Statement Of Schedule Of Changes In Working Capital
This statement is prepared with the help of current assets and current liabilities relating to two different periods.
An increase or decrease in respect of each of such items should be recorded to ascertain the net increase or decrease in the working capital.
An increase in the value of current assets between two different periods indicates an increase in the working capital. It is an application of funds.
An increase in the value of current liabilities between two different periods indicates decrease in the working capital. It is sources of funds.
For Videos use the links below
0 Course Introduction:: https://www.youtube.com/watch?v=9km4aXTus5c
1 Financial system and Environment : https://www.youtube.com/watch?v=BC2bAftm43c
2 Participants in a Financial System: https://www.youtube.com/watch?v=IEv_y7_aR7o
3 Functions of a Financial System: https://www.youtube.com/watch?v=T73-Dd8RM4I
4 Financial System and its components: https://www.youtube.com/watch?v=ovkAjEO8YAw
5 Efficiency of a financial system: https://www.youtube.com/watch?v=8xEUtvKYvPc
For Videos use the links below
0 Course Introduction:: https://www.youtube.com/watch?v=9km4aXTus5c
1 Financial system and Environment : https://www.youtube.com/watch?v=BC2bAftm43c
2 Participants in a Financial System: https://www.youtube.com/watch?v=IEv_y7_aR7o
3 Functions of a Financial System: https://www.youtube.com/watch?v=T73-Dd8RM4I
4 Financial System and its components: https://www.youtube.com/watch?v=ovkAjEO8YAw
5 Efficiency of a financial system: https://www.youtube.com/watch?v=8xEUtvKYvPc
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
Sources of Funds:
Transactions which result in an increase in the amount of fund or working capital are called sources of fund.
The following are the sources of funds:
Funds from operations, operating profit or trading profit.
Non operating incomes.
Refund of Income Tax (received).
Issue of Shares for cash or for any other current asset.
Issue of debentures for cash or for any other current asset.
Long term and medium term loans borrowed.
Long term or medium term deposits accepted.
Sale of long term investments for cash or for any other current asset.
Sale of fixed assets for cash or for any other current asset.
Preparation of Funds from Operations
The term Operation means the day to day affairs of the business.
It refers to trading.
Non operating items should not be treated as operational, while ascertaining funds from operations.
Examples of Non Operating expenses:
Depreciation
Loss on sale of fixed assets.
Writing-Off of fictious assets like Goodwill
Preliminary expenses, discount or loss on issue of shares and debentures
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
Sources of Funds:
Transactions which result in an increase in the amount of fund or working capital are called sources of fund.
The following are the sources of funds:
Funds from operations, operating profit or trading profit.
Non operating incomes.
Refund of Income Tax (received).
Issue of Shares for cash or for any other current asset.
Issue of debentures for cash or for any other current asset.
Long term and medium term loans borrowed.
Long term or medium term deposits accepted.
Sale of long term investments for cash or for any other current asset.
Sale of fixed assets for cash or for any other current asset.
Preparation of Funds from Operations
The term Operation means the day to day affairs of the business.
It refers to trading.
Non operating items should not be treated as operational, while ascertaining funds from operations.
Examples of Non Operating expenses:
Depreciation
Loss on sale of fixed assets.
Writing-Off of fictious assets like Goodwill
Preliminary expenses, discount or loss on issue of shares and debentures
Cash FlowsIntroductionThe Statement of Cash Flows is the third.docxcravennichole326
Cash Flows
Introduction
The Statement of Cash Flows is the third basic financial statement that is presented with the Balance Sheet and the Income Statement on a periodic basis. By reviewing the changes in cash due to operations, investing activities, and financing activities, the analyst can better ascertain how cash was generated and spent.
The Statement of Cash Flows
The statement of cash flows was developed in the 1970s and 1980s as a reaction to the need for management to reconcile net income to available cash. Many managers questioned how a company could report a profit, but have no money, or report a loss and still have cash available; the statement of cash flows was developed to explain how the income statement related to the available cash. The statement of cash flows can help managers and business owners to understand the sources and uses of cash, and predict future cash requirements so that needs may be met.
The cash flow statement focuses attention on a firm's ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing (Libby, Libby, & Short, 2004). It is designed to help both managers and analysts answer important cash-related questions such as these:
Will the company have enough cash to pay its short-term debts to suppliers and other creditors without additional borrowing?
Is the company adequately managing its accounts receivable and inventory?
Has the company made necessary investments in new productive capacity?
Did the company generate enough cash flow internally to finance necessary investment, or did it rely on external financing?
Is the company changing the makeup of its external financing?
These questions and others can be answered through the preparation and examination of the statement of cash flows.
Operating, Investing, and Financing Activities
The statement of cash flows has three main sections: (a) cash flows from operating activities, which are related to earning income from normal, recurring operations; (b) cash flows from investing activities, which are related to the acquisition and sale of productive assets; and (c) cash flows from financing activities, which are related to external financing of the enterprise. The net cash inflow or outflow for the year is the same amount as the increase or decrease in cash and cash equivalents for the year on the balance sheet. Cash equivalents are highly liquid investments with original maturities of less than three months. The operating activities section of the statement of cash flows can be prepared using either the direct or indirect method; the investing and financing activities sections are always prepared directly.
Direct Method of Determining Cash Flows from Operating Activities
The direct method for reporting cash flows from operating activities separates all of the operating transactions that result in either a deb ...
Why is the process of financial reporting important.pdfRathnakarReddy17
Financial reporting gives information and openness about the operations and financial health of an organisation. It is meant to provide our stakeholders with the right information in the right quantity to make better informed decisions. This applies to external investors, tax authorities or internal controls. Good Financial Reporting & Compliance in Delaware puts various parties on the same page with a single version of the truth and gives credibility to the company and management. On the other hand, fraudulent or inaccurate financial statements can damage a company's reputation and values.
Similar to FFA- Statement of Schedule of Changes in Working Capital (20)
Investment:
Relationship between profit and investment is shown by computing “Rate of Return ratios”.
Return on Investment (ROI)
Return on Total Resources
Return on Equity (ROE)
Earning Per Share Ratio (EPS)
Fixed Assets Turnover Ratio
Debt to Total Fund Ratio
Entrepreneurship Development Programme (EDP)uma reur
EDP – Introduction to Entrepreneurship Development Programme
Entrepreneurship Development Programme is primarily meant for developing those first generation entrepreneurs who on their own cannot become successful entrepreneurs. It covers three major variables- location, target group and enterprise.
Any of these can become the focus or starting point for initiating and implementing an EDP.
The Khadi and Village Industries Commission (KVIC)uma reur
The Khadi and Village Industries Commission (KVIC) is a statutory body formed in April 1957 (During 2nd Five Year plan) by the Government of India, under the Act of Parliament, 'Khadi and Village Industries Commission Act of 1956'. It is an apex organisation under the Ministry of Micro, Small and Medium Enterprises, with regard to khadi and village industries within India, which seeks to - "plan, promote, facilitate, organise and assist in the establishment and development of khadi and village industries in the rural areas in coordination with other agencies engaged in rural development wherever necessary.“
KVIC also helps in building up reserve of raw materials for supply to producers.
The commission focuses in creation of common service facilities for processing of raw materials, such as semi-finished goods.
KVIC has also helped in creation of employment in Khadi industry.
Schemes Under Khadi and Village Industries Commission
Under the Khadi and Village Industries Commission, you can avail the following schemes:
PMEGP or Prime Minister's Employment Generation Programme
The Ministry of Micro, Small and Medium Enterprises introduced this credit linked subsidy scheme for the creation of employment in both rural and urban areas of the nation. This scheme replaced the previous Rural Employment Generation Programme or in short the REGP.
Under the PMEGP scheme the applicants from the general category are given a 15% to 25% subsidy on the interest rates. Applicants from other categories than general as well as woman applicants, former service members, physically disabled and applicants from the hill or border areas are provided with a subsidy of 20% to 35%.
Entrepreneurship Development Institute of India (EDII)uma reur
EDI has been spearheading entrepreneurship movement throughout the nation with a belief that entrepreneurs need not necessarily be born, but can be developed through well-conceived and well-directed activities.
In consonance with this belief, EDI aims at:
Creating a multiplier effect on opportunities for self-employment,
Augmenting the supply of competent entrepreneurs through training,
Augmenting the supply of entrepreneur trainer-motivators,
Participating in institution building efforts,
Long-Term Financing
Long-term financing is usually needed for acquiring new equipment, R&D, cash flow enhancement, and company expansion. Some of the major methods for long-term financing are discussed below.
Equity Financing
Equity financing includes preferred stocks and common stocks. This method is less risky in respect to cash flow commitments. However, equity financing often results in dissolution of share ownership and it also decreases earnings.
The cost associated with equity is generally higher than the cost associated with debt, which is again a deductible expense. Therefore, equity financing can also result in an enhanced hurdle rate that may cancel any reduction in the cash flow risk.
Sales:
Relationship between profit and sales is shown by computing “Profit margin ratios”.
Gross Profit Ratio
Operating Ratio
Expenses Ratio
Operating Profit Ratio
Net Profit Ratio
From the following information calculate Debtors turnover ratio (DTR) and Average collection period (ACP).
Total Sales Rs.3,80,000, Cash sales Rs. 2,40,000, Opening Debtors Rs. 12,000, Closing Debtors Rs. 16,800. Opening balance of Bills receivable Rs. 9,600 and Closing balance of Bills receivable Rs.14,400.
Creditor’s Turnover Ratio is also known as Payables Turnover Ratio, Creditor’s Velocity and Trade Payables Ratio. It is an activity ratio that finds out the relationship between net credit purchases and average trade payables of a business.
It finds out how efficiently the assets are employed by a firm and indicates the average speed with which the payments are made to the trade creditors.
It is calculated by the following formula:
Role of financial institutions in support of women entrepreneurial activities...uma reur
The RUDSETI type of Institutions aided by GoI will, therefore, have the following objectives:
The trainings offered will be demand driven
Rural BPL youth will be given priority
Area in which training will be provided to a particular rural BPL youth will be decided after assessment of the aptitude of the candidate
Hand holding will be provided for assured credit linkage with Banks
Escort services will be provided for ensuring at least a two year follow up to ensure sustainability of micro enterprise undertaken by the rural BPL youth.
Provide intensive short-term residential self-employment training programmes with free food and accommodation to rural youth for taking up self employment initiatives and skill up gradation for running their micro-enterprises successfully.
Empower rural youth and economically backward sections leading to the development of rural enterprises and entrepreneurship.
Identify, orient, motivate, train and assist rural youth including tribal communities to attain sustainability and economic well being through rural entrepreneurship.
Upgrade technical, agricultural, managerial and service delivery skills.
Promote and train self-help groups.
Identify, develop and transfer appropriate and sustainable rural technologies.
Personality development for school and college students.
Promote awareness and trigger use of non-conventional and energy efficient technologies.
Identification & selection of right candidate for the right course.
Campus and practical approach.
Use of simulation exercises, group discussions, role plays during training period.
Field visits & experience sharing with role models.
Interactions with Bankers /Govt. Officials.
Turnover Ratios or Activity Ratios or Performance Ratios
Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. These ratios measure the operating efficiency of an enterprise.
The types of Turnover ratios are: –
Inventory Turnover Ratio or Stock Turnover Ratio.
Debtors Turnover Ratio.
Creditors Turnover Ratio.
Cash Turnover Ratio.
Working Capital Turnover Ratio.
Fixed Assets Turnover Ratio.
Capital Turnover Ratio or Sales to Net Worth Ratio.
It is also referred as the stock turnover ratio which is used to measure the number of sales generated from its inventory and how efficiently the inventories in a company is used.
This ratio reveals the number of times stock is replaced during a given accounting period.
It is calculated by the following formula:
Illustration 1:
From the following information calculate stock turnover ratio. Opening stock 30,000, purchases 90,000, carriage inward 7500, sales 1,50,000, closing stock 15,000, gross profit 37,500.
The Debtors Turnover Ratio also called as Receivables Turnover Ratio or Debtors velocity shows how quickly the credit sales are converted into the cash. This ratio measures the efficiency of a firm in managing and collecting the credit issued to the customers.
It is calculated by the following formula:
De퐛퐭퐨퐫퐬 퐓퐮퐫퐧퐨퐯퐞퐫 퐑퐚퐭퐢퐨=(퐍퐞퐭 퐂퐫퐞퐝퐢퐭 퐒퐚퐥퐞퐬)/(퐀퐯퐞퐫퐚퐠퐞 퐃퐞퐛퐭퐨퐫퐬)
Interpretation:
Standard credit period is 30 days
If the credit period is more than 30 days it indicates that the concern is not efficient.
If the credit period is less than 30 days it indicates that the concern is efficient.
The Average Collection Period, also called as Debt Collection Period, shows how much time business takes to realize the credit sales. Simply, how long will it take to recover payments from the debtors against the credit sales?
It is calculated by dividing the number of months or days or weeks by the debtors turnover ratio.
Leverage Ratios or Solvency Ratios or Capital Structure Ratios
Leverage or Solvency ratios can be defined as a type of ratio that is used to evaluate whether a company is solvent and well capable of paying off its debt obligations or not. These ratios are used to measure the long term financial position as a test of solvency of an organisation.
The types of Leverage ratios are: –
Proprietary Ratio or Equity Ratio
Equity to Fixed Asset Ratio
Equity to Current Assets Ratio
Current Liabilities to Shareholders Funds Ratio
Debt Equity Ratio
Capital Gearing or Leverage Ratio
Liquidity Ratios
This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher liquidity ratio represents that the company is highly rich in cash.
The types of liquidity ratios are: –
Current Ratio or Working Capital Ratio
Quick Ratio or Liquidity Ratio or Acid Test Ratio
Absolute Liquid Ratio or Cash Ratio
Stock to Working Capital Ratio
Current Ratio: The current ratio is the ratio between the current assets and current liabilities of a company. The current ratio is used to indicate the liquidity of an organization in being able to meet its debt obligations in the upcoming twelve months. A higher current ratio will indicate that the organization is highly capable of repaying its short-term debt obligations.
Current Ratio = Current Assets / Current Liabilities
Current Assets:
Current Assets means cash and those assets which can be converted into cash within one year in ordinary course of business.
Current Liabilities:
Current Liabilities are those which are to be paid by the firm in one year.
Quick Ratio or Liquidity Ratio or Acid Test Ratio :
The quick ratio is used to ascertain information pertaining to the capability of a company in paying off its current liabilities on an immediate basis.
The formula used for the calculation of a quick ratio is-
Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivables) / Current Liabilities
. Absolute Liquid Ratio or Cash Ratio:
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities
Stock to Working Capital Ratio:
It is calculated by dividing the value of stock (or inventories such as raw materials, work in progress, finished goods, stores and packing materials) by the Working capital.
Role of financial institutions in support of women entrepreneurial activities...uma reur
The ‘District Industries Centre’ (DICs) programme was started by the central government in 1978 with the objective of providing a focal point for promoting small, tiny, cottage and village industries in a particular area and to make available to them all necessary services and facilities at one place. The finances for setting up DICs in a state are contributed equally by the particular State Government and the Central Government.
To facilitate the process of small enterprise development, DICs have been entrusted with most of the administrative and financial powers. For purpose of allotment of land, work sheds, raw materials etc., DICs functions under the ‘Directorate of Industries’. Each DIC is headed by a General Manager who is assisted by four functional managers and three project managers to look after the following activities :
The important objectives of DICs are as follow :
i. Accelerate the overall efforts for industrialisation of the district.
ii. Rural industrialisation and development of rural industries and handicrafts.
iii. Attainment of economic equality in various regions of the district.
iv. Providing the benefit of the government schemes to the new entrepreneurs.
v. Centralisation of procedures required to start a new industrial unit and minimisation- of the efforts and time required to obtain various permissions, licenses, registrations, subsidies etc.
CEDOK Established in 1992 is a Government of Karnataka Organisation promoted by the Department of Industries and Commerce with the support of State level industrial developmental agencies such as :
Karnataka State Small Industries Development Corporation (KSSIDC),
Karnataka State Financial Corporation (KSFC),
Karnataka State Industrial Investment Development Corporation (KSIIDC),
Karnataka Industrial Area Development Board (KIADB),
and national level financial institutions such as
Industrial Development Bank of India (IDBI),
Industrial Finance Corporation of India (IFCI),
Industrial Credit and Investment Corporation of India (ICICI) and
Government of India through Development Commissioner (SSI), New Delhi
with a objective to contribute to the development and dispersal of entrepreneurship by undertaking various entrepreneurship development and skill development / upgradation training programmes thus expand the social and economical base of entrepreneurial class
Role of financial institutions in support of women entrepreneurial activities...uma reur
Origin of SIDBI
In order to promote small scale industries in the country, a special Act was passed in Parliament in April 1990 for starting of Small Industries Development Bank of India. SIDBI is a wholly owned subsidiary of IDBI. It is providing assistance to all those institutions which are promoting small scale industries.
Capital of SIDBI
SIDBI has an authorised capital of Rs. 1000 crores. The RBI has also allocated INR 10,000 Crores to SIDBI for various venture capital activities and company startups in 2015. The entire operations of IDBI connected with small scale industries are now handed over to SIDBI.
Objectives of SIDBI:
To promote marketing of products of small scale sector.
To upgrade technology and also undertaking modernization of small scale units.
To provide more financial assistance to small scale ancillary and tiny sector.
To encourage employment oriented industries.
To coordinate all the other institutions involved in the promotion of small scale industries.
Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.
Modes of Expression of Ratios:
Ratios may be expressed in any one or more of the following ways:
(a) Proportion,
(b) Rate or times
(c) Percentage.
Advantages of Ratio Analysis:
The information shown in financial statements does not signify anything individually because the facts shown are inter-related. Hence it is necessary to establish relationships between various items to reveal significant details and throw light on all notable financial and operational aspects. Ratio analysis caters to the needs of various parties interested in financial statements. The basic objective of ratio analysis is to help management in interpretation of financial statements to enable it to perform the managerial functions efficiently.
Limitations of Ratio Analysis:
Ratios are precious tools in the hands of management but the utility lies in the proper utilisation of ratios. Mishandling or misuse of ratios and using them without proper context may lead the management to a wrong direction. The financial analyst should be well versed in computing ratios and proper utilization of ratios. Like all techniques of control, ratio analysis also suffers from several ‘ifs and buts’ and for proper computation and utilization of ratios the analyst should be aware of the limitations of ratio analysis.
Uses and Users of Financial Ratio Analysis
Analysis of financial ratios serves two main purposes:
1. Track company performance
Determining individual financial ratios per period and tracking the change in their values over time is done to spot trends that may be developing in a company. For example, an increasing debt-to-asset ratio may indicate that a company is overburdened with debt and may eventually be facing default risk.
2. Make comparative judgments regarding company performance
Comparing financial ratios with that of major competitors is done to identify whether a company is performing better or worse than the industry average. For example, comparing the return on assets between companies helps an analyst or investor to determine which company is making the most efficient use of its assets.
Users of financial ratios include parties external and internal to the company:
External users: Financial analysts, retail investors, creditors, competitors, tax authorities, regulatory authorities, and industry observers
Internal users: Management team, employees, and owners
Management Accounting - Trend Analysis - Income Statementuma reur
Meaning of Trend Analysis:
Comparison of past data over a period of time with a base year is Trend Analysis.
It computes the changes in percentage for different variables over a long period and then makes a comparative study of them.
Each item in the base year is taken as 100 and on that basis, trend analysis for the corresponding items in the other years are calculated.
Compute the trend percentage from the following data taking 2010 as the base year.
Compute the trend percentage from the following data taking 2010 as the base year.
Common Size Statement of Assets & Liabilitiesuma reur
Common Size Balance Sheet
A common size balance sheet shows the percentage in relation to each item of assets to total assets and each item of liabilities to total liabilities and capital.
A comparative common size balance sheet for different periods helps to understand the trends and reasons for changes in different items.
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Culturally, the Romans were eclectic, absorbing and adapting elements from the civilizations they encountered, particularly the Greeks. Roman art, literature, and philosophy reflected this synthesis, creating a rich cultural tapestry. Latin, the Roman language, became the lingua franca of the Western world, influencing numerous modern languages.
Roman architecture and engineering achievements were monumental. They perfected the arch, vault, and dome, constructing enduring structures like the Colosseum, Pantheon, and aqueducts. These engineering marvels not only showcased Roman ingenuity but also served practical purposes, from public entertainment to water supply.
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FFA- Statement of Schedule of Changes in Working Capital
1. MANAGEMENT ACCOUNTING
FUNDS FLOW STATEMENT
BY:
SMT.UMA MINAJIGI REUR
HEAD, DEPT. OF COMMERCE & MANAGEMENT
SMT. V G DEGREE COLLEGE FOR WOMEN, KALABURAGI
3. B.COM SIXTH SEMESTER
6.3: PRINCIPLES OF MANAGEMENT ACCOUNTING
Unit I: Management Accounting (08 Hours):
Definition and objectives of Management Accounting - Relationship between Cost, Financial and Managerial Accounting.
Unit II : Financial Statements (15 Hours):
Nature, uses and limitations. Analysis and interpretations – meaning, procedure, objectives, and importance. Comparative
statement, Common Size Statements and Trend Analysis - practical problems.
Unit III: Ratio Analysis (15 Hours):
Definition and meaning of Ratio Analysis, importance and limitations, Profitability Ratio – Gross profit Ratio, operating
Ratio, Overall profitability ratio – Earning per share. Turnover Ratios- Inventory Turnover Ratio, Debtors Turnover Ratio,
Debt collection period , Creditors Turnover Ratio, Debt payment period, Liquidity Ratio- current ratio, liquid ratio.
Financial positions and Leverage Ratios- Debt Equity Ratio, Proprietary Ratio - Problems thereon.
Unit IV: Analysis through Leverages (12 Hours):
Meaning- types of Leverages- operating – financial and combined leverages- problems thereon.
Unit V: Fund Flow Statement (15 Hours):
Meaning , uses and limitations – preparation of fund-flow statement. Cash Flow Statement: Meaning and preparation of
Cash flow statement- problems thereon.
4. Management Accounting
The term Management Accounting consists of two words: “Management” and “Accounting”.
Management is a technique of managing men. Its an art of getting things done by others.
Hence, for a successful execution of all activities, management has to to take various decisions
at every level. To take proper decisions, correct information is required. Such information is
provided by accounting.
Accounting is the process of identifying, measuring and communicating economic information
to management and outsiders. Such information’s help management to take decisions.
Management Accounting is the process of identification, measurement, accumulation, analysis,
preparation, interpretation, and communication of financial information in order to plan the
formulation of policies to plan and control the operations of the controlling of business
operations.
5. Definition:
J.S. Batty defines, “Management accounting is the term used
to describe the accounting methods, systems and techniques
which coupled with special knowledge and ability to assist
management in its task of maximising profit and minimising
losses.”
Management Accounting is a system for gathering data and
other financial information primarily for the internal needs of
management. It is designed to assist internal management in
the efficient formulation, execution and appraisal of business
plans.
6. Meaning of Funds Flow Statement:
It is a statement which discloses the analytical information about the different
sources of a fund and the application of the same in an accounting cycle.
It deals with the transactions which change either the amount of current assets and
current liabilities (in the form of decrease or increase in working capital) or fixed assets,
long-term loans including ownership fund.
It gives a clear picture about the movement of funds between the opening and closing
dates of the Balance Sheet. It is also called the Statement of Sources and Applications of
Funds, Movement of Funds Statement; Where Got-Where Gone Statement: Inflow and
Outflow of Fund Statement etc.
No doubt, Funds Flow Statement is an important indicator of financial analysis and
control. It is valuable and also helps to determine how the funds are financed. The
financial analyst can evaluate the future flows of a firm on the basis of past data.
Funds Flow Statement
7. Funds Flow Statement statement supplies an efficient method for
the financial manager in order to assess the
(a)growth of the firm,
(b)its resulting financial needs, and
(c)to determine the best way to finance those needs.
In particular, funds flow statements are very useful in planning
intermediate and long-term financing.
8. Objective of Preparing a Funds Flow Statement:
The main purpose of preparing a Funds Flow Statement is that it reveals
clearly the important items relating to sources and applications of funds of fixed
assets, long-term loans including capital. It also informs how far the assets
derived from normal activities of business are being utilised properly with
adequate consideration.
Secondly, it also reveals how much out of the total funds is being collected
by disposing of fixed assets, how much from issuing shares or debentures, how
much from long-term or short- term loans and how much from normal
operational activities of the business.
Thirdly, it also provides the information about the specific utilisation of
such funds, i.e. how much has been applied for acquiring fixed assets, how much
for repayment of long-term or short-term loans as well as for payment of tax and
dividend etc.
Lastly, it helps the management to prepare budgets and formulate the
policies that will be adopted for future operational activities.
9. Advantage of Funds Flow Statement:
1. It gives us information about how the funds are collected and how they are
used.
2. It helps in analysing the changes taking place in the working capital position
during a particular period.
3. It helps in measuring the efficiency in the utilization of funds.
4. It helps for making financial decisions.
5. It helps in estimating the future working capital requirements.
6. It helps in locating the idle funds.
7. It helps for better control over the financial activities of a firm by comparing
with the budgeted figures.
10. Limitations of Funds Flow Statement:
1. Profit ascertained is not correct, as it does not include non cash
items.
2. It is historical in nature and does not provide any basis for future.
3. It does not contain any original information, as the figures are
extracted from financial statements.
4. Management may manipulate the working capital position.
11. Sources of Funds:
Transactions which result in an increase in the amount of fund or
working capital are called sources of fund.
The following are the sources of funds:
1. Funds from operations, operating profit or trading profit.
2. Non operating incomes.
3. Refund of Income Tax (received).
4. Issue of Shares for cash or for any other current asset.
5. Issue of debentures for cash or for any other current asset.
6. Long term and medium term loans borrowed.
7. Long term or medium term deposits accepted.
8. Sale of long term investments for cash or for any other current asset.
9. Sale of fixed assets for cash or for any other current asset.
12. Application of Funds:
Transactions which result in decrease in fund are called uses or
applications of fund.
The following are the application of funds:
1. Funds lost in operations, operating loss or trading loss.
2. Non operating expenses.
3. Redemption of redeemable preference Shares for cash or for any other
current asset.
4. Redemption of debentures for cash or for any other current asset.
5. Redemption of Long term and medium term loans in cash or in any other
current asset.
6. Redemption of Long term or medium term deposits in cash or in any other
current asset.
7. Purchase of long term investments for cash or for any other current asset.
8. Purchase of fixed assets for cash or for any other current asset.
9. Drawings.
13. Preparation of Funds Flow Statement
1. Preparation of Statement of changes in working capital.
2. Preparation of Fixed Assets accounts.
3. Ascertain the funds from operations.
4. Finally preparation of Funds flow statement.
14. Statement Of Schedule Of Changes In Working Capital
This statement is prepared with the help of current assets and current liabilities
relating to two different periods.
An increase or decrease in respect of each of such items should be recorded to
ascertain the net increase or decrease in the working capital.
An increase in the value of current assets between two different periods indicates
an increase in the working capital. It is an application of funds.
An increase in the value of current liabilities between two different periods
indicates decrease in the working capital. It is sources of funds.
15. Particulars Previous
Year
Current
Year
Increase in
Working Capital
Decrease in
Working Capital
a) Current Assets
I Current Investments
Temporary Investment
Short Term Investment
II Inventories
Stock
III Trade Receivable
Sundry Debtors
Bills Receivable
IV Cash & Cash Equivalent
Cash Balance
Bank Balance
V Short Term Loans & Advances
Prepaid Expenses
VI Other Current Assets
Outstanding Incomes
Format:
Statement of schedule of changes in working capital
16. Particulars Previous
Year
Current
Year
Increase in
Working Capital
Decrease in
Working Capital
a) Current Liabilities
I Short Term Borrowings
Bank Overdraft
Short Term Loans & Advances
II Trade Payable
Sundry Creditors
Bills Payable
III Other Current Liabilities
Outstanding expenses
IV Short Term Provisions
Dividend Payable
Proposed dividends
Provisions for taxation
Working Capital (A-B)
Increase or Decrease in Working
Capital
17. Rules for preparing the Statement Of Schedule Of Changes In Working Capital
Increase in a current asset result in increase(+) in working capital.
Decrease in a current asset result in decrease(-) in working capital.
Increase in a current liability result in decrease(-) in working capital.
Decrease in a current liability result in increase(+) in working capital.
18. Illustration 1:
The following are the statement of Assets and Liabilities of a concern as on 31-12-2017 and 2018. Prepare statement of
schedule of changes in working capital.
Statement of Assets & Liabilities
Particulars 31-12-2017 31-12-2018
Amount Amount Amount Amount
I. Equity & Liabilities
1. Shareholders fund
Share Capital 6,00,000 6,00,000
Reserves & Surplus 6,92,000 12,92,000 8,64,000 14,64,000
2. Non-Current Liabilities
Long Term Borrowings 1,00,000 2,35,000
3. Current Liabilities
Trade Payables 6,39,000 9,41,000
Total 20,31,000 26,40,000
II. Assets
1. Non-Current Assets
a. Fixed Assets
Tangible Assets 11,13,000 13,98,000
2. Current Assets
Current Investments 87,000
Inventories 4,32,000 6,83,000
Trade receivables 3,46,000 5,28,000
Cash & Cash Equivalents 53,000 9,18,000 31,000 12,42,000
19. Notes to Accounts
Particulars 31-12-2017 31-12-2018
Amount Amount
Note 1: Share Capital
60,000 Equity Shares of Rs.10 each 6,00,000 6,00,000
Share Capital 6,00,000 8,00,000
Note 2: Reserves & Surplus
Profit & Loss 6,92,000 8,64,000
Reserves & Surplus 6,92,000 8,64,000
Note 3: Long Term Borrowings
Loan from Bank 1,00,000 2,35,000
Long Term Borrowings 1,00,000 2,35,000
Note 4: Trade Payable
Sundry Creditors 4,13,000 6,27,000
Bills Payable 2,26,000 3,14,000
Trade Payable 6,39,000 9,41,000
21. Solution:
Statement of schedule of changes in working capital
Particulars 2017 2018 Increase in
Working
Capital
Decrease in
Working
Capital
A. Current Assets
Current Investments
Inventories
Trade Receivables
Cash & Cash
Equivalents
B. Current Liabilities
Trade Payables
Sundry Creditors
Bills Payable
Working Capital (A-B)
Increase in Working
Capital
87,000
4,32,000
3,46,000
53,000
9,18,000
6,83,000
5,28,000
31,000
12,42,000
2,51,000
1,82,000
4,13,000
2,26,000
6,39,000
6,27,000
3,14,000
9,41,000
4,33,000
2,14,000
88,000
22,000
87,000
2,79,000
22,000
3,01,000
3,01,000
3,01,000 4,33,000 4,33,000
4,11,000
22,000
--
22. Particulars 2017 2018 Increase in
Working Capital
Decrease in Working
Capital
A. Current Assets
Current Investments 87,000 87,000
Inventories 4,32,000 6,83,000 2,51,000
Trade receivables 3,46,000 5,28,000 1,82,000
Cash & Cash Equivalents 53,000 31,000 22,000
9,18,000 12,42,000
B. Current Liabilities
Trade Payables
Sundry Creditors 4,13,000 6,27,000 2,14,000
Bills Payable 2,26,000 3,14,000 88,000
6,39,000 9,41,000
4,33,000 4,11,000
Working Capital (A-B) 2,79,000 3,01,000
Increase in Working Capital 22,000 22,000
3,01,000 3,01,000 4,33,000 4,33,000
Solution:
Statement of schedule of changes in working capital