10.funds flow analysis

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Financial and Management Accounting Unit 10

Sikkim Manipal University 184

Unit 10 Funds Flow Analysis

Structure:

10.1 Introduction

Objectives

10.2 Meaning

Self Assessment Questions 1

10.3 Concept


10.4 Technique


10.5 SourcesSelf Assessment Questions 4

10.6 Increase in funds


10.7 Decrease in Assets


10.8 Increase in Liabilities


10.9 Increase in Networth


10.10 Sources


10.11 Increase in Assets

Self Assessment Questions10

10.12 Decrease in Liabilities


10.13 Networth


10.14 Flow of funds


10.15 Transaction not affecting flow


10.16 Steps in preparation of funds flow statements


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10.17 Computation of changes in working capital


10.18 LayoutSelf Assessment Questions 17

10.19 Treatment of certain items


Terminal Questions

Answer to SAQs and TQs

10.1 Introduction

The usefulness of developing certain financial statements as an aid to evaluate past and / or

present performance of a business concern is unquestionable and beyond any dispute. The

Income Statement reports the revenues earned and expenses incurred or outstanding. The

Balance Sheet conveys about the deployment of funds in various assets and equities The Fund

Flow analysis is a modern technique of analyzing the movement of funds of a concern. The

Fund Flow statement shows the movement of funds between two balance sheet dates. As per

Robert N. Anthony the Funds Flow statement describes the sources from which additional funds

were derived and the use to which these funds were put. Such a statement is becoming more

and more popular and is being increasingly published as part of the annual accounts. Para 20 of

International Accounting Standards 7 reads as follows :A statement of changes in financial position should be included as an integral part of financial

statements. The statement of changes in financial position should be presented for each period

for which the income statement is prepared.

The inclusion of such a statement, therefore, is very helpful to improve the understanding of the

operations and activities of an enterprise for the reporting period.

Learning Objectives:

After studying this unit, you should be able to understand the following

1. Understand the meaning and the concepts of funds flow statement.

2. Familiar with techniques of fund flow statement.

3. Preparation of fund flow statement.


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10.2 Meaning of Fund Flow Statement

Statement of Sources and Uses of Funds is a statement which depicts the sources from which

funds are obtained and the uses to which they are being put. It is essentially derived from the

analysis of changes which have occurred in assets and equities between two Balance Sheets

periods. It is not the end product of accounting records. The statement speaks about the

changes in financial items of Balance Sheets prepared at two different dates. Therefore, the

funds flow indicates the inflows and outflows of funds during a particular accounting period

generally a year. The flow exhibits the movements of funds in both the directions inside and

outside the business. As such, the term flow in the context of funds indicates the transfer of

cash or cash equivalent from asset to equity or one equity to another equity or from one asset to

another asset.


1. Fund flow statement is _________ From _________ Changes in _____ and ____.

2. FFS speaks about changes in _______________________ Balance Sheets.

3. Flow exhibits the flows _______________ And ________________ business.

4. Flow refers to transfer of ___________________ And __________________.

10.3 Concept of Fund

The term funds has been defined in a number of ways in financial circles. The three common

usages of the term are cash , working capita and total financial resources..

Cash: Under this concept, the term funds is used only in the sense of cash. Here, only the

changes in cash are considered. Hence, the statement is called Cash Flow statement. This

statement aims at listing the various items which bring about changes in the cash balance

between two balance sheet dates. Cash planning becomes useful for control purposes.

Using this method has certain disadvantages. Since cash is considered as short term assets,

they are subjected to short term fluctuations. A delay in making payment to suppliers and a

provision of one months credit for making a payment of land purchases may show sufficient cash

flow . They may reflect a satisfactory position. But it is not a reality. Therefore, cash equivalent

concept of fund is useful only for short term financial planning and not for long term or

general financial position assessment.

Working Capital: Working capital is Current asserts minus current liabilities. It is an

alternative measure of the changes in the financial position. All those transactions which increase


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or decrease working capital are included in this statement. It excludes all such items which do

not affect the working capital. The working capital concept of funds is in conformity with normal

accounting procedures. Hence, a funds flow statement based on this concept fits well with the

other statements. Moreover, working capital is also a measure of short term liquidity of the firm.Therefore, an analysis of factors bringing about a change in the amount of net working capital is

useful for decision making by shareholders, creditors and management. Due to these reasons,

the working capital approach to funds is more useful than the cash approach.

Total Financial Resources : The term funds is very often used in the sense of useful financial

resources also. Cash approach and working capital approach both are incomplete and

inadequate to the extent that they omit a few major financial and investment transactions. Such

items do not affect net working capital. But, if they are included, they would certainly provide

qualitative information for the decision making.,

For example issuing equity shares and debentures for purchase of buildings or assets shall not

have any effect on the working capital. But it is a significant financial transaction that should be

disclosed. Therefore, this concept seems to be the best approach to disclose the changes in the

financial position as compared to other concepts. It is in conformity with the statutory regulations

and legal requirements.


1. The three common funds are __________________________.

2. Cash planning is used for ____________________________.

3. Cash equivalent is used for ___________________________.

4. Working capital is __________________________________.

5. Non working capital items are ________________________.

6. Working capital means ______________________________.

7. Total financial resources considers _____________________.

8. Total financial resources provide _______________________.

Objectives:

The main objectives of the funds flow statement is normally based on the purpose its going to be

served. These are :

a) to help in understanding the changes that are likely to take place in the assets and liabilities

portfolio. These may not be readily available from the income statement.


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b) To inform the stakeholders as to how a firm can use the funds which are available at its

disposal.

c) To bring out the financial strengths and weaknesses of the business.


1. The objectives of FFS is to identify ______________ in ______. and ____.

2. FFS is to bring out _______________________.

10.4 Techniques Of Preparing A Funds Flow Statement

Like other accounting statements, the structure of Fund Flow Statement is based on the equality

of financial assets and liabilities including capital. The basic understanding is that the funds are

obtained through profit, external borrowings or by issue of shares. If funds are not available

readily from these sources, the other alternative available is to sell the fixed assets andinvestments. . The preparation of Funds Flow Statement is normally based on the following to

bring to scientific method of preparation.

a) Schedule of working capital changes

b) Statement of Sources and Uses of Fund.

Schedule of Working Capital Changes : It is also known as Comparative change in Working

Capital Statement or Working Capital Variation Statement. The net change in working capital

is projected here in the place of individual changes in all the current assets and current liabilities

in the Funds Flow Statement. The statement indicates the amount of working capital at the end of

two years. It shows the increase or decrease in the individual items of current assets and current

liabilities. The effect of the changes in the individual items of the current assets and current

liabilities on working capital is also presented clearly and precisely. The difference in the amount

of working capital at the end of two years will depict either the increase or decease in working

capital. While ascertaining the increase or decrease in individual items of current assets and

current liabilities and its impact on working capital, the following Rules should be taken into

account.

i) increase in Current Assets will increase the Working Capital

ii) Decrease in Current Assets will decrease the Working Capital

iii) Increase of Current Liabilities will decrease the Working Capital

iv) Decrease in Current Liabilities will increase the Working Capital


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It is, therefore, noted that the changes in the items of current assets are positively correlated to

the changes in the working capital. On the other hand, changes in current liabilities are inversely

related to the changes in the working capital.


1. FFS is based on ___________________________.

2. FFS is prepared based on ___________________.

3. Working capital schedule indicates the ______________________.

4. Increase in current assets ___________________ the Working capital.

5. Decrease in CA _____________________________________ the WC.

6. Increase in CL ______________________________________ the WC.

7. Decrease in CL ______________________________________ the WC.

8. Changes in CA ________________________________ changes in WC.

9. Changes in CL ________________________________ changes in WC.

10.5 Sources of Funds

The transactions that increase the working capital are sources of funds. Following may the

sources of funds in a concern.

Funds from operations : Profit earned by the concern during the current year is deemed to be

the source of funds. It is very important source of funds inflow. Net profit is arrived at by

deducting cost of goods sold and other expenses from total sales revenue. However, the profit so

calculated is seldom equal to the funds from operations because there are many items which are

debited or credited in the Profit and Loss Account which do not affect working capital. Therefore,

in calculating the funds from operations, the following adjustments must be kept in mind:

Items to be added back to net profit :

a. Non fund revenue deductions: These are items which are debited to Profit and Loss

account. These do not cause outflow of funds such as depreciation and depletion on non

current assets, amortization of fictitious and intangible assets, preliminary expenses,

redemption of preference shares or debentures, deferred charges, advertising suspense

account written off. If non fund expenditures does not affect the current assets such as

unexpired insurance, do not add back. So also, all allowances for income tax payable in

future years are excluded.


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b. Non trading charges or losses : These items which were debited to Profit and Loss account

reduce the profits but they do not cause any outflow of funds. Hence, profit should be

corrected by adding back all such charges and losses. These include appropriation of

retained earnings such as general reserve, dividend equalization fund, reserve forcontingencies, sinking fund. In addition the dividend on shares must be added back since it

is an appropriation and not trading charge. The losses arising out of sale of land, buildings,

machinery, long term investments which were written off to the profit and loss account must

be added back. Do not add the loss arising out of sale of a current asset such short term

investments. It is a trading loss and hence it will not require any adjustment. The amount set

aside as provision for current taxation will also be added back. This will be considered only

when the provision for taxation is treated as a charge on profits.

Items to be deducted from Net Profit.

The non fund and non trading revenue receipts or incomes must be deducted

Net profit in order to compute funds from operations. The items are:

(a) Dividend received or receivable: Although this transaction increases the current assets

such as cash and debtors, it is not a trading income. Hence, it should be deducted from the

net profits to determine the funds from operations.

(b) Retransfer of excess provisions: Where the provisions made for taxation, depreciation,

doubtful debts exceed the genuine requirements, the excess amount is transferred back to

the Profit and loss account. It does not create any inflow of funds since it is an accounting

entry. Hence, deduct it.

(c) Profit on sale of non current assets: It is a non trading income. Hence it must be

eliminated from the amount of profit.

(d) Appreciation in fixed assets: The amount of appreciation on revaluation of fixed assets is

normally credited to the profit and loss account. If it is so, deduct it from the profit to compute

the funds from operations.


1. Increase in working capital ____________________.2. Decrease in WC _____________________________.

3. Net profit is ________________________________.

4. Items to be added back to net profit are __________.

5. Some of non fund revenue items _______________.


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6. Non trading losses include ___________________.

10.6 Increse in Funds

In a nutshell, the sources of funds can be observed as follows :

a) increase of fresh shares derived from increase in share capital.

b) Issue of debentures derived from increase in debentures.

c) Raising of new loan derived from increase in long term loans

d) Sale of fixed assets for cash or for other current assets derived from decrease in fixed assets

and additional information.

e) Non trading income

f) Profit from operations before deducting non cash items of expenses and losses and before

additional non cash, non trading incomes.

g) Decrease in working capital derived from the Schedule of Working capital changes.


1. Increase in share capital is ___________________________ of cash.

2. Increase in debentures _______________________________ of cash.

3. Increase in raising loans ______________________________.

4. sale of fixed assets __________________________________.

5. Non trading income is _______________________________.

6. Profit from operations is _____________________________.7. Decrease in working capital is ________________________.

10.7 Decrease in Assets

Decrease in assets is always a source of funds for the business. Decrease may be in many

ways: such as cash received from debtors, sale of goods for cash, Bills realized, sale of assets,

fixed assets through provision for depreciation or amortization of fictitious assets. Decrease in an

item of assets results in either a parallel decrease in some other liabilities or a parallel increase in

some other item of assets example repayment of bank loan.. It should be remembered at the

very outset that the decrease is ascertained by comparing the cost of fixed assets and not by

comparing the written down value i.e cost less depreciation. If fixed assets have been shown not

at cost but at written down value, then cost may be ascertained by adding total depreciation

written off to date (generally known as accumulated depreciation) to the written down value The

decrease in fixed assets results in sale of fixed assets. Specific information is generally given in


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the problem about this. The decrease in fixed assets not on account of depreciation or writing off

is known as sale of fixed assets. It must be noticed that the total sale proceeds and not the cost

of fixed assets sold are shown as source of fund. If the information in respect of sale of fixed

assets is not clearly given, the following steps should be taken to find out the value of saleproceeds.

Cost of Fixed Assets (Previous Year)

Less: Cost of Fixed Assets of Current year ( )

Cost of Fixed Assets x x x x x x x x

ADD : Profit or DEDUCT loss on sale

Sale Proceeds to be treated as source XXXXXXXXXXXXXX

The amount of profit or loss on sale of fixed assets for the above purpose derived from profit and

loss account or from capital reserve or from any specific reserve. This is based on the fact that

such profit or loss are credited or debited or transferred to these accounts in accordance with the

accounting principles. It must be remembered that profit or loss on sale of fixed assets are not

included in profit from operation for the purpose of this Fund Flow Statement.

If such profit or loss has been included in Profit and Loss Account , adjustment has to be made.

If there is profit on sale of assets, the net profit disclosed by Profit and Loss Account is reduced

by the amount of profit earned on the sale of fixed assets. On the other hand, the net profit

shown by Profit and Loss Account is increased by the amount of loss incurred on the sale of fixed

assets.

Example:

The land and buildings account had a balance of Rs.5,00,000on Jan 2007. A piece of land has

been sold . There is no purchase. Rs.30,000 depreciation has been charged in 2007. The profit

on sale has been credited to Capital Reserve Account . The balance stood on January 1, 2007

was Rs.20,000 and Rs.50,000 on December 31. The balance of land and building account as on

December 31 is Rs.4,50,000. Find the sale proceeds.

Solution

Balance of land and building on Jan 1, 2007 5,00,000

LESS : Depreciation charged (30,000)

4,70,000


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LESS: Balance of Land and Building on Dec 31 ( 4,50,000)

Cost of Land sold 20,000

ADD : Profit on sale (derived from capital reserve) 30,000

(closing minus opening balance

Rs.50,000 minus Rs.20,000)

Sale Proceeds 50,000


1. Decrease in assets is _________________________________.

2. Profit or loss on sale of fixed assets ____________________.

10.8 Increase In Liabilities

The increase in liabilities is always a source of funds for the business. It may occur as a result of

many transactions such as equity share capital or / and debentures to the public., purchase of

goods on credit. Outstanding expenses are also considered as source of funds since payments

are postponed and cash saved is parked in the business. A comparison of the amount of the

items of long term liabilities i.e debentures and mortgage and other loans for the current year and

previous year will disclose the increase or decrease in the long term liabilities. Additional

information should also be taken into account for determining the correct amount of increase or

decrease for the purpose of this statement.

Any increase on account of the issue of debentures for consideration other than cash or current

assets for the purchase of fixed assets or redeeming other debentures or preference shares

would not at all be shown in the statement because in such a case there is no flow of fund.


1. Increase in liability is ______________________ .

2. Outstanding expenses is __________________ .

10.9 Increase In Net Worth

There can be only two main channels of increase in net worth or equity :

a) procurement of more funds by issue of additional shares

b) through accumulation of retained earnings or profits in business

As the increased in owned funds is concerned, it happens only when the business has plans for

expansion, diversification, modernization. The increase in paid up equity


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Share capital is not a regular feature. Its occurrence is only sporadic. But profit generated from

operations is a normal feature and is virtually a continuous process from year to year. Profit

earned during an operating period increases the new worth of the business and hence it is

always considered as a source of funds. Sometimes, the premium received on sale of equityshares and credited to share premium account is also a source of funds as it adds to the size of

net worth .

Share capital consists of equity share capital and preference share capital. The change in equity

share capital is always in the form of increase it can never be in the form of decrease. The

increase in equity share capital as per Balance Sheet values must be adjusted in terms of

additional information. If the increase has taken place on account of the issue of fresh shares,

only that portion of increase should be treated as sources which is due to the issue of fresh

shares for cash and other current assets. Increase on account of share issues for consideration

involving the purchase of fixed assets or redemption of preference shares or debentures shall

not partake the character of inflow of funds and hence should not be shown in the statement. If

fresh shares have been issued at premium, the amount of premium must be added to the

increase in share capital for the purpose of showing it as source of fund. If the fresh shares

have been issued at discount, the amount of discount must be deducted from the increase in

share capital because it does not involve inflow of fund.

Example:

The opening and closing balance of Share capital are Rs.6,00,000 and Rs.9,50,000 respectively.

The Preference Share capital included in opening balance is Rs.1,00,000. During the year,

Rs.75,000 worth of Preference shares were redeemed at 8 % premium. Bonus shares at Re.1

for every five equity shares held . In addition, a business was purchased by issue of Rs.90,000

shares at a premium of 10 %. The opening and closing balance in the Premium Account is

Rs.8,00,000 and Rs.14,000 respectively. Calculate the further fresh issue.

Solution:

Share capital at close 9,50,000

DEDUCT : Share capital opening 6,00,000

Less: Redemption of PreferenceShares ( 75,000)

( 5,25,000)

4,25,000

Deduct: Shares issued for non cash items (90,000)


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3,35,000

DEDUCT : Bonus shares ( 1 / 5 x 5,00,000) (1,00,000)

(1/5 of 6,00,000)

2,25,000

ADD: Share premium. (14,000 + 6,000 minus

8,000 minus 9,000) 3,000

Fresh issue of Shares 2,28,000


1. Decrease in net worth is through __________________________.

2. Increase in net worth is needed for ________________________.

3. Profit earned _________________________________ net worth.

4. Premium on shares is __________________________.

5. Change in equity shares is always ________________.

6. Decrease in preference share capital is ____________.

10.10 Sources Of Funds

The use of funds results in cash outflows. The outflows are known as :application of funds. The

uses of funds are mainly concerned with.

a) Redemption of Preference shares in cash derived from decrease in share capital.b) Redemption of debentures in cash derived from decrease in debentures

c) Repayment of loan derived from decrease in long term loans

d) Purchase of fixed assets for consideration other than shares, debentures or long term debt

derived from increase in fixed assets and additional information.

e) Loss from operations

f) Payment of dividend in cash


1. Use of funds result in ________________________.

2. Redemption of Preference shares is _____________.

3. Redemption of debentures is __________________.

4. Redemption of long term loan is _______________.

5. Purchase of fixed asset is _____________________.

6. Loss from operations is ______________________.


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7. Payment of dividend is ______________________.

10. 11 Increase In Assets

The increase in fixed assets is known in the accounting language as Purchase of fixed assets.

In order to find out the increase in fixed assets, cost of fixed assets of previous year as reduced

by the cost of fixed assets sold during the current year is deducted from the cost of fixed assets of

the current year. In other words, the increase in fixed assets is calculated as under :

Cost of Current year fixed assets

DEDUCT Cost of previous fixed assets ..

LESS: Cost of fixed assets sold or

Written off during the

Current year (.) (..)

INCREASE in fixed assets x x x x x x x

Example: The opening and closing written down balances of an asset are Rs.5,00,000 and

Rs.5,50,000. The accumulated depreciation has been Rs.1,50,000 at the beginning and

Rs.1,90,000 at the close. A machine costing Rs.30,000 (accumulated depreciation Rs.18,000)

was sold during the year for Rs.9,500. Calculate the purchase price of the fixed assets.

Solution

Closing cost of asset (closing value + closing accumulated

Depreciation : 5,50,000 + 1,90,000 7,40,000

DEDUCT : Opening cost of Asset (opening

Value + opening accumulated Depreciation

5,00,000 + 1,50,000 6,50,000

Less : Cost of asset sold (30,000)

(6,20,000)

1,20,000

Sometimes, it may happen that the cost figures cannot be ascertained on the basis of information

available. Increase in fixed assets, in this case, has to be found out with reference to the written

down value along with annual depreciation. If no purchase of fixed assets were made during

the current year, then the value of fixed assets shown in the Balance Sheet of the current year


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should be equal to the values of the previous year minus annual depreciation for current year.

The excess of current years value over previous years value minus annual depreciation will be

treated as increase. This will represent the purchase of fixed assets.

Current year written down value of Asset ..

DEDUCT Previous year WDV

of Asset

Less: Current year Depreciation () ( ..)

_______________

Increase in Fixed Asset being Purchases x x x x x x

Example: The written down value of a Machinery at the beginning and at close were Rs.2,00,000

and 1,75,000. An old machine whose written down value was Rs.12,000 was sold for Rs.6,500.

Rs.32,000 depreciation was charged during the current year. Calculate the purchase price.

Solution:

Current year written down value of Machinery 1,75,000

DEDUCT : Previous year written down

Value of Machinery 2,00,000

Less : Current year depreciation ( 32,000)

1,68,000

Less: written down value of machine Sold ( 12,000)

(1,56,000)

Purchase price 19,000


1. Increase in fixed asset is known as _____________________.

2. Purchase is _______________________________________.

3. The excess of current year minus (previous year + Depreciation) is treated as

________________.

10.12 Decrease In LiabilitiesIt implies application which is the flow of funds out of business. Decrease in liability may be done

due increase in one or more liability items or due to decrease in one or more asset items. It may

also be partly due to increase in liability and partly due to decrease in assets. . Any amount of

premium on the redemption of debentures should be adjusted as deduction . Any decrease on


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account of redemption of debentures through the issue of another debentures or preference

shares should also not be shown in the statement.

Example:

On January 1, 2007, the balance of 8 % Debentures Account stood at Rs.5,00,000. Rs.60,000

debentures were repaid at 5 percent premium. Rs.75,000 debentures were purchased at Rs.95

from the market and cancelled. The closing balance of debentures was Rs. 2,00,000. Calculate

the outflow of funds.

Solution:

Opening balance of Debenture Account 5,00,000

LESS: Closing balance of Debenture Account ( 2,00,000)

Decrease 3,00,000

LESS : Discount on cancellation (Rs.75,000 / Face

Value of Rs.100 each or 750 debentures x

Rs.5 each (Rs.100 minus Rs.95) ( 1,250)

2,98,750

ADD: Premium (Rs.60,000 x 5 / 100) 3,000

Outflow of funds 3,01,750


1. Decrease in fixed liabilities ________________________ funds.

2. Premium on redemption of debentures is _____________ .

10.13 Net Worth

It may be used due to (a) loss from operations (b) payment of cash dividend out of accumulated

reserves and (c) return of a part of paid up share capital to shareholders implying reduction of

share capital a rare occurrence. If there is decrease in preference share capital and this

decrease is on account of redemption of these shares in cash or other current assets, such

decrease should be shown as use of fund. But the decrease on account of redemption by the

issue of another preference shares or equity shares or debentures, shall never be shown in the

statement because it will not involve outflow of fund. If the preference shares have been

redeemed at a premium, necessary adjustments should be made


1. New worth is due to _______________________.


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2. Net worth is also due to ___________________.

3. Net worth can be ________________________.

10.14 Flow of FundsIt refers to change in fund. Increase of funds of any transaction is a source and decrease of

funds in any transaction is application or uses of funds. But the transactions which do not result

in any change in the funds is called Non fund. Flow of fund takes place when a business

transaction brings a change in the working capital. Such change may be increase or decrease.

The increase is a positive change and the decrease being the negative. These directions in

change are known as fund elements or fund factors. They are commonly known as inflows and

outflows. The basic rule is :

Flow of fund if a transaction involves :

a) Current assets and fixed assets that is machine sold for cash

b) Current assets and fixed liabilities that is issue of debentures to the public

c) Current assets and owner equity that is issue of shares for cash

d) Current liabilities and fixed assets that is transfer of assets to discharge a claim

e) Current liabilities and fixed liabilities that is conversion of creditors due by issue of

debentures.

f) Current liabilities and capital that is conversion of creditors into owners equity by issue of

equity shares.


1. Flow refers to __________________________.

2. Increase in funds _______________________.

3. Decrease in funds ______________________.

4. Non change is known as _________________.

5. Flow takes place due to __________________ working capital.

6. The increase in fund is a __________________ change.

7. The decrease in fund is a __________________ change.

10.15 Transactions that do not affect the flow of Funds

a) Current assets and current liabilities creditors paid

b) Fixed assets and fixed liabilities purchase of assets for debentures

c) Fixed assets and capital purchase of assets by issue of equity shares.


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1. Transactions not affecting flow are _______________________.

10.16 Steps In Preparation Of Funds Flow Statement

There are three steps involved in the preparation of a Fund Flow Statement (FFS). They are as

follows:

a) Preparation of Statement of changes in working capital or Schedule of changes in working

capital.

b) Preparation of Adjusted Profit and Loss Account (APL)

c) Statement of changes in Financial position as per AS 7


1. First step in preparation of FFS is __________________.2. Second step in the preparation of FFS is _____________.

3. Third step in the preparation of FFS is _______________.

10. 17 Computation of Changes in Working Capital and Funds from Operations

It is a customary practice that only the net changes in working capital should be shown in the

Fund Flow Statement instead of individual changes. Here, the current assets and current

liabilities are considered. For this purpose, a separate statement or schedule is being prepared.

Individual items are entered here. The opening and closing balances are entered one after the

other. The corresponding increase or decrease are entered based on the following rules :

a) Increase in a current asset item increases working capital.

b) Decrease in a current asset item decreases working capital.

c) Increase in a current liability item decreases working capital.

d) Decrease in a current liability item increases working capital .

Insert the total of current asset and current liabilities of both opening and closing periods. Say,

the total of current assets as A and that of total of current liabilities as B. Deduct A minus B. The

answer is known as net Working capital. If the working capital at the end of the current year is

more than the working capital at the end of previous year, the excess is called as increase in

working capital. Otherwise, if previous years working capital is more than the current years

working capital, the difference is called as Decrease in working capital. Increase in working

capital is shown as application of funds and decrease in working capital as source of funds in the

Funds Flow Statement.


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The funds from operation can be found with the help of preparing an Adjusted Profit and Loss

Account.


1. Individual items are projected in ___________________.

2. Working capital equation is _______________________.

3. A is total _____________________________________.

4. B is total ____________________________________.

5. Working capital is _____________________________.

6. Net increase or decrease is ______________________.

10.18 Layout

The layout for schedule of changes in Working Capital is as follows

Balances as on Effect on

Details Last Current Increase Decrease

Year Year

CURRENT ASSETS

Cash in hand

Cash at Bank

Sundry Debtors

Bills ReceivableStock or Inventory

Prepaid expenses

Total Current Assets, Say A

CURRENT LIABILITIES

Sundry Creditors

Bills Payable

Bank Overdraft

Outstanding expenses

Total Current Liabilities, Say B

NET WORKING CAPITAL

A minus B

Increase or Decrease in Working


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Capital (Balancing figure)

Example: DR Ltd provides the following information

Jan 1 Dec 31

In Rupees

Sundry Debtors 65,000 1,05,000

Cash in hand 13,000 20,000

Cash at Bank 15,000 20,000

Bills Receivable 16,000 30,000

Inventory 90,000 84,000

Bills Payables 12,000 8,000

Outstanding expenses 6,000 5,000

Sundry Creditors 30,000 58,000

Bank Overdraft 30,000 42,000

Short term Loans 32,000 36,000

Prepare a schedule of changes in working capital


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Solution

Schedule of changes in Working Capital

Balances as on Effect of WC

Details Jan 1 Dec 31 Increase DecreaseCurrent Assets

Cash in hand 13,000 20,000 7,000

Cash at Bank 15,000 20,000 5,000

Sundry Debtors 65,000 1,05,000 40,000

Bills Receivable 16,000 30,000 14,000

Inventory 90,000 84,000 6,000

Total Current Assets, A 1,99,000 2,59,000

Current Liabilities

Sundry Creditors 30,000 58,000 28,000

Bills Payables 12,000 8,000 4,000

Outstanding expenses 6,000 5,000 1,000Bank Overdraft 30,000 42,000 12,000

Short term loans 32,000 36,000 4,000

Total Current Liabilities, B 1,10,000 1,49,000

Working Capital A minus B 89,000 1,10,000

Net Increase in working capital

(balancing figure) 21,000 21,000

TOTAL 1,10,000 1,10,000 71,000 71,000


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Example :

Prepare a statement of changes in working capital from the following information.

Jan 1 Dec 31In Rupees

Share Capital 50,000 50,000

Retained earnings 14,000 40,000

Fixed Assets at cost 80,000 90,000

Provision for Depreciation on Fixed Assets 22,000 27,000

Investments in shares of subsidiaries 15,000 15,000

8% Debentures (redeemable in 5 equal

annual instalment of Rs.20,000 each,

from the current year) 20,000

Prepaid expenses 21,000 14,000

Outstanding expenses 5,000 12,000

Creditors and Bills Payables 30,000 25,000

Debtors and Bills Receivables 18,000 20,000

Cash and Bank balances 5,000 13,000

Provision for Doubtful Debts 4,000 2,000

Solution

Statement of changes in working capital during the year

DetailsBalances as on Effect on WC

Jan 1 Dec 31 Increase Decrease

Current Assets

Cash and bank balances

Debtors and B.R.

Government Securities

Prepaid expenses

Total, say A

Current Liabilities

8% Debentures

Outstanding expenses

Creditors and B.P.

Provision for Doubtful Debts

5,000

18,000

6,000

21,000

50,000

13,000

20,000

12,000

14,000

59,000

8,000

2,000

6,000

5,000

7,000

20,000

7,000

20,000

5,000

30,000

4,000

20,000

12,000

25,000

2,000


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Total, say B

Working Capital : A minus B

Net increase in working capital

59,000 39,000 3,000

29,000

( 9,000 )

29,000

20,000

20,000 20,000 43,000 43,000

Adjusted Profit and Loss Account

The Layout is as follows:

Dr. Cr.

To By

Depreciation written off Profit and Loss account

Depreciation Provision last year from Balance

Preliminary expenses written Sheet

Off Profit on sale of investments

Goodwill written off Profit on sale of Fixed assets

Discount on issue of shares and Dividend and interest received

Debentures written off from trade investments

Fixed assets discarded or

Written off

Loss on sale of fixed assets FUNDS GENERATED FROM

Loss on sale of trade investments TRADING OPERATIONS

Transfer to General Reserve, (balancing figure) transferred

to Funds Flow Statement as

Sinking Funds, Reserve Funds application of funds

Transfer to other Reserves

Premium on redemption of

Preference Shares

Provision for Tax

Provision for Final or

Proposed Dividend

Interim Dividends

Net Profit as per closing current

Year Profit and Loss Account

TOTAL


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NOTE : If debit total of APL is more than the credit total, the difference is Funds generated from

Operation : Record on the credit side of Adjusted Profit and Loss Account.

If credit total of APL is more than the debit total, the difference is funds lost in operations. Record

on the debit side of Adjusted Profit and Loss Account

The balancing figures should be transferred in opposite direction to Funds Flow statement..

Example 3: Calculate funds from operations from the following Profit and Loss Account

To By

Expenses paid and 3,00,000 Gross Profit 4,50,000

Outstanding

Depreciation 70,000 Gain on sale of land 60,000

Loss on sale of machine 4,000

Discount 200

Goodwill 20,000

Net Profit 1,15,800

5,10,000 5,10,000

Solution:

ADJUSTED PROFIT AND LOSS ACCOUNT

To Rs. By Rs.


Goodwill written off 20,000 Funds from operations 1,50,000Discount written off 200 (balancing figure)

Loss on sale of machines 4,000

Net Profit 1,15,800

2,10,000 2,10,000

Example 4: Following are the extracts from the Balance sheets of DR Lt.

31 3 2007 31 3 2008

Rs. Rs.Profit and Loss account 11,100 14,800

General Reserve 7,400 9,250

Goodwill 3,700 1,850

Provision for depreciation on asset 3,700 4,400

Preliminary expenses 2,200 1,500


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During the year, the company sold land whose book value was Rs.50,000 for Rs.54,000 and paid

an interim dividend of Rs.2,000

Calculate funds from operations.

Solution

ADJUSTED PROFIT AND LOSS ACCOUNT

To Rs By Rs.

General Reserve Balance brought down 11,100

(9,250 minus 7,400) 1,850 being opening balance

Goodwill written off Profit on sale of land 4,000

(3,700 minus 1.850) 1,850

Preliminary expenses

Written off 700 Funds generated from

Depreciation written operations (balancing

Off 700 figure) 6,800

Interim dividend paid 2,000

Closing balance of Profit

And Loss account 14,800

21,900 21,900

NOTES:

1. There is an increase in the balance in General Reserve. It implies that some amount has

been transferred to the account from the Profit and Loss account. This is an appropriation of

profit which does not result in any outflow of funds.

2. The balance in Goodwill Account and preliminary expenses account has come down which

indicates tht the difference has been written. This also does not result in an outflow of funds.

3. The increase in provision for depreciation is on account of current years depreciation which

does not result in any outflow of funds.

4. Profit on sale of land and interim dividend being non operating items are to be separately

shown as source and application of funds in the Funds Flow Statement.


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Example 5: The following information is provided :

Opening balance of Plant Rs.1,32,500. Closing balance of Plant Rs.1,97,500. Provision for

Depreciation in Plant at the beginning 45,000 and at close Rs.61,000. During the year

Rs.65,000 worth of Plant was purchased in exchange for fully paid debentures and old Plantcosting Rs.40,000 was sold for Rs.34,000. Depreciation provided Rs.18,000. Calculate the flow

of funds.

Solution:

Plant Account

To By

Opening Balance 1,32,500 Bank : Sale of Plant 34,000

Debenture Account 65,000 Provision for Depreciation

(Plant purchased) Account : Depreciation on

sold 18,000

Adjusted P&L Account

Profit on sale 12,000* Closing balance 1,97,500

Bank Account : Plant

Purchased (balancing

Figure) 40,000

2,49,500 2,49,500

Calculation of Profit on sale : 34,000 minus (40,000 18,000) = 12,000

Provision for Depreciation on Plant Account

To By

Plant Account

:Depreciation Opening Balance 45,000

On plant sold 18,000 APL : Current year

Closing Balance 61,000 Depreciation (bal.figure 34,000

79,000 79,000

Note: For all Asset Account, record the opening balance on the debit side and closing balance on

the credit side of the concerned Asset Account. For all liabilities , record the opening balance on

the credit side and the closing balance on the debit side.


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10.19 TREATMENT OF CERTAIN ITEMS

There are certain items whose treatment is not uniform. Different authors differ differently. But,

in this study material, an uniformity is maintained. The likely arguments have been provided for

treating items on a particular principle. The items are :

Provision for Bad Debts

Sometimes, it is shown as reserve for bad / doubtful debts. Actually, this item is shown as

deduction from total book debts to the asset side of the Balance Sheet. Therefore, this item

should be deducted from the amount of debtors shown in the schedule of working capital

changes. Since such treatment may complicate the calculation work, it is suggested that it should

be shown along with current liabilities, although, it does not belong to that category.

Provision for Tax:

DO not treat this item as a current liability. The Provision has to be made to meet the tax liability

of current year. If there is a Provision for last year, it has to be paid this year. Hence, the last

year Provision actually becomes the current year cash outflow. Hence record it in the Funds flow

statement.

Proposed Dividend

Normally, the proposed dividends are given as Balance Sheet item on the liability side. The

Directors propose the final dividend which needs to be approved by the General Meeting. Hence,

it is fair to assume that the proposed dividend is not a current liability. Do not show in the

schedule of working capital changes. The last year proposed dividend should be paid during the

current year, hence a cash outflow

Investments

It poses problems in its treatment. The Rule is :

a) if the investments are in the form of Government or other marketable securities, treat it as

current assets.

b) If it is mentioned as trade investments, that is investments in shares and debentures of

another companies, treat it as fixed assets.

c) Ifnothing is mentioned specifically, the treatment is :

: if investments have been sold simultaneously, treat it as current assets

: in other cases, treat it as Fixed Assets.


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Depreciation

Normally, the value of deprecation will be provided in the problem as an adjustment items.

Depreciation is a non cash item. It is, therefore, charged to Profit and Loss and recorded in the

concerned Fixed Assets Account. If the depreciation is given as a percentage, calculate thevalue on the opening balance of the concerned account.. If the value of depreciation is not

given, it has to be found out as follows :

Opening balance of Fixed Assets ..

ADD: Purchases .

LESS : Fixed assets sold (.)

LESS : Closing balance of fixed assets (.)

Depreciation charges x x x

If a concern intends to show its fixed assets at its cost price, the periodic annual depreciation is

shown under liabilities side as Provision for Depreciation commonly known as Accumulated

Depreciation Fund Account. If there were to be an Accumulated Depreciation Fund Account in

already in operation, the current year depreciation is charged against this Provision for

accumulated Depreciation Account and not recorded directly into Adjusted Profit and Loss

Account . In other words, the current year depreciation is routed through the Provision Account.

Increase / Decrease in Fixed Assets

The increase or decrease by means of cash is recorded in the FFS. Increase or decrease due to

purchase consideration through shares and debentures are not recorded.

Increase / Decrease in long term liabilities

Compare debentures and mortgages as per the Balance Sheet figures. Only consider if cash is

the main striker to cause the increase or decrease. If the changes were to be due to

consideration other than cash or current assets, do not record it in the FFS..

Hidden Items

Prepare the necessary ledger accounts concerned in the fixed assets, fixed liabilities and share

capital and carry out all the necessary adjustments. The balancing figure, if any, would be the

cash transactions. For all non, cash transactions, concentrate on the Adjusted Profit and Loss

Account.


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1. Provision is shown as _______________________

2. Provision for doubtful debts is _______________ from gross debtors

3. Provision is shown in _______________________4. Provision for tax may be _____________________

5. If Provision for Tax is maintained , treat it in _________________

6. Proposed dividend is shown on ________________ of Balance sheet

7. Proposed dividends are to be approved by _____________________

8. Proposed divided. Is not considered as ________________________

9. Last year proposed dividend is cash __________________________

10. Government investments are _______________________________

11. Investments in shares and debentures are ______________________

12. Depreciation is _____________________

13. Depreciation is a ___________________

14. If Depreciation is given as a percentage, calculate on _____________

15. If Provision for depreciation account is maintained, charge the current depreciation to

_____________ and not to _______________________

16. Depreciation is charged only on _______________________________

Problem 6: The Balance Sheets are given below :

Year (Rs.in lakhs)

2006 2007

Fixed Assets 50 60

Investments 10 20

Current Assets 140 150

Share Capital 100 160

Profit and Loss Account 30 30

Debentures 10 -

Current Liabilities 60 40

Depreciation charges was Rs.6 lakhs. Prepare Fund Flow statement.


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Solution:

Schedule of changes in working capital

2006 2007

Current Assets 140 150

LESS: Current liabilities ( 60 ) (40)

Working Capital : CA minus CL 80 110

Net Increase in working capital transferred to 30

FFS (application)

110 110


To By

Depreciation 6 Opening Balance 30

Closing Balance 30 Funds from Operations 6

36 36

Funds Flow Statement

Sources Applications

Issue of Equity shares 60 Purchase of Fixed Assets 16

Funds from operation 6 Purchase of investment 10

Redemption of debenture 10

Increase in working capital 30

66 66


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Problem 7 : From the following extracts, calculate funds from operations

Year

2006 2007

Profit and Loss account 50,000 80,000

Provision for taxation on 10,000 15,000

Proposed dividends 5,000 10,000

Additional information: Tax paid Rs.2,500. Dividends paid Rs.1,000.. Calculate funds from

operation taking provision for tax and provision for tax and proposed dividend as (a) non current

liabilities and (b) current liabilities.

Solution:

Provision for tax and proposed dividend are taken as non current liabilities

To By

Income tax account 2,500 Opening balance 10,000

Tax paid Profit and loss account 7,500

Closing balance 15,000 provision made (balance

Figure)

17,500 17,500

Proposed Dividend Account

To By

Dividend account being Opening balance 5000

Dividend paid during the Profit and loss account

Year 1,000 proposed dividend 6,000

Closing balance 10,000

11,000 11,000


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To By

Provision for Tax 7,500 Opening balance 50,000

Proposed Dividend 6,000 Funds from operations

Closing balance 80,000 (balancing figure) 43,500

93,500 93,500

c) If Provision of tax and proposed dividend are taken as a current liability, funds from

operations will be the difference in Profit and Loss account at the beginning and the end of

the year.

NOTES

1. In case a) Income tax paid Rs.2,500 and Dividend paid Rs.1,000 are shown as application of

funds in the FFS.

2. In case (b), there is no need to prepare proposed dividend account and provision for tax

account,. However, the opening and closing balances of the two accounts are shown as

current liabilities in the statement of changes in working capital

Problem 8: The book value of trade investments of DR Ltd as on March 1, 2006 and March 31,

2007 was Rs.50,000 and Rs.70,000 respectively. During the year, Rs.5,000 was received as

dividends, of which Rs.2,000 pertained to pre acquisition profits which have been credited to

Investments Account. Investments costing Rs.10,000 have been sold during the year for

Rs.10,000. Find the flow of funds on account of investments.

Solution:

Investments Account

To By

Opening balance 50,000 Dividend Account : Pre

Bank Account : purchase acquisition profit 2,000

Of investments (balance 32,000 Bank : sale of investments 10,000


82,000 82,000


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Notes:

1) The investments purchased were valued cum dividend. Hence, on receipt of dividends, they

were rightly credited to Investments. Hence there is no need for any further adjustment.

2) The investments sold has been at the book value. There is no profit or loss on account of thetransactions. If the transaction had resulted in profit, it will have to be deducted from net profit

to calculate funds from operations. In case of loss, it would be added to net profit to calculate

funds from operations.

Problem 9: Prepare a fun d flow statement of DR Ltd.

Year

2007 2008

Equity share capital 10,00,000 15,00,000

10 % Preference Share Capital 3,00,000

11 % debentures 8,00,000 6,00,000

Share Premium Account 1,00,000 95,000

Additional information (a) 10 % Preference shares have been redeemed at a premium of 10%,

the premium amount was charged to the share premium account (b) There has been a profit of

Rs.1,000 on the redemption of debentures.

Solution:

Equity Share Capital

To By

Closing Balance 15,00,000 Opening balance 10,00,000

Bank (Fresh issue) 5,00,000

Balancing figure

15,00,000 15,00,000

Preference Share Capital Account

To By

Bank (Redemption) 3,30,000 Opening balance 3,00,000

Premium on redemption 30,000

3,30,000 3,30,000


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Debentures Account

To By

Bank (redemption) 1,99,000 Opening balance 8,00,000

Profit on redemption 1,000Closing balance 6,00,000

8,00,000 8,00,000

Share Premium Account

To By

Preference share 30,000 Opening balance 1,00,000

capital

Closing balance 95,000 Equity share capital * 25,000

1,25,000 1,25,000

STATEMENT SHOWING SOURCES AND APPLICATION OF FUNDS

Equity share capital 5,00,000 Redemption of Preference shares 3,30,000

Share Premium 25,000 Redemption of Debentures 1,99,000

Decrease in working capital 4,000

5,29,000 5,29,000

Problem 10: The following are the summarized Balance Sheets of DR Ltd.

Liabilities 2006 2007

Share Capital 5,00,000 6,00,000

Reserves 1,50,000 1,80,000

Profit and Loss Account 40,000 65,000

Debentures 3,00,000 2,50,000

Creditors for goods 1,70,000 1,60,000

Provision for Income tax 60,000 80,000

12,20,000 12,20,000

Assets

Fixed Assets 10,00,000 11,20,000

Less : Depreciation (3,70,000) (4,60,000)

Stock 2,40,000 3,70,000

Book Debts 2,50,000 2,30,000

Cash 1,00,000 75,000

12,20,000 12,20,000

Prepare a Funds Flow statement


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Solution:

Statement of changes in working capital

Balances as on Effect on W.C

2006 2007 Increase Decrease

Current Assets

Stock 2,40,000 3,70,000 1,30,000 -

Book Debts 2,50,000 2,30,000 20,000

Cash 1,00,000 75,000 25,000 .

Total CA say A 5,90,000 6,75,000

Current Liabilities

Creditors for goods 1,70,000 1,60,000 10,000 -

Provision for income tax 60,000 80,000 20,000

Total CL, say B 2,30,000 2,40,000

Working Capital, A B 3,60,000 4,35,000

Increase in Working capital 75,000 75,000

Total 4,35,000 4,35,000 1,40,000 1,40,000


To By

Reserve 30,000 Opening balance 40,000

Depreciation 90,000 Funds from Operation 1.45,000

Closing balance 65,000 transferred to source

1,85,000 1,85,000


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Statement showing Sources and Application of Funds

Sources Application

Issue of Share capital 1,00,000 Redemption of debentures 50,000

Funds from operation 1,45,000 Purchase of Fixed Assets 1,20,000

Increase in working capital 75,000

2,45,000 2,45,000

Notes:

1) The increase in General Reserve is due to transfer a part of profit of the current year and

hence the difference is transferred to APL since its a non cash item

2) The difference in depreciation is charged to APL, since its a non cash item.

3) Increase in Equity Share capital is assumed to be the fresh issue which is a cash item. It is

recoreded in FFS.

4) The difference is debentures is the redemption. Its a cash item. Hence taken to FFS

5) Purchase of fixed asset is difference between the opening and closing balance of fixed

assets. Its a cash item. Hence taken to FFS .

Problem 11

Prepare a Fund Flow Statement

Balance Sheets

2006 2007 2006 2007

Equity Share capital 50,000 65,000 Cash balances 15,000 9,000

Profit & Loss 14,750 17,000 Debtors 25,000 27,000

Trade Creditors 31,000 29,000 Investment 5,000 -

Mortgage 10,000 15,000 Fixed Assets 70,000 80,000

Short term loans 16,500 15,000 Less: Depreciation (25,250) (7,000)

Accrued expenses 7,500 8,000 Goodwill 5,000 -

1,29,750 1,49,000 1,29,750 1,49,000

Depreciation provided is Rs.4,750. Write off goodwill. Dividend paid Rs.3,500.


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Solution:

Schedule of changes in working capital

Balances as on

2006 2007

Current Assets

Cash 10,000 13,000

Debtors 25,000 27,000

Stock 40,000 35,000

Total current assets, say A 75,000 75,000

Current Liabilities

Trade Creditors 29,000 31,000

Short term loans 15,000 16,500

Accrued expenses 8,000 7,500

Total current liabilities, say B 52,000 55,000

Working capital, A B 20,000 24,000

Net increase in Working capital 4,000

Total 24,000 24,000


To By

Depreciation 1,750 Opening balance 30,000

Goodwill 5,000 Funds generated from

Dividend 3,500 operations 12,500


27,250 27,250


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Funds Flow statement

Issue of fresh equity 15,000 Purchase of fixed assets 30,000

Sale of investment 5,000 Payments of dividends 3,500

Loan on mortgage 5,000 Increase in working capital 4,000

Funds from operations 12,500

37,500 37,500

Problem 12

The Balance Sheets of DR Ltd

Rupees in 000s

2006 2007 2006 20078

Share capital 50 100 Goodwill 15 25

Debenture 25 Plant 18 96

Profit and Loss 15 25 Stock 40 35

Proposed Dividend 5 6 Debtors 15 32.5

Creditors 20 30 Cash 8 9

Liabilities for expenses 5 3.5 Preliminary exp 4 2.5

100 200 100 200

A business was purchased during the year by the issue of 25,000 shares and 25,000 debentures.

Depreciation Rs.6,000 has been provided in the year. A machine has been sold for Rs.1,50,000,

the written down value being Rs.1,000. The business purchased had the following assets and

liabilities : Machine Rs.20,000, Stock Rs.5,000, Debtors Rs.15,000, Creditors Rs.5,000. Prepare

the Funds Flow Statement.

Solution

In this problem, another business concern was purchased whereby the assets and liabilities come

into business. For this purchase, the payment is through the issue of shares and debentures. If

the payment were to be in excess of assets and liabilities taken over, the excess payment is

known as Goodwill.


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Assets taken over : Machine 20,000

Stock 5,000

Debtors 15,000

40,000

Less Creditors taken over ( 5,000 )

Net assets taken over 35,000

Total payments made : Share capital + Debentures 50,000

Excess payment being treated as Goodwill (50,000 35,000) 15,000

Statement showing changes in working capital:

Balances as on

2006 2007

Current Assets

Stock 40,000 35,000

Debtors 15,000 32,500

Cash 8,000 9,000

Total current assets, say A 63,000 76,500

Current Liabilities

Sundry Creditors 20,000 30,000

Liabilities for expenses 5,000 3,500

Overdraft 5,000 10,500

Total current liabilities, say B 30,000 44,000

Working capital A B 33,000 32,500

Decrease in working capital (source) 500

33,000 33,000


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To By

Goodwill 5,000 Opening balance 15,000

Preliminary expenses 1,500 Profit on sale of Plant 500

Depreciation 6,000 Funds from operations 28,000

Proposed dividend 6,000


43,500 43,500

Funds Flow Statement

Issue of fresh shares for :

cash for current assets

Stock 5,000

Debtors 15,000

Less: Creditors (5,000) 15,000 Purchase of Plant 65,000

Sale of Plant 1,500 Payment of dividend 5,000

Funds from operations 28,000

Decrease in working

Capital 500

70,000 70,000

Terminal Question

Problem 1: The balance in the Provision for taxation : opening Rs.30,000 and closing

Rs.40,000. Taxes paid during the year was Rs.25,000. Calculate Funds from operation. (b) What

is the provision made during the year?


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Problem 2: Extracts of Balance Sheets are given below :

2006 2007

Profit and Loss appropriation account 30,000 40,000

General Reserve 20,000 25,000

Goodwill 10,000 5,000

Preliminary expenses 6,000 4,000

Provision for Depreciation on Machinery 10,000 12,000

Calculate funds from operation

Problem 3: Calculate funds from operations:

Profit and Loss Account

To By

Expenses 3,00,000 Gross profit 4,50,000


Loss on sale of plant 4,000

Discount on Debenture 200

Goodwill 20,000

Net profit 1,15,800

5,10,000 5,10,000

Problem 4: Calculate funds from sale of Plant

Plant (gross) 1,00,000 1,25,000

Additional information:

a) Loss on sale 1,000

b) Depreciation charged 14,000

c) Purchase of Plant 35,000


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Problem: 5. The Balance Sheets are as follows

Capital 25,000 20,000 Cash 4,700 3,000

Profit and Loss 2,300 1,000 Debtors 11,500 12,000Bills Payable 4,500 7,000 Land 6,600 5,000

Stock 9,000 8,000

31,800 28,000 31,800 28,000

Prepare a statement of Sources and uses of funds.

Answer Self Assessment Questions


1. Derived, changes, assets, equities

2. Two

3. Inside and outside

4. Cash and cash equivalents


1. Cash, working capital, total financial resources

2. Control

3. Short term financial planning4. Current assets minus current liabilities

5. Excluded

6. Short term liquidity

7. Both financial and investment transaction

8. Qualitative information


1. Changes, assets and liabilities

2. Financial strengths and weaknesses


1. Financial assets and liabilities including capital

2. Statement of changes in working capital, statement of sources and uses of funds


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3. Net increase or decrease in individual items

4. Increases

5. Decreases

6. Decreases7. Increases

8. Positively co related

9. Inversely related


1. Application

2. Source

3. Gross profit Cost of goods sold + expenses

4. Non fund revenue, non trading changes or losses5. intangible assets and revenue items

6. Appropriation of retained earnings.


1. Inflow

2. Inflow

3. Inflow

4. Inflow

5. Inflow

6. Inflow

7. Inflow


1. Source

2. Excluded from fund flow statement.


1. Source of funds

2. Source of funds


1. Addition of shares, accumulated retained earnings

2. Expansion, diversification and modernization


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3. Increases

4. Source

5. Increases and never decreases

6. Redemption


1. Outflow of cash

2. Outflow of cash

3. Outflow of cash

4. Outflow of cash

5. Outflow of cash

6. Outflow of cash

7. Outflow of cash.


1. Purchase

2. Current year minus previous year

3. Increase in fixed assets


1. Outflow2. Deduction.


1. Loss of operation

2. Payment of cash dividend out of accumulated reserves

3. Part of paid up capital + reserves and surplus.


1. Change of fund

2. Source

3. Application

4. Non fund

5. Change.

6. Positive


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7. Negative.


1. Current assets and Current liabilities.


1. Schedule of changes in working capital

2. Adjusted Profit and Loss account

3. Funds flow statement


1. Two Balance sheet dates2. (b) A minus B

3. (c) Current assets

4. Current liabilities

5. A minus B

6. Balancing figure.


1. Reserve2. Deduction

3. Working capital changes

4. Considered as current liabilities

5. In Provision account

6. Liability

7. General Body Meeting

8. Current liability

9. Outflow

10. Current assets

11. Fixed assets

12. Fall in value

13. Non cash item

14. Opening balance


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15. Provision account and not to Profit and Loss account

16. Fixed assets

Answer for Terminal Questions1: 35,000, (b) Taxes paid is an application of funds.

2. Rs.24,000

3. Rs.1,50,000

4. Fund Rs.45,000 Accumulated Depreciation on plant sold Rs.9,000

5. Funds lost from operations. Rs.1,300, Decrease in WC Rs.4,700)

10.funds flow analysis

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