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• PV of Perpetuity : Ax 1/I
• At a 20% discount rate, the maximum annuity
factor will be 5 (i.e. 1/0.2). If Rs. 1000 is
received every year upto the perpetuity, then
its present value will be 1000x5 = Rs. 5,000/-
Capital Recovery
• Certain financial problems require reverse calculations
to those of the present value of annuity. For example a
Leasing Co. would like to calculate an annual rental
charge for the lease equipment or a bank would like to
recover a loan in equated annual installments.
• PV of Annuity : PV = A ( 1+i)t-1)
ix(1+i)t
• A Bank disbursed a loan of Rs. 1 Lac @18% recoverable
in 5 equated annual installments with interest.
Calculate the amount of installment?
Capital Recovery
• Solution = 1,00,000x(0.18x(1.18)5
(1.18)5 – 1
=
1,00,000x(0.4118/1.2878)
= 1,00,000x0.3198
= Rs. 31,980/-
Funds Flow Statement
• Funds : It refers to cash, cash equivalents or to working
Capital. Current Assets and Current Liabilities.
• Flow of Funds : The term ‘Flow’ means change and
therefore the term ‘Flow of Funds’ means change in Funds
or change in working capital. In other words any increase or
decrease in working capital means Flow of Funds.
• Funds Flow Statement : A summary of a firm’s changes
in financial position from one period to another. It is also
termed as a “Statement of Sources and Applications of
Funds” and “Where got and where gone funds”.
• Balance Sheet = Stock of funds
• Changes in Balance Sheet items = Net flow of funds
Sources & Uses of Funds
We prepare a basic, bare bones funds statement
by :
• Determining the amount and direction of net
Balance Sheet changes that occur between two
Balance Sheet dates.
• Classifying net Balance Sheet changes as either
sources or uses of funds, and
• Consolidating this information in a sources and
uses of funds statement format
Uses/Importance of Funds
Flow Statement
1. It explains the financial
consequences of business
operations.
2. It answers intricate queries.
3. It acts as an instrument for
allocation of resources.
4. It is a test as to effective or
otherwise use of working capital.
Techniques for preparing
Funds Flow Statement
1. Schedule of changes in Working Capital
It can be prepared by comparing the current
assets and current liabilities of two periods.
2. Funds Flow Statement
For preparing a Funds Flow Statement, it is
necessary to find out the sources and Application
of Funds. Here, attention is given to changes in
Fixed Assets and Fixed Liabilities and the changes
in current assets and current liabilities are ignored.
Schedule of changes in
Working Capital - Rules
1. Increase in current assets results in
increase (+) in working capital.
2. Decrease in current assets results in
decrease (-) in working capital.
3. Increase in current liability, results
in decrease (-) in working capital.
4. Decrease in current liability, results
in increase (+) in working capital.
Funds Flow Statement
1. Sources of Funds
• Issue of Shares
• Issue of Debentures
• Long term Borrowing
• Sale of fixed assets
• Operating profit
Total Sources
Funds Flow Statement
2. Application of Funds
• Redemption of redeemable Preference Shares
• Redemption of Debentures.
• Payment of other long term loans.
• Purchase of Fixed Assets.
• Operating Loss
• Payment of dividend, Tax etc.
Total Uses
Net Increase/Decrease in Working Capital
(Total Sources – Total Uses.
Funds Flow Statement
• Tip to remember : The following
device should help you to remember
what constitutes a source or use of
funds :
A L
S - +
U + -
Funds Flow Statement
• The following is the Comparative Balance Sheet of
M/s. ABC Ltd. Prepare a Funds Flow Statement
Balance Sheet
• Liabilities 31.12.2008 31.12.2009
Share Capital 8,000 8,500
P&L Appropriation A/c. 1,450 2,450
Creditors 900 500
Mortgage Loan 500
----------------------------
10,350 11,950
Funds Flow Statement
• Balance Sheet : Assets 31.12.08 31.12.09
Land 5,000 5,000
Plant 2,400 3,400
Debtors 1,650 1,950
Stock 900 700
Cash at Bank 400 900
------------------------
10,350 11,950
Funds Flow Statement
Solution :
Schedule of Changes in Working Capital
Assets/Liability Increase(+) Decrease (-)
Stock 200
Debtors 300
Cash at Bank 500
Creditors 400
------ -----
1,200 200
Net Increase in Working Capital Rs. 1,000
Funds Flow Statement
Funds Flow Statement
• Sources of Funds
Increase in Share Capital 500
Mortgage Loan 500
Funds from Operations 1,000
Total Sources 2,000
• Application of Funds
Plant purchased 1,000
Total Application 1,000
Net Increase in Working Capital 1,000
Funds Flow Statement
Adjustments :
• Recognise Profits and Dividends.
Source : Net Profit
Less Use : Cash Dividends
Net source : Increase in Retained Earnings
• Recognise Depreciation and Gross change in
Fixed Assets :
Source Depreciation
Less Use : Additions to Fixed Assets
Net Source : Decrease in Fixed Assets
Cash Flow Statement
What is Balance Sheet?
• A Balance Sheet is a statement showing
the financial position of the firm as at
the last day of the account period.
What is Profit & Loss Account?
• This is an income statement which
focuses on financial performance due to
the operating activities of a firm during
the period.
Cash Flow Statement
• What is Funds Flow Statement :
A summary of a firm’s changes in
financial position from one period to
another. It is also termed as a
“Statement of Sources and
Applications of Funds” and “Where
got and where gone funds”.
Cash Flow Statement
What is Cash Flow Statement?
• Cash Flow Statement is a statement which
indicates sources of cash inflows and
transactions of cash outflows of a firm during
an accounting period. The activities /
transactions which generate cash inflows are
known as sources of cash and activities which
cause cash outflows are known as uses of
cash. It is also termed as “Where got where
gone statement”.
Cash Flow Statement
Sources of Cash Inflows
• Business Operations/Operating activities
• Non-business/operating activities (Interest,
Dividend received)
• Sale of Long term assets (Plant, building
and equipment)
• Issue of additional Long term securities
(Equity, Preference Shares and Debentures)
• Additional Long term borrowings ( Banks &
Financial Institutions)
• Other sources (specify them)
Cash Flow Statement
Sources of Cash Outflows :
• Purchase of Long term assets (Plant &
Machinery, Land & Building, Office equipment
& Furniture)
• Redemption of Preference Shares &
Debentures
• Repurchase of Equity Shares
• Repayment of long term borrowings
• Cash dividends paid to shareholders
(Preference & Equity)
• Other items (Specify)
Net Increase/Decrease in Cash.
Usefulness of Cash Flow
Statement
It helps in answering the following questions:
• How much cash has been generated from normal
business operating activities / operations of a
company.
• What have been the other premier financing
activities of the firm through which cash has been
raised? What has happened to cash so obtained?
• How much cash has been spent on investment
activities, say on purchase of new Plant &
Equipments?
Usefulness of Cash Flow
Statement
• How was the redemption of Preference Shares and
Debentures accomplished?
• How long term sources of cash (internally
generated plus raised externally) adequate to
finance purchase of new long term/fixed assets.
• What has been the proportion of Debt and Equity
for cash raised from outside?
• Why are dividends not larger?
• Is the Co. borrowings to pay cash dividends?
• Has the liquidity position of the Co. improved
Preparation of Cash Flow
Statement-
Format
Balance as on 01.01.20 (Opening
Balances)
• Cash Balance
• Bank Balance
Add : Sources of Cash
Issue of Shares
Raising of long term loans
Sale of Fixed Assets
Short term borrowings
Cash Flow Statement
Cash from Operations :
• Profit as per P & L Account
Add/Less : Adjustment for Non-Cash items
Add : Increase in Current liabilities
Decrease in Current Assets
Less : Increase in Current Assets
Decrease in Current Liabilities
Total Cash Available (1)
Cash Flow Statement
Less : Application of Cash
Redemption of Preference Shares
“ Long term Loans
Purchase of Fixed Assets
Decrease in deferred payment liabilities
Cash outflow on account of operations
Tax Paid
Dividend paid
Decrease in unsecured loans, deposits etc.
Total Applications (2)
Closing Balances
Cash Balance
Bank Balance
Utility of Cash Flow
Analysis
• Helps in efficient Cash Management.
1,38,300
Cash from Operations
B/F
1,38,300
Less : Increase in B.R 2,500
“ in Accrued Income 150
Decrease in B.P 2,000
“ in Ad. Income 50
4,700
2. Functional Method
Traditional Method
• The traditional classification has been on the
basis of the financial statement to which the
determinants of a ration belong.
• Coverage Ratios.
• Turnover Ratios.
• Financial Ratios :
Profitability Ratios
(a). Gross Profit Ratio = Gross Profit X 100
Net Sales
(b). Net Profit Ratio = Net Profit X 100
Net Sales
©. Operating or = Operating Costs X
100
Expenses Ratio Net Sales
Profitability Ratios
(d). Overall Profitability Ratio : It is also
called as “Return on Investment” or
“Return on Capital Employed”. It indicates
the % of return on the total capital
employed in the business. The formula is :
Quick Assets
Quick Liabilities
• Super Quick Ratio can also be calculated by dividing
Cash & Marketable securities with Current/Quick
Liabilities.
• Debt Equity Ratio : (a). External Equities
Internal Equities,
(b). Total Long Term Debt
Total Long Term Funds
• Debt Service Coverage Ratio :
Profit After Tax + Depreciation +
Interest on term debt + Lease Rentals, if any
Repayment of term + Interest on term debt + Lease
Rentals, if any
• Overall Profitability Ratio = Operating Profit X 100
Capital employed
Computation of Ratios
• From the following information, prepare P & L A/C & B/S of
ABC & Co.
Opening Stock 1,50,000 Purchases 3,00,000
Sales 10,00,000 Wages 2,00,000
Closing Stock 2,50,000 Mfg Exps. 1,00,000
Salary 25,000 Loss on Sale 55,000
Insurance 25,000 Plant
Rent 30,000 Debtors 1,00,000
Reserves 1,00,000 Creditors 1,00,000
Comm. Paid 20,000 Bank Balance 50,000
Computation of Ratios
Intt. On Debentures 10,000 Deb. 2,00,000
Pft on sale of shares 50,000 B.Payable 35,000
Share Capital : O/S Exps 15,000
Equity 1,00,000
Preference 1,00,000
Machinery 1,00,000
Furniture 1,00,000
Prepaid Exps 50,000
Computation of Ratios
• Also calculate the following Ratios.
1. Gross Profit & Net Profit Ratio
2. Return on Investment Ratio
3. Current Ratio
4. Debt-Equity Ratio
5. Stock Turnover Ratio
6. Liquidity Ratio
7. Overall Profitability Ratio
Sources of Finance -
Classification
1. According to Period :
(a). Long Term Sources : Shares,
Debentures, Long term Loans
(b). Short Term Sources : Advances from
Banks, Public Deposits, Advances from
customers & Trade Creditors etc.
2. According to Ownership :
(a). Own Capital viz. Share Capital,
Retained-Earnings and Surpluses etc.
(b). Borrowed Capital viz. Debentures,
Public Deposits and Loans etc.
Sources of Finance -
Classification
3. According to Source of Generation :
(a). Internal Sources viz. Retained
Earnings and Depreciation Fund etc.