The document outlines the procedure for preparing a funds flow statement and a statement of changes in working capital, highlighting their objectives and importance in assessing a company's financial performance. It details the factors affecting working capital, categorizing assets and liabilities into current and fixed items, and explains how to prepare these statements for managerial decision-making. Additionally, it includes illustrations and calculations to demonstrate working capital changes over specified periods.

1. PROCEDURE FOR PREPARING A
FUNDS FLOW STATEMENT &
Statement of changes in working capital
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 1
Mr. LIBEESH P C
Assistant Professor in Commerce
B Com, Bed, M Com, UGC NET

2. Keep in mind
Objectives of FFS
To measure the movement of fund over a period of time.
To find out the financial performance of company.
To take corrective action in case of performance is not up to the mark.
To measure the degree of increase of working capital for a period.
To take various managerial decisions of a company.
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 2

3. Importance of current and fixed item in the fund
Increase or decrease of working capital shows that
the extent of fund utilized.
The utilization or movement funds is due to the
effect of changes in the fixed item.
So both current and fixed item are considered as
important in the fund flow analysis.
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 3

4. Causes of changes in working capital
An increase in current assets increases the working capital
The decrease in current assets decreases the working capital
An increase in current liabilities decreases the working capital
A decrease in current liabilities increases working capital
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 4

5. Current items
Current liabilities
Sundry creditors
Bank overdraft
Bills payable
Outstanding expenses
Income received in advance
Provision for tax
Proposed dividend
Current assets
Stock
Sundry debtors
Cash
Bank balance
Bills receivables
Outstanding income
Expenses paid in advance
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 5

6. Fixed items (non current items)
Fixed liabilities
Equity share capital
Preference share capital
Debenture
Long term loan
Fixed assets
Land and buildings
Plant and machinery
Furniture and fittings
Investments
Other non current Assets
Good will
Preliminary expenses
Discount issue of shares
Other non current liabilities
Profit and loss account
General reserve
Capital debenture reserve
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 6

7. preparation of FFS consists of three parts
1. Statement or schedule of changes in working capital
2. Preparation of adjusted profit and loss account
3. Statement of sources and application of funds
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 7

8. Statement or schedule of changes in working capital
To find out the increase decrease of working capital for current year
compared to the previous year.
Prepared with the help of current assets and current liabilities derived
from the two balance sheets
Increase of working capital is considered as the excess of fund inflow.
Working capital = Current assets - Current liabilities
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 8

9. Statement of changes in working capital
Particulars Period 1 Period 2 Increase in WC Decrease in WC
Current assets
Stock
Debtors
Cash
Bank
Bills receivables
Current liabilities
Sundry creditors
Bank over draft
Outstanding expenses
Working capital (CA-CL)
Increase or decrease in WC MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 9

10. Calculate working capital from the following information
Particulars 31-03-2016 Rs 31-03-2017 Rs
Sundry debtors 1,40,000 1,60,000
Sundry creditors 1,30,000 1,50,000
Bank overdraft 40,000 50,000
Outstanding expenses 20,000 17,000
Expense paid in advance 24,000 19,000
Income received in advance 15,000 10,000
Stock 90,000 1,25,000
Cash 60,000 70,000
Outstanding income 25,000 35,000
Illustration 1
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 10

11. Particulars 31-03-2016 Rs 31-03-2017 Rs
Current Assets
Sundry debtors 1,40,000 1,60,000
Stock 90,000 1,25,000
Cash 60,000 70,000
Outstanding income 25,000 35,000
Expense paid in advance 24,000 19,000
Total Current Assets 3,39,000 4,09,000
Current Liabilities
Sundry creditors 1,30,000 1,50,000
Bank overdraft 40,000 50,000
Outstanding expenses 20,000 17,000
Income received in advance 15,000 10,000
Total Current Liabilities 2,05,000 2,27,000
Working Capital = CA-CL 1,34,000 1,82,000
Solution 1 Calculation of working capital
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 11

12. Illustration 2
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 12

13. Statement of changes in working capital
Particulars Period 1 Period 2 Increase in WC Decrease in WC
Current assets
Stock 1,50,000 2,25,000 75,000
Accounts receivables 70,000 1,40,000 70,000
Cash 30,000 10,000 20,000
Work in progress 80,000 90,000 10,000
Total assets 3,30,000 4,65,000 1,55,000 20,000
Solution 2
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 13

14. Statement of changes in working capital (Cont.)
Particulars Period 1 Period 2 Increase in WC Decrease in WC
Total assets 3,30,000 4,65,000 1,55,000 20,000
Current liabilities
Tax payable 77,000 43,000 34,000
Accounts payable 96,000 1,92,000 96,000
Interest payable 37,000 45,000 8,000
Dividend payable 50,000 35,000 15,000
Total Current Liability 2,60,000 3,15,000 49,000 1,24,000
Working capital (CA-CL) 70,000 1,50,000 2,04,000 1,24,000
Increase or decrease in WC 80,000 80,000
1,50,000 1,50,000 2,04,000 2,04,000
Solution 2
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 14

15. 1. ……………..means excess of current assets over current liabilities.
(a)Working capital
(b) Gross working capital
(c) Net working capital
(d) All of these
Ans: Net working capital
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 15

16. 2. ……………….means cash and other assets which are expected to be sold
or consumed during the normal operating cycle of business.
(a) Liquid assets
(b) Quick assets
(c) Cash equivalents
(d) Current assets
Ans: Current assets
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 16

17. 3. Which among the following asset is excluded from current assets ?
(a) Loose tools
(b) Accounts receivable
(c) Short term investments with bank
(d) Finished goods
Ans: Loose tools
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 17

18. 4. Which transaction results in flow of funds ?
(a)transaction involve only fixed assets
(b) transaction involve only current assets
(c) All of these
(d) None of these
Ans: None of these
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 18

19. 5. There will be flow of funds, if a transaction involves………………
(a) Current assets and fixed assets
(b) Current assets and capital
(c) Current assets and fixed liabilities
(d) All of these
Ans: All of these
MANAGEMENT ACCOUNTING, FUND FLOW STATEMENT 19
Mr. LIBEESH P C
Assistant Professor in Commerce
B Com, Bed, M Com, UGC NET