Chapter4 PDF

CHAPTER 4
STATEMENT OF CHANGES IN
FINANCIAL POSITION
LEARNING OBJECTIVES
After studying this chapter, you
should be able to :
l
Explain the meaning of term
funds (working capital) and flow
of funds;
l
State the meaning and need of
Statement of Changes in
Financial Position (SCFP);
l
Prepare Statement of changes
in financial position on
working capital basis;
l
Explain the usefulness of SCFP
and its limitations;
l
State the purpose and
preparation of statement of cash
flows;
l
Distinguish between operating
activities, investing activities
and financing activities;
l
Prepare the statement of cash
flows using direct method;
l
Prepare the statement of cash
flows using indirect method;
l
Distinguish between Statement
of Changes in Financial Position
(SCFP) on working capital basis
and statement of cash flows;
l
Analyse SCFP and statement of
cash flows.
The users of financial statements are

many times eager to find the answers
to some of the following questions:
(1) How could company pay
dividends in excess of its current
profits?
(2) Why dividends are not paid
though company earned higher
profit than previous year?
(3) Why have current assets
decreased over the year whereas
the profits were higher?
(4) How the fixed assets were
financed?
(5) How the proceeds from fresh issue
of share/debenture were used?
Most often, investors are

interested to get answers to such
questions Financial statements
communicate about financial
performance and financial position
of an enterprise to the users of such
statements. Though they are useful
to an investor but questions like
above, remain unanswered. For
this purpose, we need to prepare
and analyse these statements.
158
ACCOUNTANCY
Such statements are called Statement of Changes in Financial Position

(SCFP) and Statement of Cash Flows(SCF). The chapter is divided into
two sections first section deals with the preparation of statement of
changes in financial position, whereas second section deals with the
preparation of cash flows.
4.1 Meaning
The term Funds has different interpretations. We can understand this
by a simple example of arguments between father and son over purchase
of a new computer system. Son is insisting on purchase of a new
computer system and the father replies that he does not have funds to
purchase the same. Here, father is referring to funds in the context of
cash required to buy the system. Thus, funds are taken in this case as
synonymous for cash (on hand and at bank). The son argues that funds
can be arranged by taking loan against a fixed deposit with the bank or
by sale of investment in shares. Now, funds used by son represents
other resources held by his father, which could be converted into cash.
However, in the context of statement of changes in financial position,
the term Funds is used to represent net working capital. Net working
capital represents that portion of current assets which is financed
through long-term sources. Net working capital is, thus, computed by
subtracting current liabilities from current assets.
Net Working Capital = Current Assets Current Liabilities
Current Assets are cash and other assets that are expected to be
converted into cash or consumed in the process of operating main
activities of the business, either in a year or operating cycle, whichever
is longer. The operating cycle is the average time required between the
acquisition of materials and the realisation of cash through the sales of
product/service for which the materials were acquired. All assets other
than current assets are called as non-current assets. Current assets
include stock/inventory, accounts receivable, bills receivable, prepaid
expenses, accrued revenue, short-term investment, cash on hand and
at bank.
159
STATEMENT OF CHANGES IN FINANCIAL POSITION
Current Liabilities are those obligations which are expected to be

liquidated usually out of existing resources, which are classified as
current assets or incurrence of other current liabilities within the period
of one year or operating cycle whichever is longer. Current liabilities are
accounts payable, bills payable, outstanding expenses, revenues,
provision for taxation, etc.
The Balance Sheet of a company is shown below categorizing the different
assets and liabilities into current and non-current components:
Format of Balance Sheet
Component-I
Component-3
Equity and Non-Current Liabilities
Fixed Assets
Share Capital
Reserve and Surpluses
Debenture
Long-Term Loans
Intangible Assets
Land
Plant and Machinery
Long-term Investments
Components-2
Component-4
Current Liabilities
Current Assets
Accounts Payable
Bill payable
Short-Term Loans
Accrued Expenses
Revenues Received in Advance
Other current
Liabilities and Provisions
Bank Overdraft
Stock
Accounts Receivable
Bills Receivable
Accrued Revenues
Marketable Securities
Loan and Advances
Cash on hand and at Bank
Funds are to be computed by substracting the total of current liabilities (component 2)

from the total of current assets (component 4)
Funds (Net Working Capital) = Current Assets
(Total of component 4)
Current Liabilities
(Total of component 2)
Example 4.1
Given below is the summarized balance sheet of Ram Rahim Ltd. as at
March 31, 2002
160
ACCOUNTANCY
Balance Sheet of Ram Rahim Ltd. as at March 31, 2002

2001
Rs.
2002
Rs.
Liabilities
Equity Share Capital
10,00,000
10,00,000
Reserve and Surpluses
3,18,000
5,44,600
10% Debenture
6,00,000
5,00,000
Accounts Payable
1,40,000
1,71,200
Bills Payable
54,400
72,800
Expenses Payable
18,600
27,800
21,31,000
23,16,400
5,00,000
5,00,000
Assets
Land
Building at cost
Less Accumulated Depreciation
6,80,000
1,50,000
5,30,000
6,80,000
1,63,600
Plant and Machinery at cost

Less : Accumulated Depreciation
5,16,400
7,50,000
2,50,000
5,00,000
9,00,000
3,25,000
5,75,000
Furniture
Less : Accumulated Depreciation
1,50,000
15,000
1,35,000
1,50,000
30,000
1,20,000
Stock on hand
1,85,000
2,57,000
192,000
2,25,000
Bills Receivable
43,000
38,000
Cash on hand
46,000
85,000
21,31,000
23,16,400
Accounts Receivable
Total
Required : Analyse Current Assets and Current Liabilities of Ram Rahim Ltd.,
as at March 31, 2001.
Solution
Current Assets :
Stock
Accounts
Bills Receivables
Receivable
= {Rs. 1,85,000 + 1,92,000
+ 43,000
= Rs. 4,66,000
Current Liabilities : Account

Receivable
{ Rs. 1,40,000 +
= Rs. 2,13,000
Bills payable Accrued Expenses

54,400
+ 18,600 }
Cash
+ 46,000}
161

Net Working Capital (as at 31.03.2001)
Current Assets
Current Liabilities
= Rs. [4,66,000 2,13,000]

= Rs. 2,53,000
Stock
Accounts
Receivable
= Rs.[2,57,000 +
= Rs. 6,05,000
2,25,000
Account
Receivable
Bills Payable Accrued Expenses
= Rs. (1,71,200 + 72,000

= Rs. 2,71,000
Bills Receivable
+ 38,000
Cash
+
85,000]
+ 27,800)
Net Working Capital (as on 31.03.2002)
= Rs. [6,05,000 2,71,000]

= Rs. 3,34,000
4.2 Flow of Funds

Flow refers to change or movement. Whenever a transaction takes
place, it affects the items contained in one or more of the components of
balance sheet. If a transaction results in simultaneous increase or
decrease in current assets and current liabilities components or it
does not result in any change in these components, it will not affect
funds of the business. On the other hand, if there is an increase or
decrease in one of these two components, then it results in flow of
funds.
Equity and Non current Liabilities
+ -
Non-Current Assets
+ -
Current Liabilities
+ - + Current Assets
Exhibit 4.1 : Transaction resulting in change in funds
+ -
162
ACCOUNTANCY
Equity and Non-current

Liabilities
Current Liabilities
Non-Current Assets
Current Assets
Exhibit 4.2 : Transactions not affecting funds
If a transaction results in net increase in current assets or net decrease in

current liabilities, it is referred to as sources of funds. On the other hand, if a
transaction results in net decrease in current assets or net increase in current
liabilities, it is referred to as uses of funds.
Example 4.2
Analyses the following transactions and ascertain the impact of these transactions
on the working capital of the company :
(i)
Goods purchased on cash
(ii)
Paid amount due to creditors
(iii) Debenture issued for cash

(iv) Repaid bank loan (long-term)
(v)
Sold old furniture for cash
Solution
Analysis of transactions and their effect on working capital
(i) This transaction will result in increase in stock (current assets) and
decrease in cash (current assets) simultaneously with the same amount.
Thus, it does not result in change in working capital or there is no flow
of funds.
(ii)
163
This transaction will decrease cash (current assets) and creditors (current
liabilities) simultaneously with the same amount. Thus, this transaction
does not result in the change of working capital.
(iii) This transaction will result in increase in debenture (long-term) and

increase in cash (current assets) simultaneously. Thus, it will increase
current assets and results in change in working capital or flow of
funds. It will increase the working capital, and therefore, is called a
source of working capital.
(iv) This transaction will result in decrease in bank loan (non-current
liability) and decrease in cash (current assets) simultaneously. Thus,
this will result in flow of working capital. It will decrease the working
capital, and therefore, is called use of working capital.
(v)
This transaction will result in decrease in furniture (fixed assets) and

increase in cash (current assets). Thus, this transaction results in
flow of funds. Since, it results in increase in current assets, therefore,
is called sources of funds.
4.2.1 Schedule of Changes in Net Working Capital

Schedule of changes in net working capital is a statement prepared to ascertain
the net change (increase or decrease) in working capital over a period of time.
We learned from the above analysis, (shown in example 4.2 and exhibits 4.1
and 4.2), that transactions take place in a business can be categorised as :
(i)
Transactions which result in change in net working capital, and
(ii) Transactions which do not result in change in net working capital.

The effect of all these transactions is reflected in the balance sheet of an
enterprise. We need to analyse the changes in current assets and current
liabilities of an enterprise over the period (in the beginning and at the end of
the year) to compute the net changes in working capital. The following statement
is prepared to compute the net changes in working capital (increase or decrease)
over a period of time.
164
ACCOUNTANCY
Exhibit 4.3 : Schedule of Changes in Working Capital
Particulars
Current Assets
Current
Liabilities
Beginning of
End of the
the period(0)
Period (1)
Rs.
Rs.
C.A.(0)*
C.A.(1)*
C.A.(0)*
C.A.(1)*
C.L.(0)*
C.L.(1)*
C.A.(0)*
C.L.(1)*
Net increase or
(decrease) in
Working Capital
Effect on Net Working capital

Increase in
Working Capital
Rs.
C.A.(1) C.A (0)
(increase in Current
Assets)
C.A.(0) C.A.(1)
(Decrease in
Current Assets)
C.L.(0) C.L. (1)
(Decrease in Current
Liabilities)
Balancing
Figure
Total
* C.A. (0) Current Assets at beginning of period

C.A. (1) Current Assets at end of period
C.A. (0) Current Liabilities at beginning of period
C.L. (1) Current Liabilities at end of period
Decrease in
Working Capital
Rs.
or
C.A.(1) C.L.(0)
(Decrease in
Current
Liabilities)
Balancing
Figure
Total
165
Example 4.3
The Balance Sheet of Robert, Rakesh and Rehman Ltd. is given below :
Balance Sheet of Robert, Rakesh
and Rehman Ltd. as at March 31, 2002
Particulas
Rs.
Assets
Land
14,50,000
4,80,000
Plant and Machinery

Less : Accumulated
Depreciation
Accounts Receivable
Rs.
8,00,000
Building Cost
Less : Accumulated
Depreciation
Furniture
Less : Accumulated
Depreciation
Stock
2001
Rs.
2002
Rs.
8,00,000
9,70,000
16,80,000
5,20,000
11,60,000
18,75,000
6,80,000
11,95,000
19,95,000
7,85,000
12,10,000
2,89,000
69,000
2,20,000
3,65,000
75,000
2,90,000
2,50,000
3,35,000
3,45,000
3,40,000
85,000
1,30,000
38,65,000
42,65,000
20,00,000
20,00,000
Reserve & Surpluses
10,44,000
12,28,000
12% Debentures
5,00,000
7,00,000
Accounts Payable
Cash on hand and at bank

Total
Liabilities
2,16,000
2,36,000
Bills Payable
70,000
61,000
Expenses Payable
35,000
40,000
38,65,000
42,65,000
Total
Required : Prepare schedule of changes in working capital.
166
ACCOUNTANCY
Solution
Schedule of changes in Working Capital of Robert, Rakesh and Rehman Ltd.
for the year ended March 31, 2002
2001
Amount
Rs.
2002
Amount
Rs.
Particulars
Current Assets
Stock
Accounts Receivable
Cash Balance
2,50,000
3,45,000
85,000
3,35,000
3,40,000
1,30,000
Total
6,80,000
8,05,000
Accounts Payable
Bills Payable
Expenses Payable
Net Increase in
Working Capital
2,16,000
70,000
35,000
2,36,000
61,000
40,000
Total
3,21,000
Amount
Rs.
Amount
Rs.
Increase in Net
working Capital
Decrease in Net
working Capital
85,000
5,000
45,000
Current Liabilities
20,000
9,000
5,000
1,09,000
3,37,000
1,39,000
1,39,000
4.3 Statement of Changes in Financial Position

The schedule of changes in working capital reveals only the net changes in working
capital over a period of time. This does not throw any light on how these changes
have taken place. For this purpose we need to prepare statement of changes in
financial position. Statement of changes of financial position shows the sources
of working capital on one side and the application (uses) of working capital on
the other side of the statement. The difference between the two sides will reveal
net increase/decrease in working capital.
4.3.1 Sources and Uses of Funds
When a transaction increases the current assets or decrease the current liabilities,
it is called as a source of funds. When a transaction decreases the current assets
or increases the current liabilities, it is called application or use of funds. Sources
and Uses of funds are depicted in figure 4.1.
167
1*
2*
3*
4*
5*
Sources of net working capital
Net Working Capital
uses of working capital
(i)**
(ii)**
(iii)**
(iv)**
(v)**
(vi)**
Fig. 4.1
*Sources of Funds :
**Uses of Funds :
1.
2.
3.
4.
5.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Sale of long-term assets

Issue of shares
Issue of debenture
Long-term loans raised
Funds from operation
Purchase of long term assets

Redemption and buy back of shares
Redemption of debentures
Repayment of long term loans
Payment of dividends
Funds used for operations
168
ACCOUNTANCY
4.3.2 Preparation of Statement of Changes in Financial Position

Statement of changes in financial position is prepared by listing sources on left
side of the statement and the uses on the right side. The difference between the
two sides reveal net increase/decrease in working capital. To determine the sources
and uses of funds, the following steps are taken :
(i)
Compute funds from operations
(ii)
Analyse the changes in non-current assets and liabilities in the balance sheet
in the beginning and at the end of the period with the help of additional
information provided to determine the net decreases in non-current assets
and net increases in non-current liabilities and equity, which or inflow of
funds. The net decreases in non-current liabilities and equity, and increases
in non-current assets, which, represent outflow or uses of funds.
(iii) List all the sources on the left side of the statement and uses on the right
side of the statement.
(iv) The two sides are totalled and the difference between them is recorded on
the side which is shorter in order to make the totals equal. Write net
increases (if it appears on the right side) or decreases (if it appears on the
left side) in working capital. This must be equal to the amount of net
increase or decrease computed while preparing schedule of changes in
working capital.
4.3.3 Funds from Operation
The Profit and Loss account shows income generated from operation. Income
is determined on the basis of revenue recognition and matching principle.
Items included for determining income may or may not affect funds of the
enterprise. Therefore, we need to adjust those items which affect the income
but do not affect funds or may appear as sources or uses under any other
head. Thus, such items need to be adjusted for computing funds from operation.
Items deducted while computing income but which do not use working capital
are listed below :
l
Depreciation, Depletion and Amortisation of intangible assets;
Amortisation of discount on issue of debenture, preliminary expenses,

deferred revenue expenditure;
Loss on sale of non-current assets.

Above items are added to the net income to arrive at funds from operation.
169
There are several items which are added to income, but these do not provide
working capital.
l
Gain from sale of non-current assets for the year which needs to be
subtracted from the net income to arrive at funds from operations.
Sometimes, the net income for the year may not be given. But instead of
this, profit and loss appropriation account balance in the beginning and
at the end of the period are given. Thus, we need to start with the net
change in the two balances and also adjust the following items along with
the above items of adjustments :
(i) Transfer to general reserve
(ii) Dividends proposed/declared
Example 4.4
Profit and Loss Account of Navroj Ltd. for the year ended March 31, 2002 is
given below :
Profit and Loss Account of Navroj Ltd. for the year ended March 31, 2002
Particulars
Amount
(Rs.)
Salaries
4,90,000
Depreciation
1,85,000
Preliminary expenses
written-off
Rent
15,000
18,000
Administrative expenses
2,62,000
Selling and Distribution

expenses
2,54,000
Total
15,80,000
1,84,000
Commission
Net profit
Gross profit
Amount
(Rs.)
12,000
Interest
Insurance expenses
Particulars
36,000
1,24,000
15,80,000
Required : Compute funds from operation.
15,80,000
170
ACCOUNTANCY
Solution
Funds from Operation
Particulars
Amount (Rs.)
Net profit for the year

Add : Depreciation charged
Preliminary expenses written-off
1,24,000
1,85,000
12,000
3,21,000
Example 4.5
Following items have been drawn from the balance sheet of Rangaswami Metal
Works Ltd. on at March 31, 2001 and 2002
Profit and Loss Appropriation (Cr.)

General Reserve(Cr.)
Goodwill (Dr.)
As at
31.03.2001
As at
31.03.2002
6,00,000
7,50,000
11,00,000
12,50,000
2,85,000
2,35,000
60,000
45,000
3,85,000
4,70,000
Preliminary Expenses (Dr.)

Accumulated Depreciation
on Fixed Assets (Cr.)
* Relevant items only

The dividend paid in June, 2002 were Rs. 1,50,000. During the year and
there were no purchase or sale of fixed assets.
Required : Compute funds from operation.
Solution
Particulars
Amount (Rs.)
Increase in Profit and Loss Appropriation balance

( 7,50,000-6,00,000)
Add : Transfer to general reserve
Dividend paid
1,50,000
Net Income for the year
4,50,000
Add : Goodwill written-off

Preliminary expenses written-off
Depreciation written-off
1,50,000
1,50,000
50,000
15,000
85,000
6,00,000
171
4.3.4 Computation of Other Sources and Uses of Funds

The other sources of funds are issue of shares, debenture, raising long term
loans, sale of fixed assets and long term assets. The uses of funds are
redemption of shares, debenture, repayment of long term loans, purchase of
fixed assets and long term assets.
The information relating to issue or redemption of shares and about long
term loans will be available from the balance sheet in the beginning and at the
end of the year. Any discount or premium on issue/redemption of shares and
debentures is given in the form of additional information. Similarly, the balances
of fixed assets and long term investments in the beginning and at the end of
the year along with information relating to sale, or purchase and depreciation
charged on fixed assets is ascertained to compute the amount of purchases or
sales of fixed assets and investments. The information available may be written
in the accounts and missing figures can be ascertained, the following accounts
may be prepared to find out the missing information.
Fixed Assets Account
Dr.
Date
Cr.
Particulars
Rs.
Opening Balance
Purchase of Assets
Total
Date
Particulars
Rs.
Sale of Assets
(at cost)
Closing Balance
Total
Accumulated Depreciation on Fixed Assets Account

Dr.
Date
Cr.
Particulars
Rs.
Accumulated depreciation
written-off on Assets sold
Date
Particulars
Rs.
Balance b/f
Balance c/f
Depreciation charged
for Current year
Total
Total
Fixed Assets Sold Account

Dr.
Date
Cr.
Particulars
Rs.
Fixed Assets
Gain on sale of assets

Total
or
Date
Particulars
Rs.
Accumulated
depreciation
Bank
(Amount realised on sale)
Loss on sale of assets
Total
172
ACCOUNTANCY
Example 4.6
Balance Sheet of Zeal Ltd. as at March 31, 2002 is given below :
Balance Sheet of Zeal Ltd. as at March 31, 2002
Liabilities
2001
Amount
(Rs.)
2002
Amount
(Rs.)
10,00,000
15,00,000
Land
Reserve and
Surplus
8,10,000
10,15,000
10% Debenture
4,00,000
Accounts Payable
3,20,000
Equity Capital
2001
Amount
(Rs.)
2002
Amount
(Rs.)
9,00,000
11,00,000
Buildings
16,50,000
26,00,000
6,00,000
Accumulated
Depreciation
(4,00,000)
(7,00,000)
2,90,000
Inventory
2,10,000
2,15,000
Accounts
Receivable
1,70,000
1,85,000
25,000
90,000
15,000
10,000
Outstanding
Expenses
20,000
65,000
Provision for
taxation
20,000
30,000
Total
25,70,000
Assets
Cash on hand
Preliminary
Expenses
35,00,000
25,70,000 35,00,000
Additional Information :
(i)
A building costing Rs. 9,50,000 and land Rs. 2,00,000 was purchased for
cash.
(ii) Equity share and debenture were issued for cash at par.
(iii) Dividend paid during the year were Rs. 3,00,000.
Required :
Prepare schedule of change in working capital, compute fund from operation,
and prepared statement of changes in financial position.
Solution
Computation of Funds from Operation
Particulars
Amount(Rs.)
Increase in Reserve and Surpluses

(10,15,000 8,10,000)
Dividends paid
Preliminary Expenses written-off
Depreciation Charged
2,05,000
3,00,000
5,000
3,00,000
8,10,000
173
Schedule of Changes in Working Capital of Zeal Ltd.

Particulars
Current Assets :
Inventory
Accounts Receivable
Cash
Increase in
Net Working
Capital
Rs.
2001
2002
2,10,000
1,70,000
25,000
2,15,000
1,85,000
90,000
5,000
15,000
65,000
3,20,000
20,000
2,90,000
65,000
30,000
20,000
30,000
Decrease in
Net Working
Capital
Rs.
Current Liabilities :
Accounts Payable
Outstanding
Expenses
Provision for Taxation
Net increase in
Working Capital
Total
45,000
10,000
60,000
1,15,000
1,15,000
Statement of Changes in Financial Position

Sources
Issue of Share
Issue of Debenture
Total
Amount(Rs.)
8,10,000
5,00,000
2,00,000
15,10,000
Uses
Dividends paid
Purchase of land
Purchase of Buildings
Net increase in
Working Capital
Amount(Rs.)
3,00,000
2,00,000
9,50,000
60,000
15,10,000
Example 4.7
The balance sheet of Rohan Manufacturers Ltd. as at March 31, 2002 is given
here :
174
ACCOUNTANCY
Balance Sheet of Rohan Manufacturers Ltd. as at March, 31, 2002
Particulars
2001
Amount(Rs.)
2002
Amount(Rs.)
20,00,000
6,00,000
5,00,000
2,70,000
70,000
45,000
20,00,000
8,60,000
7,00,000
3,60,000
1,50,000
30,000
34,85,000
41,00,000
Liabilities
Reserve & Surpluses
12% Debenture
Accounts Payable
Bills Payable
Expenses Payable
Total
Assets
Goodwill
Land
Building Cost
Less : Accumulated
Machinery
Less : Accumulated
Depreciation
Investment
Stock
Accounts Receivable
Bills Receivable
Prepaid Expenses
Cash at Bank
Cash on Hand
Total
50,000
8,00,000
11,85,000
2,85,000
1,95,000
45,000
9,00,000
1,50,000
9,50,000
14,55,000
3,25,000
2,45,000
75,000
11,30,000
1,70,000
5,60,000
4,90,000
2,80,000
80,000
25,000
1,10,000
40,000
6,50,000
5,30,000
3,10,000
60,000
40,000
1,90,000
70,000
34,85,000
41,00,000
The following additional information is provided :

(i)
A piece of machinery costing Rs. 50,000 (accumulated depreciation

Rs. 10,000) was sold for Rs. 36,000.
(ii) During the year dividends were paid for Rs. 2,00,000.
Required
Prepare schedule of changes in working capital and statement of changes in
financial position.
175
Solution
Schedule of Changes in Working Capital of Rohan Manufactures Ltd.
Particulars
2001
2002
Changes in working capital
Amount
Rs.
Amount
Rs.
Increase in
Net working
Capital
Stock
4,90,000
5,30,000
40,000
Accounts Receivable
2,80,000
3,10,000
30,000
Bills Receivable
80,000
60,000
Prepaid expenses
25,000
40,000
15,000
Cash at bank
1,10,000
1,90,000
80,000
Cash on hand
40,000
70,000
30,000
Decrease in
Net working
Capital
Current Assets
20,000
Current Liabilities
Bill payable
70,000
1,50,000
80,000
Accounts Payable
2,70,000
3,60,000
90,000
Expenses Payable
45,000
30,000
Net Increase in
Working Capital
20,000
2,10,000
2,10,000
Computation of Funds from Operation

Amount(Rs.)
Net Increase in Reserve and
Surpluses (8,60,000 6,00,000)
2,60,000
Add Dividends paid
2,00,000
Depreciation on Buildings
40,000
Depreciation on Machinery
40,000
Loss on sale of Machinery

Goodwill written-off
4,000
50,000
5,94,000
176
ACCOUNTANCY

Sources of Funds
Amount(Rs.)

Issue of Debenture
Sale of Machinery
Total
5,94,000
2,00,000
36,000
8,30,000
Uses of Funds
(Amount)Rs.
Purchase of Land
Purchase of Buildings
Purchase of Machinery
Purchase of Investment
Payment of Dividends
Net Increase in
Working Capital
1,50,000
2,70,000
1,00,000
90,000
2,00,000
Total
8,30,000
20,000
Machinery Account
Dr.
Cr.
Date
Amount(Rs.) Date
Amount(Rs.)
Balance b/f
Purchase of Machinery
1,95,000
1,00,000
Machinery sold
Balance c/f
50,000
2,45,000
Total
2,95,000
Total
2,95,000
Machinery sold Account

Dr.
Cr.
Date
Amount(Rs.) Date
Machinery
Total
50,000
50,000
Amount(Rs.)
Accumulated
Depreciation
on Machinery Sold
Bank
Loss on sale
10,000
36,000
4,000
Total
50,000
Accumulated Depreciation on Machinery Account

Dr.
Cr.
Date
Amount(Rs.) Date
Amount(Rs.)
Accumulated Depreciation on Machinery Sold
10,000
Balance b/f
Depreciation
Balance c/f
75,000
charged
Total
85,000
Total
Example 4.8
Following is the balance sheet of Zircon Limited.
45,000
40,000
85,000
177
Balance Sheet of Zircon Ltd. as at March 31, 2003.

Capital and
Liabilities
2002
Amount
Rs.
2003
Amount
Rs.
Equity share capital
80,00,000
88,00,000
Land
26,00,000
44,00,000
Reserves
9% Debenture
14,50,000
26,00,000
40,00,000
Building
(at cost)
36,00,000
36,00,000
9,00,000
75,000
10,00,000
95,000
Accumulated
depreciation
6,00,000
6,72,000
36,00,000
49,80,000
8,00,000
8,90,000
Stock
9,18,000
10,12,000
Accounts
Receivable
6,54,000
8,37,000
Accounts Payable
Expenses Payable
Assets
2002
Amount
Rs.
Plant and
Machinery
Accumulated
depreciation
Cash at Bank
Total
1,04,25,000 1,64,95,000
Total
2003
Amount
Rs.
4,53,000
32,28,000
1,04,25,000
1,64,95,000
Additional information
1.
Land purchased during the year was for Rs. 20,00,000.
2.
Plant and Machinery costing Rs. 4,20,000(Accumulated Depreciation

thereon Rs. 3,80,000) was sold for Rs. 25,000.
3.
Plant and Machinery purchased for Rs. 18,00,000.
4.
Depreciation charged on Plant and Machinery Rs. 4,70,000 and on building

Rs. 72,000.
5.
Dividend paid during the year were Rs. 8,00,000.
Required
Prepare schedule of changes in financial position on working capital basis
(Funds Flow Statement).
178
ACCOUNTANCY
Solution
Schedule of changes in Working Capital
Particulars
2002
2003
Changes in Working Capital
Amount
Rs.
Amount
Rs.
Increase in
Net working
Capital
Stock
9,18,000
10,12,000
94,000
Accounts Receivable
6,54,000
8,37,000
1,83,000
Cash at Bank
4,53,000
32,28,000
27,75,000
Accounts Payable
Expenses Payable
9,00,000
75,000
10,00,000
95,000
Decrease in
Net working
Capital
1,00,000
20,000
Net increase in
Working Capital
29,32,000
Total
30,52,000
30,52,000
Computation of Funds from Operations

Amount (Rs.)
Net increase in Reserves
(26,00,000 14,50,000)
11,50,000
Dividends paid
8,00,000
Depreciation on Building
72,000
Depreciation on Plant and Machinery
4,70,000
Loss on sale of plant and machinery
15,000
25,07,000

Sources of Funds
Funds from operations
Issue of shares
Issue of debentures
Sale of Plant and Machinery
Total
Amount(Rs.)
Uses of Funds
Amount(Rs.)
25,07,000 Dividend paid
8,00,000
8,00,000 Land purchased

40,00,000 Plant and Machinery purchased
25,000 Net increase in
working capital
73,32,000 Total
18,00,000
18,00,000
29,32,000
73,32,000
179

Plant and Machinery Account
Dr.
Cr.
Date
Amount(Rs.)
Date
Amount(Rs.)
Balance b/f
36,00,000
Plant and
Machinery sold
Plant and Machinery
18,00,000
Balance c/f
Total
54,00,000
Total
4,20,000
49,80,000
54,00,000
Plant and Machinery Sold Account

Dr.
Cr.
Date
Amount(Rs.)
Plant and Machinery
Total
Date
4,20,000
Amount(Rs.)
Accumulated depreciation on plant
4,20,000
3,80,000
Bank
25,000
Loss on sale
15,000
Total
4,20,000
Accumulated Depreciation on Plant and Machinery Account

Dr.
Cr.
Date
Amount(Rs.)
Plant and
Machinery sold
Balance c/f
Total
3,80,000
8,90,000
12,70,000
Date
Amount(Rs.)
Balance b/f
Depreciation
charged
Total
8,00,000
4,70,000
12,70,000
4.4 Uses and Limitations of Statement of Changes in Financial Position

The statement of changes in financial position is useful to understand how the
funds have been generated and used during the period. It ascertains total
funds generated from operations, which, normally is a major source of funds
for a healthy company. It also helps in evaluating the funds generated from
financing and investing activities of the business. It also throws light on how
these funds were used. It helps the lenders to evaluate the ability of an enterprise
to meet its financial obligations. It help in ascertaining the funds that needs to
be generated to meet the expansion requirements.
Though Statement of Changes in Financial Position (SCFP) is of immense
help to management and external users, yet, it suffers from some limitations.
It only rearranges the information contained in the financial statements
180
ACCOUNTANCY
therefore, the limitation of financial statements do not make Statement of Changes

in Financial Position (SCFP) more reliable than the financial statements. It does
not help in ascertaining whether the cash will be available to meet future
obligations or not. This Statement reveals his historical information only and
does not reveal future flows. Also, current assets financed through current
liabilities are not revealed by statement of changes in financial position.
4.5 Statement of Cash Flows Meaning and Purpose
As discussed earlier in this chapter, the term Funds have different interpretations.
It is also interpreted as cash. Therefore, statement of changes in financial position
may also be prepared by taking cash as the basis instead of working capital.
This statement is more commonly known as Cash Flow Statement or Statement
of Cash Flows(SCF). Accounting Standard 3 issued by The Institute of Chartered
Accountants of India deals with preparation and presentation of statement of
changes in Cash Flows. The Companies listed on recognized stock exchanges of
India and other commercial, industrial and business enterprises in the public
and private sectors are required to prepare and report statement of cash flows
along with the profit and loss account and balance sheet.
The purpose of the Statement of Cash Flows is to provide the information
about an enterprises cash receipts(cash inflows) and payments(cash outflows)
during the period. For this purpose, the cash flows are divided into operating,
financing and investing activities. The statements concludes with the amount of
net cash flow drawn from all these three activities. The opening balance of cash is
added to the net flow during the period which will give the cash balance at the
end of the period. The net flow is already known(being equal to the difference
between opening and closing balance). It is, therefore, not the net flow but the
reasons for this net flow which is highlighted by the statement.
Cash flow statement is considered to be better than Statement of Changes in
Financial Position on working capital basis. It focuses on cash flow rather than
on working capital. Since the company must convert its current assets into cash
to meet its financial obligations. Thus, Statement of cash flow helps the users to
ascertain in a more accurate manner the liquidity of the firm and is considered to
be superior to Statement of Changes in Financial Position.
Cash includes cash on hand, cash at bank and cash equivalent assets. Cash
equivalent are those investments which are readily convertible into known amount
of cash and are subject to insignificant risk of changes in value. Cash equivalents
are not held for the purpose of investment.
181
4.5.1. Usefulness Statement of Cash Flows

The information provided by Statement of Cash Flows (SCF) helps investors,
creditors and other users to assess different aspects of financial position of the
firm. It helps to ascertain the ability of the enterprise to generate future cash
flows. It helps to ascertain about the ability of the enterprises to pay dividends
and meet its obligations. It also explains the difference between the net income
and cash provided by operating activities of an enterprise. It provide information
about cash flows from investing and financing transactions.
4.6 Preparation of Statement of Cash Flows

The information required to prepare Statement of Cash Flows (SCF) is obtained
from comparative balance sheet, profit and loss account and additional
information given along with these two statements. The changes in assets,
liabilities and equity are to be interpreted in the light of additional information
provided to determine the cash flows from purchase and sale of fixed assets,
cash flows from issue and redemption of share and debenture and raising and
repayment of long term loans. The income statement along with balance sheet
and other information provided will help in ascertaining cash flow from
operations. Accounting Standard 3 required these cash flows to be categorised
into flows from operation, investing and financing activities. The ascertainment
of cash flows from these categories is discussed below :
4.6.1 Cash from Operating Activities
The net income is computed on the basis of accrual basis. To compute cash
provided by operating activities we need to convert the operating activities being
considered from accrual basis to cash basis. For this purpose, we can follow
either Direct Method or Indirect Method. The cash provided will be same,
whatever method is used for computation. Accounting Standard 3 allows both
methods for reporting cash from operating activities among Indian Companies.
Cash from Operating Activities Direct Method
Under this method, we need to adjust each item in the income statement from
accrual basis to cash basis. Cash receipts and cash payments related to revenues and expenses are determined and listed as cash inflows and outflows
from operating activities. The net amount is reported in the last column as
cash provided from operations.
Step 1 : Determine cash provided by operating activities
(i)
Cash receipts from customers : The revenue from sales is reported on

accrual basis in the income statement. We add the amount of opening
182
ACCOUNTANCY
receivables to the net sales and to this we subtract amount of receivables

at the end, bad debts written-off during the period and discount allowed
to customers.
Particulars
Net Sales
Add : Opening Receivables
Less : Closing Receivables
Discount allowed
Bad Debts written off
Net cash received from customers
(ii)
Amount(Rs.)
xxx
xxx
(x x x)
(x x x)
(x x x)
xxx
Other Cash receipts : The amount of other revenue like rent, income,
commission earned, etc. are adjusted for any amounts not received or
received in advance to determine cash received.
Particulars
Other revenues earned
Add : Receivable in the beginning
Less : Receivable at the end
Add : Received in advance at the end
Less : Received-in-advance
in the beginning
Cash received from other revenues
Amount(Rs.)
x
xxx
(x x x)
xxx
(x x x)
xxx
Step 2 : Cash used from operating activities

(i)
Cash payment to suppliers : The income statement reports cost of goods

sold on accrual basis. To determine the cash paid to suppliers, we need to
first ascertain the purchases made during the year and then compute the
amount paid to suppliers. The closing stock of goods is added to cost of
goods sold and opening stock is subtracted therefrom to compute the
purchases during the period.
Particulars
Amount(Rs.)
Cost of Goods sold

Add : Closing Stock
Less : Opening Stock
Purchases
xxx
(x x x)
xxx
183
We need to add the creditors (Account Payables) in the beginning of the

period to the amount of purchases and subtract closing creditors (Accounts
Payables) therefrom for computing the amount paid to suppliers.
Particulars
Add : Opening creditors
Less : Closing creditors

Cash payment to suppliers
(ii)
Amount(Rs.)
Purchases
(xxx)
xxx
Cash payment for operating expenses : Operating expenses are reported in

the income statement on accrual basis. We need to adjust the operating
expenses for outstanding expenses and prepaid expenses to ascertain cash
payment for operating expenses.
Particulars
Operating expenses
Amount(Rs.)
xxx
Add : Prepaid Expenses at the end of the period
xxx
Less : Prepaid Expenses in the begining of the period
(xxx)
Less : Outstanding Expenses at the end of the period
(xxx)
Cash payment for operating expenses
xxx
(iii) Cash payment for Income Tax : The income statement indicates the provision made for income tax. The comparative balance sheet indicates the
amount of tax payable in the beginning and and at the end of the period.
We can compute the cash payment for income tax as follows :Particulars
Provision for Income Tax
Add : Tax Payable in the beginning
Less : Tax Payable at the end
Cash payments for Income Tax
Amount(Rs.)
xxx
xxx
(xxx)
xxx
(iv) Payment for Interest : Though interest expense is subtracted from revenues
to compute net income, according to Accounting Standard 3 cash flows
arising from interest paid and interest/dividend received in cash of
financial enterprises should be reported as cash flow from operating
activities. In the case of other enterprises, cash flows from interest paid
should be classified as financing activities and cash flows from interest
and dividends received should be reported as cash flows from Investing
activities.
184
ACCOUNTANCY
Cash from operating activities Indirect Method

Under this method, we need to start with the net income and make adjustments
for those items which affected net income but do not affect cash. The steps
followed under this indirect method are as follows :(i)
Add to the net income for the year the amount of expenses charged to
current years income but do not result in outflow of cash. These are
depreciation on fixed assets written-off, deferred revenue expenditure
written off, loss on sale of fixed assets. Gain on sale of fixed assets, on the
other hand, increases the income for the current year but it is included in
cash flow from sale of fixed assets. Therefore, gain on sale of fixed assets
is to be substracted from the profit. The changes in current assets and
current liabilities are also to be adjusted to ascertain the cash flow from
operating activities. Increases in current liabilities and decreases in current
assets over the period are added to the net profit. Interest paid is treated
as cash flow from financing activities, therefore, it is added back to profit.
The Interest and dividends received are sub-stracted from the net profit
and reported as cash flow from investing activities. The format to ascertain
the cash flow from operating activities is given below :
Computation of Cash Flow from Operating Activities
Particulars
Amount(Rs.)
Cash Flow from Operating Activities

Net Income after tax
Add : Depreciation
Add : Fixed Assets written-off
Add : Loss on sale of Fixed Assets
Add : Deferred revenue expenses written-off
Add : Interest period expenses
Add : Provision for Income Tax
Less : Gain on sale of Fixed Assets
Add : Increases in Current Liabilities (Other than bank overdraft)
Add : Decrease in Current Assets (Other than cash)
Less : Decrease in Current Liabilities (Other than bank overdraft)
Add : Increase in Current Assets (Other than cash)
Net Cash Provided from operating by operating activities
Less : Payment for Income Tax
Net Cash after tax provided by Operating Activities
xxx
xxx
xxx
xxx
xxx
xxx
xxx
(xxx)
xxx
xxx
(xxx)
xxx
(xxx)
xxx
185
4.6.2 Cash Flow from Investing Activities

The amount of fixed assets and long term investments in the beginning and at
the end of the year are available from the comparative balance sheet. The
additional information provides inputs required to evaluate the amount and
reason for changes in these items. We may ascertain the cash used for purchase
of fixed assets and investments and cash received from sale of these items by
preparing the account on the basis of information available as discussed at
the time of preparation of Statement of Changes in financial position.
The cash flows from investing activities :
(i)
Cash payments to acquire fixed assets;
(ii) Cash receipts from sale of fixed assets;

(iii) Cash payments to acquire shares, warrants or debt instruments of other
enterprises (other than cash payment for those instruments which are
considered to be cash equivalents and those which are held for trading
purposes);
(iv) Cash received with respect to interest and dividend on investments;
(v)
Cash advances and loans made to third parties. In case of financial enterprises these will be treated as cash flows from operating activities;
(vi) Cash receipts from the repayments of advances and loans made to third
parties. In case of financial enterprises these will be treated as cash flows
from operating activities.
4.6.3 Cash Flow from Financing Activities
The cash flows from financing activities reveals how the cash is provided to the
enterprises by the owners and lenders. Cash flows from financing activities is
ascertained by analysing the differences in equity and long-term liabilities in
the beginning and at the end of the year.
The cash flows from financing activities include :
(i)
Cash proceeds from issue of share;
(ii) Cash proceeds from issue of debenture;

(iii) Cash proceeds from loan raised;
(iv) Cash payments for redemption of share;
(v)
Cash payments for redemption of debenture;
(vi) Cash payments for repayment of loan;
186
ACCOUNTANCY
(vii) Cash payments for dividends on share;

(viii) Cash payments for interest on debenture and loan.
Format of Statement of Cash Flows (Direct Method)
Amount (Rs.)
Amount (Rs.)
Cash Flows from Operating Activities

Cash receipt from customers
xxx
Cash paid to suppliers
(xxx)
Cash paid to employees
(xxx)
Cash paid for expenses
(xxx)
Cash generated from operations

Cash paid for Income Taxes
xxx
(xxx)
Net Cash from operating activities
xxx
Cash Flow from Investing Activities

Purchase of fixed assets and investments
xxx
Cash from interest and dividends on

investment received
xxx
Net cash flows (used for) investing activities
xxx or (xxx)
Cash Flows from Financing Activities

Cash from issue of shares capital
xxx
Cash from issue of debenture
xxx
Cash from loans raised
xxx
Redemption of share
(xxx)
Redemption of debenture
(xxx)
Repayment of loans
(xxx)
Payment of interest
(xxx)
Payment of dividend
(xxx)
Net cash from (used for) financing activities
xxx or (xxx)
Net Increase (Decrease) in Cash

Cash in the beginning of the period
Cash at the end of the period
xxx or (xxx)
xxx
xxx
Statement of Cash Flows (Indirect Method)

Under this method there will be change in cash flows from operating activities section only
which is given here :
187

Format of Statement of Cash Flows (Indirect Method)
Amount(Rs.)
Net profit before tax
Adjustments for :
Depreciation
Interest Income
Dividend Income
Interest expense
Provision for tax
Loss on sale of fixed assets
Gain on sale of fixed assets
Other non-cash items
Operating profit before

working capital changes
Add : Increases in current liabilities
Decrease in current assets
(other than cash)
Less : Decrease in current liabilities
Increases in current assets
(other then cash)
Net cash from operating activities
xxx
xxx
(xxx)
(xxx)
xxx
xxx
xxx
(xxx)
xxx
Or
(xxx)
xxx
(xxx)
(xxx)
xxx
Rs.
Purchase of fixed assets and investments

Cash flows from sale of fixed assets
and investments
Cash from interest and dividends
on investments
Net cash from (used for) investing activities
xxx
xxx
Cash from issue of share

Cash from issue of debenture
Cash from loan raised
Redemption of share
Payment of interest
Payment of dividends
Net cash from (used for) financing activities
Net increase (decrease) in cash
Cash at the end of the period
or (xxx)
xxx
xxx
Cash from Investing Activities
Amount(Rs.)
Rs.
xxx
xxx or (xxx)
Rs.
Rs.
xxx
xxx
(xxx)
(xxx)
(xxx)
(xxx)
(xxx)
xxx or (xxx)
xxx
xxx
188
ACCOUNTANCY
Example 4.9
Ganga Yamuna Ltd. reported profit of Rs. 12,50,000 for the year ended
31, 2003 after considering the following :
Depreciation on building
Depreciation on Plant and Machinery
Depreciation on furniture
Amortization of goodwill
Loss on sale of machinery
Rs.
Rs.
Rs.
Rs.
Rs.
March
35,000
75,000
18,000
12,000
20,000
The current assets and liabilities in the beginning and at the end of the
year are given below :
March 31 2002
Accounts Receivable
Stock on hand
Cash on hand
Accounts Pabable
Expenses Payable
Rs.
Rs.
Rs.
Rs.
Rs.
38,000
75,000
18,000
34,000
7,000
March 31 2003
Rs.
Rs.
Rs.
Rs.
Rs.
42,000
68,000
32,000
32,000
10,000
Solution
Amount(Rs.)
Cash Flow from Operating Activities
Net profit for the year
12,50,000
Add : depreciation on buildings

depreciation on plant & machinery
depreciation on furniture
Amortization of goodwill
Operating profit before working capital changes
Increase in Accounts Receivable
Decrease in stock
Decrease in Accounts Payable
Increase in expenses payable
35,000
75,000
18,000
12,000
20,000
14,10,000
(4,000)
7,000
(3,000)
3,000
Net Cash from Operating Activities
14,13,000
189
Example 4.10
Given below is the summarised balance sheet and profit and loss account of an
enterprise
Balance Sheet of ........ as at March 31, 2002, 2003
Liabilities
March 31 March 31 Assets

2002
2003
Rs.
Rs.
Capital
Reserves
90,000
60,000
Long-term loans(9%)
Dividend Proposed
Accounts payable
Outstanding
Expenses
70,000
8,000
40,000
Total
32,000
March 31
2002
Rs.
March 31
2003
Rs.
1,30,000 Plant (Cost)

1,60,000
96,000 Accumulated
Depreciation
(30,000)
50,000 Patents
10,000 Stock
80,000
30,000 Sundry Debtors
60,000
Prepaid Expenses
10,000
19,000 Cash
20,000
1,65,000
3,00,000 3,35,000 Total
3,00,000
(38,000)
29,000
90,000
55,000
12,000
22,000
3,35,000
Profit and Loss Account for the year ending March 31, 2003
Particulars
Raw Material Consumed
Wages paid
Expenses
Depreciation
Patents Amortized
Net Profit
Rs.
2,00,000
40,000
80,000
8,000
1,000
46,000
Particulars
Sales
3,75,000
Rs.
3,75,000
3,75,000
Dividend Proposed
Profit Retained
10,000
36,000
Net Profit
46,000
Total
46,000
Total
46,000
Loan was repaid to the extent of Rs. 20,000 on June, 2002, Interest is paid on
monthly basis at the end of each month which is included in expenses.
Required
Prepare Statement of Cash Flows.
190
ACCOUNTANCY
Solution
Statement of Cash Flows (Indirect Method)
Amount(Rs.) Amount(Rs.)
Net profit
Add: Depreciation
46,000
8,000
Patents Amortized
1,000
Interest paid
4,800
Operating profit before working capital changes

Add: Decrease in Debtors
Less : Increase in Stock
Increase in Prepaid
59,800
5,000
(10,000)
(2,000)
Decreased in Accounts Payable
(10,000)
Less : Decrease in outstanding Expenses
(13,000)
Cash provided by Operating Activities
29,800
Cash Flows from Investing Activities

Cash payment for purchase of Plant
Cash payment for purchase of Patents
(5,000)
(30,000)
Net Cash used for Investing Activities
(35,000)
Cash Flows from Financing Activities

Cash from issue of shares
Cash paid for Repayment of Loans
40,000
(20,000)
Cash paid for dividends
(8,000)
Cash paid for Interest
(4,800)
Cash provided by financing activities
7,200
Net increase in cash
2,000
Cash balance in the beginning of the year

Cash Balance at the end of the year
20,000
22,000
Example 4.11
The balance Sheet of software services Ltd. as on March 31, 2003 and profit and
loss account for the year ended March 31, 2003 are given here :
191
Balance Sheet of Software Securities Ltd. as at March 31, 2002

(Rs. in000)
2001
2002
Amount
Amount
108.0
396.0
Retained Earnings
244,8
370.8
9% Debenture
270.0
198.0
Capital and Liabilities
Accounts Payable
72.0
41.4
Expenses Payable
18.0
694.8
1024.2
Total
Assets an Properties
Land
126.0
81.0
Buildings
360.0
360.0
Accumulated Depreciation on Buildings
(19.8)
(37.8)
Equipments
122.4
347.4
Accumulated Depreciation on Equipments
(18.0)
(50.4)
Stock on hand
10.8
97.2
Accounts Receivable
36.0
122.4
Cash on hand
66.6
97.2
Preliminary Expenses
10.8
7.2
694.8
10,24.2
Total
Income statement of Software Securities Ltd. for the year ended March 31, 2002
(Rs. in000)
Amount
Sales
16,02.0
Less Cost of goods sold
837.0
Operating expenses
397.8
Interest expenses
Loss on sale of Equipment
Amount
21.6
3.6
1260.0
Net Income before tax
342.0
Provision for tax
117.0
Net income after tax
225.0
192
ACCOUNTANCY
Additional Information
1.
2.
3.
4.
5.
6.
7.
8.
Operating expenses include depreciation of Rs. 59,400 and charges from

preliminary expenses of Rs. 3,600.
Land was sold at its book value.
Cash dividend paid for the year 2002 amounted to Rs. 27,000 and fully paid
bonus shares were given in the ratio of 2 shares for every 3 shares held.
Interest expense was paid in cash.
Equipment with a cost of Rs. 2,98,800 was purchased for cash. Equipment
with a cost of Rs. 73,800 (book value Rs. 64,800) was sold for Rs. 61,200.
Debenture for Rs. 18,000 were redeemed for cash and for Rs. 54,000 were
redeemed by converting into equity shares at par value.
Equity shares of Rs. 1,62,000 were issued for cash at par.
Income Tax paid during the year amounted to Rs. 1,17,000.
Required : Prepare statement of cash flows.

Solution
Statement of Cash Flows
Particulars
Amount(Rs.)

Net income before tax
3,42,000
59,400
3,600
Loss on sale of equipment
3,600
Interest expenses
21,600
Operating Profit before Working Capital Changes
4,30,200
Working Capital Changes

Increase in stock
(86,400)
Increase in debtors
(86,400)
Decrease in sundry creditors
(30,600)
Increase in expenses payable
18,000
Cash generated from operations
2,44,800
Less : Income tax paid
1,17,000
Net Cash Flows after Tax from

Operating Activities
1,27,800
193

Cash paid for purchase of equipment
(2,98,800)
Proceeds from sale of equipment
61,200
Proceeds from sale of land
45,000
Net Cash used for Investing Activities
(1,92,600)
Cash from Financing Activities

Proceeds from issue of equity share capital
1,62,000
Cash paid for redemption of debentures
(18,000)
Cash paid for dividends
(27,000)
Cash paid for interest
(21,600)
Net Cash Flows from Financing Activities
95,400
Net increase in cash
30,000
Cash in the beginning of the year
66,600
Cash at the end of the year
97,200
Notes to Solution
Equipment Account
Dr.
Date
Cr.
Particulars
Opening balance
Purchase of equipment
Amount(Rs.) Date
1,22,400
2,98,800
Particulars
Equipment sold
Closing balance
4,21,200
Amount(Rs.)
73,800
3,47,000
4,21,200
Equipment Sold Account

Dr.
Date
Cr.
Particulars
Equipment
Amount(Rs.) Date
73,800
Accumulated
Depreciation
Bank
Loss on sale
73,200
Cost book value = Accumulated Depreciation

Rs. 73,800 Rs. 64,800 = Rs. 9,000
Particulars
Amount(Rs.)
9,000
61,200
3,600
73,200
194
ACCOUNTANCY
Accumulated Depreciation on Equipment
Dr.
Cr.
Date
Particulars
Amount(Rs.) Date Particulars
Equipment sold
9,000
Closing balance
50,400
Amount(Rs.)
Opening balance
18,000
in current year
41,400
59,400
59,400
Equity share capital on March 31, 2002
3,96,000
Less : Equity share capital at March 31, 2001
1,08,000
Bonus issue
72,000
54,000
Issue of Equity shares for cash
2,34,000
1,62,000
Depreciation charged on buildings = Rs. 37,800 Rs. 19,800 = Rs. 18,000

Total depreciation charged for the current year = Rs. 41,400 + Rs. 18,000 = Rs. 59,400
Terms Used in the Chapter

Funds
Flow of Funds
Investing Activities
Working Capital
Net Working Capital
Cash Flows
Operating Activities
Financing Activities
Statement of Changes in
Financial Position
Summary
Funds : There are many questions like how the company paid dividends in excess
of its currents profits, how the assets are financed, how the proceeds from shares
are used? Investors and other users of financial statements are interested to get
answers to these questions. Statement of changes in Financial Position (SCFP)
helps in answering such questions. The term funds in this context is used to indicate
net working capital (current assets-current Liabilities)
Statement of Cash Flow : The statement of cash flows is considered to be superior
to SCFP to ascertain the liquidity of an enterprise. SCF is to be prepared and
195
reported by Indian enterprises according to AS-3 issued by the Institute of Chartered

Accountants of India. The cash flows are categorized into flows from operating,
investing and financing activities. This statement helps the users to ascertain the
amount and certainty of cash flows to be generated by an enterprise.
Exercises
I
A.
Objectives type Questions

State whether the following transaction will result in flow of funds or not :
(i)
Cash received from debtors
(ii)
Share issued for cash
(iii)
Old furniture written-off
(iv)
Deferred reserve expenditure charged to profit
(v)
Sale of goods on credit
(vi)
Discount received on making payment to supplies
(vii)
Purchase of fixed assets against issue of shares
(viii)
Wages paid for the current months
(ix)
Payments outstanding rent for previous month
(x)
Cash withdrawn from business by the owners
B. State True or False
C.
(i)
Cash received from sale of fixed assets at less than the book value is a
source of funds
(ii)
Payment of cash against purchase of stock is use of fund,
(iii)
Dividends paid is not a source of funds,
(iv)
Sale of goods on credit is not a source of funds.
(v)
Funds from operation is not a major source of funds for an enterprises.
Tick the right choices

(i)
Which of the following is incorrect about the statement of cash flows?
(a)
it provides information about the cash receipt and cash payments of an

enterprise.
(b)
it reconciles ending cash balance with the balance as per bank statement.
(c)
it provides information about the operating, investing and financing

activities.
(ii)
The statement of cash flows clarifies cash flows according to:
(a)
operating and non-operating flows
(b)
investing and non-operating flows
196
ACCOUNTANCY
(c)
inflows and outflows
(d)
operating, investing and financing activities
(iii) Example of cash flow from financing activity is:
D.
(a)
payment of dividend
(b)
receipt of dividend on investment
(c)
cash received from customer
(d)
purchase of fixed asset
(iv)
An example of cash flow from investing activity is:
(a)
issue of debenture
(b)
repayment of long-term loan
(c)
purchase of raw materials for cash
(d)
sale of investment by non-financial enterprise.
(v)
An example of cash flow from operating activity is;
(a)
purchase of own debenture
(b)
sale of fixed assets
(c)
interest paid on term-deposits by a bank
(d)
Issue of equity share capital
Mention the net amount of source or use of funds in each of the following
case:
(i)
Fixed asset sold for Rs.12,480 (book value Rs.14,000).
(ii)
Received Rs.17,980 from a debtor and allowed Rs.220 as discount

(Amount due from debtor is Rs.18,200).
(iii) Goods sold for Rs.18,500 for cash costing Rs.14,900.
E.
(iv)
Paid wages for current month Rs.24,000.
(v)
Issue of shares for Rs.8,50,000 against purchase of business comprising

of fixed assets Rs.7,60,000; current assets Rs.2,15,000 and took over
current liabilities Rs.1,25,000.
State in each case whether the cash flows resulting from the transaction are
from operating investing or financing activities;
(i)
Issue of shares capital for cash
(ii)
Redemption of debenture at premium for cash
(iii) Purchase of machinery for cash

(iv)
Purchase of inventory for cash
(v)
Sale of goods for cash
(vi)
Payment of interest on debenture
(vii) Receivied interest on investments by a trading enterprise.

(viii) Payment of income tax
197
(ix) Payment of income tax

(x)
F.
Sale of old furniture at a loss.
Fill in the blanks:

(i)
Schedule of changes in working capital reveals net...............
(ii)
Statement of financial position (on working capital basis) shown............

and ........... of funds.
(iii) The balancing figure in funds flow statement reveals.............
2.
(iv)
Schedule of changes in working capital emphasises on ......... whereas

funds flow statement emphasises on ............... and ....... of .....................
(v)
Cash flows are categorised in .....................and .............. activities.
Short Answer Questions

(i)
What is funds?
(ii)
What is statement of changes in financial position?
(iii) What is statement of cash flow ?

(iv)
What is schedule of changes in working capital?
(v)
Distinguish between schedule of changes in working capital and funds

flow statement?
(vi)
Distinguish between statement of changes in financial position and statement of cash flows?
(vii) What are the major uses of funds ?

(viii) What are the major reserves of funds?
(ix)
What are the major uses of funds?
(x)
What is funds from operation?
(xi)
Describe the Direct method of computing cash flows from operating

activities?
(xii
Describe the Indirect method of computing cash flows from operating

activities?
(xiii) Describe the computation of funds from operation?

(xiv) What are major cash inflows and outflows from investing activities?
(xv) What are major cash inflows and outflows from financing activities?
(xvi) What are the limitations of statement of changes in financial position?
(xvii) Why is statement of cash flow preferred over statement of changes in
financial position?
3. Essay Type Questions
(i)
Describe the procedure to prepare statement of changes in financial

position.
(ii)
Describe the procedure to prepare statement of cash flows.
(iii) Describe Direct and Indirect method of ascertaining cash flows from
operating activities.
198
ACCOUNTANCY
(iv)
What are the advantages and limitations of Statement of changes in

Financial Position? Distinguish between statement of changes in Financial
Position and Statement of Cash Flows?
Problems
4.
Following is the Balance Sheet of Chandra Foods Ltd.

Balance Sheet of Chandra Foods Ltd. as at March 31, 2002, 2003
Liabilites
2002
Rs.
2003
Rs.
2,50,000
2,50,000
Accounts payable
55,000
Bills Payable
20,000
Mortgage
10,000
Share Capital
Total
Assets
2002
Rs.
2003
Rs.
Land & Building
1,40,000 1,40,000
80,000
Stock
1,00,000 1,30,000
40,000
Accounts Receivable
28,000
30,000
15,000
Cash on hand
Goodwill
7,000
60,000
25,000
60,000
3,35,000 3,85,000
Total
3,35,000 3,85,000
Required : Prepare Schedule of Changes in Working Capital

5.
Following is the Balance Sheet of Rajeshwari Co. Ltd.

Balance Sheet of Rajeshwari Co. Ltd. as at March 31, 2002 and 2003
Liabilites
2002
Rs.
2003
Rs.
Share Capital
Profit & Loss
8% Debenture
6,50,000 7,80,000
40,000
65,000
3,00,000 2,50,000
Accounts Payable
Bills Payable
Outstanding Expenses
1,70,000 1,60,000
40,000
50,000
20,000
30,000
Total
12,20,000 13,35,000
Assets
2002
Rs.
2003
Rs.
Fixed Assets
8,30,000 8,60,000
Stock in Trade
2,90,000 3,70,000
Cash on Hand
80,000
90,000
and at Bank
Prepaid Expenses
10,000
15,000
Preliminary
10,000
Expenses
Total
12,20,000 13,35,000
Required : Prepare Schedule of Changes in Working Capital.

6.
Following are two Balance Sheet of Rose Ltd. as at March 2002 and 2003
Balance Sheet of Rose Ltd. as at March 31, 2002 and 2003
2002
Rs.
2003
Rs.
Cash on hand
Accounts Receivable
Stock on hand
Buildings
30,000
1,20,000
80,000
50,000
47,000
1,15,000
90,000
66,000
Total
2,80,000
3,18,000
Assets
199
Capital and liability

Accounts payables
Retained Earnings
Total
2,00,000
70,000
10,000
2,50,000
45,000
23,000
2,80,000
3,18,000
Required : Prepare Schedule of Changes in working capital

7.
Following Balance Sheet of Palash Ltd. as at March 31, 2002-2003

Balance Sheet of Palash Ltd. as at March 2002 and 2003
Liabilities
March 31, 2002

Rs.
March 31, 2003

Rs.
80,000
14,500
9,000
1,000
85,000
24,500
5,000
5,000
1,300
1,04,500
1,20,000
50,000
24,000
9,000
17,500
4,000
50,000
34,000
7,000
20,800
9,000
1,04,500
1,20,000

Profit and Loss Appropriation
Accounts Payable
Mortgage
Provision for doubtful debts
Total
Assets and Properties
Land and Building
Plant and Machinery
Stock on hand
Accounts Receivables
Cash at Bank
Total
Required : Prepare Schedule of Changes in Working Capital.

8.
Following are the Balance Sheets of Pawan Hans Ltd. as at 31st March, 2002
and 2003.
Balance Sheet of Pawan Hans Ltd. as at March 31, 2002 and 2003
Liabilities
Share Capital
Accounts Payable
Accrued expenses
Income Tax payable
Retained earnings
Total
2002
Rs.
2003
Rs.
90,000 1,11,000
60,000
54,000
6,000
12,000
3,000
3,300
37,950
40,950
1,96,950 2,21,250
Assets
2002
Rs.
2003
Rs.
Cash at bank
15,000
18,000
Accounts Receivable 42,000
42,000
Stock on hand
66,000
24,000
Prepaid Rent
450
300
Prepaid Insurance
600
750
Prepaid property tax
900
1,200
Land
12,000
24,000
Building and
Equipment
90,000 1,44,000
less Accumulated
Depreciation
(30,000) (33,000)
Total
Required : Schedule of Changes in Working Capital
1,96,950 2,21,250
200
ACCOUNTANCY
Funds from Operations
9.
Following are the balances extracted from the Profit and Loss account for the
year ended March 31, 2000 of Surbhi Ltd.
Profit and Loss Account of Surbhi Limited
Particulars
Rs.
Expenses Paid
1,50,000
Depreciation
35,000
Loss on sale of machine
Particulars
Gross Profit
Profit on Sale of Land
Rs.
8,00,000
30,000
2,000
Goodwill
10,000
Net Profit
6,33,000
Total
8,30,000
8,30,000
10. The net income of Fresh Dairy Ltd. for the year ended March 31, 2003 was
Rs. 14,87,000. The income was arrived at after adjusting the following :
(i)
depreciation on tangible assets Rs. 86,000 and amortization of goodwill
and patents Rs. 18,000.
(ii)
writing-off preliminary expenses Rs. 5,000.
(iii) loss on sale of old furniture Rs. 800 and on old machinery Rs. 4,600.
(iv)
payment of interest on debenture Rs. 80,000.
Compute funds from operations.

11. Following are the balances extracted from the Profit and Loss account of Grejim
Ltd. for the year ended March 31, 2003.
Profit and Loss Account of Grejim Ltd.
for the year ended March 31,2003
Particulars
Expenses Paid
and Outstanding
Depreciation
Loss on sale of machine
Discount
Goodwill
Net Profit
Total
Rs.
6,000
Particulars
Gross Profit
Gain on sale of land
Rs.
9,000
1,200
1,400
80
4
400
2,316
10,200
Total
10,200
Hint : Discount is assumed to be discount allowed to customers.

Required : Calculate funds from operation.
12. Following is the Profit and Loss account of Aakash Ltd. for the year ended
March 31, 2003.
201

Profit and Loss Account of Aakash Ltd.
for the year ended March 31,2003
Particulars
Rs.
Depreciation
Discount on issue of share
Goodwill (written off)
Business expenses
Net Profit
Total
900
200
400
2,200
650
2,500
5,650
12,500
Particulars
Rs.
Gross Profit
Profit on sale of plant
Total
8,500
4,000
12,500
Requird : Calculate Funds from operation

13.
Following is the Profit and Loss account of Apple Ltd.

Profit and Loss Account of Apple Ltd.
Particulars
Rs.
Salaries to employees
Rent
60,000
22,500
Provision for bad debts

written-off
Goodwill written-off
Depreciation on machinery
Loss on sale of plant
Book Balance
15,000
Sold for
12,000
Provision for Taxation
Net Profit
7,500
15,000
Total
Particulars
Gross Profit
Profit on sale of
buildings :
Sold for
15,000
Book Value 7,500
Rs.
1,50,000
7,500
7,500
7,500
3,000
7,500
27,000
1,57,500
Total
Required : Calculate Funds from operation

14. Following is the Profit and Loss Account of Sapphire Ltd.
1,57,500
202
ACCOUNTANCY
Profit and Loss Account of Sapphire Ltd.
for the year ended 2000
Particulars
Rs.
Particulars
Salaries
Expenses
Depreciation
Loss on sale of furniture
Net Profit
50,000
12,000
30,000
5,000
2,18,000
Gross Profit
Profit on sale of plant
and equipments
Interest received
Total
3,15,000
Total
Rs.
3,00,000
12,000
3,000
3,15,000
Hint : Interest received will be treated as non-operating income, because the

firm does not seem to be involved in financial business.
Required : Ascertain Funds from operation
15. During the year 2001 Kocher Txt. Ltd. earned a profit of Rs. 1,75,720 after
adjusting the following :
(i)
Depreciation written off as follows : Plant Rs. 12,800 and Furniture

Rs. 2,500.
(ii) Profit on sale of fixed assets Rs. 15,000.
(iii) Discount on issue of debenture written off Rs. 20,000.
(iv) Investment costing Rs. 30,000 were sold for Rs. 28,000
(v) Preliminary expenses appears in the books at Rs. 40,000; out of that 20
per cent has been written off.
(vi) Proposed dividend Rs. 50,000.
(vii) Dividend received Rs. 2,500.
(viii) Transfer to sinking fund Rs. 20,000.
Required : Ascertain the funds from operation.
Cash Flow Statement
16. Valcano Ltd reported net income of Rs. 84,50,000 in 2003. Depreciation for
the year was Rs. 14,95,000 debtors at the end of the year were Rs. 87,000
more than that in the beginning of creditors increased by Rs 43,000 over the
year and stock decreased by Rs. 9,000 over the year. Compute net cash provided by operating activities.
17. For each of the following items, state how it should be reported in the cash
flow statement for the year :
(i)
Issue of 20,00,000 equity shares of Rs. 10 each at a premium of Rs. 4

per share,
(ii)
Purchase of equipment for Rs. 4,85,000
(iii) Sale of old equipment for Rs. 87,000 (book value Rs. 98,000)
(iv)
Declared and paid dividend Rs. 1,25,000.
(v)
Received interest Rs. 18,000 on investment.
18. Following are the comparative balance sheets of Mudra Ltd. as at

March 31,2000 and 2001.
203

Balance Sheet of Mudra Ltd. as at March 31, 2000 and 2001
Liabilities
2000
Amount
Rs.
2001
Amount
Rs.
Assets
Share Capital
Debenture
Provision for
Doubtful debts
Profit and Loss
1,40,000
24,000
1,400
1,48,000
12,000
1,600
20,080
21,120
Cash on hand
Accounts Receivable
Stock in Trade
Land
Goodwill
Total
2,06,200
2,06,400
Total
2000
Amount
Rs.
2001
Amount
Rs.
18,000
29,800
98,400
40,000
20,000
15,600
35,400
85,400
60,000
10,000
2,06,200
2,06,400
Required : Calculate : (1) Operating Net Profit (2) Cash from Operation.
19.
Read the following data carefully :

Summarised Balance Sheet of Plastic Product Ltd.
as at March 31, 200 and 2001
Liabilities
Accounts payable
Bills payable
Other current
Liabilities
6% Debentures
Profit and Loss
Total
On
31-3-2000
Amount
Rs.
On
31-3-2001
Amount
Rs.
20,000
20,000
40,000
25,000
5,000
45,000
60,000
80,000
80,000
1,10,000
2,20,000
2,65,000
Assets
Cash on hand
Marketable
Securities
On
On
31-3-2000 31-3-2001
Amount
Amount
Rs.
Rs.
20,000
10,000
40,000
30,000
Stock on hand
Accounts Receivable
Gross Block
30,000
30,000
1,00,000
45,000
40,000
1,40,000
Total
2,20,000
2,65,000
Required : (1) Calculate net operating Profit

(2) Cash from operations
20. The following is the comparative balance sheet of Sundram Ltd.
Balance Sheet of Sundram Ltd.
as at March 31, 2000, 2001
Liabilities
Share Capital
Profit & Loss
Accounts payable
Mortgage Loans
Total
31-03-02 31-03-03 Assets

Amount
Amount
Rs.
Rs.
48,000
51,000 Cash at Bank
85,00 1,05,000 Accounts Receivable
5,400
6,000 Stock on hand
2,800
10,000 Land
Plant
1,41,200 1,72,000 Total
Required : (1) Operating net Profit

(2) Calculate Cash from operations
(3) Prepare Cash flow statement.
31-03-02 31-03-03
Amount Amount
Rs.
Rs.
2,400
5,400
99,000 1,19,000
5,400
4,200
20,000
20,000
14,400
23,400
1,41,200 1,72,000
204
ACCOUNTANCY
21. Consider the following information.

Liabilities
2002
Amount
Rs.
2003
Amount
Rs.
Assets
Equity share
Capital
Accounts Payable
Bills Payable
General Reserve
Profit & Loss
Appropriation
50,000
60,000
Cash on hand
10,000
8,000
6,000
22,000
5,000
10,000
40,000
55,000
Bank at bank
Accounts Receivable
Land
Building
Machinery
1,14,000
1,52,000
Total
Total
2002
Amount
Rs.
2003
Amount
Rs.
3,000
5,000
8,000
9,000
10,000
50,000
34,000
14,000
12,000
16,000
70,000
35,000
1,14,000
1,52,000
Required : Prepare Cash flow Statement

Funds Flow Statement
22. Following is the comparative Balance Sheet of Kota Stone Ltd.
Balance Sheet of Rama Textiles Ltd. as at 31, 2002, 03
Liabilities
Amount
2002
Amount
Rs.
2003
Share Capital
Profit and Loss
Appropriation
Accounts Payable
Mortgage
2,40,000
2,55,000
43,500
27,000
-
73,500
15,000
15,000
Total
3,10,500 3,58,500
Assets
2002
Amount
Rs.
2003
Amount
Rs.
Land and
Building
Plant
Stock on hand
Cash on hand
1,50,000
1,50,000
75,000
24,000
13,500
1,05,000
18,000
28,500
Total
3,10,500
3,58,500
Rs.
Required : Prepare Fund Flow Statement.

23. Following is the Balance Sheet of Kumars Ltd.
Balance Sheet of Kumars Ltd. as at March 3, 2002, 2003
March 31
2002
Rs.
March 31
2003
Rs.
Capital
Accounts Payable
Mortgage
1,60,000
29,000
18,000
-
1,70,000
49,000
10,000
10,000
2,07,000
2,39,000
205
Assets
Land and Buildings
Plant and Machinery
Stock on hand
Accounts Receivable
Cash at Bank
1,00,000
48,000
18,000
33,000
8,000
1,00,000
68,000
14,000
39,000
18,000
2,07,000
2,39,000
Required : Prepare Fund Flow Statement.

24.
Following is the balance sheet of R. K. Enterprises Ltd.

Balance Sheet of R.K. Enterprises Ltd. as at March 31, 2002, 2003
Liabilities
Capital and Liabilites

Accounts Payable
Mortgage
Provision for Doubtful Debts
Total
Assets
Land and Buildings
Plant and Machinery
Stock on hand
Accounts Receivable
Cash at Bank
Total
March 31
2002
Rs.
March 31
2003
Rs.
80,000
14,500
9,000
1,000
85,000
24,000
5,000
5,000
1,300
1,04,500
1,20,800
50,000
24,000
9,000
17,500
4,000
50,000
34,000
7,000
20,800
9,000
1,04,500
1,20,800
Required : Prepare Funds flow Statement

25. Following is the balance of Mahindra Films Ltd. as at March 31, 2002, 2003
Ltd.
Assets
Furniture (at cost)
Less : Depreciation Reserve
Stock
Account Receivable
Cash at Bank
Prepaid Expenses
Total
31-03-2002
40,000
18,000
31-03-2003
50,000
23,000
22,000
70,000
17,000
12,000
2,500
27,000
78,000
16,000
34,000
1,600
1,23,500
1,56,600
206
ACCOUNTANCY
Liabilities
Preference Share Capital
Profit and Loss Account
Accounts Payable
Total
50,000
25,000
20,000
28,500
1,00,000
37,000
19,600
1,23,500
1,56,600
Required : Prepare funds flow Statement

26. The Balance Sheets of Super Six Limited as on March 31, 2002 and 2003 are
as follows :
Balance Sheet of Super Six Limited as at March 31, 2002, 2003
Liabilities
Securities Premium
General Reserve
Profit and Loss Account
5% Debentures
Income Tax
Accounts Payable
Total
2002
Rs.
2003
Rs.
80,000
8,000
6,000
19,500
9,800
33,500
1,20,000
12,000
9,000
20,800
26,000
10,900
36,400
1,56,800
2,35,100
55,400
35,600
2,400
22,100
36,500
4,800
1,13,200
51,300
1,500
26,000
39,100
4,000
1,56,800
2,35,100
Assets
Freehold Premises
Plant and Machinery
Furniture and Fixtures
Stock on hand
Accounts Receivable
Bank Balance
Total
Depreciation written off during the year 1989 was :
Plant and Machinery
Rs. 12,800
Furniture and Fixtures
Rs. 400
Required : Prepare a funds flow statement, showing your computation of
funds from operation.
27. The Following are the Balance Sheets of M/s Rajdhani Corporation Ltd. as on
31st March, 2001 and 2002.
207
Liabilities
2001
Rs.
Equity Share
Capital
11% Preference
Shares (Redeemable)
General Reserves
Profit and Loss
Proposed Dividend
Bills Payable
Outstanding
Expenses
Provision for
Taxation
Total
2002
Rs.
Assets
2001
Rs.
2002
Rs.
80,000 1,20,000
Goodwill
Land & building
20,000
40,000
16,000
20,000
40,000
8,000
7,200
11,200
14,000
3,200
20,000
12,000
10,800
15,600
21,200
2,400
Plant
Investments
(Long-term)
Sundry Debtors
Stock on hand
Cash on hand
Preliminary
Expenses
36,000
76,400
4,000
30,000
34,000
6,800
4,000
14,000
43,200
31,200
11,200
2,800
11,200
12,800
1,74,800
2,14,800
1,74,800 2,14,800
Total
Required : Prepare a schedule of changes in working capital and statement

of flow of funds. Show working notes also.
28. Following is the balance sheet of Maya & Sons as at 31st March 2001 and
31st March 2002.
Liabilities
31-3-2001
Rs.
31-3-2002
Rs.

Securities Premium
General Reserve
Profit and Loss
Debenture
Bills Payable
Accounts Payable
1,50,000
50,000
20,000
1,00,000
25,000
35,000
2,000
2,00,000
5,000
60,000
35,000
75,000
20,000
40,000
1,000
Total
Assets
3,82,000
4,36,000
Goodwill
Furniture (Cost)
Less : Depreciation
10,000
50,000
28,000
8,000
60,000
34,000
Long-term investments
Stock on hand
Accounts Receivable
Cash at Bank
Discount on Debenture
22,000
40,000
2,54,000
31,000
22,000
3,000
26,000
52,000
2,89,000
28,000
31,000
2,000
Total
3,82,000
4,36,000
Required : Prepare funds flow Statement
208
29.
ACCOUNTANCY
Following is the Balance Sheets of M/s Taran & Co. as on March 31, 2002 and
March 31, 2003 were as follows :
Assets
March 31, 2002

Rs.
March 31, 2003

Rs.
80,000
5,00,000
1,00,000
1,50,000
20,000
8,50,000
1,20,000
8,00,000
75,000
1,60,000
20,000
11,75,000
5,00,000
1,00,000
50,000
1,53,000
40,000
7,000
7,00,000
1,60,000
70,000
1,90,000
50,000
5,000
8,50,000
11,75,000
Land and Buildings

Plant and Machinery
Stock on hand
Accounts Receivable
Cash
Liabilities and Capital
Share Capital
Profit and Loss and Account
General Reserve
Accounts Payable
Bills Payable
Additional Information given by the company is :

(i)
Rs. 50,000 depreciation has been charged to Plant and Machinery during the year, 2003
(ii)
A piece of machinery was sold for Rs. 8,000 during 1989. It had cost Rs.
12,000 depreciation of Rs. 7,000 had been provided on it.
Required : Prepare a schedule of changes in working capital and a statement

of funds flow.
30. Read the data carefully :
Balance Sheet as on March 31, 2001 and 2002
Liabilities
General Reserve
Profit and Loss
Accounts Payable
Short-term Loan
Provision for Tax
Provision for
Doubtful Debts
Total
2001
Rs.
2002
Rs.
6,00,000
1,04,000
76,000
48,000
7,200
96,000
6,00,000
1,08,000
78,000
32,400
4,800
1,08,000
2,400
3,600
Assets
Goodwill
Land
Building
Short-term
Investments
Stock on hand
Accounts
Receivable
Cash at Bank
9,33,600 9,34,800
2001
Rs.
2002
Rs.
72,000
2,40,000
2,22,000
60,000
72,000
2,16,000
2,16,000
66,000
1,80,000
1,20,000
1,40,000
1,33,200
39,600
91,200
9,33,600 9,34,800
Additional Information : (a) A piece of land has been sold for Rs. 24,000, (b)
Depreciation of Rs. 42,000 had been charged to Building, (c) An Interim
Dividend paid the year Rs. 30,000.
Required : Prepare Funds flow statement
209

31.
Read the data carefully :

Balance Sheet of Ruchita Creation Ltd.
as at on March 31 2001 and 2002
Liabilities
2001
Rs.
2002
Rs.
Equity Share Capital 1,60,000

Pref. Share Capital
40,000
General Reserve
8,000
Profit & Loss A/c
4,800
13% Debentures
28,000
Creditors
44,000
Provisions for Tax
16,800
Proposed Dividend
23,200
Bank Overdraft
27,200
1,10,000
50,000
8,000
4,000
24,000
48,000
12,000
20,000
50,000
Assets
2001
Rs.
2002
Rs.
Fixed Assets
Less : Accum.
Depreciation
1,60,000
1,64,000
(60,000)
(44,000)
Debtors
Stock
Prepaid Expen
Cash at Bank
1,00,000
96,000
2,000
14,000
1,20,000
80,000
1,200
4,800
3,52,000 3,26,000
3,52,000 3,26,000
Additional Information : (a) Taxes paid Rs. 14,000 (b) Fixed assets sold for
Rs. 20,000, their, cost Rs. 40,000 and accumulated depreciation till date of
sale on them Rs. 12,000, (c) An interim Dividend paid during the year Rs.
18,000.
Required : Prepare funds flow statement
32. The balances in Equipment account and Accumulated depreciation account
as on March 31, 2002 and 2003 are given below :
Balance as at
Equipment
Accumulated depreciation
March 31, 2002
March 2003
65,00,00
78,70,000
10,80,000
16,32,000
The Equipment costing Rs. 12,30,000 accumulated depreciation thereon Rs.

7,18,000 was sold for Rs. 4,68,000.
Required :
(i)
Compute the amount of equipment purchased, depreciation charged for

the year and toss on sale of equipment.
(ii)
How each of the item related to the equipment will be reported in

statement of cash flows.
33. The net income of Blue Sky Ltd. for the year ended March 31, 2003 was Rs.
4,89,000. Depreciation charged for the year was Rs. 87,000. Income for the
year was arrived at after adjusting for gain on sale of land Rs. 1,05,000, loss
on sale of equipment Rs. 48,000 and writing off cost of equity issue Rs. 25,000.
The current assets and current liabilities of Blue Sky Ltd. as at March 31,
2002 and 2003 are given here :
210
ACCOUNTANCY
March 31
2002
March 31
2003
Stocks
1,85,000
1,67,000
Receivables
1,42,000
1,45,000
Prepaid Expenses
12,000
8,000
Cash in hand and at bank
87,000
1,02,000
Payables
95,000
1,07,000
Expenses outstanding
13,000
9,000
Required : Prepare cash flow statement

34.
Balance Sheets of Flowers Ltd. as at March 31,2002 and 2003 are given
below :
Balance Sheet of Flowers Ltd. as at March 31, 2002, 2003
2002
Rs.
2003
Rs.
15,00,000
17,50,000
Liabilities & Equity

Equity share capital
Reserves & Surpluses
9% Debenture
3,90,000
6,27,000
10,00,000
10,00,000
67,000
1,20,000
Accounts Payable
18,000
23,000
29,75,000
35,20,000
Rs
Rs
10,00,000
13,00,000
8,00,000
9,00,000
Accumulated Depreciation on Buildings
(1,20,000)
(1,60,000)
Equipment
14,00,000
16,50,000
(4,35000)
(5,80,000)
Assets
Land
Buildings
Accumulated Depreciation on Equipments

Furniture & Fitting
85,000
1,25,000
Accumulated Depreciation on Furniture
(17,000)
(38,000)
Accounts Payable
1,28,000
1,43,000
Cash on hand
47,000
84,000
29,75,000
35,20,000
(i)
Cash dividends declared and paid Rs 1,50,000.
(ii)
25,000 Equity shares of Rs 10 each were issued for cash at a premium of

Rs. 2 per share.
211
(iii) Equipment costing Rs 2,20,000 (accumulated depreciation Rs 1,20,000)

was sold at a loss of Rs 15,000
Required :
(i)
Compute net change in working capital.
(ii)
Prepare funds flow statement.
(iii) Prepare statement of cash flows.

35. The balance Sheet and income statement of Orange Ltd. are presented below :
Balance Sheet of Orange Ltd.
Assets
Rs.
Fixed Assets
7,80,000
Less Accumulated
3,00,000
Rs.
Rs.
Rs.
9,75,000
4,80,000
2,40,000
7,35,000
Depreciation
Stock on hand
78,000
93,000
Accounts Receivable
85,000
1,02,000
Cash on hand
47,000
95,000
6,90,000
10,25,000
Rs.
Rs.
3,00,000
5,00,000
Reserves & Surpluses
1,18,000
3,74,000
10% Debenture
2,00,000
1,00,000
Debenture Redemption
Premium
20,000
10,000
Accounts Payable
38,000
32,000
Outstanding expenses
14,000
09,000
6,90,000
10,25,000
Equity and liabilities
(i) Cash dividends paid Rs. 45,000.
(ii)
Equipment purchased for cash Rs. 4,00,000
(iii) Old piece of machinery was sold for Rs. 45,000 at a loss of Rs. 20,000
(iv)
Equity share capital was issued for cash at par.
(v)
Debentures were redeemed at a premium of 10%.
Required
(i)
Prepare schedule of changes in working capital and statement of changes

in financial position.
(ii)
Prepare statement of Cash flows.
212
ACCOUNTANCY
Answers
4.
Net Increase in Working Capital
Rs.
5,000
5.
Rs.
85,000
6.
Rs.
47,000
7.
Rs.
10,000
8.
Net Decrease in Working Capital
Rs.
39,000
9.
Rs.
6,50,000
10.
Rs.
16,01,400
11.
Rs.
2,996
12.
Rs.
6,000
13.
Rs.
60,000
14.
Rs.
2,38,000
15.
Rs.
2,73,520
16.
Cash provided by operating

activities
Rs.
99,10,000
17.
Cash inflow from financing

activities
Rs.
2,80,000
Cash used for investing activities
Rs.
4,85,000
18.
19.
20.
21.
22.
23.
Cash inflow from investing activities
Rs.
87,000
Cash used for financing activities
Rs.
1,25,000
Rs.
18,000
Operating net profit
Rs.
11,040
Cash from operation
Rs.
21,600
Rs.
30,000
Cash from operation
Rs.
10,000
Rs.
20,000
Total Cash flow statement
Rs.
14,400
Rs.
19,000
Total Cash flow statement
Rs.
46,000
Increase in Working Capital
Rs.
30,000
Rs.
30,000
Total funds flow statement
Rs.
60,000
Rs.
24,200
Total of fund flow statement
Rs.
30,200
213

24. Increase in Working Capital
Rs.
10,000
Rs.
10,000
Total of funds flow statement
Rs.
20,000
Rs.
37,000
Rs.
22,000
Total of funds flow statement
Rs.
72,000
Rs.
1,700
Rs.
17,500
Total funds of statement
Rs.
88,000
Rs.
6,800
Rs.
28,400
Total funds flow statement
Rs.
88,400
28. Total funds flow statement
Rs.
1,46,000
29. Decrease in Working Capital
Rs.
60,000
Rs.
1,27,000
30. Total fund flow statement
Rs.
2,10,000
31. Total fund flow statement
Rs.
1,70,800
32. (i)
Equipment purchased
(It will reported as cash used
for investing activities)
Rs.
26,00,000
Loss on sale of equipment

(it will be added to net income
for compuring cash flow from
operating activities)
Rs.
44,000
33. Cash provided by operating activities
Rs.
5,71,000
34. (i)
Net changes in Working Capital
Rs.
3,000
Rs.
6,78,000
Rs.
10,93,000
Total uses of funds
Rs.
10,90,000
(iii) Cash provided by

operating activities
Rs.
8,02,000
Rs.
8,25,000
Rs.
60,000
(ii)
(ii)
Total source of funds
214
35.
ACCOUNTANCY
Net increase in Working Capital
Rs.
91,000
Rs.
4,01,000
Total sources of funds
Rs.
6,46,000
Total uses of funds
Rs.
5,55,000
Rs.
3,55,000
Rs.
45,000

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CHAPTER 4

The users of financial statements are

Most often, investors are

Such statements are called Statement of Changes in Financial Position

STATEMENT OF CHANGES IN FINANCIAL POSITION

Current Liabilities are those obligations which are expected to be

Equity and Non-Current Liabilities

Funds are to be computed by substracting the total of current liabilities (component 2)

Balance Sheet of Ram Rahim Ltd. as at March 31, 2002

Reserve and Surpluses

Plant and Machinery at cost

Current Liabilities : Account

Bills payable Accrued Expenses

STATEMENT OF CHANGES IN FINANCIAL POSITION

= Rs. [4,66,000 2,13,000]

Bills Payable Accrued Expenses

= Rs. (1,71,200 + 72,000

Net Working Capital (as on 31.03.2002)

= Rs. [6,05,000 2,71,000]

4.2 Flow of Funds

Exhibit 4.1 : Transaction resulting in change in funds

Equity and Non-current

Exhibit 4.2 : Transactions not affecting funds

If a transaction results in net increase in current assets or net decrease in

Goods purchased on cash

Paid amount due to creditors

(iii) Debenture issued for cash

Sold old furniture for cash

STATEMENT OF CHANGES IN FINANCIAL POSITION

(iii) This transaction will result in increase in debenture (long-term) and

This transaction will result in decrease in furniture (fixed assets) and

4.2.1 Schedule of Changes in Net Working Capital

Transactions which result in change in net working capital, and

(ii) Transactions which do not result in change in net working capital.

Effect on Net Working capital

* C.A. (0) Current Assets at beginning of period

STATEMENT OF CHANGES IN FINANCIAL POSITION

Plant and Machinery

Equity Share Capital

Reserve & Surpluses

Cash on hand and at bank

Required : Prepare schedule of changes in working capital.

4.3 Statement of Changes in Financial Position

STATEMENT OF CHANGES IN FINANCIAL POSITION

Sources of net working capital

Net Working Capital

uses of working capital

Sale of long-term assets

Purchase of long term assets

4.3.2 Preparation of Statement of Changes in Financial Position

Compute funds from operations

Depreciation, Depletion and Amortisation of intangible assets;

Amortisation of discount on issue of debenture, preliminary expenses,

Loss on sale of non-current assets.

STATEMENT OF CHANGES IN FINANCIAL POSITION

Selling and Distribution

Required : Compute funds from operation.

Net profit for the year

Funds from Operation

Profit and Loss Appropriation (Cr.)

Preliminary Expenses (Dr.)

* Relevant items only