Sanjay Marketing Finance

8/4/2019 Sanjay Marketing Finance

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Funds Flow Statement


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Basic Terminologies (1/2)

Funds::According to Accounting Standard No.7, the term

Fund generally refers to cash and cash equivalents

Working Capital: There are two concepts of working capital :

Gross working capital

Net working capital

CurrentAssets: ex. Cash, accounts receivable, inventory,

advances recoverable, prepaid expenses etc.

CurrentLiabilities: ex. accounts payable, outstanding

expenses, bank overdrafts, short term loans, advance

payments received, current maturities of long-term loans etc.


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Basic Terminologies (2/2)

Non CurrentAssets: ex. goodwill, land, building, machinery,

furniture, debit balance in P & L account etc.

Non CurrentLiabilities: ex. share capital, long term loans,

debentures, share premium, credit balance in P & L account.

FlowofFunds: Flow of funds will not occur for transactions

involving only Non Current assets or liabilities or only Current

assets or liabilities. Cross transactions involving a fixed asset

or liability and a current asset or liability will result in a flow of

funds.


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Preparation of the Funds Flow

Statement (1/7)

Sources ofFunds

InternalSources: Following adjustments need to be made to the figure of

Net Profit to calculate the funds from operations:

(+)Addthe following items that do not involve funds outflow: Depreciation,

Preliminary expenses or goodwill etc. written off.,

Contribution to debenture redemption fund, transfer to general

reserve etc.,

Provision for taxation and proposed dividend,

Loss on sale of Fixed Asset

(-)Deductthe following as no funds inflow is involved :

Profit on sale of fixed Asset

Profit on revaluation of Fixed Assets


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Statement (2/7)ExternalSources:

Funds from long term loans : e.g. debentures, borrowings from

financial institutions etc.

Sale of fixed assets : Sale of land, building, long-term investments

will result in generation of funds.

Funds from increase in share capital : Issue of shares for cash or any

other current asset results in increase in working capital and hence

there will be flow of funds.


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Statement (3/7)

Application offunds:

Purchase of Fixed Assets

Payment of dividend Payment of fixed liabilities

e.g. redemption of debentures or redeemable preference shares.

Payment of tax liability


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Statement (4/7)

Scheduleforchanges in Working Capital: Funds flow

statement depicts changes in working capital, hence it is

advisable to prepare a schedule for changes in working

capital, which can be done by comparing current assets and

current liabilities for two periods

Rules:

Increase in current assets results in increase in working

capital and vice versa

Increase in current liabilities results in decrease in

current liabilities and vice versa


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Statement (5/7)Format for Schedule of changes in Working Capital

Item as on as on Change

--- --- Increase Decrease

Current Assets:

CashBank BalanceAccounts receivableStock in tradePrepaid expenses

Current Liabilities:

Bank OverdraftOutstanding ExpensesAccounts payable

Net Increase/ Decrease

in working capital


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Statement (6/7)Funds FlowStatement

While preparing this statement, current assets and liabilities are to be ignored. Attention is to be given to

changes in fixed assets and fixed liabilities:

A. Sources of funds:

Issue of sharesIssue of debentures

Long term borrowings

Sale of fixed Assets

Operating Profit

B. Application of funds:

Redemption of redeemable preference sharesRedemption of debentures

Payment of other long term loans

Purchase of fixed Assets

Operating loss

Payment of dividends, tax etc.

Net Increase/ decrease in Working Capital ( A-B)


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Q-Comparative Balance sheet of Z Ltd. As on year2000 and 2001 were as follow

LiabilitiesLiabilities 20002000 20012001 AssetsAssets 20002000 20012001

Account payableAccount payable

Notes payableNotes payable

Loan onLoan onMortgageMortgage

CapitalCapital

Sinking fundSinking fund

RetainedRetainedEarningEarning

Provision for DDProvision for DD

AccumulatedAccumulatedDepreciationDepreciation--

BuildingBuilding

furniturefurniture

1500015000

1000010000

4000040000

5000050000

1600016000

1395013950

13501350

1200012000

32003200

161500161500

1800018000

7500075000

4000040000

4500045000

1200012000

1627516275

14251425

90009000

24002400

151600151600

CashCash

AccountAccount

receivablereceivableStockStock

Sinking fundSinking fundinvestmentinvestment

LandLand

BuildingBuilding

FurnitureFurniture

1120011200

21300213003500035000

1600016000

1000010000

600006000080008000

161500161500

85008500

23500235003060030600

1200012000

1000010000

600006000070007000

151600151600


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Additional Information

Net profit for the year 2001 amounted 6675.

Dividend amounted to Rs.5000 was paid during the

year.

Prepare a statement of sources and uses of fund.


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Schedule of Changes in Working Capital

ItemsItems

CURRENR ASSETS:CURRENR ASSETS:--

CashCash

Account receivableAccount receivable

StockStockTOTAL of CA (A)TOTAL of CA (A)

CUURENTCUURENTLIABILITIES:LIABILITIES:--

Account payableAccount payable

Note payableNote payableProvision for DProvision for D DD

TOTAL of CL (B)TOTAL of CL (B)

Difference b/w (ADifference b/w (A--B)B)

Decrease in W CDecrease in W C

20002000

AmountAmount

1120011200

2130021300

3500035000

6750067500

1500015000

100001000013501350

2635026350

4115041150

4115041150

20012001

AmountAmount

85008500

2350023500

30600306006260062600

1800018000

7500750014251425

2692526925

3567535675

54755475

4115041150

Change inChange in

IncreaseIncrease

22002200

25002500

54755475

1017510175

WorkingWorkingcapitalcapital

DecreaseDecrease

27002700

44004400

30003000

7575

1017510175


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Fund flow statement

Sources of fundSources of fund

Sale of sinkingSale of sinkingfund investmentfund investment

Fund fromFund fromoperationoperation

Decrease inDecrease inworking capitalworking capital

AmountAmount

40004000

525525

54755475

1000010000

Application ofApplication offundfund

Redemption ofRedemption ofshare capitalshare capital

Dividend paidDividend paid

AmountAmount

50005000

50005000

1000010000


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Treatment ofProvision for Taxation

ProvisionforTaxation : There are two options available:

Treated as a current liability:When provision for taxation is made,

it involves P & L appropriation account, which is a fixed liability and

Provision for taxation account, which is a current liability, resulting

in a decrease in working capital. On payment of tax, there will be

no change in working capital as it involves one current liability (

Provision for Tax) and one current asset ( Bank or cash ).

It may be taken only as an appropriation of profits: There will beno change in working capital when the provision is made as two

fixed liabilities are involved i.e P & L appropriation account and

Provision for taxation account. However, when taxes are paid, there

is an application of funds as it involves one fixed liability ( Provision

forTax ) and one current asset ( Bank or Cash ).


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Treatment ofProposed Dividends

Proposed Dividends:

May be treated as current liability : It will appear as one of theitems decreasing working capital in the schedule for changes in

working capital. It will not be shown as application of funds whendividend is paid later on.

May be treated as an appropriation of profits : In this case,proposed dividend for the current year will be added back tocurrent years profits in order to find out funds from operations, ifsuch amount of dividend has already been charged to profits.Payment of dividends will be shown as an application of funds.

In case no specific directions are given with regard to the treatment of

these two items, it is advised that assumptions are clearly stated.


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Funds Flow Vs. Income Statement

Fund Flow

Deals with financial resourcesrequired for running thebusiness. Explains how fundswere obtained & used.

Matches funds raised and fundsapplied during a particularperiod. The sources andapplications of funds may becapital or revenue in nature.

Sources of funds are many,besides operations such as sharecapital, debentures, sale of fixedassets etc.

Income Statement

Discloses the result of businessactivities i.e how much hasbeen earned and how it hasbeen spent..

Matches incomes of a periodwith the expenditure of thatperiod, both of which arerevenue in nature.

An income statement whichdiscloses the results ofoperations cannot evenaccurately tell about the fundsfrom operations alone becauseof non-fund items likedepreciation, being included

therein.


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Uses Of Funds Flow Statement

Explains the Financial consequences of business

operations: Helps the financial analyst in advising his employer /client regarding directing of funds to those channels which will be most

profitable for the business.

Acts as an instrument for allocation of resources: The fundsshould be managed in such a way that the business is in a position to

make payment of interest and loan installments as per the agreed

schedule.

It is a test as to the effective or otherwise use of capital:The adequacy or inadequacy of working capital will tell the financial

analyst about the possible steps that the management should take for

effective use of surplus working capital or make arrangements in case

of inadequacy of working capital.


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Cash Flow Statement

Cash flow statement is a statement of

inflows(sources) and outflows(uses) of cash

and cash equivalents in an enterprise during a

specified period of time.

A cash flow statement summarizes the causes

of changes in cash position of a business

enterprise between dates of two balance

sheets.


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Classification

As per Accounting Standard-3, the changes

resulting in cash inflows and cash outflows

arise on account of three types of activities-

1) Cash flow from Operating Activities

2) Cash flow from Operating Activities

3) Cash flow from Financing Activities


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Contd

Cash flow from Operating activities: Operating activitiesare the principal revenue activities of the enterprise. Hence,

these are the results of those transactions and events that

determines the net profit of loss.Examples-

Cash inflows-

Cash sales and cash received from debtors

Cash received from royalty, fees, commission, etcCash Outflows-

Cash purchases and payment to creditors

Payments of taxes, wages, salaries, rent, insurance, etc


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Contd

Cash flows from Investing activities: Investing activitiesinclude the acquisition and disposal of long term assets such

as plan, machinery, furniture, land building, etc.

Examples-Cash Inflows-

Sale of fixed assets

Sale of investments such as shares, debentures

Cash outflows-

Purchase of fixed assets

Purchase of shares, debentures, etc


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Contd

Cash flows from Financing activities: These are theactivities that result in the size and composition of the

owners capital and borrowing of the enterprise.

Examples-Cash Inflows-

Cash receipts from issue of shares, debentures, etc

Cash receipts from loan raised

Cash outflows-

Cash payment for redemption of preference shares and

debentures

Payment of interest and dividends


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Objectives & Uses

The primary objective of CFS is to provide information

regarding the cash receipts and payments of an

enterprise for an accounting period.

In, brief, the cash flow statement serves the following

purposes:Helpful in planning and co-ordination

Useful in Internal Financial management

Payment of dividends

Helpful in short term financial decisions

Explains reason for surplus or shortage of cash


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Difference Between Funds Flow and

Cash Flow

Fund flow statement Cash flow statement

Based on wider concept of fund

(working capital)

Based on narrower concept of

funds (cash)

Based on accrual basis of

accounting.

Based on cash basis of

accounting

Schedule of changes in

working capital is prepared

No such schedule is prepared


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Difference Between Funds Flow and

Cash Flow ( contd)

Fund flow statement Cash flow statement

It reveals the sources and

applications of funds. Netdifference between sources and

uses of funds represents net

increase or decrease in working

capital

It is prepared by classifying all

cash inflows and outflows.Net difference represents net

increase or decrease in cash and

cash equivalents

It is useful in planning

intermediate and long term

financing

It is useful for short term

analysis and cash planning of

the business.

Sanjay Marketing Finance

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