FUND FLOW STATEMENT ANALYSIS

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120

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 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.

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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121 Fund Flow Statement Analysis

7.2 MEANING & OBJECTIVES OF 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

Decrease in Current Assets

Increase in Current Liabilities

Decrease in Current Liabilities

Increase in Working Capital

Decrease in Working Capital

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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 from Operations (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 .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

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 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

(4)

(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)

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Accounting and Finance for Managers

Refund 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 50,000

Discount 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 4,000

Proposed 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

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125 Fund Flow Statement Analysis The 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 FLOW

STATEMENT

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.

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 Institutional lending: Banker-Loans & Advances Money Market: Public Deposit, Commercial paper External Sources

Share Capital and so on

Internal Sources: Retained Earnings

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for Managers

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?

l What is the role of the fund from operation generated? l How the raised funds applied into business?

l How the decrease in working capital was applied?

l 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.

l It is not a resultant of the transaction instead it is an arrangement of among the available information.

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

(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

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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

(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 11,20,000

Reserves 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 Increase In working capital Decrease In 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 26,000 Working capital 4,40,000 4,58,000 54,000 36,000 Increase in working capital 18,000 --- --- 18,000

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for Managers The 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:

l The company issued bonus shares for Rs.1,00,000 and for cash Rs.1,00,000 l 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 3,90,000 Accounts 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 capital Current asset: Cash 60,000 1,80,000 1,20,000 ---

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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 Share capital.

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.Whites’Loan 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 55,000 Land 40,000 50,000 Building 35,000 60,000 2,30,000 2,47,000 2,30,000 2,47,000

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for Managers 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

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 depreciation account. 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 --- 4,000 Working 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

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131 Fund Flow Statement Analysis Dr 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 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

(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 Rs

To 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 19,000

Cash 6,600 15,200

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for Managers The 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 1,200 Debtors 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

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133 Fund Flow Statement Analysis The 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

(1) 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

(2) 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

(3) 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

(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 profit in 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 8,000 To 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

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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 ?

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135 Fund Flow Statement Analysis 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. 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.