Management accounting provides information to support management decision making. This presentation discusses management accounting, funds flow statements, and cash flow statements. It defines management accounting and its functions. It explains the meaning, objectives, and preparation of funds flow statements and cash flow statements. Key terms like working capital, current assets, current liabilities, and their relationship are also discussed along with the importance and limitations of funds flow statements.

1. WELCOME TO Presentation on
MANAGEMENT ACCOUNTING
FUNDS FLOW STATEMENT
CASH FLOW STATEMENT
Working Capital
DR. SHIVAJI VISHWAS SHINDE
Department of Accountancy
D.A.V.Velankar College of
Commerce, Solapur.

2. PAPER-M ANAGEMENT ACCOUNTING AND
FINANCE
Unit – II. Management Accounting:
Meaning and scope management accounting as
a tool of Management;
The Role Management Accounting.
 Funds Flow Analysis : Concept of Funds,
 Sources and application of Funds, Preparation
of Funds Flow Statement
Cash Flow Analysis:
Preparation of cash flow statement; uses

3. INTRODUCTION
•Management Accounting-
•Two words-Management-Accounting-
•Management-oriented Accounting.
“Basically study of managerial aspect of
financial accounting-accounting in relation
to management function".
Reference- Accounting for Managers: Paul M. Collier
Aston Business School, Aston University2003

4. Financial Accounting-
Maintain records –
Financial control
Financial Statements-Trading-profit and loss
account and balancesheet
Managerial Accounting-
Provides the data needed to support
management- decision making
Cost Accounting-
Cost Of Products
Cost Of Functions
Cost Of services
The basis for managerial accounting
The basis in financial accounting for inventory
evaluation

5. The primary task of management accounting –
 To redesign the entire accounting system so that it
may serve the operational needs of the firm.
 It furnishes definite accounting information, past,
present or future, which may be used as a basis for
management action.
The financial data are so devised and systematically
development that they become a unique tool for
management decision.

6. DEFINITIONS OF MANAGEMENT ACCOUNTING:
The Report of the Anglo-American Council of
Productivity(1950)-
“Management Accounting is the presentation of
accounting information in such a way as to assist the
management in creation of policy and the day to day
operation of an undertaking".
It is an accounting for the management i.e.,
accounting which provides necessary information to the
management for discharging its functions.
Reference- Accounting for Managers: Paul M. Collier
Aston Business School, Aston University2003

7. NATURE OF MANAGEMENT ACCOUNTING
The term management accounting is composed of 'management' and
'accounting'.
Management accounting for management needs.
 The management accounting - for decision making.
Management accounting - tools for an analysis of costs, prices and
profits, etc.
Helpful for other disciplines like costing, statistics, mathematics, financial
accounting, etc.
A knowledge of political , sociology, Psychology helps to understand the
behaviour of man in groups.
Management accounting builds a better employer-employee relationship
and a sound morale.
Management accounting has no set principles such as the double entry
system of bookkeeping.
Management accounting is managerially oriented, its data is selective in
nature.
It focuses on potential opportunities rather than opportunities lost.
Management accounting is highly sensitive to management needs.
A wide and diverse subject.

8. FUNCTIONS OF MANAGEMENT ACCOUNTING-
The basic function of management accounting is to assist the management
in performing its functions effectively. The functions of the management are
planning, organizing, directing and controlling. Management accounting
helps in the performance of each of these functions in the following ways:
(i)Provides data:
(ii) Modifies data:
(iii) Analyses and interprets data:
iv) Serves as a means of communicating:
(v) Facilitates control:
(vi) Uses also qualitative information:

9. 7. SCOPE OF MANAGEMENT ACCOUNTING
Management accounting is concerned with presentation
of accounting information in the most useful way for the
management. Its scope is, therefore, quite vast and
includes within its fold almost all aspects of business
operations. However, the following areas can rightly be
identified as falling within the ambit of management
accounting:

10. (i)Financial Accounting
(ii) Cost Accounting:
(iii) Budgetary Control:
(iv) Inventory Control
(v) Rayio analysis
(vi)Marginal costing
(vii)Stanndarsd costing

11. (v) Statistical Methods: Graphs, charts, pictorial presentation, index numbers
and other statistical methods make the information more impressive and
intelligible.
(vi) Interim Reporting: This includes preparation of monthly, quarterly, half-
yearly income statements and the related reports, cash flow and funds flow
statements, scrap reports, etc.
(vii) Taxation: This includes computation of income in accordance with the tax
laws, filing of returns and making tax payments.
(viii) Office Services: This includes maintenance of proper data processing and
other office management services, reporting on best use of mechanical and
electronic devices.
(ix) Internal Audit: Development of a suitable internal audit system for internal
control.

12. LIMITATIONSOF MANAGEMENTACCOUNTING
Management accounting, being comparatively a
new discipline, suffers from certain limitations,
which limit its effectiveness.
1. Limitations of basic records:
2. Persistent efforts.
3. A Tool in the Hands of Management:
4. Wide scope:
5. Top-heavy structure:
6. Opposition to change:
7. Evolutionary stage:
8.Accuracy is not Ensured:
9.Lack of Knowledge and Understanding:

13. Features of data Provided by
Financial
Accounting
Provided by
Management
Accounting
1.period After stated period At frequent intervals
2.Time Historical data Current and future data
3.Unit of Expression Money only Any statistical unit
4. Nature Actual data Projected data
5. Specificity Aggregates Detailed analysis
6. Description Money consequences Events
7. Reality Objective Subjective
8. Precision Accuracy May be guess-work
9. Principles Double entry system Cost benefit analysis
10. Legality Obligatory Optional
11. Purpose Overview of entire
Business activity
Analytical details of
such activities as call
for decisions
Financial Accounting and Management Accounting

14. 2.FUNDS FLOW STATEMENT
Learning Objectives-
1.Introduction
2 .Meaning & Definitions
3 .Objectives
4 .Limitations
5 . Statement of Changes in Working Capital
6.Procedure of Preparing Funds Flow Statement
7. Funds Flow Statement
8. Parties Interested in Funds Flow Statement
9.Typical Items Which Require Particular Care

15. •INTRODUCTION
•The balance sheet and income statement
•Furnish useful financial data regarding business operations,
•They fail to provide the information regarding causes of changes between
two-time period
•Additional statement should be prepared to show the changes in assets,
liabilities and owner’s equity between dates of two balance sheets.
•statement of changes in financial positions.
•The statement of changes in financial position overcomes these limitations
of basic financial statements.
•statement of changes in financial position are called the Funds Flow
Statement and the Cash Flow Statement

16. MEANING & DEFINITIONS
The Funds Flow Statement is combination of three words
Funds, Flow and Statement.
Funds mean working capital.
There are mainly two concepts of the working capital.
 First, the broad concept according to which working capital
represents the amount of funds invested in current assets.
Second, the narrow sense, which termed working capital as
the excess of current asset over current liabilities

17. Flow means movement.
If we take the flow of funds it means changes in
the position of the funds due to any transaction.
The funds may increase or decrease.
The increase in funds -- called funds inflow and
The decrease in funds-- called funds outflow.
Current assets and current liabilities.

18. Funds Flow Statement means a summary
of the sources and uses of the Funds.
Definitions:
“A statement of sources and application of funds is a technical
device designed to analyze the changes in the financial condition of a
business enterprise between two dates.” Foulke
According to I.C.W.A. “Funds Flow Statement is a statement
either prospective or retrospective, setting out the sources and
applications of the fund of an enterprise. The purpose of the statement
is to indicate clearly the requirement of funds and how they are
proposed to be raised and the efficient utilization and application of the
same.”
Anthony defines the Funds Flow Statement as the sources from
which additional funds were derived and the use to which these sources
were put.

19. It has several names
1.funds flow statement
2.sources and application of funds statement
3.where got where gone statement
4.inflow and outflow of funds statement
5.

20. Importance and limitations of funds flow statement
Importance LIMITATIONS
1. Provide the information regarding
changes in funds position
2. It helps in the formation of future
dividend policy
3. It helps in proper allocation of
resources
4. It act as future guide
5. It helps in appraising the use of
working capital
6. It helps to the overall credit
worthiness of a firm
7. It helps to know about the utilization
of the sources
1. Prepared from the final
statements:
2. Only rearrangement:
3. Past oriented:
4. Working capital oriented
5. Periodic in nature:
6. Not a substitute

21. SCHEDULE OF CHANGES IN WORKING CAPITAL
This statement is made to recognize the changes in the amount of working
capital among the dates of two balance sheets.
This statement is prepared by deriving the values of current assets and
current liabilities from the balance sheet.
Current assets are those assets, which can be converted into cash within a
short time period in the ordinary course of the business.
Current liability means those obligations, which are to be fulfilled in a
short time period, generally a financial year.
The schedule of changes in working capital can be prepared by comparing
the balance sheets of two dates.
Working Capital = Current Assets – Current Liabilities.

22. Schedule of Changes in Working Capital
Particulars Previous Year Current
Year
Changes in Working Capital
Increase Decrease
Cash at Bank
Sundry Debtors
Temporary Investment
Stock/Inventories
Prepaid Expenses
Accrued Income
Total Current Assets
Current Liabilities:
Bills Payable
Sundry Creditors
Outstanding Expenses
Bank Overdraft
Short-term Advances
Dividend Payable
Proposed Dividend*
Provision for Taxation*
Total Current Liabilities
Working Capital
(CA-CL)
Net Increase/Decrease
.

23. Sources of Funds Amount Applications of Funds Amount
Funds from operations
Issue of Share Capital
Raising of Long term Loans
Receipts from partly paid
shares
Sales of non-current assets
Non-trading receipts
Sale of Investment
Decrease in working capital
Funds Lost in Operations
Redemption of Preference
Share
Redemption of Debentures
Repayment of Long-term loan
Purchase of non-current assets
Non-trading payments
Payment of Dividend
Payment of Tax
Increase in working capital
XXXXX XXXXX
FUNDS FLOW STATEMENT
Funds flow statement is a statement, which shows the sources and application of the
funds during a particular time period.
This statement shows that during that period from where the funds have been
procured and where have been invested.
This statement can be prepared in two forms:
1) Report Form
2) T Form or Account Form
Specimen of T Form of Funds Flow Statement (for the year ended ……..)

24. Particulars Amount Particulars Amount
To Depreciation & Depletion
To Appropriation of retained
earnings
To Loss on sale of fixed
assets
To Dividend
To Proposed Dividend
To Provision for Taxation
To Closing Balance of P & L
A/c
To Funds lost in Operations
(B/F)
By Opening Balance of P & L
A/c
By Transfer from excess
provisions
By Appreciation in the value
of fixed assets
By Dividend received
By Profit on the sale of fixed
assets
By Funds from Operations
XXX XXX
Adjusted Profit and Loss Account

25. PARTIES INTERESTED IN FUND FLOW
STATEMENT-
Funds flow statement is useful for different parties
interested in the business.
Owners or Shareholders:
Financial Institutions:
Employees:

26. Meaning of Cash Flow Statement
Cash flow is made up of two words i.e. Cash and Flow
Cash means cash balance in hand including cash at bank
balance
Flow means changes (which may be + or – increase or
decrease) in the cash movements of the business.

27. Cash Flow Statement deals with only such items, which
are connected with cash i.e., items relating to inflow and
outflow of cash.
Prepared to study the changes in cash, or to show
impact of various transactions on the cash.
It is a statement, which is prepared to show the flow of
cash in the business during a particular period.
Tells about the changes in cash position of a business.
The changes may be related either with the cash
receipts or cash payments or disbursements of cash.
Thus, Cash Flow Statement is a summary of cash
receipts and payments

28.  Explains the reasons for the changes in the cash
position of the business on account of the Decrease
in the cash position is termed as outflow of cash and
increase is termed in flow.
Cash flow statement also tells about various
sources in cash such as cash from operations, sale of
current and fixed Assets, issue of shares/debentures,
also termed as inflow of cash whereas loss from
operations, purchase of current and fixed assets,
redemption of preference shares/debentures and
other long term loans etc are also termed as outflow
of cash.

29. USES OF CASH FLOW STATEMENT-
•Short-Term Planning :
•The Cash Flow helps understand Liquidity and Solvency :
•Efficient Cash Management
•Comparative Study :
•Reasons for Cash Position :
•Test for the Management Decisions :

30. LIMITATIONS OF CASH Flow STATEMENT
Though the Cash Flow Statement is a very useful tool of
financial analysis, it has its limitations which must be kept in
mind at the time of its use. These limitations are :
•Non-cash Transaction are ignored :
•Not a substitute for an Income Statement :
•Historical in Nature
•Ignorance

31. •IMPORTANT TERMS IN CASH FLOW STATEMENT
•Operating Activities : Operating activities are the principal revenue-producing
activities of the enterprise and other activities that are not investing or financing
activities.
•Investing Activities : Investing activities are the acquisition and disposal of long-
term assets and other investments not included in cash equivalents.
•Financing Activities : Financing activities are the activities that result in change in
the size and composition of the owners’ capital (including preference) share capital in
the case of a company) and borrowing of the enterprise.

32. Operating Activities
• Cash Inflow
• Cash Sales
• Cash received from
debtors
• Cash received from
Commission and Fees
• Royalty
• Cash Outflow
• Cash Purchases
• Payment to Creditors
• Cash Operating Expenses
• Payment of Wages
• Income Tax

33. Investing Activities
• Cash Inflow
• Cash Outflow
• Purchase of Fixed
Assets
Purchase of Investments
Sales of fixed Assets
Sale of Investments
Interest Received
Dividends Received

34. Financing Activities
• Cash Inflow
 Shares in Cash
 Issue of Debentures in Cash
 Proceeds from Long-term
Borrowings
• Cash Outflow
• Payment of Loans
• Redemption of Preference
Shares
• Buy-back of Equity Shares
• Payment of Dividend
• Payment of Interest
 Repayment of
Finance/Lease Liability

35. Working capital
Introduction
• Working capital typically means the firm’s
holding of current or short-term assets such as
cash, receivables, inventory and marketable
securities.
• These items are also referred to as circulating
capital
• Corporate executives devote a considerable
amount of attention to the management of
working capital.

36. Concept of working capital
• There are two possible interpretations of
working capital concept:
1. Balance sheet concept
2. Operating cycle concept
Balance sheet concept
There are two interpretations of working
capital under the balance sheet concept.
a. Excess of current assets over
current liabilities
b. gross or total current assets.

37. Definition of Working Capital
Working Capital refers to that part of the
firm’s capital, which is required for
financing day to day expenses.
Working Capital is also known as
revolving or circulating capital or short-
term capital.

38. • Excess of current assets over current liabilities are
called the net working capital or net current assets.
• Working capital is really what a part of long term
finance is locked in and used for supporting current
activities.
• The balance sheet definition of working capital is
meaningful only as an indication of the firm’s current
solvency in repaying its creditors.
• When firms speak of shortage of working capital they
in fact possibly imply scarcity of cash resources.
• In fund flow analysis an increase in working capital,
as conventionally defined, represents employment or
application of funds.

39. • Operating cycle concept
• A company’s operating cycle typically consists of three
primary activities:
– Purchasing resources,
– Producing the product and
– Distributing (selling) the product.
These activities create funds flows that are both
unsynchronized and uncertain.
Unsynchronized because cash disbursements (for example,
payments for resource purchases) usually take place before
cash receipts (for example collection of receivables).
They are uncertain because future sales and costs, which
generate the respective receipts and disbursements, cannot
be forecasted with complete accuracy.

40. “ circulating capital means current assets of a
company that are changed in the ordinary
course of business from one form to another,
as for example, from cash to inventories,
inventories to receivables, receivable to cash”
……Genestenbreg

41. • The firm has to maintain cash balance to pay
the bills as they come due.
• In addition, the company must invest in
inventories to fill customer orders promptly.
• And finally, the company invests in accounts
receivable to extend credit to customers.
• Operating cycle is equal to the length of
inventory and receivable conversion periods.

42. TYPES OF WORKING CAPITAL
WORKING CAPITAL
BASIS OF
CONCEPT
BASIS OF
TIME
Gross
Working
Capital
Net
Working
Capital
Permanent
/ Fixed
WC
Temporary
/ Variable
WC
Regular
WC
Reserve
WC
Special
WC
Seasonal
WC

43. 1. Nature of the Industry
2. Demand of Industry
3. Cash requirements
4. Nature of the Business
5. Manufacturing time
6. Volume of Sales
7. Terms of Purchase and Sales
8. Inventory Turnover
9. Business Turnover
10. Business Cycle
11. Current Assets requirements
12. Production Cycle

44. Working Capital Determinants (Contd…)
13. Credit control
14. Inflation or Price level changes
15. Profit planning and control
16. Repayment ability
17. Cash reserves
18. Operation efficiency
19. Change in Technology
20. Firm’s finance and dividend policy
21. Attitude towards Risk

45. Disadvantages or Dangers of Inadequate or Short
Working Capital
 Can’t pay off its short-term liabilities in time.
 Economies of scale are not possible.
 Difficult for the firm to exploit favourable market
situations
 Day-to-day liquidity worsens
 Improper utilization the fixed assets and ROA/ROI
falls sharply

46. • Disadvantages of Redundant or Excess
Working Capital
Idle funds, non-profitable for business, poor
ROI
 Unnecessary purchasing & accumulation
of inventories over required level
 Excessive debtors and defective credit
policy, higher incidence of B/D.
Overall inefficiency in the organization.
When there is excessive working capital,
Credit worthiness suffers
 Due to low rate of return on
investments, the market value of shares may
fall

47. MANAGEMENT OF WORKING CAPITAL ( WCM )
Management of working capital is concerned with the
problems that arise in attempting to manage the current
assets, the current liabilities and the inter-relationship that
exists between them. In other words, it refers to all aspects of
administration of CA and CL.
Working Capital Management Policies of a firm have a great
effect on its profitability, liquidity and structural health of the
organization.

48. THE WORKING CAPITAL
CYCLE
(OPERATING CYCLE)
Accounts Payable
Cash
Raw
Materials
W I P
Finished
Goods
Value Addition
Accounts
Receivable
SALES