Accounts_Module 8 Funds & Cash Flow Statements

8/22/2019 Accounts_Module 8 Funds & Cash Flow Statements

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Meaning of Funds

For some, it is nothing but cash while for some others

it is cash and marketable securities. Some others sayit is nothing but gross working capital.

But the correct meaning is probably givenInternational Accounting Standard No.7, which says

that net working capital should be taken for funds.Net working capital is nothing but the excess ofcurrent assets over current liabilities.

Current Assets1. Cash including fixed deposits with bank

2. Accounts receivable i.e., trade debtors and bills receivable3. Inventory i.e., raw materials, work in progress and finished

goods

4. Advances recoverable

5. Prepaid expenses


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Current Liabilities1. Accounts Payable

2. Outstanding expenses3. Bank Over Draft

4. Short term loans

5. Advance payments received by the business for the

services to be rendered in the future6. Current maturities of long term loans

7. Provision against current assets ex: provisions forbad and doubtful debts, provisions for loss stock,provision for discount on debtors etc.

Non-Current Assets: All assets other than current assets

Non-Current Liabilities: All liabilities other than currentliabilities


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Meaning of Flow of Funds

Means change in funds or changes in working capital.

In other words, any increase or decrease in working capital

means Flow Funds. The term flow includes both inflow

and outflow. Hence in flow of funds, both inflow and

outflow of funds are analysed.

Any inflow of funds results in an increase of funds and

hence called Sources of Funds. Any outflow of funds

results in a decrease of funds and hence termed as

Application of Funds.


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Rules to decide on flow of funds

There will be a flow of funds if a transaction involves:

Current assets and fixed assets ex:purchase of building

for cash

Current assets and capital ex: issue of shares for cash

Current assets and fixed liabilities ex: redemption of

debentures in cash.

Current liabilities and fixed liabilities ex: creditors paid of

in debentures Current liabilities and capital ex: creditors paid off in

shares

Current liabilities and fixed assets ex:buildings

transferred to creditors in satisfaction of their claims


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There will be no flow of funds if it involves:

a. Current assets and current liabilities ex:payment made

to creditorsb. Fixed assets and fixed liabilities ex:building purchase

and payment made in debentures

c. Fixed assets and capital ex:building purchased andpayment made in shares

Finding out of transaction involving change in workingcapital

I. In case the entry involves accounts only of a fixed(asset

or liability) nature oronly of a cur rent(asset or liability)nature then there will be no flow of funds.

II. But a cross transaction(i.e., a transaction involving afixed asset or fixed liability and a current asset or a currentliability) wil l resul t in f low of funds .


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Meaning Of Fund Flow Statement

A funds flow statement is a statement depicting change in

working capital. It is also termed as a Statement of

sources and application of funds, Summary of financial

operations, funds generated and expended, where got and

where gone statement, statement showing changes inworking capital.

Uses of funds flow statement

1. It explains the financial consequences of business

operations

2. It answers intricate questions

3. It acts as an instrument for allocation of resources

4. It is a test as to the effective use of working capital


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PREPARATION OF A FUNDS FLOW

STATEMENT

In order to prepare a Funds Flow Statement, it is necessaryto find out the sources and application of funds.

Sources of Funds

The sources from which the funds flow into the

organisation are called sources of funds. The sources offunds can be both internal and external.

1. Internal sources

Funds from operations are the only internal source of

funds. However, the following adjustments will berequired to be made in the figure of Net Profit for findingout real funds from operations.


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Addthe following items, as they do not result in outflow of

funds.

i. Depreciation on fixed assets

ii. Preliminary expenses or goodwill etc., written offiii. Contribution to debenture redemption fund, transfer

to general reserve, etc., if they have been deducted

before arriving at the figure of the net profit

iv. Provision for taxation and proposed dividend areusually taken as appropriation of profits only and not

current liabilities for the purpose of Funds Flow

Statement.

v. Tax or dividends actually paid are taken as application

of funds. Similarly interim dividend paid is shown as

an application of funds. All these items will be added

back to net profit, if already deducted, to find funds

from operations.

vi. Loss on sale of fixed assets.


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Deductthe following items, as they do not increase the funds:

i. Profits on sale of fixed assets since the full sale proceedsare taken as a separate source of funds and inclusion

here will result in duplication.

ii. Profit on revaluation of fixed assets

iii. Non-operating incomes such as dividend received oraccrued dividend, refund of income tax, rent received

or accrued rent. These items will increase funds but

they are non-operating incomes. They will be shown

under separate heads as source of funds in the funds

flow statement.

iv. In case the Profit and Loss Account shows Net Loss,

this should be taken as an item which decreases the

funds.


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2. External Sources:

These sources include

i. Funds from long-term loans Long-term loans such asdebentures, borrowings from financial institutions willincrease the working capital and therefore will be flow of

funds. However if the debentures have been issued againstfixed assets, there will be no flow of funds.

ii. Sale of fixed assets Sale of land, buildings, long-terminvestments will result in generation of funds.

iii. Funds from increase in share capital Issue of shares forcash or for any other current asset results in increase inworking capital and hence there will be flow of funds.


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Application of Funds

The uses to which funds are put are called application of

funds. Following are some of the purposes for whichfunds may be used:

1. Purchase of fixed assets like land, building, plant and

machinery etc.2. Payment of dividend will affect funds since it

decreases a fixed liability.

3. Payment of fixed liabilities like redemption ofdebentures, redemption of redeemable preferenceshares. It results in decrease of working capital andhence treated as an application of funds.

4. Payment of tax liability If the tax has been paid, it istaken as an application of funds.


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STATEMENT OF CHANGES IN

WORKING CAPITAL

Items As on(previous

year)

As on(current

year)Increase Decrease

Current Assets

Cash Balance

Bank Balance

Marketable

Securities

Accounts Receivable

Stock-In- Trade

Prepaid Expenses

Total Cur rent Assets

A xxxx xxxx xxx xxx


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Contd

Current Liabilities

Bank Overdraft

Outstanding

Expenses

Accounts Payable

Total Current

Liabilities B xxxx xxxx xxxx xxx

Increase/Decrease in

working capital A-B xxxx xxxxx xxx xxx


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Note: At the end of the period there will be either

increase or decrease only but not both.

Rules of preparing the schedule:

i. Increase in a current asset, results in increase (+) in

working capitalii. Decrease in a current asset, results in decrease (+) in

working capital

iii. Increase in a current liability, results in decrease (+)

in working capital

iv. Decrease in a current liability, results in increase (+)

in working capital


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FUNDS FLOW STATEMENTThe funds flow statement can also be prepared in T form

as follows:Particulars Rs. Particulars Rs.

Sources of Funds Application of Funds

Issue of debentures Redemption of redeemable

preference shares

Issue of shares Redemption of Debentures

Long-term borrowings Payment of other long-term

loans

Sale of fixed assets Purchased of fixed assets

Operating profit* Operating Loss*

Decrease of working capital Payment of dividends, tax

etc.,

Increase in working capital


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(Or)..

Particulars Amount

Sources of funds

Issue of debentures

Issue of shares

Long-Term borrowings

Sale of fixed assets

Operating profit*

Total sources xxxx


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Cont*Note only figure will be there

Application of fundsRedemption of redeemable preference

shares

Redemption of Debentures

Payment of other long-term loans

Purchased of fixed assets

Operating Loss*

Payment of dividends, tax etc.,

Total Uses xxxx

Net Increase / Decrease of working

capitalxxxx


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Adjusted Profit and Loss AccountThis account is drawn to know funds from operations.The format

is given as under

Particulars Rs Particulars Rs

To opening balance (P&L

A/c Dr)

Xxx By opening balance(P&L

a/c Cr)

xxx

To transfer to By transfer from excess

Reserve

Xxx

Sinking fund xxx By appreciation on fixed

assets

Xxx

General Reserve Xxx By profit on revaluation

or sale of fixed assets or

long term Investments

Xxx

Capital redemption

reserve

xxx By non-operating incomes Xxx

Other reserves xxx Dividend received Xxx

To depreciation on fixed xxx Interest received xxx


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To goodwill, patents written offxxx

Rent received Xxx

To share discount, preliminary

expenses Advertising,

suspense a/c etc.Written off

xxx Income tax refund

received

Xxx

To loss on revaluation/sale of

fixedAssets and long term

investments

xxxOther incomes Xxx

To provision for taxation xxx By closing balance

(p&l a/c dr. balance)

Xxx

To Dividends paid xxx By funds from operations(Balance figure)

xxx

To Interim dividend paid xxx

To proposed dividend xxx

To closing balance of p&la/c

(Credit balance)

xxx

To funds lost in operations

(Balance figure)xxx

xxxx xxxx


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CASH FLOW STATEMENT

MEANINGCash flow statement is a statement,which describes the inflows and outflows ofcash and cash equivalents in an enterprise

during a specific period of time. Suchstatement takes into account the receiptsand disbursements of cash. A cash flowstatement summarises the causes of changes

in cash position of a business enterprisebetween two dates.


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Cash Flow StatementComparing the Statements of Cash Flow

Goodco Badco

Cash Derived From Operating Activities:

Net income for the year

Depreciation & non-cash items:Receivables

Inventory

Prepaids

Accounts Payable

Accrued Expenses

Taxes Payable

total 0 0

Cash Derived From Financing Activities:

Changes in equity

Changes in Long Term Debt

Less Dividends Paid

total 0 0

Cash Used for Investing Activities:

Purchase of fixed assetsLoss or gain on sale of shares

total 0 0

Increase/Decrease in Cash 0 0

Net Cash (cash minus credit line) - last year

Net Cash (cash minus credit line) - this year

Increase/Decrease in Cash 0 0


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Classification of Cash Flows

Operating Activities

Cash effects of transactions on Net Income

Investing Activities Capital investment Salvage value Working capital investment or recovery

Financing Activities Debt and repayment of principal


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Cash flow from operating activities

Operating activities are the principal revenue

producing activities of the enterprise and otheractivities that are not investing or financing activities.Cash flow from operating activities is principallyderived from the principal revenue-producing activitiesof the enterprise.

The cash inflows from operating activities includereceipts from customers for sales or goods and services(including collection from debtors). Cash outflows

from operating activities include payments to suppliersfor purchase of materials and for services, payments toemployees for services and payments to governmentsfor tax duties.


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Operating Activities

Sales revenue (inflow)

Cost savings (inflow)

Manufacturing expenses (outflow) O & M cost (outflow)

Interest payments (outflow)

Lease expenses (outflow) Income taxes (outflow)


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Cash flow from investing activitiesInvesting activities are the acquisition and

disposal of long-term assets and other investments not

included in cash equivalents. It involves making andcollecting of loans and acquiring and disposing of debtand equity instruments and fixed assets.

The cash inflows from investing activities arereceipts from collection of loans, receipts from sales ofshares, debt or similar instruments of other enterprises,receipts from sales of fixed assets, and interest anddividends received on loans and investments. Cashoutflows from investing activities are disbursementsof loans, payments to acquire shares, debt or similarinstruments of other enterprises, and payments(including advance and down payments) to acquire

fixed assets.


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Investing Activities

Capital investment (outflow)

Salvage value (inflow)

Working capital (outflow) Working capital recovery (inflow)

Gains taxes (outflow)


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Cash flow from financing activities

Financing activities are the activities that result inchange in the size and consumption of the owners capital(including preference share capital in case of a company)and borrowings of the enterprise.

Cash inflows from financing activities are proceedsfrom issuing shares or other similar instruments,debentures, mortgages, bonds and other short or long-term

borrowings. Cash outflows from financing activities arethe payments of dividends, payments to acquire or redeem

shares or other similar instruments of the enterprise,repayments of amounts borrowed, principal payments tocreditors who have extended long-term credit, and interest

paid.


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Financing Activities

Borrowed Amount (inflow)

Principal repayments (outflow)


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Cash Flow Statement for the year ended

Particulars Rs. Rs.

Cash flows from Operating Activities

Either

Cash receipts from customers

xxxxx

(-) Cash paid to customers (xxx)

Cash generated from operations xxxxx

(-) Income tax paid (Xxx)

Cash flow before extra ordinary items xxxxxExtraordinary items xxxxx

Net cash from (used in) operating activi ties xxxxx


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Net profit before tax and extraordinary items xxxx

Adjustments for non-cash and non-operating

items

xxxx

[List of individual items such as depreciation,

foreign exchange loss, loss on sale of fixed

assets, interest income, dividend income,

interest expense etc.]

xxxx

Operating prof i t before working capital changes xxxx

Adjustment for change in current asset and

current liabilities {list of individual items} xxxx

Cash generated from (used in) operations before

taxxxxx


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(-) Income tax paid (xxx)

Cash flow before extra ordinary items xxxx

Extraordinary items xxxx

Net cash from (used in) operating activities xxxx

Cash flow from Investing Activities

Individual items of cash inflows and cash

outflows from investing activitiesxxx

[Such as purchase/sale of fixed assets,

purchase or sale of investments,Interest received, dividend received etc.]

xxx

Net cash from (used in) investing activi ties xxxx


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Cash inf lows Activities Cash Outlays

Payments to suppliers

and employees for

materials and services

Payments to government

for taxes and duties

OperatingActivities

Receipts from

customers for sales

of goods andservices activities


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Contd.

Payment for

purchase of fixed

assets

Payments forpurchase of

investments and

making loans

Investing Activities

Receipts from sale

of fixed assets

Receipts from sales

of investments and

fro collection of

loans

Receipts frominterest and

dividends on loans

and investments



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Contd.

Payments for

dividends on share

capital

Payments for

principal on

debentures and

other borrowings

Payments for

interest on

debentures and

other borrowings

Financing

Activities

Receipts from

issuance of share

capital

Receipts from

issuance of

debentures

Receipts from

other long-term

borrowings



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Thank You

Accounts_Module 8 Funds & Cash Flow Statements

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