International financial and management accounting lesson 06

109 LESSON FUND FLOW STATEMENT ANALYSIS CONTENTS 6.0 Aims and Objectives 6.1 Introduction 6.2 Meaning of Fund Flow Statement 6.3 Objectives of Fund Flow Statement Analysis 6.4 Steps in the Preparation of Fund Flow Statement 6.5 Schedule of Changes in Working Capital 6.6 Methods of Preparing Fund from Operations 6.6.1 Net Profit Method 6.6.2 Sales Method 6.7 Advantages of Preparing Fund Flow Statement 6.7.1 Structured Analysis on the Working Capital of a Firm 6.7.2 Illustrative Statement of Financing 6.7.3 To Fulfill the Primary Objective of the Financial Management 6.7.4 Facilitation through Financial Planning 6.7.5 Guide to Working Capital Management 6.7.6 Indicator of Yester Track Path of the Firm 6.8 Limitations of Fund Flow Statement Analysis 6.9 Let us Sum up 6.10 Lesson End Activity 6.11 Keywords 6.12 Questions for Discussion 6.13 Suggested Readings 6.0 AIMS AND OBJECTIVES After studying this lesson, you will be able to: Describe objectives and importance of fund flow statement analysis Point out steps involved in fund flow statement analysis Explain various methods of determining fund from operation Fund Flow Statement Analysis 110 International Financial and Management Accounting 6.1 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 analysis of 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 6.2 MEANING OF FUND FLOW STATEMENT 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 to 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 Statement changes in financial position Analysis of working capital changes and Movement of funds statement 6.3 OBJECTIVES OF FUND FLOW STATEMENT 6.3 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 6.4 STEPS IN THE PREPARATION OF FUND FLOW 6.4 STATEMENT First and foremost 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 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 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 6.5 SCHEDULE OF CHANGES IN WORKING CAPITAL The ultimate purpose of preparing the schedule of changes in the working capital 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 Particulars Previous Year Increase in Working Capital Current Year Increase in Working Capital (+) Decrease in in Working 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 Figure 6.1: Schedules of Changes in Working Capital The next important step is to prepare that adjusted profit and loss account 111 Fund Flow Statement Analysis 112 International Financial and Management Accounting 6.6 METHODS OF PREPARING FUND FROM 6.6 OPERATIONS Method of Fund from Operations Net Profit Method Add Non Operating Expenses Less Non Operating Incomes Sales Method Less - Payments (Application) Figure 6.2: Methods of Preparing Fuel from Operations 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 6.6.1 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 Add: (A) Non Funding Expenses: Loss on Sale of Fixed Assets Loss on Sale of Long Term Investments Loss on Redemption Debentures/Preference Shares Discount on Debentures /Share (B) Non Operating Expenses: Depreciation of fixed Assets (C) Intangible Assets: Amortization of Goodwill Amortization of Patent Amortization of Trade Mark (D) Fictitious Assets: Writing off Preliminary expense Writing off Discount on Shares/Debentures (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 xxxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx 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 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 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 6.6.2 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 Salaries Rent 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/ Opening balance on Profit & Loss A/c Discount on Issue of Debentures Provision for bad debts Transfer to general reserve Preliminary expenses written off Rs 10,000 6,000 6,000 10,000 10,000 8,000 4,000 1,20,000 50,000 4,000 2,000 2,000 6,000 113 Fund Flow Statement Analysis 114 International Financial and Management Accounting Goodwill written off Dividend Received Proposed Dividend 4,000 10,000 12,000 Calculation of fund from operation First Method: Closing balance of Profit & Loss A/c Less Opening Balance 1,20,000 50,000 Balance Forward 70,000 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 10,000 8,000 4,000 4,000 2,000 2,000 6,000 4,000 12,000 1,22,000 Less Refund of Tax Profit on Sale of Building Dividend Received 6,000 10,000 10,000 Fund from operations 96,000 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 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 The next step is to prepare the fund flow statement The proforma of the fund flow statement 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 Check Your Progress 1) 2) 3) Fund flow means a study of a) Working capital change c) Long investment change Normally Working capital means a) Current assets-current liabilities c) Gross working capital Increase in working capital a) Increase in current assets c) Increase in current liabilities b) Cash position change d) Change in the current liabilities b) Current assets d) Net working capital b) Increase Net working capital d) Increase in long-term source of financing 6.7 ADVANTAGES OF PREPARING FUND FLOW 6.7 STATEMENT 6.7.1 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 6.7.2 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 Capital Structure-Long Term Financial Resources External Sources Share Capital and so on Internal Sources: Retained Earnings Medium & Short-term Financial Resources Institutional lending: Banker-Loans & Advances Money Market: Public Deposit, Commercial paper Figure 6.3: Illustrative Statement of Financing 115 Fund Flow Statement Analysis 116 International Financial and Management Accounting 6.7.3 To Fulfill 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 the financial resources for an increase in the working capital? 6.7.4 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 6.7.5 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 6.7.6 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 6.8 LIMITATIONS OF FUND FLOW STATEMENT 6.8 ANALYSIS It is an extension of financial statements but it cannot be levelled 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 2 Adjusted profit and loss account is prepared for a) Determining the fund from b) Determining the fund lost in operations operations c) (a) or (b) d) None of the above Fund flow statement is categorized into two parts a) Fund in flow & Fund b) Cash in flow & Cash out flow out flow c) Sources & Applications d) None of the above Fund from operations is a) Sources of the firm b) Applications of the firm c) Neither sources nor applications d) None of the above Illustration 117 Form the following details prepare a statement showing changes in working capital during 1985 Liabilities 1984 Rs 1985 Rs Assets 1984 Rs 1985 Rs 10,00,000 11,20,000 3,70,000 4,60,000 6,30,000 6,60,000 Share capital 5,00,000 6,00,000 Fixed assets Reserves 1,50,000 1,80,000 Less: Depreciation 40,000 65,000 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 60,000 80,000 Cash in hand 80,000 60,000 Preliminary expenses 20,000 15,000 12,20,000 13,35,000 Profit and Loss A/c Provision for tax 12,20,000 13,35,000 (B.Com., Bharathidasan November,1986) Solution: The first step is to prepare the schedule of changes in working capital Schedule of Changes in Working Capital 1984 1985 Increase in working capital Decrease in working capital Stock 2,40,000 3,70,000 1,30,000 Book debts 2,50,000 2,30,000 - 20,000 Current asset: Cash in hand 80,000 60,000 5,70,000 6,60,000 20,000 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 5,00,000 5,00,000 1,30,000 40,000 Current liability 1,00,000 1,40,000 1,40,000 Illustration 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 2005 Rs 80,000 20,000 4,60,000 5,60,000 2004 Rs 2005 Rs 90,000 46,000 5,00,000 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 Fund Flow Statement Analysis 118 Solution: International Financial and Management Accounting The first step is to prepare the schedule of changes in working capital Schedule of Changes in Working Capital 2004 2005 Increase in working capital 60,000 94,000 34,000 Debtors 2,40,000 2,30,000 Stock in trade 1,60,000 1,80,000 4,60,000 5,04,000 20,000 46,000 Decrease in working capital Current asset: Cash 10,000 20,000 Current liability: Trade creditors Working capital 26,000 4,40,000 4,58,000 54,000 36,000 18,000 - 18,000 4,58,000 4,58,000 54,000 54,000 Increase in working capital The next step is to prepare the non-current accounts of the firm Rs To Balance B/d To Cash(Purchase) balancing fig Rs 1,00,000 32,000 By Balance c/d 1,32,000 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 By Cash (Issue of shares) Balancing fig By Balance b/d 90,000 Cr Rs 10,000 80,000 90,000 Then the next step is to prepare the adjusted profit and loss account to determine the fund from the operations Dr Adjusted Profit & Loss A/c Rs Rs By Balance B/d To Balance c/d 5,00,000 5,00,000 Cr By Fund from operation Balancing fig 4,60,000 40,000 5,00,000 119 The next step is to prepare the fund flow statement of the firm Fund Flow Statement Analysis Fund flow statement Sources Rs Applications Rs Issue of Shares 10,000 Purchase of Land 32,000 Funds from operation 40,000 Increase in working capital 18,000 50,000 50,000 Illustration From the following relating to Panasonic Ltd., prepare funds flow statement Balance sheet of Panasonic Ltd as on 31st December Liabilities Share capital Reserves Retained earnings Accounts payable 1994 Rs 6,00,000 2,00,000 1995 Rs 8,00,000 1,00,000 60,000 90,000 9,50,000 1,20,000 2,70,000 12,90,000 Assets Fixed assets Accounts receivable Stock Cash 1994 Rs 3,80,000 2,10,000 1995 Rs 4,20,000 3,00,000 3,00,000 60,000 9,50,000 3,90,000 1,80,000 12,90,000 Additional information: 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 Solution: The first step is prepare the statement of changes in working capital Schedule of changes in working capital 1994 Current asset: Cash Stock in trade Accounts receivable Current liability: Accounts payable Working capital Increase in working capital 1995 60,000 3,00,000 2,10,000 1,80,000 3,90,000 3,00,000 5,70,000 8,70,000 90,000 4,80,000 1,20,000 6,00,000 Increase in working capital Decrease in working capital 1,20,000 90,000 90,000 2,70,000 6,00,000 3,00,000 1,80,000 1,80,000 1,20,000 6,00,000 3,00,000 3,00,000 The next step is to prepare the non-current account First non-current asset account should have to be prepared 120 Dr Fixed Assets A/c International Financial and Management Accounting Rs To Balance B/d 3,80,000 To Cash (Purchase) Balancing fig 70,000 4,50,000 By Depreciation (Adjusted Profit &Loss A/c) By Balance c/d Cr Rs 30,000 4,20,000 4,50,000 The next non-current account is that non-current liability which is nothing but Share capital Dr Share capital A/c Cr Rs To Balance c/d 8,00,000 Rs 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 And another non-current account is to be prepared that General reserve account Dr General Reserve A/c Rs To Share capital 1,00,000 To Balance c/d 1,00,000 Cr Rs By Balance b/d 2,00,000 2,00,000 2,00,000 The next step is to prepare the Adjusted Profit & Loss A/c Dr Adjusted Profit & Loss A/c To (Fixed Assets ) depreciation To Balance c/d Rs 30,000 1,20,000 By Balance B/d(Retained Earnings) By Fund from operation Balancing fig 1,50,000 Cr Rs 60,000 90,000 1,50,000 The next step is to prepare the fund flow statement of the enterprise Fund flow statement Sources Issue of Shares Funds from operation Rs 1,00,000 90,000 1,90,000 Applications Purchase of Land Increase in working capital Rs 70,000 1,20,000 1,90,000 Illustration Balance sheets of M/s Black and White as on 1-1-1986 and 31-12-1986 were as follows: 121 Balance sheet Fund Flow Statement Analysis Liabilities Creditors Mrs.Whites’Loan Loan from P.N.Bank Capital 1-1-86 Rs 40,000 25,000 40,000 31-12-1986 Rs 44,000 50,000 1,25,000 1,53,000 2,30,000 2,47,000 Assets 1-1-86 Rs 10,000 30,000 35,000 31-12-1986 Rs 7,000 50,000 25,000 80,000 40,000 35,000 2,30,000 55,000 50,000 60,000 2,47,000 Cash Debtors Stock Machinery Land Building 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 Solution: Changes in working capital in between the various current assets and current liabilities are as follows: Statement of Changes in Working Capital Current asset: Cash Debtors Stock Current liability: Sundry creditors Working capital Increase in working capital 1-1-86 Rs 31-121986 Rs Increase in working capital Decrease in working capital 10,000 30,000 35,000 75,000 7,000 50,000 25,000 82,000 20,000 - 3,000 -10,000 40,000 35,000 3,000 38,000 44,000 38,000 20,000 38,000 20,000 4,000 17,000 3,000 20,000 The next step is to determine the cost of the machinery before the charge of depreciation i.e to find out the Gross value of the assets, in other words Original cost of the assets to be found out at the moment of purchase Written down value of the machinery extracted from the balance sheet as on dated Add: Accumulated depreciation or Provision for depreciation Original Cost of Machinery 1-1-1986 31-12-1986 Rs.80,000 Rs.55,000 25,000 40,000 1,05,000 95,000 The ultimate aim is to find out the original cost of the machinery for the preparation of the machinery account Before preparing the Machinery account, the worth of the sale transaction of the machinery should be found out 122 Original cost of the Machinery Rs.10,000 International Financial and Management Accounting (-)Depreciation Rs.3,000 Machinery worth for sale Rs.7,000 (-)Machinery sold Rs.5,000 Loss on sale of the portion of the machinery sold Rs.2,000 Dr To Balance B/d Machinery A/c Rs 1,05,000 By Cash (Sales) By Provision for machinery By loss on sale(Adjusted profit and loss account) By Balance c/d 1,05,000 Cr Rs 5,000 3,000 2,000 95,000 1,05,000 The next one is the provision for depreciation account or Accumulated depreciation account Dr To Machinery A/c To Balance c/d Provision for Depreciation A/c Rs 3,000 40,000 By Balance B/d By depreciation provided during the current year 43,000 Dr To Drawings (Balancing fig) To Balance c/d Dr Capital A/c Rs 17,000 1,53,000 1,70,000 By Balance B/d By Net profit Loan P.N.Bank 50,000 To Balance c/d Cr Rs By Cash (Balancing fig) 10,000 50,000 Mr.White's A/c 25,000 Rs 1,25,000 45,000 1,70,000 40,000 Rs To Cash( Loan paid) Cr By BalanceB/d 50,000 Dr Rs 25,000 18,000 43,000 Rs To Balance c/d Cr Cr Rs By Balance B/d 25,000 25,000 The next step is to prepare the Adjusted Profit & Loss Account 25,000 123 Adjusted Profit & Loss Account Fund Flow Statement Analysis To Machinery (Loss on sale) To Provision for taxatio To Balance c/d (Net profit) Rs 2,000 18,000 45,000 65,000 Rs 65,000 By Balance B/d By fund from operations 65,000 The next step is to prepare the fund flow statement Fund flow statement Sources Sale of machinery Loan from P.N.Bank Fund from operation Rs 5,000 10,000 65,000 Applications Purchase of land Purchase of Building Drawings Repayment of Mr White Loan Increase working capital Rs 10,000 25,000 17,000 25,000 3,000 80,000 80,000 Illustration 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 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 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 1983 Rs 1,00,000 18,000 13,000 5,400 800 18,000 400 600 1,55,600 1,55,800 Assets Good will Building Plant Investments Stock Bill receivable Debtors Cash 1982 Rs 12,000 40,000 37,000 10,000 30,000 2,000 1983 Rs 12,000 36,000 36,000 11,000 23,400 3,200 18,000 19,000 6,600 1,55,600 15,200 1,55,800 (M.Com Madras,1984) Solution: 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 1983 Rs Increase in working capital 30,000 2,000 18,000 6,600 56,600 23,400 3,200 19,000 15,200 60,800 1,200 1,000 8,600 8,000 5,400 2,600 Decrease in working capital 6,600 Contd 124 Bills payable Provision for doubtful debts International Financial and Management Accounting 1,200 400 9,600 47,000 7,000 54,000 Working capital Increase in working capital 800 600 6,800 54,000 400 13,800 54,000 13,800 200 6,800 7,000 13,800 The next step is to prepare the non-current accounts First, Non current asset account to be prepared The first non-current asset account is Building account Dr To Balance B/d Building Account Rs 40,000 By (Depreciation)Adjusted profit & Loss A/c By Balance c/d 40,000 Cr Rs 4,000 36,000 40,000 The next non- current asset account is Plant account Dr To Balance B/d To Cash (Purchase) balancing fig Plant Account Rs 37,000 3,000 40,000 By (Depreciation) Adjusted profit & Loss A/c By Balance c/d Cr Rs 4,000 36,000 40,000 The next non-current asset account is Investments account Dr Investments account Rs 10,000 1,000 11,000 To Balance B/d To Cash (purchase) Balancing fig Cr Rs By Balance c/d 11,000 11,000 The next one is the non-current liability account Dr General Reserve Account Rs To Balance B/d 18,000 By Balance B/d By Adjusted profit and loss A/c(Profit transferred during the current year) 18,000 Cr Rs 14,000 4,000 18,000 The next non-current liability account is Provision for taxation account Dr To Cash(Tax paid previous year taxation) Balancing fig To Balance B/d Provision for Taxation Account Rs 17,000 18,000 35,000 By Balance B/d By Adjusted profit & Loss A/c (provision for taxation made during the year) Cr Rs 16,000 19,000 35,000 125 The next step is to prepare the Adjusted profit and loss account Fund Flow Statement Analysis Adjusted Profit and Loss Account To Depreciation Building To Depreciation Plant To Transfer to General Reserve To Provision for taxation To Interim dividend To Balance c/d Rs 4,000 4,000 4,000 19,000 8,000 13,000 52,000 By Balance B/d By Fund from operations Rs 16,000 36,000 52,000 The next step is to prepare the fund flow statement Fund Flow Statement Sources Fund from operations Rs 36,000 Applications Purchase of the plant Purchase of the Investment Increase working capital Tax paid Interim dividend 36,000 Rs 3,000 1,000 7,000 17,000 8,000 36,000 Check Your Progress Purchase of plant & machinery Rs.10 lakh through the issue of Lakh shares at Rs.10 per share; affect the following accounts a) Non-current asset and Non-current liability accounts b) Non-current asset and Current liability accounts c) Current asset account and Non-current liability accounts d) Current asset and current liability accounts XYZ Ltd has made a credit purchase of Rs.1 lakh worth of goods led to Rs.1 lakh worth of additional stock of tradable goods for the enterprise, leads to a) Increase in the working capital - Applications b) No change in the working capital position - Neither an application nor resource c) Decrease in the working capital - Resource d) None of the above The meaning of the "To cash (Tax paid)" entry posted in the Provision for taxation account is a) Last year taxation is paid through the current year provision b) Current year taxation is paid through the current year provision c) Last year tax is paid through the last year taxation d) Current year taxation is paid through the last year provision Profit on sale of the fixed assets are considered to be a) Resource to the enterprise b) Non-operating income c) Application of the enterprise d) None of the above Contd 126 International Financial and Management Accounting 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 The a) b) c) d) redemption bank term loan leads to change in the 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 6.9 LET US SUM UP We have discussed in this lesson the various objectives of fund flow statement analysis along with methods and steps involved in preparing fund flow statement The method of portraying the changes on the volume of financial position is the analysis of fund flow statement 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 6.10 LESSON END ACTIVITY Explain any non-current account transactions affecting the fund position of the firm 6.11 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 6.12 QUESTIONS FOR DISCUSSION Define fund Define flow What is meant by fund flow? List out the various objectives of preparing the fund flow statement 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 Explain the process of preparing the statement of changes in working capital 10 Draft the proforma of the Fund flow statement Check Your Progress: Model Answers CYP 1 (a), (a), (a) (a), (a) (b), (a), CYP (c), CYP (a), (b), (a), (a) 6.13 SUGGESTED READINGS M P Pandikumar, Management Accounting, Excel Books M N Arora, "Cost and Management Accounting", 8th Edition, Vikas Publishing House (P) Ltd Hilton, Maher and Selto, "Cost Management", 2nd Edition, Tata McGraw-Hill Publishing Company Ltd B.M Lall Nigam and I.C Jain, "Cost Accounting", Prentice-Hall of India (P) Ltd 127 Fund Flow Statement Analysis ... READINGS M P Pandikumar, Management Accounting, Excel Books M N Arora, "Cost and Management Accounting" , 8th Edition, Vikas Publishing House (P) Ltd Hilton, Maher and Selto, "Cost Management" ,... Financing 115 Fund Flow Statement Analysis 116 International Financial and Management Accounting 6.7.3 To Fulfill the Primary Objective of the Financial Management It not only elucidates the mode...110 International Financial and Management Accounting 6.1 INTRODUCTION Every business establishment usually prepares the balance sheet at the end of the fiscal year which highlights the financial