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Meaning of Funds
For some, it is nothing but cash while for some others
it is cash and marketable securities. Some others sayit is nothing but gross working capital.
But the correct meaning is probably givenInternational Accounting Standard No.7, which says
that net working capital should be taken for funds.Net working capital is nothing but the excess ofcurrent assets over current liabilities.
Current Assets1. Cash including fixed deposits with bank
2. Accounts receivable i.e., trade debtors and bills receivable3. Inventory i.e., raw materials, work in progress and finished
goods
4. Advances recoverable
5. Prepaid expenses
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Current Liabilities1. Accounts Payable
2. Outstanding expenses3. Bank Over Draft
4. Short term loans
5. Advance payments received by the business for the
services to be rendered in the future6. Current maturities of long term loans
7. Provision against current assets ex: provisions forbad and doubtful debts, provisions for loss stock,provision for discount on debtors etc.
Non-Current Assets: All assets other than current assets
Non-Current Liabilities: All liabilities other than currentliabilities
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Meaning of Flow of Funds
Means change in funds or changes in working capital.
In other words, any increase or decrease in working capital
means Flow Funds. The term flow includes both inflow
and outflow. Hence in flow of funds, both inflow and
outflow of funds are analysed.
Any inflow of funds results in an increase of funds and
hence called Sources of Funds. Any outflow of funds
results in a decrease of funds and hence termed as
Application of Funds.
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Rules to decide on flow of funds
There will be a flow of funds if a transaction involves:
Current assets and fixed assets ex:purchase of building
for cash
Current assets and capital ex: issue of shares for cash
Current assets and fixed liabilities ex: redemption of
debentures in cash.
Current liabilities and fixed liabilities ex: creditors paid of
in debentures Current liabilities and capital ex: creditors paid off in
shares
Current liabilities and fixed assets ex:buildings
transferred to creditors in satisfaction of their claims
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There will be no flow of funds if it involves:
a. Current assets and current liabilities ex:payment made
to creditorsb. Fixed assets and fixed liabilities ex:building purchase
and payment made in debentures
c. Fixed assets and capital ex:building purchased andpayment made in shares
Finding out of transaction involving change in workingcapital
I. In case the entry involves accounts only of a fixed(asset
or liability) nature oronly of a cur rent(asset or liability)nature then there will be no flow of funds.
II. But a cross transaction(i.e., a transaction involving afixed asset or fixed liability and a current asset or a currentliability) wil l resul t in f low of funds .
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Meaning Of Fund Flow Statement
A funds flow statement is a statement depicting change in
working capital. It is also termed as a Statement of
sources and application of funds, Summary of financial
operations, funds generated and expended, where got and
where gone statement, statement showing changes inworking capital.
Uses of funds flow statement
1. It explains the financial consequences of business
operations
2. It answers intricate questions
3. It acts as an instrument for allocation of resources
4. It is a test as to the effective use of working capital
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PREPARATION OF A FUNDS FLOW
STATEMENT
In order to prepare a Funds Flow Statement, it is necessaryto find out the sources and application of funds.
Sources of Funds
The sources from which the funds flow into the
organisation are called sources of funds. The sources offunds can be both internal and external.
1. Internal sources
Funds from operations are the only internal source of
funds. However, the following adjustments will berequired to be made in the figure of Net Profit for findingout real funds from operations.
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Addthe following items, as they do not result in outflow of
funds.
i. Depreciation on fixed assets
ii. Preliminary expenses or goodwill etc., written offiii. Contribution to debenture redemption fund, transfer
to general reserve, etc., if they have been deducted
before arriving at the figure of the net profit
iv. Provision for taxation and proposed dividend areusually taken as appropriation of profits only and not
current liabilities for the purpose of Funds Flow
Statement.
v. Tax or dividends actually paid are taken as application
of funds. Similarly interim dividend paid is shown as
an application of funds. All these items will be added
back to net profit, if already deducted, to find funds
from operations.
vi. Loss on sale of fixed assets.
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Deductthe following items, as they do not increase the funds:
i. Profits on sale of fixed assets since the full sale proceedsare taken as a separate source of funds and inclusion
here will result in duplication.
ii. Profit on revaluation of fixed assets
iii. Non-operating incomes such as dividend received oraccrued dividend, refund of income tax, rent received
or accrued rent. These items will increase funds but
they are non-operating incomes. They will be shown
under separate heads as source of funds in the funds
flow statement.
iv. In case the Profit and Loss Account shows Net Loss,
this should be taken as an item which decreases the
funds.
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2. External Sources:
These sources include
i. Funds from long-term loans Long-term loans such asdebentures, borrowings from financial institutions willincrease the working capital and therefore will be flow of
funds. However if the debentures have been issued againstfixed assets, there will be no flow of funds.
ii. Sale of fixed assets Sale of land, buildings, long-terminvestments will result in generation of funds.
iii. Funds from increase in share capital Issue of shares forcash or for any other current asset results in increase inworking capital and hence there will be flow of funds.
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Application of Funds
The uses to which funds are put are called application of
funds. Following are some of the purposes for whichfunds may be used:
1. Purchase of fixed assets like land, building, plant and
machinery etc.2. Payment of dividend will affect funds since it
decreases a fixed liability.
3. Payment of fixed liabilities like redemption ofdebentures, redemption of redeemable preferenceshares. It results in decrease of working capital andhence treated as an application of funds.
4. Payment of tax liability If the tax has been paid, it istaken as an application of funds.
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STATEMENT OF CHANGES IN
WORKING CAPITAL
Items As on(previous
year)
As on(current
year)Increase Decrease
Current Assets
Cash Balance
Bank Balance
Marketable
Securities
Accounts Receivable
Stock-In- Trade
Prepaid Expenses
Total Cur rent Assets
A xxxx xxxx xxx xxx
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Contd
Current Liabilities
Bank Overdraft
Outstanding
Expenses
Accounts Payable
Total Current
Liabilities B xxxx xxxx xxxx xxx
Increase/Decrease in
working capital A-B xxxx xxxxx xxx xxx
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Note: At the end of the period there will be either
increase or decrease only but not both.
Rules of preparing the schedule:
i. Increase in a current asset, results in increase (+) in
working capitalii. Decrease in a current asset, results in decrease (+) in
working capital
iii. Increase in a current liability, results in decrease (+)
in working capital
iv. Decrease in a current liability, results in increase (+)
in working capital
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FUNDS FLOW STATEMENTThe funds flow statement can also be prepared in T form
as follows:Particulars Rs. Particulars Rs.
Sources of Funds Application of Funds
Issue of debentures Redemption of redeemable
preference shares
Issue of shares Redemption of Debentures
Long-term borrowings Payment of other long-term
loans
Sale of fixed assets Purchased of fixed assets
Operating profit* Operating Loss*
Decrease of working capital Payment of dividends, tax
etc.,
Increase in working capital
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(Or)..
Particulars Amount
Sources of funds
Issue of debentures
Issue of shares
Long-Term borrowings
Sale of fixed assets
Operating profit*
Total sources xxxx
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Cont*Note only figure will be there
Application of fundsRedemption of redeemable preference
shares
Redemption of Debentures
Payment of other long-term loans
Purchased of fixed assets
Operating Loss*
Payment of dividends, tax etc.,
Total Uses xxxx
Net Increase / Decrease of working
capitalxxxx
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Adjusted Profit and Loss AccountThis account is drawn to know funds from operations.The format
is given as under
Particulars Rs Particulars Rs
To opening balance (P&L
A/c Dr)
Xxx By opening balance(P&L
a/c Cr)
xxx
To transfer to By transfer from excess
Reserve
Xxx
Sinking fund xxx By appreciation on fixed
assets
Xxx
General Reserve Xxx By profit on revaluation
or sale of fixed assets or
long term Investments
Xxx
Capital redemption
reserve
xxx By non-operating incomes Xxx
Other reserves xxx Dividend received Xxx
To depreciation on fixed xxx Interest received xxx
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To goodwill, patents written offxxx
Rent received Xxx
To share discount, preliminary
expenses Advertising,
suspense a/c etc.Written off
xxx Income tax refund
received
Xxx
To loss on revaluation/sale of
fixedAssets and long term
investments
xxxOther incomes Xxx
To provision for taxation xxx By closing balance
(p&l a/c dr. balance)
Xxx
To Dividends paid xxx By funds from operations(Balance figure)
xxx
To Interim dividend paid xxx
To proposed dividend xxx
To closing balance of p&la/c
(Credit balance)
xxx
To funds lost in operations
(Balance figure)xxx
xxxx xxxx
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CASH FLOW STATEMENT
MEANINGCash flow statement is a statement,which describes the inflows and outflows ofcash and cash equivalents in an enterprise
during a specific period of time. Suchstatement takes into account the receiptsand disbursements of cash. A cash flowstatement summarises the causes of changes
in cash position of a business enterprisebetween two dates.
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Cash Flow StatementComparing the Statements of Cash Flow
Goodco Badco
Cash Derived From Operating Activities:
Net income for the year
Depreciation & non-cash items:Receivables
Inventory
Prepaids
Accounts Payable
Accrued Expenses
Taxes Payable
total 0 0
Cash Derived From Financing Activities:
Changes in equity
Changes in Long Term Debt
Less Dividends Paid
total 0 0
Cash Used for Investing Activities:
Purchase of fixed assetsLoss or gain on sale of shares
total 0 0
Increase/Decrease in Cash 0 0
Net Cash (cash minus credit line) - last year
Net Cash (cash minus credit line) - this year
Increase/Decrease in Cash 0 0
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Classification of Cash Flows
Operating Activities
Cash effects of transactions on Net Income
Investing Activities Capital investment Salvage value Working capital investment or recovery
Financing Activities Debt and repayment of principal
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Cash flow from operating activities
Operating activities are the principal revenue
producing activities of the enterprise and otheractivities that are not investing or financing activities.Cash flow from operating activities is principallyderived from the principal revenue-producing activitiesof the enterprise.
The cash inflows from operating activities includereceipts from customers for sales or goods and services(including collection from debtors). Cash outflows
from operating activities include payments to suppliersfor purchase of materials and for services, payments toemployees for services and payments to governmentsfor tax duties.
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Operating Activities
Sales revenue (inflow)
Cost savings (inflow)
Manufacturing expenses (outflow) O & M cost (outflow)
Interest payments (outflow)
Lease expenses (outflow) Income taxes (outflow)
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Cash flow from investing activitiesInvesting activities are the acquisition and
disposal of long-term assets and other investments not
included in cash equivalents. It involves making andcollecting of loans and acquiring and disposing of debtand equity instruments and fixed assets.
The cash inflows from investing activities arereceipts from collection of loans, receipts from sales ofshares, debt or similar instruments of other enterprises,receipts from sales of fixed assets, and interest anddividends received on loans and investments. Cashoutflows from investing activities are disbursementsof loans, payments to acquire shares, debt or similarinstruments of other enterprises, and payments(including advance and down payments) to acquire
fixed assets.
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Investing Activities
Capital investment (outflow)
Salvage value (inflow)
Working capital (outflow) Working capital recovery (inflow)
Gains taxes (outflow)
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Cash flow from financing activities
Financing activities are the activities that result inchange in the size and consumption of the owners capital(including preference share capital in case of a company)and borrowings of the enterprise.
Cash inflows from financing activities are proceedsfrom issuing shares or other similar instruments,debentures, mortgages, bonds and other short or long-term
borrowings. Cash outflows from financing activities arethe payments of dividends, payments to acquire or redeem
shares or other similar instruments of the enterprise,repayments of amounts borrowed, principal payments tocreditors who have extended long-term credit, and interest
paid.
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Financing Activities
Borrowed Amount (inflow)
Principal repayments (outflow)
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Cash Flow Statement for the year ended
Particulars Rs. Rs.
Cash flows from Operating Activities
Either
Cash receipts from customers
xxxxx
(-) Cash paid to customers (xxx)
Cash generated from operations xxxxx
(-) Income tax paid (Xxx)
Cash flow before extra ordinary items xxxxxExtraordinary items xxxxx
Net cash from (used in) operating activi ties xxxxx
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Net profit before tax and extraordinary items xxxx
Adjustments for non-cash and non-operating
items
xxxx
[List of individual items such as depreciation,
foreign exchange loss, loss on sale of fixed
assets, interest income, dividend income,
interest expense etc.]
xxxx
Operating prof i t before working capital changes xxxx
Adjustment for change in current asset and
current liabilities {list of individual items} xxxx
Cash generated from (used in) operations before
taxxxxx
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(-) Income tax paid (xxx)
Cash flow before extra ordinary items xxxx
Extraordinary items xxxx
Net cash from (used in) operating activities xxxx
Cash flow from Investing Activities
Individual items of cash inflows and cash
outflows from investing activitiesxxx
[Such as purchase/sale of fixed assets,
purchase or sale of investments,Interest received, dividend received etc.]
xxx
Net cash from (used in) investing activi ties xxxx
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Cash inf lows Activities Cash Outlays
Payments to suppliers
and employees for
materials and services
Payments to government
for taxes and duties
OperatingActivities
Receipts from
customers for sales
of goods andservices activities
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Contd.
Payment for
purchase of fixed
assets
Payments forpurchase of
investments and
making loans
Investing Activities
Receipts from sale
of fixed assets
Receipts from sales
of investments and
fro collection of
loans
Receipts frominterest and
dividends on loans
and investments
Cash inf lows Activities Cash Outlays
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Contd.
Payments for
dividends on share
capital
Payments for
principal on
debentures and
other borrowings
Payments for
interest on
debentures and
other borrowings
Financing
Activities
Receipts from
issuance of share
capital
Receipts from
issuance of
debentures
Receipts from
other long-term
borrowings
Cash inf lows Activities Cash Outlays
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Thank You