funds flow analysis

INTRODUCTION

INTRODUCTION

Firms create manufacturing capacities for production of goods some provide services to consumers. They sell their goods or services to earn profit. They raise funds to acquire manufacturing and other facilities. Thus, the three most important activities of a business firm are; finance, production and marketing. A firm secures whatever capital it needs and employees it (finance activity) in activities which generate returns on invested capital and marketing activities.

FUNCTIONS OF FINANCIAL MANAGEMENT:

The financial functions can be divided into four broad categories:

1. Investment decisions.

2. Financing decisions.

3. Dividend decisions.

4. Liquidity decisions.

1. Investment decision

Investment decision or capital budgeting involves the decision of allocation of capital or commitment of funds to long-term assets, which would yield, benefits in future. Its one very significant aspect is the task of measuring the prospective profitability of new investments. Future benefits are difficult to measure and cannot be predicted with certainty.

2. Financing decision:

Financing decision is the second important function to be performed by the financial manager. Broadly, he must decide when, where and how to acquire funds to meet the firms investment needs. The central issue before him is to determine the proportion of equity and debt. The mix of debt and equity is known as the firms capital structure. The firms capital structure is considered to be optimum when the market value of shares is maximized.3. Dividend decision:

Dividend decision is the third major financial decision. The financial manager must decide whether the firm should distribute a portion and retain the balance. Like the debt policy, the dividend policy should be determined in terms of impact on the shareholders value. The optimum dividend policy is one, which maximizes the market value of the firms shares.

4. Liquidity decision:

Current assets management, which affects a firms liquidity, is an important finance function. Current assets should be managed efficiently for safe guarding the firm against the dangers of liquidity and insolvency. Investment in current assets affects firms profitability, liquidity and insolvency. Investment in current assets affects firms profitability, liquidity and risk. A conflict exists between profitability and liquidity while managing current assets.

Financial analysis is the process of identifying the financial strengths and weaknesses of the firm. It is done by establishing relationships between the items of financial statements viz., balance sheet and profit and loss account. Financial analysis can be undertaken by management of the firm or by parties outside the firm viz., owners creditors, investors and others.Types of analysis:

1. Vertical analysis

2. horizontal analysis

Method of analysis:-

Now the financial analyst may use one or multiple methods of financial analysis are:

i. Comparative statements.

ii. Common size statements.

iii. Trend analysis.iv. Ratio analysis.

v. Funds flow analysis.

vi. Cash flow analysis.

vii. Cost-volume-profit analysis (cup analysis).

As a view of my project is depends on Funds flow statement analysis so, I focus on this analysis. Funds Flow Analysis

Definition:

It is a Statement summarizing significant financial changes which have occurred between the beginning and the end of the companys accounting period. Concept of Funds Flow analysis:

Indicates Changes in Financial Condition.

Difference from balance sheet and income statement. Supplementary to the above statements and not a substitute.

Summarizes events taking place between two accounting periods.Significance of funds flow analysis: Helps shareholders, creditors and other to evaluate the uses of funds by the enterprise Assists in analysis of past trends and thus aid future expansion decisions Helps finance managers in identification of problems, enabling detailed analysis and immediate action

Uses of funds Flow: Guides the management in deciding abut the dividend and retention policies Planning for long term purposes is enabled It facilitates allocation of resources and funds

It also indicates the sources from which the company has obtained its funds

Factors resulting in change in working capital may also be ascertained

Types of preparation of funds flow statement

funds flow statement:

Cash flow approach

Total resources approach

Working capital approach

Cash flow approach: According to this method, the word funds is synonymous with cash

Through this association, the funds flow statement turns into the receipts and payment account

To prepare funds statement on cash basis, al balance sheet changes taken place must be classified into either changes that increase cash or changes that decrease cash

All these changes must be classified from the income statement and surplus statement.

Total resources approach: Here funds represents, total assets or resources of the enterprise.

All changes that result in increase or decrease in assets and liabilities are shown

To prepare funds statement on total resource basis, all balance sheet changes taken place must be classified into either inflow or outflow of funds

Inflow of funds consists earnings of the company, contribution of additional funds, increase in liabilities and decrease in assets

Outflow of funds consists of net losses, decrease in liabilities, decrease in capital funds and increase in assets

Working capital approach: In his method, funds are equivalent to the net working capital (current assets minus current liabilities).

The prime objective of this approach is to show movement of funds through working capital and shed light on the factors contributing to such movements

Two statements are prepared in this concept

The first one is the schedule of working capital in which changes in net working capital are recorded

The second statement is the funds flow statement in which the factors responsible for these variances in working capital are shown Funds Flow

By Funds flow (in accounting and financial management) we mean the flow in relation to the various items that form part of the Fund Area in a Balance Sheet. The Funds Flow explains how the values changed from the initial figure to the final figure between the two balance sheet dates. Flow is between two points and the two points in a Funds Flow Analysis are the beginning and the ending dates as indicated by the two balance sheets. Inflow (Or) Source of Fund

Where the change in the value of a Fund Account (Asset or Liability) results in the availability of additional funds we say there is an inflow of fund and the change forms the source of fund. The source of fund is an explanation for how we are getting the funds.

Thus, the following would result in an inflow of funds

An Increase in the value of a Fund Liability

Equity Share Capital

Debentures

Preference Share Capital

Long Term Loans

Reserves

Accumulated Profits

A Decrease in the value of a Fund Asset

Fixed Assets

Accumulated Losses Outflow (Or) Application of Fund

Where the change in the value of a Fund Account (Asset or Liability) results in the reduction of available funds, we say there is an outflow of fund and the change forms the application of fund. The application of fund is an explanation for how we are using the funds.

Thus, the following would result in an inflow of funds

An Increase in the value of a Fund Asset

Fixed Assets

Accumulated Losses

A Decrease in the value of a Fund Liability

Equity Share Capital

Debentures

Preference Share Capital

Long Term Loans

Reserves

Accumulated Prof its

NEED FOR THE STYDYThe main need of the study is to analyses the financial information of the Madhi Lakshmaiah & Co. Ltd.

1. To find out the liquidity or short term solvency of the Maddi Lakshmaiah &Co. Ltd.2. To know the different types of funds flow analysis and how it show impact on different organizations.

3. To allow the relationship among various aspects in such a way that it allows drawing conclusion about the performance, strength and to find out the liquidity or short term solvency of the weaknesses of the company.

4. To know the short term servicing ability of the company.

OBJECTIVES OF THE STUDY

The main objective of the study is to analyze the financial information of the Maddi Lakshmaiah & Co. Ltd.

1. To study the tobacco industry in India and analyze the financial performance of Maddi Lakshmaiah & Co. Ltd.

2. To present a theoretical framework relating to financial analysis.

3. To evaluate the liquidity position of Maddi Lakshmaiah & Co. Ltd.

4. To understand the operating efficiency of Maddi Lakshmaiah & Co. Ltd.

5. To offer suggestions if any for the betterment of the companyMETHODOLOGY

Methodology is scientific and systematic search for pertinent information on specific topic. The reliability of management decision depends upon the quality of data. Basically we have two types of data. These are primary data and secondary data.

Primary data:

Primary data can be collected either through experience or through survey. That which is collected a fresh and for the first time and thus happens to be original in character is called primary data. Primary data can be collected in the following ways.

By observation.

Through personal interview.

Through telephone interviews.

Secondary data:

Secondary data means data that is already available which was collected and analyzed by someone else and which have already been passed through the statistical process. Secondary data may either be published data or unpublished.

LIMITATIONS OF THE STUDY:

While the study is undertaken about the financial analysis of the Maddi Lakshmaiah & Co. Ltd the following limitations were encountered.

1. Due to shortage of time the overall analysis of the financial information of Maddi Lakshmaiah & Co. Ltd. became difficult.

2. Since the current year was not completed it was not possible to compare the current year information with the previous information.

3. Some of the information was with registered office of the company due to some statutory requirements so it became difficult to get the overall information of the company.

4. Since we are new to the company, company refused to provide its financial information.

INDUSTRY PROFILE

HISTORY:

Tobacco is a plant that grows natively in north and South America. It is in the same family as the potato, pepper and the poisonous nightshade, a very dead plant. The seed of a tobacco plant is very small. A 1 ounce sample contains about 300,000 seeds.

It is believed that tobacco began growing in the America about 6,000 B.C. As early as 1 B.C., American Indians began using tobacco in many different ways, such as in religious and medicinal practices. Tobacco was believed to be a cure-all, and was used to dress wounds, as well as a pain killer. Chewing tobacco was believed to relieve the pain of a toothache.

Soon after, sailors brought tobacco back to Europe, and the plant was being grown all over Europe. The major reason for tobaccos growing popularity in Europe was its supposed healing properties. Europeans believed that tobacco could cure almost anything, from bad breath to cancer.

In 1571, a Spanish doctor named Nicolas Monardes wrote a book about the history of medicinal plants of the new world. In this he claimed that tobacco could cure 36 health problems.

In 1588, a Virginian named Thomas Harriet promoted smoking tobacco as a viable way to get ones daily dose of tobacco. Unfortunately, he died of nose cancer (because it was popular then to breathe the smoke out through the nose).

During the 1600s, tobacco was so popular that it was frequently used as money! Tobacco was literally as good as gold! This was also a time when some of the dangerous effects of smoking tobacco were being realised by some individuals. In 1610 sir Francis Bacon noted that trying to quit the bad habit was really hard.

In 1632, 12 years after the mayflower arrived on Plymoth Rock, it was illegal to smoke publicly in Massachusetts! This had more to do with moral beliefs of the day, than health concerns about smoking tobacco.

In 1760, Pierre Lorillard establishes a company in New York City to process tobacco, cigar, and snuff. Today, P. Lorillard is the oldest tobacco company in the U.S.

GROWTH:

In 1776, during the American revolutionary war, tobacco helped finance the revolution by serving as collateral for loans the Americans borrowed from France! Over the years, more and more scientists began to understand the chemical in tobacco, as well as the dangerous health effects smoking produces.

In 1826, the pure form of nicotine was finally discovered. Soon after, scientists concluded that nicotine was dangerous poison.

In 1836, New Englander Samuel Green stated that tobacco was an insecticide, a poison, and can kill a man.

In 1847, the famous Phillip Morris was established, selling hand rolled Turkish cigarettes. Soon after in 1849, J. E. Liggett and Brother was established in St. Louis, Mo. (the company that has settled out of the big lawsuits recently). Cigarettes became popular around this time when soldiers brought it back to England from the Russian and Turkish soldiers.

Cigarettes in the U.S. were mainly made from scraps left over after the production of other tobacco products, especially chewing tobacco. Chewing tobacco became quite popular at this time with the cowboys of the American West.

In 1875, R. J. Reynolds Tobacco Company (better known for its Reynolds wrap aluminum foil) was established to produce chewing tobacco. It wasnt until the 1900s that the cigarette became the major tobacco product made and sold. Still, in 1901 3.5 billion cigarettes were sold, while 6 billion cigars were sold. Along with the popularity of cigarettes however, was a small but growing anti-tobacco campaign, with some states proposing a total ban on tobacco?

In 1902, the British Phillip Morris set up a New York headquarters to market its cigarettes, including a now famous Marlboro brand. The demand for cigarettes grew however, and in 1913 R.J. Reynolds began to market a cigarette brand called Camel.WAR & CIGARETTES: A DEADLY COMBO:The cigarette exploded during world war (1914-1918), where cigarettes were called the soldiers smoke. By 1923, Camel controls 45% of the U.S. market! In 1924, Phillip Morris began to market Marlboro as a womans cigarette that is a Mild as May!

To battle this, American Tobacco Company, maker of the lucky strike brand, began to market its cigarettes to women and gains 38% of the market. Smoking rates among female teenagers soon tripled during the years between 1925-1935 In 1939, American Tobacco Company introduced a new brand, Pall Mall, which allowed American to become the largest tobacco company in the U.S.

During World War II (1939-1945), cigarette rates were at an all time high. Cigarettes were included in a soldiers C-Rations (like food). Tobacco companies sent millions of cigarettes to the soldiers for free, and when these soldiers came home, the companies had a steady stream of loyal customers. During the 1950s, more and more evidence was surfacing that smoking was linked to lung cancer.

In 1952 P. Lorillard markets its Kent brand with the Micronite filter, which contained asbestos! This was fortunately discontinued in 1956. In 1953, Dr. Ernst L.Wynders found that putting cigarette tar on the backs of mice causes tumors! In 1954, RJ Reynolds introduced the Salem brand, which was the first filter-tipped menthol cigarette.

HEALTH HAZARDS REVEALED:

In 1964, the Surgeon Generals Report on Smoking and Health came out. This report assisted in allowing the government to regulate the advertisement and sales of cigarettes. The 1960s in general was a time when much of health hazards of smoking were reported.

In 1965, television cigarette ads were taken off the air in Great Britain. In 1966, those health warnings on cigarette packs began propping up. In 1968, Bravo, a non-tobacco cigarette brand was marketed made primarily of Lettuce, it failed miserably!Because of the negative press about tobacco, the major tobacco companies began to diversify their products. Phillip Morris began to buy into the Miller Brewing company, makers of Miller Beer, Miller Lite, and Red Dog Beer. RJ Reynolds Tobacco Company drops the Tobacco Company in its name, and becomes RJ Reynolds industries.

It also began to buy into other products, such as aluminium American Tobacco Company also drops Tobacco from its name, becoming American Brands, Inc. In 1971, television ads for cigarettes are finally taken off the air in the U.S. cigarettes, however, were still the most heavily advertised product second to automobiles. In 1977, the first national great American Smoke out took place.

In 1979, the surgeon general reported on the health consequences of smoking for women. This is in light to the increasing number of women who were taking up the bad habit. Some attribute is to slick and campaign of the Virginia Slims brand, youve come a long way baby.

THE RECENT PAST:

During the 1980s there were many lawsuits filed against the tobacco industry because of the harmful effects of its products. Smoking became politically incorrect, with more public places forbidding smoking. In 1982, the surgeon general reported that second hand smoke may cause lung cancer. Smoking in pubic areas was soon restricted, especially at the work place. In 1985, lung cancer became the No.1 killer of women, beating out breast cancer! Phillip Morris continued to diversify into other products, buying into General Foods Corporation and Kraft Inc in 1985. R. Reynolds also diversified, buying Nabisco and becoming RJR / Nabisco.

In 1987, congress banned smoking on all domestic flights lasting less than 2 hours. In 1990, smoking is banned, except to Alaska and Hawaii. In 1990, Ben & Jerrys (of ice cream fame) boycotts RJR / Nabisco, and dropped Oreos from its ice cream products.

During the 80s and 90s, the tobacco started marketing heavily in areas outside the U.S., especially developing countries in Asia. Marlboro is considered the worlds no.1 most valuable brand of any product with a value over $30 billion! Over this period, there is a battle between Coca Cola and Marlboro as the No.1 brand in the world.

In the recent years there is growing evidence that the tobacco industry has known all along that cigarettes are harmful, but continue to market and sell them. There is also evidence that they know that nicotine was addictive and exploited this hidden knowledge to get millions of people hooked on this dangerous habit!

Tobacco industry is an agro based industry. Tobacco is cultivated mainly in the states of Andhra Pradesh and Karnataka most of the tobacco is used for the manufacture of cigarettes and for exports. Tobacco is also grown in Tamilnadu, West Bengal, Uttar Pradesh, Gujarat, Madhya Pradesh, Maharashtra and Orissa also.

However the tobacco grown in these states is of very less quality and is not used for manufacture of cigarettes and exports. Several varieties of tobacco such as Virginia flue cured ,Virginia air cured light soil burley, sun cured Virginia ,nature, chewing. Tobacco, HDBRG, wrapper tobacco, beedi tobacco and hookah tobacco etc. are grown in India. Virginia flue cured is a major variety grown in India. More than 80% of Indian tobacco crop belongs to this variety.

The tobacco cultivation exports and some other industrial activities are regulated by central government (ministry of commerce) through Tobacco board. Tobacco board is headed by I.A.S officer of senior category generally from the central government. The board consists of several central government officers, state government officers, political leaders, representatives of farmers and reputed industrialists. One of the directors of ML group is always representing the industrialists in the tobacco board.

Tobacco board issues licenses to the farmers who are permitted to grow tobacco. The licenses regulate the cultivations area the farmers have to restrict the cultivation to the given area and must sell the grown tobacco through tobacco board auctions only any violation is an offence and is punishable.

In Virginia flue cured variety the tobacco leaves are separated from the plant and are cured in tobacco barns. Tobacco barns are like a furnace where the fumes are used to cure the green leaves of tobacco plant. tobacco barns appear like small go downs with firing chambers at the bottom fixed to the walls .the green tobacco leaves of the plant will be arranged in the form of rows inside the barns .the temperature inside the barn will be regulated by means of flow of hot air through the firing chambers .

This is simple technical process by which the green leaf exposed to hot air at high temperature and cooled slowly over a period of time. After the curing process, the primary leaf tobacco turns into lemon yellow colour, gold colour, brownish yellow colour, brown colour and dark brown colour. This tobacco is called katcha tobacco leaf and is ready for sale. The formers pack different colours as a separate grade which has a separate price in the market.

Tobacco must be sold only through tobacco board auction platforms under strict rules and regulations. Farmer or buyer is permitted to transact in tobacco board auction platforms. Central government has also established several tobacco research institutes for betterment of quality of tobacco in India. The other varieties of tobacco are not regulated by tobacco board.

The tobacco purchased from the tobacco board auction platforms will be graded further wherever required. Grading is a process of manual separation of one variety of leaf from the other and is done mainly on the basis if colour. Each grade will generally have unique quality parameters.

The graded tobacco is further processed either manually or on machines; this processing is called DEBUTTING and STRIPPING. Workers separate the butt of the tobacco leaf from the leaf. This process can also be done on machines .The machines processing is called THRESHING.

After stripping/threshing, the tobacco will be further processed for stabilization of moisture. And this process is called REDRYING. In this process the tobacco first of all will be dried completely then it will be given steam at the required temperature.

After re drying process the tobacco will be packed in the required packing say bale packing /case packing etc. The packed tobacco is ready for export. In India, the first threshing plant which is working uninterruptedly for the last 25/30 years an imported one by Maddi Lakshmaiah &co ltd. This was installed at Ganapavaram and the plant is still running at high efficiency levels in the country with 98% average efficiency level for the last 3 years. There are two plants owned by ITC which can be compared with this plant in the country. ITC uses their threshing plants for their own consumption.

Tobacco industry is fetching more than Rs 9000 crores of revenue to the Central Government. It is providing employment to lakh of people directly and millions of people indirectly and is also contributing RS 1000 crores of forex reserves to the country. The Central Government is announcing several restrictions on advertisement and consumption of cigarettes in the country. Encouraging to farmers by providing subsidized fertilizers and by supporting through tobacco board. The major players in tobacco industry in India are as under:

Name of the companyOccupation% of business in India

ITC ltdCigarette manufacturing & un manufactured tobacco exports50%

VST industries ltdCigarette manufacturing & un manufactured tobacco exports12%

GTC industries ltdCigarette manufacturing & un manufactured tobacco exports 6%

Godfrey Phillips India ltdCigarette manufacturing & un manufactured tobacco exports 8%

The consumption is linked with the habits of the people; the tobacco usage cannot be eradicated, even in countries like USA where anti tobacco campaign started in 1962, the production of cigarettes and consumption of cigarettes is still progressing. Exporters:

S.No Name of the company Occupation% of business in India

A ML groupCigarette manufacturing & un manufactured tobacco exports5%

B Polisetty groupCigarette manufacturing & un manufactured tobacco exports5%

C Bommidala groupCigarette manufacturing & un manufactured tobacco exports3%

D Mittapalli groupCigarette manufacturing & un manufactured tobacco exports3%

E Other companiesCigarette manufacturing & un manufactured tobacco exports8%

Our ML company has developed strong relationship with overseas manufacturing in Europe, Russia and Middle East though there is very good demand from Russian market. Our company is not exporting much because of poor economic conditions of the country.

ML Company is now exporting cigarettes to Middle East and U.S.A by manufacturing the cigarettes on job work basis. The company foresees a very bright future for this company in tobacco in the coming years. ML group is the first tobacco company who exported tobacco to China and is the first company who imported tobacco also from China. There was imported tobacco in Indian tobacco history before this and after till now. The group maintains good relationship with the Chinese tobacco monopoly.

One of the trade delegates that accompanied our honorable Prime Minister during his recent visit to China is from ML Company. Three ambassadors of China have visited our company in the past as our guests and expressed their satisfaction on our infrastructure facilities.

Production of different varieties of tobacco in India: VFC TobaccoTraditional/NCOs/My sore200 million

VFC Tobacco HDBRG12 million

ISB TobaccoISB (Releswaram/Warangal)10 million

IAS Tobacco25 million

COMPANY PROFILE

HISTORY:

The highly competitive tobacco market represented tremendous growth potential to Mr. Maddi Lakshmaiah. Foreseeing the and for quality Indian tobacco a long term strategy was formulated. Right from its inception, the company adhered to international standards and made rapid in roads to global tobacco markets.

A sophisticated threshing plant of international standards was commissioned in 1976 first in Andhra Pradesh. It created a revolution in tobacco processing and led to a huge upsurge in demand. This led to the commissioning of two modern plants with threshers, redryers and other sophisticated equipment for the processing of quality tobacco.

ML Group has taken its credo of total quality to the furthest, whether in the quality of process, products or working conditions for the vast workforce. The foresighted innovation of Sri Maddi Lakshmaiah has given the group strong edge. The personal involvement of the directors in all aspects of the business has resulted in high quality operational parameters.

The company can proudly claim some of the most skilled work force and a highly efficient management people who have contributed significantly to the prominent position the company. The company has earned recognition from apex institutions and is a recognized leader in tobacco markets the world over.

The quantum growth in ML Co: Spread of investment in infra structure and diversification into other business.

ML GROUP under its umbrella, various companies have an annul turnover of Rs 1550 million and an asset base of Rs 2000 million. A real estate development wing was setup to develop and lease commercial properties with working environment that rival the best internationally.

The information about the establishment of the group which consists of five concerns as displayed on the preceding pages, let us have a look on the various concerns of ML Group individually: ML group of companies (ML group) was founded by Mr.Maddi Lakshmaiah in 1970. He joined in his family business in 1952 after completing his engineering degree. The joint family business started payback in 1943 dealing with tobacco exports, well before India.

ML group of companies (ML group), a pioneer in Indian un manufactured tobacco industry has been exporting tobacco to all over the world for the past three decades. It has solidified its relationship with overseas tobacco merchants& manufactures.

Maddi Lakshmaiah & Co Ltd, was set up at Chilakaluripet, a village in Andhra Pradesh that produces some of the best tobacco in the country. Today it has evolved into a diversified, multi products conglomerate known as ML Group that is recognised world over for its excellence. The company processes tobacco and another agro based products that are used both in the country and exported to the most quality conscious world markets.

An emphasis on total quality and dedication to the interests of its clients world wide is a hallmark of ML group. The group is performing excellently well from the date of its incorporation and has been exporting large volume of tobacco to Russia, CIS countries, U.K, Europe, African countries, China, Latin American countries, Middle East countries, Bangladesh & Nepal etc. The group established its branches in Russia & European countries and has strong tie up with African and Latin American countries and especially with the neighbour giant China.The group is founded by Sri Maddi Lakshmaiah, a mechanical engineer after 15 years of versatile experience in tobacco industry in 1970 at Chilakaluripet , Gnter dist, A.P .the group has 5 major concern namely;

Maddi Lakshmaiah & Co Ltd (MLCO)

ML Agro Products (MLAP)

K.S Subbaiah Pillai & co ltd (KSSP)

ML Exports (MLE)

Coromandal Agro Products & Oils Ltd (CAPOL)

Expecting CAPOL which is engaged in edible oils all are engaged in tobacco industry. MLCO & MLAP have concentrated on processing activities where as KSSP&MLE are leading exporters and are recognised by government of India as export house.Vision:

Descriptions of some thing can organization corporate culture, business technology an activity in the future.

The company is trying to develop world class information technology building in Bangalore, china and Hyderabad in the coming 5 years time.

The company is going for sheet tobacco plant in joint venture with on of the Indian best tobacco cigarette manufacturer.

The company is also contemplating for 100% tobacco joint venture association with one of the best cigarette manufacturer.

The company exports with second strongest country china, Russia and Germany.

The ambassadors are coming to Maddi Lakshmaiah Company limited in August.

The ambassadors of South Africa are hold up and the company is having top joint venture with U.K.

Mission:

A mission statement is an enduring statement of purpose that distinguishes one business from others similar firms. This statement identifies the scope of firms operations in product and market terms.

M.L & company limited mission is to produce good quality of tobacco and get number one position in India in producing and exporting tobacco.

Policies:

Policies can be considered a guide to action it is desirable that persons responsible for implementation of policies use discretion and judgment in appraising and deciding among alternative courses of action.

The company has well defined policies for exports the quality tobacco.

To conduct its operation with honesty integrity and transpoarency.

Employment policy is formulation and adoption.

This company shall maintain quality leadership by providing products and services that completely and consistently meet the agreed.

Requirements of all customs and unsure fitness for use of all products there by ensuring total confidence to every customer.

Employment policy formulation and adoption.

Canteen, cleaning, security maintenance of good industrial relation.

Future plans :-

The company (Maddi Lakshmaiah) for an ECB for 50 million dollars and development of regular trade and also infrastructure projects in India.

Maddi Lakshmaiah Company is also working on joint venture basis with UK based Commodities Company for supply of agri products to South Asian countries.

The company already entered into joint venture with an US based company by name CARGIL for the south Indian needs.

They have worked for joint venture arrangements with Yugoslavian government for their requirement for India.

This for above five million dollars of investment in supply of 5000 tonnes every year.

Achievements / awards:-

Maddi Lakshmaiah Company has no particular achievements/ awards.

Maddi Lakshmaiah group (CAPOL Chirala, Prakasam Dist ) got several achievement awards .

All India Cotton Feed Crushers Association, Mumbai awarded CAPOL as III highest exporter and II highest domestic seller of cotton seed extraction for the year 1992-93.

CAPOL is the highest exporter and III highest domestic set of cotton seed extraction for the year 1993-94.

CAPOL is the III highest domestic seller of cotton seed extraction in the year 1994-95.

CAPOL is the II highest domestic seller of cotton seed extraction in the year 1995-96.

CAPOL is the II highest domestic seller of cotton seed extraction in the year 1997-98

CAPOL is the III highest domestic seller of cotton seed extraction for the year 1999-2000.

CAPOL is the II highest extraction of cotton linter for the year 2000-01.

CAPOL is the III highest exporter of cotton linter and III highest domestic seller of cotton seed extraction for the year 2001-02.

The company (CAPOL) has been awarded may commendation led by government of AP for its continuous harmonious relations with its employees in the years 1994,95,96,97.Track record:-

The company has 30 years of performance.

It never failed in meeting the scheduled repayments of loans with the bank. Rather it postponed most of the loans with the lenders.

LAND MARKS:-

Maddi Lakshmaiah Company was the first Indian company to join with China to do business.

It was the first company to import tobacco and export tobacco.

Ambassadors have already come here and 4th one is coming in this august.

GRADING POINTS:-

Maddi Lakshmaiah Company has three grading points at Chilakaluripet i.e. Martur, Muppavaram and some other on national highway between Guntur and Chilakaluripet and three more in Guntur city.

NEGOTIATIONS:-

The company is trying to develop world class information technology building in Bangalore, Chennai and Hyderabad in the coming five years time

The company is going for sheet tobacco plant in joint venture with one of the Indian best tobacco cigarette manufacture.

The company is also contemplating for 100% tobacco joint venture in association with one of the best cigarette manufacture.

The company exports with the second strongest country china, Russia and India.

The finance manager is assisted by a team of experienced management and non management staff who takes care of finance & accounts activities of the organization.

The export manager (ML Company) deals all the matters regarding the exports department and directly reports to the managing director.

ML group was a multifaceted corporate leader of which the group consists of five concerns namely.

Maddi Lakshmaiah and Co Ltd - Tobacco threshers, packers & exporters, real estate &leasing. ML Agro Products - Tobacco threshers, packers &exporters. KS Subbaiah Pillai & Co (India) ltd - Tobacco export.

ML Exports. - Exports house. Coromandal Agro Products & Oils ltd. - Bulk producers of oils.Maddi Lakshmaiah & Co Ltd:-

ML & company Limited, the fore runner of all the companies of ML group, the company enjoys a pre eminent standing in the world of tobacco, exporting to China, Russia, Western Europe, Africa and Bangladesh among others.

Supported by a team of experts, technicians, engineering and a skilled world force, the company has forged a head setting standards that have become benchmarks in the industry. Today Chilakaluripet is a well known name in the global tobacco business in no little measure due to the pioneering efforts of the intrepid founder, Sri Maddi Lakshmaiah.

ML AGRO PRODUCTS LTD:-

ML agro products ltd was born of a increase in demand for quality tobacco in both the domestic and foreign markets. Building on the rich experience of running a profitable operation, a new plant was set up in 1976 at Martur, Prakasam district.

It is fully self sufficient with modern threshers, lamina re dryers, automatic double ram press, sophisticated quality control laboratory and mammoth ware houses. It ranks among the largest threshing units in the country apart from its export commitments.

KS Subbiah Pillai & Co (India) ltd:

K.S.S.P & Co Ltd was acquired in 1982 with all its assets K.S Subbaiah Pillai & Co (India) Ltd is the group with leading tobacco exporting unit. In a field that is extremely competitive, the excellent performance of the company is an indicator of the trust that it enjoys across the globe.

COROMANDAL AGRO PRODUCTS & OILS LTD (CAPOL):

CAPOL started in 1976, extracts and refines cotton seed oil. Today it is a multi products company with equipment to process all kinds of oil seeds. The plant has a storage capacity of 2100 tones for different types of oil.

Extreme care is taken to ensure that at every stage in the process of production right from selection of the raw material to packing the products, only the best is passed.

Minimum human intervention and rigorous application of quality control process ensures the final product conform to all appropriate standards. The by-products, hulls and de-oil cakes are in high demand in many parts of the world.ML EXPORTS:

ML exports is a totally export oriented unit, with clients in a variety of markets around the world. The company enjoys a reputation for excellent delivery schedules and transparent business practice in global markets.

SHARE HOLDING PATTERN & MANAGEMENT OF GROUP:

The group has been successfully improving its business in all of its activities such as domestic sales, export sales, tobacco processing & other tobacco development activities, warehousing facilities etc. The group has two tobacco processing plants and one solvent extraction plant in South India. The group owns around 1, 00,000 sq. mts of warehousing complexes in south India.INCORPORTATION:

ML Company is a limited company (m/s Maddi Lakshmaiah and Company Limited) which was originally incorporated on 8th day of October 1970 under the name, Maddi Lakshmaiah and Company Private Limited having passed the necessary special resolution on the 23rd day of March 2002, in terms of Sec 31(1)/44 of the Companies Act 1956 the name of the company changed to Maddi Lakshmaiah and Company Limited.

NATURE OF ACTIVITY:

This factory produces good quality tobacco.

The production capacity per each day is 1 lakh 20 tonesFINANCIAL STRUCTURE;The initial investment of ML Company is 10, 00,000.

TURN OVER OF THE GROUP:

The turn over of the group for the financial year 1989-99 standards is at around Rs 800 million. The net earnings after taxes of the group have been maintained at Rs 150/200 million per annum.

The group has sound assets base having assets spread in most of the prime centres & ports of South India.

The group has developed excellent infrastructure during the past 30 years which has been yielding a promising regular income of more than Rs 225 million every year.TURNOVER OF THE COMPANY:

The turnover of ML Company for the following years of 1997-2003 is as follows:S NONO OF YEARSAMOUNT IN RS IN LAKHS

119942370

219951693

31996488

419972372

519983358

619991778

720001000

Profit after tax:

SNONO OF YEARSAMOUNT IN RS IN LAKHS

12001109

22002270

32003203

42004312

52005262

62006134

72007103

82008123

The above table represents the profit for the following years after paying all the taxes.

The products of the M.L Company &their main uses:

The various products of the MLCompany and their economic uses are as follows.

Karnataka light soil-Mysore:

This tobacco is preferred for low nicotine content, high filling capacity and suitability to blend well with any tobacco.

Monsoon burley:

Used in U.S. blended cigarettes

Traditional burley:

Used for pipe mixture, chewing plugs and hookah tobacco paste.Kurnool and Telangana (natu):

Primarily used for cigarette blending and for hookah tobacco paste making.Eluru (natu tobacco):

Mainly used for cheroots, snuff pipe tobacco, cigarette blending and for hookah paste making.

Oriental:Used for cigarette blending.Century fire cured tobacco:

Used in pipe mixtures and hookah tobacco paste Bidi tobacco:Used in the manufacture of bidis, a hand rolled smoking products made by wrapping tobacco with natured bony leaves.

Cigar wrapper tobacco:

Mainly used for wrapping the cigars.

Cigar filler tobacco:

Mainly used in the manufacture of cigars &exported to some countries for use in hookah tobacco paste.

Cheroot tobacco:

Used for the manufacture of cheroots and hookah tobacco paste.

Lanka tobacco: Used for the manufacture of cigars & cherootsTamilnadu: Used for chewing & cheroot.

Black Chopadia: Used as chewing tobacco.

Red Chopadia:

Mostly used for chewing also called lat Chopadia and Safna. The export packing ranges from 250gms-1000gms and is available in bales of up to 100kg.

Rustic tobacco: Used as chewing tobacco, hookah tobacco for tobacco sheet making, for kreteks in Indonesia, pipe mixers& cigarette blending to some extent

Motihari: Used in manufacture of various tobacco products such as chewing tobacco, hookah paste, bidis etc.

Southern light soil: Blends with any tobacco.

Black soil (traditional): Blends well with any tobacco.

Northern light soil (nls):

This tobacco is flavoured to semi flavoured with excellent ageing properties.

Objectives of the company:

To serve the nations vital interest in the tobacco related sectors.

To earn a reasonable return on investment. To work towards achievement of self reliance in the field of tobacco, threshing formulation& distribution system.

To create strong research& development in the field of tobacco and stimulate R&D of exports.

To maximise utilisation of the existing facilities in order to improve efficient and increased productivity.

To import training, conduct seminars, workshops and educational courses on computers, computer maintenance software development and software exports and to develop and design software in India.

Abroad and to start software technology part in India or abroad and to offer relationship management solutions for individuals and organisations both individually and through strategic alliances with others companies.

To employ experts to investigate and examine into the conditions, prospects, value character and circumstance of any business concern and undertaking and generally of any assets property or right.

To carry on all kinds of agency business.

To carry on business as merchants in all kinds of goods.BOARD OF DIRECTORS:Managing Director:Sri Maddi Lakshmaiah

Director

:Sri Maddi Seetha Devi

Director

:Sri Maddi Venkateswara Rao (M.B.A in USA)

Director

:Sri Maddi Ramesh

Excutive Director : Sri Mallavarapu Rama Mohana Rao

Excutive Director : Sri Meaden Sekhar

MANAGEMENT TEAM:Managing Director

:M. Venkateswara Rao

Director

:M. Lakshmaiah

General Director

:M. Rama Mohana Rao

Personnel Manager:B. Babu Rao

Leaf Manager

:M. Rama Mohana Rao

Finance Manager

:M. Shekhar

Export Manager

:M. Shekhar

Production Manager:K.S. Rami Reddy

Circle Manager

:Anji Babu

Factory coordinator:P. Subba Rao

ORGANIZATION STRUCTURE:

The company (ML Company) is under the complete administrative control of the managing director and he is reported by the director and he is reported by general manager.

The General Manager (ML Company) is assisted by five General Managers. Manager personnel.

Manager leaf department.

Manger finance.

Manager exports.

Manager production.

Responsibilities:

The M.L Company managing director M.Venkateswara Rao is under the complete administrative control of the managing direction and he is reported by the director and he is reported by general manager

The general manager of ML Company is M. Ram Mohan Rao assisted by fine general manager i.e., personal manager, leaf manager or department manager, finance manager, exports manager and production manager.

The personal department manager B. Babu Rao is headed by who reports directly to G.M. he looks after the areas of personnel & administration under there may be a personal offices welfare officer and a safely officer.

The finance manager M.Shekhar is assisted by a team of experienced management and non management staff who tekes care of the finance is accounts activities of the organization.

The export manager M.Shakhar deals all the matters regarding the export departments and directly reports to managing director.

The production manager K.S.Rami Reddy is headed by the G.M. is assisted by a plant engineer and staff of the production department.

Functions OF THE COMPANY:

The group has the following different departments.

Personnel department:

This department deals with the matters of industrial relations, HRD, welfare activities, labour legislations, recruitment and issues of wages etc. which is the main department in the organisation.

Leaf department:

This department deals with the matters of tobacco leaf. It looks after buying tobacco from the farmers for the processing of tobacco.Export department:

It looks after the export matters of the organisation. This organisation exports tobacco leaf to China, Bangladesh & UK.

Production department:

This department takes care to produce quality tobacco to customers.Marketing department:This department takes care of marketing the company tobacco to other countries such as Russia, Europe, Middle East, Bangladesh, African countries etc.

They sell varieties of tobacco in market and maintain good relationship with the customers. This is one of the main/important departments in this organization.

M.L group was concentrating on domestic market.

It ties up with Indian strongest cigarette manufacturing company, ITC.

Methods:-

In ML Company the methods of purchasing tobacco is of various types i.e.

With tenders raised in market, documents will be filled up by various companies or merchants can purchase them.

They have good contacts with various merchants (mediators between manufacture & exporters) in reputed companies at Guntur.

Every year they are procuring 1000 tonnes of various varieties /grades of tobacco.

They usually do their business with the international reputed companies like.

Universal

Dimon

Standard commercial

The company have some direct contacts with other countries and they directly ask them at the time of requirement.Marketing channels:-

Normally they send samples/verities.

At the time of requirement, they send samples through couriers.

Participating in exhibitions- every year ML Company was taking participation in 5-6 exhibitions.

The people who have connection in tobacco visit tobacco stalls usually, even from Europe, Russia & china.

People like manufactures, dealers, bankers, merchants of tobacco may visit the tobacco exhibitions.

They display the samples of the company and sell the samples.Another mode:-

The other mode of marketing (channel) is through business delegations of Tobacco Board of Central government, Ministry of Commerce. Government. of India, Guntur. The tobacco board usually:

Regularize crop.

Register of foreigners.

Fixing the crop size.

The board explore marketing possibilities with the help of exporters.

Another type of business mode is tobacco trade delegations from different countries (usually every year 5-6 delegations may takes place).

The tobacco delegations meet exporters and inspect all the tobacco.

They get the business through reputation.

Customers usually approach them because of the good will of the company.

Mode of payment:-

Exporters normally receive payment from their buyers through L.CS (letters of credit).

Some time through advance payment ion terms of D.A&D.P.

Document against payment

Document against acceptance.

After customers checkers in the Madras port it may send to abroad.

Shipment of tobacco is through Chennai port only.

At the same time shipment of tobacco the pay/buyers send payment to bank in the companys account.Credit:-

Some parties ask/need some time for payment with in certain period from the date of bill of payment (up to 180 days).

In India there is a rule that on credit basis, the payment must be done with in 180 days from the date.Market range:-

ML Company was marketing 7-10 million kilos of tobacco every year. But the market range is not fixed. The market range depends on supply &demand forces.

When there is demand, the company produces more.

In the tobacco field, the marketing/market range may be flexible based on international supply -demand.

FINANCE DEPARTMENT:

In this department

Cash payments will be checked by cashiers.

Cash bills and credit bills may be received from trashing factory and engineering department.

Concerned accounts may be generalized by the accountants and may be sent to concerned heads.

Credit bills payment will be given in the form of cheques or DDs.

FUNDS FLOW ANALYSIS

Introduction

Significant technique of financial analysis is Funds Flow Analysis. It is designed to highlight changes in the financial conditions of a business concern between two points of time which generally conform to beginning and ending financial statement dates. Funds flow statement is also termed as a statement of sources and applications of Funds, statement of changes in working capital, statement of changes in Financial Position, statement of Funds supplied and Applied, statement of Funds Generated and Expended, where got and where gone statement, funds statement.

Although financial statements supply useful information to the management and describe the nature of changes ownership as a result of the periods productive and commercial activities, these statements fail to mirror the funds changes that have taken place over a given time span. They do not spell out the movements of funds. It is more important to describe the sources from which additional funds sere derived and the uses to which these funds were put, because the ultimate success of a business enterprise depends on where got and where gone situations. The funds flow statement is, therefore, prepared to uncover the information which the financial statements fail to describe clearly.

Funds Flow Statement:

The following are the definitions of funds flow statement.

R.N. Anthony:"The funds flow statement describes the sources from which additional funds were derived and the uses to which these funds were put.

R.A.Foulk: A statement of sources and applications of funds is a technical devise designed to analysis the changes in the financial conditions of a business between two dates.

Bigman: It is a statement which highlights the underlying financial movements and explains the changes of working capital from one point of time to another.Thus funds flow statement is a report which summarizes the events taking place between the two accounting periods. It spells out the sources from which funds were derived and the uses to which these funds were put. This statement is essentially derived from an analysis of the changes that have occurred in assets and liabilities items between two balances sheet dates. In this statements only the net changes are shows that the outcome of a transaction as of a series of transactions upon the financial condition of a business enterprise is reflected more sharply.Concept of Fund:

The term Funds has a variety of meanings. Some people take funds synonymous to cash, and to them there is a no difference between a cash Flow Statement prepared on this basis and a Funds Flow Statement. While others include marketable securities and cash to constitute business funds. However, the most common definition of the term funds is Working Capital or Net current Assets. Thus the difference between Current Assets and Current Liabilities is called Funds.

Objectives of financial analysis:

Analysis of financial statements may be made for a particular purpose in view. However, the following are generally considered to be the objectives of financial analysis.

1. To find out the financial stability and soundness of the business enterprise.

2. To assess and evaluate the earning capacity of the business

3. To estimate and evaluate the fixed assets stock etc of the concern.

4. To estimate and determine the possibilities of future growth of business.

5. To assess and evaluate the firms capacity and ability to repay short-term and long term loans.

Parties interested in financial analysis:

The analysis and interpretation of financial statements is an important accounting activity. The end users of business financial statements are interested these statements primarily as an aid to determine the financial position and the results of the operations. There are different parties interested in the financial analysis of these statements. But their aim and objectives of analysis differ significantly. The users of financial statements can be divided into two broad groups; (i) internal users and (ii) external users.1. Internal users:

1. Financial executives:The first party interested in the financial statement analysis is the financial department of the company itself. This analysis helps the finance manager to have a deep insight into the financial condition of the enterprise. This analysis helps him in taking appropriate decisions from future point of view.

I. Top management:The top management of the concern is also interested in the analysis of financial statements. It helps them in reaching conclusion on the following.

a) Is the firm in a position to meet its current obligations?

b) What sources of long-term finance are employed by the firm? What is the relationship between them? Is there any danger to the solvency of the firm due to the employment of excessive debt?

c) How efficiently does the firm use its assets?

d) Are the earnings of the firm adequate?

e) Do investors consider the firm as profitable and safe for the purpose of investing their money in its shares?

2. External users:

Investors:Those who are interested in buying the shares of a company are naturally interested in the financial statements to know how safe the investment already made is and how safe the proposed investment will be.1. Creditors:Lenders are interested to know whether their loan, principal and interest, will be paid when due suppliers and other creditors and also interested to know the ability of the firm to pay their dues in time.

2. Workers: In our country, workers are extitled to payment of bonus which depends on the size of profit earned. Hence, they would like to be satisfied that the bonus beung paid to them is correct. This knowledge also helps them in conducting negotations for wages.

3. Customers:They are also concerned with the stability and profitability of the enterprise. They may be interested in knowing the financial strength of the company to take further decision relating to purchase of goods.

4. Government:Financial analysis helps governments in determining tax liability. This also helps government is knowing the role and status of industry in general and companies in particular for framing macro-economic policies.

5. Public:The public at large is interested in the functioning of the enterprise because it may make a substantial contribution to the local economy in many ways including the number of people employed and their patronage to local supliers.

6. Researches:The financial statements being a mirror of business conditions, is of great interest to schalours undertaking research in accounting theory as well as business affairs and practies.

Significance of Funds Flow Statement:

The funds flow statement is an important tool of financial analysis. The utility of the funds flow statement items from the fact that it enables management, shareholders, investors, creditors and other interested in the enterprise to evaluate the uses of financial policies of the management.

i. Decisions relating to financing:

With the people of the funds flow statement the analyst can evaluate the financing patterns of the enterprise. An analysis of the major sources of funds in the past reveals what portion of the growth was financed internally and what portion externally. The statement is also meaningful in judging whether the company has grown at too fast a rate, credit has increased at relatively higher rate, one would wish to evaluate the consequences of slowness in the trade payments on the credit standing of the company and its ability to finance in future.

ii. Decision on capitalization:

The funds flow statement serves as handmaid to the finance manager in deciding the make up of capitalizations. Estimated uses of funds for new fixed assets working capital, dividend, and repayment of debt are made for each of several future years. Estimates are made of the funds to be provided by operations, and the balance must be obtained by borrowing or issuance of new securities, if the indicated amount of new funds required is greater than what the finance manager thinks possible to raise, then plans for new fixed assets acquisition and the dividend policies are re-examined so that the uses of funds can be brought into balance with the anticipated sources of financing them. In particular funds statements are very useful in planning intermediate and long term financing.iii. Reveals the reasons for financial difficulties:

The funds flow statement reveals clearly the cause for the financial difficulties of the company. The difficulties may be due to improper mix of short and long term sources, un necessary accumulation of inventory of fixed assets etc., These can be found out by a careful study of the funds flow statement.iv. Others uses:

Funds Flow Statement is useful to the management in following cases.

a) Estimating the amount of funds needed for growth;

b) Improving the rate of income on assets;

c) Planning the temporary investment of idle funds;

d) Securing additional working capital when needed ;

e) Securing economies in the centralized management of cash in organisation whose management is decentralized;

f) Planning the payment of dividend to shareholders and interest to creditor and

g) Lasting the effects of insufficient cash balance.Useful as control device:

The funds flow statement also serves as a control device in that the statement compared with the budgeted figures will show to what extent the funds were put to use according to plan. This enables the finance managers to find out deviation from the planned course of action and take remedial steps to correct the deviations.Useful to the external parties:

The outside parties can have a clear knowledge about the financial policies that the company has persuade. In the light of the information so supplied by the statement the outsiders can decide whether or not to invest in the enterprise and on what terms funds have to be invested. The funds statement provides an insight into the financial operations of a business enterprise an insight immensely valuable to the finance manager in analyzing the past and future expansion plans of the enterprise and the import of these plans an its liquidity. He can detect imbalances in the issue of funds and undertake remedial actions.

Thus, the funds statement draws the attention of finance manager to problems which call for detailed analysis and immediate action. In view of these funds flow statement is becoming more popular with management. Even some bank managers make it obligatory for the borrowers to furnish a funds statement along with their annual balance sheet now a days many Indian companies are publishing this statement in their annual reports although they are not obliged to do so under the companies Act.

Limitations of financial analysis:

Every coin has two sides. Same is the case with analysis of financial statement. Although this analysis has much significant and usefulness yet it has certain limitations. Financial analysis may not provide exact answers to these questions but it does indicates what can expected in the future. The limitations of financial analysis are given below.

1. Historical data:Analysis of the financial statements indicates about the performance of the business in the preceding periods. It does not indicate the present position of the business. Financial statements are prepared on historian facts and not throw light on the current and present position of the business.

2. Lack of standard terminology:Accounting is not an exact science. It does not universally accepted terminology. Different meanings are given to a particular term. These are different methods of providing depreciation. Interest may be charged on different rates. In this way, there is sufficient possibility of manipulation and the financial statements have suffer. 3. As a consequence financial analysis also proves to be defective. However, in the recent past the International Accounting Board is taking active interest and taking measures for standard sing the accounting terminology as well as bringing standards for bring informing in accounting system.

4. Affects of price level changes:The results shown by financial statements may be misleading, if price level changes havent been accounted for. The ratio may improve with the increase in price, where as the actual efficiency may not improve. Ratios on the two years will not be meaningful for comparison, it the prices of commodities are different. Changes in price affects cost of production, sales and value of assets and as a consequence comparability of suffers.

5. Non-consideration qualitative aspects:Financial analysis does not measure the qualitative aspects of the business. It does not show the skill, technical know how and the efficiency of its employees and managers. It is the qualitative measurement of the performence. It means that analysis of financial statements measures only one sided performance of the business. It completely ignores human resources.

6. Misleading results:Results shown by financial analysis may be misleading in the absence of absolute data. For example, the analysis of one firm revels that the increase in profits form Rs.20,000 to Rs.80,000 shows that the profit has increased by four times. In case of another firm the analysis reveals that the profit of this firm also increased for Rs.100 crores to Rs.400 crores, showing four fold increase. But this analysis ignored the size of the firms. As such, the results may mislead.

Financial Statements and Funds Flow Statement:

Financial statement means the profit and loss account and the balance sheet. All the organizations more particularly, the company from of organizations is required to present the annual financial statements every year. The financial statements differ with the funds flow statement in many ways.

A Funds Flow Statement is a statement measuring the inflows the inflows and outflows of net working capital that result from any type of business activity between two dates. An Income statement in a statement measuring the inflows and outflows of net assets of revenue nature that result form rendering goods on services to customers between two dates.

A Funds Flow Statements has become a useful tool in the hands of financial analyst. That is because the financial statements i.e., Income statement measures the flows restricted to transaction relating to rendering of goods and services to customers. It is not capable of any accurate information of the resources from operating unless the income data is converted into funds data. It does not depict the major financial transactions which have resulted in changes in Balance Sheet.

Preparation of Funds Flow Statement:

In order to prepare funds flow statement, it is necessary to find out the Sources and Applications of funds.Sources of Funds:

1. Funds from Operations: Funds from operations is the only internal sources of funds. Some adjustments are to be made in calculating funds from operations to the net profit given in the financial statement.2. Calculation of funds form operations:

ParticularsAmountParticularsAmount

To DepreciationBy Opening Balance of P&L A/c

To General Reserve AccountBy Profit on fixed Assets

To Loss on fixed asset

To Provision for Taxation

To Closing Balance of P&L A/cBy Funds from operations

The following procedure is to be followed in the calculation of funds from operations.

1. Start with the Net Profit given in the profit and loss account.

2. Add the following items to the net profit as they do not result in outflow of funds.

i. Preliminary expenses or good will etc., written off.

ii. Contribution to debenture redemption funds, transfer to general reserve etc., if they have been deducted before arriving at the figure of net profit.

iii. Provision for taxation and proposed dividend. These may be taken as appropriations of profits or current liabilities for the purposes of Funds Flow Statement. Tax or dividends actually paid are taken as applications to funds. Similarly interim dividend paid is known as an application of funds. All these items will be added back to net profit if already deducted, to find funds from operations.

iv. Loss on sale of fixed assets.1. Deduct the following items from net profit as they do not increase the funds:

i. Profit on sale of fixed assets, since the full sale proceeds are taken as a separate source of funds and conclusion here will result in duplication.

ii. Profit on revaluation of fixed assets.

iii. Non-operating incomes such as dividend received or accured rent. These items increase funds but they are not operating incomes. They will be shown under separate heads as sources of funds in the Funds Flow Statement.

In case the profit and loss account shows net loss this should be taken as an items which decrease the finds.

Statement of changes in working capital:

The increase or decrease in working capital can be calculated by preparing the schedule of changes in working capital.

Working capital represents the excess of current assets over current liabilities. Several items of all current assets and current liabilities are the components of working capital. In order to ascertain the working capital at the beginning and at the end of the period and to measure the increase or decrease therein it is necessary to prepare a statement or schedule of changes in working capital.

Schedule of changes in working capital of the company for the year ended

Particulars Previous

Year(Rs.)Current

Year(Rs.)Effect on working capital

Increase (Rs.)Decrease(Rs.)

Current Assets:

Stock

Debtors

Cash Bank

Bills receivable

Prepaid expenses

Total (A)

Current liabilities:

Creditors

Bills payable

Outstanding expenses

Total (B)

Working changes:(A-B)

Increase/decrease in

Working capital

While preparing a schedule of changes in working capital it should be noted that.

a. an increase in current assets increases working capital;

b. a decrease in current assets decrease working capital;

c. an increase in current liabilities decreases working capital;

d. a decrease in current liabilities increase working capital;

e. an increases in current asset and increase in current liabilities does not affect working capital.

f. a decrease in fixed assets and fixed liabilities affects working capital .

2. The changes in all currents assets and current liabilities are merged into one figure only either an increase or decrease in working capital over the period for which funds statements has been prepared. If the working capital at the end of the difference expressed as increase in working capital. On the other hand, if the working capital at the end of the period is less than that at the commencement, the difference is called decrease in working capital.Current Assets:

The expression current assets denotes those assets which are continually on the move since they are constantly in motion, they are also known as the circulating capital of the business. These assets can or will be converted into cash during a complete operating cycle of the business. Current assets include;

a. stock-in-trade or inventories

b. debtors

c. payments in advance or prepaid expenses

d. stores

e. bills receivables

f. cash at bank

g. cash in hand

h. work in progressCurrent liabilities:

Current liabilities are those liabilities which are to be paid in the near future, i.e., during a complete operating cycle of the business. Such liabilities include;

a. Trade creditors

b. Accured or outstanding expenses.

c. Bills payable.

d. Income tax payable

e. Dividends declared;

f. Bank overdraft

Note: Some experts are of the opinion that as bank over draft has a tendency to become more or less a permanent source of financing and hence it need not be included among current liabilities.

Statement of Sources and Application of Funds:

1. Funds from operation:It is an internal source of funds. Funds from operations are to be calculated as per the method stated above.

2. Funds from long term loans:Long term loans such of debentures, borrowing from financial institutions will increase the working capital and therefore, there will be inflow of funds. However, if the debentures have been issued in consideration of some fixed assets, there will be no inflow of funds.

3. Sale of fixed assets:Sale of land, buildings, and long-term investments will result in generation of funds.

4. Funds from increase in share capital:Issue of shares for cash or for any other current asset or in discharge of current liability is another source of funds. However, shares allotted in consideration of some fixed assets will not result in funds. However, it is recommended that such purchase of fixed assets as well as issue of securities to pay for them be revealed in funds flow statement.

5. Decrease in working capital:Decrease in working capital is the result of decrease in current asset or increase in current liabilities. In both the cases inflow of funds takes place. Suppose stock, a current asset reduce from Rs.15,000 to Rs.12,000 the decrease of Rs.3,000 is assumed to be due to the disposal of stock which undoubtedly brings funds into the business. In the fame way, increase in current liabilities means lesser payment, so retaining funds is also a source.Funds flow Statements

ParticularsAmount (Rs.)

Sources of funds:

Issue of shares

Issue of debentures

Long term borrowings

Sale of fixed assets

* Decrease in working capital

Total sources

Application of funds:

Redemption of redeemable

Preference shares

Redemption of debentures

Purchase of fixed assets

Payment of other long term loans

Payment of dividends, taxes, etc

*increase in working capital

Total uses

Note: * only one will be there.XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Treatment of adjustments:

Some times the factors affecting the funds from operations may not be given in the problems directly and there may be some hidden information. As such, some of the transactions have to digged out using the additional information provided as adjustments to the balance sheet. These items include: a) provision for tax (b) proposed dividends (c) sale purchase of fixed assets.

a. Provision for tax:it is current liability while preparing a funds flow statement, these are two options available.

Provision for tax may be taken as a current liability in such a case, when provision for tax is made the transaction involves profit and loss appropriation account which is a fixed liability and provision for tax account which is a current liability. It will thus decrease the working capital. On payment of tax these will be no change in working capital because it will in-values one current liability (i.e., provision for tax) and the other a current assets (i.e., bank or cash balance).

Provision for tax may be taken only as an appropriation of profit. It means that, there will now change in working capital position when provision for tax is made since it will involve two fixed liabilities, i.e., profit and loss appropriation account and provision for tax account. However, when tax is paid, it will be taken as application of funds, because it will when involve Provision for tax account which has been taken as a fixed liability and bank which is current assets.

b. Proposed dividends:Whatever has been said about the provision for tax is also applicable to proposed dividends. Proposed dividends can also be dealt with in twoways; Proposed dividends may be taken current liability since declaration of dividends by the share holders is simply a formality. Once the dividends are declared in the general meeting, they will have to be paid within 42 days of theirs declaration. In case proposed dividends is taken as a current liability it, will appear as one of the items decreasing working capital in the schedule of changes in working capital. It will not be shown as an application of funds when dividend is paid later on.

Proposed dividends may simply be taken as an appropriation of profits. In such a case proposed dividend for the current year will be added back to current years profit in order to find out funds from operations if such amount of dividend has already been charged to profits. Payment of dividend will be shown an application of funds.

c. Sale or purchase of fixed assets:For arriving at the final figure we have to prepare the asset account, depreciation account, assets sold as purchased account. This can be illustrated well with the following extracts of the balance sheet. Asset account (plant and machinery account):This is maintained at the cost price. The accounts is debited with the cost of the machinery as at the beginning of the year (i.e., balance in the machinery account at the beginning) and with purchases during the year. It is credited with the cost price of the machinery sold and with cost of the machinery as at the close of the year (i.e., balance in the machinery account at the end). In the problems either the total value of purchases during the year may be missing or the cost of the machinery sold may be missing. The missing figure can be found out by feeding the account with the available information and balancing it.

Depreciation account: Depreciation is not source of funds. Source of funds is constituted by those transactions, where one account belongs to current category and the other is longs to non-current category. In case of depreciation both items belong to non-current category, as such it does not make any change in the funds and is not a source of funds. In support of the answer journal entry regarding depreciation is presented herewith.

Asset sold account:the purpose of preparing this account is to ascertain the profit or loss made on sale of the asset. The account is debited with the cost of the assets sold (transferred from the asset account). It is credited with the accumulated depreciation on the asset sold (transferred from depreciation account). It is also credited with the money received on sale of the machinery. The difference between the two sides would be profit (if credit balance or loss (if debit balance).

Data analysis and interpretation

Table 5.1

SHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR 2008-09ParticularsPrevious year 2007-08Current year 2008-09Working capital

Increase Rs.Decrease Rs.

A) Current assets:

1) Inventories133343618 17225632138912703

2) Sundry Debtors2439557124937024541453

3) cash & bank balance162539953346575317211758

4) other current assets24471301286568164185515

5) Loans & Advances1519574314928012267731

Total Current Assets213660228274243926

B) Current liabilities:

1) Current Liabilities7595915710839143132432274

2) Provisions for taxation481906072569272437867

Total Current Liabilities80778217115648358

Net working capital (A-B)132882011158595568

Increase in working capital2571355725713557

Total 1585955681585955686085142960851429

Source: Compiled from annual reports of the company

Table 5.2

ADJUSTED PROFIT & LOSS ACCOUNT FOR THE YEAR 2008-09Dr. Cr.

ParticularsAmount Rs.ParticularsAmount Rs.

To Depreciation A/c71209082By Opening Balance of Reserves and surplus A/c122618090

To Closing Balance of Reserves and surplus A/c135167525By Funds from operations83758517

206376607206376607

Source: Compiled from annual reports of the companyTable 5.3

FUNDS FLOW STATEMENT FOR THE YEAR 2008-09SourcesAmount Rs.ApplicationsAmount Rs.

Raising unsecured loans137875142Payment on secured loan26776514

Funds from operations83757517Decrease in Differed tax161048

Purchase fixed assets168546189

Increase in investments436351


221632659221633659


Interpretation:

It is observed from table 5.1. That the net increase in working capital for the year 2008-09 is Rs 2,57,13,557. The current assents of the company are increased comparing with previous year results. The current liabilities of the company are decreased comparing the previous results. To find the table 5.2, the company gains profit from the operation to an extent Rs 8,37,58,517. It shows the table 5.3, net increase in working capital is Rs 2,57,13,557. This year raising the unsecured loans and paying the secured loans. And this year company increased investments. Table 5.4

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR 2009-2010ParticularsPrevious year 2008-09Current year 2009-10Working capital


A) Current assets:

1) Inventories17225632118793401215677691

2) Sundry Debtors24937024268605401923516



5) Loans & Advances14928012117230193204993







Decrease in working capital2898225828982258

Total 1585955681585955686660649566606495


Table 5.5

ADJUSTED PROFIT & LOSS ACCOUNT FOR THE YEAR 2009-10Dr.

Cr.

ParticularsAmount Rs.ParticularsAmount Rs.



235748057235748057


Table 5.6


Raising unsecured loans23688279Payment on secured loan74848773

Funds from operations100580532Purchase fixed assets79411683

Sale of investment736800

Decrease in working capital28982258

Increase in differed tax272587

154260456154260456

Source: Compiled from annual reports of the companyINTERPRETATION:

It is observed from table 5.4. That the net increase in working capital for the year 2009-10 is Rs 2,89,82,258. The current assents of the company are decreased comparing with previous year results. The current liabilities of the company are increased comparing the previous results. To find the table 5.5, the company gains profit from the operation to an extent Rs 10,05,80,532. It shows the table 5.6, net decrease in working capital is Rs 2,89,82,258. This year raising the unsecured loans and selling some investments. This year changes in differed tax increased, the company paying some funds to secured loans holders.

Table 5.7



A) Current assets:

1) Inventories18793401223988007551946063

2) Sundry Debtors26860540359926869132146



5) Loans & Advances1172301912529745806726








Total 1536704251536704258688224586882245


Table 5.8

ADJUSTED PROFIT & LOSS ACCOUNT FOR THE YEAR 2010-11ParticularsAmount Rs.ParticularsAmount Rs.



296170094296170094


Table 5.9


Increase in differed tax451322Payment on secured loan10888974


Payment Unsecured loan6198613


166351380166351380


INTERPRETATION:It is observed from table 5.7. That the net increase in working capital for the year 2010-11 is Rs 2,40,57,115. The current assents of the company are increased comparing with previous year results. The current liabilities of the company are decreased comparing the previous results. To find the table 5.8, the company gains profit from the operation to an extent Rs 16,59,00,058. It shows the table 5.9, net increase in working capital is Rs 2,40,57,115. This year company is paying unsecured loans, at present time no change in investments. And this year change in differed tax increased and the company pay some funds to secured loan holders. Table 5.10



A) Current assets:

1) Inventories2398800752369757622904313

2) Sundry Debtors3599268636258591265905



5) Loans & Advances12529745108641191665626








Total 2117518722117518727515792075157920


Table 5.11

ADJUSTED PROFIT & LOSS ACCOUNT FOR THE YEAR 2011-12ParticularsAmount Rs.ParticularsAmount Rs.



376691884376691884


Table 5.12


Raise secured loans99207205Payment on unsecured loan111445151


Decrease in differed tax723545


324762132324762132

Source: Compiled from annual reports of the companyINTERPRETATION:

It is observed from table 5.10. That the net increase in working capital for the year 2011-12 is Rs 5,80,81,447. The current assents of the company are increased comparing with previous year results. The current liabilities of the company are decreased comparing the previous results. To find the table 5.11, the company gains profit from the operation to an extent Rs 22,55,54,927. It shows the table 5.12, net increase in working capital is Rs 5,80,81,447. This year changes in differed tax decreased and the company raising some funds to secured loan holders.Table 5.13



A) Current assets:

1) Inventories23697576232741254390436781

2) Sundry Debtors362585912236149813897093



5) Loans & Advances10864119139666913102572



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