Meaning of Funds

For some, it is nothing but cash while for some others it is cash and marketable securities. Some others say it is nothing but gross working capital. But the correct meaning is probably given International Accounting Standard No.7, which says that net working capital should be taken for funds. Net working capital is nothing but the excess of current assets over current liabilities.

Current Assets
1. 2.

3.

4. 5.

Cash including fixed deposits with bank Accounts receivable i.e., trade debtors and bills receivable Inventory i.e., raw materials, work in progress and finished goods Advances recoverable Prepaid expenses

Current Liabilities
Accounts Payable 2. Outstanding expenses 3. Bank Over Draft 4. Short term loans 5. Advance payments received by the business for the services to be rendered in the future 6. Current maturities of long term loans 7. Provision against current assets ex: provisions for bad and doubtful debts, provisions for loss stock, provision for discount on debtors etc. Non-Current Assets: All assets other than current assets Non-Current Liabilities: All liabilities other than current liabilities
1.

Meaning of Flow of Funds

Means change in funds or changes in working capital. In other words, any increase or decrease in working capital means Flow Funds. The term flow includes both inflow and outflow. Hence in flow of funds, both inflow and outflow of funds are analysed. Any inflow of funds results in an increase of funds and hence called Sources of Funds. Any outflow of funds results in a decrease of funds and hence termed as Application of Funds.

Rules to decide on flow of funds

There will be a flow of funds if a transaction involves: Current assets and fixed assets ex: purchase of building for cash Current assets and capital ex: issue of shares for cash Current assets and fixed liabilities ex: redemption of debentures in cash. Current liabilities and fixed liabilities ex: creditors paid of in debentures Current liabilities and capital ex: creditors paid off in shares Current liabilities and fixed assets ex: buildings transferred to creditors in satisfaction of their claims

There will be no flow of funds if it involves: a. Current assets and current liabilities ex:payment made to creditors b. Fixed assets and fixed liabilities ex:building purchase and payment made in debentures c. Fixed assets and capital ex:building purchased and payment made in shares Finding out of transaction involving change in working capital I. In case the entry involves accounts only of a fixed (asset or liability) nature or only of a current (asset or liability) nature then there will be no flow of funds. II. But a cross transaction (i.e., a transaction involving a fixed asset or fixed liability and a current asset or a current liability) will result in flow of funds .

Meaning Of Fund Flow Statement

A funds flow statement is a statement depicting change in working capital. It is also termed as a Statement of sources and application of funds, Summary of financial operations, funds generated and expended, where got and where gone statement, statement showing changes in working capital. Uses of funds flow statement 1. It explains the financial consequences of business operations 2. It answers intricate questions 3. It acts as an instrument for allocation of resources 4. It is a test as to the effective use of working capital

PREPARATION OF A FUNDS FLOW STATEMENT

In order to prepare a Funds Flow Statement, it is necessary to find out the sources and application of funds. Sources of Funds The sources from which the funds flow into the organisation are called sources of funds. The sources of funds can be both internal and external. 1. Internal sources Funds from operations are the only internal source of funds. However, the following adjustments will be required to be made in the figure of Net Profit for finding out real funds from operations.

Add the following items, as they do not result in outflow of funds. i. Depreciation on fixed assets ii. Preliminary expenses or goodwill etc., written off iii. Contribution to debenture redemption fund, transfer to general reserve, etc., if they have been deducted before arriving at the figure of the net profit iv. Provision for taxation and proposed dividend are usually taken as appropriation of profits only and not current liabilities for the purpose of Funds Flow Statement. v. Tax or dividends actually paid are taken as application of funds. Similarly interim dividend paid is shown as an application of funds. All these items will be added back to net profit, if already deducted, to find funds from operations. vi. Loss on sale of fixed assets.

Deduct the following items, as they do not increase the funds:

i. Profits on sale of fixed assets since the full sale proceeds are taken as a separate source of funds and inclusion here will result in duplication. ii. Profit on revaluation of fixed assets iii. Non-operating incomes such as dividend received or accrued dividend, refund of income tax, rent received or accrued rent. These items will increase funds but they are non-operating incomes. They will be shown under separate heads as source of funds in the funds flow statement. iv. In case the Profit and Loss Account shows Net Loss, this should be taken as an item which decreases the funds.

2.

External Sources:

These sources include i. Funds from long-term loans Long-term loans such as debentures, borrowings from financial institutions will increase the working capital and therefore will be flow of funds. However if the debentures have been issued against fixed assets, there will be no flow of funds. ii. Sale of fixed assets Sale of land, buildings, long-term investments will result in generation of funds. iii. Funds from increase in share capital Issue of shares for cash or for any other current asset results in increase in working capital and hence there will be flow of funds.

Application of Funds
The uses to which funds are put are called application of funds. Following are some of the purposes for which funds may be used: 1. Purchase of fixed assets like land, building, plant and machinery etc. 2. Payment of dividend will affect funds since it decreases a fixed liability. 3. Payment of fixed liabilities like redemption of debentures, redemption of redeemable preference shares. It results in decrease of working capital and hence treated as an application of funds. 4. Payment of tax liability If the tax has been paid, it is taken as an application of funds.

STATEMENT OF CHANGES IN WORKING CAPITAL

Items
Current Assets Cash Balance As on (previous year) As on (current year) Increase Decrease

Bank Balance
Marketable Securities Accounts Receivable Stock-In- Trade Prepaid Expenses Total Current Assets A

xxxx

xxxx

xxx

xxx

Contd
Current Liabilities Bank Overdraft

Outstanding Expenses
Accounts Payable Total Current Liabilities B Increase/Decrease in working capital A-B

xxxx xxxx

xxxx xxxxx

xxxx xxx

xxx xxx

Note: At the end of the period there will be either increase or decrease only but not both.
Rules of preparing the schedule: i. Increase in a current asset, results in increase (+) in working capital ii. Decrease in a current asset, results in decrease (+) in working capital iii. Increase in a current liability, results in decrease (+) in working capital iv. Decrease in a current liability, results in increase (+) in working capital

FUNDS FLOW STATEMENT

The funds flow statement can also be prepared in T form as follows:
Particulars Rs. Particulars Rs. Sources of Funds
Issue of debentures

Application of Funds
Redemption of redeemable preference shares Redemption of Debentures Payment of other long-term loans Purchased of fixed assets Operating Loss* Payment of dividends, tax etc.,

Issue of shares Long-term borrowings Sale of fixed assets Operating profit* Decrease of working capital

Increase in working capital

(Or)..
Particulars Sources of funds
Issue of debentures Issue of shares Long-Term borrowings

Amount

Sale of fixed assets

Operating profit* Total sources xxxx

Cont
*Note only figure will be there

Application of funds
Redemption of redeemable preference shares Redemption of Debentures Payment of other long-term loans

Purchased of fixed assets

Operating Loss* Payment of dividends, tax etc., Total Uses Net Increase / Decrease of working capital xxxx xxxx

Adjusted Profit and Loss Account

This account is drawn to know funds from operations.The format is given as under

Particulars
To opening balance (P&L A/c Dr)
To transfer to

Rs
Xxx

Particulars
By opening balance(P&L a/c Cr)
By transfer from excess Reserve

Rs
xxx
Xxx

Sinking fund
General Reserve

xxx
Xxx

By appreciation on fixed assets

By profit on revaluation or sale of fixed assets or long term Investments

Xxx
Xxx

Capital redemption reserve Other reserves To depreciation on fixed

xxx xxx xxx

By non-operating incomes Xxx Dividend received Interest received Xxx xxx

To goodwill, patents written off To share discount, preliminary expenses Advertising, suspense a/c etc. Written off

xxx xxx

Rent received Income tax refund received

Xxx Xxx

To loss on revaluation/sale of fixed Assets and long term investments

To provision for taxation

xxx
xxx

Other incomes

Xxx

By closing balance (p&l a/c dr. balance)

Xxx

To Dividends paid
To Interim dividend paid To proposed dividend

xxx
xxx xxx xxx

By funds from operations xxx (Balance figure)

To closing balance of p&l a/c (Credit balance)

To funds lost in operations (Balance figure)

xxx

xxxx

xxxx

CASH FLOW STATEMENT

MEANING Cash flow statement is a statement, which describes the inflows and outflows of cash and cash equivalents in an enterprise during a specific period of time. Such statement takes into account the receipts and disbursements of cash. A cash flow statement summarises the causes of changes in cash position of a business enterprise between two dates.

Cash Flow Statement

Comparing the Statements of Cash Flow Goodco Cash Derived From Operating Activities: Net income for the year Depreciation & non-cash items: Receivables Inventory Prepaids Accounts Payable Accrued Expenses Taxes Payable total Cash Derived From Financing Activities: Changes in equity Changes in Long Term Debt Less Dividends Paid total Cash Used for Investing Activities: Purchase of fixed assets Loss or gain on sale of shares total Increase/Decrease in Cash Net Cash (cash minus credit line) - last year Net Cash (cash minus credit line) - this year Increase/Decrease in Cash 0 0 0 0 0 0 Badco

Classification of Cash Flows

Operating Activities

Cash effects of transactions on Net Income Capital investment Salvage value Working capital investment or recovery Debt and repayment of principal

Investing Activities

Financing Activities

Cash flow from operating activities

Operating activities are the principal revenue producing activities of the enterprise and other activities that are not investing or financing activities. Cash flow from operating activities is principally derived from the principal revenue-producing activities of the enterprise.

The cash inflows from operating activities include receipts from customers for sales or goods and services (including collection from debtors). Cash outflows from operating activities include payments to suppliers for purchase of materials and for services, payments to employees for services and payments to governments for tax duties.

Operating Activities

Sales revenue Cost savings Manufacturing expenses O & M cost Interest payments Lease expenses Income taxes

(inflow) (inflow) (outflow) (outflow) (outflow) (outflow) (outflow)

Cash flow from investing activities

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. It involves making and collecting of loans and acquiring and disposing of debt and equity instruments and fixed assets. The cash inflows from investing activities are receipts from collection of loans, receipts from sales of shares, debt or similar instruments of other enterprises, receipts from sales of fixed assets, and interest and dividends received on loans and investments. Cash outflows from investing activities are disbursements of loans, payments to acquire shares, debt or similar instruments of other enterprises, and payments (including advance and down payments) to acquire fixed assets.

Investing Activities

Capital investment Salvage value Working capital Working capital recovery Gains taxes

(outflow) (inflow) (outflow) (inflow) (outflow)

Cash flow from financing activities

Financing activities are the activities that result in change in the size and consumption of the owners capital (including preference share capital in case of a company) and borrowings of the enterprise. Cash inflows from financing activities are proceeds from issuing shares or other similar instruments, debentures, mortgages, bonds and other short or long-term borrowings. Cash outflows from financing activities are the payments of dividends, payments to acquire or redeem shares or other similar instruments of the enterprise, repayments of amounts borrowed, principal payments to creditors who have extended long-term credit, and interest paid.

Financing Activities

Borrowed Amount Principal repayments

(inflow) (outflow)

Cash Flow Statement for the year ended

Particulars
Cash flows from Operating Activities Either Cash receipts from customers xxxxx (-) Cash paid to customers Cash generated from operations (-) Income tax paid Cash flow before extra ordinary items Extraordinary items Net cash from (used in) operating activities (xxx) xxxxx (Xxx) xxxxx xxxxx xxxxx

Rs.

Rs.

Net profit before tax and extraordinary items

Adjustments for non-cash and non-operating items [List of individual items such as depreciation, foreign exchange loss, loss on sale of fixed assets, interest income, dividend income, interest expense etc.]

xxxx
xxxx xxxx

Operating profit before working capital changes

xxxx
xxxx xxxx

Adjustment for change in current asset and current liabilities {list of individual items} Cash generated from (used in) operations before tax

(-) Income tax paid

Cash flow before extra ordinary items Extraordinary items Net cash from (used in) operating activities Cash flow from Investing Activities Individual items of cash inflows and cash

(xxx)
xxxx xxxx xxxx

xxx

outflows from investing activities

[Such as purchase/sale of fixed assets,

purchase or sale of investments, Interest received, dividend received etc.]

xxx

Net cash from (used in) investing activities

xxxx

Cash inflows

Activities

Cash Outlays
Payments to suppliers and employees for materials and services

Receipts from customers for sales of goods and services activities

Operating Activities Payments to government for taxes and duties

Contd.
Cash inflows Activities Cash Outlays

Receipts from sale of fixed assets

Payment for purchase of fixed assets

Receipts from sales of investments and fro collection of loans

Investing Activities

Receipts from interest and dividends on loans and investments

Payments for purchase of investments and making loans

Contd.
Cash inflows Activities Cash Outlays

Receipts from issuance of share capital

Payments for dividends on share capital

Financing
Receipts from issuance of debentures

Activities

Payments for principal on debentures and other borrowings

Receipts from other long-term borrowings

Payments for interest on debentures and other borrowings

Thank You