seminar ffs
TRANSCRIPT
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Financial StatementsFinancial Statements
Profit and Loss A/cProfit and Loss A/c
Balance SheetBalance Sheet
Discloses the financial position of theDiscloses the financial position of thebusiness on a particular date.business on a particular date.
Dont Disclose the changes or theDont Disclose the changes or themovement of the funds between two periods.movement of the funds between two periods.
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For ExampleFor Example
If Fixed Asset of Rs. 5,00,000 is purchased byIf Fixed Asset of Rs. 5,00,000 is purchased by
raising Share Capital of Rs. 5,00,000.raising Share Capital of Rs. 5,00,000.
Balance Sheet will simply show higher F.A.Balance Sheet will simply show higher F.A.value and higher Share Capital.value and higher Share Capital.
If loan is raised for Rs. 2,00,000 and is paid inIf loan is raised for Rs. 2,00,000 and is paid in
accounting year.accounting year.
It will not find place in the Balance Sheet.It will not find place in the Balance Sheet.
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To Know the answersTo Know the answers
W
here have the funds come fromW
here have the funds come from Where they have been usedWhere they have been used
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FundFund
FlowFlowStatementStatement
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FundFund
Working CapitalWorking Capital
Excess of Current Assets over CurrentExcess of Current Assets over CurrentLiabilitiesLiabilities
(Current Assets(Current Assets-- Current Liabilities)Current Liabilities)
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Flow of FundFlow of Fund
When fund is working capital flow of fundWhen fund is working capital flow of fund
means movement of funds which cause ameans movement of funds which cause a
change in working capital of the organisation.change in working capital of the organisation. The flow of fund only takes place only if aThe flow of fund only takes place only if a
current account is involved to identify a flowcurrent account is involved to identify a flow
journalise the transaction identify the twojournalise the transaction identify the two
accounts involved as current and non currentaccounts involved as current and non current
and apply the general ruleand apply the general rule
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Transaction that involve oneTransaction that involve one currentcurrent and oneand one
non currentnon current account result in a flow of fundaccount result in a flow of fund
Eg. When shares are issued for cashEg. When shares are issued for cash
Bank A/c Dr.Bank A/c Dr.
To Share Capital A/cTo Share Capital A/c
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Transaction that involves onlyTransaction that involves only currentcurrent
accountsaccounts do not result in a flowdo not result in a flow
Eg. When debtors are realisedEg. When debtors are realisedBank A/c Dr.Bank A/c Dr.
To Sundry Debtors A/cTo Sundry Debtors A/c
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Transaction that involves onlyTransaction that involves only nonnon--currentcurrent
accountsaccounts do not result in a flowdo not result in a flow
Eg. When shares are issued for purchase ofEg. When shares are issued for purchase ofbuildingbuilding
Building A/c Dr.Building A/c Dr.
To Share Capital A/cTo Share Capital A/c
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Steps in preparing Fund FlowSteps in preparing Fund Flow
StatementStatement
Statement or Schedule of Changes in WorkingStatement or Schedule of Changes in Working
Capital.Capital. Fund from OperationFund from Operation
Statement of Sources and Uses of Funds orStatement of Sources and Uses of Funds or
Funds Flow Statement.Funds Flow Statement.
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Schedule or Statement of changes in working capitalSchedule or Statement of changes in working capital
It discloses the changes in the individual item ofIt discloses the changes in the individual item of
current asset and current liability between two periodscurrent asset and current liability between two periods
and their effect on working capital. Working capitaland their effect on working capital. Working capital
will increasewill increase when there is an increase in current assetwhen there is an increase in current assetand decrease in current liabilities, whereas, workingand decrease in current liabilities, whereas, working
capital will decrease when there is a decrease incapital will decrease when there is a decrease in
current asset & increase in current liabilities.current asset & increase in current liabilities.
Net increase in working capital is treated as use ofNet increase in working capital is treated as use of
funds & the net decrease in working capital is treatedfunds & the net decrease in working capital is treated
as source of funds.as source of funds.
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Statement of changes in working capitalStatement of changes in working capitalParticularsParticulars Current YearCurrent Year PreviousPrevious
YearYear
Increase inIncrease in
Working CapitalWorking Capital
Decrease in Working CapitalDecrease in Working Capital
Current AssetsCurrent Assets::
Cash at bankCash at bank
Cash in handCash in hand
Stock in tradeStock in trade
DebtorsDebtors
Bills receivableBills receivable
Advance paymentAdvance payment
Short term investmentShort term investment
Prepaid expensePrepaid expense
Accrued incomeAccrued income
Total Current AssetsTotal Current Assets xxxxxx xxxxxx
Current LiabilitiesCurrent Liabilities
(1) Short term loans(1) Short term loans
(2) Bank overdraft(2) Bank overdraft
(3) Creditors(3) Creditors
(4) Bills payable(4) Bills payable(5) Outstanding expenses(5) Outstanding expenses
(6) Unclaimed dividend(6) Unclaimed dividend
Total Current LiabilitiesTotal Current Liabilities xxxxxx xxxxxx
Net Working CapitalNet Working Capital
Net Increase/Decrease in WorkingNet Increase/Decrease in WorkingCapitalCapital
xxxxxx
xxxxxx
xxxxxx
xxxxxx
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Fund From OperationFund From Operation
Fund from operation means the netFund from operation means the net
working capital provided by the operatingworking capital provided by the operating
activities of the business.activities of the business.
Direct methodDirect method::
Indirect methodIndirect method::
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Direct MethodDirect Method
Profit & Loss Adjustment A/cProfit & Loss Adjustment A/cParticularParticular Amount(Rs.)Amount(Rs.) ParticularParticular Amount(Rs.)Amount(Rs.)
DepreciationDepreciation
Loss on sale of fixedLoss on sale of fixed
assetsassets
Under writingUnder writing
commissionscommissions
Discount on issue ofDiscount on issue ofshares &shares &
debenturesdebentures
Preliminary expensePreliminary expense
written offwritten off
Deferred revenueDeferred revenue
expensesexpensesGoodwill written offGoodwill written off
Patent or trademarkPatent or trademark
Provision for taxesProvision for taxes
(If treated non current(If treated non current))
Profit or gain on saleProfit or gain on sale
ofof
fixed assetfixed asset
Dividend receivedDividend received
Interest received ofInterest received of
investmentinvestmentProfit on revaluationProfit on revaluation
of assetof asset
Fund from operationFund from operation
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Indirect MethodIndirect Method
Net Profit earned during the yearNet Profit earned during the year xxxxxxxxAdd: Non Fund and Non Operating Items (which are already debited to P/L A/c)Add: Non Fund and Non Operating Items (which are already debited to P/L A/c)
Depreciation on Fixed Assets xxxxDepreciation on Fixed Assets xxxx
Goodwill Written Off xxxxGoodwill Written Off xxxx
Discount on issue of Shares Written Off xxxxDiscount on issue of Shares Written Off xxxx
Preliminary Expense Written Off xxxxPreliminary Expense Written Off xxxx
Patents Written Off xxxxPatents Written Off xxxx
Transfer to General Reserve xxxxTransfer to General Reserve xxxx
Loss on sale of Fixed Assets xxxx xxxxLoss on sale of Fixed Assets xxxx xxxx
________________
Less : Non Fund and Non Operating Items (which are credited to P/L A/c)Less : Non Fund and Non Operating Items (which are credited to P/L A/c)
Profit on sale of Fixed Assets xxxProfit on sale of Fixed Assets xxx
Profit on revaluation of assets xxxxProfit on revaluation of assets xxxx
Rent received xxxxRent received xxxx
Refund on Income Tax xxxxRefund on Income Tax xxxx
Dividend Received xxxDividend Received xxx xxxxxxxx
________________
Fund From OperationFund From Operation xxxxxxxx
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Fund Flow StatementFund Flow Statement
While preparing a fund flow statement current assets and current liabilities are to beWhile preparing a fund flow statement current assets and current liabilities are to beignored. Attention is given to changes in fixed assets and fixed liabilities.ignored. Attention is given to changes in fixed assets and fixed liabilities.
This fund flow statement has two parts:This fund flow statement has two parts:
Sources of fundSources of fund
Application of fundApplication of fund
The difference between these two parts that is sources & uses of funds representsThe difference between these two parts that is sources & uses of funds represents
Net changes in working capital.Net changes in working capital.
TheThe excess of sourcesexcess of sources of funds over uses of fund is the net increase in workingof funds over uses of fund is the net increase in workingcapital &capital & excess of usesexcess of uses over sources of fund is net decrease in working capital.over sources of fund is net decrease in working capital.
The amount of net increase or decrease as shown in fund flow statement should beThe amount of net increase or decrease as shown in fund flow statement should beequal to the amount shown by schedule of working capital changes.equal to the amount shown by schedule of working capital changes.
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Fund Flow StatementFund Flow StatementSources of FundSources of Fund Amount(Rs.)Amount(Rs.) Uses of FundsUses of Funds Amount(Rs.)Amount(Rs.)
Fund from operationFund from operationIssue of shareIssue of share
Issue of debentureIssue of debenture
long term loanslong term loans
Sale of fixed assets /Sale of fixed assets /
InvestmentInvestment
Non trading receiptsNon trading receipts
Decrease in workingDecrease in working
capitalcapital
(if any)(if any)
Loss from operationLoss from operationRedemption ofRedemption of
preference sharespreference shares
Redemption ofRedemption of
debenturesdebentures
Repayment ofRepayment of
long term loanslong term loans
Purchase of fixedPurchase of fixed
assetsassets
/ Investments/ Investments
Payment of dividendPayment of dividend
& taxes& taxes
Increase in workingIncrease in workingcapitalcapital
(if any)(if any)
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QQ-- Following is the summarized Balance sheet of X Ltd. As on 31stFollowing is the summarized Balance sheet of X Ltd. As on 31st
December 2004 and 2005. You are required to prepare a fund flowDecember 2004 and 2005. You are required to prepare a fund flow
statement for the year ended 31st December 2005.statement for the year ended 31st December 2005.
LiabilitiesLiabilities 2004(Rs.)2004(Rs.) 2005(Rs.)2005(Rs.) AssetsAssets 2004(Rs.)2004(Rs.) 2005(Rs.)2005(Rs.)
Share CapitalShare Capital
General ReserveGeneral Reserve
Profit and LossProfit and Loss
A/cA/c
Bank LoanBank Loan
(Long Term)(Long Term)CreditorsCreditors
Provision for taxProvision for tax
1,00,0001,00,000
25,00025,000
15,25015,250
35,00035,000
75,00075,000
15,00015,000
1,25,0001,25,000
30,00030,000
15,30015,300
67,60067,600
----
17,50017,500
GoodwillGoodwill
BuildingBuilding
PlantPlant
StockStock
DebtorsDebtors
BankBank
CashCash
----
1,00,0001,00,000
75,00075,000
50,00050,000
40,00040,000
----
250250
2,5002,500
95,00095,000
84,50084,500
37,00037,000
32,10032,100
4,0004,000
300300
2,65,2502,65,250 2,55,4002,55,400 2,65,2502,65,250 2,55,4002,55,400
Additional InformationAdditional Information
Dividend of Rs. 11,500 was paid.Dividend of Rs. 11,500 was paid.
Depreciation written off on plant Rs. 7,000 and on building Rs. 5000.Depreciation written off on plant Rs. 7,000 and on building Rs. 5000.
Provision for tax was made during the year Rs. 16,500Provision for tax was made during the year Rs. 16,500..
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Schedule of Changes in Working CapitalSchedule of Changes in Working CapitalItemsItems 2004Amount(2004Amount(
Rs.)Rs.)
2005Amount(2005Amount(
Rs.)Rs.)
Increase inIncrease in
Working CapitalWorking Capital
Decrease inDecrease in
Working CapitalWorking Capital
Current AssetsCurrent Assets
CashCash
BankBank
DebtorsDebtors
StockStock
250250
----
40,00040,000
50,00050,000
300300
4,0004,000
3210032100
37,00037,000
5050
4,0004,000
7,9007,900
13,00013,000Total CurrentTotal Current
Assets (A)Assets (A)
90,25090,250 73,40073,400
CurrentCurrent
Liabilities:Liabilities:--
CreditorsCreditors
75,00075,000 ---- 75,00075,000
Total CurrentTotal Current
Liabilities (B)Liabilities (B)
75,00075,000 ----
Working capitalWorking capital
(A(A--B) Net IncreaseB) Net Increase
in Working Capitalin Working Capital
15,25015,250
58,15058,150
73,40073,400
73,40073,400 73,40073,400 79,05079,050 79,05079,050
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Calculation of Fund From OperationCalculation of Fund From Operation
Net Profit earned during the year (15,300 Net Profit earned during the year (15,300--15,250) 5015,250) 50Add: Non Fund and Non Operating Items (which are already debited to P/L A/c)Add: Non Fund and Non Operating Items (which are already debited to P/L A/c)
Depreciation on: Building 5,000Depreciation on: Building 5,000
Plant 7,000Plant 7,000
Transfer to General Reserve 5,000Transfer to General Reserve 5,000
Provision for Tax 16,500Provision for Tax 16,500Dividends Paid 11,500 45,000Dividends Paid 11,500 45,000
______________
Less: Non Fund and Non Operating Items (which are credited to P/L A/c)Less: Non Fund and Non Operating Items (which are credited to P/L A/c) ----
______________
Fund from OperationFund from Operation 45,05045,050
______________
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Fund flow statementFund flow statement
Sources of fundSources of fund Amount (Rs.)Amount (Rs.) Application of Application of
fundfund
Amount (Rs.)Amount (Rs.)
Fund fromFund from
OperationsOperations
Issue of SharesIssue of Shares
Bank LoanBank Loan
45,05045,050
25,00025,000
32,60032,600
Purchase of PlantPurchase of Plant
Income Tax PaidIncome Tax Paid
Dividend PaidDividend Paid
Goodwill PaidGoodwill Paid
Net increase inNet increase in
Working CapitalWorking Capital
16,50016,500
14,00014,000
11,50011,500
2,5002,500
58,15058,150
1,02,6501,02,650 1,02,6501,02,650
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Provision for Taxation A/cProvision for Taxation A/c
ParticularParticular Amount(Rs.)Amount(Rs.) ParticularsParticulars Amount (Rs.)Amount (Rs.)
To Income Tax A/cTo Income Tax A/c(tax paid)(tax paid)
To balance c/dTo balance c/d
14,00014,000
17,50017,500
By balance b/dBy balance b/d
By Profit & LossBy Profit & Loss
A/cA/c
15,00015,000
16,50016,500
31,50031,500 31,50031,500
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Land and Building A/cLand and Building A/c
ParticularParticular Amount(Rs.)Amount(Rs.) ParticularsParticulars Amount (Rs.)Amount (Rs.)
To balanceTo balance
b/db/d
1,00,0001,00,000 By Profit and Loss A/cBy Profit and Loss A/c
(Depreciation)(Depreciation)
By balance b/dBy balance b/d
5,0005,000
95,00095,000
1,00,0001,00,000 1,00,0001,00,000
ParticularParticular Amount(Rs.)Amount(Rs.) ParticularsParticulars Amount (Rs.)Amount (Rs.)
To balance b/dTo balance b/dTo Bank A/cTo Bank A/c
75,00075,00016,50016,500
By Profit and Loss A/cBy Profit and Loss A/c(Depreciation)(Depreciation)
By balance b/dBy balance b/d
7,0007,00084,50084,500
91,50091,500 91,50091,500
Plant A/cPlant A/c
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UsersUsers Owner or ShareholdersOwner or Shareholders
Owner or Shareholders are interested in ascertaining the financial position of business. Funds FlowOwner or Shareholders are interested in ascertaining the financial position of business. Funds Flow
statement helps them to find out:
statement helps them to find out:
Whether the business has enough funds to pay them dividends at reasonable rate?Whether the business has enough funds to pay them dividends at reasonable rate?
Whether the business is in a position to meet its present liabilities in time?Whether the business is in a position to meet its present liabilities in time?
Whether the management is making effective use of funds at their disposal?Whether the management is making effective use of funds at their disposal?
Financial institutionsFinancial institutions:: The financial institutions are interested in the safety of their funds. A careful analysis of the fund flowThe financial institutions are interested in the safety of their funds. A careful analysis of the fund flow
statement will help them in ascertaining :statement will help them in ascertaining :
Overall creditworthiness of the enterprise:Overall creditworthiness of the enterprise:
The resources from which the enterprise will be in a position to make repayments of the loan taken.The resources from which the enterprise will be in a position to make repayments of the loan taken.
Is the business generating sufficient funds from its normal business operations?Is the business generating sufficient funds from its normal business operations?
EmployeesEmployees:: The employees also have a stake in the business. Their growth and security of job depend on theThe employees also have a stake in the business. Their growth and security of job depend on the
profitability of the firm which is directly related to the effective utilisation of the funds. The funds shouldprofitability of the firm which is directly related to the effective utilisation of the funds. The funds shouldbe managed in a manner that the business is in a position to make payments of salaries to the employeesbe managed in a manner that the business is in a position to make payments of salaries to the employeesin time beside meeting other business costs.in time beside meeting other business costs.
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LimitationLimitation Not a substitute for an income statement. The fund flow statementNot a substitute for an income statement. The fund flow statement
simply tells about the working capital position of the business. It doessimply tells about the working capital position of the business. It does
not explain how much profit the business has really earned. This can benot explain how much profit the business has really earned. This can befound out only by an income statement.found out only by an income statement.
It is not an original statement it is only a rearrangement of data given inIt is not an original statement it is only a rearrangement of data given infinancial statement.financial statement.
It is essentially historic in nature. A projected fund flow statement, onIt is essentially historic in nature. A projected fund flow statement, onthe basis of it can not be prepared with much accuracy. It does notthe basis of it can not be prepared with much accuracy. It does notestimate the sources and application of funds of the near future.estimate the sources and application of funds of the near future.
I
t cannot reveal continuous changes.I
t cannot reveal continuous changes.
Misleading the fund flow statement may prove to be misleading. AMisleading the fund flow statement may prove to be misleading. Aheavy balance of working capital does not necessarily mean that theheavy balance of working capital does not necessarily mean that the
business has made large profits. Similarly, lower amount of workingbusiness has made large profits. Similarly, lower amount of workingcapital does not necessarily mean that the business has suffered a heavcapital does not necessarily mean that the business has suffered a heavloss.loss.
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Thank YouThank You
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Submitted BySubmitted By
Anuradha NimeshAnuradha Nimesh
MBA SemMBA Sem--II
Roll No. 15Roll No. 15