. an% cas. e$ui&alents at t.e beginning o! t.e perio% = Cas. an% cas. e$ui&alents at t.e en% o! t.e perio% 7he closing balance of Cash and cash e%uivalent should tally with cash and bank balance of .alance +heet. . Illustration (> Compute the cash flow from operating activities
Page 42
ro!it an% Loss Account
7o Cost of goods sold *,>>,>>>
.y +ales including cash;,>>,>>> sales 1,>>,>>> 1rofit on sale of land )>,>>> Interest on investment #>,>>>
Office expenses +elling expenses :epreciation Loss on sale of plant <oodwill written off Income tax 8et 1rofit
1#,>>> E,>>> A,>>> *,>>> ),>>> @,>>> 1,1>,>>> ;,;>,>>>
;,;>,>>>
Solution
Page 43
Illustration *> Calculate cash flow from operating activities if the operating profit before working capital changes 3s.),E>,>>>
Solution
Page 44
Illustration /> 7he following is the .alance sheet for the period ending )1st 0arch #>>A and #>>@. If the Current year net loss is 3s.)E,>>>. Calculate the cash flows
Solution
Illustration 2> 2ollowing is the extracts of .alance +heet in respect of a company.
7he current year net loss is 3s. ;>,>>>. Calculate the cash flows. Solution>
Page 45
Illustration 3> 2ollowing is the balance sheet of !mit and bros for the year #>>A and #>>@. -ou are re%uired to prepare Cash 2low +tatement 0ALA+C: SG::? as on 6arc. /(st *994 an% *995
Liabilities +hare Capital <eneral 3eserve 1rofit and Loss
*994 #,>>,>>> ;>,>>> )>,;>>
*995 #,;>,>>> A>,>>> )>,A>> = 1,);,#>> );,>>> 3#(9#799
.ank Loan 'Long=term( @>,>>> +undry Creditors 1,;>,>>>
1rovision for 7axation )>,>>> ?otal Assets Land and .uilding 0achinery +tock #,>>,>>> 1,;>,>>> 1,>>,>>> 3#/9#399
1,?>,>>> 1,A?,>>> @*,>>>
Page 46
+undry :ebtors Cash .ank <oodwill ?otal
E>,>>> ;>> = = 3#/9#399
A*,#>> A>> E,>>> ;,>>> 3#(9#799
A%%itional In!ormation> :uring the year ended )1st :ecember,#>>@ 1. :ividend of 3s.#),>>> was paid #. !ssets of another company were purchased for a consideration of 3s.;>,>>> payable in shares. 7he assets include +tock 3s.#>>>>, 0achinery 3s.#;,>>> ). 0achinery was further purchased for 3s.E>>> *. :epreciation written off on machinery 3s.1#,>>> ;. Income tax provided during the year 3s.)),>>> A. 0achinery worth 3s.#>>> was sold for 3s.1E>>. Loss on sale of machinery 3s.#>> was transferred to general reserve.
Page 47
Ledger accounts of certain transactions are prepared to find the hidden information. .y the virtue of practice certain information can be traced even without preparation of ledger accounts Seg. .ank loan aGc, land and building aGcT
Page 48
Illustration 4 Follo"ing are t.e summari@e% balance s.eets o! ?.omson as on /( st 1ecember *993 an% *994'
A%Austments 1. :ividend of 3s. 11,;>> was paid #. !ssets of another Company were 3s. )>,>>> payable in shares. 7he 'a( stock 3s. 1>,>>> 'b( 0achinery 3s.1#,;>> ). 0achinery was further purchased for 3s. *,>>> *. Income tax paid 3s. 1A,;>> for the tear ;. :epreciation written=off in 0achinery 3s. A,>>> A. Loss on sale machine 3s. 1>> was written=off to <eneral 3eserve. 1repare Cash flow statement. purchased following for a assets consideration of were purchased
Solution>
Page 49
Working +otes>
Sel! Assessment Muestions>

1). :ividend received is UUUUUUUUUUUU activity because income is received from investment in shares of another company. 1*. :ividend paid is UUUUUUUUUUUUU activity.
Cas. Flo" Statement un%er 1irect 6et.o% 5nder this method gross cash receipts and gross cash payments for the ma$or items are disclosed, such as cash receipts from customers and cash paid to suppliers.
Illustration 4> <iven below are the .alance +heet as on 0arch )1, previous year and current year, and a +tatement of Income and 3econciliation of earnings for the current year of 6lectronics Ltd. 7he only item in the plant and machinery account sold during the year was a speciali/ed machine that originally cost 3s.1; lacs. 7he accumulated depreciation on this machine at the time of sale was 3s.E lacs. 7he machine was sold for 3s.A lacs and full payment was received in cash. 6lectronics Ltd. purchased patents for 3s.1A lacs during the year. .esides cash purchases of plant and e%uipment, the assets of another company were also purchased for 3s.1 crore payable in fully paid=up shares, issued at par9 the assets purchased being goodwill, 3s.)> lacs and plant, 3s.@> lacs.
Page 51
2rom the foregoing information, prepare a Cash=flow statement both under :irect and Indirect 0ethod for 6lectronics Ltd. Solution JAK> J1irect met.o%K
+'0> I It may be recalled that cash from operating activities Sshown in +ection IIT was 3s.1*9 the difference of 3s.1* S3s.#E as per !+ D ) and 3s.1* as per C2+T is due to exclusion of interest payment on debentures S3s.1*T9 this interest payment is shown under financing activities.
Page 52
Working +otes> (
Solution J0K> JIn%irect met.o%K
7he +tatement highlights that the firm does not have enough funds from its operating activities S3s.#E lacsT and financing activities S3s.#> lacsT to cater to investment re%uirement of 3s.E; lacs, causing decline in cash S3s.)@ lacsT
roblem on Cas. Flo" An% Fun%s Flo" Statement> Illustration 5> 7he financial position of 0Gs C and : on Van 1 and :ecember )1 st, #>>* was as follows4
Page 53
Liabilities
1st Van
)1st :ec *>,A>>
!sset Cash
1st Van *>>>
)1st :ec ),A>>
Current )A,>>> liability for goods 'crs( 0rs.!Ls Loan = Loan .ank from)>,>>>
#>,>>> #;,>>>
:ebtors +tock
);,>>> #;,>>>
)E,>>> ##,>>>
&ire 1urchase= vendor Capital
#>,>>>
Land
#>,>>>
)>,>>>
1,*E,>>> 1,;*,>>> .uilding
;>,>>>
;;,>>> EA,>>> #;,>>>
0achinery E>,>>> :elivery Nan ?otal *#(2#999 *#38#499 ?otal =
*#(2#999
*#38#499
7he delivery van was purchased in :ecember #>>* on hire purchase basis9 a payment of 3s.;>>> was made immediately and the balance of the amount is to be paid in #> monthly installments of 3s.1>>> each together with interest at 1#P p.a. :uring the year the partners withdrew 3s.#A,>>> for domestic expenditure. 7he provision for depreciation against machinery on )1st :ecember #>>) was 3s.#@,>>> and on )1st :ecember #>>* 3s.)A,>>> -ou are re%uired to prepare the 2unds flow and Cash 2low statement. Observe the difference between funds from operations and cash from operations and give the inference. (' reparation o! !un%s !lo" statement
Page 54
Acti&ity (> repare Cas. !lo" Statement using t.e !ormat gi&en belo"
Working +otes>
Page 55
(9'7 1i!!erence bet"een Cas. Flo" Analysis an% Fun%s Flo" Analysis Follo"ing are t.e points o! %i!!erence bet"een Cas. Flo" Analysis an% a Fun%s Flo">
Cas. Flo" Analysis
Fun% Flo" Analysis
1. It is concerned only with the1. Is concerned with change in working change in cash position capital position between9 two balance sheet dates. #. It merely a record of cash#. In 2und 2low statement net effect of receipts and disbursements receipts and disbursements are recorded. ). It is more useful to the). It is concerned with the total management as a tool ofprovision of funds. financial analysis in short period. *. Cash is part of working*. !n improvement in funds positions capital and therefore, anneed not resulting improvement in cash improvement in cash positionposition results in improvement in the funds position ;. !n increase in a current;. !n increase in a current liability or liability of decrease in a currentdecrease in a current asset results asset will result in increase indecrease in working capital cash position A. It is based on cash basis A. It is based on accrual basis
@. It is not based on ledger mode@. It is based on ledger principles Uses o! Cas. Flo" Statement 7he cash flow statement, being one of the important financial documents a firm has to possess, reveals the effective uses. 2irst of all, it explains in depth the reasons for the low cash balance available at a particular time. .ased on this, it is possible to find the reasons for such a situation. It also shows the ma$or sources and uses of cash. .y effectively maintaining the cash and controlling the outflow of cash, it is possible to set in motion the smooth functioning of the organi/ation. It helps the financial decisions more effectively with regard to short term li%uidity position of an organi/ation. 1ro$ections of cash inflows and outflows can be regulated based on
Page 56
the records available in the past. 1roper pro$ections can be made once the reasons are analy/ed. .ased on this, it is possible to li%uidate the short term obligations without much fun=fare. +hort term obligations need to be serviced so that the credit worthiness of an organi/ation can be carried on unabated.
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Unit - IV

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Unit - IV

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Financial Accounting & Analysis

Financial Accounting & Analysis

ithout this investment, we can not operate our fixed assets

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

Financial Accounting & Analysis

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

'i( <ross Concept 'ii( 8et Concept

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

)ross Working Capital= ?otal Current Assets

Financial Accounting & Analysis

Land and .uilding

1lant and 0achinery

Cash and .ank .alance

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

A%%itional In!ormation> 1. :epreciation provided is 3s.1@;>. #. rite off goodwill.

). :ividend paid 3s.);>>.

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

debentures M :eferred expenditures like preliminary expenses, advertising expenses.

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

Computation o! Working capital>

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

Format o! Sc.e%ule o! C.anges in Working Capital

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

A%Auste% ro!it an% Loss account

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

Fun%s Flo" Statement

By K.Arjun Goud 'Assistant Professor(

Financial Accounting & Analysis

Illustration1: XYZ Ltd provides the following information

#>,>>> )>,>>> E,>>> E,>>> ;,>>> ;E,>>> #,>>> )A,>>>