The balance sheet and income statement are the traditional basic financial statement of a business enterprise. A serious limitation of these statements is that they do not provide information regarding changes in the firm’s financial position during a particular period of time. They fail to answer following question
Does the firm possess adequate working capital?
How much funds have been generated from operations?
Why did the firm not pay dividend in spite of adequate profit?
The changes which occurred in the current accounts as a result flow of fund are reflected in a statement known as ‘ schedule of changes in working capital’ .
The similar changes in non current accounts are shown in ‘Fund Flow Statement’.
Therefore, following two statements under this techniques .
1. Statement or Schedule of Changes in Working Capital.
2. Statement of Sources and Uses of Funds or Funds Flow Statement.
Schedule of Changes in Working Capital:-
It discloses the changes in individual item of current asset & current liabilities between two period & there effect on working capital. Working capital will increase when there is an increase in current asset and decrease in current liabilities, whereas, working capital will decrease when there is a decrease in current asset & increase in current liabilities.
Net increase in working capital is treated as use of funds & the net decrease in working capital is treated as source of funds.
Statement or Schedule of Changes in Working Capital . Item (A) Current Assets Cash at bank Cash in hand Stock in trade Debtors Bills receivable Advance payment Short term investment Prepaid expense Accrued income Total (A) (B) Current Liabilities (1) Short term loans (2) Bank overdraft (3) Creditors (4) Bills payable (5) Outstanding expenses (6) Unclaim dividend Total (B) Net Working Capital (A-B) Incraese / Decrease in Working Capital Total Previous Year Current Year Effect on Incraese Rs. Working captial Decrease Rs.
Sources of Fund A mount Fund from operation Issue of share Issue of debenture long term loans Sale of fixed assets / Investment Non trading receipts Decrease in working capital (if any) Uses Of Funds Amount Loss from operation Redemption of preference shares Redemption of debentures Repayment of long term loans Purchase of fixed assets / Investments Payment of dividend & taxes Increase in working capital (if any)
Particular Amount Depreciation Loss on sale of fixed assets Under writing commissions Discount on issue of shares & debentures Preliminary expense written off Deferred revenue expenses Goodwill written off Patent or trademark Provision for taxes (If treated non current ) Particular Amount Profit or gain on sale of fixed asset Dividend received Interest received of investment Profit on revaluation of asset Fund from operation