Chapter 7 Funds Analysis, Cash Flow Analysis, and Financial PlanningIntroduction: Cash flow and financial distressIn China, most ST firms get into financial distress. If they could not get financial help soon they will not stand of feetBut why does they get themselves in such a hell ? They have got much money with IPO. 304051820053.3910122.612001Study ObjectivesFlow of funds statementAccounting statement of cash flowsCash-flow forecastingRange of cash-flow estimatesForecasting financial statements1.Flow of funds statementsFlow of funds statement is a summary of a firms changes in financial position from one period to anotherWHY do we need a flow of funds statement?By arranging a companys flow of funds in a systematic fashion, the analyst can better determine whether the decisions made for the firm resulted in a reasonable flows of funds or in questionable flows, which warrant future inspection(1)What is funds?Funds: all of the firms investments and claimsWe define funds as the claims and investments because many important transactions are not reported in cash(2)What does flow of funds tell us?The sources and uses of funds during a period of timeThe firms flow of funds is therefore comprised of the individual changes in balance sheet items between two points in timeThe flow of funds statement portrays net rather than gross changes, although an analysis of the gross funds flow of a firm over time would be much more revealing than analysis of net funds flow, we are usually constrained by the financial information available(3) What are source? Uses?Sources of funds: any decrease in an asset item or any increase in an claim itemUses of funds: any increase in an asset item or any decrease in a claim itemSee Table 7-1 the determination of sources and uses(4) AdjustmentsIn the former computation, the change in fixed assets and retained earnings is a mixed result of changes, and what we want is detailed information of changes in these itemsSee computation: page 175(5) Implications of funds of statement analysisImbalances in the use of funds can be detected and appropriate actions undertakenAn analysis of the major sources of funds in the past reveals what portions of the firms growth were financed internally and externallyWe can judge whether the firm has expanded at too fast a rate and whether the firms financing capability is strained2. Accounting statement of cash flowStatement of cash flow is a summary of a firms cash receipts and cash payments during a period of timeThe purpose of the statement of cash flow is to report a firms cash inflows and outflows, during a period of time, segregated into three categories: operating, investing, and financing activities(1) The usefulness of statement of cash flowIt helps the financial manager to assess and identify:A companys ability to generate future net cash inflows from operations to pay debts, interest, and dividendsA companys need for external financingThe reasons for differences between net income and net cash flow from operating activitiesThe effects of cash and noncash investing and financing transactions(2) Contents of the statementThe statement of cash flows explains changes in cash (and cash equivalents) by listing the activities that increased cash and those decreased cashEach activitys cash inflow or outflow is segregated according to one of three broad category types: operating, investing, or financing activityTable 7-4 (page 178) lists the activities found most often in a typical statement of cash flows(3) Alternative forms of the statementThe cash flow statement may be presented using either a direct method or an indirect method. The only difference between the direct and indirect methods of presentation concerns the reporting of operating activities; the investing and financing activity sections would be identical under either method(4) Analyzing the statement of cash flowOperating cash inflow, dividend and investment outflowSales revenue inflow, inventory and employee wages outflowAnalyzing of Aldine: page 1803. Cash-flow forecasting(1)Cash budget: a forecast of a firms future cash flows arising from collections and disbursements, usually on a monthly basisCash flow reveals the timing and amount of expected cash inflows and outflows over the period studied. With this information, the financial manager is better able to determine the future cash needs of the firm, plan for the financing of these needs, and exercise control over the cash and liquidity of the firm.Without cash budget, the firm may run into financial difficulty(2) The preparation of cash budgetSales forecastCollections and other cash receiptsCash disbursementsNet cash flow and cash balanceMeans of meeting the cash deficitsThe sales forecastOften this is done by marketing departmentThis forecast can be based on an internal analysis, an external one, or both.With an internal approach, sale representatives are asked to project sales for the forthcoming period. The product sales managers screen these estimates and consolidate them into sales estimates for product lines. The estimates for the various product lines are then combined into an overall sales estimate for the firm.The basic problem with an internal approach is that it can be too myopic. Often, significant trends in the economy and in the industry are overlookedWith an external approach, economic analysts make forecasts of the economy and of industry sales for several years to come. They may use regression analysis to estimate the association between industry sales and economy in general. The next step is to estimate market share by individual products, prices that are likely to prevail, and the expected reception of new productFrom this information, an external sales forecast can be preparedThe defect of external approach is that the data used in the computation are not always very accurate, most of them are estimated by scholars or experts who are not familiar with product marketsPast experience will show which of the two forecasts is likely to be more accurateIn general, the external forecast should serve as a foundation for the final sales forecast, often modified by internal forecastCollections and other cash receiptsCollections here means to determine the cash receipts from the salesFor cash sales, cash is received at the time of the sale; for credit sales, the receipts comes later. How much later depends on the billing terms, the type of customer, and the credit and collection policies of the firmExample: Table 7-7, page 183Cash receiptsCash receipts may arise from the sale of assets, as well as from external financing and investment income. These cash receipts need estimations or advanced planningCash disbursementsOperation disbursements and other disbursementsOperation disbursements are expenses occurred to maintain operation, such as material, wages, power, interest, tax, etc.How does the firm estimate Operation disbursements ?Sales---production schedules---material purchasing, labor cost, and other expensesExample: Table 7-8 page 184Other disbursementsCapital expenditures: the expenditures involves long-term investment. They are planned in advance, so they are predictable for the short-term cash budgetDividend payments for most companies are stable and are paid on specific dateFederal taxes can be estimated according to the firms sales and incomeNet cash flow and cash balanceAfter having taken all foreseeable cash inflows and outflows into account, we combine the cash receipts and disbursements, and compute the projected cash position by monthIf, in a month there is a cash deficit, the financial manager should take measures to meet this deficit. The feasible measures may including borrowing from bank or delaying capital expenditures or payments for purchasesExampleThe cash manager of Monet Paint are preparing a cash budget for the 6 months from April through September. Their cash management model is based on the following assumptions:Recent and forecasted sales are:Month2(actual)3(actual)4(forecast)5678910

Sales forecast$400000500000600000700000800000800000700000600000500000

Twenty percent of sales are collected in the month of sale, 50% are collected in the month following the sale, and 30% are collected in the second month following the salePurchases are 60% of sales, and purchases are paid for 1 month prior to saleWages and salaries are 12% of sales and are paid in the same month as the saleRent of $10000 is paid each month. Additional cash operating expense of $30000 per month will be incurred for April through July. These will decrease to $25000 for August and SeptemberTax payments of $ 20000 and $30000 are expected in April and July, respectively. A capital expenditure of $150000 will occur in June, and the firm has a mortgage payment of $60000 due in MayThe cash balance at the end of March is $150000. Managers want to maintains a minimum balance of $100000 at all times. The firm will borrow what it needs to achieve the minimum balance. Any cash above the minimum will be used to pay off any loan balance until it is eliminated.Cash receipts budgetmonth456789

sales600000700000800000800000700000600000

Collection(current) 20%120000140000160000160000140000120000

Previous month 50%250000300000350000400000400000350000

2nd month previous 30%120000150000180000210000240000240000

Total cash receipts490000590000690000770000780000710000

Cash disbursement budget

month456789

purchase420000480000480000420000360000300000

Wages and salaries720008400096000960008400072000

Rent100001000010000100001000010000

Cash operating expense300003000030000300002500025000

Tax installments2000030000

Capital expenditures150000

Mortgage payment60000

Total cash disbursement552000664000766000586000479000407000

Cash balance and deficits meetingsmonth456789

Net cash flow-62000-74000-76000184000301000303000

Beginning cash balance150000100000100000100000122000423000

Available balance880002600024000284000423000726000

Monthly borrowing120007400076000

Monthly repayment162000

Ending balance100000100000100000122000423000726000

Cumulative loan balance1200086000162000000

4. Range of cash flow estimatesDepending on the care devoted to preparing the budget and the volatility of cash flows resulting from the nature of the business, actual cash flows will deviate more or less widely from those that are expected.In the face of uncertainty, we must provide information about the range of possible outcomesDeviations from expected cash flowsTo take into account deviations from expected cash flows, it is desirable to work out additional cash budgetWe can change assumptions of cash flow and display new cash budget. For example, different sales volume, price, etc.See figure 7-1, distributions of ending cash balances Use of probabilistic informationThe expected cash position plus the distribution of possible outcomes give us a considerable amount of informationadditional funds required or the funds released under various possible outcomesthe firms ability to adjust to deviations from the expected outcomesFrom the standpoint of internal planning, it is far better to allow for a range of possible outcomes than to rely solely on the expected outcome5.Forecasting financial statementsForecast financial statements are expected financial statements based on conditions that management expects to exist and actions it expects to takeA cash budget gives us information about only the prospective future cash positions of the firm, whereas forecast statements embody expected estimates of all assets and liabilities as well as of income statement itemsMuch of the information that goes into the preparation of the cash budget can be used to derive a forecast income statementSales revenue: sales forecastAssume cost can be divided into fixed cost and variable costCost of goods sold: assume variable costSelling, general and administrative expense: assume fixed costIncome tax: according to tax lawDividend: according to dividend policyForecast asset: assume fixed turnover ratios for receivables and inventoriesFuture net fixed assets are estimated by adding planned expenditures to existing net fixed assets and substracting from this sum the book value of any fixed assets sold along with depreciations during the periodForecasting liabilities: accounts payable according to purchase and payments amounts; wages according to production schedule; shareholders equity according to net profit less dividendExample: page 189-191FUNDS FLOW STATEMENT

This statement gives an overview of how I plan to manage the finances of each year of my M.S. (Computer Science) Programme at the (University Name). The estimated amount of tuition and living expenses for 1 year is US $ 23,422 which is approximately equal to Rs. 11.48 lakhs per year (at the exchange rate 1 US $ = Rs. 49/-).

YEARSEMESTERFUNDS REQUIREDSOURCES OF FUNDSFUNDS ARRANGED

FirstSem 1Aug 2002Rs. 5.74 lakhs33% of current bank balanceRs. 5.8 lakhs

Sem 2Jan 2003Rs. 5.74 lakhs33% of current bank balanceRs. 5.8 lakhs

SecondSem 3Aug 2003Rs. 5.74 lakhs25% of current bank balance30% of Post Office Savings DepositRs. 4.4 lakhs

Rs. 1.5 lakhs

---------------Rs. 5.9 lakhs

Sem 4Jan 2004Rs. 5.74 lakhs60% of Post Office Savings Deposit50% of fixed deposits and recurring deposit with UBI40% of General Provident Fund

Rs. 3.0 lakhs

Rs. 1.6 lakhs

Rs. 1.2 lakhs

---------------Rs. 5.8 lakhs

TOTALRs. 22.96 lakhsRs. 23.3 lakhs

Balance Assets after meeting with all the expenses:

Movable Assets:Rs. 12.68 lakhsImmovable Assets: Rs. 73.52 lakhs-----------------------------------------------------------TOTAL BALANCE ASSETS: Rs. 86.20 lakhs

Besides this, my parents have a steady annual income of about Rs. 8.03 lakhs per year.

(Name of Applicant)

1 2 0Accounting and Financefor ManagersLESSON7FUND FLOW STATEMENT ANALYSISCONTENTS7.0 Aims and Objectives7.1 Introduction7.2 Meaning & Objectives of Fund Flow Statement Analysis7.3 Methods of Preparing Fund Flow Statement7.3.1 Schedule of Changes in Working Capital7.3.2 Net Profit Method7.3.3 Sales Method7.3.4 First Method7.3.5 Second Method7.4 Advantages of Preparing Fund Flow Statement7.4.1 Illustrative Statement of Financing7.4.2 To fulfil the Primary Objective of the Financial Management7.4.3 Facilitation through Financial Planning7.4.4 Guide to Working Capital Management7.4.5 Indicator of Yester Track Path of the Firm7.5 Let us Sum up7.6 Lesson-end Activity7.7 Keywords7.8 Questions for Discussion7.9 Suggested Readings7.0 AIMS AND OBJECTIVESIn this lesson we shall discuss about fund flow statement analysis. After going throughthis lesson you will be able to:(i) understand meaning and objectives of fund flow statement analysis(ii) analyse methods of preparing fund flow statement(iii) discuss advantages of preparing fund flow statement.7.1 INTRODUCTIONEvery business establishment usually prepares the balance sheet at the end of the fiscalyear which highlights the financial position of the yester years It is subject to change inthe volume of the business not only illustrates the financial structure but also expressesthe value of the applications in the liabilities side and assets side respectively. Normally,Balance sheet reveals the status of the firm only at the end of the year, not at thebeginning of the year. It never discloses the changes in between the value position of thefirm at two different time periods/dates.The method of portraying the changes on the volume of financial position is the statementfund flow statement. To put them in nutshell, fund between two different time periods. It isfurther illustrated that the changes in the financial position or the movement or flow of fund.www.jntuworld.com1 2 1Fund Flow Statement Analysis7.2 MEANING & OBJECTIVES OF FUND FLOWSTATEMENT ANALYSISA report on the movement of funds or working capital. In a narrow sense the term fundmeans cash and the fund flow statement depicts the cash receipts and cash disbursements/payments. It highlights the changes in the cash receipts and payments as a cash flowstatement in addition to the cash balances i.e., opening cash balance and closing cashbalance. Contrary to the earlier, the fund means working capital i.e., the differencesbetween the current assets and current liabilities.The term flow denotes the change. Flow of funds means the change in funds or inworking capital. The change on the working capital leads to the net changes taken placeon the working capital i.e., especially due to either increase or decrease in the workingcapital. The change in the volume of the working capital due to numerous transactions.Some of the transactions may lead to increase or decrease the volume of workingcapital. Some other transactions neither registers an increase nor decrease in the volumeof working capital.According Foulke A statement of source and application of funds is a technical device designedto analyse the changes to the financial condition of a business enterprise in between two datesVarious Facets of Fund flow statement are as follows:l Statement of sources and application of fundsl Statement changes in financial positionl Analysis of working capital changes andl Movement of funds statementObjectives of fund flow statement analysis:(1) It pinpoints the mobilization of resources and the further utilization of resources(2) It highlights the financing of the general expansion of the business firms(3) It exemplifies the utilization of debt finance in the structure of financing(4) It portrays the relationship between the financing, investment, liquidity and dividenddecision of the firm during the given point of time.7.3 METHODS OF PREPARING FUND FLOWSTATEMENTSteps in the preparation of Fund Flow Statement:l First and fore most method is to prepare the statement of changes in workingcapital i.e., to identify the flow of fund / movement of fund through the detectionof changes in the volume of working capital.l Second step is the preparation of Non- Current A/c items-Changes in the volumeof Non current a/cs have to be prepared only in order to quantify the flow fund i-eeither sources or application of fund.l Third step is the preparation Adjusted Profit& Loss A/c, which already elaboratelydiscussed in the early part of the chapter.l Last step is the preparation of fund flow statement.7.3.1 Schedule of Changes in Working CapitalThe ultimate purpose of preparing the schedule of changes in the working capital is toillustrates the changes in the volume of net working capital which envisages eithersources or application of fund. The schedule of changes are focused as follows:Increase in Current Assets Decrease in Current Assets Increase in Current Liabilities Decrease in Current Liabilities Increase in Working Capital Decrease in Working Capital Decrease in Working Capital Increase in Working Capital www.jntuworld.com1 2 2Accounting and Financefor ManagersThe next important step is to prepare that Adjusted profit and loss accountThe first method is widely used method by all in determining the volume of Fund fromOperations (FFS)Under the Net Profit Method, Fund flow from operations can be computed7.3.2 Net Profit MethodUnder this method, Fund from operations can be determined in two different ways .Thefirst method is through the statement formatNet Profit from the Profit & Loss A/c xxxxxAdd:(A) Non Funding Expenses:Loss on Sale of Fixed Assets xxxxLoss on Sale of Long Term Investments xxxxLoss on Redemption Debentures/Preference Shares xxxxDiscount on Debentures /Share xxxx(B) Non Operating Expenses:Depreciation of fixed Assets xxxx(C) Intangible Assets:Amortization of Goodwill xxxxAmortization of Patent xxxxAmortization of Trade Mark xxxx(D) Fictitious Assets:Writing off Preliminary expense xxxxWriting off Discount on Shares/Debentures xxxxMethod of Fund From Operations Net Profit Method Add Non Operating Expenses Less Non Operating Incomes Sales Method Less-Payments(Application) Particulars Previous Year Current Year Increase inWorking Capital (+) Decrease in inWorking Capital () (A) Current Assets: Cash In Hand Cash at Bank Marketable Securities Bills Receivable Sundry Debtors Closing Stock Prepaid Expenses (B) Current Liabilities: Creditors Bills Payable Outstanding expenses Pre received Income Provision for doubtful and bad debts Net Working Capital(A-B) Increase/Decrease Working Capital www.jntuworld.com1 2 3(E) Profit Appropriation Fund Flow Statement AnalysisTransfer to General Reserve xxxxLess:(F) Non funding Profits:Profit on Sale of Fixed Assets xxxxProfit on Sale of Long Term Investments xxxxProfit on Redemption Debentures/Preference Shares xxxx(G) Non Operating Incomes:Dividend Received xxxxInterest Received xxxxRent Received xxxxFund From operations / Fund Lost in Operations xxxxxThe second method of determining the fund from operations under the first classificationis the Accounting Statement Format.Adjusted Profit & Loss A/cDr Cr7.3.3 Sales MethodUnder this method, the following is the statement format is used to arrive fund flowfrom operations:Sources:Sales xxxxxStock at the end xxxxxLess:Application:Stock at Opening xxxxNet Purchases (Purchase-Returns) xxxxWages xxxxSalaries xxxxTelephone expenses xxxxElectricity charges xxxxOffice stationery expenses xxxxOther operating cash expenses xxxxFund from operationsFrom the following details calculate funds from operations:Rs.Salaries 10,000Rent 6,000To Depreciation xxxx To Goodwill Written off xxxx To Patent Written off xxxx To Loss on Sale of Fixed Asset xxxx To Loss on Sale of Investment xxxx To Loss on redemption of Liability xxxx To Preliminary Expenses off xxxx To Proposed Dividend xxxx To Transfer to General Reserve xxxx To Current Year Provision for Taxation xxxx To Current Year Provision for Depreciation xxxx To Balancing Figure xxxx (Fund Lost in Operations) By Opening Balance Profit xxxx By Profit on sale of Fixed Assets xxxx By Profit on Sale of Investments xxxx By Profit on redemption of Liability xxxx By Transfer from General Reserve xxxx By Balancing Figure xxxx Fund From Operations(FFS) www.jntuworld.com1 2 4Accounting and Financefor ManagersRefund of Tax 6,000Profit on Sale of Building 10,000Depreciation on Plant 10,000Provision for Taxation 8,000Loss on Sale of plant 4,000Closing Balance of Profit & Loss A/c 1,20,000Opening balance on Profit & Loss A/c 50,000Discount on Issue of Debentures 4,000Provision for bad debts 2,000Transfer to general reserve 2,000Preliminary expenses written off 6,000Good will written off 4,000Dividend Received 10,000Proposed Dividend 12,000Calculation of fund from operation7.3.4 First MethodClosing balance of Profit & Loss A/c 1,20,000Less Opening Balance 50,000Balance Forward 70,000Add: Non Fund / Non Operating Charges:Depreciation on Plant 10,000Provision for Taxation 8,000Loss on Sale of Plant 4,000Discount on issue of debentures 4,000Provision for bad debts 2,000Transfer to general reserve 2,000Preliminary expenses off 6,000Good will written off 4,000Proposed Dividend 12,0001,22,000LessRefund of Tax 6,000Profit on Sale of Building 10,000Dividend Received 10,000Fund from operations 96,0007.3.5 Second MethodAdjusted Profit & Loss A/cDepreciation on Plant 10,000 Provision for Taxation 8,000 Loss on Sale of Plant 4,000 Discount on issue of debentures 4,000 Provision for bad debts 2,000 Transfer to general reserve 2,000 Preliminary expenses off 6,000 Good will written off 4,000 Proposed Dividend 12,000 To Closing Profit B/d 1,20,000 1,72,000 By Opening Balance B/d 50,000 By Profit on Sale of Building 10,000 By Dividend Received 10,000 By Refund of Tax 6,000 By Balancing Figure 96,000 Fund From operations 1,72,000 www.jntuworld.com1 2 5The next step is to prepare the fund flow statement. The proforma of the fund flow Fund Flow Statement AnalysisstatementCheck Your Progress(1) Fund flow means a study of(a) working capital change(b) Cash position change(c) Long investment change(d) Change in the current liabilities(2) Normally Working capital means(a) Current assets- current liabilities(b) Current assets(c) Gross working capital(d) Net working capital(3) Increase in working capital(a) Increase in current assets(b) Increase Net working capital(c) Increase in current liabilities(d) Increase in long term source of financing7 . 4 ADVANTAGE S OF PRE PARING FUND F LOWSTATEMENTStructured analysis on the Working capital of a firm:It is the only statement to study the changes in the working capital in between twodifferent periods from the balance sheet of a firm through structured analysis on thebasis of working capital position.7.4.1 Illustrative Statement of FinancingIt is a statement which highlights the role of various kinds of financing not only in thedimension of project development and expansion but also growth rate of the organization.Sources of funds Uses of funds Funds from Business Operation Non trading Incomes Sale of Non-Current Assets Sale of Long Term Investments Issue of shares Acceptance of deposits Long Term Borrowings Decrease in Working Capital Funds Lost in Operations Redemption of Preference Share Capital Repayment of Loans Purchase of Long Term Investments Purchase of Fixed Assets Payment of Taxes Payment of Dividends Drawings Loss of Cash Increase in Working Capital Financial Structure Capital Structure-Long Term Financial Resources Medium &Short term Financial Resources Institutional lending: Banker-Loans & AdvancesMoney Market: Public Deposit, Commercial paperExternal Sources Share Capital and so on Internal Sources: Retained Earnings www.jntuworld.com1 2 6Accounting and Financefor Managers7.4.2 To fulfil the Primary Objective of the Financial ManagementIt not only elucidates the mode of financing but also the application of resources afterraising. It answers to the following queries viz:l How the outsider's liabilities are redeemed?l What is the role of the fund from operation generated?l How the raised funds applied into business?l How the decrease in working capital was applied?l What is the mode of raising of financial resources for an increase in the workingcapital?7.4.3 Facilitation through Financial PlanningThe projected fund flow statement from the past performance facilitates the firm toanticipate the future requirement of financial resources. It guides the management toprioritize the application in the future to the tune of scarce resources.7.4.4 Guide to Working Capital ManagementIt acts as a guide to the management to maintain the working capital at optimum levelthrough either purchase or sale of marketable securities during the periods of adequateand inadequate working capital respectively.7.4.5 Indicator of Yester Track Path of the Firm The insight on the financial performance of the firm can be had by the lending institutionsthrough fund flow statement at the time of extending financial assistance to the firm.Limitations:l It is an extension of financial statements but it cannot be leveled with the emphasisof them.l It is not a resultant of the transaction instead it is an arrangement of among theavailable information.l Projected fund flow statement ever only to the tune of financial statements whichare historic in feature.Check Your Progress(1) Adjusted profit and loss account is prepared for(a) Determining the fund from operations(b) Determining the fund lost in operations(c) (a) or (b)(d) None of the above(2) Fund flow statement is categorized into two parts(a) Fund in flow & Fund out flow(b) Cash in flow & Cash out flow(c) Sources & Applications(d) None of the above(3) Fund from operations is(a) Sources of the firm(b) Applications of the firm(c) Neither sources nor applications(d) None of the abovewww.jntuworld.com1 2 7Fund Flow Statement AnalysisIllustration 1Form the following details prepare a statement showing changes in working capital during1985:Balance sheet of Pioneer ltd. as on 31st December(B.com., Bharathidasan November, 1986)The first step is to prepare the schedule of changes in working capital.Schedule of changes in working capitalIllustration 2From the following two balance sheet as at December 31, 2004 and 2005. Prepare thestatement of sources and uses of funds.The first step is to prepare the schedule of changes in working capital.Schedule of changes in working capitalLiabilities 1984 Rs 1985 Rs. Assets 1984 Rs. 1985 Rs. Share capital 5,00,000 6,00,000 Fixed assets 10,00,000 11,20,000 Reserves 1,50,000 1,80,000 Less:Depreciation 3,70,000 4,60,000 Profit and Loss A/c 40,000 65,000 6,30,000 6,60,000 Debentures 3,00,000 2,50,000 Stock 2,40,000 3,70,000 Creditors for goods 1,70,000 1,60,000 Book Debts 2,50,000 2,30,000 Provision for tax 60,000 80,000 Cash in hand 80,000 60,000 Preliminary expeneses 20,000 15,000 12,20,000 13,35,000 12,20,000 13,35,000 1984 1985 Increase In working capital Decrease In working capital Current asset: Stock 2,40,000 3,70,000 1,30,000 ------------ Book debts 2,50,000 2,30,000 ------- 20,000 Cash in hand 80,000 60,000 20,000 5,70,000 6,60,000 1,30,000 40,000 Current liability Creditors for goods 1,70,000 1,60,000 10,000 ------- Working capital 4,00,000 5,00,000 1,40,000 40,000 Increase in working capital 1,00,000 ------------ 1,00,000 5,00,000 5,00,000 1,40,000 1,40,000 2004 2005 2004 2005 Liabilities Rs. Rs. Rs. Rs. Share capital 80,000 90,000 Trade creditors 20,000 46,000 Profit & Loss a/c 4,60,000 5,00,000 Assets Cash 60,000 94,000 Debtors 2,40,000 2,30,000 Stock in trade 1,60,000 1,80,000 Land 1,00,000 1,32,000 5,60,000 6,36,000 5,60,000 6,36,000 2004 2005 Increase In working captial Decrease In working capital Current asset: Cash 60,000 94,000 34,000 Debtors 2,40,000 2,30,000 10,000 Stock in trade 1,60,000 1,80,000 20,000 4,60,000 5,04,000 Current liability Trade creditors 20,000 46,000 26,000 Working capital 4,40,000 4,58,000 54,000 36,000 Increase in working capital 18,000 ------------- ---------- 18,000 4,58,000 4,58,000 54,000 54,000 www.jntuworld.com1 2 8Accounting and Financefor ManagersThe next step is to prepare the non current accounts of the firm.Dr Land A/c CrNext non-current account item is the share capital account in the liability side.The closing balance of the share capital is more than that of the opening balance whichmeans that the firm has undergone the issue of further more share capital.During the issue of share capital, the cash resources are raised by the firm through thesale of shares.Dr Share capital A/c CrThen the next step is to prepare the adjusted profit and loss account to determine thefund from the operationsDr Adjusted Profit & Loss A/c CrThe next step is to prepare the fund flow statement of the firmFund flow statementIllustration 3From the following relating to Panasonic ltd., prepare funds flow statement.Balance sheet of Pioneer ltd. as on 31st DecemberAdditional information:l The company issued bonus shares for Rs.1,00,000 and for cash Rs.1,00,000l Depreciation written off during the year Rs.30,000The first step is prepare the statement of changes in working capitalSchedule of changes in working capitalRs. Rs. To Balance B/d 1,00,000 To Cash(Purchase) balancing fig. 32,000 By Balance c/d 1,32,000 1,32,000 1,32,000 Rs. Rs. To Balance c/d 90,000 By Cash( Issue of shares) Balancing fig. 10,000 By Balance b/d 80,000 90,000 90,000 Rs. Rs. By Balance B/d 4,60,000 To Balance c/d 5,00,000 By Fund from operation Balancing fig. 40,000 5,00,000 5,00,000 Sources Rs. Applications Rs. Issue of Shares 10,000 Purchase of Land 32,000 unds from operation 40,000 Increase in working capital 18,000 50,000 50,000 Liabilities 1994 Rs 1995 Rs Assets 1994 Rs 1995 Rs Share capital 6,00,000 8,00,000 Fixed assets 3,80,000 4,20,000 Reserves 2,00,000 1,00,000 Accounts receivable 2,10,000 3,00,000 Retained earnings 60,000 1,20,000 Stock 3,00,000 3,90,000 Accounts payable 90,000 2,70,000 Cash 60,000 1,80,000 9,50,000 12,90,000 9,50,000 12,90,000 Contd...1994 1995 Increase In working captial Decrease in working capital Current asset: Cash 60,000 1,80,000 1,20,000 ---------- www.jntuworld.com1 2 9Fund Flow Statement AnalysisThe next step is to prepare the non - current accountFirst non-current asset account should have to be preparedDr Fixed Assets A/c CrThe next non-current account is that non-current liability which is nothing but Sharecapital.Dr Share capital A/c CrAnd another non current account is to be prepared that General reserve account.Dr General Reserve A/c CrThe next step is to prepare the Adjusted Profit & Loss A/cDr Adjusted Profit & Loss A/c CrThe next step is to prepare the fund flow statement of the enterpriseFund flow statementIllustration 4Balance sheets of M/s Black and White as on 1-1-1986 and 31-12-1986 were as follows:Stock in trade 3,00,000 3,90,000 90,000 ---------- Accounts receivable 2,10,000 3,00,000 90,000 ---------- 5,70,000 8,70,000 Current liability Accounts payable 90,000 2,70,000 1,80,000 Working capital 4,80,000 6,00,000 3,00,000 1,80,000 Increase in working capital 1,20,000 1,20,000 6,00,000 6,00,000 3,00,000 3,00,000 Rs Rs To Balance B/d 3,80,000 By Depreciation(Adjusted Profit &Loss A/c ) 30,000 To Cash (Purchase) Balancing fig. 70,000 By Balance c/d 4,20,000 4,50,000 4,50,000 Rs Rs To Balance c/d 8,00,000 By Cash( Issue of shares) 1,00,000 By General reserve 1,00,000 By Balance b/d 6,00,000 8,00,000 8,00,000 Rs Rs To Share capital 1,00,000 By Balance b/d 2,00,000 To Balance c/d 1,00,000 2,00,000 2,00,000 Rs Rs To (Fixed Assets) depreciation 30,000 By Balance B/d(Retained Earnings) 60,000 To Balance c/d 1,20,000 By Fund from operation Balancing fig. 90,000 1,50,000 1,50,000 Sources Rs Applications Rs Issue of Shares 1,00,000 Purchase of Land 70,000 Funds from operation 90,000 Increase in working capital 1,20,000 1,90,000 1,90,000 Liabilities 1-1-86 Rs 31-12-1986 Rs Assets 1-1-86 Rs 31-12-1986 Rs Creditors 40,000 44,000 Cash 10,000 7,000 Mrs.WhitesLoan 25,000 - Debtors 30,000 50,000 Loan from P.N.Bank 40,000 50,000 Stock 35,000 25,000 Captial 1,25,000 1,53,000 Machinery 80,000 55,000 Land 40,000 50,000 Building 35,000 60,000 2,30,000 2,47,000 2,30,000 2,47,000 www.jntuworld.com1 3 0Accounting and Financefor ManagersAdditional informationDuring the year machine costing Rs.10,000 (accumulated depreciation Rs.3,000) wassold for Rs.5,000 . The provision for depreciation against machinery as on 1-1-1986 wasRs.25,000 and on 31-12-1986 Rs.40,000 Net profit for the year 1986 amounted toRs.45,000. You are required to prepare funds flow statement (M.Com MKU April 1980).The very first step is to prepare the statement of changes in working capitalChanges in working capital in between the various current assets and current liabilitiesare as follows:Statement of changes in working capitalThe next step is to determine the cost of the machinery before the charge of depreciationi.e., to find out the Gross value of the assets, in other words Original cost of the assets tobe found out at the moment of purchase.The ultimate aim is to find out the original cost of the machinery for the preparation ofthe machinery account:Before preparing the Machinery account, the worth of the sale transaction of themachinery should be found out .Original cost of the Machinery Rs.10,000(-)Depreciation Rs.3,000 Machinery worth for sale Rs.7,000(-)Machinery sold Rs.5,000Loss on sale of the portion of the machinery sold Rs.2,000Dr Machinery A/c CrThe next one is the provision for depreciation account or Accumulated depreciationaccount.1-1-86 Rs 31-12-1986 Rs Increase In working capital Decrease In working capital Current asset: Cash 10,000 7,000 ----------- 3,000 Debtors 30,000 50,000 20,000 ---------- Stock 35,000 25,000 --------- 10,000 75,000 82,000 Current liability Sundry creditors 40,000 44,000 ----------- 4,000 Working capital 35,000 38,000 20,000 17,000 Increase in working capital 3,000 3,000 38,000 38,000 20,000 20,000 1-1-1986 31-12-1986 Written down value of the machinery extracted from the balance sheet as on dated Rs.80,000 Rs.55,000 Add: Accumulated depreciation or Provision for depreciation 25,000 40,000 Original Cost of Machinery 1,05,000 95,000 Rs Rs To Balance B/d 1,05,000 By Cash (Sales) 5,000 By Provision for machinery 3,000 By loss on sale(Adjusted profit and loss account) 2,000 By Balance c/d 95,000 1,05,000 1,05,000 www.jntuworld.com1 3 1Dr Provision for Depreciation A/c Cr Fund Flow Statement AnalysisDr Capital A/c CrDr Loan P.N. Bank CrDr Mr. White's A/c CrThe next step is to prepare the Adjusted Profit & Loss Account.Adjusted Profit & Loss AccountThe next step is to prepare the fund flow statement.Fund flow statementIllustration 5From the following balance sheets of A Ltd on 31st Dec, 1982 and 1983, you are requiredto prepare Fund flow statementThe following are additional information has also been givenl Depreciation charged on plant was Rs.4,000 and on building Rs.4,000l Provision for taxation of Rs.19,000 was made during the year 1983l Interim Dividend of Rs.8,000 was paid during the year 1983Balance sheet (M.Com.Madras,1984)Rs Rs To Machinery A/c 3,000 By Balance B/d 25,000 To Balance c/d 40,000 By depreciation provided during the current year 18,000 43,000 43,000 Rs Rs To Drawings (Balancing fig) 17,000 By Balance B/d 1,25,000 To Balance c/d 1,53,000 By Net profit 45,000 1,70,000 1,70,000 Rs Rs By BalanceB/d 40,000 To Balance c/d 50,000 By Cash (Balancing fig) 10,000 50,000 50,000 Rs Rs To Cash( Loan paid) 25,000 By Balance B/d 25,000 To Balance c/d ----------- 25,000 25,000 Rs Rs To Machinery (Loss on sale) 2,000 By Balance B/d ----------- To Provision for taxatio 18,000 By fund from operations 65,000 To Balance c/d(Net profit) 45,000 65,000 65,000 Sources Rs Applications Rs Sale of machinery 5,000 Purchase of land 10,000 Loan from P.N.Bank 10,000 Purchase of Building 25,000 Fund from operation 65,000 Drawings 17,000 Repayment of Mr White Loan 25,000 Increase working capital 3,000 80,000 80,000 Liabilities 1982 Rs 1983 Rs Assets 1982 Rs 1983 Rs Share capital 1,00,000 1,00,000 Good will 12,000 12,000 General Reserve 14,000 18,000 Building 40,000 36,000 Profit & Loss A/c 16,000 13,000 Plant 37,000 36,000 Sundry creditors 8,000 5,400 Investments 10,000 11,000 Bills payable 1,200 800 Stock 30,000 23,400 Provision for taxation 16,000 18,000 Bill receivable 2,000 3,200 Provision for doubtful debts 400 600 Debtors 18,000 19,000 Cash 6,600 15,200 1,55,600 1,55,800 1,55,600 1,55,800 www.jntuworld.com1 3 2Accounting and Financefor ManagersThe first step is to prepare the Statement of changes in the working capitalStatement of changes in working capitalThe next step is to prepare the non current accounts.First, Non current asset account to be prepared.The first non-current asset account is Building account.Dr Building account CrThe next non- current asset account is Plant accountDr Plant account CrThe next non-current asset account is Investments account.Dr Investments account CrThe next one is the non-current liability account.Dr General Reserve account CrThe next non-current liability account is Provision for taxation accountDr Provision for taxation account Cr1982 Rs 1983 Rs Increase In working capital Decrease In working capital Current asset: Stock 30,000 23,400 6,600 Bill receivable 2,000 3,200 1,200 Debtors 18,000 19,000 1,000 Cash 6,600 15,200 8,600 56,600 60,800 Current liability Sundry creditors 8,000 5,400 2,600 Bills payable 1,200 800 400 Provision for doubtful debts 400 600 200 9,600 6,800 Working capital 47,000 54,000 13,800 6,800 Increase in working capital 7,000 7,000 54,000 54,000 13,800 13,800 Rs Rs To Balance B/d 40,000 By (Depreciation)Adjusted profit & Loss A/c 4,000 By Balance c/d 36,000 40,000 40,000 Rs Rs To Balance B/d 37,000 By (Depreciation)Adjusted profit & Loss A/c 4,000 To Cash (Purchase) balancing fig. 3,000 By Balance c/d 36,000 40,000 40,000 Rs Rs To Balance B/d 10,000 To Cash(purchase) Balancing figure 1,000 By Balance c/d 11,000 Rs Rs By Balance B/d 14,000 To Balance B/d 18,000 By Adjusted profit and loss A/c (Profit transferred during the current year) 4,000 18,000 18,000 Rs Rs To Cash(Tax paid previous year taxation) Balancing figure 17,000 By Balance B/d 16,000 To Balance B/d 18,000 By Adjusted profit & Loss A/c (provision for taxation made during the year) 19,000 35,000 35,000 www.jntuworld.com1 3 3The next step is to prepare the Adjusted profit and loss account. Fund Flow Statement AnalysisAdjusted Profit & Loss AccountThe next step is to prepare the fund flow statement.Fund flow statementCheck Your Progress(1) Purchase of plant & machinery Rs.10 lakh through the issue of 1 Lakhshares at Rs.10 per share ; affect the following accounts(a) Non current asset and Non current liability accounts(b) Non current asset and Current liability accounts(c) Current asset account and Non current liability accounts(d) Current asset and current liability accounts(2) XYZ Ltd. has made a credit purchase of Rs.1 lakh worth of goods led toRs.1 lakh worth of additional stock of tradable goods for the enterprise,leads to(a) Increase in the working capital - Applications(b) No change in the working capital position -Neither an application nor resource(c) Decrease in the working capital-Resource(d) None of the above(3) The meaning of the "To cash ( Tax paid)" entry posted in the Provision fortaxation account is(a) Last year taxation is paid through the current year provision(b) Current year taxation is paid through the current year provision(c) Last year tax is paid through the last year taxation(d) Current year taxation is paid through the last year provision(4) Profit on sale of the fixed assets are considered to be(a) Resource to the enterprise(b) Non operating income(c) Application of the enterprise(d) None of the above(5) The treatment of current year depreciation with the closing balance of profitin determining the fund from operations(a) To be added(b) To be multiplied(c) To be deducted(d) To be dividedRs Rs To Depreciation Building 4,000 By Balance B/d 16,000 To Depreciation Plant 4,000 By Fund from operations 36,000 To Transfer to General Reserve 4,000 To Provision for taxation 19,000 To Interim dividend 8,000 To Balance c/d 13,000 52,000 52,000 Sources Rs Applications Rs Fund from operations 36,000 Purchase of the plant 3,000 Purchase of the Investment 1,000 Increase working capital 7,000 Tax paid 17,000 Interim dividend 8,000 36,000 36,000 Contd...www.jntuworld.com1 3 4Accounting and Financefor Managers(6) The redemption bank term loan leads to change in the(a) Non current liability account and current asset account(b) Current asset account and current liability account(c) Non current asset account and current liability account(d) Non current asset account and current liability account7.5 LET US SUM UPNormally, Balance sheet reveals the status of the firm only at the end of the year, not atthe beginning of the year. It never discloses the changes in between the value position ofthe firm at two different time periods/ dates. A report on the movement of funds orworking capital. In a narrow sense, the term fund means cash and the fund flowstatement depicts the cash receipts and cash disbursements/payments. The projectedfund flow statement from the past performance facilitates the firm to anticipate thefuture requirement of financial resources. It guides the management to prioritize theapplication in the future to the tune of scarce resources.7.6 LESSON-END ACTIVITYIn the long run, is it more important for a business to have positive cash flows from itsoperating activities, investing activities, or financing activities? Why? Give your opinion.7.7 KEYWORDSFund: Fund means working capitalFlow: Flow means changes occurred in between two different time periodsStatement of changes in working capital: Enlisting the changes taken place in betweenthe Current assets and current liabilities of two different time horizonsCurrent assets: Assets which are in the form of cash, equivalent to cash or easilyconvertible into cash .Current liabilities: Short term financial resources of the firmNon-current assets: Long term assetsNon current liabilities: Long term financial resourcesIncrease in working capital: Increase in Net working capital i.e. Excess of currentassets over the current liabilities- Applications side of the fund flowDecrease in working capital: Decrease in Net working capital i.e. Excess of currentliabilities over the current assets - Resources side of the fund flowFund from operations: Income generated from only operationsFund lost in operations: Loss incurred in the operations7.8 QUESTIONS FOR DISCUSSION1. Define fund.2. Define flow.3. What is meant by fund flow ?4. List out the various objectives of preparing the fund flow statement.www.jntuworld.com1 3 5Fund Flow Statement Analysis5. Enumerate the various advantages in the preparation of fund flow statement.6. Briefly explain the limitations of fund flow statement.7. What are the steps involved in the process of fund flow statement ?8. Explain the various methods of determining the fund from/lost (in ) operations.9. Explain the process of preparing the statement of changes in working capital.10. Draft the pro forma of the Fund flow statement.11. Explain any non current account transactions affecting the fund position of thefirm.7.9 SUGGESTED READINGSR.L. Gupta and Radhaswamy, "Advanced Accountancy".V.K. Goyal, "Financial Accounting", Excel Books, New Delhi.Khan and Jain, "Management Accounting".S.N. Maheswari, "Management Accounting".S. Bhat, "Financial Management", Excel Books, New Delhi.Prasanna Chandra, "Financial Management - Theory and Practice", Tata McGrawHill, New Delhi (1994).I.M. Pandey, "Financial Management", Vikas Publishing, New Delhi.Nitin Balwani, "Accounting & Finance for Managers", Excel Books, New Delhi.www.jntuworld.com