Friday, November 29, 2019
Fund Flow Statement Essay Example
Fund Flow Statement Paper FUNDS FLOW STATEMENT Meaning The term â€Å"Flow†means change and therefore, the term â€Å"Flow of Funds†means â€Å"Change in Funds†or â€Å"Change in Working Capital â€Å". In other works, any increase or decrease in working capital means â€Å"Flow of Funds†. There are two concepts of working capital – gross concept and net concept. †¢ Gross working capital refers to the firm’s investment in current assets †¢ Net working capital means excess of current assets over current liabilities. In business several transactions take place. Some of these transactions increase the funds while others decrease the funds. Some may not make any change in the funds position. In case a transaction results in increase in funds, it will be termed as â€Å"source of funds†. Eg. 1. Issue of shares         inflow of funds           source of fund       2. Purchase of assets        leads to outgo of funds       application of funds According to the International Accounting Standard 7, the term ‘Fund’ refers to cash, to cash and cash equivalent, or to working capital. The term ‘flow’ refers to change and therefore the term ‘Funds flow†refers to ‘change in funds’ or ‘change in working capital’. In other words, any increase or decrease in working capital means ‘flow of funds’. Working capital = Current Assets – Current Liabilities  | | |CURRENT ASSETS |CURRENT LIABILITIES | | | | | | | |Cash and bank balances |Accounts payable | |Inventory Sundry creditors | |Sundry Debtors |Bank overdraft | |Temporary investments |Unclaimed dividends | |Pre-paid expenses |Provision for taxation* | |Outstanding incomes |Proposed dividends* | |Accounts receivables |Short term loans | |Bills receivables | | | | | *Provision for Taxation: It can be treated in two ways: 1. Treated as current liability: when there is no income tax paid or additional provision made it is treated as current liability. We will write a custom essay sample on Fund Flow Statement specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Fund Flow Statement specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Fund Flow Statement specifically for you FOR ONLY $16.38 $13.9/page Hire Writer It can be taken to schedule of changes in working capital. No further treatment is required. 2. Treated as non-current liability: A ledger account (Provision for taxation a/c) is prepared. Sometimes we may have to arrive at income tax paid during the year from the given information. *Proposed Dividend: It can be treated in two ways: 1. Treated as current liability: Proposed dividend may be taken as Current liability since declaration of dividends by share holders is simply a formality. It is taken to schedule of changes in working capital with no further treatment. 2. Treated as non-current liability: Proposed dividend can be taken as an appropriation of profit. In such a case, proposed dividend for the current year will be added back to current year’s profit in order to find out funds from operations if such amount of dividend has already been charged to profit. Payment of dividend will be shown as an application of fund. NON CURRENT ASSETS AND NON CURRENT LIABILITIES |NON CURRENT LIABILITIES |NON CURRENT ASSETS | |Share capital |Fixed assets | |Long term loans |Fictitious assets like goodwill, patents, copyrights, | |Debentures |trademarks. |Share premium a/c |Long term investments | |Forfeited shares a/c |Profit and loss a/c (debit balance) | |Profit and loss a/c (credit bal) |Discount on issue of shares debentures | |Appropriation of profits |Deferred expenditures like preliminary expenses, advertising| |Provision for taxation |expenses. | |Provision for depreciation | | |Capital reserve | | | | | Non fund Transaction: If the funds are Rs. 10000 and a fixed asset of Rs. 5000 is purchased by issuing shares of Rs. 000 the fund s position will not change and therefore this transaction will be taken as a non-fund transaction. BALANCE SHEET as on †¦Ã¢â‚¬ ¦. |Non-current liabilities: | |Non-current Asset | | |Share Capital: | |Goodwill |50000 | |16% Redeemable Preference Shares of | |Buildings |1,00,000 | |Rs. 10 each | |Plant |1,00,000 | | |1,00,000 |Furniture |  50,000 | |Equity shares of Rs. 0 each | |Long term Investment | 50,000 | | |1,00,000 | | | |Long term Loans: | | | | |12%Debenture |1,00,000 | | | |Loan on Mortgage |  50,000 | | | |Reserves Surplus: | | | | |General reserve |1,00,000 | | | |Profit Loss a/c |  50,000 | | | |Total non-current liabilities | |Total Non-current Assets | | | |5,00,000 | |3,50,000 | |Current liabilities: | |Current Assets: | | |Sundry creditors | 50,000 |Sundry Debtors |  80,000 | |Bills Payable | 50,000 |Bills receivable |  50,000 1,00,000| |Bank Overdraft | 25,000 |Inventories |  50,000 | |Outstanding expenses  25,000 |Pre-paid Expenses |  20,000 | | | |Cash balance | | |Total current liabilities |1,50,000 |Total current assets |3,00,000 | |Total liabilities |6,50,000 |Total assets |6,50,000 | Computation of Working capital: CURRENT ASSETS                          Rs. 3,00,000 CURRENT LIABILITIES              Rs. 1,50,000 NET WORKING CAPITAL             1,50,000 There will be flow of funds on account of change in working capital position. A few independent transactions are given below and the effect of each of the transaction on flow of funds is determined. 1. The company realizes Rs. 20,000 from its debtors. †¢ Debtors will reduce from Rs. 80,000              to Rs. 60,000 †¢ Cash balance will increase from Rs. 20000 to Rs. 40,000 CURRENT ASSETS                          Rs. 3,00,000 CURRENT LIABILITIES              Rs. 1,50,000 ___________ NET WORKING CAPITAL            1,50,000 ___________ There will be flow of funds on account of change in working capital position. †¢ This transaction will not bring any change in the working capital because it is simply conversion of one current asset into another current asset. 2. The company pays to its creditors a sum of Rs. 10,000 out of the cash balance. †¢ Cash balance gets reduced from Rs. 20,000 to Rs. 10,000                   †¢ Sundry creditors will stand reduced from Rs. 50,000 to Rs. 40,000 CURRENT ASSETS                          Rs. 2,90,000 CURRENT LIABILITIES                  Rs. 1,40,000                                                   ________ WORKING CAPITAL                                1,50,000                                                   ________ There will be no change in working capital position 3. The company purchases furniture of Rs. 10,000 by raising long-term loans of Rs. 10,000. This transaction will not have any effect on working capital position, since the transaction involves non-current asset and a non-current liability which are not the constituents of working capital. 4. The company redeems preference shares of Rs. 1,00,000 by issuing 12% debentures of Rs. 1,00,000. †¢ This transaction will not involve any change in the working capital since both the accounts involved are not the constituents of the working capital. 5. The company raises Rs. 50,000 in cash by issue of new shares. †¢ This transaction will increase the cash balance of the company from Rs. 20,000 to Rs. 70,000. The working capital position will be : Current Assets      Rs. 3,50,000 Current LiabilitiesÂ à ‚ Rs. 1,50,000 __________ Working capital           2,00,000 ___________ This transaction will increase the W. C 6. The company sells its building having a book value of Rs. 50,000 for a sum of Rs. 60,000. †¢ This transaction will increase the cash balance with the company from Rs. 20,000 to Rs. 80,000. Current Assets      Rs. 3,60,000 Current Liabilities  Rs. 1,50,000 __________ Working capital           2,10,000 ___________ This transaction will increase the W. C From the above, the following general rules can be formed: 1. There will be flow of funds if a transaction involves: †¢ Current assets and fixed assets, e. g. purchase of building for cash †¢ Current assets and capital, e. g. , issue of shares for cash †¢ Current assets and fixed liabilities, e. g. edemption of debentures in cash †¢ Current liabilities and fixed liabilities, e. g. Creditors paid off in debentures †¢ Current liabilities and capital, e. g. , creditors paid off in shares. †¢ Current liabilities and fixed assets, e. g. building tr ansferred to creditors in satisfaction of their claims 2. There will be no flow of funds if a transaction involves. †¢ Current assets and current liabilities, e. g. , payment made to creditors through cash †¢ Fixed assets and fixed liabilities, e. g. , building purchased and payments made in debentures. †¢ Fixed assets and capital, e. g. building purchased and payment made in shares Funds Flow Diagram CURRENT ASSETS CASH IN HAND AT BANK MARKETABLE INVESTMENTS RECEIVABLES STOCKS PREPAID EXPENSES FIXED ASSETS: GOOD WILL BUILDING PLANT AND MACHINERY FUTURE AND FIXTURES LONG TERM INVESTMENTS CURRENT LIABILITIES BANK OVERDRAFT OUTSTANDING EXPENSES ACCOUNTS PAYBLE NON-CURRENT LIABILITIES       SHARE CAPITAL RESERVES AND SURPLUS DEBENTURES LONG TERM LOANS Flow Funds                                       No Flow of Funds ISSUE OF SHARES LONG-TERM BORROWINGS OPERATIONAL PROFIT SALE OF FIXED ASSETS FUNDS PAYMENT OF TAX / DIVIDEND OPERATIONAL LOSS PAYMENT OF LONG-TERM LOANS PURCHASE OF FIXED ASSET REDEMPTION OF PREF. SHARES Sources Uses APPLICATIONS Rules for preparing the schedule of changes in working capital: †¢ Increase in a current asset, results in increase                           (+) in â€Å"working capital††¢ Decrease in a current asset, results in decrease              (-) in â€Å"working capital††¢ Increase in a current liability, results in decrease              (-) in â€Å"working capital††¢ Decrease in a current liability, results increase                           (+) in â€Å"working capital†. Illustration: From the following balance sheets of X Ltd, on 31st December, 1985 and 1986, you are required to prepare. (a) A schedule of changes on working capital (b) A Funds Flow Statement |Liabilities |1985 |1986 |Asset |1985 |198 6 | | |Rs. |Rs. |Rs. |Rs. | |Share Capital |1,00,000 |1,00,000 |Goodwill |12,000 |12,000 | |General Reserve |14,000 |18,000 |Building |40,000 |36,000 | |Profit Loss A/c |16,000 |13,000 |Plant |37,000 |36,000 | |Sundry Creditors |8,000 |5,400 |Investments |10,000 |11,000 | |Bills Payable |1,200 |800 |Stock |30,000 |23,400 |Provision for Taxation |16,000 |18,000 |Bills Receivable |2,000 |3,200 | |Provision for Doubtful Debts |400 |600 |Debtors |18,000 |19,000 | | | | |Cash at Bank |6,600 |15,200 | |Total |1,55,600 |1,55,800 | |1,55,600 |1,55,800 | The following additional information has also been given: (i)  Depreciation charged on plant was Rs. 4,000 and on Building Rs. 4,000 (ii)  Provision for Taxation of Rs. 19,000 was made during the year 1986. (iii) Interim Dividend of Rs. 8,000 was paid during the year 1986. Solution SCHEDULE OF CHANGES IN WORKING CAPITAL |Particulars |1985 |1986 |Increase (+) |Decrease (-) | | |Rs. |Rs. |Rs. |Rs. |Current As sets: | | | | | |Cash at Bank |6,600 |15,200 |8,600 | | |Debtors |18,000 |19,000 |1,000 | | |Bills Receivable |2,000 |3,200 |1,200 | | |Stock |30,000 |23,400 | |6,600 | |Current Liabilities : | | | | | |Provision for doubtful debts |400 |600 | |200 | |Bill Payable |1,200 |800 |400 | | |Sundry Creditors |8,000 |5,400 |2,600 | | |Total | | |13,800 |6,800 | |Net Increase in Working Capital | | |7,000 | | FUNDS FLOW STATEMENT |Particulars |Rs. |Sources : | | |Funds from Operations      (See Note 1) |36,000 | |                                                                                          Total Sources |36,000 | |Applications: | | |Purchase of Plant              (See Note 2) |3,000 | |Tax paid                             (See Note 3) |17,000 | |Investments purchased      (See Note 4) |1,000 | |Interim Dividend paid |8,000 | |                                                                                   Total Applications |29,000 | |Net Increase in Working Capital |7,000 | Working Notes 1. Funds from Operations: |Particulars |Rs. |Rs. | |        Profit Loss account Balance on 31st Dec. , 1986 | |13,000 | |Add : Items which do not decrease Funds from Operations: |à ‚ | | |         Transfer to General Reserve |4,000 | | |         Provision Tax |19. 00 | | |         Depreciation : | | | |Plant |4,000 | | |Building |4,000 | | |         Interim Dividend P’ble [Prov] |8,000 |39,000 | | | |52,000 | |Less: Profit Loss A/c balance 31st Dec. , 1985 | |16,000 | |         Funds from operations for the year | |36,000 | 2. Purchase of plant. This has been found out by preparing the plant Account. PLANT ACCOUNT |Particulars |Rs. |Particulars |Rs. |To Balance b/d |37,000 |By Depreciation |4,000 | |To Bank (purchase of plant balancing figure) |3,000 |By Balance c/d |36,000 | | |40,000 | |40,000 | 3. Tax paid during the year has been found out by preparing a provision for Tax Account PROVISION FOR TAX ACCOUNT |Particulars |Rs. |Particulars |Rs. | |To Bank (bei ng tax paid – bal fig) |17,000 |By Op. Balance b/f |16,000 | |To Cl. Balance c/d |    18,000 |By Prov. P L. A/c |19,000 | | |35,000 | |35,000 | 4. Investments’ have been taken as a fixed asset presuming that they are long-term investment. Illustration: Balance Sheet of M/s Black and White as on 1-1-1988 and 31-12-1988 were as follows: BALANCE SHEET |Liability |1-1-88 |31-12-88 |Asset |1-1-88 |31-12-88 | | |Rs. |Rs. | |Rs. |Rs. | |Creditors |40,000 |44,000 |Cash |10,000 |7,000 | |Mr. White’s Loan |25,000 |- |Debtors |30,000 |50,000 | |Loan from P. N Bank |40,000 |50,000 |Stock |35,000 |25,000 | |Capital |1,25,000 |1,53,000 |Machinery |80,000 |55,000 | | | | |Land |40,000 |50,000 | | | | |Building |35,000 |60,000 | | |2,30,000 |2,47,000 | |2,30,000 |2,47,000 | During the year machine costing Rs. 10,000 (accumulated depreciation Rs. 3,000) was sold for Rs. 5,000. The Provision for Depreciation against machinery as on 1-1-1988 was Rs. 25,000 and on 31-12-1988 Rs. 40,000. Net Profit for the 1988 amounted to Rs. 45,000. You are required to prepare Funds (Working Capital) Flow Statement. Solution: Funds Flow Statement For the year ending 31. 12. 1988 Particulars |Rs | |Source | | |Loan from P N Bank |10,000 | |Sale of P M                    [See Working Notes] |5,000 | |Funds from Operations     [See Working Notes] |65,000 | |Total                                                                                              |80,000 | |[1] | | |Application | | |White’s Loan repaid |25,000 | |Partners’ Drawings           [See Working Notes] |17,000 | |Purchase of Land |10,000 | |Purchase of Building |25,000 | |Total                                                                                              |77,000 | |[2] | | |Increase in Working Capital                                                [1 – 2] |3,000 | Schedule of Changes in Working Capital |Particulars |1. 1. 88 |31. 12. 8 |Increase |Decrease | |Current Assets | | | | | |Cash |10,000 |7,000 | |3,000 | |Debtors |30,000 |50,000 |20,000 | | |Stock |35,000 |25,000 | |10,000 | |Current Liabilities | | | | | |Creditors |40,000 |44,000 | |4,000 | | | | |20,000 |17,000 | |Increase in Working Capital | | |3,000 | | Working Notes: Funds from Operations Net Profit made during the year |45,000 | |Add: Loss on Sale of Machine [Non-operating expense] |2,000 | |[BV (Cost – Depr’n) – Cash realized] = [(10000 – 3000) – 5000] | | |Add:Depreciation on Machinery [See Prov. for depr’n on P M A/c] |18,000 | |Funds from Operations for the year |65,000 | N. B: Details about Depreciation on Buildings not provided for in the exercise. Hence, depreciation on building is not considered for arriving at Funds from operations. Capital A/c |Particulars |Rs. |Particulars |Rs. | |To Drawings a/c [Bal. fig. ] |17,000 |By Balance b/d |1,25,000 | |To Balance c/d |1,53,000 |By P L a/c [Profit for the yr] |45,000 | |Total |1,70,000 |Total |1,70,000 | Machinery Account |Particulars |Rs. |Particulars |Rs. |To Balance b/d |1,05,000 |By Provision for Depreciation on Machinery |3,000 | | | |sold | | | | |By Bank – P M sold |5,000 | | | |By Loss on Machinery sold [Balancing |2,000 | | | |figure] | | | | |By Balance c/d |95,000 | |Total |1,05,000 |Total |1,05,000 | Provision for Depreciation on Machinery |Particulars |Rs. |Particulars |Rs. | |To Machinery a/c 3,000 |By Balance b/d |25,000 | |[Prov. on P M sold] | | | | |To Balance c/d |40,000 |By P L a/c [depreciation provided drg. |18,,000 | | | |the year [Balancing figure] | | |Total |43,000 |Total |43,000 | Illustration: The following are the sum marized Balance sheets of Vivek Ltd. as on 31. 12. 1990 and 31. 12. 1991. Liabilities |1990 |1991 | | |Rs |Rs | |Share Capital |12,00,000 |16,00,000 | |Debentures |4,00,000 |6,00,000 | |P L A/c |2,50,000 |5,00,000 | |Creditors |2,30,000 |1,80,000 | |Provisions for: | | | |Bad Doubtful debts |12,000 |6,000 | |Depreciation on Land Bldng. |40,000 |48,000 | |Depreciation on Plant Machinery |60,000 |70,000 | |Total |21,92,000 |30,04,000 | |Assets |1990 |1991 | | |Rs |Rs | |Plant Machinery [At cost]              |12,90,000 | | |8,00,000 | | |Land Building [At cost] |6,00,000 |8,00,000 | |Stock |6,00,000 |7,00,000 | |Bank |40,000 |80,000 | |Preliminary Expenses |14,000 |12,000 | |Debtors |1,38,000 |1,22,000 | |Total |21,92,000 |30,04,000 | Additional Information: 1. During the year, a part of the machinery, costing Rs. 1,40,000 [accumulated depreciation thereon Rs. 4,000], was sold for Rs. 12,000. 2. Dividend of Rs. 1,00,000 was p aid during the year. Ascertain: 1. Change in Working capital for 1991. 2. Funds Flow statement for 1991. Solution: Particulars |Increase [+] |Decrease [-] | |Current Assets | | | |Stock |             1,00,000 | | |Bank |40,000 | | |Debtors | |16,000 | |Current Liabilities | | | |Creditors |50,000 | | |Provision for Doubtful Debts |6,000 | | | |1,96,000 |16,000 | |Increase in Working capital |1,80,000 | | Funds Flow Statement |Particulars | |Rs. |Sources: | | | |Issue of Shares | |4,00,000 | |Issue of Debentures | |2,00,000 | |Sale of Machinery |Working Note : 2 |12,000 | |Funds from Operations | |4,98,000 | |Total of Sources [A] | |11,10,000 | Applications: | | | |Purchase of Plant Machinery |Working Note : 1 |6,30,000 | |Purchase of Land Building | |2,00,000 | |Payment of Dividend | |1,00,000 | |Total Uses [B] | |9,30,000 | |Increase in Wor king Capital [A – B] | |1,80,000 | Working Notes: 1 Plant Machinery A/c |Particulars |Rs. |Particulars |Rs. | |To Balance B/d |8,00,000 |By Bank |12,000 | |To Bank [Purchase of P M – Balancing |6,30,000 |By P L a/c [loss on sale] |1,24,000 | |Fig. | | | | | | |By Provision for Dep. |4,000 | | | |[On Plant sold] | | | | |By balance C/d |12,90,000 | |Total |14,30,000 |Total |14,30,000 | Working Notes: 2 Provision for Depreciation on Plant Machinery A/c |Particulars |Rs. |Particulars |Rs. |To Plant Machinery [Depreciation on Plant |4,000 |By Balance B/d |60,000 | |sold] | | | | |To Balance C/d |70,000 |By P L a/c [Balancing Fig. ] |14,000 | |Total |74,000 |Total |74,000 | Working Notes: 3 Adjusted P L A/c |Particulars |Rs. |Particulars |Rs. | |To Dividend |1,00,000 |By Balance B/d |2,50,000 | |To Prov. for Depreciation: | |By Funds from Operations [Balancing Fig. ]|4,98,000 | |- Land Bldng. 8,000 | | | |- Plant Machinery |14,000 | | | |To Loss on sale of  |1,24,000 | | | |    Machinery                                | | | | |To Preliminary Exp’s written- |2,000 | | | |    Off | | | | |To Balance C/d |5,00,000 | | | | |7,48,000 | |7,48,000 | Illustration: From the following Balance Sheet prepare: 1. Statement of Changes in Working Capital and 2. Funds Flow Statement BALANCE SHEET Liability |1990 |1991 |Asset |1990 |1991 | | |Rs. |Rs. | |Rs. |Rs. | |Equity Share Capital |3,00,000 |3,50,000 |Fixed Assets [Net] |5,10,000 |6,20,000 | |9% Preference Share Capital |2,00,000 |1,00,000 |Investments |30,000 |80,000 | |Debentures |1,00,000 |2,00,000 |Current Assets |2,40,000 |3,75,000 | |P L A/c |1,10,000 |2,70,000 |Discount on Debentures |10,000 |5,000 | |Prov. or Doubtful debts |10,000 |15,000 | | | | |Current Liabilities |70,000 |1,45 ,000 | | | | | |7,90,000 |10,80,000 | |7,90,000 |10,80,000 | Additional Information: 1. Preference Shares were redeemed at a premium of 5% during the year 1991. 2. Dividend at 15% on Equity Share for the year 1190 and Preference dividend for 1990 were paid. 3. The Provision for Depreciation stood at Rs. 1,50,000 and Rs. 1,90,000 for the year 1990 and 1991 respectively. 4. A machine costing Rs. 70,000, depreciation written off Rs. 30,000 was disposed off for Rs. 25,000. Solution: Step 1: Schedule of changes in Working Capital Particulars |1990 |1991 |Increase [+] |Decrease [-] | |Current Assets |2,40,000 |3,75,000 |1,35,000 | | |Total Current Assets |2,40,000 |3,75,000 |             | | | | | | | | |Current Liabilities |70,000 |1,45,000 | |75,000 | |Prov. or Doubtful debts |10,000 |15,000 | |5,000 | |Total Current Liabilities |80,000 |1,60,000 | | | |Working Capital [A – B] |1,60,000 |2,15,000 | | | |Net Increase in Working capital |55,000 | | |55,000 | |Total |2,15,000 |2,15,000 |1,35,000 |1,35,000 | Step 2: Ledger Accounts for all Non-Current Assets and Liabilities Fixed Assets A/c |Particulars |Rs. |Particulars |Rs. | |To Op. Balance B/d |6,60,000 |By Depreciation A/c |30,000 | |[5,10,000 + 1,50,000] | | | | |To Cash A/c [Purchases] |2,20,000 |By Cah a/c [Sale] |25,000 | |[Trf. to Funds Flow Stnt. – Bal. Fig. ] | |[Trf. to Funds Flow Stnt. | | | | |By Adjusted P L A/c |15,000 | | | |[Loss on Sale] | | | | |By Cl. Balance C/d |8,10,000 | | | |[6,20,000 + 1,90,000] | | | |8,80,000 | |8,80,000 | Depreciation A/c |Particulars |Rs. |Particulars |Rs. |To Machinery |30,000 |By Op. Balance B/d |1,50,000 | |[5,10,000 + 1,50,000] | | | | |To Cl. Balance C/d |1,90,000 |By Adjusted P L A/c |70,000 | | | |[Depreciation for Current yr. ] | | | |2,20,000 | |2,20,000 | Discount on Debenture A/c Particulars |Rs. |Particulars |Rs. | |To Op. Balance B/d |10,000 |By Adjusted P L A/c |5,000 | | | |[Balancing Fig. ] | | | | |By Cl. Balance C/d |5,000 | | |10,000 | |10,000 | Equity Share Capital A/c Particulars |Rs. |Particulars |Rs. | |To Cl.. Balance C/d |3,50,000 |By Op. Balance B/d |3,00,000 | | | |By Cash A/c [Issue of Shares |50,000 | | |3,50,000 | |3,50,000 | Investments A/c |Particulars |Rs. |Particulars |Rs. | |To Op. Balance B/d |30,000 |By Cl. Balance C/d |80,000 | |To Cash A/c [addl. Investment made] [trf. to|50,000 | | | |Funds Flow Stnt. – Bal. Fig. ] | | | | | |80,000 | |80,000 | 8% Preference Share Capital A/c |Particulars |Rs. |Particulars |Rs. | |To Cash A/c [Redemption at 5% premium] |1,05,000 |By Op. Balance B/d |2,00,000 | |[1,00,000 + 5,000] | | | | |To Cl. Balance C/d |1,00,000 |By Adjusted P L A/c [Premium] |5,000 | | |2,05,000 | |2,05,000 | Debentures A/c |Particulars |Rs. |Particulars |Rs. | |To Cl. Balance C/d |2,00,000 |By Op. Balance B/d |1,00,000 | | | |By Cash A/c [Issued] [Trf to Funds Flow |1,00,000 | | |Stnt. ] | | | |2,00,000 | |2,00,000 | Step 3: Adjusted Profit and Loss A/c |Particulars |Rs. |Particulars |Rs. | |To Loss on Machinery |15,000 |By Balance C/d |1,10,000 | |To Depreciation A/c |70,000 |By Funds from Operation [Balancing Fig. ] |3,16,000 | |To Premium on redemption of Pref. Shares |5,000 | | | |To dividends on Equity Shares |45,000 | | | |To Dividends on Preference Shares |16,000 | | | |To Discount on Debentures |5,000 | | | |To Balance C/d |2,70,000 | | | | |4,26,000 | |4,26,000 | Step 4: Funds Flow Statement |Sources |Rs. |Applications |Rs. |Issue of Shares |50,000 |Redemption of Preference Shares |1,05,000 | |Issue of Debentures |1,00,000 |Purchase of Fixed Assets |2,20,000 | |Sale of Machinery |25,000 |Equity Shares Dividends |45,000 | |Funds from Operation |3,16,000 |Preference Shares Dividends |16,000 | | | |Investments |50,000 | | | |Increase in Working Capital [Balancing |55,000 | | | |Fig. | | | |4,91,000 | |4,91,000 | Illustration: Following are the Comparative Balance Sheets of Goodluck Ltd. as at 31st March: BALANCE SHEET |Liability |1997 |1998 |Asset |1997 |1998 | | |Rs. |Rs. | |Rs. |Rs. | |Share Capital |10,00,000 |11,00,000 |Goodwill |50,000 |40,000 | |Debentures |5,0 0,000 |3,00,000 |Land |4,20,000 |6,60,000 | |Gen. Reserves |2,00,000 |2,00,000 |Machinery |6,00,000 |8,00,000 | |P L A/c |1,10,000 |1,90,000 |Stock |2,50,000 |2,10,000 | |Prov. for Tax |40,000 |1,10,000 |Debtors [Good] |3,00,000 |2,40,000 | |Creditors |50,000 |40,000 |Preliminary Exp’s |30,000 |20,000 | |Bills Payable |20,000 |30,000 |Cash |3,00,000 |24,000 | |Prov. or Doubtful debts |30,000 |24,000 | | | | | |19,50,000 |19,94,000 | |19,50,000 |19,94,000 | Additional Information: 1. During the year 1998, a part of machine costing Rs. 7,500 [accumulated depreciation thereon being Rs. 2,500] was sold for Rs. 3,000. 2. Income tax of 1997 was paid in 1998 Rs. 40,000. This is to be disclosed in the Funds statement. 3. Depreciation on Machinery for 1998 was provided at Rs. 50,000 Prepare: 1. A Statement of changes in Working Capital. 2. A Funds Flow Statement. Solution: Step 1: Schedule of changes in Working Capital Particulars |1997 |1998 |Increase [+] |Decrease [-] | |Current Assets | | | | | |Sto ck |2,50,000 |2,10,000 | |40,000 | |Debtors |3,00,000 |2,40,000 | |60,000 | |Cash |3,00,000 |24,000 | |2,76,000 | |A. Total Current Assets |8,50,000 |4,74,000 |             | | | | | | | | |Current Liabilities | | | | | |Creditors |50,000 |40,000 |10,000 | | |Bills Payable |20,000 |30,000 | |10,000 | |Prov. for Doubtful debts |30,000 |24,000 |6,000 | | |B. Total Current Liabilities |1,00,000 |94,000 | | | |Working Capital [A – B] |7,50,000 |3,80,000 | | | |Decrease in Working capital | |3,70,000 |3,70,000 | | |Total |7,50,000 |7,50,000 |3,86,000 |3,86,000 | Step 2: Ledger Accounts for all Non-Current Assets and Liabilities Goodwill A/c |Particulars |Rs. |Particulars |Rs. | |To Op. Balance B/d |50,000 |By Adjusted P L A/c |10,000 | | | |[Goodwill written-off] | | | | |By Cl. Balance C/d |40,000 | | | |[6,20,000 + 1,90,000] | | | |50,000 | |50,000 | Land A/c |Particulars |Rs. |Particulars |Rs. | |To Op. Balance B/d |4,20,000 |By Cl. Balance C/d |6,60,000 | |To Cash A/c [Purchases] [Trf. o Fund flow |2,40,000 | | | |Stnt. – Bal. Fig. ] | | | | | |6,60,000 | |6,60,000 | Preliminary Expenses A/c |Particulars |Rs. |Particulars |Rs. | |To Op. Balance B/d |30,000 |By Adjusted P L A/c [Written off] |10,000 | | | |By Cl. Balance C/d |20,000 | | |30,000 | |30,000 | Share Capital A/c |Particulars |Rs. |Particulars |Rs. | |To Cl. Balance C/d |11,00,000 |By Op. Balance B/d |10,00,000 | | | |By Cash a/c [Issue of Shares] [Trf. to Fund|1,00,000 | | | |Flow  Stnt. – Balancing Fig. | | | |11,00,000 | |11,00,000 | Machinery A/c |Particulars |Rs. |Particulars |Rs. | |To Op. Balance B/d |6. 00,000 |By Cash A/c [Sale] [Transfer to Fund Flow |3,000 | | | |Stnt] | | |To Cash A/c [Purchases] [Trf. to Fund flow |2,57,500 |By Revised P L A/c [Depreciation] |50,000 | |Stnt. – Bal. Fig. | | | | | | |By Revised P L A/c [Depreciation] |2,500 | | | |By Adjusted P L A/c |2,000 | | | |[Loss on sale] | | | | |By Cl. Balance C/d |8,00,000 | | |8,57,500 | |8,57,500 | Debentures A/c |Particulars |Rs. |Particulars |Rs. |To Cash A/c [Redemption] |2,00,000 |By Op. Balance B/d |5,00,000 | |[Transfer to Fund Flow Stnt] | | | | |To Cl. Balance C/d |3,00,000 | | | | |5,00,000 | |5,00,000 | Provision for Tax A/c |Particulars |Rs. |Particulars |Rs. | |To Cash A/c [Income Tax Paid] |40,000 |By Op. Balance B/d |40,000 | |[Transfer to Fund Flow Stnt] | | | | |To Cl. Balance C/d |1,10,000 |By Adjusted P L A/c |1,10,000 | | | |[Prov. made Balancing Fig. ] | | | |1,50,000 | |1,50,000 | General Reserve A/c |Particulars |Rs. |Particulars |Rs. | |To Cl. Balance C/d |2,00,000 |By Op. Balance B/d |2,00000 | | |2,00,000 | |2,00,000 | Step 3: Adjusted Profit and Loss A/c |Particulars |Rs. |Particulars |Rs. | |To Provision for Tax |1,10,000 |By Balance C/d |1,10,000 | |To Preliminary Exp’s written-off |10,000 |By Funds from Operation [Balancing Fig. ] |2,64,500 | |To Depreciation on Machinery |50,000 | | | |To Depreciation on Machinery |2,500 | | | |To Loss on sale of Machinery |2,000 | | | |To Goodwill written-off |10,000 | | | |To Balance C/d |1,90,000 | | | | |3,74,500 | |3,74,500 | Step 4: Funds Flow Statement |Sources |Rs. |Applications |Rs. |Sale of Machinery |3,000 |Purchase of Land |2,40,000 | |Issue of Shares |1,00,000 |Purchase of Machinery |2,57,500 | |Funds from Operation |2,64,500 |Redemption of Debentures |2,00,000 | |Decrease in Working Capital [Balancing |3,70,000 |Income Tax paid |40,000 | |Fig. ] | | | | | |7,37,500 | |7,37,500 | Illustration: Following is the Balance Sheet of Tayco as on December 31st, 1998 and 1999: BALANCE SHEET |Liability |1998 |1999 |Asset |1998 |1999 | | |Rs. |Rs. | |Rs. |Rs. |Share Capital |2,00,000 |2,50,000 |Land Bldng. |2,00,000 |1,90,000 | |Gen. Reserves |50,000 |60,000 |Machinery |1,50,000 |1,69,000 | |P L A/c |30,500 |30,600 |Stock |1,00,000 |74,000 | |Bank Loan |70,000 |- |Sdry. Debtors | 80,000 |64,200 | |Sundry Creditors |1,50,000 |1,35,200 |Cash |500 |600 | |Prov. or Taxation |30,000 |35,000 |Bank |- |8,000 | | | | |Goodwill | |5,000 | | | | | | | | | |5,30,500 |5,10,800 | |5,30,500 |5,10,800 | Additional Information: 1. During the year ended December 1999: a. Dividend of Rs,23,000 was paid and b. Asseets of another Company were purchased for a consideration of Rs. 50,000 payable in Shasres. 2. The following Assets were purchased: a. Stock Rs. 20,000. b. Machinery Rs. 25,000, additional purchase Rs. 8,000. c. Depreciation written-off on Machinery Rs. 12,000. d. Income tax paid during the year Rs. 33,000 e. Loss on sale of machine Rs. 200 was written-off to General Reserve You are required to prepare the Statement of Fund Flow Solution: Step 1: Schedule of changes in Working Capital |Particulars |1997 |1998 |Increase [+] |Decrease [-] | |Current Assets | | | | | |Stock |1,00,000 |74,000 | |26,000 | |Sdry. Debtors |80,000 |64,200 | |15,800 | |Cash |500 |600 |100 | | |Bank |- |8,000 |8,000 | | |A. Total Current Assets |1,80,500 |1,46,800 |             | | |Current Liabilities | | | | | |Sdry
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