Preparing Funds Flow Statement
Q. Define the terms ‘Fund’ and ‘Flow’ in the context of
the funds flow statement.
Meaning of the term ‘Fund’: - The term ‘Fund’ has been
assigned different meanings by different people. In narrow
sense ‘Funds’ means cash and Bank balance. To many people
funds is nothing but having the net effect of various business
events on the basis of cash. This explains the trend towards
the preparation and presentation of "Cash Flow Statement"
in published report of accounts.
But in wider sense the term ‘Fund’ is the sum of cash and
assets, which are easily convertible into cash minus current
liabilities. In other words ‘Fund’ means excess of current
assets over current liabilities. Where current assets include
cash in hand, cash at bank, bills receivable, sundry debtors,
stock, marketable securities and prepaid expenses etc. The
current liabilities include sundry creditors, bills payable,
outstanding expenses, short-term loans and bank overdraft
etc.
Funds = Current Assets – Current Liabilities = Working
Capital
Meaning of the term ‘Flow’: - The term ‘Flow’ means
change. Therefore flow of funds means change in working capital.
The change in funds may be either positive or negative. It
may be inflow of funds or outflow of funds.
How to prepare Fund Flow statement
A funds flow statement is basically prepared from non-current
items of the balance sheets, prepared at the end of two accounting
periods. It takes into account the sources and uses of funds
during that accounting period. The major sources and applications
of funds are as under: |
Funds Flow Statement
| |
Sources |
|
Rs. |
|
|
Applications |
|
Rs. |
| |
Funds from Operation |
XXX |
|
Funds Loss from Operation |
XXX |
| |
Issue of Equity Share Capital |
XXX |
|
Redemption of Preference Share Capital |
XXX |
| |
Issue of Preference Share Capital |
XXX |
|
Redemption of Debentures |
XXX |
| |
Issue of Debentures/Long term Loans |
XXX |
|
Repayment of Long term Loans |
XXX |
| |
Premium on issue of shares/debentures |
XXX |
|
Premium on redemption of preference shares/debentures
|
XXX |
| |
Sale of Investments |
XXX |
|
Purchase of Investments/Fixed Assets |
XXX |
| |
Sale of Fixed Assets |
XXX |
|
Dividend Paid |
XXX |
| |
Net decrease in working capital(Bal. Fig.)
|
XXX |
|
Taxes Paid |
XXX |
| |
|
|
|
Drawings by proprietor/partner |
XXX |
| |
|
|
|
Net increase in working capital (Bal. Fig.)
|
XXX |
| |
|
XXX |
|
|
XXX |
Example: The Balance Sheets of X Ltd. as on Dec. 31, 2004 and
Dec. 31, 2005 were as follows:
| |
Liabilities |
|
2004
Rs. |
|
2005
Rs. |
|
|
Assets |
|
2004
Rs. |
|
2005
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 Expenses |
7,000 |
5,000 |
|
|
|
|
| |
|
8,50,000 |
11,75,000 |
|
|
8,50,000 |
11,75,000 |
- Rs. 50,000 depreciation has been charged to Plant & Machinery
during the year 2005.
- A piece of machinery costing Rs. 12,000 (Depreciation provided
thereon Rs. 7,000) was sold at 60% profit on book value.
Required: - Prepare Funds Flow Statement.
Funds Flow Statement
for the year ending on 31st December 2005
| |
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
| |
Particulars |
|
2004
Rs. |
|
2005
Rs. |
|
Increase
Rs. |
|
Decrease
Rs. |
| |
Current Assets: |
|
|
|
|
| |
Stock |
1,00,000 |
75,000 |
|
25,000 |
| |
Debtors |
1,50,000 |
1,60,000 |
10,000 |
|
| |
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 |
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) |
|
|
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