FUND FLOW STATEMENT ANALYSIS

Transcription

1 Accounting and Finance for Managers LESSON 7 FUND FLOW STATEMENT ANALYSIS CONTENTS 7.0 Aims and Objectives 7.1 Introduction 7.2 Meaning & Objectives of Fund Flow Statement Analysis 7.3 Methods of Preparing Fund Flow Statement Schedule of Changes in Working Capital Net Profit Method Sales Method First Method Second Method 7.4 Advantages of Preparing Fund Flow Statement Illustrative Statement of Financing To fulfil the Primary Objective of the Financial Management Facilitation through Financial Planning Guide to Working Capital Management Indicator of Yester Track Path of the Firm 7.5 Let us Sum up 7.6 Lesson-end Activity 7.7 Keywords 7.8 Questions for Discussion 7.9 Suggested Readings 7.0 AIMS AND OBJECTIVES In this lesson we shall discuss about fund flow statement analysis. After going through this lesson you will be able to: (i) understand meaning and objectives of fund flow statement analysis (ii) analyse methods of preparing fund flow statement (iii) discuss advantages of preparing fund flow statement. 7.1 INTRODUCTION 120 Every business establishment usually prepares the balance sheet at the end of the fiscal year which highlights the financial position of the yester years It is subject to change in the volume of the business not only illustrates the financial structure but also expresses the value of the applications in the liabilities side and assets side respectively. Normally, Balance sheet reveals the status of the firm only at the end of the year, not at the beginning of the year. It never discloses the changes in between the value position of the firm at two different time periods/dates. The method of portraying the changes on the volume of financial position is the statement fund flow statement. To put them in nutshell, fund between two different time periods. It is further illustrated that the changes in the financial position or the movement or flow of fund.

2 7.2 MEANING & OBJECTIVES OF FUND FLOW STATEMENT ANALYSIS A report on the movement of funds or working capital. In a narrow sense the term fund means cash and the fund flow statement depicts the cash receipts and cash disbursements/ payments. It highlights the changes in the cash receipts and payments as a cash flow statement in addition to the cash balances i.e., opening cash balance and closing cash balance. Contrary to the earlier, the fund means working capital i.e., the differences between the current assets and current liabilities. The term flow denotes the change. Flow of funds means the change in funds or in working capital. The change on the working capital leads to the net changes taken place on the working capital i.e., especially due to either increase or decrease in the working capital. The change in the volume of the working capital due to numerous transactions. Some of the transactions may lead to increase or decrease the volume of working capital. Some other transactions neither registers an increase nor decrease in the volume of working capital. According Foulke A statement of source and application of funds is a technical device designed to analyse the changes to the financial condition of a business enterprise in between two dates Various Facets of Fund flow statement are as follows: l Statement of sources and application of funds l Statement changes in financial position l Analysis of working capital changes and l Movement of funds statement Objectives of fund flow statement analysis: (1) It pinpoints the mobilization of resources and the further utilization of resources (2) It highlights the financing of the general expansion of the business firms (3) It exemplifies the utilization of debt finance in the structure of financing (4) It portrays the relationship between the financing, investment, liquidity and dividend decision of the firm during the given point of time. 7.3 METHODS OF PREPARING FUND FLOW STATEMENT Steps in the preparation of Fund Flow Statement: l First and fore most method is to prepare the statement of changes in working capital i.e., to identify the flow of fund / movement of fund through the detection of changes in the volume of working capital. l Second step is the preparation of Non- Current A/c items-changes in the volume of Non current a/cs have to be prepared only in order to quantify the flow fund i-e either sources or application of fund. l Third step is the preparation Adjusted Profit& Loss A/c, which already elaborately discussed in the early part of the chapter. l Last step is the preparation of fund flow statement Schedule of Changes in Working Capital The ultimate purpose of preparing the schedule of changes in the working capital is to illustrates the changes in the volume of net working capital which envisages either sources or application of fund. The schedule of changes are focused as follows: Increase in Current Assets Increase in Working Capital Fund Flow Statement Analysis Decrease in Current Assets Decrease in Working Capital Increase in Current Liabilities Decrease in Working Capital Decrease in Current Liabilities Increase in Working Capital 121

3 Accounting and Finance for Managers Particulars (A) Current Assets: Cash In Hand Cash at Bank Marketable Securities Bills Receivable Sundry Debtors Closing Stock Prepaid Expenses Previous Year Current Year Increase inworking Capital (+) Decrease in inworking Capital ( ) (B) Current Liabilities: Creditors Bills Payable Outstanding expenses Pre received Income Provision for doubtful and bad debts Net Working Capital(A-B) Increase/Decrease Working Capital The next important step is to prepare that Adjusted profit and loss account Method of Fund From Operations Net Profit Method Add Non Operating Expenses Less Non Operating Incomes Sales Method Less-Payments(Application) 122 The first method is widely used method by all in determining the volume of Fund from Operations (FFS) Under the Net Profit Method, Fund flow from operations can be computed Net Profit Method Under this method, Fund from operations can be determined in two different ways.the first method is through the statement format Net Profit from the Profit & Loss A/c x Add: (A) Non Funding Expenses: Loss on Sale of Fixed Assets Loss on Sale of Long Term Investments Loss on Redemption Debentures/Preference Shares Discount on Debentures /Share (B) Non Operating Expenses: Depreciation of fixed Assets (C) Intangible Assets: Amortization of Goodwill Amortization of Patent Amortization of Trade Mark (D) Fictitious Assets: Writing off Preliminary expense Writing off Discount on Shares/Debentures

4 (E) Profit Appropriation Transfer to General Reserve Less: (F) Non funding Profits: Profit on Sale of Fixed Assets Profit on Sale of Long Term Investments Profit on Redemption Debentures/Preference Shares (G) Non Operating Incomes: Dividend Received Interest Received Rent Received Fund From operations / Fund Lost in Operations x The second method of determining the fund from operations under the first classification is the Accounting Statement Format. Dr To Depreciation To Goodwill Written off To Patent Written off To Loss on Sale of Fixed Asset To Loss on Sale of Investment To Loss on redemption of Liability To Preliminary Expenses off To Proposed Dividend To Transfer to General Reserve To Current Year Provision for Taxation To Current Year Provision for Depreciation To Balancing Figure (Fund Lost in Operations) Adjusted Profit & Loss A/c By Opening Balance Profit By Profit on sale of Fixed Assets By Profit on Sale of Investments By Profit on redemption of Liability By Transfer from General Reserve By Balancing Figure Fund From Operations(FFS) Sales Method Under this method, the following is the statement format is used to arrive fund flow from operations: Sources: Sales x Stock at the end x Less: Application: Stock at Opening Net Purchases (Purchase-Returns) Wages Salaries Telephone expenses Electricity charges Office stationery expenses Other operating cash expenses Fund from operations From the following details calculate funds from operations:. Salaries 10,000 Rent 6,000 Cr Fund Flow Statement Analysis 123

5 Accounting and Finance for Managers 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 on 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 Calculation of fund from operation First Method Closing balance of Profit & Loss A/c 1,20,000 Less Opening Balance 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 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 Fund from operations 96, Second Method Adjusted Profit & Loss A/c 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 off 6,000 Good will written off 4,000 Proposed Dividend 12,000 To Closing Profit B/d 1,20,000 1,72,000 By Opening Balance B/d 50,000 By Profit on Sale of Building 10,000 By Dividend Received 10,000 By Refund of Tax 6,000 By Balancing Figure 96,000 Fund From operations 1,72,

6 The next step is to prepare the fund flow statement. The proforma of the fund flow statement Sources of funds Funds from Business Operation Non trading Incomes Sale of Non-Current Assets Sale of Long Term Investments Issue of shares Acceptance of deposits Long Term Borrowings Decrease in Working Capital Uses of funds Funds Lost in Operations Redemption of Preference Share Capital Repayment of Loans Purchase of Long Term Investments Purchase of Fixed Assets Payment of Taxes Payment of Dividends Drawings Loss of Cash Increase in Working Capital Fund Flow Statement Analysis (1) Fund flow means a study of (a) (b) (c) working capital change Cash position change Long investment change Check Your Progress (d) Change in the current liabilities (2) Normally Working capital means (a) Current assets- current liabilities (b) (c) Current assets Gross working capital (d) Net working capital (3) Increase in working capital (a) Increase in current assets (b) (c) (d) Increase Net working capital Increase in current liabilities Increase in long term source of financing 7.4 ADVANTAGES OF PREPARING FUND FLOW STATEMENT Structured analysis on the Working capital of a firm: It is the only statement to study the changes in the working capital in between two different periods from the balance sheet of a firm through structured analysis on the basis of working capital position Illustrative Statement of Financing It is a statement which highlights the role of various kinds of financing not only in the dimension of project development and expansion but also growth rate of the organization. Financial Structure Capital Structure-Long Term Financial Resources Medium &Short term Financial Resources External Sources Share Capital and so on Internal Sources: Retained Earnings Institutional lending: Banker-Loans & Advances Money Market: Public Deposit, Commercial paper 125

7 Accounting and Finance for Managers To fulfil the Primary Objective of the Financial Management It not only elucidates the mode of financing but also the application of resources after raising. It answers to the following queries viz: l How the outsider's liabilities are redeemed? l What is the role of the fund from operation generated? l How the raised funds applied into business? l How the decrease in working capital was applied? l What is the mode of raising of financial resources for an increase in the working capital? Facilitation through Financial Planning The projected fund flow statement from the past performance facilitates the firm to anticipate the future requirement of financial resources. It guides the management to prioritize the application in the future to the tune of scarce resources Guide to Working Capital Management It acts as a guide to the management to maintain the working capital at optimum level through either purchase or sale of marketable securities during the periods of adequate and inadequate working capital respectively Indicator of Yester Track Path of the Firm The insight on the financial performance of the firm can be had by the lending institutions through fund flow statement at the time of extending financial assistance to the firm. Limitations: l It is an extension of financial statements but it cannot be leveled with the emphasis of them. l It is not a resultant of the transaction instead it is an arrangement of among the available information. l Projected fund flow statement ever only to the tune of financial statements which are historic in feature. Check Your Progress 126 (1) Adjusted profit and loss account is prepared for (a) Determining the fund from operations (b) Determining the fund lost in operations (c) (a) or (b) (d) None of the above (2) Fund flow statement is categorized into two parts (a) Fund in flow & Fund out flow (b) Cash in flow & Cash out flow (c) Sources & Applications (d) None of the above (3) Fund from operations is (a) Sources of the firm (b) Applications of the firm (c) Neither sources nor applications (d) None of the above

8 Illustration 1 Form the following details prepare a statement showing changes in working capital during 1985: Balance sheet of Pioneer ltd. as on 31st December Liabilities Assets Share capital 5,00,000 6,00,000 Fixed assets 10,00,000 11,20,000 Reserves 1,50,000 1,80,000 Less:Depreciation 3,70,000 4,60,000 Profit and Loss A/c 40,000 65,000 6,30,000 6,60,000 Debentures 3,00,000 2,50,000 Stock 2,40,000 3,70,000 Creditors for goods 1,70,000 1,60,000 Book Debts 2,50,000 2,30,000 Provision for tax 60,000 80,000 Cash in hand 80,000 60,000 Preliminary expeneses 20,000 15,000 12,20,000 13,35,000 12,20,000 13,35,000 (B.com., Bharathidasan November, 1986) The first step is to prepare the schedule of changes in working capital. Schedule of changes in working capital Increase capital The first step is to prepare the schedule of changes in working capital. Schedule of changes in working capital Decrease capital Current asset: Stock 2,40,000 3,70,000 1,30, Book debts 2,50,000 2,30, ,000 Cash in hand 80,000 60,000 20,000 5,70,000 6,60,000 1,30,000 40,000 Current liability Creditors for goods 1,70,000 1,60,000 10, Working capital 4,00,000 5,00,000 1,40,000 40,000 Increase in working capital 1,00, ,00,000 5,00,000 5,00,000 1,40,000 1,40,000 Illustration 2 From the following two balance sheet as at December 31, 2004 and Prepare the statement of sources and uses of funds Liabilities.... Share capital 80,000 90,000 Trade creditors 20,000 46,000 Profit & Loss a/c 4,60,000 5,00,000 Assets Cash 60,000 94,000 Debtors 2,40,000 2,30,000 Stock in trade 1,60,000 1,80,000 Land 1,00,000 1,32,000 5,60,000 6,36,000 5,60,000 6,36, Increase captial Decrease capital Current asset: Cash 60,000 94,000 34,000 Debtors 2,40,000 2,30,000 10,000 Stock in trade 1,60,000 1,80,000 20,000 4,60,000 5,04,000 Current liability Trade creditors 20,000 46,000 26,000 Working capital 4,40,000 4,58,000 54,000 36,000 Increase in working capital 18, ,000 4,58,000 4,58,000 54,000 54,000 Fund Flow Statement Analysis 127

9 Accounting and Finance for Managers 128 The next step is to prepare the non current accounts of the firm. Dr Land A/c Cr.. To Balance B/d 1,00,000 To Cash(Purchase) balancing fig. 32,000 By Balance c/d 1,32,000 1,32,000 1,32,000 Next non-current account item is the share capital account in the liability side. The closing balance of the share capital is more than that of the opening balance which means that the firm has undergone the issue of further more share capital. During the issue of share capital, the cash resources are raised by the firm through the sale of shares. Dr Share capital A/c Cr.. To Balance c/d 90,000 By Cash( Issue of shares) 10,000 Balancing fig. By Balance b/d 80,000 90,000 90,000 Then the next step is to prepare the adjusted profit and loss account to determine the fund from the operations Dr Adjusted Profit & Loss A/c Cr.. By Balance B/d 4,60,000 To Balance c/d 5,00,000 By Fund from operation 40,000 Balancing fig. 5,00,000 5,00,000 The next step is to prepare the fund flow statement of the firm Fund flow statement Sources. Applications. Issue of Shares 10,000 Purchase of Land 32,000 unds from operation 40,000 Increase in working capital 18,000 50,000 50,000 Illustration 3 From the following relating to Panasonic ltd., prepare funds flow statement. Balance sheet of Pioneer ltd. as on 31st December Liabilities Assets Share capital 6,00,000 8,00,000 Fixed assets 3,80,000 4,20,000 Reserves 2,00,000 1,00,000 Accounts 2,10,000 3,00,000 receivable Retained earnings 60,000 1,20,000 Stock 3,00,000 3,90,000 Accounts payable 90,000 2,70,000 Cash 60,000 1,80,000 9,50,000 12,90,000 9,50,000 12,90,000 Additional information: l The company issued bonus shares for.1,00,000 and for cash.1,00,000 l Depreciation written off during the year.30,000 The first step is prepare the statement of changes in working capital Schedule of changes in working capital Increase captial Decrease in working capital Current asset: Cash 60,000 1,80,000 1,20, Contd...

10 Stock in trade 3,00,000 3,90,000 90, Accounts receivable 2,10,000 3,00,000 90, ,70,000 8,70,000 Current liability Accounts payable 90,000 2,70,000 1,80,000 Working capital 4,80,000 6,00,000 3,00,000 1,80,000 Increase 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 Dr Fixed Assets A/c Cr To Balance B/d 3,80,000 By Depreciation(Adjusted Profit 30,000 &Loss A/c ) To Cash (Purchase) 70,000 By Balance c/d 4,20,000 Balancing fig. 4,50,000 4,50,000 The next non-current account is that non-current liability which is nothing but Share capital. Dr Share capital A/c Cr To Balance c/d 8,00,000 By Cash( Issue of shares) 1,00,000 By General reserve 1,00,000 By Balance b/d 6,00,000 8,00,000 8,00,000 And another non current account is to be prepared that General reserve account. Dr General Reserve A/c Cr To Share capital 1,00,000 By Balance b/d 2,00,000 To Balance c/d 1,00,000 2,00,000 2,00,000 The next step is to prepare the Adjusted Profit & Loss A/c Dr Adjusted Profit & Loss A/c Cr To (Fixed Assets) depreciation 30,000 By Balance B/d(Retained 60,000 Earnings) To Balance c/d 1,20,000 By Fund from operation 90,000 Balancing fig. 1,50,000 1,50,000 The next step is to prepare the fund flow statement of the enterprise Fund flow statement Sources Applications Issue of Shares 1,00,000 Purchase of Land 70,000 Funds from operation 90,000 Increase in working capital 1,20,000 1,90,000 1,90,000 Illustration 4 Balance sheets of M/s Black and White as on and were as follows: Liabilities Assets Creditors 40,000 44,000 Cash 10,000 7,000 Mrs.Whites Loan 25,000 - Debtors 30,000 50,000 Loan from 40,000 50,000 Stock 35,000 25,000 P.N.Bank Captial 1,25,000 1,53,000 Machinery 80,000 55,000 Land 40,000 50,000 Building 35,000 60,000 2,30,000 2,47,000 2,30,000 2,47,000 Fund Flow Statement Analysis 129

11 Accounting and Finance for Managers Additional information During the year machine costing.10,000 (accumulated depreciation.3,000) was sold for.5,000. The provision for depreciation against machinery as on was.25,000 and on ,000 Net profit for the year 1986 amounted to.45,000. You are required to prepare funds flow statement (M.Com MKU April 1980). The very first step is to prepare the statement of changes in working capital Changes in working capital in between the various current assets and current liabilities are as follows: Statement of changes in working capital Increase capital Decrease capital Current asset: Cash 10,000 7, ,000 Debtors 30,000 50,000 20, Stock 35,000 25, ,000 75,000 82,000 Current liability Sundry creditors 40,000 44, ,000 Working capital 35,000 38,000 20,000 17,000 Increase in working capital 3,000 3,000 38,000 38,000 20,000 20,000 The next step is to determine the cost of the machinery before the charge of depreciation i.e., to find out the Gross value of the assets, in other words Original cost of the assets to be found out at the moment of purchase Written down value of the machinery extracted.80,000.55,000 from the balance sheet as on dated Add: Accumulated depreciation or 25,000 40,000 Provision for depreciation Original Cost of Machinery 1,05,000 95,000 The ultimate aim is to find out the original cost of the machinery for the preparation of the machinery account: Before preparing the Machinery account, the worth of the sale transaction of the machinery should be found out. Original cost of the Machinery.10,000 (-)Depreciation.3,000 Machinery worth for sale.7,000 (-)Machinery sold.5,000 Loss on sale of the portion of the machinery sold.2,000 Dr Machinery A/c Cr To Balance B/d 1,05,000 By Cash (Sales) 5,000 By Provision for machinery 3,000 By loss on sale(adjusted profit 2,000 and loss account) By Balance c/d 95,000 1,05,000 1,05,000 The next one is the provision for depreciation account or Accumulated depreciation account. 130

12 Dr Provision for Depreciation A/c Cr To Machinery A/c 3,000 By Balance B/d 25,000 To Balance c/d 40,000 By depreciation provided during 18,000 the current year 43,000 43,000 Dr Capital A/c Cr To Drawings (Balancing fig) 17,000 By Balance B/d 1,25,000 To Balance c/d 1,53,000 By Net profit 45,000 1,70,000 1,70,000 Fund Flow Statement Analysis Dr Loan P.N. Bank Cr By BalanceB/d 40,000 To Balance c/d 50,000 By Cash (Balancing fig) 10,000 50,000 50,000 Dr Mr. White's A/c Cr To Cash( Loan paid) 25,000 By Balance B/d 25,000 To Balance c/d ,000 25,000 The next step is to prepare the Adjusted Profit & Loss Account. Adjusted Profit & Loss Account To Machinery (Loss on sale) 2,000 By Balance B/d To Provision for taxatio 18,000 By fund from operations 65,000 To Balance c/d(net profit) 45,000 65,000 65,000 The next step is to prepare the fund flow statement. Fund flow statement Sources Applications Sale of machinery 5,000 Purchase of land 10,000 Loan from P.N.Bank 10,000 Purchase of Building 25,000 Fund from operation 65,000 Drawings 17,000 Repayment of Mr White Loan 25,000 Increase working capital 3,000 80,000 80,000 Illustration 5 From the following balance sheets of A Ltd on 31st Dec, 1982 and 1983, you are required to prepare Fund flow statement The following are additional information has also been given l Depreciation charged on plant was.4,000 and on building.4,000 l Provision for taxation of.19,000 was made during the year 1983 l Interim Dividend of.8,000 was paid during the year 1983 Balance sheet Liabilities Assets Share capital 1,00,000 1,00,000 Good will 12,000 12,000 General Reserve 14,000 18,000 Building 40,000 36,000 Profit & Loss A/c 16,000 13,000 Plant 37,000 36,000 Sundry creditors 8,000 5,400 Investments 10,000 11,000 Bills payable 1, Stock 30,000 23,400 Provision for taxation 16,000 18,000 Bill receivable 2,000 3,200 Provision for doubtful debts Debtors 18,000 19,000 Cash 6,600 15,200 1,55,600 1,55,800 1,55,600 1,55,800 (M.Com.Madras,1984) 131

13 Accounting and Finance for Managers 132 The first step is to prepare the Statement of changes in the working capital Statement of changes in working capital 1982 The next step is to prepare the non current accounts. First, Non current asset account to be prepared. The first non-current asset account is Building account. Dr Building account Cr To Balance B/d 40,000 By (Depreciation)Adjusted profit & 4,000 Loss A/c By Balance c/d 36,000 40,000 40,000 The next non- current asset account is Plant account Dr Plant account Cr To Balance B/d 37,000 By (Depreciation)Adjusted profit & 4,000 Loss A/c To Cash (Purchase) 3,000 By Balance c/d 36,000 balancing fig. 40,000 40,000 The next non-current asset account is Investments account. Dr Investments account Cr The next one is the non-current liability account. Dr General Reserve account Cr By Balance B/d 14,000 To Balance B/d 18,000 By Adjusted profit and loss A/c 4,000 (Profit transferred during the current year) 18,000 18,000 The next non-current liability account is Provision for taxation account Dr Provision for taxation account Cr To Cash(Tax paid previous 17,000 By Balance B/d 16,000 year taxation) Balancing figure To Balance B/d 18,000 By Adjusted profit & Loss A/c 19,000 (provision for taxation made during the year) 35,000 35, Increase capital Decrease capital Current asset: Stock 30,000 23,400 6,600 Bill receivable 2,000 3,200 1,200 Debtors 18,000 19,000 1,000 Cash 6,600 15,200 8,600 56,600 60,800 Current liability Sundry creditors 8,000 5,400 2,600 Bills payable 1, Provision for doubtful debts ,600 6,800 Working capital 47,000 54,000 13,800 6,800 Increase in working capital 7,000 7,000 54,000 54,000 13,800 13,800 To Balance B/d 10,000 To Cash(purchase) Balancing figure 1,000 By Balance c/d 11,000

14 The next step is to prepare the Adjusted profit and loss account. Adjusted Profit & Loss Account To Depreciation Building 4,000 By Balance B/d 16,000 To Depreciation Plant 4,000 By Fund from operations 36,000 To Transfer to General Reserve 4,000 To Provision for taxation 19,000 To Interim dividend 8,000 To Balance c/d 13,000 52,000 52,000 The next step is to prepare the fund flow statement. Fund flow statement Sources Applications Fund from operations 36,000 Purchase of the plant 3,000 Purchase of the Investment 1,000 Increase working capital 7,000 Tax paid 17,000 Interim dividend 8,000 36,000 36,000 Fund Flow Statement Analysis Check Your Progress (1) Purchase of plant & machinery.10 lakh through the issue of 1 Lakh shares at.10 per share ; affect the following accounts (a) Non current asset and Non current liability accounts (b) Non current asset and Current liability accounts (c) Current asset account and Non current liability accounts (d) Current asset and current liability accounts (2) XYZ Ltd. has made a credit purchase of.1 lakh worth of goods led to.1 lakh worth of additional stock of tradable goods for the enterprise, leads to (a) Increase in the working capital - Applications (b) No change in the working capital position -Neither an application nor resource (c) Decrease in the working capital-resource (d) None of the above (3) The meaning of the "To cash ( Tax paid)" entry posted in the Provision for taxation account is (a) Last year taxation is paid through the current year provision (b) Current year taxation is paid through the current year provision (c) Last year tax is paid through the last year taxation (d) Current year taxation is paid through the last year provision (4) Profit on sale of the fixed assets are considered to be (a) Resource to the enterprise (b) Non operating income (c) Application of the enterprise (d) None of the above (5) The treatment of current year depreciation with the closing balance of profit in determining the fund from operations (a) To be added (b) To be multiplied (c) To be deducted (d) To be divided Contd

15 Accounting and Finance for Managers (6) The redemption bank term loan leads to change in the (a) Non current liability account and current asset account (b) Current asset account and current liability account (c) Non current asset account and current liability account (d) Non current asset account and current liability account 7.5 LET US SUM UP Normally, Balance sheet reveals the status of the firm only at the end of the year, not at the beginning of the year. It never discloses the changes in between the value position of the firm at two different time periods/ dates. A report on the movement of funds or working capital. In a narrow sense, the term fund means cash and the fund flow statement depicts the cash receipts and cash disbursements/payments. The projected fund flow statement from the past performance facilitates the firm to anticipate the future requirement of financial resources. It guides the management to prioritize the application in the future to the tune of scarce resources. 7.6 LESSON-END ACTIVITY In the long run, is it more important for a business to have positive cash flows from its operating activities, investing activities, or financing activities? Why? Give your opinion. 7.7 KEYWORDS Fund: Fund means working capital Flow: Flow means changes occurred in between two different time periods Statement of changes in working capital: Enlisting the changes taken place in between the Current assets and current liabilities of two different time horizons Current assets: Assets which are in the form of cash, equivalent to cash or easily convertible into cash. Current liabilities: Short term financial resources of the firm Non-current assets: Long term assets Non current liabilities: Long term financial resources Increase in working capital: Increase in Net working capital i.e. Excess of current assets over the current liabilities- Applications side of the fund flow Decrease in working capital: Decrease in Net working capital i.e. Excess of current liabilities over the current assets - Resources side of the fund flow Fund from operations: Income generated from only operations Fund lost in operations: Loss incurred in the operations 7.8 QUESTIONS FOR DISCUSSION Define fund. 2. Define flow. 3. What is meant by fund flow? 4. List out the various objectives of preparing the fund flow statement.

16 5. Enumerate the various advantages in the preparation of fund flow statement. 6. Briefly explain the limitations of fund flow statement. 7. What are the steps involved in the process of fund flow statement? 8. Explain the various methods of determining the fund from/lost (in ) operations. 9. Explain the process of preparing the statement of changes in working capital. 10. Draft the pro forma of the Fund flow statement. 11. Explain any non current account transactions affecting the fund position of the firm. Fund Flow Statement Analysis 7.9 SUGGESTED READINGS R.L. Gupta and Radhaswamy, "Advanced Accountancy". V.K. Goyal, "Financial Accounting", Excel Books, New Delhi. Khan and Jain, "Management Accounting". S.N. Maheswari, "Management Accounting". S. Bhat, "Financial Management", Excel Books, New Delhi. Prasanna Chandra, "Financial Management - Theory and Practice", Tata McGraw Hill, New Delhi (1994). I.M. Pandey, "Financial Management", Vikas Publishing, New Delhi. Nitin Balwani, "Accounting & Finance for Managers", Excel Books, New Delhi. 135