Funds and Cash

8/14/2019 Funds and Cash

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FUNDS FLOW STATEMENT

PRESENTED BY :

V.PRASANTH


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AT A GLANCE

Meaning and Definition of Funds Flow Statement;

Importance of Funds Flow Statement

Limitations of Funds Flow StatementWay of preparing Funds Flow Statement

Precautions to be taken while preparing FundsFlow Statement

Few Numerical Questions


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PHILOSOPY OF FUNDS FLOWSTATEMENT

It is continuous process. The study andcontrol of this funds-flow process (i.e., The

uses and sources of funds) is the mainobjective of financial management toassess the soundness of the solvency of

the enterprise.


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FUNDS STATEMENT

The funds statement was also known as astatement of funds flow or a statement ofsources and applications of funds

This statement was deemed to be necessary asthe balance sheet and income statement did notpresent a complete picture of an entitys

economic activitiesThe statement was seen as necessary tosummarise investing and financing activities


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MEANING OF FUND FLOW

The term of Funds Flow has made up with the two

words Funds and Flow of funds. Let us first we

understand these meaning and then we see howfunds flow statement is prepared.


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THE TREM FUND IS USED IN THREE

SENSES

CASH -

In narrow sense, the term fund is used to meanonly the cash and bank balance. Therefore, inthis sense, funds flow statement is a statementreflecting the changes in cash and bank balancesonly. This concept is better for the preparing of

Cash Flow Statement Therefore, this term is notused in this sense.


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TOTAL RESOURCES -

In broader sense it includes all resources used in the

business whether in the form of men, material,machinery, money and methods etc.


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Working Capital

In popular sense, the term Fund is used to mean

working capital i.e. the excess of current assetsover current liabilities. Therefore, in this sense,

fund flow statement includes all the transactions

affecting current assets and current liabilities.


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MEANING OF FLOW IN FUNDS

Before understanding the meaning of flow infunds, it is necessary to classify the balance

sheet of a concern into four parts as shown

below-


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Balance Sheet

1. Non-Current Liability 3. Non-Current AssetsShare Capital Goodwill

Debentures Land & Buildings

Other Long-term loans Plant &Machinery

Reserve & Surplus Motor Vehicles

Security Premium Long-term InvestmentsCapital Redemption reserve Preliminary Expenses

General Reserve Discount on shares

Profit & Loss Account Miscellaneous Expenses

2. Current Liabilities 4. Current AssetsCreditors Debtors

Bills Payable Bills Receivable

Short-term loans Advances

Bank Overdraft Short-term investments

Advance Payment Received Stock in hand

Outstanding Expenses Cash in hand

Provision for taxation Cash at Bank

TOTAL TOTAL

The arrows explain when transaction will constitute flow of funds.


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COMPONENTS OF BALANCE-SHEET

1. NON-CURRENT LIABILITIESThese liabilities are not payable within a year andout of current assets. These liabilities are generally

payable either in the long-period or at the close ofthe business. For example, see item (1) in theabove balance-sheet.

Contd..


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2. CURRENT LIABILITIES

These liabilities are payable within a year and out

of current assets. The values of these liabilitiesgenerally changes within one year. For example,

see item (2) in the above balance sheet.

Contd


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3. NON-CURRENT ASSETS

Those assets which are obtained in business for

use over a long period of time for earningpurpose are called non-current assets. These

assets are not purchased for the purpose of

selling and include tangible, intangible andfictitious


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4. CURRENT ASSETS

These assets are equal to cash or reasonablyexpected to be realized in cash or sold orconsumed within one year or during the normal

operating cycle of the business are called currentassets. For example, see item (4) in the abovebalance-sheet.


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MEANING OF FLOW

The term Flow means changes incoming andoutgoing. When this term is used with funds, it

means the changes taking place in funds during a

certain period. Whenever there is change in thefunds, it is presume that flow in funds has taken

place. Transactions that bring working capital into

the firm are sources of funds and on the contrary,if the working capital decreases, it is an application

of funds.


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TRANSACTIONS THAT WILL AFFECT THE

FLOW OF FUNDS

The following transactions will bring the change in

the working capital

Current Assets and Non-Current Assets

Current Assets and Non-Current Liabilities Current Liabilities and Non-Current Liabilities

Current Liabilities and Non-Current Assets

In brief, it can be said that when one aspect is of

non-current category, and the other current

category, there will be flow in funds.


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TRANSACTIONS THAT WILL NOT

AFFECT THE FLOW OF FUNDS

1. Current Assets and Current Liabilities

2. Non-Current Assets and Non-Current Liabilities

3. Non-Current Liabilities or Non-Current Assets.


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MEANING OF FUNDS FLOW

STATEMENT

The Funds flow statement (FFS) is a financialstatement which reveals the methods by which

the business has been financed and how it has

used its funds between the opening and closingBalance-Sheet dates. It studies from where the

funds have been received and where the funds

have been used.


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TO CONCLUDE We shall include only those transactions in funds

flow which affect current assets or current

liabilities, on one hand, and a fixed asset or long-

term liabilities or owners equity on the other.


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Following questions are answered by Funds Flow

Statement -

1. Where the profit is put up?

2. Why net current assets are low even though

there is an increase in net profit? In other words,why cash balance has not increased.

3. Why excess dividend was distributed when there

were low profits?4. How is the amount realized from the sale of

assets used?

OBJECTS OF FUNDS STATEMENT


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Contd

5. How were the changes in Working Capital

6. How were the plant and machinery

expanded?

7. How was the amount received from the issueof shares of debentures used?

8. Why the funds were not available for the

purchase of machinery and plant?


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IMPORTANCE OF FUNDS FLOW

STATEMENT

1. Financial Analysis and Control2. Financial Planning and Budget preparation

3. Useful to Bankers and Money Lenders

4. Helpful in Comparative Study

5. Knowledge of Managerial Policies

6. Knowledge ofBusiness Problems

7. Dividend Policy


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LIMITATIONS OF FUNDS FLOW

STATEMENT1. Non-fund transactions and this is why it is less

popular than Balance-sheet and Profit & LossAccount;

2. It fails in the disclosure of all changes that

have taken place during the ordinary course ofbusiness;

3. It is not a substitute of Income Statement orBalance-sheet. It merely provides someadditional information relating to the financialposition of a firm;

contd..


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4. It is historical in nature and analyses past

events only;5. It gives only a view about the financial

position of business as it does not disclose all

the facts;

6. Changes in cash are more important than

changes in working capital which is notrevealed by fund flow statement.


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PREPARATION OF FUNDS FLOW

STATEMENTFunds flow statement can be prepared monthly butusually it is prepared for one, two, three, four ormore years. The data for the preparation of thisstatement are obtained form two balance sheetssupplemented by such other information from the

accounts as may be needed. It is customary foraccompany to use the figures of the balance sheetfor the latest year and those on the balance sheet asat the beginning of the period for which thisstatement is to be prepared.

contd.


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Preparation of funds flow statement is divided

into two parts.1. Schedule of Changes in Working Capital;

2. Funds from Operation;3. Funds Flow Statement


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STATEMENT OF CHANGES IN

WORKING CAPITAL

This statement is prepared from current assets

and current liabilities in order to calculate theincrease or decrease in working capital and is

prepared in the Performa given as under.

Contd


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STATEMENT OF CHANGES IN WORKING CAPITAL

Particulars PreviousYear Fig.

Rs.(2008)

Current

Year Fig.

Rs.(2009)

Changes

in current

assets

and

liabilities

Incr-

ease

Decre

-ase

Current Assets :Cash

Debtors

StocksBill Receivables

Advance payment

Accrued income

Marketable Securitiesor Short-term

Investment


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Contd..

PreviousYear Fig.

Rs.(2008)

CurrentYear Fig.

Rs.(2009)

Change incurrent and

liabilities

Particulars

In.(+) Dec.(-)

Current

Liabilities:Creditors

Bills Payable

Bank Overdraft

OutstandingExpenses

Short-term

Loan etc.Increase or

Decrease in

Working Capital


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The following rules may be applied to current

assets and current liabilities for preparing this

statement:

1. An increase in current assets, increases working

capital

2. A decrease in current assets, decreases working

capital3. An increase in current liabilities, decreases working

capital

4. A decrease in current liabilities, increases workingcapital


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FUNDS FLOW STATEMENT

This statement is usually prepared in T form.Left-hand side is for sources of funds and right-

hand side for applications of funds. The items of

sources and applications are given as follows:

Contd.


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The following are the sources from which funds come:

1. Funds from operations

2. Income from investments

3. Issue of shares and debentures4. Raising a loan

5. Sale of fixed assets and long-term investments

6. Receipt of interest on non-trade investment,dividend, refund of tax etc.

7. Decrease in working capital etc.

Sources ofFunds:


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Uses (or Applications) offunds:

The following are the various purposes for which

funds can be used:

1. Funds lost in operations

2. Repayment of long-term loans

3. Redemption of preference shares and debentures

4. Purchase of fixed assets5. Purchase of long-term investments

Contd


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6. Payment of cash dividends

7. Payment of taxes

8. Drawing in case of proprietary or partnership

business9. Loss of cash by embezzlement

10. Increase in working capital etc.

USES OF FUNDS


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FUNDS FROM OPERATIONS

It can be calculated in two forms :

Particulars

Net Profit for Current Year

Add : Non fund itemsDepreciation

Goodwill, Patents

Preliminary Expenses Written

off

LESS : Non-fund Items andNon-trading Income ,already

Credited to P & L A/c.

Dividend Recevied

Profit on sale

Funds from operations

Amount

Rs.

Amount

Rs.


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Profit and Loss Adjustment A/c

To Depreciation

To Goodwill Written off

To preliminary Expenses

written off

To Transfer to sinking fundTo Loss on sale of fixed Assets

To Closing Balance of P&L

Appropriation A/c

By opening Balance ofP&LAppropriation A/c

By Dividend Received

By Over provisions WrittenBack

By Funds fromoperations

(Balancing Figure)


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PRECAUTIONS TO BE TAKEN WHILE

PREPARING FUNDS FLOW STATEMENT

Following points must be kept in mind while preparing funds flowstatement

1. Changes in fixed Accounts

2. Internal Reserves

3. Provision against current Assets

4. Changes in current Assets

5. Interim Dividend6. Investments

7. Provision for taxation

8. Proposed dividend

9. Profit or Loss on the Sales of Fixed Assets10. Dividend received

11. Goodwill and Preliminary Expenses written off


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IMPORTANT QUESTIONS

Short answer questions

1. State the meaning of Funds flow statement2. How is the schedule of changes in working capital

prepared?

3. Discuss the importance of funds flow statement .4. Explain the terms funds items and non funds

items. Give examples.

5. Write short notes on application of funds.6. How are the funds from operations calculated?

7. Distinguish between the funds flow statement andBalance-Sheet.


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Long Answer questions1. Explain the terms Funds and Flow in funds in

respect of funds flow statement

2. What is a Funds Flows statement? How is itprepared? What are the various sources and uses

of funds ?

3. How is a funds flow statement prepared ?Give aPerforma of schedule of changes in working

capital and funds flow statement.

Contd.


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Suggested readingsFundamentals of corporate Accounting By J. R.

Monga ( Mayoor Paper books , Noida)

Financial Accounting A Managerial Perspective By

Dinabandhu Mukhopadhyay (Asian Books Pvt. Ltd.,New Delhi)

Financial Accounting By S. N. Maheshwari & S. K.

Maheshwari (Vikas Publishing House, New Delhi)Financial Accounting By Ashish K. Bhattachary (

Printce Hall of India, New Delhi)

Contd..


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Accounting and Financial Analysis & Management By

Agarwal & Agarwal ( Pragati Prakashan, Meerut)

Financial Statement Analysis By John J Wild and

Robert F Halsey (Tata Mc Graw Hill, New Delhi)Management Accounting Theory and Practice By M.P.

Pandikumar (Excel Books, New Delhi)

Management Accounting By M. N. Arora (VikasPublishing House, New Delhi)


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THANK YOU


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CASH FLOW

STATEMENT

Presented By:

Niranjan Jha


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Concept

-A Cash Flow statement discloses net

increase (or decrease)in cash during an

accounting period.As per AS-3(Revised)theobjective of cash flow statement is to

provide information about cash flows of an

enterprise which is useful in providing the

users of financial statement a basis to

asses the ability of an enterprise togenerate cash and cash equivalents to

utilise those cash flows.


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Definitions in AS-3The following terms are used in this

statement which the meaning specified.Cash Flows are inflows and outflows of

cash and cash equivalents.

1.Cash comprises cash on hand anddemand deposits with banks.

2.Cash equivalent are short term highlyliquid investment that are readily

convertible in to known amounts of cash.


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Classification of cash inflows andoutflows.

A cash flow statement focuses on

various activities and items which

bring about changes in the cash

balance between two Balance Sheetdates.This statement covers all items

which increases or decrease the cashof a business enterprise.


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The ICAIs AS-3 cash flow

statementhas classified cash flows

into three categories-

(1)Operating Activities(or flows)

(2) Investing Activities(or flows)

(3) Financial Activities(or flows)


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(1) Operating Activities-Operating activities are

those transactions which are considered in the

determination of net income.Examples :

cash received from debtors for goods and

services,interest and dividend received on loans and

investment.

Out flows examples are cash payments for goodsand services; merchandise ;wages;interest;taxes;


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(2) Investing Activities-Investing

activities include acquisition of

long term or fixed assests disposal

of long term or fixed

assets,acquisition and disposal of

intangible assets,purchase and sale

of shares,debentures and other

securities,landing of money and its

subsequent collection.


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(3) Financing Activities-Financing activitiesrelates to long term liabilities and equity

capital.A firm engages in financing activities

when it obtains resources from owners,returnsresources to owners, borrows resources from

creditors and repays amounts borrowed.Here

cash inflows include proceeds from issue of

shares and short term and long term

borrowings.Cash outflows include repayment of

loans and payments to owners.

Cl ifi i f h i fl d fl l i


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Classification of cash inflows and outflows relating to

operating activities.

Cash Inflows

Cash received from debtorfor goods and services

Interest and dividends on

loans and investment

Cash outflows

Cash payment for goods andservices,merchandise

Cash payment for wages

Cash payment for interest

to creditors

Payment to Govt.for taxes

Payment to other for

expenses

C h I fl d O tfl l ti t I ti


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Cash Inflows and Outflows relating to Investing

Activities

Cash Inflows

Cash sales of property,plantequipment,other long term

assets.

Cash sales of Investment in

shares debenture and other

securities

Cash collection(loan

repayments) from browwrs

Cash Outflows

Purchase ofshares,debenture sand

securities of other

enterprise

Purchase of property,plant

,equipment and other long

term assest

Loan given to other firms

Cash Inflows and Outflows relating to Financing


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Cash Inflows and Outflows relating to Financing

activities

Cash Inflows

Proceeds from issue ofshare

Proceeds from short term

and long term debt

Cash Outflows

Repayment of loans Payment of loans

Payment to

owners,including cash

divident

Reacquiring preference or

equity share


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Presentation of cash flow statementsA Cash flow statement can be

presented in either the direct orindirect format.The investing and

financing sections will be the same

under either format.

(1) Direct Method

(2) Indirect Method


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(1) Direct Method-Direct Method is that methodwhereby major class of gross cash receipts and gross

Cash payments are disclosed.

Direct Method should report separately the followingclasses operating cash received and payments.

1.Cash collected from customers including

lessees,licensee and other similar items.2.Interest and dividents received

3.Other operating cash receipt ,if any .4.Cash paid to

emplyees and other suppliers of goods or services.

5.Interest paid ,Income taxes paid.

(2) Indirect Method-Under the indirect method,


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the net cash flow from operating activities is

determined by adjusting net profit or loss for

the effects of ;

a.Changes during the period in inventories andoperating receivables and payables.

b.Non-cash items such as

depreciatons,provisions deferred taxes andunrealised excanges gains and losses;and

c.All other items for which the cash effects are

investing or financing cash flows.

The following summarizes the process


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The following summarizes the process.

Change

Decrease in a currentasset

Increase in a currentasset

Decrease incurrentliability

Increase in current

Adjustment to Net

income

Add

Subtract

Subtract

Add

P i C h l S


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Preparing Cash Flow Statement-

Before preparing cash flow statement the

following three steps have to be completed:-

(1) Determining cash flows from operating

activities

(2) Determining cash flows from investingactivities.

(3) Determining cash flows from financing

activities.After obtaining information regarding the above

a cash flow statement can be prepared.


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Cash Flow from Operations

The profit and loss account focuses on net income

determination from operating activities .However it does not

show cash inflow and outflow relating to operatng activitivities

because the profit and loss account is prepared on accrual basis.In preparing profit and loss account revenue

are recorded even though cash for them has not been received

.Similarly expenses are recorded even though they may not have

been paid . Therefore, to find cash flows fromoperations, one need to convert accrual basis income statement

figures to cash basis by making adjustments .By way of

adjustment,earned revenue will be converted into cash received

from sales and customers and incurred expenses will beconverted

into cash expended,i.e.,expenses actually paid in cash.

Accrual- Basis Net Income


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|Deduct increase in accounts account receivable (or Add

decrease in account receivable)

Deduct Increase in Merchandise Inventory (Add Decrease

in Merchandise Inventory)Deduct Increase in prepaid Expenses ( or Add decrease in

prepaid expenses)

Add increase in account payable (or Deduct Decrease in

account payable )Add increase in Accrued Expenses (or Deduct Decrease in

Accrued

Expenses)

Add Depreciation and amortization expenses for the year.|

Cash Basis Net Income

Symbolically, the real net cash flows in year(RNCF) ----


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RNCF=S-R+I-T+D+K+L+A+M

where

S=Actual and most-readily realizable cash inflows on account of

sale in a year.

R

= Actual and most readily payable cash outflows formaterial,wages and other expenses in year.

I= Real cash flows for loan interest in year.

T= Real cash outflows for taxation in year.

D= Real cash flows for dividend in year.K=Real cash flows issue/repayment of securities/debentures in

year

L= Real cash flows for long term (current portion) and short term

loans in yearA=Real cash flows for assets sold/purchased in year.

M= Real cash flows for miscellaneous items,e.g. subsidy and

other.

(1) It explains the nature of the financial events which


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have affected the cash positions.It explains the

reasons for the difference between opening and

closing balance.

(2) It is useful in financial planning purpose.

(3) It focuses the enterprises earning capacity with its

spending and operating activity.

(4) It provides an insight into the critical areas of

financial management by identifying two important

classes of cash flows operating and financing cash

flows.

(5) The significance of cash flow statement lies in the

increased complexity of business activity.This

complexity results in a greater disparity between the

time when income and expenses items are reported

s s a emen , s nce oes no cover non-cas

items, is not useful in analysing changes in financial


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position of an enterprise(2) Changes in financial position measured through

cash only

has drawbacks and does not indicate accurately the

changes in

financial position.

(3) It has utility for making short-term financial

planning but for long term planning this statement

would not be useful.

(4) There is no direct disclosure of the extend to

which the total resources of the firm have changed

during the period.

(5)Because of the limited usefulness of statement of

chan e in cash ,the re aration of statement of

C l i


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Conclusion-

Present historical cost accounting,which is based

on accruals and allocations,is not really helpful

in investment and other types of decisions. Ininvestment ,the primary factor is cash flow, but

the but the performance evaluation is done on

the basis of earning.This is inconsistent .Both the investment

decisions and the performance evaluation

should be on cash flow basis becausethe primary objective of an business enterprise

is cash flow.

Funds and Cash

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