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Chapter 5

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

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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’.

Working Capital = Current Assets – Current Liabilities

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.

The distinction between Funds and Cash


What is the distinction between Funds and Cash?
The Fund is simply another name for Working Capital. It is the difference between the total value of Current
Assets and Current Liabilities or Net Current Assets. On the other hand, cash is the actual physical cash
available and spent or applied during a given period. To illustrate this difference an example might be useful.
Suppose, the Net Working Capital at the beginning of an accounting period was Rs.125000 and a Trade Debtor
who owed Rs.25,000 settled his account by making full payment. How does this affect Funds? It has absolutely
no effect on Net Working Capital, because when a Trade Debtor of Rs.25,000 simply turns into Cash the Net
Working Capital remains unchanged. However, this does affect Cash. The Cash Balance or available Cash

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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

General rules for Identification of flow of funds


1. There will be a flow of funds, if a transaction involves one current account and another non-current
account, i.e. involves
(a) Current assets and fixed assets; e.g. purchase of building for cash
(b) Currents asset and capital, e.g. issue of share for cash
(c) Current assets and fixed liabilities, e.g. redemption of debentures in cash
(d) Current liabilities and fixed liabilities, e.g. creditors paid off in debentures
(e) Current liabilities and capital, e.g. creditors paid off in shares
(f) Current liabilities and fixed assets, e.g. building transferred to creditors in satisfaction of their
claims.
2. There will be NO flow of funds, if a transaction involves 2 current accounts or 2 non-current accounts i.e.
involve:
(a) Current assets and current liabilities; e.g. Payment of creditors in cash
(b) Fixed assets and fixed liabilities; e.g. Building purchased and payments made in debentures
(c) Fixed assets and capital; e.g. Building purchased and payment made in shares.

Which are Current account Items?

Current Assets Current Liabilities

Cash in hand Bills payable


Cash at bank Trade or sundry creditors

Bills receivable Outstanding expenses

Trade or sundry debtors Cash credit/bank overdraft

Inventory: Raw-materials, work-in-


Short-term loans
progress, Finished Goods, Stores, etc

Prepaid expenses Income received in advance


Outstanding incomes Long-term loans (or part) which fall due
for repayment within a year
Short-term loans and advances, Provision for doubtful debts and discount
Temporary investments, etc on debtors

Which are Non-current Account Items?

Non-current Assets Non-current Liabilities

Land and Buildings Equity share capital

Plant and Machinery and vehicles Preference share capital

Furniture and fittings Debentures

Goodwill Reserves and surplus

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Patents, trademarks, copy rights,
Long –term loans
preliminary expenses, P & L A/c(Cr),etc

Few Examples to identify the transactions involving Flow of Funds


Many transactions which take place in a business enterprise may increase its working capital, may decrease it
or may not effect any change at all. Let us consider the following examples.
(i) Purchased machinery for Rs.3, 00,000
Here the accounts involved are Current Assets (Cash a/c) and Non-current/ Fixed Asset (Machinery a/c).
Hence there is a flow of funds. The effect of this transaction is that working capital decreases by Rs. 3, 00,000
as cash balance is reduced. This change (decrease) in working capital is called as application of funds.
(ii) Issue of share capital of Rs.10, 00,000
Here the two accounts involved are current assets (Cash a/c) and Non-current/Long-Term Liability (Share
Capital a/c). Hence there is a flow of funds. This transaction will increase the working capital as cash balance
increases. This change (increase) in working capital is called as source of funds.
(iii) Sold plant for Rs.3, 00,000
Here the accounts involved are current assets (Cash a/c) and Non-current/ Fixed Assets (Plant a/c). Hence
there is a flow of funds. This transaction will have the effect of increasing the working capital by Rs.3, 00,000
as the cash balance increases by Rs.3, 00,000. It is a source of funds.
(iv) Redeemed debentures worth Rs.1, 00,000
The two accounts affected by this transaction are Current Assets (Cash a/c) and Non-current/ Long-Term
Liability (Debenture a/c). Hence there is a flow of funds. This transaction has the effect of reducing the
working capital, as the redemption of debentures results in reduction in cash balance. Hence it is an example
of application of funds.
(v) Purchased inventory worth Rs.10, 000 on cash
Both the accounts affected are Current Assets. This transaction results in decrease in cash by Rs.10, 000 and
increase in stock by Rs.10, 000; thereby keeping the total current assets at the same figure. Hence there will
be no change in the Working Capital and there is no flow of funds in this transaction.
(vi) Notes payables drawn by creditors accepted for Rs.30, 000
Here the accounts involved are Notes payable (a current liability) and Creditors (another current liability). It
results in increase in notes payable (a current liability) and decreases the creditors (another current liability).
The effect of this transaction on working capital is zero. Since there is no change in total current liabilities
there is no flow of funds.
(vii) Building purchased for Rs.30, 00,000 and payment is made by shares
Both the accounts affected are Non-current. The two accounts affected are Non-current/Fixed Assets (Building
a/c) and Non-current/ Long Term Liabilities (Capital a/c). This transaction will not have any impact on working
capital as it does not result in any change either in the current asset or in the current liability. Hence there is
no flow of funds.

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

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Methods of calculating Funds from Operation

Net Profit Method


Sales Method

Adjusted Profit & Loss A/c Method

(a) Net Profit Method


Profit earned by a concern in the current year is deemed to be a source of fund. It is very important source of
funds inflow. Net profit is arrived at by deducting cost of goods sold and other expenses from total sales
revenue. However, the profit so calculated is seldom equal to the funds from operations because there are
many items which are debited or credited in the Profit and Loss Account, which do not affect working capital.
Therefore, in calculating the funds from operations, the following adjustments must be kept in mind:
Items to be added back to net profit
(i) Non-fund revenue deductions:
These are items which are debited to Profit and Loss account. These do not cause outflow of funds such
as; depreciation and depletion on noncurrent assets, amortization of fictitious and intangible assets,
preliminary expenses, redemption of preference shares or debentures, deferred charges, advertising
suspense account written off.
If non-fund expenditure does not affect the current assets such as unexpired insurance, then those are
not added back. So also, all allowances for income tax payable in future years are excluded.

(ii) Non-trading charges or losses:


These items which were debited to Profit and Loss account reduce the profits but they do not cause any
outflow of funds. Hence, profit should be corrected by adding back all such charges and losses. These
include appropriation of retained earnings such as; general reserve, dividend equalization fund, reserve
for contingencies, sinking fund.
In addition the dividend on shares must be added back since it is an appropriation and not trading
charge.
The losses arising out of sale of land, buildings, machinery, long term investments which were written off
to the profit and loss account must be added back.
The loss arising out of sale of a current asset such short term investments are also not added. It is a
trading loss and hence it will not require any adjustment.
The amount set aside as provision for current taxation will also be added back. This will be considered
only when the provision for taxation is treated as a charge on profits.

Items to be deducted from Net Profit


The non-fund and non-trading revenue receipts or incomes must be deducted from Net profits in order to
compute funds from operations. The items are:
(iii) Dividend received or receivable:
Although this transaction increases the current assets such as cash and debtors, it is not a trading
income. Hence, it should be deducted from the net profits to determine the funds from operation.

(iv) Retransfer of excess provisions:

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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.

(v) Profit on sale of non current assets:


It is a non-trading income. Hence it must be eliminated from the amount of profit.

(vi) Appreciation in fixed assets:


The amount of appreciation on revaluation of fixed assets is normally credited to the profit and loss
account. If it is so, deduct it from the profit to compute the funds from operations.

Format for determining Funds from operations under net profit method

Net Profit as per the Profit & Loss A/c xxx

(A)Non Funding Expenses


Loss on Sale of Fixed Assets xxx
Loss on Sale of Long Term Investments xxx
Loss on Redemption Debentures/Preference Shares Discount xxx
on Debentures /Share xxx

(B)Non Operating Expenses


Depreciation of fixed Assets xxx

Add (C) Intangible Assets


Amortization of Goodwill xxx
Amortization of Patent xxx
Amortization of Trade Mark xxx

(D)Fictitious Assets
Writing off Preliminary expense xxx
Writing off Discount on Shares/Debentures xxx

(E)Profit Appropriation
Transfer to General Reserve xxx

(A) Non funding Profits


Profit on Sale of Fixed Assets xxx
Profit on Sale of Long Term Investments xxx
Profit on Redemption Debentures/Preference Shares xxx
Less
(B)Non Operating Incomes
Dividend Received xxx
Interest Received xxx
Rent Received xxx

Fund from operations /Fund Lost in Operations xxx

(b) Adjusted Profit & Loss A/c Method


The second method of determining the fund from operations is the Accounting Statement Method or Adjusted
Profit & Loss A/c Method. The format under this method is given below:

Dr Adjusted Profit & Loss A/c Cr

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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

Funds from Operations


Net Profit Method
Particulars Rs.
Closing Balance of Profit & Loss A/c 1,20,000
Less:
Opening Balance of Profit & Loss A/c 50,000
Balance Forward 70,000
Add: Non Fund / Non Operating Charges:
Depreciation on Plant 10,000
Provision for Taxation 8,000
Loss on Sale of plant 4,000
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
Proposed Dividend 12,000
1,22,000
Less:
Refund of Tax 6,000
Profit on Sale of Building 10,000
Dividend Received 10,000

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Fund from operations 96,000

Funds from Operations


Adjusted Profit & Loss A/c Method

Illustration 2

Calculate funds from operations from the following Profit and Loss Account

Profit and Loss Account

Particulars Amount Particulars Amount


To Expenses paid and 3,00,000 By Gross Profit 4,50,000
Outstanding
To Depreciation 70,000 By Gain on sale of 60,000
land
To Loss on sale of machine 4,000
To Discount 200
To Goodwill 20,000
To Net Profit 1,15,800

5,10,000 5,10,000

Solution

Adjusted Profit and Loss Account


Particulars Amount Particulars Amount
To Depreciation 70,000 By Gain on sale of land 60,000
To Goodwill written off 20,000 By Funds from operations 1,50,000
To Discount written off 200
To Loss on sale of machine 4,000
To Net Profit 1,15,800
2,10,000 2,10,000

Illustration 3
Following are the extracts from the Balance sheets of DR Ltd.

Balance sheets of DR Ltd

Particulars 31-3-2010 31-3-2011


Profit and Loss account 11,100 14,800
General Reserve 7,400 9,250
Goodwill 3,700 1,850
Provision for depreciation on asset 3,700 4,400
Preliminary expenses 2,200 1,500

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.

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Solution

DR Ltd
Adjusted Profit and Loss Account

Particulars Amount Particulars Amount


To General Reserve (9250-7400) 1,850 By op bal. of Profit and Loss account 11,100
To Goodwill written off (3700-1850) 1,850 By Profit on sale of land 4,000
To Preliminary expenses written off 700 By Funds from operations (bal fig.) 6,800
To Depreciation written off 700
To interim dividend 2,000
To Profit and Loss account(closing bal) 14,800
21,900 21,900

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

Total Sources of Funds (A) 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

Total Application (B) xxx

Fund from operations/ Fund Lost in Operations (A-B) xxx

(ii) External Sources

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

Share capital at close 9,50,000

Deduct: Share capital at the beginning 6,00,000


Less: Redemption of Preference Shares (75,000) (5,25,000)

4,25,000

Deduct: Shares issued for non-cash items (90,000)

3,35,000

Deduct : Bonus shares (1/ 5 x5,00,000) (1/5 of 600000) (1,00,000)

2,25,000

ADD: Share premium. (14,000 + 6,000 - 8,000 -9,000) 3,000

Fresh issue of Shares 2,28,000

(b) Issue of debentures of long term loans:


Issue of debentures, accepting public deposits, and raising long term loans result in the flow of funds.
However, if debentures have been allotted to somebody other than cash, then consideration does not
generate fund.
(c) Sale of fixed assets or Long term investments:
When any fixed asset like Land, Building, Machinery, Furniture on long term investments etc. are sold, it
generate funds and becomes a source of funds.
(d) Non-trading income: Any non-trading receipts like dividends, rent, interest etc.,
The sources of funds, as usually presented in the fund flow statement, are enumerated below:

5. APPLICATION OR USE OF FUNDS


(a) Redemption of preference share capital: If there is any decrease in preference share capital during
current year, when compared with previous year, we must assume that the preference shares are
redeemed. It results in the outflow of funds and is taken as Application of funds.
(b) Redemption of debentures: If any debentures are redeemed during the account period, it constitutes
application of funds.
(c) Repayment of long-term loans: Repayment of long-term loan also constitutes an application of funds.
(d) Purchase of fixed assets or long term investments: The increase in fixed assets is known in the
accounting language as “Purchase of fixed assets” and constitutes an application of funds. The increase
in fixed assets is calculated as under:

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Cost of Current year fixed assets ------

Deduct: Cost of previous fixed assets ------


Less: Cost of fixed assets sold/written off
during the Current year (------) (------)

------
Deduct: Cost of previous year fixed assets

Increase in 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

Cost of Current year fixed assets


5, 50,000 +
(Closing value of fixed assets + Closing accumulated 7, 40,000
1, 90,000
Depreciation)

Deduct: Opening cost of Asset


(opening Value + opening accumulated 6,50,000
Depreciation) : 5,00,000 + 1,50,000
Less: Cost of fixed assets sold/written off during the (6,20,000)
Current year (30,000)
Purchase of fixed assets 1,20,000

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.

Current year written down value of Asset ………


Deduct: Previous year WDV of Asset ………
Less: Current year Depreciation (………) (……)

Increase in Fixed Asset being Purchases xxxx

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

Current year written down value of Machinery 1,75,000


Deduct: Previous year WDV of Asset 2,00,000
Less: Current year Depreciation (32,000)
Less: written down value of machine Sold (12,000) (1,56,000)

Increase in Fixed Asset being Purchases 19,000

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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:

6. FUND FLOW STATEMENT

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:

Balance Sheet vs. Funds Flow Statement

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.

A funds flow statement incorporates the


A balance sheet incorporates all assets and
Incorporation different sources and application of funds
liabilities of the business on a particular date.
during a period.

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.

14
 
Format

Concept

Compulsion

I
S
U
H
L
P
G
K
W
M
A
T
&
C
R
D
N
F
O
E
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.

It is compulsory for a company to prepare


and present its balance sheet at the time of
its annual general meeting.

Funds Flow Statement vs. Schedule of Changes in Working Capital

  Basis of Schedule of Changes


in Working Capital

Schedule of changes in working capital is


prepared to work out the net increases or
decreases in working capital.

Schedule of changes in working capital is


prepared on the basis of current assets and
current liabilities.

Schedule of changes in working capital is


prepared only with the help of two Balance
sheets.

Funds Flow Statement vs. Profit & Loss Account

Basis of
Profit & Loss Account

Profit & Loss A/c is prepared to workout net


profit or net loss of the business.

Profit & Loss A/c is prepared on the basis of


nominal accounts.

It is compulsory for a company to prepare its


Trading and Profit & Loss A/c at the end of its
accounting period.
Profit & Loss A/c is prepared in order to show
the performance of business activities.

Profit & Loss A/c is one of the basic financial


statements, which provides information for
analysis of financial statement.

8. PREPARATION OF FUNDS FLOW STATEMENT


The preparation of funds flow statement consists of the following steps:
(a)
(b)
(c)
(d)
Preparation of Schedule of changes in working capital
Calculation of funds generated from (lost in) operations
Identification of various sources and application of funds
Preparation of funds flow statement

R
U
F
D
N
M
O
L
F
W
O
N
A
M
E
O
I
S
P
T
R
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.

It is not compulsory for a company to prepare


and present funds flow statement.

Funds Flow Statement

A funds flow statement is prepared in order to


show the overall inflow or outflow of working
capital during a period of time.

Funds flow statement is prepared on the basis


of Fixed Assets and Fixed Liabilities.

Funds flow statement is prepared with the help


of two balance sheets, profit & loss account
and additional information.

Funds Flow Statement

A funds flow statement is prepared in order


to show the overall inflow or outflow of
working capital during a period of time.

Funds flow statement is prepared on the


basis of non-current assets and liabilities.

It is not compulsory for a company to


prepare funds flow statement.

Funds flow statement helps in financial


activities of a business.

Funds flow statement is an important tool


of analysis of financial statement.

15
(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.

Schedule of changes in working capital


for the period ending
Working Capital
Previous Current Increase/
Particulars Increase Decrease
Year Year Decrease
(+) (–)
Current Assets
Cash In Hand
Cash at Bank
Marketable Securities
Bills Receivable
Sundry Debtors
Closing Stock
Prepaid Expenses

Total current assets (A)


Current Liabilities
Creditors
Bills Payable
Outstanding expenses
Pre-received Income
Provision for doubtful & bad debts
Total current liabilities (B)
Working capital (A-B)

Increase/Decrease 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.

16
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
(+) (–)

(b) Calculation of funds generated from (lost in) operations


It is already been discussed under the heading ‘sources of funds’ earlier in this chapter.

(c) Identification of various sources and application of funds


It is also already been discussed under the heading ‘Flow of funds’ in advance in this chapter. However, the
primary structure of flows is illustrated in the Figure I.

(d) Preparation of funds flow statement


The last step is to prepare the fund flow statement. This statement is prepared in two formats:
(i) Horizontal form or T-Form
When prepared in the Horizontal form or T-Form, a Funds Flow Statement would appear as follows:

(ii) Vertical form or Report Format

17
When prepared in the Vertical form or Report Format, a Funds Flow Statement would appear as follows:

Net increase/decrease in working capital = (Total Sources – Total uses )

9. TREATMENT OF CERTAIN ITEMS


There are certain items whose treatment is not uniform. Authors differ. But, we in this study tried for
maintaining uniformity. The likely arguments have been provided for treating items on a particular principle.
The items are:
Provision for Bad Debts
Sometimes, it is shown as reserve for bad/doubtful debts. Actually, this item is shown as deduction from total
book debts to the asset side of the Balance Sheet. Therefore, this item should be deducted from the amount of
debtors shown in the schedule of working capital changes. Since such treatment may complicate the
calculation work, it is suggested to show it along with current liabilities, although, it does not belong to that
category.
Provision for Tax
Provision for taxation may either be treated as current liability or long-term liability. When treated as current
liability, it is taken to `schedule of changes in working capital’ and thereafter no adjustment is required
anywhere. If they are treated as long-term liabilities, there is no place for them in the schedule of changes in
working capital. The amount of tax provided during the current year will be added to net profits to find the
funds from operations. The amount of actual tax will be shown as application of funds in the Funds Flow
Statement. We suggest the Provision for taxation to be taken as Current Liability.
Proposed Dividend
Normally, the proposed dividends are given as Balance Sheet item on the liability side. The Directors propose
the final dividend which needs to be approved by the General Meeting. Hence, it is fair to assume that the
proposed dividend is not a current liability. Hence it should not be shown in the schedule of working capital
changes. The last year’s proposed dividend paid during the current year should be shown as a cash outflow
Investments
It poses problems in its treatment. The Rule is:
a) If the investments are in the form of Government or other marketable securities, it may be treated as
current assets.
b) If it is mentioned as trade investments, that are investments in shares and debentures of another
company, it may be treated as fixed assets.
c) If nothing is mentioned specifically, the treatment is:
 if investments have been sold simultaneously, treat it as current assets
 In other cases, may be treated as Fixed Assets.
Depreciation
Normally, the value of deprecation is provided in the problem as an adjustment items. As depreciation is a
non-cash item, therefore, it is charged to Profit and Loss and recorded in the concerned Fixed Assets Account.
If the depreciation is given as a percentage, then it is to be calculated on the opening balance of the concerned
account. If the value of depreciation is not given, it has to be found out as follows:

18
Opening balance of Fixed Assets ……..
Add: Purchases ……..
Less: Fixed assets sold (…….)
Less: Closing balance of fixed assets (…….)

Depreciation charges xxx

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

Non-Current Items Meaning Treatment


1 Intangible non-current assets like;
. goodwill, copyright, patent, etc.
a) Increase. It represents the amount Show as an application of
of purchase. funds.

b) Decrease It represents amount Added back to the current


written off year’s profit
2 Tangible depreciable assets like; land
. and building, plant and machinery,
etc. It represents the amount Show as an application of
a) Increase. of purchase funds.

b) Decrease. It represents the amount Added back to current


of depreciation year’s profit
3 Investments.
. a) Increase It represents the amount Show as an application of
of purchase fund

b) Decrease. It represents the amount Show as a source of fund.


of sale
4 Fictitious assets other than discount
. on shares or debentures.
a) Incr It represents the amount Show as an application of
ease. of payment fund.

It represents the amount Add back to current year’s


b) Decr written off profit.
ease

19
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.

b) Decrease. It represents the amount Shown as an application of


of redemption or fund.
repayment
7 General Reserve.
. a) Increase. It represents transfer of Add back to current year’s
profit from profit and loss profit.
account.

b) Decrease. It represents transfer of Deduct from current year’s


profit from general reserve profit.
to profit and loss account.
8 Securities premium
. a) Increase. It represents the amount Show as source of fund.
of premium received on
issue of shares
No treatment is required
It represents the amount but it may be noted that an
b) Decrease of premium utilized for amount of decrease in
writing off preliminary preliminary expenses,
expenses, underwriting, underwriting commission to
commission, discount on the extent of decrease is
issue of shares, etc. not to be added back to
current year’s profit.

10. LIMITATIONS OF FUNDS FLOW STATEMENT


The Funds Flow Statement has a number of uses. However, it has certain limitations also, which are listed
below.
(a) Not a substitute: It should remember that a Funds Flow Statement is not a substitute of an income
statement or a balance sheet. It provides only some additional information as regards chances in working
capital.
(b) Lacks originality: It is not an original statement but simply is arrangement of date given in the financial
statements.
(c) Does not reveal continuous changes: A funds flow statement indicates only the past changes, it does not
reveal continuous changes.
(d) Lopsided: When both the aspects of the transaction are current, they are not considered. Similarly when
both the aspects of the transaction are non-current, even then they are not included in funds flow
statement.
(e) Not a perfect tool: Some Management Accountants are of the opinion that this statement is not ideal tool
for financial analysis. Changes in cash are more important and relevant for financial management than
the working capital.
(f) Essentially historic: It is essentially historic in nature and project funds flow statement cannot be
prepared with much accuracy.

11. IMPORTANCE OF FUNDS FLOW ANALYSIS


The importance of Funds Flow Analysis in all undertakings needs no emphasis. A funds flow statement tells us
many financial facts, which a balance sheet cannot tell. Balance sheet does not disclose the cause for change
in the assets and liabilities between two different points of time. Again, while balance sheet is the end result of

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?

(c)Helps in the formation realistic Dividend Policy:


Sometimes a firm has sufficient profits available for distributing as dividend but yet may not be available to
distribute for cash resources. In such cases a funds flow statement helps in the information of a realistic
dividend policy.
(d) Helps in the proper Allocation of Resources:
In modern large scale business, available funds are always short for expansion programmes and there is
always a problem of allocation of resources. It is, therefore, a need of evolving an order of priorities for putting
through their expansion programmes which are phased accordingly, and funds have to be arranged as
different phases of programmes get into their stride. The amount of funds to be available for these projects
shall be estimated by the finance manager with the help of Funds Flow Statement. This prevents the business
from becoming a helpless victim of unplanned action.
(e) A Tool of Communication to Outside World:
Funds Flow Statement helps in gathering the financial status of a business. It gives an insight into the
evolution of the present financial position and gives answer to the problem ‘where have our resources been
moving'? In the present world of credit financing, it provides useful information to bankers, creditors, financial
institutions, government etc. regarding amount of loan required, purposes of making loans, the terms of
repayment and sources for repayment of loan. In fact, Funds Flow Statement carries information regarding
firm's financial policies to the outside world.
(f) Helps in appraising the use of Working Capital:
A funds flow statement helps in explaining the management of working capital and also suggests the ways the
management should use its working capital with greater efficiency.
(g) Helps in knowing the Overall credit Worthiness:
Generally, banks and financial institutions such as; State Financial Institutions, Industrial Development
Corporation of India, Industrial Development Bank of India etc., all ask for funds flow statement constructed
for a number of years before granting loans to know the credit worthiness and paying-capacity of a firm.
Hence a firm seeking assistance from these institutions has no alternative, but to prepare funds flow
statement.
(h) Assessing the degree of risk:
Funds Flow Statement helps the bankers, creditors, financial institutions in assessing the degree of risk
involved in granting the credit to the business concern.
(i) Control device:
It serves as a measure of control to the management. If actual figures are compared with budgeted/projected
figures, management can take remedial action, if there are any deviations.
(j) Acts as a Future Guide:

21
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

Flora Fibers Ltd


Investments Account
Particulars Amount Particulars Amount
Dividend Account : Pre-
To opening Bal 50,000 2,000
acquisition profit
To Bank Account (purchase By Bank: sale of investments
32,000 10,000
Of investments (bal fig) (bal fig.)
By Closing Bal 70,000
82,000 82,000

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

Babul Brothers Ltd


Equity Share Capital Account
Particulars Amount Particulars Amount
To Closing Bal 15,00,000 By Opening Bal 10,00,00
By Bank: fresh issue (bal fig.) 5,00,000
15,00,000 15,00,000

Babul Brothers Ltd


Preference Share Capital Account
Particulars Amount Particulars Amount

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

Babul Brothers Ltd


Debentures Account
Particulars Amount Particulars Amount
To Bank (redemption) 1,99,000 By Opening Bal 8,00,000

To Profit on redemption 1,000


To Closing Bal 6,00,000
8,00,000 8,00,000

Babul Brothers Ltd


Share Premium Account
Particulars Amount Particulars Amount
To Preference share capital 30,000 By Opening Bal 1,00,000
To Closing Bal 95,000 By Equity share capital 25,000
1,25,000 1,25,000

Babul Brothers Ltd


Funds Flow Statement
SOURCES Amount APPLICATIONS Amount
Issue of Equity shares 5,00,000 Redemption of Preference shares 3,30,000
Share Premium 25,000 Redemption of Debentures 1,99,000
Decrease in working capital 4,000
5,29,000 5,29,000

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

Depreciation charges were Rs.6 lakhs. Prepare Fund Flow statement .

Solution

Schedule of changes in working capital


Twinkle Steel and Energy Ltd
31-3-2010 31-3-2011
Particulars
(Rs.in lakhs) (Rs.in lakhs)
Current Assets 140 150
Current Liabilities 60 40
Working Capital(CA-CL) 80 110
Net Increase in working capital transferred to 30 -

23
FFS (application)

Twinkle Steel and Energy Ltd


Adjusted Profit and Loss Account
Particulars Amount Particulars Amount
By op bal. of Profit &
To Depreciation written off 6 30
Loss account
To Profit and Loss By Funds from
30 6
account(closing bal) operations (bal fig.)
36 36

Twinkle Steel and Energy Ltd


Funds Flow Statement
Amoun
SOURCES APPLICATIONS Amount
t
Issue of Equity shares 60 Purchase of Fixed Assets 16
Funds from operation 6 Purchase of investment 10
Redemption of debenture 10
Increase in working capital 30
66 66

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

Minali Steel and Energy Ltd


Provision for Tax Account

Particulars Amount Particulars Amount


To Income tax account 2,500 By Opening balance 10,000
To Closing balance 15,000 By Profit and loss account 7,500
provision made (bal fig.)
17,500 17,500

Minali Steel and Energy Ltd


Proposed Dividend Account
Amoun
Particulars Particulars Amount
t
To Dividend account
being paid during the 1,000 By Opening balance 5,000
Year
To Closing balance 10,000 By Profit and loss account – 6,000

24
Proposed dividend (bal fig.)
11,000 11,000

Minali Steel and Energy Ltd


Adjusted Profit and Loss Account

Particulars Amount Particulars Amount


To Provision for Tax 7,500 By op bal. of Profit and Loss 50,000
account
To Proposed Dividend 6,000 By Funds from operations 43,500
(bal fig.)
To Profit and Loss 80,000
account
(closing bal)
93,500 93,500

(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:

2010 2011 2010 2011


 Liabilities Assets
Rs. Rs. Rs. Rs.
 Share Capital 5,00,000 7,00,000 Land and Building 80,000 1,20,000
 General Reserve 50,000 70,000 Plant & Machinery 5,00,000 8,00,000
 Profit & Loss A/c 1,00,000 1,60,000   Stock 1,00,000 75,000
   
 Sundry Creditors 1,53,000 1,90,000   Sundry Debtors 1,50,000 1,60,000
 Bills Payable 40,000 50,000   Cash 20,000 20,000
Outstanding
  7,000 5,000    
Expenses
   8,50,000 11,75,000     8,50,000 11,75,000
Additional information:
(a) Rs. 50,000 depreciation has been charged to Plant & Machinery during the year 2011.
(b) A piece of machinery costing Rs. 12,000 (Depreciation provided thereon Rs. 7,000) was sold at 60%
profit on book value.
You required to prepare the Funds Flow Statement.

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

  2010   2011   Increase Decrease


  Particulars
Rs. Rs. Rs. Rs.
  Current Assets:    
  Stock 1,00,000 75,000 25,000
  Debtors 1,50,000 1,60,000 10,000

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

  Particulars Rs.   Particulars Rs.


  To General Reserve 20,000   By Balance b/d 1,00,000
  To Depreciation   50,000    By Gain on sale of Machinery   3,000
  To Balance c/d 1,60,000   By Funds from Operation (Bal. Fig.) 1,27,000
    2,30,000     2,30,000
 
Plant and Machinery Account
 
  Particulars Rs.   Particulars Rs.
  To Balance b/d 5,00,000   By Depreciation A/c 50,000
  To Profit & Loss A/c (Gain on sale)   3,000    By Bank A/c (Sale )   8,000
  To Bank A/c (Bal. Fig.) 3,55,000   By Balance c/d 8,00,000
    8,58,000     8,58,000

Note:  Book Value of Machinery sold = Original Cost – Depreciation provided


= Rs. 12,000 – Rs. 7,000 = Rs. 5,000.
Profit on Sale of Machinery = 60/100 x Rs. 5,000 = Rs. 3,000.
Therefore, Machinery sold for Rs. 8,000 (i.e. Rs. 5,000 + Rs. 3,000)
Illustration 12
From the following relating to Panasonic ltd., prepare funds flow statement.

Balance sheet of Pioneer ltd.


as on 31st December
2010 2011 2010 2011
Liabilities Assets
Rs Rs Rs Rs
Share capital 6,00,000 8,00,000 Fixed assets 3,80,000 4,20,000
Reserves 2,00,000 1,00,000 Accounts receivable 2,10,000 3,00,000
Retained 60,000 1,20,000 Stock 3,00,000 3,90,000
earnings
Accounts payable 90,000 2,70,000 Cash 60,000 1,80,000
9,50,000 12,90,00 9,50,00 12,90,000
0 0
Additional information:
 The company issued bonus shares for Rs.1,00,000 and for cash Rs.1,00,000
 Depreciation written off during the year Rs.30,000
Solutions

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

 Particulars Rs. Particulars Rs.


 To Balance b/d 3,80,000 By Depreciation A/c (Adjusted Profit &Loss A/c ) 30,000
   
 To Bank A/c (Bal. Fig.) 70,000 By Balance c/d 4,20,000
   4, 50,000    4, 50,000

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

Particulars Amount Particulars Amount

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

  Sources Rs.  Applications Rs.


  Issue of Share Capital 1,00,000  Purchase of Land 70,000
  Funds From Operation   90,000   Net increase in Working Capital   1,20,000
    
   1,90,000    1, 90,000

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:

Liabilities 31.3.2008 31.3.2009 Assets 31.3.2008 31.3.2009


Rs. Rs. Rs.
Equity Share Capital Land & Building 6,00,000 7,00,000
(Rs.10 face value Plant & Machinery 9,00,000 11,00,000
per share ) 10,00,000 12,00,000 Investments (Long- 2,50,000 2,50,000
General Reserve 3,50,000 2,00,000 term) 3,60,000 3,50,000
9% Preference Share Stock 3,00,000 3,90,000

28
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

Statement showing schedule of changes in working capital


Year ended
Current Assets- 31.3.200 31.3.2009
Stock 8 3,50,000
Debtor 3,60,000 3,90,000
Cash and Bank 3,00,000 95,000
Prepaid expenses 1,00,000 20,000
Total (A) 15,000 8,55,000
7,75,000
Current Liabilities
Creditors. 2,05,000 3,00,000
Bills payable 45,000 81,000
Total (A) 2,50,000 3,81,000
Working capital (A – B) 5,25,000 4,74,000
Decrease in working capital 51,000
.
Statement Showing Fund From Operation
Increase in Profit and Loss accounts 1,00,000
Add: Preliminary expenses writtenFund
off flow Statement 5,000
Add: Depreciation
Sources of Fund ( 50,000 + 1,20,000) Rs Application of Fund 1,70,000
Rs
Add: Loss on Sale of machine 8,000
Add: of Proposed
Sale dividend
Plant &Machinery 32,000 Dividend Paid 2,60,000
1,50,000
Add: 9%
Issue Interim dividend
Preference Paid
Share 5,00,000 Redemption of Preference 50,000
Add: Transfer to General Reserve.
Capital 4,000 Share Capital 50,000
3,15,000
Add: Pro.
Refund for taxation
of Adv. Tax 7,49,000 Debenture Redeemed 1,06,000
2,06,000
Fund from operation 51,000 Interim dividend paid 50,000
7,49,000
Decrease in working capital Purchase of Building 1,50,000
Purchase of Plant &
Machinery 3,60,000
Adv. Tax paid 10,5,000
13,36,000 13,36,000
29
Working notes:
Provision for taxation

To Adv. Tax 80,000 By Bal. b/d 70,000


To Bal. c/d 1,00,000 By P & L A/c 6,000
By Cash A/c 4,000
By P & L A/c 1,00,000
1,80,000 1,80,000

Advance Tax A/c.

To Bal. b/d 80,000 By Pro. for tax 80,000


To Cash A/c 1,05,000 By Bal. c/d 1,05,000
1,85,000 1,85,000

General Reserve

To Equity Share Capital 2,00,000 By Balance b/d 3,50,000


To Balance c/d 2,00,000 By P/L 50,000

4,00,000 4,00,000

9% Preference Share Capital


To Cash 3,00,000 By Balance b/d 3,00,000
By Cash. 5,00,000
To Balance c/d 5,00,000
8,00,000 8,00,000

Share Premium A/c


To Premium of Redemption of By Balance b/d 25,000
P.S.C. 15,000
To Premium of Redemption of
Debenture 6,000
To Balance c/d 4,000
25,000 25,000

8% Debenture A/c
To Cash 2,00,000 By Balance b/d 3,00,000

To Balance c/d 1,00,000


3,00,000 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

Land & Building


To Balance b/d 6,00,000 By Deprecation 50,000
To Cash 1,50,000
By Balance c/d 7,00,000
7,50,000 7,50,000

Plant & Machinery


To Balance b/d 9,00,000 By Deprecation 1,20,000
To Cash 3,60,000 By Cash 32,000
By Profit & Loss A/c 8,000
By Balance c/d 11,00,000
12,60,000 12,60,000

Equity Share Capital A/c


By Balance b/d 10,00,000
By General Reserve 2,00,000
( Bonus Share)

30
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

Balance Sheet of M/s BROYHILL Industries Ltd, as on

Liabilities 31-12-2005 31-12-2006 Assets 31-12-2005 31-12-2006

Share capital 12,00,000 16,00,000 Goodwill (at Cost) 6,00,000 5,50,000


Debentures 4,00,000 6,00,000 Plant and Machinery 8,00,000 14,90,000
Reserve 3,00,000 3,50,000 (Cost) 6,00,000 10,00,000
Profit & Loss a/c 2,50,000 5,00,000 Buildings 3,50,000 4,70,000
Creditors 2,30,000 1,80,000 Land 3,38,000 3,72,000
Bank Loan 8,00,000 13,00,000 Debtors 6,00,000 8,00,000
Provision for Depreciation Stock 40,000 80,000
on Buildings 12,000 6,000 Bank 14,000 12,000
on Plant & Machinery 40,000 48,000 Preliminary expenses
Provision for:
Bad & Doubtful Debts 60,000 70,000
Taxation 50,000 1,20,000

  33,42,000 47,74,000   33,42,000 47,74,000


You are required to analyse the Funds Flow and the Changes in working Capital in as much detail as possible,
using the following additional details available.
1. A part of the machinery costing Rs. 1,40,000 (Accumulated depreciation Rs. 12,000 ) was sold for Rs.
1,20,000.
2. Buildings costing Rs. 1,00,000 (Accumulated depreciation 10,000) was sold for Rs. 1,10,000.
3. Land costing Rs. 1,50,000 was sold for Rs. 1,70,000. Profit of Rs. 20,000 transferred to reserve.
4. Dividends of Rs. 1,00,000 were paid during the year.
5. Provision for taxation in 2006 Rs. 1,10,000.
6. During 2006 Assets of another company were purchased for a consideration of Rs. 1,00,000, payable in
shares. These assets included buildings worth Rs. 50,000 and stock worth Rs. 50,000.

Solution
Schedule of Changes in Working Capital

Working Capital Change


Previous
Particulars/Account Current Period
Period
Increase Decrease

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)

  Current Period (3,72,000 − 70,000) 6,00,000 8,00,000 2,00,000


2) Stock 40,000 80,000 40,000
3) Bank

  9,18,000 11,82,000 2,64,000 -

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

  2,80,000 3,00,000 3,14,000 70,000

31
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

Share Capital a/c

To Balance 16,00,000 By Balance b/d 12,00,000


c/d By Buildings 50,000
By Stock 50,000
By Cash/Bank 3,00,000
a/c

16,00,000 16,00,000

Debentures a/c

To Balance 6,00,000 By Balance b/d 4,00,000


c/d By Cash/Bank 2,00,000
a/c

6,00,000 6,00,000

Reserve a/c

To Balance c/d 3,50,000 By Balance b/d 3,00,000


By Land a/c 20,000
By P/L Appr. 30,000
a/c

3,50,000 3,50,000

Bank Loan a/c

To Balance 13,00,000 By Balance b/d 8,00,000


c/d By Cash/Bank 5,00,000
a/c

13,00,000 13,00,000

Goodwill a/c

To Balance 6,00,000 By P/L Appr. a/c 50,000


b/d 5,50,000
Balance c/d

6,00,000 5,50,000

Preliminary Expenses a/c

To Balance 14,000 By P/L Appr. a/c 2,000

32
b/d By Balance c/d 12,000

14,000 14,000

Plant and Machinery a/

To Balance b/d 8,00,000 By Plant Disposal a/c 1,40,000


To Cash/Bank 8,30,000 By Balance c/d 14,90,000
a/c

Total 16,30,000 Total 16,30,000

Provision for Depreciation on Plant and Machinery a/c

To Plant Disposal a/c 12,000 By Balance b/d 40,000


To Balance c/d 48,000 By P/L Appr. a/c 20,000

60,000 60,000

Plant Disposal a/c

To Plant/Machinery 1,40,000 By Depr. Res a/c 12,000


a/c By Cash/Bank 1,20,000
a/c 8,000
By P/L Appr. a/c

1,40,000 1,40,000

Buildings a/c

To Balance b/d 6,00,000 By Building Disposal 1,00,000


To Share Capital a/c 50,000 a/c 10,00,000
To Cash/Bank a/c 4,50,000 By Balance c/d
(?)

11,00,000 11,00,000

Provision for Depreciation on Buildings a/c

To Building Disposal a/c 10,00 By Balance b/d 12,000


To Balance c/d 0 By P/L Approp. a/c 4,000
6,000

16,00
16,000
0

Building Disposal a/c

To Building a/c 1,00,000 By Depr. Res a/c 10,000


To P/L Appr. 20,000 By Cash/Bank 1,10,000
a/c a/c

1,20,000 1,20,000

Land a/c

To Balance b/d 3,50,000 By Land Disp 1,50,000


To Cash/Bank a/c 2,70,000 a/c 4,70,000
(?) By Balance c/d

6,40,000 6,40,000

33
Land Disposal a/c

To Land a/c 1,50,000 By Cash/Bank 1,70,000


To Reserve a/c 20,000 a/c
(*)

1,70,000 1,70,000

Profit and Loss (Appropriation) a/c

To Reserve a/c 30,000 By Balance b/d 2,50,000


To Goodwill a/c 50,000 By Profit/Loss a/c (FFO) 3,44,000
To Preliminary Expenses a/c 2,000 By Profit on Sale of 20,000
To Prov. Depr. Plant/Mach 20,000 Bldgs
To Loss on Sale of 8,000
Plant/Mach 4,000
To Prov. Depr. Bldgs 5,00,000
To Balance c/d (Net Profit)

6,14,00 6,14,000

Statement for Calculation of Funds from Operations

Particulars Amount Amount

Profit and Appropriation a/c:


    Closing Balance 5,00,00
Less: Opening Balance 0 2,50,000
2,50,00
0

Current Period Profit 2,50,000


Add: Items of Expenses debited to Profit/Loss a/c
        not resulting in a flow of funds
1) Reserve 30,000
2) Goodwill written off 50,000
3) Preliminary Expenses written off 2,000
4) Provision for Depreciation on Plant and 20,000
Machinery 8,000
5) Loss on Sale of Plant and Machinery 4,000 1,14,000
6) Provision for Depreciation on Buildings

Less: Items of Incomes credited to Profit/Loss a/c 3,64,000


        not resulting in a flow of funds
1) Profit on Sale of Buildings 20,000 20,000

Funds From Operations 3,44,000

Statement of Sources and Applications of Funds for the period from __ to __

Sources (Inflow) Applications (Outflow)


Amount Amount
of Funds of Funds

1) Share Capital (Stock) 50,000 1) Purchase of Plant and 8,30,000


2) Share Capital 3,00,000 Machinery 4,50,000
(Cash/Bank) 2,00,000 2) Purchase of Buildings 2,70,000
3) Debentures 5,00,000 3) Purchase of Land
4) Bank Loan 1,20,000
5) Plant Sale 1,10,000
6) Building Sale 1,70,000
7) Land Sale 3,44,000
8) Funds from Operations

34
  17,94,000   15,50,000

Change in Working Capital 2,44,000

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

15. The Balance Sheets of DRB Ltd

Liabilities Year Assets Year


Rs. in 000s 2010 2011 Rs. in 000s 2010 2011

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

You are informed that during the year:


a) A machine costing Rs.70, 000 book value Rs.40,000 was disposed of for Rs.25,000.
b) Preference share redemption was carried out at a premium of 5% and
c) Dividend at 15% was paid on equity shares for the year 2006.
Further:
a) The provision for depreciation stood at Rs.1, 50,000 on 31.12.2010 and at Rs.1, 90,000 on
31.12.2011;
b) Stock which was valued at Rs.90,000 as on 31.12.10; was written up to its cost, Rs.1,00,000 for
preparing profit and loss account for the year 2011.
Ans: Increase in working capital Rs. 50, 000
Funds from operations 295000
Funds Flow Statement total Rs. 470000
18. The following are the balance sheets of a limited company on 31st December 2010 and 2011.

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.

Balance sheet of ABC Ltd


Liabilities 31 Dec ‘10
st
31st Dec ‘11 Assets 31st Dec ‘10 31st Dec ‘11
Share capital 10,000 15,000 Fixed Assets 10,000 20,000
Provision for Tax 2,000 3,000 Current 13,000 14,500
Trade Creditors 4,000 6,000 Assets
Proposed Dividends 1,000 1,500
Profit & Loss A/c 4,000 6,000
Outstanding
Expenses 2,000 3,000
23,000 34,500 23,000 34,500
Additional Information:
 Tax paid during 2005 is Rs.2,500
 Dividends paid during 2005 is Rs.1,000

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

Balance sheet of XY Ltd


31st Dec 31st Dec 31st Dec
Liabilities 31 Dec ‘10
st
Assets
‘11 ‘10 ‘11
Share capital 1,00,000 1,00,000 Land 48,000 96,000
General Reserve 14,000 18,000 Building and Equipment 3,60,000 5,76,000
Provision for Tax 16,000 18,000 Cash 60,000 72,000
Sundry Creditors 8,000 5,400 Debtors 1,68,000 1,86,000
Provision for Doubtful Stocks 2,64,000 96,000
debts 400 600 Advances 7,800 9,000
Profit & Loss A/c 16,000 13,000
Bills Payable 1,200 800
1,55,600 1,55,800 1,55,600 1,55,800
Additional Information:
Cost of equipment sold was Rs.72, 000.

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.

Balance sheet of X XLtd


Liabilities 31st Dec 31st Dec ‘11 Assets 31st Dec 31st Dec
‘10 ‘10 ‘11
Share Capital 70,000 74,000 Cash 9,000 7,800

38
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

Funds Flow Statement

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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]

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