Funds flow statement by Dr. Suresh vadde
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Transcript of Funds flow statement by Dr. Suresh vadde
CHAPTER – IVFUNDS FLOW SATEMENT
Flow of Fund means the inward and outward movement of a fund of an enterprise.
For the purpose, Fund refers to Working Capital and flow means movement or changes.
Therefore, Flow of Fund means movement of or changes in the Working Capital (i.e., current) items.
MEANING OF FLOW OF FUND
Flow of Fund is identified by the means of inward or outward movement of Current Assets and Current Liabilities.
When Current Assets increase or Current Liabilities decrease—Inflows of Fund.
Cont’d..,
Working Capital
Current Assets
Current Liabilities
The Funds flow statement contain all the details of the financial resources which have became available during an accounting period.
This statement discloses the amounts raised from various sources of finance during a period.
It explains that how finance has been used in the business.
It is a very useful tool in analysis of financial statements which analyses the changes taking place between two balance sheet dates.
The Funds flow statement
Fund Flow Statement acts as an important tool for financial analysis and shows the brief reasons for change in the Working Capital between two Balance Sheet dates.
Fund Flow Statement explains how the financial position has changed from the beginning of an accounting period to the end of that period.
It acts as an important instrument for allocation of resources of a concern.
It can be used in planning a sound dividend policy.
It is useful in forecasting the flow of funds and in projecting the working capital requirements.
What are the uses of the funds flow statement?
Fund Flow Statement is not a basic Financial Statement,
but is a supplementary statement. It does not
disclose any new fact which is not reflected in the
Income Statement and the Balance Sheet.
It provides a partial financial information to the
management.It cannot present the
continuous changes in the financial position.
It does not indicate the structural change of an
asset or a liability.
It is prepared on the basis of historical data.It exhibits the changes in
the Fund position, but does not indicate the changes in the cash position, which is most important for every
business concern.
LIMITATIONS OF FUND FLOW STATEMENT
The changes which occurred in the current accounts as a result flow of fund are reflected in a statement known as ‘schedule of changes in working capital’ .
The similar changes in non current accounts are shown in ‘Fund Flow Statement’.
Therefore, following two statements under this techniques .1. Statement or Schedule of Changes in Working Capital.2. Statement of Sources and Uses of Funds or Funds Flow Statement.
Preparation of Fund Flow Statement
A funds flow statement
depicts change in working
capital. It will, therefore, be better for the students to
prepare first a Schedule of Changes in
Working Capital before
preparing a funds flow statement.The primary purpose
of the statement is to explain the net
change in Working Capital, as arrived in
Funds Flow Statement.
It can be prepared by
comparing the current assets
and the current liabilities of two
periods.
Technique for preparing a funds flow statement
Item
(A) Current AssetsCash at bank Cash in handStock in tradeDebtorsBills receivableAdvance paymentShort term investmentPrepaid expenseAccrued incomeTotal (A) (B) Current Liabilities (1) Short term loans (2) Bank overdraft (3) Creditors (4) Bills payable (5) Outstanding expenses (6) Unclaim dividend Total (B)Net Working Capital (A-B)Incraese / Decrease in Working
Capital Total
Previous Year Current Year Effect on
Incraese Rs.
Working captialDecrease Rs.
Statement or Schedule of Changes in Working Capital.
The following rules may be applied to current assets and current liabilities for preparing this statement:
In order to prepare a Funds Flow Statement, it is necessary to find out the “sources” and “applications” of funds.
While preparing a funds flow statement, current assets and current liabilities are to be ignored.
Consider the changes in Fixed Assets and Fixed Liabilities.
PREPARATION OF FUNDS FLOW TATEMENT
Sources of Funds Amount Application of Funds Amount
Issue of share capital ……. Redemption of pref. share ……..
Issue of debenture ……. Redemption of debenture ……..
Raising of long term loan ……. Payment of long term loan ……..
Sales of fixed assets ……. Purchase of fixed assets ……..
Interest received ……. Interest paid ……..
Dividend received ……. Dividend paid .…….
Refund of Taxes ……. Payment of Taxes ……..
Decrease in working capital
……. Increase in working capital ……..
Fund from operation …….
TOTAL …….. TOTAL ……..
Format of Fund Flow Statement (As on…………..)
Calculation of Fund from operation It can be calculated by preparing
Profit & loss Adjustment a\c
Particular Amount
DepreciationLoss on sale of fixed assetsUnder writing commissionsDiscount on issue of shares & debenturesPreliminary expense written offDeferred revenue expenses Goodwill written off Patent or trademarkProvision for taxes (If treated non current)
Particular Amount
Profit or gain on sale of fixed assetDividend received Interest received ofinvestmentProfit on revaluation
of asset Fund from operation
Balance Sheet of M/s ______
Liabilities as on 31stMarch
Assets as on 31stMarch
2006 2007 2006 2007
Capital Profit/Loss Appropriation Bank Loan Bills Payable Sundry Creditors Reserve for Taxation
18,50,000 14,78,000 12,00,000 4,00,000 14,00,000 2,00,000
21,00,000 17,64,000 9,00,0000 6,80,000
12,20,000 1,80,000
Goodwill (at Cost) Land and Buildings Plant and Machinery Furniture and Fittings Stock/Inventories Sundry Debtors Bills Receivable Bank Cash
6,00,000 18,50,000 4,74,000 1,94,000 8,26,000 12,00,000 8,00,000 5,00,000 84,000
6,00,000 22,00,000 5,24,000 1,94,000 7,24,000
12,80,000 7,21,000 4,83,000 1,18,000
TOTAL 65,28,000 68,44,000 TOTAL 65,28,000 68,44,000
Example:- From the following information preparei) A Schedule of Changes in Working Capital ii) A Funds Flow Statement
Balance Sheet of M/s ______
Liabilities as on 31stMarch
Assets as on 31stMarch
2006 2007 2006 2007
CapitalProfit/Loss AppropriationBank LoanBills PayableSundry CreditorsReserve for Taxation
18,50,000
14,78,000
12,00,000
4,00,000 14,00,000
2,00,000
21,00,000 17,64,000 9,00,0000 6,80,000 12,20,000 1,80,000
Goodwill (at Cost)Land and BuildingsPlant and MachineryFurniture and FittingsStock/InventoriesSundry DebtorsBills ReceivableBankCash
6,00,000 18,50,000 4,74,000 1,94,000 8,26,000 12,00,000 8,00,000 5,00,000 84,000
6,00,000 22,00,000
5,24,000 1,94,000 7,24,000 12,80,000
7,21,000 4,83,000 1,18,000
TOTAL 65,28,000 68,44,000 TOTAL 65,28,000 68,44,000
Solution : Working NotesIdentify the Current and Non-Current accounts from within the balance sheet distinctly.
Current ItemsNon-Current Items
Schedule/Statement of Changes in Working Capital for the period from 31/03/06 to 31/03/07
Particulars/AccountBalance as on 31st March Working Capital Change
2006 2007 Increase Decrease
a) CURRENT ASSETS
1) Stock/Inventories 2) Sundry Debtors 3) Bills Receivable 4) Bank 5) Cash
826,000 1,200,000 800,000 500,000 84,000
724,000 1,280,000 721,000 483,000 118,000
80,000
34,000
102,000
79,000 17,000
TOTAL 3,410,000 3,326,000 114,000 198,000
b) CURRENT LIABILITIES
1) Bills Payable 2) Sundry Creditors 3) Provision for Taxation
400,000 1,400,000 200,000
680,000 1,220,000 180,000
180,000 20,000
280,000
TOTAL 2,000,000 2,080,000 200,000 280,000
Working Capital [(a) - (b)] 1,410,000 1,246,000
TOTAL 314,000 478,000
Net Change in Working Capital 164,000
I- Statement/Schedule of Changes in Working Capital
There is a decrease in working capital to the extent of 164,000.
The net change can also be obtained from the working capital figures relating to the two balance sheet dates.
Change in Working Capital = Working Capital as on 31/03/07 - Working Capital
as on 31/03/06 = 1,246,000 – 1,400,000
= - 164,000 Negative value indicates a decrease in working
capital.
Cont’d..,
When there is no additional data apart from the balance sheets and we are sure that there are no other transactions that have affected the non-current accounts.
Therefore, we may derive the inflow/outflow by comparing the opening and closing figures.
II - Statement of Changes in Non-Current accounts (or) A Funds Flow Statement
Statement of changes in Non-Current Accounts
Account
Balance as on 31st Dec Change
Type Result
2006 2007 Amount Direction
Capital Profit/Loss Appropriation Bank Loan Land and Building Plant and Machinery
18,50,000 14,78,000 12,00,000 18,50,000 4,74,000
21,00,000 17,64,000 9,00,000
22,00,000 5,24,000
2,50,000 2,86,000 3,00,000 3,50,000
50,000
Increase Increase Decrease Increase Increase
Liability Liability Liability Assets Assets
Inflow Inflow outflow outflow outflow
Working notes
Statement of Sources and Applications of Funds for the period from 31/03/06 to 31/03/07
Sources/Inflows of Funds Amount Applications/Outflows of Funds Amount
Capital Funds from Operations [P/L Appropriation a/c]
2,50,000 2,86,000
Land and Buildings Plant and Machinery Bank Loan
3,50,000 50,000
3,00,000
5,36,000 7,00,000
Change in Fund (Working Capital) 1,64,000
Funds Flow Statement for the period from 31/03/06 to 31/03/07
Since the Applications/outflows are more than the Sources/Inflows of Funds there is a Net decrease in Fund (Working Capital) = 700,000 – 536,000 = 164,000
Example: Reading Assignment
Balance Sheet of M/s ___
Liabilities As on 31st December
Assets As on 31st December
2004 2005 2004 2005
Share Capital Profit and Loss Appropriation account Long Term Loan Sundry Creditors Bills Payable
10,000
5,000 4,000 8,000 5,000
15,000
8,000 6,000 12,000 3,000
Cash Debtors Stock Machinery Land
5,000 10,000 10,000 3,000 4,000
8,000 15,000 12,000 5,000 4,000
32,000 44,000 32,000 44,000
Individual Assignment From the following information preparei) A Schedule of Changes in Working Capital ii) A Funds Flow Statement
By
Dr.Suresh VaddeM.Com;MFA;MBA;M.Phil;Ph.D
Associate ProfessorDept. of Management
Samara University, Ethiopia.