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Fund Flow
Analysis
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Chapter Outline
1. Introduction
2. Concept Of Funds
Working Capital Concept of Fund
The distinction between Funds and Cash
3. Flow Of Funds
General rules for Identification of flow of funds
4. Sources Of Funds
Internal Sources
Funds from operations
Methods of calculation
External Sources
5. Application Or Use Of Funds
6. Fund Flow Statement
7. Funds Flow Statement, Schedule of Changes in Working Capital, Balance Sheet, Profit & Loss A/c
Balance Sheet vs. Funds Flow Statement
Funds Flow Statement vs. Schedule of Changes in Working Capital
Funds Flow Statement vs. Profit & Loss A/c
8. Preparation Of Funds Flow Statement
Preparation of Schedule of Working Capital Changes
Calculation of funds generated from (lost in) operations
Identification of various sources and application of funds
Preparation of funds flow statement
9. Treatment of Certain Items
10. Limitations of Funds Flow Statement
11. Importance of Funds Flow Analysis
12. Comprehensive Illustrations
13. Questions
1
1. INTRODUCTION
Every business establishment usually prepares the Balance Sheet and Income Statement (Profit & Loss
Account) at the end of the fiscal year. These are the traditional basic financial statements, which highlights the
financial position of the yester year(s) of a business enterprise. While they do furnish useful financial data
regarding operations, a serious limitation of these statements is that they do not provide information regarding
changes in the firm’s financial position during a particular period of time. In operational terms, they fail to
answer questions such as:
What are the factors responsible for the difference in owner’s equity, assets and liabilities of the
firm at two dates of consecutive balance sheets?
Have long-term sources been adequate to finance fixed assets purchases?
Does the firm possess adequate working capital?
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Why did the firm not pay dividends in spite of adequate profits?
How much funds have been generated from operations?
Why the company is experiencing difficulty in making payments to creditors?
Why the bank balance is getting thinner?
However, there is a general recognition in industry and business and among professional accounting bodies
that financial statements should provide relevant information which serves the multiple objectives of
shareholders, investors, creditors, customers and the public and which enable them to arrive at rational
economic decisions. Normally what the shareholders look for in these statements is an account of the
stewardship of the firm and the amount which may be expected as dividend. Potential investors look upon
funds flow statements as the source of their realistic view of the value of a company’s shares in terms of an
expected futures stream of distribution and judge the efficiency of the management accordingly.
Para 20 of International Accounting Standards (IAS-7) reads as follows: “A statement of changes in financial
position should be included as an integral part of financial statements. The statement of changes in financial
position should be presented for each period for which the income statement is prepared”. The inclusion of
such a statement, therefore, is very helpful to improve the understanding of the operations and activities of an
enterprise for the reporting period. Such a statement is becoming more and more popular and is being
increasingly published as part of the annual accounts.
In this context, a funds flow statement, otherwise called as ‘Statement of Sources and Applications of Funds’ is
a technical device designed to analyze, the changes in the financial condition of a business enterprise between
two different dates. It is becoming popular with the management because it not only helps in analyzing
financial operations, but also serving as a tool of communication for different stakeholders.
2. CONCEPT OF FUNDS
How are funds defined? Perhaps the most ambiguous aspect of funds flow statement is understanding of ‘what
is meant by funds? Unfortunately there is no general agreement as to how precisely funds be defined.
(a) In a Narrow Sense: It means ‘cash only’ and a funds flow statement prepared on this is called a cash flow
statement. Such a statement enumerates net effects of the various business transactions on cash and
takes into account receipts and disbursements of cash.
(b) In Broader sense: The term Funds here refers to money values in whatever forms it exist. It represents all
financial resources used in business whether in the form of men, material, money, machinery or others.
(c) In a Popular Sense: The term Funds means ‘working capital’ i.e., the excess of current assets over current
liabilities. The working capital concept of funds has emerged due to fact that total resource of a business
are invested partly in fixed assets in the form of fixed capital and partly kept in liquid or near liquid form
as working capital.
In this chapter the term `funds’ is used in the sense of Working Capital.
Working Capital Concept of Fund
The excess of an enterprise’s total current assets over its total current liabilities at any point of time may be
termed as its ‘Net Current Assets’ or ‘Working Capital’.
To illustrate, let us assume that on the balance sheet date the total current assets of an enterprise are Rs.3,
00,000 and its total current liabilities are Rs.2, 00,000. It working capital on that date will be Rs.3,00,000–
Rs.2,00,000 = Rs.1,00,000.
It follows from the above that any change in total current assets or total current liabilities will result in a
change in working capital.
3
increases by Rs.25,000. Actually, the Cash Flow Statement is a summary of the Cash Book or Cash Receipts
and Payments for the period covered by the Income Statement.
3. FLOW OF FUNDS
Flow of funds means transmigration (coming and going) of funds. In other words, Flow of funds means change
in Working capital, as in funds flow statement the words ‘funds’ mean net working capital. The definitions
given by authorities on the subject are as follows:
(a) The flow of funds refers to movement of funds in and out of the working capital area. In short, any
increase or decrease in Working Capital means `flow of funds’: Manmohan and Goyal
(b) Fund Flow indicates the increase in cash resources and the utilization of such resources during the
accounting period: Anthony
(c) Fund Flow refers to changes occurring in items of financial condition between two different balance sheet
dates: Smith Brown
4
Patents, trademarks, copy rights,
Long –term loans
preliminary expenses, P & L A/c(Cr),etc
4. SOURCES OF FUNDS
The transactions that increase the working capital are sources of funds. The sources of funds in a concern may
either be internal or external.
Internal Sources
The important possible internal sources of funds include:
a. Funds generated from operations
b. Sale of non-current assets
c. Any surplus working capital
(i) Funds from operations
5
Methods of calculating Funds from Operation
6
Where the provisions made for taxation, depreciation, doubtful debts exceed the genuine requirements,
the excess amount is transferred back to the Profit and loss account. It does not create any inflow of
funds since it is an accounting entry. Hence, deduct it.
Format for determining Funds from operations under net profit method
(D)Fictitious Assets
Writing off Preliminary expense xxx
Writing off Discount on Shares/Debentures xxx
(E)Profit Appropriation
Transfer to General Reserve xxx
7
To Depreciation xxx
By Opening Balance Profit xxx
To Goodwill Written off xxx
By Profit on sale of Fixed Assets xxx
To Patent Written off xxx
By Profit on Sale of Investments xxx
To Loss on Sale of Fixed Asset Xxx
By Profit on redemption of Liability xxx
To Loss on Sale of Investment xxx
By Transfer from General Reserve xxx
To Loss on redemption of Liability xxx
By Balancing Figure xxx
To Preliminary Expenses off xxx
(Fund From Operations)
To Proposed Dividend xxx
To Transfer to General Reserve xxx
To Current Year Provision for Taxation xxx
To Current Year Provision for Depreciation xxx
To Balancing Figure xxx
(Fund Lost in Operations)
Illustration 1
From the following details calculate funds from operations under Net Profit Method and Adjusted Profit & Loss
A/c Method.
Rs.
Salaries 10,000
Rent 6,000
Refund of Tax 6,000
Profit on Sale of Building 10,000
Depreciation on Plant 10,000
Provision for Taxation 8,000
Loss on Sale of plant 4,000
Closing Balance of Profit & Loss A/c 1,20,000
Opening Balance of Profit & Loss A/c 50,000
Discount on Issue of Debentures 4,000
Provision for bad debts 2,000
Transfer to general reserve 2,000
Preliminary expenses written off 6,000
Good will written off 4,000
Dividend Received 10,000
Proposed Dividend 12,000
Solution
8
Fund from operations 96,000
Illustration 2
Calculate funds from operations from the following Profit and Loss Account
5,10,000 5,10,000
Solution
Illustration 3
Following are the extracts from the Balance sheets of DR Ltd.
During the year, the company sold land whose book value was Rs.50, 000 for Rs.54, 000 and paid an interim
dividend of Rs.2, 000. Calculate funds from operations.
9
Solution
DR Ltd
Adjusted Profit and Loss Account
Notes:
(i) There is an increase in the balance in General Reserve. It implies that some amount has been transferred
to the account from the Profit and Loss account. This is an appropriation of profit which does not result in
any outflow of funds.
(ii) The balance in Goodwill Account and Preliminary Expenses account has come down, which indicates that
the difference has been written off. This also does not result in an outflow of funds.
(iii) The increase in provision for depreciation is on account of current year’s depreciation which does not
result in any outflow of funds.
(iv) Profits on sale of land and interim dividend being non-operating items are to be separately shown as
source and application of funds in the Funds Flow Statement.
(c) Sales Method
Under this method, the following statement format is used to arrive at fund flow from operations:
Sources
Sales xxx
Stock at the end xxx
Applications
Stock at Opening xxx
Net Purchases (Purchase -Returns) xxx
Wages xxx
Salaries xxx
Telephone expenses xxx
Electricity charges xxx
Office stationery expenses xxx
Other operating cash expenses xxx
External sources of funds are resources raised from outside the organisation to augment funds availability for
any of the uses to be discussed later. Normally, there are only four ways of doing this:
(a) Issue of share capital:
Share capital consists of equity share capital and preference share capital. The increase in equity share capital
as per Balance Sheet values must be adjusted in terms of additional information. If the increase has taken
place on account of the issue of fresh shares, only that portion of increase should be treated as sources which
are due to the issue of fresh shares for cash and other current assets. Increase on account of share issues for
consideration involving the purchase of fixed assets or redemption of preference shares or debentures shall not
take the character of inflow of funds and hence should not be shown in the statement. If fresh shares have
been issued at premium, the amount of premium must be added to the increase in share capital for the
purpose of showing it as source of fund. If the fresh shares have been issued at discount, the amount of
discount must be deducted from the increase in share capital because it does not involve inflow of fund.
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Illustration 4
The opening and closing balance of Share capital are Rs.6,00,000 and Rs.9,50,000 respectively. The
Preference Share capital included in opening balance is Rs.1,00,000. During the year, Rs.75,000 worth of
Preference shares were redeemed at 8 % premium. Bonus shares are issued at Re.1 for every five equity
shares held. In addition, a business was purchased by issue of Rs.90, 000 shares at a premium of 10%. The
opening and closing balance in the Premium Account is Rs.8, 00,000 and Rs.14, 000 respectively. Calculate
the further fresh issue.
Solution
4,25,000
3,35,000
2,25,000
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Cost of Current year fixed assets ------
------
Deduct: Cost of previous year fixed assets
Illustration 5
The opening and closing written-down balances of an asset are Rs.5,00,000 and Rs.5,50,000. The accumulated
depreciation has been Rs.1, 50,000 at the beginning and Rs.1, 90,000 at the close. A machine costing
Rs.30,000 (accumulated depreciation Rs.18,000) was sold during the year for Rs.9,500. Calculate the
purchase price of the fixed assets.
Solution
Sometimes, it may happen that the cost figures cannot be ascertained on the basis of information available.
Increase in fixed assets, in this case, has to be found out with reference to the written down value along with
annual depreciation. If no purchase of fixed assets were made during the current year, then the value of fixed
assets shown in the Balance Sheet of the current year should be equal to the values of the previous year
minus annual depreciation for current year. The excess of current year’s value over previous year’s value
minus annual depreciation will be treated as increase in fixed assets.
Illustration 6
The written down value of a machinery at the beginning and at close were Rs.2,00,000 and 1,75,000
respectively. An old machine whose written down value was Rs.12,000, was sold for Rs.6,500. Rs.32,000
depreciation was charged during the current year. Calculate the purchase price of machinery.
Solution
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Note: If any fixed asset is purchased for a consideration of issue of shares or debentures, it does not involve
any funds and hence not an application of funds.
(e) Non-trading payment: Payment of dividends and tax etc. reduce the working capital and is an
application of funds. However, mere declaration of dividend or creating a provision for taxation, do not be
treated as an outflow of funds.
(f) Any other non-trading payment: Any payment or expense, not related to the trading operations of the
business amounts to outflow of funds and also taken as application of funds.
(g) Funds lost in operations: If there is any loss during the accounting period, it amounts to loss of funds
in operations. Such loss of funds in trading operations treated as outflow of funds.
The uses of funds, as they are usually presented in the fund flow statement, are enumerated below:
Meaning
A fund flow statement is an important document in the accounting world. It shows a company's inflows and
outflows of funds. It is used to show investors, stakeholders or owners where the company's money came
from and where it went.
A Funds Flow Statement is called in its several other names as follows:
(a) Statement of sources and applications of funds.
(b) Statement of inflow and outflow of funds.
(c) Statement of Fund Supplied and Applied.
(d) Statement of Resources provided and Applied.
(e) Where got and where gone Statement.
Definitions
(a) A technical device designed to analyse the changes to the financial condition of a business enterprise in
between two dates- Foulke
(b) The Funds Flow statement describes the sources from which additional funds were derived and the use to
which these funds were put. -Robert N. Anthony
(c) A statement of changes in financial position or statement of sources and application of funds in which
element of net income and working capital contribution to an understanding of the whole of financial
operations during the reporting period replace totals of these items. – Kotler
(d) A statement, prospective or retrospective, setting out the sources and applications of the funds of an
enterprise. The purpose of the statement is to indicate clearly the requirements of funds and how they
are proposed to be raised and the efficient utilisation and application of the same.- The ICWAI
(e) A Statement of changes in financial position summarising, for the period covered by it, the changes in
the financial position including the sources from which funds were obtained by the enterprise and the
specific uses to which such funds were applied.- The ICAI (AS-3)
(f) The statement of showing sources and uses of funds is popularly known as funds flow statement. It is a
condensed report of how the activities of the business have been financed and how the financial
resources have been used during the period covered by the statement._ S. C. Kuchhal
(g) The fund statement is a statement summarizing the significant financial changes which have occurred
between the beginning and the end of a company’s accounting period._ Coleman
Thus, a Funds Flow Statement is a report which summarizes the events taking 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 which these have occurred in assets and liabilities
items between two balance sheet dates.
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Advantages of Fund Flow Statement
(a) Management of various companies are able to review their cash budget with the aid of fund flow
statements
(b) It explains the relationship between the changes in the working capital and net profits.
(c) It is an effective tool in the allocation of resources
(d) Helps provide explicit answers to the questions regarding liquid and solvency position of the company,
distribution of dividend and whether the working capital is effectively used or not.
(e) Helps the management of companies to forecast in advance the requirements of additional capital and
plan its capital issue accordingly.
(f) Helps in determining how the profits of a company have been invested: whether invested in fixed assets
or in inventories or ploughed back.
(g) The balance sheet and profit and loss account failed to provide the information which is provided by
Funds Flow statement i.e., changes in financial position of an enterprise. This statement indicates the
changes in financial position of an enterprise.
(h) This statement indicates the changes which have taken place between the two accounting dates.
(i) Gives details of sources and uses of funds during given period are of great help to the users of financial
information.
(j) It is also a very useful tool in the hands of management judging the financial and operating performance
of the company.
(k) It also indicates the working capital position which helps the management in taking policy decisions
regarding dividend etc.,
(l) Funds Flow statement helps in answering questions like where the profits have gone? Why there is
imbalance existing between liquidity position and profitability position of the enterprise? Why is the
concern financially solid in spite of losses?
(m) It helps management to take policy decisions to decide about the financing policies and capital
expenditure programmed for future.
7. FUNDS FLOW STATEMENT, BALANCE SHEET, SCHEDULE OF CHANGES IN WORKING CAPITAL AND
PROFIT & LOSS ACCOUNT
Funds Flow Statement is not a substitute of an income statement i.e., a Profit and Loss Account, and a Balance
Sheet. The profit and loss account is a document, which indicates the extent of success achieved by a business
in earning profits. A balance sheet is a statement of financial position or status of business on given date. It is
prepared at end of an accounting period. The balance sheet depicts various resources of an undertaking and
the deployment of these resources in various assets on a particular date. As it indicates the financial condition
on a particular date, it is static in nature; while funds flow statement is a dynamic one.
In this context, the differences between funds flow statement, balance sheet, schedule of changes in working
capital and profit & loss account are given below:
Basis
Balance Sheet Funds Flow Statement
of Difference
A balance sheet is prepared in order to show A funds flow statement is prepared in order to
Objective the financial position of a business on a show the overall inflow or outflow of working
particulars date. capital during a period of time.
The balance sheet is prepared on the basis of Funds flow statement is prepared on the basis
Basis balances of ledger at the end of a particular of Profit & Loss A/c, Balance Sheet and other
period. additional information.
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Format
Concept
Compulsion
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Difference
Objective
Basis
Contents
Difference
Objective
Contents
Compulsion
Capacity
Tool of financial
analysis
A balance sheet is prepared in a format
prescribed by Indian Companies Act.
a particular date.
Basis of
Profit & Loss Account
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There is no prescribed format for preparation
of funds flow statement.
A balance sheet is based on stock concept. It A funds flow statement is based on flow
shows the position of assets and liabilities on concept. It shows the causes for changes in
working capital during a period of time.
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(a) Preparation of Schedule of Working Capital Changes
Also known as ‘Comparative change in Working Capital Statement’ or ‘Working Capital Variation Statement’, it
helps in locating where this changes/variation took place. It is prepared to compare the working capital
position between two balance sheet dates so as to determine increase or decrease in working capital. While an
increase in working capital is an application of funds, a decrease in working capital is a source. The following
Rules should be taken into account.
From above, it is to be noted that the changes in the current assets are positively correlated to the changes in
the working capital. On the other hand, changes in current liabilities are inversely related to the changes in the
working capital.
The statement of changes in working capital (Table 1) shows that the increases in current assets amounted to
Rs. 52 million, a major part of the increase arising out of cash, receivable and inventory. Decrease in working
capital came about mostly from the increased accounts payable, advances from customers and taxes payable.
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Total amount of decrease in working
capital resulting from increase in current
liabilities amounted to Rs. 25 million, thus,
showing a net increase in working capital
of Rs. 27 million.
Table 1
TOTALS INDIA LTD.
Statement of changes in Working Capital
for the year ending March 31, 2011
(Rs. in Millions)
Working Capital
March March Increase/
Particulars Increase Decrease
2010 2011 Decrease
(+) (–)
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When prepared in the Vertical form or Report Format, a Funds Flow Statement would appear as follows:
18
Opening balance of Fixed Assets ……..
Add: Purchases ……..
Less: Fixed assets sold (…….)
Less: Closing balance of fixed assets (…….)
If a concern intends to show its fixed assets at its cost price, the periodic annual depreciation is shown under
‘liabilities side’ as “Provision for Depreciation” commonly known as ‘Accumulated Depreciation Account’. If
there is an Accumulated Depreciation Account in already in operation, the current year depreciation is charged
against this Provision for accumulated Depreciation Account and not recorded directly into Adjusted Profit and
Loss Account. In other words, the current year depreciation is routed through the Provision Account.
Increase /Decrease in Fixed Assets
Any increase or decrease in Fixed Assets by means of cash is recorded in the Funds Flow Statement. Increase
or decrease due to purchase consideration through shares and debentures are not recorded as there is no flow
of funds.
Increase /Decrease in Long-term Liabilities
If cash is the main striker to cause the increase or decrease in Long-term Liabilities then it is considered in the
Funds Flow Statement. If the changes are due to consideration other than cash or current assets, are not
recorded in the FFS.
Hidden Items
For other hidden items, necessary ledger accounts for concerned fixed assets, fixed liabilities and share capital
accounts be prepared and all the required adjustments are carried out. If the balancing figure, comes to be the
cash transactions, then it is treated as flow of funds. For non-cash transactions, the Adjusted Profit and Loss
account is concentrated.
Chart explainimg the treatment of changes in non-current assets and non-current liabilities
The following chart explains the treatment of changes in non-current assets and non-current liabilities
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5 Discount on shares / debentures
. a) Increase. It represents the amount Deduct from the increase in
of discount allowed on share capital or debentures
shares / debentures to ascertain the net amount
of issue to be shown as
source of funds.
b) Decrease. It represent the amount Add back to current year’s
written off profit.
6 Share capital, debentures and long
. term loans It represents an issue of Shown as a source of fund.
a) Increase. new shares, debentures or
raising fresh loan.
20
all accounting operations for a period of time, the funds flow statement provides additional information as
regard changes in working capital derived from financial statements at two points of time. It is a tool of
management for financial analysis and helps in making decisions. The significance of Funds Flow Analysis can
be understood from following points:
(a) Helps in the analysis of financial operations:
The financial statements reveal the net effect of various transactions on the operational and financial position
of the concern. The balance sheet gives a static view of the resource of a business and these have been put at
a certain point of time. But it does not disclose the causes for changes in the assets and liabilities between two
different points of time. On the other hand, the funds flow statement explains cause for such changes and also
effect these changes on the liability position of the company. Sometimes a business concern may operate with
profit and yet its cash position may become worse. The funds flow statement gives a clear answer to such a
situation explaining what happened to the profits of the firm.
(b) Throws light on many perplex questions of general interest :
A funds flow statement may answer to the following confusing questions:
(i) Why were the net current assets lesser in spite of higher profits and vice-versa?
(ii) Why more dividends could not be declared in spite of available profits?
(iii) How was it possible to distribute more dividends than the present earnings?
(iv) What happened to the profit and where it has gone?
(v) What happened to the sales proceeds of fixed assets, issue of shares, debentures, etc?
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An analysis of Funds Flow Statements of several years reveals certain valuable information for the financial
manager for planning the future financial requirements of the firm and their nature i.e., short term, long-term
or mid-term. The management can formulate its financial policies based on information gathered from the
analysis of such statements. Financial manager can rearrange the firm's financing more effectively on the basis
of such information along with the expected changes in trade payables and the various accruals. In this way, it
guides the management in arranging its financing more effectively.
Comprehensive Illustrations
Illustration 7
The book value of trade investments of Flora Fibers Ltd as on March 1, 2010 and March 31, 2011 was
Rs.50,000 and Rs.70,000 respectively. During the year, Rs.5,000 was received as dividends, of which Rs.2,
000 pertained to pre-acquisition profits which have been credited to Investments Account. Investments costing
Rs.10, 000 have been sold during the year for Rs.10,000. Find the flow of funds on account of investments.
Solution
Notes:
1) The investments purchased were valued cum-dividend. Hence, on receipt of dividends, they were rightly
credited to Investments. Hence there is no need for any further adjustment.
2) The investment sold has been at the book value. There is no profit or loss on account of the transactions.
If the transaction had resulted in profit, it will have to be deducted from net profit to calculate funds from
operations. In case of loss, it would be added to net profit to calculate funds from operations.
Illustration 8
Prepare a fund flow statement of Babul Brothers Ltd.
Balance Sheets
Babul Brothers Ltd
31st, March
Particulars
2010 (Rs.) 2011 (Rs.)
Equity share capital 10,00,000 15,00,000
10 % Preference Share Capital 3,00,000 -
11 % debentures 8,00,000 6,00,000
Share Premium Account 1,00,000 95,000
Additional information: (a) 10 % Preference shares have been redeemed at a premium of 10%, the premium
amount was charged to the share premium account (b) There has been a profit of Rs.1,000 on the redemption
of debentures.
Solution
22
To Closing Bal 3,30,000 By Opening Bal 3,00,000
By Premium on redemption 30,,000
3,30,000 3,30,000
Illustration 9
The Balance Sheets of Twinkle Steel and energy Ltd.for the years ending March 2010 and 2011 are given
below:
Balance sheets of
Twinkle Steel and Energy Ltd
31-3-2010 31-3-2011
Particulars
(Rs.in lakhs) (Rs.in lakhs)
Fixed Assets 50 60
Investments 10 20
Current Assets 140 150
Share Capital 100 160
Profit and Loss Account 30 30
Debentures 10 -
Current Liabilities 60 40
Solution
23
FFS (application)
Illustration 10
From the following extracts, calculate funds from operations of Minali Steel and Energy Ltd
Balance sheets
Minali Steel and Energy Ltd
31st, March
Particulars
2010 (Rs.) 2011 (Rs.)
Profit and Loss Account 50,000 80,000
Provision for taxation 10,000 15,000
Proposed dividends 5,000 10,000
Additional information: Tax paid Rs.2, 500. Dividends paid Rs.1, 000. Calculate funds from operation taking
provision for tax and provision for tax and proposed dividend as (a) non-current liabilities and (b) current
liabilities.
Solution
(a) Provision for tax and proposed dividend are taken as non-current liabilities
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Proposed dividend (bal fig.)
11,000 11,000
(b) If Provision for Tax and Proposed Dividend are taken as a current liability, funds from operations will
be the difference in Profit and Loss account at the beginning and the end of the year.
Notes
a. In case (a) Income tax paid Rs.2, 500 and Dividend paid Rs.1, 000 are shown as application of funds in
the FFS.
b. In case (b), there is no need to prepare proposed dividend account and provision for tax account.
However, the opening and closing balances of the two accounts are shown as current liabilities in the
statement of changes in working capital
Illustration 11
The Balance Sheets of X Ltd. as on Dec. 31, 2010 and Dec. 31, 2011 were as follows:
Solutions
Funds Flow Statement
for the year ending on 31st December 2011
Sources Rs. Applications Rs.
Issue of Share Capital 2,00,000 Purchase of Land and Building 40,000
Sale of Plant and Machinery 8,000 Purchase of Plant and Machinery 3,55,000
Funds From Operation 1,27,000
Net Decrease in Working Capital 60,000
3,95,000 3,95,000
Schedule of Changes in Working Capital
25
Cash 20,000 20,000
2,70,000 2,55,000
Current Liabilities:
Sundry Creditors 1,53,000 1,90,000 37,000
Bills Payable 40,000 50,000 10,000
Outstanding Expenses 7,000 5,000 2,000
2,00,000 2,45,000
Working Capital 70,000 10,000
Net Decrease in Working Capital 60,000 60,000
70,000 70,000 72,000 72,000
Workings
Adjusted Profit & Loss Account
Panasonic ltd
Schedule of changes in working capital
2010 2011 Increase Decrease
Particulars
Rs. Rs. Rs. Rs.
Current Assets:
Stock 3,00,000 3, 90,000 90,000 ---
Accounts receivable 2, 10,000 3,00,000 90,000
Cash 60,000 1, 80,000 1,20, 000 ---
26
5,70,000 8,70,000
Current Liabilities:
Accounts payable 90, 000 2, 70, 000 1, 80, 000
Working Capital 4, 80,000 6, 00,000
Net Decrease in Working Capital 1, 20, 000 1, 20, 000
6,00,000 6,00,000 3,00,000 3,00,000
The next step is to prepare the non-current account. First non-current asset account should have to be
prepared.
Panasonic Ltd
Fixed Assets Account
Panasonic ltd
Equity Share Capital Account
Particulars Amount Particulars Amount
To Closing Bal 8,00,000 By Opening Bal 6,00,000
By Bank: fresh issue 1,00,000
By General reserve 1,00,000
8,00,000 8,00,000
Panasonic ltd
General Reserve Account
Particulars Amount Particulars Amount
To Share capital 1,00,000 By Opening Bal 2,00,000
To Closing Bal 1,00,000
2,00,000 2,00,000
Panasonic ltd
Adjusted Profit and Loss Account
By Balance B/d(Retained
To (Fixed Assets) depreciation 30,000 60,000
Earnings)
To Profit and Loss account By Funds from operations
1, 20,000 90,000
(closing bal) (bal fig.)
93,500 93,500
Panasonic ltd
Fund flow statement
Illustration 13
The following information and the balance sheet relate to Shyam sons Ltd.
27
Net profit for the period after charging Rs. 5,000 on account of depreciation was Rs. 20,000. A piece of
equipment costing Rs. 25,000 on which depreciation accumulated in the amount of Rs. 10,000 was sold for Rs.
10,000. Dividends paid during the year amounted to Rs. 10,000. Prepare a Source and Uses of funds
statement in the following format.
Solutions
Illustration 14
Balance Sheets of RST Limited as on March 31, 2008 and March 31, 2009 are as under:
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Capital 3,00,000 5,00,000 Debtors 1,00,000 95,000
Share Premium A/c 25,000 4,000 Cash & Bank 15,000 20,000
Profit & Loss A/c 2,00,000 3,00,000 Prepaid Expenses 80,000 1,05,000
8% Debentures 3,00,000 1,00,000 Advance Tax Payment 40,000 35,000
Creditors 2,05,000 3,00,000 Preliminary Expenses
Bills Payable 45,000 81,000
Provision for Tax 70,000 1,00,000
Proposed Dividend 1,50,000 2,60,000
26,45,000 30,45,000 26,45,000 30,45,000
Additional information:
(i) Depreciation charged on building and plant and machinery during the year 2008-09 were Rs.50,000
and Rs.1,20,000 respectively.
(ii) During the year an old machine costing Rs.1,50,000 was sold for Rs.32,000. Its written down value
was Rs.40,000 on date of sale.
(iii) During the year, income tax for the year 2007-08 was assessed at Rs.76,000. A cheque of Rs.4,000
was received along with the assessment order towards refund of income tax paid in excess, by way of
advance tax in earlier years.
(iv) Proposed dividend for 2007-08 was paid during the year 2008-09.
(v) 9% Preference shares of Rs.3,00,000, which were due for redemption, were redeemed during the year
2008-09 at a premium of 5%, out of the proceeds of fresh issue of 9% Preference shares.
(vi) Bonus shares were issued to the existing equity shareholders at the rate of one share for every five
shares held on 31.3.2008 out of general reserves.
(vii) Debentures were redeemed at the beginning of the year at a premium of 3%.
(viii) Interim dividend paid during the year 2008-09 was Rs. 50,000. Required :
Required:
(a) Schedule of Changes in Working Capital; and
(b) Fund Flow Statement for the year ended March 31, 2009.
Solutions
General Reserve
4,00,000 4,00,000
8% Debenture A/c
To Cash 2,00,000 By Balance b/d 3,00,000
Proposed dividend
To Cash 1,50,000 By Balance b/d 1,50,000
By P/L A/c 2,60,000
To Balance c/d 2,60,000
4,10,000 4,10,000
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To Balance c/d 12,00,000
12,00,000 12,00,000
Illustration 15
Following are the Balance Sheets of BROYHILL Industries Ltd, as on 31.12.2005 and 31.12.2006
Solution
Schedule of Changes in Working Capital
A. CURRENT ASSETS
1) Debtors 2,78,000 3,02,000 24,000
Less: Bad and Doubtful Debts
Previous Period (3,38,000 − 60,000)
B. CURRENT LIABILITIES/PROVISIONS
1) Creditors 2,30,000 1,80,000 50,000
2) Provision for Taxation 50,000 1,20,000 70,000
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Working Capital (A − B) 6,38,000 8,82,000
(8,82,000 − 6,18,000)
Change in Working Capital 2,44,000
(Or) (3,14,000 − 70,000)
Assumptions
In the absence of specific instruction to the contrary, Provision for Taxation is treated as a Current Liability The
additional information indicates payment of dividends. Considering, Provision for Dividend to be a Current
Account, this information would be of no importance in the Funds Flow analysis.
Working Notes
16,00,000 16,00,000
Debentures a/c
6,00,000 6,00,000
Reserve a/c
3,50,000 3,50,000
13,00,000 13,00,000
Goodwill a/c
6,00,000 5,50,000
32
b/d By Balance c/d 12,000
14,000 14,000
60,000 60,000
1,40,000 1,40,000
Buildings a/c
11,00,000 11,00,000
16,00
16,000
0
1,20,000 1,20,000
Land a/c
6,40,000 6,40,000
33
Land Disposal a/c
1,70,000 1,70,000
6,14,00 6,14,000
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17,94,000 15,50,000
Questions
1. Explain the terms ‘Funds’ and ‘Flow in funds’ in respect of funds flow statement.
2. State the meaning of Funds flow statement. Discuss its importance.
3. Distinguish between the funds flow statement and Balance-sheet.
4. How are the funds from operations calculated?
5. How is a funds flow statement prepared? Give a Performa of schedule of changes in working capital and
funds flow statement.
6. How is the schedule of changes in working capital prepared?
7. What is a ‘Funds Flows statement’? How is it prepared? What are the various sources and uses of funds?
8. What is a funds flow statement? Give a specimen of funds flow statement. Discuss its uses.
9. Write short notes on application of funds.
10. What are the items to be added back to and what are the items to be subtracted from the current year’s
net profit while calculating funds from operations?
11. How do you treat the following while preparing funds flow statement?
a. Provision for taxation.
b. Proposed dividend.
12. Prepare a fun d flow statement of DR Ltd.
Year
2010 2011
Equity share capital 10,00,000 15,00,000
10 % Preference Share Capital 3,00,000 -
11 % debentures 8,00,000 6,00,000
Share Premium Account 1,00,000 95,000
Additional information
(i) 10 % Preference shares have been redeemed at a premium of 10%, the premium amount was charged
to the share premium account
(ii) There has been a profit of Rs.1, 000 on the redemption of debentures.
Ans: Fresh issue of Equity Share Capital: Rs.5, 00,000
Redemption of Preference Share Capital Account: Rs.3, 30,000
Redemption of Debentures: Rs. 1, 99,000
Decrease in working capital: Rs. 4,000
13. The following are the summarized Balance Sheets of DRA Ltd.
Year
2010 2011
35
Prepare a Funds Flow statement
Ans: Increase in Working capital 75,000
Funds from Operation 1.45,000
14. Prepare a Fund Flow Statement
Year Year
Liabilities Assets
2010 2011 2010 2011
Depreciation provided is Rs.4, 750. Write off goodwill. Dividend paid Rs.3, 500.
Ans: Net increase in Working capital 4,000
Funds generated from operations 12,500
A business was purchased during the year by the issue of 25,000 shares and 25,000 debentures. Depreciation
Rs.6, 000 has been provided in the year. A machine has been sold for Rs.1, 50,000, the written down value
being Rs.1, 000. The business purchased had the following assets and liabilities: Machine Rs.20, 000, Stock
Rs.5, 000, Debtors Rs.15, 000, Creditors Rs.5, 000.
Prepare the Funds Flow Statement.
Ans: Excess payment being treated as Goodwill (50,000-35,000): Rs.15, 000
Decrease in working capital (source) Rs.500
Funds from operations 28,000
16. The Balance Sheets of Chetan Ltd. as at 31st March, 2010 & 2011
31-3-2010 31-3-2011
Rs. Rs.
Equity Share Capital (shares of Rs. 10 each fully called) 10,00,000 14,50,000
Less: Calls-in-Arrears (Rs. 2 per share) 5,000 --
36
9,95,000 14,50,000
Add: Share Forfeiture Balance (Rs. 8 per share) 8,000 1,600
Paid up Equity Capital 10,03,000 14,51,600
8% Redeemable Preference Share Capital 5,00,000 4,00,000
Securities Premium 1,00,000 40,000
Capital Reserve (Net profit on Forfeited Shares reissued) -- 16,500
General Reserves 2,47,000 3,49,000
Profit & Loss Account 1,50,000 7,42,900
Loans 5,00,000 10,00,000
25,00,000 40,00,000
Fixed Assets (At cost Less Dep.) 12,00,000 20,00,000
Investments 3,00,000 4,00,000
Working Capital 10,00,000 16,00,000
25,00,000 40,00,000
Other Information
(a) During the year Equity shares on which calls were in arrears have been forfeited.
(b) Part of the forfeited shares has been reissued at Rs. 7 per share.
(c) Bonus shares are issued by using securities premium of Rs. 60,000 and General Reserve of Rs. 1,
40,000.
(d) Depreciation on Fixed Assets for the year was Rs. 1, 80,000.
(e) Investments costing Rs. 75,000 were sold at Rs. 1, 00,000.
Prepare Fund Flow Statement for the year ended 31st March, 2011.
17. From the fallowing figures, prepare a statement showing the changes in the working capital and funds
flow statement during the year 2011.
Assets Dec.31, 2010 Dec.31, 2011
Liabilities
2010 2011
LIABILITIES
(Rs) (Rs)
37
Share capital 1,00,000 1,50,000
Premium on issue of shares - 5,000
General reserves 50,000 60,000
Profit and loss account 10,000 17,000
15% debentures 70,000 50,000
Accumulated depreciation 50,000 56,000
Sundry creditors 86,000 95,000
3,66,000 4,33,000
2010 2011
ASSETS
(Rs) (Rs)
Freehold land 1,00,000 1,00,000
Plant at cost 1,04,000 1,04,000
Furniture at cost 7,000 9,000
Investments at cost 60,000 80,000
Debtors 30,000 70,000
Stock 35,000
Cash 30,000 29,000
41,000
3,66,000 4,33,000
During 2011, a machine that had been purchased for Rs.4, 000 and on which Rs.2000 had been provided as
depreciation was sold for Rs.1, 000. You are required to prepare funds flow statement.
19. From the following Balance sheets of ABC Ltd as on 31st December 2010 and 2011, you are required
to prepare a Schedule of Changes in the Working Capital and a Funds Flow Statement.
20. From the following Balance Sheets of XY Ltd as on 31st December 2010 and 2011, you are required
to prepare: (i) Schedule of Changes in Working Capital and (ii) Funds Flow Statement
21. Following are the comparative Balance Sheets of XX Ltd for the years 2000 and 2001, you are required to
prepare: (i) Statement of Changes in Working capital and (ii) Funds Flow Statement.
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Debentures 12,000 6,000 Debtors 14,900 17,700
Creditors 10,360 11,840 Stock 49,200 42,700
Profit & Loss A/c 10,740 11,360 Goodwill 10,000 5,000
Land 20,000 30,000
1,03,100 1,03,200 1,03,100 1,03,200
Additional information:
(i) Dividends paid during the year Rs.4, 000
(ii) Land was purchased during the year for Rs.15, 000
22. From the following Balance Sheets of Sriramco, prepare (a) Statement of Changes in Working Capital, and
(b) Funds Flow Statement: Balance Sheet of Sriramco as on 31st December…
2010. 2011
Assets Rs. Rs.
Goodwill 90,000 80,000
Land and Buildings 2,80,000 2,00,000
Plant 1,00,000 2,00,000
Investments 30,000 40,000
Book Debts 1,80,000 2,10,000
Stock 80,000 1,20,000
Cash in hand and at Bank 40,000 45,000
Preliminary Expenses 20,000 10,000
8,20,000 9,05,000
Liabilities
Share Capital
Equity Share Capital 4,00,000 5,00,000
10% Red. Pref. Share Capital 2,00,000 1,00,000
Capital Reserve - 30,000
General Reserve 60,000 80,000
P. and L. Account 30,000 45,000
Proposed Dividend 60,000 60,000
Sundry Creditors 30,000 45,000
Provision for Taxation 40,000 45,000
8,20,000 9,05,000
The following additional information is also available
(a) A machine has been sold for Rs. 40,000 whose written down value was Rs. 36,000.
(b) Depreciation of Rs. 15,000 has been charged on plant in 2011;
(c) A piece of land had been sold out in 2011 and the profit on the sale has been credited to capital reserve;
(d) An interim dividend of Rs. 30,000 has been paid in 2001;
(e) Income tax paid during 2011 amounts to Rs. 45,000;
(f) Preference Shares were redeemed at 5% premium.
23. From the following Balance Sheet of M/s Anu Ltd. as on 31-12-10 and Fund Flow Statement for the year
ended 31-12-11. You are required to prepare the Balance Sheet of M/s Anu Ltd. as on 31-12.11.
Balance Sheet
as on 31-12-10
39
for the Year Ended 31-12-11
Notes:
(a) The actual amount of Tax paid and charged to provision for Taxation account was Rs.9, 000
(b) The accumulated Depreciation on Machine sold on the date of sale was Rs.15, 000
(c) Furniture was purchased on 31-12-11.
(d) The total of Current Assets on 31-12-11 was Rs. 1, 10,000. Stock, Debtors and Bank were in the ratio
of 8:2:1.
[Ans: Balanacesheet total Rs. 4, 14,000]
40