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Accounting and Finance


for Managers

LESSON

7
FUND FLOW STATEMENT ANALYSIS
CONTENTS
7.0
7.1
7.2
7.3

Aims and Objectives


Introduction
Meaning & Objectives of Fund Flow Statement Analysis
Methods of Preparing Fund Flow Statement
7.3.1 Schedule of Changes in Working Capital
7.3.2 Net Profit Method
7.3.3 Sales Method
7.3.4 First Method
7.3.5 Second Method

7.4 Advantages of Preparing Fund Flow Statement


7.4.1 Illustrative Statement of Financing
7.4.2 To fulfil the Primary Objective of the Financial Management
7.4.3 Facilitation through Financial Planning
7.4.4 Guide to Working Capital Management
7.4.5 Indicator of Yester Track Path of the Firm
7.5 Let us Sum up
7.6 Lesson-end Activity
7.7 Keywords
7.8 Questions for Discussion
7.9 Suggested Readings

7.0 AIMS AND OBJECTIVES


In this lesson we shall discuss about fund flow statement analysis. After going through
this lesson you will be able to:
(i) understand meaning and objectives of fund flow statement analysis
(ii) analyse methods of preparing fund flow statement
(iii) discuss advantages of preparing fund flow statement.

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

MEANING & OBJECTIVES OF FUND FLOW


STATEMENT ANALYSIS

Fund Flow Statement Analysis

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

METHODS OF PREPARING FUND FLOW


STATEMENT

Steps in the preparation of Fund Flow Statement:


l
First and fore most method is to prepare the statement of changes in working
capital i.e., to identify the flow of fund / movement of fund through the detection
of changes in the volume of working capital.
l
Second step is the preparation of Non- Current A/c items-Changes in the volume
of Non current a/cs have to be prepared only in order to quantify the flow fund i-e
either sources or application of fund.
l
Third step is the preparation Adjusted Profit& Loss A/c, which already elaborately
discussed in the early part of the chapter.
l
Last step is the preparation of fund flow statement.

7.3.1 Schedule of Changes in Working Capital


The ultimate purpose of preparing the schedule of changes in the working capital is to
illustrates the changes in the volume of net working capital which envisages either
sources or application of fund. The schedule of changes are focused as follows:
Increase in Current Assets

Increase in Working Capital

Decrease in Current Assets

Decrease in Working Capital

Increase in Current Liabilities

Decrease in Working Capital

Decrease in Current Liabilities

Increase in Working Capital

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Particulars

Previous
Year

Current
Year

Increase
inWorking
Capital (+)

Decrease in
inWorking
Capital ()

(A) Current Assets:


Cash In Hand
Cash at Bank
Marketable Securities
Bills Receivable
Sundry Debtors
Closing Stock
Prepaid Expenses
(B) Current Liabilities:
Creditors
Bills Payable
Outstanding expenses
Pre received Income
Provision for doubtful and bad
debts
Net Working Capital(A-B)
Increase/Decrease Working
Capital

The next important step is to prepare that Adjusted profit and loss account
Method of Fund From Operations

Net Profit Method


Add Non Operating Expenses
Less Non Operating Incomes

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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(E) Profit Appropriation


Transfer to General Reserve
Less:
(F) Non funding Profits:
Profit on Sale of Fixed Assets
Profit on Sale of Long Term Investments
Profit on Redemption Debentures/Preference Shares
(G) Non Operating Incomes:
Dividend Received
Interest Received
Rent Received
Fund From operations / Fund Lost in Operations

Fund Flow Statement Analysis

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

7.3.3 Sales Method


Under this method, the following is the statement format is used to arrive fund flow
from operations:
Sources:
Sales
Stock at the end
Less:

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

7.3.5 Second Method


Adjusted Profit & Loss A/c
Depreciation on Plant
10,000
Provision for Taxation
8,000
Loss on Sale of Plant
4,000
Discount on issue of debentures 4,000
Provision for bad debts
2,000
Transfer to general reserve
2,000
Preliminary expenses off
6,000
Good will written off
4,000
Proposed Dividend
12,000
To Closing Profit B/d
1,20,000
1,72,000

124

By Opening Balance B/d


By Profit on Sale of Building
By Dividend Received
By Refund of Tax
By Balancing Figure
Fund From operations

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

Fund Flow Statement Analysis

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

Check Your Progress

(1)

(2)

(3)

Fund flow means a study of


(a)

working capital change

(b)

Cash position change

(c)

Long investment change

(d)

Change in the current liabilities

Normally Working capital means


(a)

Current assets- current liabilities

(b)

Current assets

(c)

Gross working capital

(d)

Net working capital

Increase in working capital


(a)

Increase in current assets

(b)

Increase Net working capital

(c)

Increase in current liabilities

(d)

Increase in long term source of financing

7.4 ADVANTAGES OF
STATEMENT

PREPARING FUND FLOW

Structured analysis on the Working capital of a firm:


It is the only statement to study the changes in the working capital in between two
different periods from the balance sheet of a firm through structured analysis on the
basis of working capital position.

7.4.1 Illustrative Statement of Financing


It is a statement which highlights the role of various kinds of financing not only in the
dimension of project development and expansion but also growth rate of the organization.
Financial Structure

Capital Structure-Long Term


Financial Resources

External Sources
Share Capital and
so on

Internal Sources:
Retained
Earnings

Medium &Short term


Financial Resources

Institutional
lending:
Banker-Loans &
Advances

Money Market:
Public Deposit,
Commercial paper

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7.4.2 To fulfil the Primary Objective of the Financial Management


It not only elucidates the mode of financing but also the application of resources after
raising. It answers to the following queries viz:
l

How the outsider's liabilities are redeemed?

What is the role of the fund from operation generated?

How the raised funds applied into business?

How the decrease in working capital was applied?

What is the mode of raising of financial resources for an increase in the working
capital?

7.4.3 Facilitation through Financial Planning


The projected fund flow statement from the past performance facilitates the firm to
anticipate the future requirement of financial resources. It guides the management to
prioritize the application in the future to the tune of scarce resources.

7.4.4 Guide to Working Capital Management


It acts as a guide to the management to maintain the working capital at optimum level
through either purchase or sale of marketable securities during the periods of adequate
and inadequate working capital respectively.

7.4.5 Indicator of Yester Track Path of the Firm


The insight on the financial performance of the firm can be had by the lending institutions
through fund flow statement at the time of extending financial assistance to the firm.
Limitations:
l

It is an extension of financial statements but it cannot be leveled with the emphasis


of them.

It is not a resultant of the transaction instead it is an arrangement of among the


available information.

Projected fund flow statement ever only to the tune of financial statements which
are historic in feature.
Check Your Progress

(1)

(2)

(3)

126

Adjusted profit and loss account is prepared for


(a)

Determining the fund from operations

(b)

Determining the fund lost in operations

(c)

(a) or (b)

(d)

None of the above

Fund flow statement is categorized into two parts


(a)

Fund in flow & Fund out flow

(b)

Cash in flow & Cash out flow

(c)

Sources & Applications

(d)

None of the above

Fund from operations is


(a)

Sources of the firm

(b)

Applications of the firm

(c)

Neither sources nor applications

(d)

None of the above

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Fund Flow Statement Analysis

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

(B.com., Bharathidasan November, 1986)


The first step is to prepare the schedule of changes in working capital.
Schedule of changes in working capital

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

The first step is to prepare the schedule of changes in working capital.


Schedule of changes in working capital

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

Share capital A/c


Rs.
90,000

To Balance c/d

Cr
Rs.
10,000

By Cash( Issue of shares)


Balancing fig.
By Balance b/d

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

Adjusted Profit & Loss A/c

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

Depreciation written off during the year Rs.30,000

The first step is prepare the statement of changes in working capital


Schedule of changes in working capital

Current asset:
Cash
128

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

Fund Flow Statement Analysis

-------------------

1,80,000
1,80,000
1,20,000
3,00,000

The next step is to prepare the non - current account


First non-current asset account should have to be prepared
Dr

Fixed Assets A/c


Rs
3,80,000

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

Share capital A/c


To Balance c/d

Rs
8,00,000

Cr

By Cash( Issue of shares)


By General reserve
By Balance b/d

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

General Reserve A/c


Rs
1,00,000
1,00,000
2,00,000

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

Adjusted Profit & Loss A/c

To (Fixed Assets) depreciation


To Balance c/d

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

Machinery worth for sale

Rs.7,000

(-)Machinery sold

Rs.5,000

Loss on sale of the portion of the machinery sold

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

Provision for Depreciation A/c


Rs
3,000
40,000

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

Loan P.N. Bank

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)

Mr. White's A/c


Rs
25,000
----------25,000

Fund Flow Statement Analysis

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

The next step is to prepare the fund flow statement.


Fund flow statement
Sources
Sale of machinery
Loan from P.N.Bank
Fund from operation

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

The next step is to prepare the non current accounts.


First, Non current asset account to be prepared.
The first non-current asset account is Building account.
Dr
To Balance B/d

Building account
Rs
40,000

By (Depreciation)Adjusted profit &


Loss A/c
By Balance c/d

40,000

Cr
Rs
4,000
36,000
40,000

The next non- current asset account is Plant account


Dr
To Balance B/d
To Cash (Purchase)
balancing fig.

Plant account
Rs
37,000

By (Depreciation)Adjusted profit &


Loss A/c
By Balance c/d

3,000
40,000

Cr
Rs
4,000
36,000
40,000

The next non-current asset account is Investments account.


Dr
To Balance B/d
To Cash(purchase) Balancing
figure

Investments account
Rs
10,000
1,000

Cr
Rs

By Balance c/d

11,000

The next one is the non-current liability account.


Dr

General Reserve account


Rs

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

The next non-current liability account is Provision for taxation account


Dr
To Cash(Tax paid previous
year taxation) Balancing figure
To Balance B/d
132

Provision for taxation account


Rs
17,000
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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Fund Flow Statement Analysis

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

The next step is to prepare the fund flow statement.


Fund flow statement
Sources
Fund from operations

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

Check Your Progress

(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)

Non current asset and Non current liability accounts

(b)

Non current asset and Current liability accounts

(c)

Current asset account and Non current liability accounts

(d)

Current asset and current liability accounts

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)

Increase in the working capital - Applications

(b)

No change in the working capital position -Neither an application nor resource

(c)

Decrease in the working capital-Resource

(d)

None of the above

The meaning of the "To cash ( Tax paid)" entry posted in the Provision for
taxation account is
(a)

Last year taxation is paid through the current year provision

(b)

Current year taxation is paid through the current year provision

(c)

Last year tax is paid through the last year taxation

(d)

Current year taxation is paid through the last year provision

Profit on sale of the fixed assets are considered to be


(a)

Resource to the enterprise

(b)

Non operating income

(c)

Application of the enterprise

(d)

None of the above

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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Accounting and Finance


for Managers

(6)

The redemption bank term loan leads to change in the


(a)

Non current liability account and current asset account

(b)

Current asset account and current liability account

(c)

Non current asset account and current liability account

(d)

Non current asset account and current liability account

7.5 LET US SUM UP


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. 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. The projected
fund flow statement from the past performance facilitates the firm to anticipate the
future requirement of financial resources. It guides the management to prioritize the
application in the future to the tune of scarce resources.

7.6 LESSON-END ACTIVITY


In the long run, is it more important for a business to have positive cash flows from its
operating activities, investing activities, or financing activities? Why? Give your opinion.

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

7.8 QUESTIONS FOR DISCUSSION

134

1.

Define fund.

2.

Define flow.

3.

What is meant by fund flow ?

4.

List out the various objectives of preparing the fund flow statement.

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5.

Enumerate the various advantages in the preparation of fund flow statement.

6.

Briefly explain the limitations of fund flow statement.

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 the process of preparing the statement of changes in working capital.

Fund Flow Statement Analysis

10. Draft the pro forma of the Fund flow statement.


11.

Explain any non current account transactions affecting the fund position of the
firm.

7.9 SUGGESTED READINGS


R.L. Gupta and Radhaswamy, "Advanced Accountancy".
V.K. Goyal, "Financial Accounting", Excel Books, New Delhi.
Khan and Jain, "Management Accounting".
S.N. Maheswari, "Management Accounting".
S. Bhat, "Financial Management", Excel Books, New Delhi.
Prasanna Chandra, "Financial Management - Theory and Practice", Tata McGraw
Hill, New Delhi (1994).
I.M. Pandey, "Financial Management", Vikas Publishing, New Delhi.
Nitin Balwani, "Accounting & Finance for Managers", Excel Books, New Delhi.

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