accounts fund flow
TRANSCRIPT
-
7/24/2019 Accounts Fund Flow
1/16
12 0
Accounting and Finance
for Managers LESSON
7
FUND FLOW STATEMENT ANALYSIS
CONTENTS
7.0 Aims and Objectives
7.1 Introduction
7.2 Meaning & Objectives of Fund Flow Statement Analysis
7.3 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 Method7.3.4 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 Activity7.7 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 throughthis 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 fiscalyear which highlights the financial position of the yester years It is subject to change inthe volume of the business not only illustrates the financial structure but also expressesthe 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 thebeginning of the year. It never discloses the changes in between the value position of the
firm at two different time periods/dates.The method of portraying the changes on the volume of financial position is the statementfund flow statement. To put them in nutshell, fund between two different time periods. It isfurther illustrated that the changes in the financial position or the movement or flow of fund.
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
2/16
12 1
Fund Flow Statement Analysis7.2 MEANING & OBJECTIVES OF FUND FLOW
STATEMENT ANALYSIS
A report on the movement of funds or working capital. In a narrow sense the term fundmeans 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 flowstatement 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 differencesbetween the current assets and current liabilities.
The term flow denotes the change. Flow of funds means the change in funds or inworking capital. The change on the working capital leads to the net changes taken placeon the working capital i.e., especially due to either increase or decrease in the workingcapital. 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 workingcapital. Some other transactions neither registers an increase nor decrease in the volumeof working capital.
According Foulke A statement of source and application of funds is a technical device designedto analyse the changes to the financial condition of a business enterprise in between two dates
Various Facets of Fund flow statement are as follows:
Statement of sources and application of funds Statement changes in financial position
Analysis of working capital changes and
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:
First and fore most method is to prepare the statement of changes in workingcapital i.e., to identify the flow of fund / movement of fund through the detectionof changes in the volume of working capital.
Second step is the preparation of Non- Current A/c items-Changes in the volumeof Non current a/cs have to be prepared only in order to quantify the flow fund i-eeither sources or application of fund.
Third step is the preparation Adjusted Profit& Loss A/c, which already elaborately
discussed in the early part of the chapter. 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
Decrease in Current Assets
Increase in Current Liabilities
Decrease in Current Liabilities
Increase in Working Capital
Decrease in Working Capital
Decrease in Working Capital
Increase in Working Capital
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
3/16
12 2
Accounting and Finance
for Managers
The next important step is to prepare that Adjusted profit and loss account
The first method is widely used method by all in determining the volume of Fund fromOperations (FFS)
Under the Net Profit Method, Fund flow from operations can be computed
7.3.2 Net Profit Method
Under this method, Fund from operations can be determined in two different ways .Thefirst 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
Method of Fund From Operations
Net Profit Method
Add Non Operating Expenses
Less Non Operating Incomes
Sales Method
Less-Payments(Application)
Particulars Previous
Year
Current
Year
Increase
inWorking
Capital (+)
Decrease in
inWorking
Capital ()
(A) Current Assets:
Cash In HandCash at Bank
Marketable Securities
Bills Receivable
Sundry DebtorsClosing Stock
Prepaid Expenses
(B) Current Liabilities:
CreditorsBills Payable
Outstanding expensesPre received Income
Provision for doubtful and bad
debts
Net Working Capital(A-B)
Increase/Decrease WorkingCapital
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
4/16
12 3
Fund Flow Statement Analysis(E) Profit Appropriation
Transfer to General Reserve xxxx
Less:
(F) Non funding Profits:
Profit on Sale of Fixed Assets xxxx
Profit on Sale of Long Term Investments xxxx
Profit on Redemption Debentures/Preference Shares xxxx
(G) Non Operating Incomes:
Dividend Received xxxx
Interest Received xxxx
Rent Received xxxx
Fund From operations / Fund Lost in Operations 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 Cr
7.3.3 Sales Method
Under this method, the following is the statement format is used to arrive fund flow
from operations:
Sources:
Sales xxxxx
Stock at the end xxxxx
Less:
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:
Rs.
Salaries 10,000
Rent 6,000
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)
By Opening Balance Profit xxxx
By Profit on sale of Fixed Assets xxxx
By Profit on Sale of Investments xxxx
By Profit on redemption of
Liability xxxx
By Transfer from General Reserve
xxxx
By Balancing Figure xxxx
Fund From Operations(FFS)
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
5/16
12 4
Accounting and Finance
for ManagersRefund of Tax 6,000
Profit on Sale of Building 10,000
Depreciation on Plant 10,000
Provision for Taxation 8,000
Loss on Sale of plant 4,000
Closing Balance of Profit & Loss A/c 1,20,000
Opening balance on Profit & Loss A/c 50,000Discount on Issue of Debentures 4,000
Provision for bad debts 2,000
Transfer to general reserve 2,000
Preliminary expenses written off 6,000
Good will written off 4,000
Dividend Received 10,000
Proposed Dividend 12,000
Calculation of fund from operation
7.3.4 First Method
Closing balance of Profit & Loss A/c 1,20,000
Less Opening Balance 50,000
Balance Forward 70,000
Add: Non Fund / Non Operating Charges:
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 4,000Proposed Dividend 12,000
1,22,000
Less
Refund of Tax 6,000
Profit on Sale of Building 10,000
Dividend Received 10,000
Fund from operations 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
By Opening Balance B/d 50,000
By Profit on Sale of Building 10,000
By Dividend Received 10,000
By Refund of Tax 6,000
By Balancing Figure 96,000
Fund From operations
1,72,000
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
6/16
12 5
Fund Flow Statement AnalysisThe next step is to prepare the fund flow statement. The proforma of the fund flow
statement
Check Your Progress
(1) Fund flow means a study of
(a) working capital change
(b) Cash position change
(c) Long investment change
(d) Change in the current liabilities
(2) Normally Working capital means
(a) Current assets- current liabilities
(b) Current assets
(c) Gross working capital
(d) Net working capital
(3) 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 PREPARING FUND FLOWSTATEMENT
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 thebasis 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 thedimension of project development and expansion but also growth rate of the organization.
Sources of funds Uses 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
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
Financial Structure
Capital Structure-Long Term
Financial Resources
Medium &Short term
Financial Resources
Institutionallending:Banker-Loans &Advances
Money Market:Public Deposit,
Commercial paper
External SourcesShare Capital and
so on
Internal Sources:Retained
Earnings
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
7/16
12 6
Accounting and Finance
for Managers7.4.2 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:
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:
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) 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
(2) 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
(3) Fund from operations is
(a) Sources of the firm
(b) Applications of the firm
(c) Neither sources nor applications
(d) None of the above
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
8/16
12 7
Fund Flow Statement AnalysisIllustration 1
Form the following details prepare a statement showing changes in working capital during
1985:
Balance sheet of Pioneer ltd. as on 31st December
(B.com., Bharathidasan November, 1986)
The first step is to prepare the schedule of changes in working capital.
Schedule of changes in working capital
Illustration 2
From the following two balance sheet as at December 31, 2004 and 2005. Prepare the
statement of sources and uses of funds.
The first step is to prepare the schedule of changes in working capital.
Schedule of changes in working capital
Liabilities 1984 Rs 1985
Rs.
Assets 1984
Rs.
1985
Rs.
Share capital 5,00,000 6,00,000 Fixed assets 10,00,000 11,20,000Reserves 1,50,000 1,80,000 Less:Depreciation 3,70,000 4,60,000
Profit and Loss A/c 40,000 65,000 6,30,000 6,60,000
Debentures 3,00,000 2,50,000 Stock 2,40,000 3,70,000
Creditors for goods 1,70,000 1,60,000 Book Debts 2,50,000 2,30,000
Provision for tax 60,000 80,000 Cash in hand 80,000 60,000
Preliminary expeneses 20,000 15,000
12,20,000 13,35,000 12,20,000 13,35,000
1984 1985 IncreaseIn working
capital
DecreaseIn working
capital
Current asset:
Stock 2,40,000 3,70,000 1,30,000 ------------
Book debts 2,50,000 2,30,000 ------- 20,000
Cash in hand 80,000 60,000 20,000
5,70,000 6,60,000 1,30,000 40,000
Current liability
Creditors for goods 1,70,000 1,60,000 10,000 -------
Working capital 4,00,000 5,00,000 1,40,000 40,000
Increase in working capital 1,00,000 ------------ 1,00,000
5,00,000 5,00,000 1,40,000 1,40,000
2004 2005 2004 2005
Liabilities Rs. Rs. Rs. Rs.
Share capital 80,000 90,000
Trade creditors 20,000 46,000
Profit & Loss a/c 4,60,000 5,00,000
Assets
Cash 60,000 94,000
Debtors 2,40,000 2,30,000
Stock in trade 1,60,000 1,80,000
Land 1,00,000 1,32,000
5,60,000 6,36,000 5,60,000 6,36,000
2004 2005 Increase
In working
captial
Decrease
In working
capital
Current asset:
Cash 60,000 94,000 34,000
Debtors 2,40,000 2,30,000 10,000
Stock in trade 1,60,000 1,80,000 20,000
4,60,000 5,04,000
Current liability
Trade creditors 20,000 46,000 26,000Working capital 4,40,000 4,58,000 54,000 36,000
Increase in working capital 18,000 ------------- ---------- 18,000
4,58,000 4,58,000 54,000 54,000
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
9/16
12 8
Accounting and Finance
for ManagersThe next step is to prepare the non current accounts of the firm.
Dr Land A/c Cr
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 Cr
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
The next step is to prepare the fund flow statement of the firm
Fund flow statement
Illustration 3
From the following relating to Panasonic ltd., prepare funds flow statement.
Balance sheet of Pioneer ltd. as on 31st December
Additional information:
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
Rs. Rs.
To Balance B/d 1,00,000
To Cash(Purchase) balancing fig. 32,000 By Balance c/d 1,32,000
1,32,000 1,32,000
Rs. Rs.
To Balance c/d 90,000 By Cash( Issue of shares)
Balancing fig.
10,000
By Balance b/d 80,000
90,000 90,000
Rs. Rs.
By Balance B/d 4,60,000
To Balance c/d 5,00,000 By Fund from operation
Balancing fig.
40,000
5,00,000 5,00,000
Sources Rs. Applications Rs.Issue of Shares 10,000 Purchase of Land 32,000
unds from operation 40,000 Increase in working capital 18,000
50,000 50,000
Liabilities 1994
Rs
1995
Rs
Assets 1994
Rs
1995
Rs
Share capital 6,00,000 8,00,000 Fixed assets 3,80,000 4,20,000
Reserves 2,00,000 1,00,000 Accounts
receivable
2,10,000 3,00,000
Retained earnings 60,000 1,20,000 Stock 3,00,000 3,90,000Accounts payable 90,000 2,70,000 Cash 60,000 1,80,000
9,50,000 12,90,000 9,50,000 12,90,000
Contd...
1994 1995 Increase
In working
captial
Decrease
in working
capitalCurrent asset:
Cash 60,000 1,80,000 1,20,000 ----------
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
10/16
12 9
Fund Flow Statement Analysis
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 Cr
The next non-current account is that non-current liability which is nothing but Sharecapital.
Dr Share capital A/c Cr
And another non current account is to be prepared that General reserve account.
Dr General Reserve A/c Cr
The next step is to prepare the Adjusted Profit & Loss A/c
Dr Adjusted Profit & Loss A/c Cr
The next step is to prepare the fund flow statement of the enterprise
Fund flow statement
Illustration 4
Balance sheets of M/s Black and White as on 1-1-1986 and 31-12-1986 were as follows:
Stock in trade 3,00,000 3,90,000 90,000 ----------
Accounts receivable 2,10,000 3,00,000 90,000 ----------
5,70,000 8,70,000
Current liability
Accounts payable 90,000 2,70,000 1,80,000
Working capital 4,80,000 6,00,000 3,00,000 1,80,000
Increase in working capital 1,20,000 1,20,000
6,00,000 6,00,000 3,00,000 3,00,000
Rs Rs
To Balance B/d 3,80,000 By Depreciation(Adjusted Profit
&Loss A/c )
30,000
To Cash (Purchase)
Balancing fig.
70,000 By Balance c/d 4,20,000
4,50,000 4,50,000
Rs Rs
To Balance c/d 8,00,000 By Cash( Issue of shares) 1,00,000
By General reserve 1,00,000
By Balance b/d 6,00,000
8,00,000 8,00,000
Rs Rs
To Share capital 1,00,000 By Balance b/d 2,00,000
To Balance c/d 1,00,000
2,00,000 2,00,000
Rs Rs
To (Fixed Assets) depreciation 30,000 By Balance B/d(Retained
Earnings)
60,000
To Balance c/d 1,20,000 By Fund from operation
Balancing fig.
90,000
1,50,000 1,50,000
Sources Rs Applications Rs
Issue of Shares 1,00,000 Purchase of Land 70,000
Funds from operation 90,000 Increase in working capital 1,20,000
1,90,000 1,90,000
Liabilities 1-1-86
Rs
31-12-1986
Rs
Assets 1-1-86
Rs
31-12-1986
Rs
Creditors 40,000 44,000 Cash 10,000 7,000
Mrs.WhitesLoan 25,000 - Debtors 30,000 50,000
Loan from
P.N.Bank
40,000 50,000 Stock 35,000 25,000
Captial 1,25,000 1,53,000 Machinery 80,000 55,000Land 40,000 50,000
Building 35,000 60,000
2,30,000 2,47,000 2,30,000 2,47,000
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
11/16
13 0
Accounting and Finance
for ManagersAdditional 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
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.
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 Machinery A/c Cr
The next one is the provision for depreciation account or Accumulated depreciationaccount.
1-1-86
Rs
31-12-1986
Rs
Increase
In working
capital
Decrease
In working
capital
Current asset:
Cash 10,000 7,000 ----------- 3,000
Debtors 30,000 50,000 20,000 ----------
Stock 35,000 25,000 --------- 10,000
75,000 82,000
Current liability
Sundry creditors 40,000 44,000 ----------- 4,000Working capital 35,000 38,000 20,000 17,000
Increase in working capital 3,000 3,000
38,000 38,000 20,000 20,000
1-1-1986 31-12-1986
Written down value of the machinery extracted
from the balance sheet as on dated
Rs.80,000 Rs.55,000
Add: Accumulated depreciation or
Provision for depreciation
25,000 40,000
Original Cost of Machinery 1,05,000 95,000
Rs Rs
To Balance B/d 1,05,000 By Cash (Sales) 5,000
By Provision for machinery 3,000
By loss on sale(Adjusted profit
and loss account)
2,000
By Balance c/d 95,000
1,05,000 1,05,000
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
12/16
13 1
Fund Flow Statement AnalysisDr Provision for Depreciation A/c Cr
Dr Capital A/c Cr
Dr Loan P.N. Bank Cr
Dr Mr. White's A/c Cr
The next step is to prepare the Adjusted Profit & Loss Account.
Adjusted Profit & Loss Account
The next step is to prepare the fund flow statement.
Fund flow statement
Illustration 5
From the following balance sheets of A Ltd on 31st Dec, 1982 and 1983, you are requiredto prepare Fund flow statement
The following are additional information has also been given
Depreciation charged on plant was Rs.4,000 and on building Rs.4,000
Provision for taxation of Rs.19,000 was made during the year 1983
Interim Dividend of Rs.8,000 was paid during the year 1983
Balance sheet
(M.Com.Madras,1984)
Rs Rs
To Machinery A/c 3,000 By Balance B/d 25,000
To Balance c/d 40,000 By depreciation provided during
the current year
18,000
43,000 43,000
Rs Rs
To Drawings (Balancing fig) 17,000 By Balance B/d 1,25,000
To Balance c/d 1,53,000 By Net profit 45,000
1,70,000 1,70,000
Rs Rs
By BalanceB/d 40,000
To Balance c/d 50,000 By Cash (Balancing fig) 10,000
50,000 50,000
Rs RsTo Cash( Loan paid) 25,000 By Balance B/d 25,000
To Balance c/d -----------
25,000 25,000
Rs Rs
To Machinery (Loss on sale) 2,000 By Balance B/d -----------
To Provision for taxatio 18,000 By fund from operations 65,000
To Balance c/d(Net profit) 45,000
65,000 65,000
Sources Rs Applications Rs
Sale of machinery 5,000 Purchase of land 10,000
Loan from P.N.Bank 10,000 Purchase of Building 25,000
Fund from operation 65,000 Drawings 17,000
Repayment of Mr White Loan 25,000
Increase working capital 3,000
80,000 80,000
Liabilities 1982 Rs 1983 Rs Assets 1982 Rs 1983 Rs
Share capital 1,00,000 1,00,000 Good will 12,000 12,000
General Reserve 14,000 18,000 Building 40,000 36,000
Profit & Loss A/c 16,000 13,000 Plant 37,000 36,000
Sundry creditors 8,000 5,400 Investments 10,000 11,000
Bills payable 1,200 800 Stock 30,000 23,400
Provision for taxation 16,000 18,000 Bill receivable 2,000 3,200
Provision for doubtful debts 400 600 Debtors 18,000 19,000Cash 6,600 15,200
1,55,600 1,55,800 1,55,600 1,55,800
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
13/16
13 2
Accounting and Finance
for ManagersThe first step is to prepare the Statement of changes in the working capital
Statement of changes in working capital
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 Building account Cr
The next non- current asset account is Plant account
Dr Plant account Cr
The next non-current asset account is Investments account.
Dr Investments account Cr
The next one is the non-current liability account.Dr General Reserve account Cr
The next non-current liability account is Provision for taxation account
Dr Provision for taxation account Cr
1982
Rs
1983
Rs
Increase
In working
capital
Decrease
In working
capital
Current asset:
Stock 30,000 23,400 6,600
Bill receivable 2,000 3,200 1,200Debtors 18,000 19,000 1,000
Cash 6,600 15,200 8,600
56,600 60,800
Current liability
Sundry creditors 8,000 5,400 2,600
Bills payable 1,200 800 400
Provision for doubtful debts 400 600 200
9,600 6,800
Working capital 47,000 54,000 13,800 6,800
Increase in working capital 7,000 7,000
54,000 54,000 13,800 13,800
Rs Rs
To Balance B/d 40,000 By (Depreciation)Adjusted profit &
Loss A/c
4,000
By Balance c/d 36,000
40,000 40,000
Rs Rs
To Balance B/d 37,000 By (Depreciation)Adjusted profit &
Loss A/c
4,000
To Cash (Purchase)
balancing fig.
3,000 By Balance c/d 36,000
40,000 40,000
Rs Rs
To Balance B/d 10,000
To Cash(purchase) Balancing
figure
1,000 By Balance c/d 11,000
Rs Rs
By Balance B/d 14,000
To Balance B/d 18,000 By Adjusted profit and loss A/c
(Profit transferred during the
current year)
4,000
18,000 18,000
Rs Rs
To Cash(Tax paid previous
year taxation) Balancing figure
17,000 By Balance B/d 16,000
To Balance B/d 18,000 By Adjusted profit & Loss A/c
(provision for taxation made
during the year)
19,000
35,000 35,000
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
14/16
13 3
Fund Flow Statement AnalysisThe next step is to prepare the Adjusted profit and loss account.
Adjusted Profit & Loss Account
The next step is to prepare the fund flow statement.
Fund flow statement
Check Your Progress
(1) Purchase of plant & machinery Rs.10 lakh through the issue of 1 Lakhshares 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
(2) XYZ Ltd. has made a credit purchase of Rs.1 lakh worth of goods led toRs.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
(3) The meaning of the "To cash ( Tax paid)" entry posted in the Provision fortaxation 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
(4) 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
(5) The treatment of current year depreciation with the closing balance of profitin determining the fund from operations
(a) To be added
(b) To be multiplied
(c) To be deducted
(d) To be divided
Rs Rs
To Depreciation Building 4,000 By Balance B/d 16,000
To Depreciation Plant 4,000 By Fund from operations 36,000
To Transfer to General Reserve 4,000
To Provision for taxation 19,000
To Interim dividend 8,000To Balance c/d 13,000
52,000 52,000
Sources Rs Applications Rs
Fund from operations 36,000 Purchase of the plant 3,000
Purchase of the Investment 1,000
Increase working capital 7,000
Tax paid 17,000
Interim dividend 8,000
36,000 36,000
Contd...
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
15/16
13 4
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
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.
ww.jntuworld.com
-
7/24/2019 Accounts Fund Flow
16/16
13 5
Fund Flow Statement Analysis5. 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.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.
ww.jntuworld.com