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Balance Sheet
Before understanding the meaning of flow in funds, it is necessary to classify the balance sheet of a concern into four parts as shown below:
Equity Share Capital
Pref. Share Capital
Debentures
Long-term Loans
Profit & Loss (Cr. Balance)
Securities Premium A/c
Shares Forfeited A/c
Capital Reserve
Provision for Depreciation on Fixed Assets
Dividend Equalisation Reserve
Capital redemption reserve
General reserve
Workmen's Compensation Fund
Debenture Sinking Fund
Creditors
Bills Payable
Bank Overdraft
Outstanding Expenses
Income Tax Payable
Accrued Income
Building
Land
Plant and Machinery
Furniture and Fixtures
Patent Rights
Trade Marks
Profit & Loss A/c (Dr. Balance)
Discount on Issue of Shares and Debentures
Preliminary Expenses
Underwriting Commission
Copyrights
Investment (long-term)
Goodwill
Cash in Hand
Cash at Bank
Marketable Securities (Temporary Investments)
Debtors
Bills Receivable
Stock-in-Trade (Inventories)
Advances to Supplies
Prepaid Expenses
Important Note: Though provision for tax & proposed dividends are a part of Current Liabilities & Provisions, still while preparing Schedule of Changes in Working Capital, these items shall be ignored & these items shall be shown separately in Funds Flow Statement due to the reason that these expenses are important expenses & flow of funds towards items needs special attention. Hence if some examination problems do provide that these items be treated as non liabilities, should be interpreted in a logical sense.
The terms used in the above balance sheet are explained below:
The word 'Funds' means Working Capital, the word 'Flow' means Change- hence -flow in- funds means change working capital.
Out of all transactions, we have to see which transactions bring flow in funds and other transactions which do not affect the flow of funds.
(A) Transactions that will affect the Flow of Funds:
In short, it can be said that when one aspect is of non-current category, and the other of current category, there will De flow in funds.
(B) Transactions that will not affect the Flow of Funds:
The following transactions will not bring any change in the working capital and thus, there will be no flow in funds.
Conclusion:
Schedule of Changes in Working Capital:
This Statement is prepared from Current Assets and Current Liabilities in order to calculate the increase or decrease in working capital. The following rules may be applied to Current Assets and Current Liabilities for preparing this statement:
(i) An increase in Current Assets increases working capital:
(ii) A decrease in Current Assets decreases working capital;
(iii) An increase in Current Liabilities decreases working capital; and
(iv) A decrease in Current Liabilities increases working capital.
The Funds Flow Statement is a financial statement which reveals the methods by which the business has been financed and how it has used its funds between the opening and closing balance sheet dates. The funds flow statement describes the sources from which additional funds were derived and the uses to which these funds were put. The analysis of such statements over periods of time clearly shows the sources from which past activities have been financed and brings to highlight the uses to which such funds have been put. The statement is known by various titles, such as, Statement of Sources and Applications of Funds, where Got and Gone Statement and Statement of Resources Provided and Applied.
The items of sources and applications are given as follows:
Sources of Funds
The following are the sources from which funds come:
(i) Funds from Operations.
(ii) Income from Investments (Interest, Rent, Dividend received).
(iii) Issue of Shares and Debentures,
(iv) Raising of Loan.
(v) Sale of Fixed Assets and Long-Term Investments,
(vi) Receipt of Refund of Tax
(vii) Introduction of Capital in case of proprietary or partnership business
(viii) Decrease in working capital etc.
Uses (or Applications) of Funds
The following are the various purposes -for which funds can be used.
(i) Funds Lost in Operations.
(ii) Repayment of Long-Term Loans.
(iii) Redemption of Preference Shares and Debentures.
(iv) Purchase of Fixed Assets.
(v) Purchase of Long-Term Investments.
(vi) Payment of Cash Dividends,
(vii) Payment of Taxes,
(viii) Drawings in case of Proprietary or Partnership Business.
(ix) Increase in Working Capital, etc.
Objectives of Funds Flow Statement:
Generally a business prepares two financial statements i.e., position statement or balance sheet and income or profit and loss account. The former reflects the state of assets and liabilities of a company on a particular date whereas the latter tells about the result of operations of the company over a period of a year. These financial statements have great utility but they do not reveal the movement of funds during the year and their consequent effect on its financial position. For example, a company which has reportedly made substantial profits during the year may discover to its surprise that there are not enough liquid funds to pay dividend and income tax because of profits tied up in other assets, and is always after the bank authorities to get the cash credit or bank overdraft facility. In order to remove this defect, another statement known as funds flow statement is prepared.
Thus, the main purposes of such statement are:
(i) To help to understand the changes in assets and asset sources which are not readily evident in the income statement or the financial position statement.
(ii) To inform as to how the loans to the business have been used, and
(iii) To joint out the financial strengths and weaknesses of the business.
Calculation of Funds from Operations:
There are two methods of calculating the Funds drom Operations:
A specimen is given as follows:
Adjusted Profit and Loss Account
To Non-cash Items:
Depreciation or Depletion of Natural Resources
Net Profit b/d
To Non-operating Expenses:
By Non-Operating Income:-
(i) Capital Losses:
- Loss on the Sale of Fixed Assets & Investments.
- Premium on redemption of Debentures or Preference Shares
- Interest received
- Profit on the Sale of Fixed Assets
- Dividend Received
- Refund of Taxation
- Transfer Fees
(ii) Fictitious Assets written off:
- Preliminary Expenses
- Discount on Issue of Shares and Debentures
- Underwriting Commission
By Funds From Operations (Balancing Figure)
(iii) Intangible Fixed Assets written off:
- Goodwill
- Copyright
- Patents and Trade Marks
(iv) Appropriation of Profits:
- Dividends (Interim/Final)
- Transfer to any Reserve
(v) Income Tax or Provision for Income Tax
To Funds Lost in Operations (Balancing Figure)
To Net Profitc/d
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