Why we prepare fund flow statement

The balance sheet and income statement are

the traditional basic financial statement of business enterprises. The serious limitation of these statement is that they don't provide information regarding the changes in the firms financial position during a particular period of time. They fail to answer the following questions:

Contd..
What funds are available during accounting year

and for what purpose these funds were utilized. How long term sources been adequate to finance fixed assets purchase. Does the firm posses adequate working capital How much funds are been generated from operations. Why did firm not pay dividend inspite of adequate profit?

FUNDS : WORKING CAPITAL FLOW OF FUNDS: THE TERM FLOW MEANS CHANGE AND THEREFORE THE TERM FLOW OF FUNDS MEANS CHANGES IN FUNDS OR CHANGES IN WORKING CAPITAL. IN OTHER

WORDS, ANY INCREASE OR DECREASE IN

WORKING CAPITAL MEANS FLOW OF FUNDS.

FUNDS FLOW STATEMENT Funds flow statements is dealt by Accounting Standard 7 . . Meaning :- It explains changes in funds or changes in working capital . It explains the working capital position of the company which gives an idea to the top management about the liquidity position of the company. Working capital:- It is the difference between current assets and current liabilities. Steps in preparation of funds flow statement:1. Preparation of working capital statement that explains increase or decrease in working capital. 2. preparation of funds from operation statement in which we find out operating profit. 3. Preparation of funds flow statement that shows various sources and application of fund .

Current assets Cash in hand and bank Marketable investments Accounts receivables Stock Prepaid exp.

Fixed assets Goodwill Land and building Plant and machinery Long term investment

Current liabilities Bank overdraft Outstanding expenses Accounts payable

Fixed liabilities Share capital Reserve and surplus Debentures Long term loans

Flow in fund

Not flow in funds

USES OF FUNDS FLOW

WHY THE LIQUID POSITION OF THE BUSINESS

BECOMING MORE AND MORE UNBALANCED IN SPITE OF COMPANY IS MAKING MORE AND MORE PROFITS. WHERE HAVE THE PROFIT GONE WHAT WILL BE THE SOURCES FOR DIVIDEND IF COMPANY IS NOT EARNING SUFFICIENT PROFIT WHAT ARE THE SOURCES OF REPAYMENT OF THE LOAN TAKEN HOW MUCH FUNDS GENERATION THROUGH NORMAL BUSINESS OPERATION.

 IN WHAT WAY THE MANAGEMENT HAS UTILIZED

THE FUNDS IN THE PAST AND WHAT ARE GOING TO BE LIKELY USES OF FUNDS ?

Funds flow Analysis

This statement is based on the working Capital concept of funds. It measures the inflows and outflows of working capital resulting from different transactions. Funds flow statement measures and presents in an analytical manner the summarized version of the numerous flows of funds for a specific period. Funds Flow is the change in Working Capital

Format of Schedule of changes in Net Working Capital

Beginning year End Year Increase in C.A. &Decrease in C.L. Decrease in C.A. &Increase in C.L.

A.

Current Assets

Cash Debtors Bills Receivable Stock Prepaid Expenses Total Current Assets B Current Liabilities Short term loans Creditors Bank overdraft Bills payable Outstanding expenses Total C.L. WORKING CAPITAL (A-B) Increase/Decrease in W.C.

FUND FLOW STATEMENT

SOURCES OF FUND Fund from operation Issue of shares Issue of debentures Sale of fixed assets/ investment Non trading receipts Long term loans Decrease in working capital AMOUNT USES OF FUND Loss from operation Redemption of shares Redemption of debentures Repayment of long term loans Purchase of Fixed Assets/ Investment Payment of dividend and taxes Increase in working capital AMOUNT

FUND FROM OPERATION

The profit made by the firm through normal

operation is a major source of funds. The amount of sales as shown in P&L A/c is a source of fund by way of increase in cash, debtors, and B/R.

Profit & Loss Adjustment A/c

Particulars
To Depreciation To Loss on sale of fixed assets To Under writing commission To Discount on issue of shares and debentures To Preliminary Expenses written off To Goodwill written off To Patent or trademark To Deferred revenue expenses To Balance c/d

Amount Particulars
By Balance b/d By Profit or gain on fixed assets By Dividend received By Interest received on investment By Profit on revaluation of assets FUND FROM OPERATION

Amount

NUMERICAL
From the following information prepare schedule of changes in net working

capital for the year ended on 31st dec,2008 Particulars Cash Bank Debtors Bills Receivable Stock Creditors Outstanding Expenses 1-1-2008 10,000 40,000 25,000 5,000 22,000 10,000 2,000 31-12-2008 12,000 30,000 45,000 2,000 22,000 8,000 2,500

NUMERICAL
From the following information prepare schedule of changes in net working

capital for the year ended on 31st March, 2009 Particulars Bank overdraft Creditors Bank Loan Cash Debtors Stock Proposed Dividend 31-03-2008 ____ 3,10,000 1,00,000 30,000 2,10,000 2,00,000 45,000 31-03-2009 5,000 2,90,000 75,000 10,000 1,80,000 2,25,000 60,000

NUMERICAL
From the following information of M/s XYZ Ltd. Prepare a Schedule of

Changes in Net Working Capital and Fund Flow Statement LIABILITIES Share Capital Reserves & Surplus Debentures Creditors Unclaimed Dividends 2008 30,000 14,000 5,000 11,000 2009 36,000 19,000 -9,000 ASSETS Plant Machinery Stock Debtors Cash 2008 6,000 25,000 12,000 15,000 2,000 ______ 60,000 2009 5,000 20,000 18,000 19,000 3,000 ______ 65,000

--______ 60,000

1,000 ______ 65,000

Cash Flow Statement

MEANING:- It is the statement depicting change in cash possession from one period to another. It explains the reasons for inflows or out flows of cash. Steps in prepration Statement of cash from operation in this we will find out the cash profit of the company Preparation of cash flow statement in which we will explain various in flows and out flows of cash. Here we will take the opening cash balance of the company and add various inflows to it and deduct various outflows. Finally we will get the closing cash balance of the company. Uses of Cash Flow Statement: Helps in efficient cash management Helps in Internal Financial Management Discloses the movement of cash Discloses success or failure of cash planning.

Cash Flow Analysis

Cash flow includes cash inflows and outflows cash receipts and cash payments during a period. A cash flow statement is a statement which portrays the changes in cash position between two accounting periods. It helps in taking short term financial decisions and also in the preparation of cash budget for the next year.

How Cash Flow Differ From funds Flow ?

Unlike funds flow Cash Flow does not has non-cash items. It comprises only those entries in which cash has come in or gone out.

Statement Of Cash From Operations

Net Profit Before Tax

330.22

(Add) Non-cash Expenses

Depreciation Interest Payable Amortizations Provisions

35.15 12.52 33.86 80.80

(Less) Non-cash Incomes

Profit on sold Assets

43.19

Cash From Operations

449.36

Cash Flow Statement

Inflow Of Cash

Outflow Of Cash

Opening Cash Balance Trade Payables Deposits Sale Of Fixed Assets Sale Of Investments Long Term Borrowings Cash From Operations

555.36 1119.70 1220.34 43.50 42.85 2253.02 449.36

Advances Direct Taxes Paid Payments For Extraordinary Items Purchase Of Fixed Assets Purchase Of Investments Interest Paid Closing Cash Balance Trade And Other Receivables

3180.69 137.00 2.80 32.91 529.80 12.52 593.61 1194.80

5684.13

5684.13