funds flow statement and cash flow statement - Future CA's

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Chapter 15

FUNDS FLOW STATEMENT AND CASH FLOW STATEMENT CHAPTER OVERVIEW

Procedure for preparinq the Funds Flow Statement

1. 2.

Procedure for preparing

3. 4.

1.

Funds Flow Statement vs Income

&

Expenditure,A/c

Analysis of Cunent Assets and Current Liabilities Analysis of Non{urrent Assets and Nonturrent Liabilities

Statement using

(a) Direct l4ethod and (b) Indkect l4ethod

Analysis of Profit

2.

Funds Flow Statehem vs Balance

Sheet

3,

Funds Flow Statetnent vs

Gsh

Preparation of Funds Flow Statement

I. FUNDS FLOW STATEMENT 1.

o€lD.ibe lhe procedule lor prcparing the Funds Flow Shiemenl.

Stage

Procedure Prepare the Schedule of Changes in l{et Worldng Capital. and ascertain the Increase lilote: Current Assets and Current Liabilities items will be considered in this Schedute.l

1

/

Decrease.

Analyse the Noft{urrent Assets and Non{urent L;abitity accounts, viz. Fixed Assets, Investmenb, Capjtal, Loan, etc. to ascertain movement of funds as under

. . . .

2

-

Fixed Assets: Sale

/ Invedments: Sale of Investments or additional investments made dudng the year, Capital: Redemption / Buyback of Shares or Fresh Issue ofCapital(at premium, ifany). Disposal or Fresh Purchase of Faxed Assets.

Loansi Repayment of Loans or Additional Eorrowing during the year. the course of analysis in Stage 2, - (a) Non{ash Items (tike Depreciation, T.ansfer to Reserves, etc, and (b) on-Operating It€ms / Aaljustments (e.9. Profit / Loss on sale of assets / investments, etc.) will also

lilot€: In

be identified.l

ftrm Operations (FFO), i.e. Surplus generated iiom activities during the period. Profit during the year + Adjust nents in respect of Depreciation, Amortisations and Write-Offs, Transfers

Compute Funds

3

FFO

=

to Reserves, Dividend declared,

Prepare the Statement of Sources and Application of Funds (i.e. Funds Flow Statenent) showing the various fund movements during the p€riod,

4

. 2,

ttc.

lhsc

z,CASHFLOWSTATEMENT be th€

prlc€dur lor preparhg tie

Cash Flow Statement is an

Cash Flow

SHement

Analytical Recon.iliation Statement of the difference in Cash and

15.1

Bank. as under

-

Students Handbook on Cost Accountinq and Flnancial Manaqement

Clo6ing Balance of Cash & cash Equivalents (Less) Opening Balance of Cash & Cash Equivalents = lncrease

/

Decrease in Cash and Cash Equivalents during the year. attributed to

Ooeratino Activities

Investing Activiti€s Changes (increase / decrease)

in

Finan.inq Activits€s Changes (increase / decrease) in

Investments & Lonc-Term Assets

Caoital and Lonc-Term Liabilities

I{ote: Long Term Assets items / movements should be considered under this Headinq. Examples

I{ote:

Crsh Generated from Operations, comDuted as under

-

-

EBT

+ llortstash Items I NoF{perating Items Operating Profit before WC Ad.iustments

a Adjustment for Working Capital Changes Cash flow before Taxes

(-) Taxes paid Cash Flow from Opelating

. .

-

from

A.tivities

FormaE The Direct Method of

/

Sale of Fixed Assets and LongF-Term Investrnents. LonqFTerm lncome Invesbnents. Purchase

Long Term Uabilt items / movements shoLrld be considered under thls Heading. Examples Redemption Equity Issue Capital, Preference Capital, & Debt

-

Particrlars Gsh

Receipts from Customers for sale of goods

/

rendedng of sewices

Cash Receipts from Royalties, fees, commission and other revenue Cash Paymenb to Supplie6 for goods and seryices

cash Paymenb to and on behalf of Employees Gsh receipts and payments relating to futures / forward contracb are held for dealing ortrading purposes.

/ option / swap conkacts when the

Cash Generated from Operations before taxes and otraordinary items

L€ss: Gsh

Payments (Refunds) of income taxes unless they can be speaifically identified with frnancing and investing activities Cash Flovys before extraordinary items

Add

/

Lesi:

cash Receipts (Payments) in relation to extraordinary items, e.g. earthquake disaster setdement, etc.

NET CASH FROI.I OPERATING

l{oter

ACTIVIIIES

For a Financial Enterprise, Interest Received & Interc6t Pajd \,!ould constitute Operating

FormaE The

IndiE t l{ethod of

Gsh

Net Profit before Taxes and Extra-{rdinary ltems

forl

Depreciation and simllar non--cash items Foreign Exchange Losses, if any

Interest / Dividend Interest Paid

/

Other Incomes relating to investjng / financing activitjes

Taxes Paid (if PAT is considered initially instead of PBT) Operaung Profit before working Capital Changes

Add

/ (Less):

Decrease

Increase

/ (Increase) in Current Assets excluding Cash / Cash Equivalenb. / (Decrease) in Current Liabilities excluding Cash / Cash Equivalents

Cash Generated From Operations

[ess:

Cash Payments (Refunds) of income taxes unless they can be specifi.ally identified with financing and investing activitjes Cash Flows before extraordinary items

Add

/

Lesr:

Flows.

no Activities is illustrated below:

Particula15 Adjustsnents

Cash Receipb (Payments) in relation to extraordinary items, if any

]{ET OASH FROI'I OPERATII{G

ACTMrIES

15.2

-

Inter€st pal, on Debt, & Divilend paid on Equlv & Prefurence Gpihl.

Activiti€6 is illustrated belou/

Cash Flows from

of

/

Students' Handbook on Cost Accountinq and Financlal Management

ILLUSTRATIONS ON FUNDS FLOW STATEMENT Procedure

Stage

Prepare the Schedule ofChanges in Net Working CaPital, and ascertain the Increase

1

/

Decrease.

'lote: Curent Assets and Current Liabilities items will be considered in this Schedule.l Analyse the Noft{u.rent Assets and Non{urrent Liability accounts, viz. Fixed Assets, lnvestments. Capital, Loant etc. to ascertain movement of funds as under

. . . .

2

-

Fixed Assetsr Sale / Disposal or Fresh Purchase of Fixed Assets.

Investments: Sale of lnvestments or additional investments made durinq the year. Capital: Redemption / Buyback of Shares or Fresh Issue of capital (at premium, ifany).

Loans: Repayment of Loans or Additional Borrowing during the year. ll{ote: In the course of analysis in Stage 2, - (a) Non-Cash Items (like Depreciation, Transfer to Reserves, etc, and (b) on{perating Items / Adjustments (e.9. Profit / Loss on sale of assets / investments, etc.) will also be identified.l

frcm operations (FFo), i.e. Surplus generated from activities during the period. Profit during the year + Adjustments in respect of Depreciation, Amortisations and Write{Ffs, Transfers

Compute Funds

3

=

FFO

to Reserves, Dividend declared, etc.

Prepare the Statement of sources and Application of Funds (i.e. Funds Flow statement) showing the va ous fund movements dudng the period,

4

I : Funds Flow Slrlement wilh Brlance She€t5 and Addlt'lonal ldorodon Balance Sheets ot RST Limiled as on 3 'r March 2008and 31d March 2009 arcasunder {ln 31.3.2009 Assels Liabililies 31.3.2008

[409.

llhslration

31.3.2008

31.3.2009

l o,oo,ooo

12,00,000

L.nd & Building

6,00,000

7,00,000

General Beserye

3,50,000

2,00,000

Plant & Machinery

9,00,000

11,00,000

9% Prel€r.nce Share Capltal

3,00,000

5,00,000

lnvestments (Long Tem)

2,50,000

2,50,000

Equtly CapiH (ns.10 per Share)

25,000

4,000

Stock

3,60,000

3,50,000

Profil & Loss A/c

2,00,000

3,00,000

Debtorc

3,00,000

3,30,000

8% Debeniures

3,00,000

I,00,000

Cash & Bank

1,00,000

95,000

Cr6diiors

2,05,000

3,00,000

Prepaid Expenses

15,000

20,000 1,05,000

Share Premium A/c

8i[$Payable Provision lor Tax Proposed Dividend Total

45,000

8t,000

Advance Tax Paymenl

80,000

70,000 't,50,000

1,00,000

Preliminary Expenses

40,000

35,000

2,60,000

26,45,000

30,45,000

26,45,000

30,45,000

Tolal

Additional inlomationi

. . . . . .

. .

Depreciation charued on Buildlng and Plant & Machinery

du

ng

200H9 were

8s.50,000 and Rs.l ,20,000 respeclively.

During lhe year, an old Machine cosling Rs.'|,50,000 was sold for Fs.32,000,|is WDV was Rs.40,000 on the date ol sale. During the year, lncome-Tax for lhe year 2007-08 was assessed at Rs.76,000. A cheque ot Rs 4,m0 was received along t!,ith the assessment order towards rcfund of lncome Tax paid in excess, by way of advance lax in earlier years.

200H9. 9% Prelerence Shares ot 8s.3,00,000 which w€Ie due for redemplion, were redeemed during lhe year 2008-09 al Proposed Dividend for 2007-08 was paid during the year

a

prcmium of 57. out of lhe prdceeds ol fresh issue ol9% Prelerence Shares.

Bonus Shares were issued to the exisllng Equity Shareholders, at the rate of one Shale for every live Sharcs held on 31 .3.2008

out of General Reserves.

Debenturcs were rcdeemed at the beginning of ihe year at lnterim Dlvidend paid

du

,

premlum of 3%.

ng lhe year 200Hl9 was Rs.50,000.

Bequircd: (a)Schedule of Changes in Working Capital, & (b)Funds Flow Statement tor yearended 3l'r March 2009

15.4

Funds Flow Sbtement and Cash Flo,v Statement

Sblution

1. Sciredule Particula13 A,CurEntAssets! Stockin-Trade Sundry Debto6

of

in

CaEltal

31.3,2008

31.O3.200!t 3,50,000

Prepald Expenses

3,60,000 3,00,000 r5,000

Cash and Bank Balances

1.00.000

95,000

7,75,OOO

&55,000

95,000

2,05,000

3,00,000

45,000

81.000

95,000 36.000

2,50,000

3,81000

1,31,000

5,25,000

4,74,000

(36,000)

51,000

51.000

5,2t000

15,000

1t000

L&B

P&M

s0,000

1,20.000

SulFTotal Current Assets B. Cunent

Liabilities:

Sundry Creditors Bills Pavable

SuFTotal clm€nt Llabilities

C. ctrryo*hg

Capital

Adlustnenh

5.25,000 z. assetB

Particulers To balance b/d (given)

6,00,000

9,00,000

90,000

5,000 5.000

Particulars Depieciation A/c (glven)

ry

By Eank (Sale ofAsset)

To Banknsset addns during the year (balancinq fiqure)

Total

3.60,OOO

7,50,000

12,60,000

Total

80,000

To Bank- Mvance Tax for 200MS foiven)

l_05_000

lotil

7 00 000

11,oo,ooo

7.50.OOO

12,50,000

A/c Pafticulars

Rs.

To balance b/d (given) (Adv, Tax for 2007-08)

8,000

By balance c/d (qiven)

3, Advance Tax

Pardcnlals

15,000

32,000

P&L A/c (Loss on sale)

ry 1.5OOOO

15,000

arc

P&t

L&A

D€crces€ 10,000

3,90,000 20,000

Decreaso in Wo*ino Caoital

Totel

Inarcase

R+

By Bank Gefund recd for 2007-{8) By Provn for Taxation 2007{8 (transfer) By balance dd (qiven in B/s)

,.85,000

Total

4,000 75,OOO 1-05_000

1,85,000

4. Prrovision for Taxation A/c

Particulars

Rs.

To Advan.e ray (2007-08) ryc (tcnsfer)

76,000

To balance c/d (qiven in B/s)

1_0&000

t

Totel

. .

Fac6

8y P&L By P&f

76,000

5. Pa.ticula15

Pattictllals 200ru8) A/c (Mdnl Provn 2007-08)

By bal. b/d (given) (for Ay'c

-

Provision for 2008-09

Total

Rs.

]s,000 6p0o 1.00.000 1.75.OOO

towards

Valle

Preference Shares (Old)

(in B/s) Rs.3,00,000

Debentures

3L- lL = Rs.2.00,000

PEmium on R€demption

Total Pevment

5% on Rs,3,00,000 = Rs.15,000 3% on Rs.2,00,000 = Rs. 6,000

Rs.3.15.000 Rs.2,06,000

5. Details of Frcah Capital Issued Since all old Preference Shares are redeemed, the amount of P€,5,00,000 as on 31.03.2009 repr€senb the proceeds iesh Preference Shares issued during the year.

Bonus Is,sue = I Share for every 5 Share held = 1/5 of Rs.10,00,000 Equity Capibl fresh inflow of funds as such towards Equjty Share Gpital.

Paltidrlers thareMders (Premium)

To Pref. To Erebentlreholders (Prcmlum) To balance dd (qiven in B/s)

Total

=

. s€curlties Premium a/c Rs. ParticulalB 15,000 By balan.e b/d (given)

RS.2,00,OOO.

of

Thus, there is no

Rs. 2s,000

6,000 4_000

2t00o

15.5

Total

25,000

Students' Handbook on Cost Accounting and Financial Management

To Equity Shareholders (Bonus Issue) (U5s of Rs.10,0o,0oo) To balance c/d (oiven in B/s)

By P&L ly'c (tcnsfer during the year) Balancinq Fiqure

400,000

Total

com

Paaticulars

Vof

(Rs.40,000

Funds

400,000

Partiaulars

Rs.

By balance c/d (Opening Balance in P&L A/c)

s,000

Rs.35,000)

By Funds from Operations (bal.

1,20,000

To Depreciation on Plant & I\4achinery To Depreciation on Building

2,00.000

fig.)

7A9,OOO

s0,000 8,000

To loss on Sale of !1/c To Provision for Taxation (extra for 2007-{8) To Provision for Taxation (for 2008-09)

6,000 1,00,000

To oividend for 2008-09: Interim proposed

50,000 2,60,000

To General Reserve - transfer To balance c/d (Closino Ealance in P & L A/c)

3,00,000

,.s0,000

Total

9,49,000

Total

9,49,OOO

10. Statement of Sources and Application of Funds (Funds Flow Statement Sources of Funds Rs. ADolication of Funds (wt{ 9) Funds from 7,49,0N Purchase of Plant & (given) 32,000 Additions to (WN Sale of Issue of Preference Share Capitals,00,000 Redemptjon of (WN 1) Decrease in Working 51,000 Redemptjon of Preference Shares (WN Refund of Income Tax (2007-08) 4,000 Advance Tax paid

Operations l4achinery

(W IV/c Building Debentures (W

Capital

(2008-09) (W

Rs.

2) 2) 5) 5) 3)

Final Dividend paid (2007-{8)

Interim Dividend Daid (2008-{9)

Total

5O,O0O

frcm

Rs.

-

Rs. 3,50,000

2_00_000

2,00,000

P&LA/C

9

Partiaulars

By balance b/d (given)

Total

To Prelim. Exps

A/c

E. General Reserye Rs.

Particlllars

lotal

13.36.000

-

1,50,000 2,06,000

3,15,m0 1,05,000 1,50,000 50.000

13,36,000

omation

lltlrrdlon 2: Fun& Flow ffin€nf nllh Bahnco Steb Erd Addldona! ln -Bilance Sheets of 0P Lld as on 3'ln March 2007 and 2(Og are as lollons 3t.03.m Assets Liabilities 31.03.07 20,00,000 Land and Buildings ShalB Capilal 20,00,000

3,5r),0o0

il ltr 31.03.07

31.03.08

15,00,000

14,oo,(loo

]

Goneral Resewe

4,00,000

4,50,0m

Plant and Machinery

18,00,000

17,50,000

Plofh and Loss Accounl

2,5o,o()o

3,60,000

lnveslment

4,00,000

3,72,000

10,00,000

8,00,000

Stock

4,80,000

8,50,000

5,00,000

6,00,0m

Debtors

6,00,000

7,98,00t)

4,00,000

5,80,000

Prepaid Expenses

50,000

41t,000

1,40,000

8s,000

49,7o,ooo

52,95,000

t0% Debentures Bank Loan (Long

-

Term)

Ctedltors Outsianding Expenses

20,000

25,000

Proposed Divldend

3,00,000

3,60,0m

Provlslon for Taxalion

1,00,000

1,20,0m

Tolal Addilional lnfomationi

4S,70,000

52,95,000

. . . . .

New Machlnery ior 8s.3,00,000 was purchased but an Accumulaled Depreciation lhercon was Fs.75,000.

Cash and Bank

Total

old Machlnery costing

Bs.'1,45,0tr0 was sold

10% Drb€nturcs wetE Edeemed at 20% premium.

lnv4rlmenb werc sold lor Rs.{5,000, and lts prolll was transfercd lo Gen€ral Feserve. lncome Tax pa,d durlng the year 2007-2008 was Rs,80,000,

An lnlerim Dividend of 8s.r,20,000 has been paid during the year 2007-2t08. 15.6

lor

Rs.50,000, and

Funds Flow Statement and

. .

lnveltrBnts al€ llon-Trade lnvestments.

-

(a) Schedule of Changss in Working

solu6on:

capit

1. schedule

l, and (b) Funds Flow St aoment.

of

Particulrrs

€uftnt

Assets:

in 31.03.2007

Stock Debtors

31.O3.2004

DeclEaae

4.80.000 6.00,000

8,50,000

3,70,000

7,98,000

1,98,000

s0,000

40,000

Prepaid Expenses

B.

Flow Statemert

A8sume the Prcvlslon for Taxation as Curent Liatlillty and Proposed Dividend as Non-Currot Liability,

Preparc

A,

Gsh

$,;

Cash and Bank balanc€s

1,40,000

85,000

sulFTotal currcnt Assets

12'70,000

t7.73.OOO

5,68,000

Cur€nt Liabilitier: CreditoE

s5,000

4,00,000

s,80,000

1,80,000

Outstanding Expenses

20,000

25,000

5,000

Provision for Taxaton

1.00.000

1,20,000

20,000

5,20,000

7,2S,OOO

2,05,000

7,50,000

10,48,000

3,63,000

sub-Total current Liabilities C. et Working Capital Adluabnene Inareasc in Workinq CaDihl Total 2. Amlysla of [on--Cun€nt

6s,000

65,000

2"9&O00

2.9a.O00

1o,48,oOO

3,63,000

10.4A.OOO

Aset & flbrFcuri€nt Llabllity Accounts .nd movements

+53,00o

Urenein

a

ParHdlars

PartioiarE

Rs.

To balance b/d - Opening balance (given) To General Reserve fPft on Sale transfer)

4,00,000

17'000

Tot l

Plait and

To Bank

-

-

18.00,000

3,00,000

Parti.ular.

Rs.

By Bank (Sale Proceeds of M/c) given By P&L A/c (Loss on Sale of Machine)

50,000 20,000

75,000 - 50,000) By P&L A/c (Depm for the year) (bal.fig)

2,80,000

dd - Ooslnq balance (qiven) Total

21.OO,OOO

(1,45,000

-

By balance

Total

3.72.O0O

4,t7.ON

C

Rs.

Opg balance (given) New m/c purchased (given)

To balance b/d

45,000

Total

4,t7.OOO

Padiculal!

ns.

By Bank (Sale Pro€eeds) (given) By balance dd - Closinq balance (qiven)

2r.,00.000

17.50.000

(c) Deprcciatjon on Buildings dudng the year = Closing Bal. less Opening Bal. = Rs.15,00,000 - Rs.14,00,000 = 8.1,00,000. (d) TGnsfer to Generdl Reserve out of cunent profits = Rs.4,50,000 - Rs.4,00,000 - Invt transfer RS.17,OOO = R5.33,OOO. (e) Amount paid on redemption of Debentures = (Rs.f0,00,000

3.

Funds

ftom Rs.

To Loss on Sale of Madinery

20,000

40,000 33,000

dd - Oosinq balance (qiven) Total

By balance b/d

-

Opening balance (given)

Rs.

2,50,000

1,00,000

To Transfer to General Reserve To balance

Partiqda]s

2,80,000

To Premium on Redemption of Debenhlres To Proposed DMdend

Rs.8,00,000) + 20% Premium = Rs,2,40,0O0, the Adiust6d P & L Account

Partic{laE To Deprealatlon on Plant & Iqachlnery To Depreclation on Buildings

-

3,60,000 3,60,000

By Funds from Operations

11,93,00O

Total

15.7

(bal.fig)

9,,43,00O

11'93,000

Sh.dents' Handbook on Cost l€countinq and Financlal Manaqement 4. Statement of Sources and Aoolication of Funds

Sourc€s of Fundg

9,43,000 1,00,000

Bank Loan (Long Term) Sale of Old t4achinery

50,000 45,000

Sale of Investrnents

Total

Tne

lo

ADDlication of Funds

Rs.

Funds from Operations

2,98,000

Purchase of New l4achinery

3,00,000

Redemption of Debentures at Premium Dividend Paid (Fln Year 2006 - 07)

2,40,000

11,3&000

31r lilarch 2Om and

31.03.200S

31.03.2010

ShareCapilal

6,75,000

7,87,500

Genel€l Reserves

2,25,000

2,81,250

Capital Reserve (Proflt on Sale ol lnvts)

't

Prolit & Loss Account l5% Debenlures

2,25,000

3,37,500

2,25,000

11,250

13,500

Credilors

1,80,000

2,81,250

-Prdiision

for Dlvidends Provision for Taratlon

33,750

38,250

78.750 't6.53.750

85,500

Tolrl

fl

n March 201 0

N05.

-

Assets

3r,03.2009

31.03.2010

11,25,000

13,50,000

Accum,oeprcciation

2.25.000

2.8t.250

t{et Fixed Assets

9,00,000

10,68,750

2,02,500

2,02,500

Stock (at cosl)

2,25,000

3,03,750

Ihbtors (Ses Note)

2,53.16

2,75,625

45,000

73,125

Expenses

11,250

13,5q)

ilisc€llaneous ErDendilur.

16.8?5

11.250

16.53.750

13.48.500

Less:

Long-Tlm lrvls ,

11,38,000

Fixed Assets

1,250

1,12,500

Adcrued Expenses

3,00,000

Total

owinq arc the Balance Sheels ol Gama Llmited lor th6

Liabililies

Rs.

Increase in Working Capital

(al cost)

E ls Heceivables

'89Bld

Tohl

19,48,500

l{ole: DebloB are net of Prcvision for Doubtful Debts of 8s.45,000 and Rs,56,250 respectively for 2009 and 2010 nspectively. Additional lnlormation:

'1.

Dlring the year 20tl0-2010, Flxed Assets witft a Net Book Value ot

R6.

,250 (Accumulated

lhprocla on

sold for 8s.9.000.

2. 3. 4, 5. 6.

= RS.?B,Z5O) wa3

During 2009-2010, lnvestments cosilng 8s.90,000 were sold, and also t.vestments costing Rs.90,000 vrere purchased. Debentures werc retircd al a prcmlum of 10%.

Tar ol Rs.6'l ,875 was paid lor 200&2009. Du ng the year m0$-2010, Bad Debts ol Rs.'15,750 weIe writbn ofl against the provision tor lloubdul Debts A/c. The Proposed Dividend for 2GO&2009 was pald ln 20t8-20't0,

Prepare a Funds Flow Statement (Statemeni ol Changes in Financtal

pos or on Worklng

Capttat basls) for th6 year

ended 31.r March 2010.

l.

Solution

Staternent of

Particulars A. Current

Assets:

Stock

2,25,0O0

Debtors (Net)

2,s3,125

Bills Receivable Prepaid Expenses

SuFTotal Cun€nt Assets B. Current

Liabilitie$

Accrued Expenses Creditors

SulFTotal Current Llabilities C. Net Working €apital Adjustmenk Increase in Workinq Caoital Total 2. Analysis of

(a) (b) (c)

in 31,03.2007

llon{urrent

Ca

31.O3.200a

45,000

3,03,750 2,75,625 73,125

11,250

13,500

2a,725 2,2s0

s,34,375

5,66,000

1.31.62s

1r.250

13,500

225O

1,80,000

2,81,250

1,01,250

,'t97,25O

2,94,7sO

3,43,125

3,7t,250

1,03,500 2A,L25

1a,7so 22,5O0

28,125

It7r,25O

2A,125

3,7,.,260

24,125

Ass€ts & I{on-Current Liabllities Accounts and movements drerBin

Increase in Share Capjtal = Rs.7,87,500

-

Rs.6,75,000 = Rs.1,12,S00.

(SourceofFund)

+ profit = Rs.90.000 + 11,250 = Rs.1,01,250. (Sourae of Fund) Redemption of D€bentures = (Rs.3,37,500 - Rs,2,2S,000) + too/6 = Rs.1,23,750. (AppticaHon of Fund) Sale Proceeds of Investment = Cost

15.8

x,125

Funds Flow Sbtement and Cash Flow Statement

(d)

Tax Provision made during the ydar = Closing Balance + Tax paid Rs.68,625. (taken to Adjusted P &

(e)

(f)

LA/c).

-

Opening Balance = 85,500

+ 61,875

-

78,750 =

+ Accum. Depreciation = 11,250 + 33,750 = 45,000. Fixed Assets purchased during the year = Closing Balance + Gross Book value of asset sold - Opening Balance = Rs.13,50,000 + Rs.45,000 - Rs.11,25.000 = Ps.2,70,000. (Application of Fund)

Gross Book Value of Asset Sold

= Net

Book Value

(g)

Depreciation provided for the year = Oosing Balance + Accum Depm on Asset Sold Rs.33,750 - Rs,2,25,000 = Rs.90,000. (taken to Adiusted P & LA/c),

(h)

l4isc. Exp. w/off during the year = Rs.16,875

Opening balance = Rs.2.81,250 +

Rs.11,250 = Rs,5,625. (taken to Adjusted P &

-

LA/c).

Funds fmm oDeratlons

3.AdiustedP&L Particulels

Particulals

Rs.

To l"lisc. Expenditure written off To Provision for Depreciation

5,625

To Loss on Sale of Asset (11,250 - 9,000) To Premium on Deb. Redemption

11,250

To Provision for Taxation

68,525

To Proposed Dividend for 2005

38.2s0

Rs.

By balance c/d (Opening Bal. in P & L A/c)

By Funds from Operations (bal.

90,000

To General Reserve - transfer To balance dd (Closinq Bal. in P & L

-

1,12,500

fig.)

3$4,7sO

2,250

56,250

I'lc)

2,2s,000

of Funds (Funds Flow AoDllcatlon of Funds

4. statement of Sources and

sources of Funds

4,97.25O

Total

4,97,25O

Total

Rs.

Rs.

Funds from Operations (WN 3) Sale of Fixed Assets (given)

3,84.750 9,000

Purchase of Fixed Assets (wN 2f)

Sale of Investments (WN 2b)

1.01,250

Redemption of Debenfures (WN 2c)

Issue of Share Capital (wN 2a)

1,12,500

Payment of Taxes (given)

51.875

Payment of Dividend (for 2004) Increase in Net Workino Cao. IWN 1)

33,750

Total

2,7O,O00

Purchase of Investments (given)

90,000

1,23,750

28,125

5,02s00

Total

5,O7,5OO

1,107'

Balance Sheets Assets

Followino are the Financial Stal€ments of Zed Ltd

Liabililies Share Capilal, Rs.10 par value

31.03.07

fi.m.06

1,67,500

't,50,000

Land

Share premium

3,35,000

2,37,500

Building, net ol depreciation

Reserues and Surplus

1,74,300

1,23,250

Machinery, net of deprecialion

Ilebenture6

2,40,000

lnvestment in 'A' Ltd.

Long_'term loans

40,000

50,000

Creditors

28,800

27,100

Bank Overdraft

7,500

6,250

4,350 48,250

4,600 't6.850

Total

10,45,700

6.15.550

3,600

6,01,800

1,78,400

1,10,850

1,07,050 46,150

tStock Prepaid Expenses

58,800 1,900

2,300

ebfors

76,350

n,150

Trade lnv6slmenls

40,000

1,05,000

iSist'

n,400

95,900

10,4s,700

6,t5,550

lncome Stalemenl for lhe year ended March

Tolal 31 , 2007

{in Rs.) 13,5o,ooo 't2,58,950

Net Sales Le3s: Cost ol Goods Sold and operating Expenses

!q!!s Depl{E!19[oLBf

31.03,06

3,600

75,000

I

Accrued expenseE lncome-Tax oavable

31.03.07

of Hs.l t

!!!r9!q&q!!qqg

Jl,0s0-

N?t Cpcraiinq Profi! Gain on sale of Trade lnveslments

6,400

Gain on sale ol Mach

1,850

15,9

StrdenB' Handbook on Co6t Accounting and Financjal Management ProlitB bcfore

T.x

99,300

lncom€-Tax

48250

Prolib afbr Tex Addlllo[al lnlormatlon:

. .

51,050

Machlneiy w{lh a t{et Book Valus ol Rs.9,I50 was sold during the year. The Shares ol 'A' Ltd vrBr€ acquiGd by issus o, Ihbenhrrer.

Preparc a Funds Flow S:lalement (Sllbnrent of Ch.ngB March

fi,

i[

Financial poslllon on Worklng Capltrl basls) for lhe year ended

m07.

Solution:

1. Statrmcnt

of

n

31-3.2008

31.03.2009

Incrcase

Stock Prepaid Beenses

45,150

s8,000

12,650

2,300

1,900

400

Debtors

77,750

18,500

Pardqrlals A.

CurltntA5sets:

Cash

Total Curtent Asrets B. Cun€nt Liabllltles: Credito6

95,900

2,2L500

2,t4,450

12,550

27,r00

28,800

1,700

4,600 6,250

4,35O

zs00

1,250

37-950 1,83,550

40,550 L73,aOO

2,95lJ

250

9,700

19,450

1,83,550

1,83.550

Bank Overdraft

C. et Worklng Adiustrenh

Capital Deo€ase in Wo*ino Caoilal

800

76,350 77,400

Accrued E'eenses

Sub-Total

t]9,7l,,) 250

9t

9,750

Total

DecreaEe

50

r9,450

19,450

2. Flxcd Asr€ts Acaount

Parti.nlal3 To balance b/d

To Bank a/c (bal,

-

fig)

Bullding

ILlachinery

\74,4O0

1,07,050

4.30,000

ABsO

assets acquired durinq the year

-

oul

By llachinery disposal a/c

1,31,llo0

= Difference between Closing & Opening Balance in Share 1,50,000) + (3,35,000 - 2,32500) = Rs.17,s00 + 92500 = 1,15,000

llachilrery 11,400 9,1500

dd

Ptoceeds from issue of Shares

= (1,67,50

Bulldlng

By Depreciaton By balance

O08,/ro0

3.

PEttlcrrlals

6,01,800

1,10,850

5,08.iO0

,.g,.4,0

Gpilil

& Share Premium a/c

4. Pt(rce€ds from issue of Debenfures = 2,40,000 - 75,000 for Investment in A Ltd = 1,55,000 5, Trade Investment Sold = Opening Bal, Lesr Closing Bal. + Gain on Sale = 1,05,000 - 40,000 + 6,400 = Rs.71,400 5. Amolnt received by Sale of l,4achinery = Book Value of 1,1/c + Plofit on Sale of Madrinery = 9,150 + 1,850 = 11,000 7, Long Term Loan Repaid = Openins Balance - Closing Balance = 50,000 -,f0,000 = 10,000. 8, Funds from operations = Operating Profit + Depreciation = 91,050 + 6,600 + 11,400 = 1,09,050 9. Funds Flow Source5 of Funds

Stabment

(Wl{ 8) Operation Machinery (w 5) Sale of Trade Investrnent (Wil 5) Debenhires Issue (W 4) Proceeds from Share Issue (Wt{ 3) Decrease in Net Wo*lng Capital (W l) Funds from

Sale of

and Aoolication

of

Applkadon of Funda 1,09,050 Purchase of Machinery (wl{ 2) 11,000 Purchase / Construction of Building 71,400 Income Tax pald (F.Y, 200H)6) 1,65,000 Long Term Loan repaid (WI{ 7) Rs.

R', 24,350 4,30,000 16,850 10,000

1,15,000

9,750

481,200

15.10

48r"200

Funds Flow Statement and Cash Flow Statement

ilur(t0m & Funda Fhf, Sh&nter{ fith Ihtlo! ad lgisbd dab II€ Financlal Stalemenls and oDeratinq resulls ot PoB Evealed lhe followinq DGition Equlty Share Caplt l (Bs.lolullypaid Share)

as on 31n March 2006

il (tr

-

Hs.20,00,000

Wo*lng Caplt l

Rs.6,00,0.8O

Bank Overdraft

Rs.l,00,000

Current Batio

2-511

1.5:l 0,75:l

Liquidlty Ratio Proprietary Ratio (Net Fixed Assels + Proprietary Fund) Cosl ol Salar

8s.14,40,000 2 monlhs

Ireblors Velocity

4 times 2(M ot Sale8

Stock Turnover based on Cost of Sales Gross Prolit Ratio Nel Prolil Ratlo

15% of Sa{eg

Closing Stock was 25% higher than the opening Slock. There were also Free Beserves brought forward from earller years. Curent Assels lnclude Stock, oeblors and Cash only. Curr€nt Llabllltlg8 excepi Bank ovsrdratl lroatod as Credilors. Expel|sqr include t epreclation of 8s,90,000.

Tle following infornation was collected from lhe Ecordr ,or lhe yetr onded 31d March Total Sale! tor $e year were 20% higher as compared lo previous year.

. . . . . . .

2007

-

Balancss as on 31d lrarch 2007 werc: Stock 88.5,20,000, Credltors 8s.4,15,000, Deblors R!.4,95,GO0 and Cash Balancs Rs.3,'10,00t. Percentag€ of GP on Tumover ha8 gon€ up lrom

m%lo

25% and r6tio

ol Net Prolitlo Sales from 15% to 16%.

A portion ol Fixed Assets was very old (Book Value Rs,'1,80,000) disposed lor 8s.90,000. (t{o depreciation io be provided on this item).

Long-Tenn lnvestmenls w€rc purch.red for F€.2,96,6m. Bank Overdralt tully discharged. PercenlagE of t eprcciatlon lo Fixod Assets to be prcvlded at the rate ln lhe pr€vlous year.

Fsq!ired:

. .

Preparc Balance Sheob a8 on 3ln March

(b) (c)

(d) (e)

and 31d March 2007.

Prepare the Fun& Flow Slaiemont lor lhe year ended 31.r March 2007.

Sioiution: ra)

2GO6

of Gross Proffts and l{et Prcfits for the Year 2007

1.

= 80Y. of Sales

Year 2006 6P = 20olo, Hence, COGS = 1000,6- 20olo COGS Rs.14.40.000

80%

= Rs,18,00,000

aoo/.

Year 2007 Sales = 20% Hioher than Year 2005 = Rs.18,00,000 + 20% Year 2007 GP = 25% on Sales = Rs.21,60.000 x 25% Year 2007 NP = 16% on Sales = Rs,21,60,000 x l6olo

of

2. C:orn

coGs

Rs.

stock

Stock Turnover for Y€ar 2006 =

(b)

So, Average Stock

(c)

On subeUtution, we have

(d)

So. Ooenino Sto.* = Rs.3.20.000- and Closino Stock = Rs.3.20.000 + 2sold = Rs.4.00.000.

-

tu 14i40'000 4

I1fA

3. D€btors for Year 2OOO= Sales

x

f

= Rs. 3.45.600

14,40,000

(a)

Averaqe Stock

= Rs,21,60,000 = Rs. 5.40.000

Average Stoak

= n,l,SO,OOo. Let opening Stock be = x. So, Closing Stock = x + 2solox = 1.25x = 3,60,000. On cro6s muluplication, 2.25x = 220,0000, So, x = 3,2O,OOO.

=

RS.I8,OO,OOO x

i

=

15.11

RS.3,O0,OOO.

4.

of

Com

workino GDibl =Cunent Assets (CAF Current Uabilitiet (CL)

(a)

qrrent

civen that

Rauo

= 2.5 times.

!{

= Rs. 6,00,000

= 2.5 times. Hence,

CA

= 2.5c1.

(b) On substitution, 2.5 CL

(c)

-

CL = 6,00,000. On simplification,

*e Oet,9!-

Of the Total CL, Bank O/D ls Rs.1,00,000. So. Creditors = Rs.4.00,000

(d) Jt6ce CA= 2.5 CL, CA= 2.5 x Rs.4,00,000 (e) so. cash = Totd ca - stock - Debtors = Rs.10,00,000

-

Rs.4,00,000

-

-

[email protected]

= Rs. 4,00,000 = Rs, 3,00,000 = Rs. 10,00,000

Rs.1,00,000 R5.3,00,000

5. Computation of Gross and Net Fixed AasGts Fixed

Asseb -

FA

(a) Propdetary Ratio = Proprletary Fund On sotving, we get Fixed Asseb (Net) =18,00,000

FA

+

NWC

FA

+ 6,00,000

= 0.75

(b) Since Depreciauon = Rs.90,000 (given), 6ross Fixed Assets = R5.18,90,000

(c)

Rate of Depreciation for vear zooe =

= 4.76%, say sq/o (Rounded off)

offi,

(d) Depreciation for Year 2007 = (R5.18,00,000

-

Rs.1,80,000)

x 5% = Rs.81,000.

6. Balance

Liabilities Share

Gpital

(given)

2o,oo,ooo

4,00,000

R€serves & Surplus (balancing figure) Bank

Overdraft

Creditors

(given)

(W]{

1,00,000

&)

3,00,000

Total l{ote:

at 31.03,2005

Ai6ets

Rs,

l€ss: .

Rs,

(W 5) (given)

FixedrAssets Depreciation

Stock Debtors Cash

2a,00.oo0

18,90,000 90,000

(wI{ 2) (wl{ 3) (wI{ 4 ) Tobl

18,oo,ooo

4,00,000 3,00,000 3,00,000 28,OO.000

Reserves lndude brought foMards Reserves + Year 2006 Profits.

7. Balance She€t aB at 31.03.2007

Liabiliti€s Share

Capilbl

Reserves and

Surplus

creditors

(given) (See Note) (qiven)

Total

llote:

L€er: Depreciation (W 6)

4,15,000

Long Term

Reseryes fo. Year 2OO7 = Year 2006 Balance

A,CurrentArc€ts:

(given) (oiven)

3.10.000

31.50500

+ Profit for 2007 as per WN 1(e) = 4,00,000 +3,45,600 in Worki 31.O3.2006 3r.03.2007 4,00,000 3,00,000

Cash

In.l€as6 1,20,000

3,00,(x)0

5,20,000 4,95,000 3,10,000

lO,oo,ooo

13,25.000

3,25,000 1,15,000

Decr€ase

1,95,000 10,000 1,00,000

Bank Overdraft

1,00,000

Creditors

3.00,000

4,15,000

4,00,000 6,00,o00

415,000

1,15,000

1,00,000

9,1O,00O

2,loiooo

(1,qr,000)

9.10,OO0

2,10000

2,10,000

sub-Total currcnt Liabllld€s C. t{et Working Capital.

AdiustmenE

15,39,000

2,96,600 5,20,000 4,95,000

Totel

Debtors

Stock

81,000

Investments (given) (give!)

Stoc* Debtors cash

State elrt ofc

Sub-Totel Curi€llt Ass€ts

cunsrt Liabilities:

16,20,000

745,@0

31,50,600

8.

Rs.

Exed Assets

20,00,000

Parddllais

B.

Airets

Rs.

Increase ln Workinq Capital

Total

3,10,000

3.10.000

9,10.000

15,12

Funds Flow Statement and Cash Flow Statement

9. Funds Flow Statement for the year ended 31.03,2007 Sources hs. Application Funds from Operations (Note)

5,16,600

Sale of Machinery Item

90,000

fugmion 6: Fud! Glven beiow is the 3ldMarch 20X1.

Op€htions

= Net Profit for the year + Depreciatjon + Loss on Sale of l4achinery = Rs.3,45,600 + Rs.81,000 + R5.90,000 = Rs.5,16,600

Sl|ect

Flow Stument lrcm P&i Bahnce Pai Balance Sheet of Excelle Lld.

As al31!t March 20X0

Fixed Aslet8 al cost Addltlon durlng tho year

As at 31.r March 20Xl

62,000

70,000 17.000

8.000 70,000 25.000

Le98:

Depr&iatlon dudng lhe year CuBenl Ass€ls

Less:

FTP

You are required lo prepare Funds Flow Slalement for the year ended

Padiculars

Add:

3,10,000 2,96,600 6,O6,6O0

Total

5,06,50O

Total Note: Funds frcm

Xs.

Increase in Net Working Capital Investments purchased

87,000 45,000

36.000

't0,000

lnvestmenl Stock at Cosl

't,81,500

1s,000 .|,90,000

Trade DebtorE

't.31.5m

1.38J00

3,2e,000

3,(},700

CurrenlLiabilitiqt Bank Overdralt

Trcde Crudllors and Provisions Proposed Divldend

r,16,000

55,000

99,800

1,r9,200

15,000

24.000

2,31,800

91,200

Total Funds EmDloved

1,98,200

1.36.200

solution:

1_S6.5m

= Rs.3,28,700 - Rs.3,13,000 = Rs.1.19.200 - Rs. q9.800

(c) Decrease in Workino Caoital

2. Funds Flow Stetement for the vear 31n Marrh 2OX1 Sources of Funals ADolication of Funds Rs. Deaense in Working Capihl (Note 1) 3,700 Purchase of Fixed Assets (given) Funds from Operatlons (balancing tigur€) 95,300 Purchase of lnvestments (Rs.I5,000 - Rs.f0,000) Repayment of Bank OD (Rs.1,16,000 - Rs.55,000) Pavment of Dividends

Total l{oter In the abs€nce of infomation.

99,000

Wher$sr:e

Co. has Dremrcd lhe

Solrc$ of Fundg k{emal Accrualg: Prolil Alter

Ihpreclatlon

Tax

Add: Less: Dlvldend (on Equlty Capltal of Rs.800 2. lncrcase ln Public Fixed 0epo6lts 3. lncrease ln Ban* Cash Cndits 4. lncrcase ln 7-vear Deb€ntures

c

Total

= Rs.15,700 = Rs.19,400 = R5. 3,700 Rs. 17,000 5,000 61,000 15.000

99,000

Funds ftom Operations has been taken as the balancing figure.

ilfifuon7r FuidrflouAtralFb:ktii.fiii&

Glve your

1.45.500

1. Chanqe in Workino Capltal

(a) Increase in Total Current Asseb (excluding Investment) fb) Increase in Trade Credito6 & Provisions

'1.

5't,00t)

shoitTam Fund'ilovqmnb

.

-

Funals Flow statemenl ior lhe nexl vear Rs.l-.khs ADDlication ol Funds 'l

Lakhs)

,000 120

(8G$)

320 150

Fs. Lakh6

I . lncrease ln Fixed Assets

800

2. lncrcasa in

100

lnveslmenls 3. Bepayhenl ol Term Loans 4. lncrer8e in Wo*ing Capital

100 170

500 200

lolal 1,170 Totel tical commenls to the Managsmenl 6n lhe proiected Source and Application ol Funds. 15.13

1.170

Sbdents' Handbook on Cost Accountinq and Fnancial Manaqement

Solution: me

Funds Flow Statement is analysed into lonqFterm and short-.term as under (Rs.

Partlqrlars

Lonq Tenn

A. Sourae3: 1. Internal Accruals 2. Increase in Public Deposits 3. Increase in Bank Cash Credits 4. Increase in 7 vearc Debentures

leldE)

Short T€rm

-

Total 320

":

500

150 500 200

650

1,170

150

)oo

Total Sources of Funds

520

B. Applietions: 1. Increase in Fixed Assets 2. lncrease in Investments 3, Repayment of Term Loans 4. tncrease in Wo*inq Capital

Total ADDlication of Funds

800

800

100 100

100

r00

900

170

170

170

1,L70

(4ao) C. Excers / (Sholtfall) A- B 440 lt is observed that short-term funds, i.e. Public DeposiB and Cash Credits are raised to finance long-term uses viz. Fixed Ass€ts. This violates the basic principle of financial management and adversely affecta liquidity. The management has to consider the following Reduction in dividend, i.e. presendy 100% on Equity Gpital.

1. 2. 3. 4, 5.

-

Need to increase investments when Public Deposlts and Cash Credit limiE are being Eised.

Possibility ofavailing Medium or Long Term Loan to finance partly / fully Fixed Assets, Need to follow the principle ofone borrowing to repay another i.e.7 year debentures to repay term Loans. Increase in Cash Credit (Current Liabilities) not reflected in increase in Working C"apital (Curent Assets)

ttdion

8: Funds Flou Analysls

arn co.

its Statement 0t Sowceg and Ulilisrlion of Funds as under

Sourc6ofFunds ESity

Share Capital

Loons al l2?. Rlduction in lnveslments $h ol Asselg IrsDl€clatlon for lhe vear

Bs.Lakhe 0.50 2.50 0.25 0.25 0.50

-Plt',

-

Aoolica[ion of Funds lncrease in Working Capitsl lncroase in Fixed Assets Lo$ as per P&L Account

RE.Lakhs 1.50 1.50

't.00

Totrl 4.00 Tolal 4.00 The Company's Curreni Batlo at tho beghnlng of lte year was 2. Th€ Curent Llabl,ltles of the Company as at ln January (beginning of the yeao stood at Rs,3 Lakhs. ll was disclosed thal during the year, lhe lumover to capilal Employed Ratio decllned from 1 .5 to 1 .25, You arc rcquired to crilically appraise ihe financlal operations ol lhe Company during lho yorr.

Solution:

1.

Analysis of Funds Flow Statement Cash Lods during the year: There is a total loss of Rs,l Lakh of which Depreciation constitutes P.s,0.50 Lakh. Hence, the balance constitutes Cash Loss either due to reduction in sales prices or volume or increase in @sts and overheads.

Gsh

2.

Reduction in Capital Turnover Ratio: The Capital Tumover Ratio (i.e. 1.50

3. 4.

Loss is not a qood siqn for the Company vis--€--vis Going Concern.

to

1.25, The higher the turnover ratio. the better

it

sales

)

has come down from

Gpital Employed is for the Firm. Fall in Gpital Employed Turnover Ratio

represents deterioration of actjvrty levels and sales, and also over-capitalization and idle funds with the FIm.

Ivlismatch of funds: Increase in Working Capital (a short-term application) has been financed out of long-term and permanent sources of fLrnds (i.e. Share Capital, Loans at 12olor Sale of Investments and Assets), This is not a prudent financial practice, since there is no proper matching between long-term and short-.term sources and appljcations.

Debt Equity Funding: In view of Gsh Losses, the Firm should have gone in ,or obtaining equity funds stnce debt involves fxed commibnent towards interest and principal. However, the Fkm has obbined more Debt Funds at a cost of 12yo, which may:ncrease the Cash Losses in the subsequent years.

5.

Excessive Cun€nt Assets: The Current Ratio at the start of the year was 2:1 which is a sati;factory one. However, during the year, there has been further increase in net Cunent Assets, which will cause a fufther increase in the Current Ratio. A high Cunent Ratio may indicate poor collection of Debtors, piling up of unsold Finished Goods, delays in production cycle and consequent increase in WIP, slo Fmoving Raw Materials, etc, The firm should monitor Working Capital items closely and adoptsuitabte techniques for maintaining a reasonable liquidity position. 15.14

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Chapter 15 FUNDS FLOW STATEMENT AND CASH FLOW STATEMENT CHAPTER OVERVIEW Procedure for preparinq the Funds Flow Statement 1. 2. Procedure for prep...

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