fund flow and cash flow analysis (2)

7/28/2019 Fund Flow and Cash Flow Analysis (2)

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Presented by : Anu John &

Anu Abraham

FUND FLOW AND CASH FLOW

ANALYSIS


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Definition of fund flow


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Why we prepare fund flow statement?

The balance sheet and income statement are the

traditional basic financial statement of a businessenterprise. A serious limitation of these statements isthat they do not provide information regardingchanges in the firms financial position during aparticular period of time.

They fail to answer following question :

What funds were available during the accountingperiod and for what purpose these funds wereutilized?

Have long term sources been adequate to financefixed asset purchase?

Does the firm possess adequate working capital?

How much funds have been generated from

operations? Why did the firm not pay dividend in spite of adequate


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The balance sheet is merely a static statement. It

is statement of asset and liabilities of thebusiness as on particular date. The fund flow

statement overcomes these limitations of basic

financial statement. Fund flow statement will

provide us information about different sources offund and their various uses in particular time.


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MEANING OF FUND The term fund has a variety ofmeaning such as cash fund, capital fund and working

capital fund. 1.Cash fundIn a narrow sense, fund means only

cash. Cash flow statement portrays net effect of thevarious business transactions on cash into accountreceipts & disbursement of cash. This concept of

preparing fund flow statement is not accepted, asthere are many such transactions which do not affectcash but represent the flow of fund . for example:purchase of furniture on credit does not affect cashbut there is flow of fund.

2. Capital fundHere fund means all financialresources used in the business, whether in the formof men, money, material, machine & others.

3.Net working capital -Net working capital meansdifference between current asset and current liabilities.funds generally refers to cash or cash equivalent or

to working capital.


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MEANING OF FLOW The term flow refers to

changes or transfer and therefore the flow of

funds means transfer of economic values fromone asset to another, from one liability to another,

from one asset to liabilities or vice-versa or a

combination of these.

So flow of fund refers to increase or decrease in

net working capital.

When a change in non current account is

followed by a change in another non currentaccount, it does not amount to flow of fund. It is

because, in such case, neither the working capital

increase nor decrease.


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Preparation of Fund Flow

StatementFund Flow Analysis

It consist of two different analysis:-

Working Capital analysis

Cash Flow Analysis

Working Capital is the excess of current asset over

current liabilities.

This analysis include two separate statements:

Statement of changes in Working CapitalStatement of Sources & Applications of funds

Cash flow analysis is the analysis of inflow & out flows

of cash.

Cash flow analysis results in separate report:i.e. Sources & Application of cash


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Step 1:Schedule of Changes in Working Capital


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Particulars Previou

s year

Current

year

Change

s in WC

increase

Changes in

WC

decrease

A. Current assets

Stock

debtors

Cash/bank

Prepaid expense

Total (A)B .Current liabilities

Creditors

Bills payable

Outstanding expenses

Bank overdraft

Total(B)

Working Capital (A-B)

Increase/decrease inWC


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Step 2:

Inflow or outflow from Non-Current Items

Step 3:

Find Out Fund from Operation


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Rs. Rs. Rs.

Sales **

Other operating revenues **

Less: Total operating cost(other than

depreciation)

(a) Cost of goods sold **

opening stock **

purchases **direct expenses **

Less: closing stock ** **

(b) Office and administration expenses

(including outstanding but excluding prepaid) **

Selling and distribution expenses

(including outstanding but excluding

prepaid)

** **

Fund from Operations **


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Step 4:

Prepare Fund Flow Statement

Sources R

s

Application of funds R

s

Sources of funds Application of funds

Fund from operators Purchases of fixed assets

Sale of fixed assets Redemption of preference

share

Issue of shares Redemption of debentures

Issue of debentures Payment of taxes

Loan taken Repayment of loans

Decrease in working capital Increase in working capital


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Definition of Cash Flow

A record of the amount of cash and cash

equivalents that flow in and out of a company for

a specific time.

Cash=currency, checks on hand, Bank deposit etc. Cash equivalence= Treasury bills, certificates of

deposits, commercial paper


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THE NEED FOR A CASH FLOW

STATEMENT

Profit represents the increase in net assets ina business during an accounting period.

This increase can be in :

---Cash---Non-current assets

---Receivables

---Inventory


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PREPARATION OF A CASH FLOW

STATEMENT Direct method :figure for the cash statement

derived from the accounting records or formthe other financial statements.

Indirect method: figures derived from the otherfinancial accounting statements:

---Balance sheets for the current year end andthe previous period

---Income statement for the period


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Direct method---Gross cash flows can be derived:

(1) from the accounting record: total the cashreceipts and payments directly, or(2) for net cash flow from operating

activities, from the opening and closingbalance sheets and income statements for

the year by constructing summary controlaccounts for:

Sales (to derive cash received fromcustomers)

Purchases (to derive cash payments tosuppliers)

Wages( to derive cash paid to and onbehalf of employees)


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Indirect method

---You are usually presented with two balance

sheets: for the end of the prior period and for theend of the current period. All the differencesbetween the opening and closing balances arevarious types of cash flow, or are otherwise

needed to produce the cash flow statement.---To calculate the operating cash flow:

(1) Find the profit figure:

Take it from operating cash flow, or

Calculate the increase in retain profit andadd back the periods dividends and tax

charge to arrive at profit before tax.


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(2)Adjust the profit figure for: Noncash expenses like depreciation, and

Movements in working capital items such asinventory, receivables and payables.(3)where there are sales of non- current assets you

will need to find figures for additions or disposals,and depreciation on disposals. Set up three T accounts for non-current asset

cost, aggregate depreciation and disposal Enter the opening and closing balances from

the balance sheets. Do the double entry in the ledger accountsand the cash

flow statements for all additional informationgiven to you

in the question The balancing figures will give you the figuresyou need


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4) set up a format as follows, leaving plenty of

space between the headings, then go through thegiven balance sheets from the top entering the

differences in the correct positions in the format.


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fund flow and cash flow analysis (2)

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