ffs

funds
flow
statement
sharma
 ffs
2 financial statement

Profit & loss Account

Balance Sheet

sharma
 ffs

What does these statements

Discloses

sharma
 ffs

What does these statements

Don’t Disclose

Changes or movement of
finances between two periods

sharma
 ffs
New Statement is Required to show

changes in
Assets
Liabilities
Owners Equity

between dates of two

Periods of B Sheet
sharma
 ffs

it is called

Statement of Changes in Financial Position

SCFP

sharma
 ffs Statement of Changes in Financial
Position

Changes in Financial &

Assets & Investment
Due to
Liabilities Decisions
Owners’ Equity

Acquiring Assets
Use in Fin.
Paying Debts
Resources Paying Dividend
During the
Increases Period
in Fin. Selling Assets
Resources Raising Capital
sharma Increasing Debt
 ffs
Statements of Changes in Financial Position

• funds flow statement

• cash flow statement

sharma
 ffs

Listed Indian companies are required to include

Cash flow Statement

in their annual accounts

sharma
 ffs
AS-3 ON Changes in Financial Position

also suggested standards for Funds Flow Statement

sharma
 ffs Nature of Changes in the Financial Position
XYZ CO.

Balance Sheet Changes

March 31,2005 and March 2006 (Rs 000)

2005 2006 Changes

Assets
Cash 54 135 +81
Debtors 6750 8235 +1485
Stock 10125 22680 +12555

Total Current Assets 16929 31050 + 14121

Fixed Assets 2970 6075 + 3105

Other Assets 945 1890 + 945

Total Assets 20844 39015 + 18171

sharma
 ffs Nature of Changes in the Financial Position
XYZ CO.

Balance Sheet Changes

March 31,2005 and March 2006 (Rs 000)

2005 2006 Changes

Liabilities & Capital
Bank Borrowings 3510 8664 + 5154
Creditors 2835 6615 + 3780
Prov for taxes 270 972 + 702
Accured Exp 810 2700 + 1800
Total C Liabilities 7425 18951 +11526
Long Term Debt 1944 1404 _
540
Total Liabilities 9369 20355 +10986
Paid Up S Capital 8370 8370
Reserves & Surplus 3105 10290 + 7185
sharma
 ffs Changes in the Financial Position

• Total Assets Increased by ….Rs 18171

• Change in Retained Earning…Rs 7185

• Change in Outsiders Liab …Rs 10986

What financial impact does these changes make?

These changes may raise few questions……..

sharma
 ffs Changes in the Financial Position

•Few Questions
•Is the Increase in inventory due to growth of Sales or
inefficiency?

•Why have the fixed Assets increased ?

•Though retained Earnings increased but whether the

liquidity position is sound ?

•Why long term debt is used or not used?

•What is the proportional change in dividend?

sharma
 Sources & Uses of Funds Rs in ‘000
ffs Amount
%
Sources
Increase in current liabilities
Bank Borrowings 5154 27.5
Creditors 3750 20.2
Provisions for Taxes 702 3.8
Accrued Expenses 1890 10.1
Total 11526 61.6
Increase in Share H Equity
ONE Reserves (Retained Earnings) 7185 38.4
WAY Total Sources 18711 100.0
To assess
Uses
percentage
Increase in Current Assets
Changes
Cash 81 0.4
Debtors 1485 7.9
Stock (Inventory) 12555 67.1
Total 14121 75.4
Increase in Fixed Assets 3105
16.6
Increase in Other Assets 945
sharma 5.1
 ffs
Changes in Working Capital (Rs 000)
Current Current
Assets
less
Liabilities
= Net W Capital

Year end 2005 16929 _ 7425 = 9504

Find Year end 2006 31050 _ 18951 =

Changes
12099
In
Working
Capital Change 14121 _ 11526 =
2595
183% 390%

sharma
 ffs

another way is to prepare

•Schedule of change in WC
•Funds Flow Statement

sharma
 ffs What are funds?

• Funds may refers to Cash only

• Funds may refers to net working Capital

• Funds may Refers to total Resources

sharma
 ffs Assess Changes in funds?

Changes in firm’s Cash position

Changes in the firm’s W Capital Position

Changes in the firm’s total financial position

sharma
 ffs Statement of Changes in Financial Position

Cash Flow Statement

Fund Flow Statement

Total Resources Statement

sharma
 ffs Statement of Changes in Financial Position

• Statement reporting changes in working capital

• NWC affected- if 1 account Current-non current

• NWC increases/decreases when a/c are C/NC

• NWC Unaffected if both a/c are current

• NWC Unaffected if both a/c are Non-Current

sharma
 ffs Ordinary Cash
Share
Shares (Current
Capital
Asset)

Changes in Funds

Machinery Cash Mach

for Cash Account Account

Cash from Cash

Debtors Debtors
Account

No changes
Cash to Cash
In Funds Creditors Creditors
Account

Purchases Fixed Issue

Land Assets Share
sharma
 ffs 1 NWC + - when transaction involves CA & NCA
2 NWC remains unaffected when both are CA’s
3 NWC remains unaffected when both are NCA’s

Current Account Non-Current

- + Account

Current Account No-Impact Impact

Non-Current
Account Impact No Impact

Effect Of Changes in Accounts on Working Capital

sharma
 ffs
Construction of SCFP

1 Funds from Operations ( Income Statement)

2 Statement of Sources & Uses
(Application)
3 Schedule of Changes in Working Capital

sharma
 ffs

Funds Flow Statement

sharma
 ffs

Inflow of Funds Uses Of Funds

Operations Profit Operations Loss

Sale of Assets Purchase of Assets
Sale of Investments Investments
Issue of Share Cap. SC Redemption
Long term Loans Debentures Red
Non-Operating Incomes Payment of Dividend
Repayment of Loans

sharma
 ffs Other way of describing FFS

Sources Of Funds Uses Of Funds

Increase in Liabilities Decrease In Liabilities

Increase in Capital Decrease in Capital

Decrease in Assets & Increase in NC Assets

Investments & Investments

sharma
 ffs Funds Flow Statement (Sources)

funds from Operations (adjusted net income)

+depreciation & Amortization
+loss from sale of Assets/Investments
+ Tax Provisions
- Non operating income
- Profit on sale of Asset/Investment

sale of Non-Current Assets

sale of long term investments
sale of tangible fixed assets
sale of intangible fixed assets
long term financing
Long Term borrowings
Issuing equity & preference shares

sharma
 ffs Funds Flow Statement (Uses)

• adjusted net loss from operations

Depreciation & Amortization
Gain or Loss from NCA
• purchase of non-current assets
purchase of LT investments
purchase of tangible fixed assets
purchase of intangible fixed assets
• repayment of long term debt
• redemption of pref shares
• payment of cash dividend

sharma
 ffs Funds Flow Statement (Horizontal)

Sources Amount Uses Amount

Loss From Operations

Funds From Operations
Redemption of SC
Issue Of Share Capital

Issue Of Debentures
Redemption Of Deb.

LT Borrowings Repayment of Loans

Sale of Assets Purchase of Assets

Investments
Sale Of Investments
Payment of Dividend
Non Operating Incomes

Any other Source Any other Use

Dec in WC (Balance) Increase in WC (Bal )

sharma
 ffs Funds Flow Statement (vertical)

Sources Of Funds
Funds from Operations
Issue of Share Capital
Issue of Debentures
Long Term Borrowings
Sale of Assets/Investments
Non Operating Incomes
Any Other Source
Total Sources (A)
Uses Of Funds
Loss from Operations
Redemption Of Shares/Deb
Repayment of Loans
Purchase Of Assets/Investments
Payment of Dividend
Any other Use
Total Uses (B)
Increase/Decrease in WC (A-B)

sharma
 ffs

Funds from Operations

sharma
 ffs Funds from Operations

•FFO refers to the funds provided by regular activities

•Difference between profit & FFO due to few transactions

•No flow of funds— depreciation, amortization, prelim Exp

•Adjustments are required

•All exp don’t involve flow of funds- added back to profit

•All non operating Profit/income be deducted- sale of assets

•All non operating losses be added back- sale of assets

sharma
 ffs Calculation of FFO

Net Profit as per IS XXXX

Add
Depreciation *****
Amorti. of Intangible Assets *****
Loss on Sale of Assets/Invt ***** XXXX

Less
Non Operating Incomes *****
Profit on Sale of Assets/Invst***** xxxx

Funds from Operations xxxx

sharma
 ffs Calculation of FFO

1 WHEN THE CURRENT YEAR IS GIVEN IN COMPLETE

Approach I
Redraft the income statement, starting from Sales
taking only those operating items involving flow of
funds balancing figure is FFO

Approach II
Start from profit and adjust non cash/non-operating items
add/deduct items which affected profit but not funds

sharma
 ffs Calculation of FFO

Net Profit as per IS XXXX

Add
Depreciation *****
Amorti. of Intangible Assets *****
Loss on Sale of Assets/Invt ***** XXXX

Less
Non Operating Incomes *****
Profit on Sale of Assets/Invst***** xxxx

Funds from Operations xxxx

sharma
 ffs Calculation of FFO
When income statement is not given
P&L adjustment Account is prepared to find FFO

Particulars Amt (Rs) Particulars Amt (Rs)

By Balance b/d
To depreciation (Op Balance of P/L
To Loss on Sale of Ast as in last year B/S) XXXX
To Loss on Sale of Inv
To Amort of intangible By Inc. from invt xxxx
To G Reserve (Transfer) By Prof from sale of
To any other Reserve Assets/ Invst xxxx
To Provision of Tax
To Proposed Dividends By FFO (Balance) xxxxx
To Interim Dividend (Source)
To Cl Balance of P/L
( end of the year)

xxxxx
sharma xxxxx
 ffs A co. reported current year profit of Rs 70000
after incorporating the following

Loss on sale of equipment 9000 gain from sale of assets 40000

Example premium on Red of Deb. 1500 Provision for Tax 22000

Discount on issue of Deb 2000 Dividend Income 4000

Depreciation on Machinery 20000 Transfer to G Reserve 5000

Depletion of Natural Res 10000 Preliminary Exp 1000

Interim Dividend 25000 Profit on Revaluation 2500

Loss on Sale of Investment 1000

Find out FFO?

sharma
 Calculation of Funds from Operations
ffs
Particulars Amt(RS) Amt(Rs)
Current Year Profit 70000
Add Loss on Sale of Equip 9000
Disc on Issue of Deb 2000
Depreciation 20000
Dep of Natural Resources 10000
Goodwill Written off 30000
Provision of Tax 22000
Transfer to G Reserve 5000
Preliminary Expenses 1000
Prem on Red of Deb 1500
Interim Dividend 25000
Loss on sale of Invst 1000 126500
196500
Less Profit on Revaluation 2500
Gain from sale of Assets 40000
Dividend Income 4000 46500
Funds from Operations 1,50,000
sharma
 ffs From extracts of 2 years Balance sheet. Calculate FFO

As on 31st December

2005 2006

Example
Profit and Loss Account 30000 40000
General Reserve 20000 25000
Goodwill 10000 5000
Preliminary Expenses 6000 4000
Prov for Depreciation 10000 12000

Find FFO?

sharma
 ffs

Profit and Loss account as on 31st dec 2006 40000

Add Transferred to Gn Reserve 5000

Goodwill written Off 5000
Preliminary Exp Written off 2000
Provision for Depreciation 2000

54000
Balance as on 31st December2005 30000

Funds from Operations 24000

sharma
 ffs
Adjusted Profit and Loss Account

Particulars Amt(Rs) Particulars Amt(Rs)

To transfer to G Reserve 5000 By Balance b/d 30000

To Goodwill written off 5000 (Op Balance)
To Preliminary Exp WO 2000 By FFO 24000
To Prov For Deprec 2000
To Balance c/d 40000

54000
54000

sharma
 ffs Special Considerations for Calculating FFO

1 Significant transactions but involving NC Accounts

Issue of shares/deb against purchase of Assets

Issues of shares by redeeming/converting debentures
Issue of Bonus shares using capital reserve
Discharging liability by transferring an assets

These exchange transactions be shown in FFS

2 Provision for Tax

As a current Liability- SWC

As a non-current Liability- not shown in SWC

Op Balance- provided last year is shown application
Cl Balance -considered non-operating for current year
added back to Profit

sharma
 ffs Special Considerations for Calculating FFO

3 Interim Dividend and Proposed Dividend

though current liability but not treated as CL in FFS

Both are considered application of funds

Both are adjusted in FFO added back - if provided after
appropriation

4 Hidden information about Fixed Assets

Assets purchased (uses of funds)

Assets Sold ( Sources)
Depreciation (FFO)
Profit/loss on sale (FFO)

sharma
 ffs

Schedule of Changes in Working Capital

sharma
 ffs Schedule of Changes in Working Capital

Op Bal Cl Bal +In WC _ In WC

1 Current Assets

Cash ---- ----

Debtors
Stock
Mkt Securities
Any Other

2 Current Liabilities
Creditors
Bills Payable
Accrued Expenses
Bank Overdraft
Any Other
Total Total Total Total

Net Increase or decrease in WC XX

sharma
 ffs Schedule of Changes in Working Capital

Few Observations

+ in CA during the year results in increase in WC

- in CA during the year results in decrease in WC

+ in CL during the year results in decrease in WC

- In CL during the year results in increase in WC

sharma
 Forms of Funds Flow Statement
ffs
Statement of Changes in Working Capital
for the year ended March 31,200x
a) Sources and use of working capital

Sources

Funds from operations 1,20,000

Sale of Machine 30,000
Issuance of debenture 1,00,000
Issuance of equity shares 1,00,000
Funds Provided 3,50,000
Uses
Purchase of Long term investments 80,000
Payment of long term loans 90,000
Payment of Cash Dividend 60,000
Increase in Working Capital 1,20,000
sharma Funds Applied 3,50,000
 Forms of Funds Flow Statement
ffs
Statement of Changes in Working Capital
for the year ended March 31,200x
a) Sources and use of working capital

Sources

Funds from operations 1,20,000

Another Sale of Machine 30,000
Way
Issuance of debenture 1,00,000
Issuance of equity shares 1,00,000
Funds Provided 3,50,000
Uses
Purchase of LT investments 80,000
Payment of LT loans 90,000
Payment of Dividend 60,000
Increase in Working Capital 1,20,000
sharma Funds Applied 3,50,000
 b) Schedule of changes in working Capital
ffs 31 march 31 march
2005 2006 + -
Rs Rs Rs Rs
Current Assets
Cash 80000 125000 45000
Debtors 50000 45000 5000
Inventory 115000 165000 50000

Total 245000 335000 95000 5000

Current Liabilities
Bills Payable 20000 8000 12000
Creditors 45000 47000 2000
Other C Liab 25000 5000 20000

Total 90000 60000 32000 2000

Working Capital 155000 225000 127000 7000

Increase in Working Capital 120000
Total 127000 127000
sharma
 ffs Question

The Comparative Balance Sheet as on December 31,2005

and 2006 and Profit and loss for the same periods for Acme
company are given. The additional information is also given

1 Plant costing Rs 50000 (depreciation 20000) was sold

2 Debenture of Rs 30000 converted to share capital at par

3 declared cash dividend of Rs 40000 and bonus shares

of Rs 20000

4 Issued 5000 additional share at par value of Rs 10 per

share, at a premium of Rs 1 per share

sharma
 ACME Company
ffs Comparative Balance Sheets
(Rs)
for the year ended 31 December,2005 & 2006
2006 2005 Change

Current Assets
Cash 70000 50000 + 20000
Debtors 40000 45000 + 5000
Inventory 125000 90000 + 35000
Total CA 235000 185000 + 50000

Fixed Assets
Land & Building 150000 100000 + 50000
Plant & Machinery 220000 200000 + 20000
Less Acc. Dep. (82000) (80000) - 2000
Net F Assets 288000 220000 + 68000

Total Assets 523000 405000 + 118000

sharma
 ACME Company
ffs Comparative Balance Sheets
(Rs)
for the year ended 31 December,2005 & 2006
2006 2005 Change
Current Liabilities
Creditors 25000 30000 - 5000
Salaries Payable 15000 10000 + 5000
Prov. For Tax 50000 60000 - 10000
Prov for Dividend 40000 40000 ----
Total CL 130000 140000 - 10000
Long Term Liabilities
Institutional Loan 23000 15000 + 8000
Debentures 120000 150000 - 30000
Total LTL 143000 165000 - 22000
Total Liabilities 273000 305000 - 32000
Share Holders’ Equity
Share Capital 175000 75000 + 100000
Share Premium 12500 7500 + 5000
Reserves & Surplus 62500 17500 + 45000
Net Worth 250000 100000 + 150000
Total Funds 523000 405000 + 118000

sharma
 ACME Company
ffs
Profit & Loss Account
for the year ended December 31 2006 (Rs)

SALES 500000
Less COGS 210000
290000
Less Operating Expenses
Office & Administration 45000
Selling & Dist 25000
Interest 12000
Depreciation 22000 104000

Operation Profit 186000

Add gain on sale of plant 6000
Profit before Tax 192000
Less Income Tax
sharma 87000
 ffs

Prepare

Funds Flow Statement

Schedule of changes in working capital

sharma
 ffs Workings

4 Funds from Operations

Net Profit Rs 105,000

Add Depreciation 22,000
127,000

Less gain on sale of plant 6,000

Funds from operations 121,000

15 Sources of Funds

Q) Sale of Plant
Plant Cost Rs 50,000 B Increase in Loan
Depreciation 20,000 Op Balance 15,000
30,000 Cl Balance 23,000
Gain 6,000 Difference 8,000
Sale 36,000
sharma
 ffs Workings
C) ISSUE OF SHARES

Issue of 5000 Share @10 50000

Share Premium 5000

Application Of Funds

1 Purchase of Land & Building Rs 50,000

2 Purchase of Plant
Plant at the end of Last year 2,00,000
Sale of Plant 50,000
1,50,000
Plant at the end of this year 2,20,000
New Purchases 70,000

sharma
 ffs
Workings

3 Conversion of Debentures

Converted Rs 30000 debentures to equity shares

both non current accounts

• Payment Of Dividend

Paid Cash dividend of Rs 40000 -use of WC

Issued Bonus share of Rs 20000- Non Current

sharma
 ACME Company
ffs
Statement of Funds Flow
for the year ended December 31 2006 (Rs)

Sources
Funds from operation 121000
Sale of Plant 36000
Institutional Loan 8000
Issue of Ordinary Shares 55000

Funds Provided 220000

Uses
Purchase of Land & Building 50000
Purchase of Plant & Machinery 70000
Payment of Cash Dividend 40000

Funds Applied 160000

Increase in Working Capital 60000

sharma
 ACME Company
ffs Schedule of Change in Working Capital (Rs)

2006 2005 + -

Current Assets
Cash 70000 50000 + 20000
Debtors 40000 45000 - 5000
Inventory 125000 90000 + 35000
Total (A) 235000 185000 + 55000 - 5000
Current Liabilities
Creditors 25000 30000 + 5000
Salaries Payable 15000 10000 - 5000
Prov. For Tax 50000 60000 + 10000
Prov for Dividend 40000 40000 ----
Total (B) 130000 140000 + 15000 - 5000
W Capital (A-B) 105000 45000 +70000 - 10000

Increase in W Capital (C) 60000

Total 70000 70000

sharma
 ACME Company
ffs
Statement of Funds Flow (Total Financial Resources Basis)
for the year ended December 31 2006 (Rs)

Sources
Working Capital from operation 121000
Sale of Plant 36000
Institutional Loan 8000
Issuance of Ordinary Shares 55000
F Resources Not Affecting WC
Issue Of Shares to convert Deb 30000
Issue of Shares as bonus shares 20000
Funds Provided 220000

Uses
Purchase of Land & Building 50000
Purchase of Plant & Machinery 70000
Payment of Cash Dividend 40000
Fin. Resources not Affecting WC
Payment of Debenture 30000
Payment as Bonus Share 20000

Funds Applied 160000

sharma
 ffs

QUESTION

sharma
 ffs Comparative Balance Sheet of a Car Painting Workshop

Liabilities 2006 2005 Assets 2006 2005

Share Capital 400000 360000 Fixed Assets 520000 480000

General Reserve 60000 110000 less Depreciation 140000 108000

Profit and Loss A/c 53450 20450 380000 372000

Sundry Creditors 175000 183650 Investments 50000 100000

Proposed Dividend 15000 28800 Debtors 167800 118300

Prov. For Tax 32000 - Stock 90500 55600

Bank 47500
49800

Preliminary Exp -
7200
sharma
 ffs Additional Information

1 The NP for the year 2005-06 was Rs 58000(after providing

Depreciation of Rs 40000,writing Off Rs 7200 and making
Provision for tax of Rs 32000

2 Sold old Machinery costing Rs 9000 for Rs 3000 having

Accumulated depreciation of Rs 8000

3 Paid interim dividend of Rs 10000 and directors declared

final dividend of Rs 15000

Prepare SCWC and FF Statement

sharma
 ffs Workings
1 Profit from Machinery

Sale proceeds of Machinery 3000

Cost of Machinery 9000
Less Accm Depreciation 8000 1000

Profit on Sale 2000

2 Funds from Operations

Net Profit Rs 58000
Add
Depreciation 40000
Prelim Exp 7200
Prov For Tax 32000 79200
137200
Less Profit On sale of Mach 2000

Funds from Operations 135200

sharma
 ffs Workings

3 Fixed Assets Purchased

Balance on 31,3.2006 Rs 520000

Balance on 31.3.2005 480000

Less Cost of Machine sold 9000 471000
49000

4 Provision for Tax is excluded from Current Liabilities

5 The Payment of Interim and final dividend are treated

as application of funds

sharma
 ffs Schedule of Change in Working Capital

As on 31,3 2005 31.3.2006 + in WC -IN WC

Current Assets
Bank 49800 47500 - 2300
Debtors 118300 167800 49500 -
Stock 55600 90500 34900 -

Current Liabilities

Creditors 183650 175350 8300

Total 92700 2300

Net Increase in Working Capital 90400

sharma
 ffs Funds Flow Statement

Sources Amt (Rs) Uses Amt (Rs)

Funds from Oper 135200 Purchase of Assets 49000

Issue of Shares 40000 Payment of Dividend
Sale of Assets 3000 Interim 10000
Final 28800
Increase in WC 90400
178200 178200

sharma
 ffs

thanks

sharma