Accounting and Finance for Managers

LESSON

FUND FLOW STATEMENT ANALYSIS

CONTENTS
7.0 7.1 Aims and Objectives 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.

120

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: 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 l 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 working l capital i.e., to identify the flow of fund / movement of fund through the detection of changes in the volume of working capital. Second step is the preparation of Non- Current A/c items-Changes in the volume l 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. Third step is the preparation Adjusted Profit& Loss A/c, which already elaborately l discussed in the early part of the chapter. Last step is the preparation of fund flow statement. l

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

121

Accounting and Finance for Managers

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 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 xxxx Loss on Sale of Long Term Investments xxxx Loss on Redemption Debentures/Preference Shares Discount on Debentures /Share xxxx (B) Non Operating Expenses: Depreciation of fixed Assets xxxx (C) Intangible Assets: Amortization of Goodwill xxxx xxxx Amortization of Patent xxxx Amortization of Trade Mark (D) Fictitious Assets: Writing off Preliminary expense xxxx Writing off Discount on Shares/Debentures xxxx

122

(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 xxxx To Loss on Sale of Investment 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 xxxx To Balancing Figure (Fund Lost in Operations) 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

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 Stock at the end Less: xxxxx xxxxx

Application: Stock at Opening xxxx xxxx Net Purchases (Purchase-Returns) xxxx Wages xxxx Salaries xxxx Telephone expenses xxxx Electricity charges xxxx Office stationery expenses xxxx Other operating cash expenses Fund from operations From the following details calculate funds from operations: Salaries Rent Rs. 10,000 6,000

123

Accounting and Finance for Managers

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 Less Refund of Tax Profit on Sale of Building Dividend Received Fund from operations 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

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 6,000 10,000 10,000 96,000

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

124

The next step is to prepare the fund flow statement. The proforma of the fund flow statement
Sources of funds Funds from Business Operation Non trading Incomes Sale of Non-Current Assets Sale of Long Term Investments Issue of shares Acceptance of deposits Long Term Borrowings Decrease in Working Capital Uses of funds Funds Lost in Operations Redemption of Preference Share Capital Repayment of Loans Purchase of Long Term Investments Purchase of Fixed Assets Payment of Taxes Payment of Dividends Drawings Loss of Cash Increase in Working Capital

Fund Flow Statement Analysis

Check Your Progress

(1)

Fund flow means a study of

(a) (b) (c) (d) working capital change Cash position change Long investment change Change in the current liabilities

(2)

Normally Working capital means

(a) (b) (c) (d) Current assets- current liabilities Current assets Gross working capital Net working capital

(3)

Increase in working capital

(a) (b) (c) (d) Increase in current assets Increase Net working capital Increase in current liabilities 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

Medium &Short term Financial Resources

External Sources Share Capital and so on

Internal Sources: Retained Earnings

Institutional lending: Banker-Loans & Advances

Money Market: Public Deposit, Commercial paper

125

Accounting and Finance 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 l l l 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 l 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)

Adjusted profit and loss account is prepared for

(a) (b) (c) (d) Determining the fund from operations Determining the fund lost in operations (a) or (b) None of the above Fund in flow & Fund out flow Cash in flow & Cash out flow Sources & Applications None of the above Sources of the firm Applications of the firm Neither sources nor applications None of the above

(2)

Fund flow statement is categorized into two parts

(a) (b) (c) (d) (a) (b) (c) (d)

(3) Fund from operations is

126

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 Share capital Reserves Profit and Loss A/c Debentures Creditors for goods Provision for tax 1984 Rs 5,00,000 1,50,000 40,000 3,00,000 1,70,000 60,000 12,20,000 1985 Rs. 6,00,000 1,80,000 65,000 2,50,000 1,60,000 80,000 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

Fund Flow Statement Analysis

(B.com., Bharathidasan November, 1986) The first step is to prepare the schedule of changes in working capital.
Schedule of changes in working capital
1984 Current asset: Stock Book debts Cash in hand Current liability Creditors for goods Working capital Increase in working capital 1985 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

2,40,000 2,50,000 80,000 5,70,000 1,70,000 4,00,000 1,00,000 5,00,000

3,70,000 2,30,000 60,000 6,60,000 1,60,000 5,00,000 -----------5,00,000

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 2005 Rs. 90,000 46,000 5,00,000 2004 Rs. 2005 Rs.

5,60,000

6,36,000

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
2004 2005 Increase In working captial 34,000 10,000 20,000 Decrease In working capital

Current asset: Cash Debtors Stock in trade Current liability Trade creditors Working capital Increase in working capital

60,000 2,40,000 1,60,000 4,60,000 20,000 4,40,000 18,000 4,58,000

94,000 2,30,000 1,80,000 5,04,000 46,000 4,58,000 ------------4,58,000

54,000 ---------54,000

26,000 36,000 18,000 54,000

127

Accounting and Finance for Managers

The next step is to prepare the non current accounts of the firm.
Dr
To Balance B/d To Cash(Purchase) balancing fig.

Land A/c
Rs. 1,00,000 32,000 1,32,000

Cr
Rs.

By Balance c/d

1,32,000 1,32,000

Next non-current account item is the share capital account in the liability side. The closing balance of the share capital is more than that of the opening balance which means that the firm has undergone the issue of further more share capital. During the issue of share capital, the cash resources are raised by the firm through the sale of shares.
Dr
To Balance c/d

Share capital A/c

Rs. 90,000 90,000 By Cash( Issue of shares) Balancing fig. By Balance b/d Rs. 10,000 80,000 90,000

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
Rs. To Balance c/d 5,00,000 5,00,000 By Balance B/d By Fund from operation Balancing fig. Rs. 4,60,000 40,000 5,00,000

Cr

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 60,000 90,000 9,50,000 1995 Rs 8,00,000 1,00,000 1,20,000 2,70,000 12,90,000 Assets Fixed assets Accounts receivable Stock Cash 1994 Rs 3,80,000 2,10,000 3,00,000 60,000 9,50,000 1995 Rs 4,20,000 3,00,000 3,90,000 1,80,000 12,90,000

Additional information: The company issued bonus shares for Rs.1,00,000 and for cash Rs.1,00,000 l
l

Depreciation written off during the year Rs.30,000

Schedule of changes in working capital
1994 1995 Increase In working captial 1,20,000 Decrease in working capital ----------

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

Current asset: Cash

128

60,000

1,80,000

Contd...

Stock in trade Accounts receivable Current liability Accounts payable Working capital Increase in working capital

3,00,000 2,10,000 5,70,000 90,000 4,80,000 1,20,000 6,00,000

3,90,000 3,00,000 8,70,000 2,70,000 6,00,000 6,00,000

90,000 90,000

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

Fund Flow Statement Analysis

3,00,000 3,00,000

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
To Balance B/d To Cash (Purchase) Balancing fig.

Fixed Assets A/c

Rs 3,80,000 70,000 4,50,000 By Depreciation(Adjusted Profit &Loss A/c ) By Balance c/d Rs 30,000

Cr

4,20,000 4,50,000

The next non-current account is that non-current liability which is nothing but Share capital.
Dr
To Balance c/d

Share capital A/c

Rs 8,00,000 By Cash( Issue of shares) By General reserve By Balance b/d Rs 1,00,000 1,00,000 6,00,000 8,00,000

Cr

8,00,000

And another non current account is to be prepared that General reserve account.
Dr
To Share capital To Balance c/d

General Reserve A/c

Rs 1,00,000 1,00,000 2,00,000 By Balance b/d

Cr
Rs 2,00,000 2,00,000

The next step is to prepare the Adjusted Profit & Loss A/c
Dr
To (Fixed Assets) depreciation To Balance c/d

Adjusted Profit & Loss A/c

Rs 30,000 1,20,000 1,50,000 By Balance B/d(Retained Earnings) By Fund from operation Balancing fig. Rs 60,000 90,000

Cr

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
Liabilities Creditors Mrs.WhitesLoan Loan from P.N.Bank Captial 1-1-86 Rs 40,000 25,000 40,000 1,25,000 2,30,000

Balance sheets of M/s Black and White as on 1-1-1986 and 31-12-1986 were as follows:
31-12-1986 Rs 44,000 50,000 1,53,000 2,47,000 Assets Cash Debtors Stock Machinery Land Building 1-1-86 Rs 10,000 30,000 35,000 80,000 40,000 35,000 2,30,000 31-12-1986 Rs 7,000 50,000 25,000 55,000 50,000 60,000 2,47,000

129

Accounting and Finance 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
1-1-86 Rs Current asset: Cash Debtors Stock Current liability Sundry creditors Working capital Increase in working capital 10,000 30,000 35,000 75,000 40,000 35,000 3,000 38,000 31-12-1986 Rs 7,000 50,000 25,000 82,000 44,000 38,000 38,000 Increase In working capital ----------20,000 ------------------20,000 20,000 Decrease In working capital 3,000 ---------10,000 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.
1-1-1986 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 Rs.80,000 25,000 1,05,000 31-12-1986 Rs.55,000 40,000 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 (-)Depreciation Machinery worth for sale (-)Machinery sold Loss on sale of the portion of the machinery sold
Dr
To Balance B/d

Rs.10,000 Rs.3,000 Rs.7,000 Rs.5,000 Rs.2,000

Cr
Rs 5,000 3,000 2,000 95,000 1,05,000

Machinery A/c
Rs 1,05,000 By Cash (Sales) By Provision for machinery By loss on sale(Adjusted profit and loss account) By Balance c/d

1,05,000

The next one is the provision for depreciation account or Accumulated depreciation account.
130

Dr
To Machinery A/c To Balance c/d

Provision for Depreciation A/c

Rs 3,000 40,000 43,000 By Balance B/d By depreciation provided during the current year Rs 25,000 18,000 43,000

Cr

Fund Flow Statement Analysis

Dr
To Drawings (Balancing fig) To Balance c/d Rs 17,000 1,53,000 1,70,000

Capital A/c
By Balance B/d By Net profit Rs 1,25,000 45,000 1,70,000

Cr

Dr
Rs To Balance c/d 50,000 50,000

Loan P.N. Bank

By BalanceB/d By Cash (Balancing fig) Rs 40,000 10,000 50,000

Cr

Dr
To Cash( Loan paid) To Balance c/d Rs 25,000 ----------25,000

Mr. White's A/c

By Balance B/d Rs 25,000 25,000

Cr

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 By Balance B/d By fund from operations Rs ----------65,000 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 Rs 10,000 25,000 17,000 25,000 3,000 80,000

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 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 l
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 1,55,600 1983 Rs 1,00,000 18,000 13,000 5,400 800 18,000 600 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
131

(M.Com.Madras,1984)

Accounting and Finance for Managers

The first step is to prepare the Statement of changes in the working capital
Statement of changes in working capital
1982 Rs Current asset: Stock Bill receivable Debtors Cash Current liability Sundry creditors Bills payable Provision for doubtful debts Working capital Increase in working capital 30,000 2,000 18,000 6,600 56,600 8,000 1,200 400 9,600 47,000 7,000 54,000 1983 Rs 23,400 3,200 19,000 15,200 60,800 5,400 800 600 6,800 54,000 54,000 Increase In working capital 1,200 1,000 8,600 Decrease In working capital 6,600

2,600 400 200 13,800 13,800 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 Rs 40,000 40,000

Building account
By (Depreciation)Adjusted profit & Loss A/c By Balance c/d Rs 4,000 36,000 40,000

Cr

The next non- current asset account is Plant account

Dr
To Balance B/d To Cash (Purchase) balancing fig. Rs 37,000 3,000 40,000

Plant account
By (Depreciation)Adjusted profit & Loss A/c By Balance c/d Rs 4,000 36,000 40,000

Cr

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 Rs By Balance c/d 11,000

Cr

The next one is the non-current liability account.

Dr
To Balance B/d

General Reserve account

Rs 18,000 18,000 By Balance B/d By Adjusted profit and loss A/c (Profit transferred during the current year) Rs 14,000 4,000 18,000

Cr

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) Rs 16,000 19,000 35,000

Cr

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

Fund Flow Statement Analysis

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 Rs 3,000 1,000 7,000 17,000 8,000 36,000

36,000

Check Your Progress

(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) (b) (c) (d) Non current asset and Non current liability accounts Non current asset and Current liability accounts Current asset account and Non current liability accounts 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) (b) (c) (d) Increase in the working capital - Applications No change in the working capital position -Neither an application nor resource Decrease in the working capital-Resource None of the above

(3)

The meaning of the "To cash ( Tax paid)" entry posted in the Provision for taxation account is
(a) (b) (c) (d) Last year taxation is paid through the current year provision Current year taxation is paid through the current year provision Last year tax is paid through the last year taxation Current year taxation is paid through the last year provision Resource to the enterprise Non operating income Application of the enterprise None of the above

(4)

Profit on sale of the fixed assets are considered to be

(a) (b) (c) (d)

(5)

The treatment of current year depreciation with the closing balance of profit in determining the fund from operations
(a) (b) (c) (d) To be added To be multiplied To be deducted To be divided
Contd...
133

Accounting and Finance for Managers

(6)

The redemption bank term loan leads to change in the

(a) (b) (c) (d) Non current liability account and current asset account Current asset account and current liability account Non current asset account and current liability account 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. 2. 3. 4. Define fund. Define flow. What is meant by fund flow ? List out the various objectives of preparing the fund flow statement.

134

5. 6. 7. 8.

Enumerate the various advantages in the preparation of fund flow statement. Briefly explain the limitations of fund flow statement. What are the steps involved in the process of fund flow statement ? Explain the various methods of determining the fund from/lost (in ) operations.

Fund Flow Statement Analysis

Explain the process of preparing the statement of changes in working capital. 9. 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.

135