com
LESSON
7
FUND FLOW STATEMENT ANALYSIS
CONTENTS
7.0
7.1
7.2
7.3
7.1 INTRODUCTION
Every business establishment usually prepares the balance sheet at the end of the fiscal
year which highlights the financial position of the yester years It is subject to change in
the volume of the business not only illustrates the financial structure but also expresses
the value of the applications in the liabilities side and assets side respectively. Normally,
Balance sheet reveals the status of the firm only at the end of the year, not at the
beginning of the year. It never discloses the changes in between the value position of the
firm at two different time periods/dates.
120
The method of portraying the changes on the volume of financial position is the statement
fund flow statement. To put them in nutshell, fund between two different time periods. It is
further illustrated that the changes in the financial position or the movement or flow of fund.
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7.2
A report on the movement of funds or working capital. In a narrow sense the term fund
means cash and the fund flow statement depicts the cash receipts and cash disbursements/
payments. It highlights the changes in the cash receipts and payments as a cash flow
statement in addition to the cash balances i.e., opening cash balance and closing cash
balance. Contrary to the earlier, the fund means working capital i.e., the differences
between the current assets and current liabilities.
The term flow denotes the change. Flow of funds means the change in funds or in
working capital. The change on the working capital leads to the net changes taken place
on the working capital i.e., especially due to either increase or decrease in the working
capital. The change in the volume of the working capital due to numerous transactions.
Some of the transactions may lead to increase or decrease the volume of working
capital. Some other transactions neither registers an increase nor decrease in the volume
of working capital.
According Foulke A statement of source and application of funds is a technical device designed
to analyse the changes to the financial condition of a business enterprise in between two dates
Various Facets of Fund flow statement are as follows:
l
Statement of sources and application of funds
l
Statement changes in financial position
l
Analysis of working capital changes and
l
Movement of funds statement
Objectives of fund flow statement analysis:
(1) It pinpoints the mobilization of resources and the further utilization of resources
(2) It highlights the financing of the general expansion of the business firms
(3) It exemplifies the utilization of debt finance in the structure of financing
(4) It portrays the relationship between the financing, investment, liquidity and dividend
decision of the firm during the given point of time.
7.3
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Particulars
Previous
Year
Current
Year
Increase
inWorking
Capital (+)
Decrease in
inWorking
Capital ()
The next important step is to prepare that Adjusted profit and loss account
Method of Fund From Operations
Sales Method
Less-Payments(Application)
The first method is widely used method by all in determining the volume of Fund from
Operations (FFS)
Under the Net Profit Method, Fund flow from operations can be computed
7.3.2 Net Profit Method
122
Under this method, Fund from operations can be determined in two different ways .The
first method is through the statement format
Net Profit from the Profit & Loss A/c
xxxxx
Add:
(A) Non Funding Expenses:
Loss on Sale of Fixed Assets
xxxx
Loss on Sale of Long Term Investments
xxxx
Loss on Redemption Debentures/Preference Shares
xxxx
Discount on Debentures /Share
xxxx
(B) Non Operating Expenses:
Depreciation of fixed Assets
xxxx
(C) Intangible Assets:
Amortization of Goodwill
xxxx
Amortization of Patent
xxxx
Amortization of Trade Mark
xxxx
(D) Fictitious Assets:
Writing off Preliminary expense
xxxx
Writing off Discount on Shares/Debentures
xxxx
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xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxxx
The second method of determining the fund from operations under the first classification
is the Accounting Statement Format.
Adjusted Profit & Loss A/c
Dr
To Depreciation
xxxx
To Goodwill Written off
xxxx
To Patent Written off
xxxx
To Loss on Sale of Fixed Asset
xxxx
To Loss on Sale of Investment
xxxx
To Loss on redemption of Liability xxxx
To Preliminary Expenses off
xxxx
To Proposed Dividend
xxxx
To Transfer to General Reserve
xxxx
To Current Year Provision for
Taxation
xxxx
To Current Year Provision for
Depreciation
xxxx
To Balancing Figure
xxxx
(Fund Lost in Operations)
Cr
By Opening Balance Profit
By Profit on sale of Fixed Assets
By Profit on Sale of Investments
By Profit on redemption of
Liability
By Transfer from General Reserve
By Balancing Figure
Fund From Operations(FFS)
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxxx
xxxxx
Application:
Stock at Opening
xxxx
Net Purchases (Purchase-Returns)
xxxx
Wages
xxxx
Salaries
xxxx
Telephone expenses
xxxx
Electricity charges
xxxx
Office stationery expenses
xxxx
Other operating cash expenses
xxxx
Fund from operations
From the following details calculate funds from operations:
Salaries
Rent
Rs.
10,000
6,000
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Refund of Tax
Profit on Sale of Building
Depreciation on Plant
Provision for Taxation
Loss on Sale of plant
Closing Balance of Profit & Loss A/c
Opening balance on Profit & Loss A/c
Discount on Issue of Debentures
Provision for bad debts
Transfer to general reserve
Preliminary expenses written off
Good will written off
Dividend Received
Proposed Dividend
Calculation of fund from operation
7.3.4 First Method
Closing balance of Profit & Loss A/c
Less Opening Balance
Balance Forward
Add: Non Fund / Non Operating Charges:
Depreciation on Plant
Provision for Taxation
Loss on Sale of Plant
Discount on issue of debentures
Provision for bad debts
Transfer to general reserve
Preliminary expenses off
Good will written off
Proposed Dividend
6,000
10,000
10,000
8,000
4,000
1,20,000
50,000
4,000
2,000
2,000
6,000
4,000
10,000
12,000
1,20,000
50,000
70,000
10,000
8,000
4,000
4,000
2,000
2,000
6,000
4,000
12,000
1,22,000
Less
Refund of Tax
Profit on Sale of Building
Dividend Received
Fund from operations
6,000
10,000
10,000
96,000
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50,000
10,000
10,000
6,000
96,000
1,72,000
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The next step is to prepare the fund flow statement. The proforma of the fund flow
statement
Sources of funds
Funds from Business Operation
Non trading Incomes
Sale of Non-Current Assets
Sale of Long Term Investments
Issue of shares
Acceptance of deposits
Long Term Borrowings
Decrease in Working Capital
Uses of funds
Funds Lost in Operations
Redemption of Preference Share Capital
Repayment of Loans
Purchase of Long Term Investments
Purchase of Fixed Assets
Payment of Taxes
Payment of Dividends
Drawings
Loss of Cash
Increase in Working Capital
(1)
(2)
(3)
(b)
(c)
(d)
(b)
Current assets
(c)
(d)
(b)
(c)
(d)
7.4 ADVANTAGES OF
STATEMENT
External Sources
Share Capital and
so on
Internal Sources:
Retained
Earnings
Institutional
lending:
Banker-Loans &
Advances
Money Market:
Public Deposit,
Commercial paper
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What is the mode of raising of financial resources for an increase in the working
capital?
Projected fund flow statement ever only to the tune of financial statements which
are historic in feature.
Check Your Progress
(1)
(2)
(3)
126
(b)
(c)
(a) or (b)
(d)
(b)
(c)
(d)
(b)
(c)
(d)
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Illustration 1
Form the following details prepare a statement showing changes in working capital during
1985:
Balance sheet of Pioneer ltd. as on 31st December
Liabilities
1984 Rs
Share capital
Reserves
Profit and Loss A/c
Debentures
Creditors for goods
Provision for tax
5,00,000
1,50,000
40,000
3,00,000
1,70,000
60,000
1985
Rs.
6,00,000
1,80,000
65,000
2,50,000
1,60,000
80,000
12,20,000
13,35,000
Assets
Fixed assets
Less:Depreciation
Stock
Book Debts
Cash in hand
Preliminary expeneses
1984
Rs.
10,00,000
3,70,000
6,30,000
2,40,000
2,50,000
80,000
20,000
12,20,000
1985
Rs.
11,20,000
4,60,000
6,60,000
3,70,000
2,30,000
60,000
15,000
13,35,000
Current asset:
Stock
Book debts
Cash in hand
Current liability
Creditors for goods
Working capital
Increase in working capital
1984
1985
2,40,000
2,50,000
80,000
5,70,000
3,70,000
2,30,000
60,000
6,60,000
1,70,000
4,00,000
1,00,000
5,00,000
1,60,000
5,00,000
-----------5,00,000
Increase
In working
capital
1,30,000
------1,30,000
10,000
1,40,000
1,40,000
Decrease
In working
capital
-----------20,000
20,000
40,000
------40,000
1,00,000
1,40,000
Illustration 2
From the following two balance sheet as at December 31, 2004 and 2005. Prepare the
statement of sources and uses of funds.
Liabilities
Share capital
Trade creditors
Profit & Loss a/c
Assets
Cash
Debtors
Stock in trade
Land
2004
Rs.
80,000
20,000
4,60,000
5,60,000
2005
Rs.
90,000
46,000
5,00,000
6,36,000
2004
Rs.
2005
Rs.
60,000
2,40,000
1,60,000
1,00,000
5,60,000
94,000
2,30,000
1,80,000
1,32,000
6,36,000
Current asset:
Cash
Debtors
Stock in trade
Current liability
Trade creditors
Working capital
Increase in working capital
2004
2005
Increase
In working
captial
60,000
2,40,000
1,60,000
4,60,000
94,000
2,30,000
1,80,000
5,04,000
34,000
20,000
4,40,000
18,000
4,58,000
46,000
4,58,000
------------4,58,000
Decrease
In working
capital
10,000
20,000
54,000
---------54,000
26,000
36,000
18,000
54,000
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The next step is to prepare the non current accounts of the firm.
Dr
Land A/c
Rs.
1,00,000
32,000
1,32,000
To Balance B/d
To Cash(Purchase) balancing fig.
Cr
Rs.
By Balance c/d
1,32,000
1,32,000
Next non-current account item is the share capital account in the liability side.
The closing balance of the share capital is more than that of the opening balance which
means that the firm has undergone the issue of further more share capital.
During the issue of share capital, the cash resources are raised by the firm through the
sale of shares.
Dr
To Balance c/d
Cr
Rs.
10,000
80,000
90,000
90,000
Then the next step is to prepare the adjusted profit and loss account to determine the
fund from the operations
Dr
Cr
Rs.
To Balance c/d
5,00,000
Rs.
4,60,000
40,000
By Balance B/d
By Fund from operation
Balancing fig.
5,00,000
5,00,000
The next step is to prepare the fund flow statement of the firm
Fund flow statement
Sources
Issue of Shares
unds from operation
Rs.
10,000
40,000
50,000
Applications
Purchase of Land
Increase in working capital
Rs.
32,000
18,000
50,000
Illustration 3
From the following relating to Panasonic ltd., prepare funds flow statement.
Balance sheet of Pioneer ltd. as on 31st December
Liabilities
Share capital
Reserves
Retained earnings
Accounts payable
1994
Rs
6,00,000
2,00,000
1995
Rs
8,00,000
1,00,000
60,000
90,000
9,50,000
1,20,000
2,70,000
12,90,000
Assets
Fixed assets
Accounts
receivable
Stock
Cash
1994
Rs
3,80,000
2,10,000
1995
Rs
4,20,000
3,00,000
3,00,000
60,000
9,50,000
3,90,000
1,80,000
12,90,000
Additional information:
l
The company issued bonus shares for Rs.1,00,000 and for cash Rs.1,00,000
Current asset:
Cash
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1994
1995
60,000
1,80,000
Increase
In working
captial
1,20,000
Decrease
in working
capital
---------Contd...
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Stock in trade
Accounts receivable
Current liability
Accounts payable
Working capital
Increase in working capital
3,00,000
2,10,000
3,90,000
3,00,000
90,000
90,000
5,70,000
8,70,000
90,000
4,80,000
1,20,000
6,00,000
2,70,000
6,00,000
3,00,000
6,00,000
3,00,000
-------------------
1,80,000
1,80,000
1,20,000
3,00,000
To Balance B/d
To Cash (Purchase)
Balancing fig.
70,000
Cr
Rs
30,000
By Depreciation(Adjusted Profit
&Loss A/c )
By Balance c/d
4,20,000
4,50,000
4,50,000
The next non-current account is that non-current liability which is nothing but Share
capital.
Dr
Rs
8,00,000
Cr
8,00,000
Rs
1,00,000
1,00,000
6,00,000
8,00,000
And another non current account is to be prepared that General reserve account.
Dr
To Share capital
To Balance c/d
Cr
Rs
2,00,000
By Balance b/d
2,00,000
The next step is to prepare the Adjusted Profit & Loss A/c
Dr
Rs
30,000
1,20,000
Cr
By Balance B/d(Retained
Earnings)
By Fund from operation
Balancing fig.
1,50,000
Rs
60,000
90,000
1,50,000
The next step is to prepare the fund flow statement of the enterprise
Fund flow statement
Sources
Issue of Shares
Funds from operation
Rs
1,00,000
90,000
1,90,000
Applications
Purchase of Land
Increase in working capital
Rs
70,000
1,20,000
1,90,000
Illustration 4
Balance sheets of M/s Black and White as on 1-1-1986 and 31-12-1986 were as follows:
Liabilities
Creditors
Mrs.WhitesLoan
Loan from
P.N.Bank
Captial
1-1-86
Rs
40,000
25,000
40,000
31-12-1986
Rs
44,000
50,000
1,25,000
1,53,000
2,30,000
2,47,000
Assets
Cash
Debtors
Stock
Machinery
Land
Building
1-1-86
Rs
10,000
30,000
35,000
31-12-1986
Rs
7,000
50,000
25,000
80,000
40,000
35,000
2,30,000
55,000
50,000
60,000
2,47,000
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Additional information
During the year machine costing Rs.10,000 (accumulated depreciation Rs.3,000) was
sold for Rs.5,000 . The provision for depreciation against machinery as on 1-1-1986 was
Rs.25,000 and on 31-12-1986 Rs.40,000 Net profit for the year 1986 amounted to
Rs.45,000. You are required to prepare funds flow statement (M.Com MKU April 1980).
The very first step is to prepare the statement of changes in working capital
Changes in working capital in between the various current assets and current liabilities
are as follows:
Statement of changes in working capital
Current asset:
Cash
Debtors
Stock
Current liability
Sundry creditors
Working capital
Increase in working capital
1-1-86
Rs
31-12-1986
Rs
Increase
In working
capital
Decrease
In working
capital
10,000
30,000
35,000
75,000
7,000
50,000
25,000
82,000
----------20,000
---------
3,000
---------10,000
40,000
35,000
3,000
38,000
44,000
38,000
----------20,000
38,000
20,000
4,000
17,000
3,000
20,000
The next step is to determine the cost of the machinery before the charge of depreciation
i.e., to find out the Gross value of the assets, in other words Original cost of the assets to
be found out at the moment of purchase.
Written down value of the machinery extracted
from the balance sheet as on dated
Add: Accumulated depreciation or
Provision for depreciation
Original Cost of Machinery
1-1-1986
31-12-1986
Rs.80,000
Rs.55,000
25,000
40,000
1,05,000
95,000
The ultimate aim is to find out the original cost of the machinery for the preparation of
the machinery account:
Before preparing the Machinery account, the worth of the sale transaction of the
machinery should be found out .
Original cost of the Machinery
Rs.10,000
(-)Depreciation
Rs.3,000
Rs.7,000
(-)Machinery sold
Rs.5,000
Rs.2,000
Dr
To Balance B/d
Machinery A/c
Rs
1,05,000
1,05,000
By Cash (Sales)
By Provision for machinery
By loss on sale(Adjusted profit
and loss account)
By Balance c/d
Cr
Rs
5,000
3,000
2,000
95,000
1,05,000
The next one is the provision for depreciation account or Accumulated depreciation
account.
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Dr
To Machinery A/c
To Balance c/d
Cr
By Balance B/d
By depreciation provided during
the current year
43,000
Dr
To Drawings (Balancing fig)
To Balance c/d
Dr
43,000
Cr
Rs
1,25,000
45,000
1,70,000
By Balance B/d
By Net profit
Cr
Rs
To Balance c/d
50,000
50,000
Dr
To Cash( Loan paid)
To Balance c/d
Rs
25,000
18,000
Capital A/c
Rs
17,000
1,53,000
1,70,000
Rs
40,000
10,000
50,000
By BalanceB/d
By Cash (Balancing fig)
Cr
Rs
25,000
By Balance B/d
25,000
The next step is to prepare the Adjusted Profit & Loss Account.
Adjusted Profit & Loss Account
To Machinery (Loss on sale)
To Provision for taxatio
To Balance c/d(Net profit)
Rs
2,000
18,000
45,000
65,000
Rs
----------65,000
By Balance B/d
By fund from operations
65,000
Rs
5,000
10,000
65,000
Applications
Purchase of land
Purchase of Building
Drawings
Repayment of Mr White Loan
Increase working capital
80,000
Rs
10,000
25,000
17,000
25,000
3,000
80,000
Illustration 5
From the following balance sheets of A Ltd on 31st Dec, 1982 and 1983, you are required
to prepare Fund flow statement
The following are additional information has also been given
l
Depreciation charged on plant was Rs.4,000 and on building Rs.4,000
l
Provision for taxation of Rs.19,000 was made during the year 1983
l
Interim Dividend of Rs.8,000 was paid during the year 1983
Balance sheet
Liabilities
Share capital
General Reserve
Profit & Loss A/c
Sundry creditors
Bills payable
Provision for taxation
Provision for doubtful debts
1982 Rs
1,00,000
14,000
16,000
8,000
1,200
16,000
400
1983 Rs
1,00,000
18,000
13,000
5,400
800
18,000
600
1,55,600
1,55,800
Assets
Good will
Building
Plant
Investments
Stock
Bill receivable
Debtors
Cash
1982 Rs
12,000
40,000
37,000
10,000
30,000
2,000
18,000
6,600
1,55,600
1983 Rs
12,000
36,000
36,000
11,000
23,400
3,200
19,000
15,200
1,55,800
(M.Com.Madras,1984)
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The first step is to prepare the Statement of changes in the working capital
Statement of changes in working capital
Current asset:
Stock
Bill receivable
Debtors
Cash
Current liability
Sundry creditors
Bills payable
Provision for doubtful debts
Working capital
Increase in working capital
1982
Rs
1983
Rs
Increase
In working
capital
30,000
2,000
18,000
6,600
56,600
23,400
3,200
19,000
15,200
60,800
8,000
1,200
400
9,600
47,000
7,000
54,000
5,400
800
600
6,800
54,000
13,800
54,000
13,800
Decrease
In working
capital
6,600
1,200
1,000
8,600
2,600
400
200
6,800
7,000
13,800
Building account
Rs
40,000
40,000
Cr
Rs
4,000
36,000
40,000
Plant account
Rs
37,000
3,000
40,000
Cr
Rs
4,000
36,000
40,000
Investments account
Rs
10,000
1,000
Cr
Rs
By Balance c/d
11,000
To Balance B/d
18,000
By Balance B/d
By Adjusted profit and loss A/c
(Profit transferred during the
current year)
18,000
Cr
Rs
14,000
4,000
18,000
35,000
By Balance B/d
By Adjusted profit & Loss A/c
(provision for taxation made
during the year)
Cr
Rs
16,000
19,000
35,000
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The next step is to prepare the Adjusted profit and loss account.
Adjusted Profit & Loss Account
To Depreciation Building
To Depreciation Plant
To Transfer to General Reserve
To Provision for taxation
To Interim dividend
To Balance c/d
Rs
4,000
4,000
4,000
19,000
8,000
13,000
52,000
By Balance B/d
By Fund from operations
Rs
16,000
36,000
52,000
Rs
36,000
Applications
Purchase of the plant
Purchase of the Investment
Increase working capital
Tax paid
Interim dividend
36,000
Rs
3,000
1,000
7,000
17,000
8,000
36,000
(1)
(2)
(3)
(4)
(5)
Purchase of plant & machinery Rs.10 lakh through the issue of 1 Lakh
shares at Rs.10 per share ; affect the following accounts
(a)
(b)
(c)
(d)
XYZ Ltd. has made a credit purchase of Rs.1 lakh worth of goods led to
Rs.1 lakh worth of additional stock of tradable goods for the enterprise,
leads to
(a)
(b)
(c)
(d)
The meaning of the "To cash ( Tax paid)" entry posted in the Provision for
taxation account is
(a)
(b)
(c)
(d)
(b)
(c)
(d)
The treatment of current year depreciation with the closing balance of profit
in determining the fund from operations
(a)
To be added
(b)
To be multiplied
(c)
To be deducted
(d)
To be divided
Contd...
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(6)
(b)
(c)
(d)
7.7 KEYWORDS
Fund: Fund means working capital
Flow: Flow means changes occurred in between two different time periods
Statement of changes in working capital: Enlisting the changes taken place in between
the Current assets and current liabilities of two different time horizons
Current assets: Assets which are in the form of cash, equivalent to cash or easily
convertible into cash .
Current liabilities: Short term financial resources of the firm
Non-current assets: Long term assets
Non current liabilities: Long term financial resources
Increase in working capital: Increase in Net working capital i.e. Excess of current
assets over the current liabilities- Applications side of the fund flow
Decrease in working capital: Decrease in Net working capital i.e. Excess of current
liabilities over the current assets - Resources side of the fund flow
Fund from operations: Income generated from only operations
Fund lost in operations: Loss incurred in the operations
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1.
Define fund.
2.
Define flow.
3.
4.
List out the various objectives of preparing the fund flow statement.
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5.
6.
7.
What are the steps involved in the process of fund flow statement ?
8.
Explain the various methods of determining the fund from/lost (in ) operations.
9.
Explain any non current account transactions affecting the fund position of the
firm.
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