Amity Business School

Amity Business School

MBA Class of 2012, Semester I
ACCOUNTING FOR MANAGERS
Module III

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Funds :
The term Fund means Working Capital i.e. the difference between current
assets and current liabilities.

Any increase or decrease in Working Capital means Flow of Funds.

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Funds flow statement

shows working capital flow rather than cash flow

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Examples of Current Assets

1. Cash in hand
2. Cash at Bank
3. Short term Investments (marketable securities)
4. Sundry debtors
5. Bills Receivable
6. Accrued income
7. Prepaid expenses
8. Stock-in-trade
9. Advance tax
10.Short term loans and advances

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Examples of Current Liabilities

1. Sundry Creditors
2. Bills Payable
3. Outstanding expenses
4. Income received in advance
5. Bank Overdraft
6. Cash credit
7. Short term loan

Schedule of Changes in Working

Capital
Amount
Particulars
A. Current Assets
Cash in hand
Cash at bank
Marketable Securities
Bills Receivable
Debtors(Gross)
Stock
Prepaid Expenses
B. Current Liabilities
Creditors
Bills Payable
Income received in advance
Provision for bad and doubtful debts
Outstanding expenses

C. Working Capital ( A - B )
D. Increase in Working Capital

2008

2009

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Change in Working Capital
Increase
Decrease
(Debit)
(Credit)

5,000
12,000
7,000
4,000
2,000
200
5,000
35,200

7,000
11,000
9,000
3,000
1,500
300
8,000
39,800

2,000

8,000
3,000
4,000
500
1,000
16,500

6,000
2,000
3,000
700
1,800
13,500

2,000
1,000
1,000

18,700

26,300

1,000
2,000
1,000
500
100
3,000

200
800

7,600
26,300

7,600
26,300

11,100

11,100

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Funds from Operation

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The Net Profit disclosed by the P&L A/C may not

generate an equal amount of funds to the business .
A business making a substantial profit may not have
adequate funds at the end of the accounting period. On
the contrary, a business may have enough funds at its
disposal though it has incurred a substantial loss.

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Reason -> P&L A/C records expenses that should

have been paid and records income that should have
been received . It takes into account all prepayments
and accruals.
Moreover,
the
charging
of
depreciation
or
amortization of intangible or fictitious items do not
require any use of funds in the current period.
In short, the P&L does not make any distinction
between any funds flow and non-funds flow items.

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Net Profit as per P&L A/C

Add:
Expenses not resulting in application of funds
Depreciation
Discount written off
Goodwill written off
Preliminary Expenses written off
Transfers to Reserves
Add:

Expenses being Non-business expenses

Loss on sale of fixed assets
Loss on redemption of debentures

Less

Income being Non business incomes

Dividend received
Interest received
Profit on sale of fixed assets
Profit on redemption of debentures

Funds from Operations

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Alternate way of
calculation of Funds
from Operation

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Dr.
Particulars
To Net Loss
To Depreciation
To Loss on sale of fixed assets
To discount on issue of shares written off
To Goodwill written off
To Preliminary Exp. Written off
To Proposed Dividend
To General Reserve
To Funds used in Operation
(Bal. fig.)

Adjusted P&L A/C

Amount Particulars
By Net Profit
By Profit on sale of fixed assets
By Dividend Received
By Funds from operations (Bal fig)

Cr.
Amount

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Funds Flow Statement

Sources of Funds
Decrease in Working Capital
Funds from Operation
Issue of shares and debentures
Increase in Share Capital,Share Premium
Increase in Debentures, loans etc
Sale of Fixed asset
Dividends Received
Interest Received
Donation , gifts and compensation received

Amount

Application of Funds
Increase in Working Capital
Funds used in Operation
Redemption of Preference Shares and Debentures
Decrease in Share Capital
Decrease in Debentures , loans etc
Purchase of Fixed asset
Dividends paid
Interest paid
Income Tax paid

Amount

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Why is Increase in Working Capital an Application of Funds ?

Working Capital = Current Assets

Working Capital =

Current Liabilities

Current Assets Current Liabilities

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Why is Decrease in Working Capital a Source of Funds ?

Working Capital =

Current Assets Current Liabilities

Working Capital = Current Assets

Current Liabilities

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From the following Balance sheet of --- prepare the statement of changes in WC

Assets
Goodwill
Cash
Debtors
Closing Stock
Long term investment
Land
Preliminary Expenses
Liabilities
Trade creditors
Bills payable
Short term loan
Share capital
Profit & loss A/C

2004

2003

5000
70000
90000
120000
10000
27000
3000

10000
25000
98000
87000
15000
15000
5000

45000
35000
20000
150000
75000

50000
20000
125000
60000

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Calculate Funds From operations from the following Information

Income Statement

To Rent
25000
To Salaries Paid
100000
To Provisions for Depreciation 50000
To commission Paid
5000
To Provision for taxation
150000
To General Reserve
3000
To loss on sale of investment 10000
To cost of issue of shares
2000
To Provision for legal Damages 5000
To net Income
165000

515000

By Gross Income
By Profit on sale of vehicle
By refund of tax
By Dividend Received

500000
3000
2000
10000

515000