fund flow[1]

7/29/2019 Fund Flow[1]

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A PRESENTATION BY :

Guided By : Ms.Neha

7/29/2019 Fund Flow[1]


The funds-flow-statement is a report on financial

operations changes, flow or movements during theperiod.

It is a statement, which shows the sources andapplication of funds or it shows how the activities of a

business is financed in a particulate period.

In other words, such a statement shows how thefinancial resources have been used during a particularperiod of time.

It is, thus, a historical statement showing sources andapplication of funds between the two dates designedespecially to analyze the changes in the financialconditions of an enterprise.

Cont …

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In the words of Foulke, it is-“A statement of Sources and Application of Funds is atechnical device designed to analyze the changes in the

financial condition of a business enterprises betweentwo dates. “

Funds Flow Statement is not an income statement.Income statement shows the items of income and

expenditure of a particular period, but the Funds flowstatement is an operating statement as it summaries thefinancial activities for a period of time. It covers allmovements that involve an actual exchange of assets.

Various titles are used for this statement such as-'Statement of sources and Application of Funds,Summary of Financial operations. Changes in FinancialPosition, Fund received and Disbursed, FundsGenerated and Expended, Changes in Working Capital,

Statement of Fund etc.Cont …

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Title of Funds Flow Statement has been modified fromtime to time.

A new interpretation of the term “Funds”, has now been adopted as to include assets or financialresourceful which do not flow through the workingcapital accounts.

It seems to be the most suitable meaning for the term'funds' but the most commonly used interpretation ofthe term 'funds' is ‘Working Capital'.

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Funds Flow Statement is an analytical tool in the hands

of financial manager.

The basic purpose of this statement is to indicate onhistorical basis the changes in the working capital i.e.,where funds came from and were there is used during agiven period.

The utility of this statement can be measured on the basis of its contributions to the financial management.

It serves the following major purposes :

Analysis of Financial Position Evaluation of the Firm's Financing An Instrument for Allocation of Resources A Tool of Communication to Outside World Future Guide

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The basic purpose of preparing the statement is to have

a rich into the financial operations of the concern.

It analyses how the funds were obtained and used in thepast.

In this sense, it is a valuable tool for the finance

manager for analyzing the past and future plans of thefirm and their impact on the liquidity.

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One important use of the statement is that it evaluates

the firm‘s financing capacity.

The analysis of sources of funds reveals how the firm'sfinanced its development projects in the past i.e.,frominternal sources or from external sources.

It also reveals the rate of growth of the firm.

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In modern large-scale business, available funds are

always short for expansion programmes and there is

always a problem of allocation of resources.

It is, therefore, a need of evolving an order of prioritiesfor putting through their expansion programmes, whichare phased accordingly, and funds have to be arrangedas different phases of programmes get into their stride.

The amount of funds to be available for these projectsshall be estimated by the finance with the help of FundsFlow Statement.

This prevents the business from becoming a helplessvictim of unplanned action.

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Funds Flow Statement helps in gathering the financial

states of Business.

It gives an insight into the evolution of the presentfinancial position and gives answer to the problem'where have our resources been moving'?

In the present world of credit financing, it provides auseful information to bankers,creditors,financialinstitutions, Government etc.

It provides information regarding amount of loanrequired, its proposes, the terms of repayment an

sources for repayment of loan etc.

The financial manager gains a confidence born out of astudy of Funds Flow Statement.

In fact, it carries information regarding firm's financial

policies to the outside world.

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An analysis of Funds Flow Statements of several years

reveals certain valuable information for the financialmanager for planning the future financial requirementsof the firm and their nature too i.e. Short term, long-termor mid term.

The management can formulate its financial policies based on information gathered from the analysis of such

statements.

The above were the purposes the Fund Flow StatementServes.

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CURRENT ASSETS:

These are those assets, which are expected to be realizedor sold or consumed within the normal operating cycle.

These assets change and fluctuate within a shorterperiod of time. It includes-

Cash and Bank Balances Temporary investments Bills Receivable Trade Debtors Stock Prepaid Expenses

Advances for Suppliers Short Term Loan and Advances Accrued Incomes etc.

Cont …

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CURRENT LIABILITIES:

These are those liabilities that are short-termobligations, which are either to be paid out of current

assets or by creating current liabilities.

Provisions against current assets are to be considered ascurrent liabilities, as these provisions reduce the amountrealizable from the respective current assets. It includes-

Trade Creditors Bills Payable Bank Overdraft Outstanding expenses Provision for Doubtful Debts

Provision for Discount on Debtors etc

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Sales are the major sources of cash-inflow and at

the same time cost of goods sold and expenses arethe main sources of cash-outflow.

The difference of these two [i.e. Sales-(Cost ofGoods sold + Expenses)] is Net Profit or Net

Income from operations.

Such income from operation differs from the netprofits shown by the profit and loss account because profit and loss account incorporates

certain items, which do not affect the flow (inflowor outflow) of funds.

Profit and loss account is, therefore, adjustedaccordingly in order to calculate the profits from

operations.

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Transactions that increase working capital are

sources of funds.

Some of them are-

Funds from Operations.

Funds from issue of Share Capital.

Funds from Issue of Debentures, Acceptance ofPublic Deposits and other Long-term Loans

Sale of Fixed Assets.

Net Decrease in Working Capital. etc

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Loss from operations

-Loss from operations either decreases the currentassets or increases the current liabilities or in otherwords reduces the funds.

Purchase of Fixed Assets

-If any fixed asset like building,machinery,furnitureor investments is purchased, it will reduce thecurrent asset (cash) without any correspondingdecrease in current liability.

Repayment of loans, Redemption of Debenturesor preference share capital

-Any such repayment including the payment ofpremium on redemption of debentures orpreference shares is an application of funds because it reduces the current assets. Cont …

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Payment of Dividend

-Payment of dividend (and not proposed dividend) isan application of fund if paid in cash. If bonus

shares are issued, it shall not be treatedapplication of funds.

Other Applications

-Any loss such as embezzlement, compensation,

donations etc. involving cash, is an application offund.

Increase in Working Capital

-Increase in working capital (as per schedule of

changes in working capital) represents investmentin current assets hence it is an application offunds.

-In other words, the excess of sources overapplication of funds is increase in working capital.

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The following items are added to the net profit as shown by the profit and loss account-

(a) Non-Funds Items- Items which do not increase thecurrent liability or decrease the current asset are non-fund items. These items are as follows:-

(i) Depreciation and Depletion- Depreciation and depletion do not affect the

working capital at all. It is usual practice in every business to write off depreciation on fixed assetswhich is debited to profit and loss account and acorresponding credit is made in the respective assetaccount.

In this way, it is only a book-keeping entry, havingthe effect of reducing the book value of fixed assetas well as the profit by the same amount. Thus itaffects only the fixed assets.

So, to nullify the effect, the amounts of depreciationand depletion already debited to P & L Account are

added back to the profits in order to calculate theamount of funds. Cont …

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(ii)Amortization of Fictitious and Intangible Assets- Amortization of certain fictitious assets in the nature

of Deferred Revenue Expenditure like preliminaryexpenses, Advertising Suspense Account, discount

on issue of Shares and Debentures, Premium onRedemption of Redeemable Preference Shares orDebentures etc.

Writing off of certain intangible assets likeGoodwill, Trade Marks and Patents are also itemswhich are only bookkeeping enters and do not affectthe current assets or current liabilities at all.

They are, therefore, added back to the net profits.

(iii) Provision for Taxation- Provision for taxation made out of current year's

profit also does not affect the flow of funds. So, it

must be added back to the profits.

Cont …

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(b)Non Trading Charges or Losses-

Items which are not trading charges or losses are callednon-trading charges or losses which includes-

(i)Appropriation of Retained Earnings-Transfer of profits to certain reserves (such asGeneral Reserve, Dividend equalization fund,Sinking fund, Reserve for contingencies or anyother reserves) does not affect the current assetsor current liabilities. Therefore, they will be

added back to the net profits.(ii)Proposed Dividend on Shares-It is also an appropriation of profits and not acharge and in no way involves a change incurrent assets or liabilities. It shall also be added back to profits.

(iii)Loss on sale of Non Current Assets-Loss on sale of fixed assets such as building,machinery, furniture or investment, which hasalready been debited to P & L Account is not a business loss and does not affect the flow offunds. It should, therefore, be added back toprofits.

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In order to find out funds from operations, items of income (i) which do not affect the current assets or

current liabilities, and (ii) which are not businessincomes, are to be deducted from net profit. They are-

Dividend Received or Receivable- Although it increases current assets (cash or bank or

debtors) but it is not a business income. Hence, it should be deducted from the net profit in

order to calculate funds from operations and should be shown in the Funds Flow Statement as a separateitem under sources of funds.

Retransfer of Excess Provisions-

It simply involves a book-keeping entry i.e., atransfer of excess provision to profit and lossaccount and does not bring any change in currentassets or current liabilities.

Also it does not constitute trading income or profit. Hence it will be deducted from net profit.

Cont …

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Profits on Sale of Non-Current Assets-

Any profits arising out of sale of fixed assets whichhave already been credited to profit and lossaccount should be deducted from the net profit because.

It is not a business profit.

Appreciation of Fixed Assets on Revaluation-

If any fixed asset has been appreciated as a result ofrevaluation process, the amount should be deductedfrom profits.

If it has already been credited to profit and loss

account.

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Schedule of changes in working capitalParticulars Previous Year

Rs.

Current Year

Rs.

Changes in Working Capital

Increase

Rs.

Decrease

Rs.

A.CURRENT ASSETS

Stock

Debtors

Bills Receivable

Cash/Bank

Prepaid Expenses

Accrued Incomes

Marketable Investments

(A)

B. CURRENT LIABILITIES

Creditors

Bills payable

Outstanding expenses

Bank overdraft

Provision for Doubtful DoubtsProvision for Discount on Debtors

Unclaimed/Unpaid Dividend

(B)

Working Capital

(A-B)

Increase/Decrease in Working Capital

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Liabilities 31.12.2005Rs. 31.12.2004

Rs. Assets 31.12.2005Rs. 31.12.2004

Rs. Equity Share Capital 5,00,000 3,00,000 Fixed Assets

Less :

Accumulated

Depreciation

7,95,000

(-)1,86,000

6,09,000

8,22,000

1,49,000

6,73,000 Preference ShareCapital 2,00,000 3,00,000 Investments 2,65,000 2,00,000 Securities Premium 80,000 50,000 Stocks of Materials 85,0000 1,10,000 Capital Reserve 50,000 20,000 Stock of Finished

Goods 1,65,000 1,25,000 Profit and Loss a/c 1,20,000 1,66,000 Sundry Debtors 1,92,000 1,60,000 10% Debentures - 3,00,000 Bills Receivable 1,42,000 1,20,000 15% Debentures 2,20,000 1,20,000 Cash on Hand 22,000 10,000 Sundry Creditors 1,10,000 90,000 Cash at Bank - 40,000 Bills Payable 45,000 50,000 Prepaid Expenses 15,000 25,000 Outstanding Expenses 10,000 15,000 Preliminary

Expenses

10,000 30,000 Bank Overdraft 40,000 - Proposed Dividend 70,000 30,000 Provision for Taxation 60,000 52,000

15,05,000 14,93,000 15,05,5000 14,93,000

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1. During the year 2005, an Interim Dividend of

Rs.25,000/- was paid.2. Income- tax paid of Rs.48,000/-

3. During the year 2005,Fixed Assets Rs.1,29,000/- werepurchased and Depreciation provided on Fixed Assetsamounted to Rs. 77,500/-

4. Old Machinery was sold at profit, which was creditedto Capital Reserve .

5. Preference Shares were Redeemed at 10%Premium on1st January,2005.Premium paid on redemption wasdebited to Securities Premium Account

6. Investments costing Rs.42,000/- were sold forRs.51,000/-

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Particulars Previous Year

(2004) Rs.

Current Year

(2005) Rs.

Changes in working capital

Increase Rs. Decrease Rs.

A.CURRENT ASSETS

Stock of Materials

Stock of Finished GoodsSundry Debtors

Bills Receivable

Cash on Hand

Cash at Bank

Prepaid Expenses

(A)

1,10,000

1,25,0001,60,000

1,20,000

10,000

40,000

25,000

85,000

1,65,0001,92,000

1,42,000

22,000

-

15,000

-

40,00032,000

22,000

12,000

-

-

25,000

40,000

10,000

5,90,000 6,06,000

B. CURRENT LIABILITIES

Sundry Creditors

Bills payable

Outstanding expenses

Bank overdraft

(B)

Working Capital

(A-B)

Net Decrease in Working Capital

90,000

50,000

15,000

-

1,10,000

45,000

10,000

40,000

-

5,000

5,000

-

19,000

20,000

-

-

40,000

1,55,000 2,05,000

34,000

4,35,000 4,35,000 1,35,000 1,35,000

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Sources Rs. Application Rs.

Sale proceeds of

fixed

assets(Machinery)

1,45,000 Purchase of fixed

assets

1,29,000

Sale of investments 51,000 Purchase of

investments

1,07,000

Proceeds of equity

share

(2,00,000+40,000)

2,40,000 10% debentures

repaid

3,00,000

Issue of 15%

debentures

1,00,000 Redemption of

preference shares

(1,00,000 +10,000)

1,10,000

Net decrease in

working capital

19,000 Proposed dividend

of last year

30,000

Funds from

operation

1,93,500 Income tax paid 48,000

Interim dividend

paid

25,000

7,49,000 7,49,000

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PARTICULARS RS. PARTICULARS RS.

To Proposed

Dividend

70,000 By Balance c/d 1,66,000

To provision for tax 56,000 By profit on sale of

investment

9000

To preliminary

expenses

20,000

To depreciation on

fixed assets

77,500

To interim dividend 25,000

To Balance c/d 1,20,000 By funds form

operation (balancing

figure)

1,93,500

3,68,500 3,68,500

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Particulars Rs. Particulars Rs.

To Balance b/d 2,00,000 By cash/bank(sold) 51,000

To P&L Adjustment 9,000 By Balance c/d 2,65,000To Cash/Bank(Balancing Figure) 1,07,000

3,16,000 3,16,000

Particulars Rs Particulars Rs.

To Balance b/d 8,22,000 By transfer to fixed assets-sold

(Balancing Figure)

1,56,000

To cash/bank 1,29,000 By Balance b/d 7,95,000

9,51,000 9,51,000

Particulars Rs Particulars Rs.

To transfer to fixed

assets(balance figure)

40,500 By Balance b/d 1,49,000

To Balance b/d 1,86,000 By Profit and Loss

Adjustment Account

77,500

2,26,500 2,26,500

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Particulars Rs Particulars Rs

By Balance b/d 20,000

To Balance c/d 50,000 By transfer from fixedasset s sold a/c

30,000

50,000 50,000


To transfer from fixed

assets

1,56,000 By provision for

depreciation

40,500

To transfer to capital

reserve(profit on sale

transfer to capital reserve)

30,000 By cash/bank (balancing

figure)

1,45,000

1,86,000 1,86,000

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To cash/bank a/c 48,000 By Balance c/d 52,000

To Balance c/d 60,000 By P&L Adjustment

(balancing figure)

56,000

1,08,000 1,08,000


To cash/bank(Last Year) 30,000 By Balance c/d 30,000

To Balance c/d 70,000 By P&L Adjustment

(balancing figure)

70,000

1,00,000 1,00,000


To premium on redemption 10,000 By balance c/d 50,000

To balance c/d 80,000 By cash/bank (balancing

figure)

40,000

90,000 90,000

7/29/2019 Fund Flow[1]


fund flow[1]

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