Chapter 7 Funds Analysis, Cash Flow Analysis, and Financial

Planning
Introduction: Cash flow and financial distress
In China, most ST firms get into financial distress. If they could not get financial help soon they
will not stand of feet
But why does they get themselves in such a hell ? They have got much money with IPO.

30
40
5 18
2005 3.39

10
12
2.61
2001

Study Objectives
Flow of funds statement
Accounting statement of cash flows
Cash-flow forecasting
Range of cash-flow estimates
Forecasting financial statements
1.Flow of funds statements
Flow of funds statement is a summary of a firms changes in financial position from one period to
another
WHY do we need a flow of funds statement?
By arranging a companys flow of funds in a systematic fashion, the analyst can better determine
whether the decisions made for the firm resulted in a reasonable flows of funds or in questionable
flows, which warrant future inspection
(1)What is funds?
Funds: all of the firms investments and claims
We define funds as the claims and investments because many important transactions are not
reported in cash
(2)What does flow of funds tell us?
The sources and uses of funds during a period of time
The firms flow of funds is therefore comprised of the individual changes in balance sheet items
between two points in time
The flow of funds statement portrays net rather than gross changes, although an analysis of the
gross funds flow of a firm over time would be much more revealing than analysis of net funds
flow, we are usually constrained by the financial information available
What are source? Uses?
Sources of funds: any decrease in an asset item or any increase in an claim item
Uses of funds: any increase in an asset item or any decrease in a claim item
See Table 7-1 the determination of sources and uses
Adjustments
In the former computation, the change in fixed assets and retained earnings is a mixed result of
changes, and what we want is detailed information of changes in these items
See computation: page 175
Implications of funds of statement analysis
Imbalances in the use of funds can be detected and appropriate actions undertaken
An analysis of the major sources of funds in the past reveals what portions of the firms growth
were financed internally and externally
We can judge whether the firm has expanded at too fast a rate and whether the firms financing
capability is strained
Accounting statement of cash flow

Statement of cash flow is a summary of a firms cash receipts and cash payments during a period
of time
The purpose of the statement of cash flow is to report a firms cash inflows and outflows, during
a period of time, segregated into three categories: operating, investing, and financing activities
The usefulness of statement of cash flow
It helps the financial manager to assess and identify:
A companys ability to generate future net cash inflows from operations to pay debts, interest,
and dividends
A companys need for external financing
The reasons for differences between net income and net cash flow from operating activities
The effects of cash and noncash investing and financing transactions
Contents of the statement
The statement of cash flows explains changes in cash (and cash equivalents) by listing the
activities that increased cash and those decreased cash
Each activitys cash inflow or outflow is segregated according to one of three broad category
types: operating, investing, or financing activity
Table 7-4 (page 178) lists the activities found most often in a typical statement of cash flows
Alternative forms of the statement
The cash flow statement may be presented using either a direct method or an indirect
method. The only difference between the direct and indirect methods of presentation concerns the
reporting of operating activities; the investing and financing activity sections would be identical
under either method
Analyzing the statement of cash flow
Operating cash inflow, dividend and investment outflow
Sales revenue inflow, inventory and employee wages outflow
Analyzing of Aldine: page 180
Cash-flow forecasting
(1)Cash budget: a forecast of a firms future cash flows arising from collections and
disbursements, usually on a monthly basis
Cash flow reveals the timing and amount of expected cash inflows and outflows over the period
studied.
With this information, the financial manager is better able to determine the future cash needs of
the firm, plan for the financing of these needs, and exercise control over the cash and liquidity of
the firm.
Without cash budget, the firm may run into financial difficulty
(2) The preparation of cash budget
Sales forecast
Collections and other cash receipts
Cash disbursements
Net cash flow and cash balance
Means of meeting the cash deficits
The sales forecast
Often this is done by marketing department
This forecast can be based on an internal analysis, an external one, or both.
With an internal approach, sale representatives are asked to project sales for the forthcoming
period. The product sales managers screen these estimates and consolidate them into sales
estimates for product lines. The estimates for the various product lines are then combined into an
overall sales estimate for the firm.
The basic problem with an internal approach is that it can be too myopic. Often, significant trends
in the economy and in the industry are overlooked
With an external approach, economic analysts make forecasts of the economy and of industry
sales for several years to come. They may use regression analysis to estimate the association
between industry sales and economy in general. The next step is to estimate market share by
individual products, prices that are likely to prevail, and the expected reception of new product
From this information, an external sales forecast can be prepared

The defect of external approach is that the data used in the computation are not always very
accurate, most of them are estimated by scholars or experts who are not familiar with product
markets
Past experience will show which of the two forecasts is likely to be more accurate
In general, the external forecast should serve as a foundation for the final sales forecast, often
modified by internal forecast
Collections and other cash receipts
Collections here means to determine the cash receipts from the sales
For cash sales, cash is received at the time of the sale; for credit sales, the receipts comes later.
How much later depends on the billing terms, the type of customer, and the credit and collection
policies of the firm
Example: Table 7-7, page 183
Cash receipts
Cash receipts may arise from the sale of assets, as well as from external financing and investment
income. These cash receipts need estimations or advanced planning
Cash disbursements
Operation disbursements and other disbursements
Operation disbursements are expenses occurred to maintain operation, such as material, wages,
power, interest, tax, etc.
How does the firm estimate Operation disbursements ?
Sales---production schedules---material purchasing, labor cost, and other expenses
Example: Table 7-8 page 184
Other disbursements
Capital expenditures: the expenditures involves long-term investment. They are planned in
advance, so they are predictable for the short-term cash budget
Dividend payments for most companies are stable and are paid on specific date
Federal taxes can be estimated according to the firms sales and income
Net cash flow and cash balance
After having taken all foreseeable cash inflows and outflows into account, we combine the cash
receipts and disbursements, and compute the projected cash position by month
If, in a month there is a cash deficit, the financial manager should take measures to meet this
deficit. The feasible measures may including borrowing from bank or delaying capital
expenditures or payments for purchases
Example
The cash manager of Monet Paint are preparing a cash budget for the 6 months from April
through September. Their cash management model is based on the following assumptions:
Recent and forecasted sales are:
Month
2(actual 3(actual 4(forecast
)
)
)
Sales
$400000
forecas
t
Twenty percent of sales are collected in the month of sale, 50% are collected in the month
following the sale, and 30% are collected in the second month following the sale
Purchases are 60% of sales, and purchases are paid for 1 month prior to sale
Wages and salaries are 12% of sales and are paid in the same month as the sale
Rent of $10000 is paid each month. Additional cash operating expense of $30000 per month will
be incurred for April through July. These will decrease to $25000 for August and September
Tax payments of $ 20000 and $30000 are expected in April and July, respectively. A capital
expenditure of $150000 will occur in June, and the firm has a mortgage payment of $60000 due in
May
The cash balance at the end of March is $150000. Managers want to maintains a minimum
balance of $100000 at all times. The firm will borrow what it needs to achieve the minimum
balance. Any cash above the minimum will be used to pay off any loan balance until it is
eliminated.
Cash receipts budget
month

sales
Collection(current) 20%
Previous month 50%
2nd month previous 30%
Total cash receipts

120000
250000
120000
490000

140000
300000
150000
590000

160000
350000
180000
690000

420000
72000
10000
30000
20000

480000
84000
10000
30000

480000
96000
10000
30000

160000
400000
210000
770000

140000
400000
240000
780000

120000
350000
240000
710000

Cash disbursement budget

month
purchase
Wages and salaries
Rent
Cash operating expense
Tax installments
Capital expenditures
Mortgage payment
Total cash disbursement

420000
96000
10000
30000
30000

360000
84000
10000
25000

300000
72000
10000
25000

150000
60000
664000

766000

586000

479000

407000

-62000
150000
88000
12000

-74000
100000
26000
74000

-76000
100000
24000
76000

184000
100000
284000

301000
122000
423000

303000
423000
726000

100000
12000

100000
86000

100000
162000

162000
122000

423000

726000

552000

Cash balance and deficits meetings

month
Net cash flow
Beginning cash balance
Available balance
Monthly borrowing
Monthly repayment
Ending balance
Cumulative loan balance

4. Range of cash flow estimates

Depending on the care devoted to preparing the budget and the volatility of cash flows resulting
from the nature of the business, actual cash flows will deviate more or less widely from those that
are expected.
In the face of uncertainty, we must provide information about the range of possible outcomes
Deviations from expected cash flows
To take into account deviations from expected cash flows, it is desirable to work out additional
cash budget
We can change assumptions of cash flow and display new cash budget. For example, different
sales volume, price, etc.
See figure 7-1, distributions of ending cash balances
Use of probabilistic information
The expected cash position plus the distribution of possible outcomes give us a considerable
amount of information
additional funds required or the funds released under various possible outcomes
the firms ability to adjust to deviations from the expected outcomes
From the standpoint of internal planning, it is far better to allow for a range of possible outcomes
than to rely solely on the expected outcome
5.Forecasting financial statements
Forecast financial statements are expected financial statements based on conditions that
management expects to exist and actions it expects to take
A cash budget gives us information about only the prospective future cash positions of the firm,
whereas forecast statements embody expected estimates of all assets and liabilities as well as of
income statement items
Much of the information that goes into the preparation of the cash budget can be used to derive a
forecast income statement
Sales revenue: sales forecast
Assume cost can be divided into fixed cost and variable cost
Cost of goods sold: assume variable cost
Selling, general and administrative expense: assume fixed cost
Income tax: according to tax law
Dividend: according to dividend policy
Forecast asset: assume fixed turnover ratios for receivables and inventories

Future net fixed assets are estimated by adding planned expenditures to existing net fixed assets
and substracting from this sum the book value of any fixed assets sold along with depreciations
during the period
Forecasting liabilities: accounts payable according to purchase and payments amounts; wages
according to production schedule; shareholders equity according to net profit less dividend
Example: page 189-191
FUNDS FLOW STATEMENT

This statement gives an overview of how I plan to manage the finances of each year of
my M.S. (Computer Science) Programme at the (University Name). The estimated amount of
tuition and living expenses for 1 year is US $ 23,422 which is approximately equal to Rs. 11.48
lakhs per year (at the exchange rate 1 US $ = Rs. 49/-).

YEAR
First

Second

SEMESTER

FUNDS REQUIRED

Sem 1
Aug 2002
Sem 2
Jan 2003
Sem 3
Aug 2003

Rs. 5.74 lakhs

33% of current bank balance

FUNDS
ARRANGED
Rs. 5.8 lakhs

Rs. 5.74 lakhs

33% of current bank balance

Rs. 5.8 lakhs

Rs. 5.74 lakhs

25% of current bank balance

30% of Post Office Savings
Deposit

Rs. 4.4 lakhs

Sem 4
Jan 2004

TOTAL

Rs. 5.74 lakhs

SOURCES OF FUNDS

60% of Post Office Savings

Deposit
50% of fixed deposits and
recurring deposit with UBI
40% of General Provident
Fund

Rs. 1.5 lakhs

--------------Rs. 5.9 lakhs
Rs. 3.0 lakhs
Rs. 1.6 lakhs
Rs. 1.2 lakhs
--------------Rs. 5.8 lakhs
Rs. 23.3 lakhs

Rs. 22.96 lakhs

Balance Assets after meeting with all the expenses:

Movable Assets:
Rs. 12.68 lakhs
Immovable Assets:
Rs. 73.52 lakhs
----------------------------------------------------------TOTAL BALANCE ASSETS: Rs. 86.20 lakhs
Besides this, my parents have a steady annual income of about Rs. 8.03 lakhs per year.

(Name of Applicant)
120

Accounting and Finance

for Managers
LESSON
7
FUND FLOW STATEMENT ANALYSIS
CONTENTS
7.0 Aims and Objectives
7.1 Introduction
7.2 Meaning & Objectives of Fund Flow Statement Analysis
7.3 Methods of Preparing Fund Flow Statement
7.3.1 Schedule of Changes in Working Capital
7.3.2 Net Profit Method
7.3.3 Sales Method
7.3.4 First Method
7.3.5 Second Method
7.4 Advantages of Preparing Fund Flow Statement
7.4.1 Illustrative Statement of Financing
7.4.2 To fulfil the Primary Objective of the Financial Management
7.4.3 Facilitation through Financial Planning
7.4.4 Guide to Working Capital Management
7.4.5 Indicator of Yester Track Path of the Firm
7.5 Let us Sum up
7.6 Lesson-end Activity
7.7 Keywords
7.8 Questions for Discussion
7.9 Suggested Readings
7.0 AIMS AND OBJECTIVES
In this lesson we shall discuss about fund flow statement analysis. After going through
this lesson you will be able to:
(i) understand meaning and objectives of fund flow statement analysis
(ii) analyse methods of preparing fund flow statement
(iii) discuss advantages of preparing fund flow statement.
7.1 INTRODUCTION
Every business establishment usually prepares the balance sheet at the end of the fiscal
year which highlights the financial position of the yester years It is subject to change in
the volume of the business not only illustrates the financial structure but also expresses
the value of the applications in the liabilities side and assets side respectively. Normally,
Balance sheet reveals the status of the firm only at the end of the year, not at the
beginning of the year. It never discloses the changes in between the value position of the
firm at two different time periods/dates.
The method of portraying the changes on the volume of financial position is the statement
fund flow statement. To put them in nutshell, fund between two different time periods. It is
further illustrated that the changes in the financial position or the movement or flow of fund.
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Fund Flow Statement Analysis
7.2 MEANING & OBJECTIVES OF FUND FLOW
STATEMENT ANALYSIS
A report on the movement of funds or working capital. In a narrow sense the term fund
means cash and the fund flow statement depicts the cash receipts and cash disbursements/
payments. It highlights the changes in the cash receipts and payments as a cash flow
statement in addition to the cash balances i.e., opening cash balance and closing cash
balance. Contrary to the earlier, the fund means working capital i.e., the differences
between the current assets and current liabilities.
The term flow denotes the change. Flow of funds means the change in funds or in
working capital. The change on the working capital leads to the net changes taken place
on the working capital i.e., especially due to either increase or decrease in the working
capital. The change in the volume of the working capital due to numerous transactions.

Some of the transactions may lead to increase or decrease the volume of working
capital. Some other transactions neither registers an increase nor decrease in the volume
of working capital.
According Foulke A statement of source and application of funds is a technical device designed
to analyse the changes to the financial condition of a business enterprise in between two dates
Various Facets of Fund flow statement are as follows:
l Statement of sources and application of funds
l Statement changes in financial position
l Analysis of working capital changes and
l Movement of funds statement
Objectives of fund flow statement analysis:
(1) It pinpoints the mobilization of resources and the further utilization of resources
(2) It highlights the financing of the general expansion of the business firms
(3) It exemplifies the utilization of debt finance in the structure of financing
(4) It portrays the relationship between the financing, investment, liquidity and dividend
decision of the firm during the given point of time.
7.3 METHODS OF PREPARING FUND FLOW
STATEMENT
Steps in the preparation of Fund Flow Statement:
l First and fore most method is to prepare the statement of changes in working
capital i.e., to identify the flow of fund / movement of fund through the detection
of changes in the volume of working capital.
l Second step is the preparation of Non- Current A/c items-Changes in the volume
of Non current a/cs have to be prepared only in order to quantify the flow fund i-e
either sources or application of fund.
l Third step is the preparation Adjusted Profit& Loss A/c, which already elaborately
discussed in the early part of the chapter.
l Last step is the preparation of fund flow statement.
7.3.1 Schedule of Changes in Working Capital
The ultimate purpose of preparing the schedule of changes in the working capital is to
illustrates the changes in the volume of net working capital which envisages either
sources or application of fund. The schedule of changes are focused as follows:
Increase in Current Assets
Decrease in Current Assets
Increase in Current Liabilities
Decrease in Current Liabilities
Increase in Working Capital
Decrease in Working Capital
Decrease in Working Capital
Increase in Working Capital
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Accounting and Finance
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The next important step is to prepare that Adjusted profit and loss account
The first method is widely used method by all in determining the volume of Fund from
Operations (FFS)
Under the Net Profit Method, Fund flow from operations can be computed
7.3.2 Net Profit Method
Under this method, Fund from operations can be determined in two different ways .The
first method is through the statement format
Net Profit from the Profit & Loss A/c xxxxx
Add:
(A) Non Funding Expenses:
Loss on Sale of Fixed Assets xxxx
Loss on Sale of Long Term Investments xxxx
Loss on Redemption Debentures/Preference Shares xxxx
Discount on Debentures /Share xxxx

(B) Non Operating Expenses:

Depreciation of fixed Assets xxxx
(C) Intangible Assets:
Amortization of Goodwill xxxx
Amortization of Patent xxxx
Amortization of Trade Mark xxxx
(D) Fictitious Assets:
Writing off Preliminary expense xxxx
Writing off Discount on Shares/Debentures xxxx
Method of Fund From Operations
Net Profit Method
Add Non Operating Expenses
Less Non Operating Incomes
Sales Method
Less-Payments(Application)
Particulars Previous
Year
Current
Year
Increase
inWorking
Capital (+)
Decrease in
inWorking
Capital ()
(A) Current Assets:
Cash In Hand
Cash at Bank
Marketable Securities
Bills Receivable
Sundry Debtors
Closing Stock
Prepaid Expenses
(B) Current Liabilities:
Creditors
Bills Payable
Outstanding expenses
Pre received Income
Provision for doubtful and bad
debts
Net Working Capital(A-B)
Increase/Decrease Working
Capital
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(E) Profit Appropriation Fund Flow Statement Analysis
Transfer to General Reserve xxxx
Less:
(F) Non funding Profits:
Profit on Sale of Fixed Assets xxxx
Profit on Sale of Long Term Investments xxxx
Profit on Redemption Debentures/Preference Shares xxxx
(G) Non Operating Incomes:
Dividend Received xxxx
Interest Received xxxx
Rent Received xxxx

Fund From operations / Fund Lost in Operations xxxxx

The second method of determining the fund from operations under the first classification
is the Accounting Statement Format.
Adjusted Profit & Loss A/c
Dr Cr
7.3.3 Sales Method
Under this method, the following is the statement format is used to arrive fund flow
from operations:
Sources:
Sales xxxxx
Stock at the end xxxxx
Less:
Application:
Stock at Opening xxxx
Net Purchases (Purchase-Returns) xxxx
Wages xxxx
Salaries xxxx
Telephone expenses xxxx
Electricity charges xxxx
Office stationery expenses xxxx
Other operating cash expenses xxxx
Fund from operations
From the following details calculate funds from operations:
Rs.
Salaries 10,000
Rent 6,000
To Depreciation
xxxx
To Goodwill Written off
xxxx
To Patent Written off
xxxx
To Loss on Sale of Fixed Asset
xxxx
To Loss on Sale of Investment
xxxx
To Loss on redemption of Liability xxxx
To Preliminary Expenses off
xxxx
To Proposed Dividend
xxxx
To Transfer to General Reserve
xxxx
To Current Year Provision for
Taxation
xxxx
To Current Year Provision for
Depreciation
xxxx
To Balancing Figure
xxxx
(Fund Lost in Operations)
By Opening Balance Profit
xxxx
By Profit on sale of Fixed Assets xxxx
By Profit on Sale of Investments xxxx
By Profit on redemption of
Liability
xxxx
By Transfer from General Reserve
xxxx
By Balancing Figure
xxxx
Fund From Operations(FFS)
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Accounting and Finance
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Refund of Tax 6,000
Profit on Sale of Building 10,000
Depreciation on Plant 10,000
Provision for Taxation 8,000

Loss on Sale of plant 4,000

Closing Balance of Profit & Loss A/c
1,20,000
Opening balance on Profit & Loss A/c 50,000
Discount on Issue of Debentures 4,000
Provision for bad debts 2,000
Transfer to general reserve 2,000
Preliminary expenses written off 6,000
Good will written off 4,000
Dividend Received 10,000
Proposed Dividend 12,000
Calculation of fund from operation
7.3.4 First Method
Closing balance of Profit & Loss A/c 1,20,000
Less Opening Balance 50,000
Balance Forward 70,000
Add: Non Fund / Non Operating Charges:
Depreciation on Plant 10,000
Provision for Taxation 8,000
Loss on Sale of Plant 4,000
Discount on issue of debentures 4,000
Provision for bad debts 2,000
Transfer to general reserve 2,000
Preliminary expenses off 6,000
Good will written off 4,000
Proposed Dividend 12,000
1,22,000
Less
Refund of Tax 6,000
Profit on Sale of Building 10,000
Dividend Received 10,000
Fund from operations 96,000
7.3.5 Second Method
Adjusted Profit & Loss A/c
Depreciation on Plant
10,000
Provision for Taxation
8,000
Loss on Sale of Plant
4,000
Discount on issue of debentures 4,000
Provision for bad debts
2,000
Transfer to general reserve
2,000
Preliminary expenses off
6,000
Good will written off
4,000
Proposed Dividend
12,000
To Closing Profit B/d
1,20,000
1,72,000
By Opening Balance B/d
50,000
By Profit on Sale of Building
10,000
By Dividend Received
10,000
By Refund of Tax
6,000
By Balancing Figure
96,000
Fund From operations
1,72,000
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The next step is to prepare the fund flow statement. The proforma of the fund flow Fund Flow
Statement Analysis
statement
Check Your Progress
(1) Fund flow means a study of

(a) working capital change

(b) Cash position change
(c) Long investment change
(d) Change in the current liabilities
(2) Normally Working capital means
(a) Current assets- current liabilities
(b) Current assets
(c) Gross working capital
(d) Net working capital
(3) Increase in working capital
(a) Increase in current assets
(b) Increase Net working capital
(c) Increase in current liabilities
(d) Increase in long term source of financing
7 . 4 ADVANTAGE S OF PRE PARING FUND F LOW
STATEMENT
Structured analysis on the Working capital of a firm:
It is the only statement to study the changes in the working capital in between two
different periods from the balance sheet of a firm through structured analysis on the
basis of working capital position.
7.4.1 Illustrative Statement of Financing
It is a statement which highlights the role of various kinds of financing not only in the
dimension of project development and expansion but also growth rate of the organization.
Sources of funds Uses of funds
Funds from Business Operation
Non trading Incomes
Sale of Non-Current Assets
Sale of Long Term Investments
Issue of shares
Acceptance of deposits
Long Term Borrowings
Decrease in Working Capital
Funds Lost in Operations
Redemption of Preference Share Capital
Repayment of Loans
Purchase of Long Term Investments
Purchase of Fixed Assets
Payment of Taxes
Payment of Dividends
Drawings
Loss of Cash
Increase in Working Capital
Financial Structure
Capital Structure-Long Term
Financial Resources
Medium &Short term
Financial Resources
Institutional
lending:
Banker-Loans &
Advances
Money Market:
Public Deposit,
Commercial paper
External Sources
Share Capital and
so on

Internal Sources:
Retained
Earnings
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Accounting and Finance
for Managers
7.4.2 To fulfil the Primary Objective of the Financial Management
It not only elucidates the mode of financing but also the application of resources after
raising. It answers to the following queries viz:
l How the outsider's liabilities are redeemed?
l What is the role of the fund from operation generated?
l How the raised funds applied into business?
l How the decrease in working capital was applied?
l What is the mode of raising of financial resources for an increase in the working
capital?
7.4.3 Facilitation through Financial Planning
The projected fund flow statement from the past performance facilitates the firm to
anticipate the future requirement of financial resources. It guides the management to
prioritize the application in the future to the tune of scarce resources.
7.4.4 Guide to Working Capital Management
It acts as a guide to the management to maintain the working capital at optimum level
through either purchase or sale of marketable securities during the periods of adequate
and inadequate working capital respectively.
7.4.5 Indicator of Yester Track Path of the Firm
The insight on the financial performance of the firm can be had by the lending institutions
through fund flow statement at the time of extending financial assistance to the firm.
Limitations:
l It is an extension of financial statements but it cannot be leveled with the emphasis
of them.
l It is not a resultant of the transaction instead it is an arrangement of among the
available information.
l Projected fund flow statement ever only to the tune of financial statements which
are historic in feature.
Check Your Progress
(1) Adjusted profit and loss account is prepared for
(a) Determining the fund from operations
(b) Determining the fund lost in operations
(c) (a) or (b)
(d) None of the above
(2) Fund flow statement is categorized into two parts
(a) Fund in flow & Fund out flow
(b) Cash in flow & Cash out flow
(c) Sources & Applications
(d) None of the above
(3) Fund from operations is
(a) Sources of the firm
(b) Applications of the firm
(c) Neither sources nor applications
(d) None of the above
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Fund Flow Statement Analysis
Illustration 1
Form the following details prepare a statement showing changes in working capital during
1985:
Balance sheet of Pioneer ltd. as on 31st December
(B.com., Bharathidasan November, 1986)
The first step is to prepare the schedule of changes in working capital.

Schedule of changes in working capital

Illustration 2
From the following two balance sheet as at December 31, 2004 and 2005. Prepare the
statement of sources and uses of funds.
The first step is to prepare the schedule of changes in working capital.
Schedule of changes in working capital
Liabilities 1984 Rs 1985
Rs.
Assets 1984
Rs.
1985
Rs.
Share capital 5,00,000 6,00,000 Fixed assets 10,00,000 11,20,000
Reserves 1,50,000 1,80,000 Less:Depreciation 3,70,000 4,60,000
Profit and Loss A/c 40,000 65,000 6,30,000 6,60,000
Debentures 3,00,000 2,50,000 Stock 2,40,000 3,70,000
Creditors for goods 1,70,000 1,60,000 Book Debts 2,50,000 2,30,000
Provision for tax 60,000 80,000 Cash in hand 80,000 60,000
Preliminary expeneses 20,000 15,000
12,20,000 13,35,000 12,20,000 13,35,000
1984 1985 Increase
In working
capital
Decrease
In working
capital
Current asset:
Stock 2,40,000 3,70,000 1,30,000 -----------Book debts 2,50,000 2,30,000
------- 20,000
Cash in hand 80,000 60,000 20,000
5,70,000 6,60,000 1,30,000 40,000
Current liability
Creditors for goods 1,70,000 1,60,000 10,000 ------Working capital 4,00,000 5,00,000 1,40,000 40,000
Increase in working capital 1,00,000 ------------ 1,00,000
5,00,000 5,00,000 1,40,000 1,40,000
2004 2005 2004 2005
Liabilities Rs. Rs. Rs. Rs.
Share capital 80,000 90,000
Trade creditors 20,000 46,000
Profit & Loss a/c 4,60,000 5,00,000
Assets
Cash 60,000 94,000
Debtors 2,40,000 2,30,000
Stock in trade 1,60,000 1,80,000
Land 1,00,000 1,32,000
5,60,000 6,36,000 5,60,000 6,36,000
2004 2005 Increase
In working
captial
Decrease
In working
capital
Current asset:
Cash 60,000 94,000 34,000
Debtors 2,40,000 2,30,000 10,000
Stock in trade 1,60,000 1,80,000 20,000

4,60,000 5,04,000
Current liability
Trade creditors 20,000 46,000 26,000
Working capital 4,40,000 4,58,000 54,000 36,000
Increase in working capital 18,000 ------------- ---------- 18,000
4,58,000 4,58,000 54,000 54,000
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Accounting and Finance
for Managers
The next step is to prepare the non current accounts of the firm.
Dr Land A/c Cr
Next non-current account item is the share capital account in the liability side.
The closing balance of the share capital is more than that of the opening balance which
means that the firm has undergone the issue of further more share capital.
During the issue of share capital, the cash resources are raised by the firm through the
sale of shares.
Dr Share capital A/c Cr
Then the next step is to prepare the adjusted profit and loss account to determine the
fund from the operations
Dr Adjusted Profit & Loss A/c Cr
The next step is to prepare the fund flow statement of the firm
Fund flow statement
Illustration 3
From the following relating to Panasonic ltd., prepare funds flow statement.
Balance sheet of Pioneer ltd. as on 31st December
Additional information:
l The company issued bonus shares for Rs.1,00,000 and for cash Rs.1,00,000
l Depreciation written off during the year Rs.30,000
The first step is prepare the statement of changes in working capital
Schedule of changes in working capital
Rs. Rs.
To Balance B/d 1,00,000
To Cash(Purchase) balancing fig. 32,000 By Balance c/d 1,32,000
1,32,000 1,32,000
Rs. Rs.
To Balance c/d 90,000 By Cash( Issue of shares)
Balancing fig.
10,000
By Balance b/d 80,000
90,000 90,000
Rs. Rs.
By Balance B/d 4,60,000
To Balance c/d 5,00,000 By Fund from operation
Balancing fig.
40,000
5,00,000 5,00,000
Sources Rs. Applications Rs.
Issue of Shares 10,000 Purchase of Land 32,000
unds from operation 40,000 Increase in working capital 18,000
50,000 50,000
Liabilities 1994
Rs
1995
Rs
Assets 1994
Rs
1995

Rs
Share capital 6,00,000 8,00,000 Fixed assets 3,80,000 4,20,000
Reserves 2,00,000 1,00,000 Accounts
receivable
2,10,000 3,00,000
Retained earnings 60,000 1,20,000 Stock 3,00,000 3,90,000
Accounts payable 90,000 2,70,000 Cash 60,000 1,80,000
9,50,000 12,90,000 9,50,000 12,90,000
Contd...
1994 1995 Increase
In working
captial
Decrease
in working
capital
Current asset:
Cash 60,000 1,80,000 1,20,000 ---------www.jntuworld.com1 2 9
Fund Flow Statement Analysis
The next step is to prepare the non - current account
First non-current asset account should have to be prepared
Dr Fixed Assets A/c Cr
The next non-current account is that non-current liability which is nothing but Share
capital.
Dr Share capital A/c Cr
And another non current account is to be prepared that General reserve account.
Dr General Reserve A/c Cr
The next step is to prepare the Adjusted Profit & Loss A/c
Dr Adjusted Profit & Loss A/c Cr
The next step is to prepare the fund flow statement of the enterprise
Fund flow statement
Illustration 4
Balance sheets of M/s Black and White as on 1-1-1986 and 31-12-1986 were as follows:
Stock in trade 3,00,000 3,90,000 90,000 ---------Accounts receivable 2,10,000 3,00,000 90,000 ---------5,70,000 8,70,000
Current liability
Accounts payable 90,000 2,70,000 1,80,000
Working capital 4,80,000 6,00,000 3,00,000 1,80,000
Increase in working capital 1,20,000 1,20,000
6,00,000 6,00,000 3,00,000 3,00,000
Rs Rs
To Balance B/d 3,80,000 By Depreciation(Adjusted Profit
&Loss A/c )
30,000
To Cash (Purchase)
Balancing fig.
70,000 By Balance c/d 4,20,000
4,50,000 4,50,000
Rs Rs
To Balance c/d 8,00,000 By Cash( Issue of shares) 1,00,000
By General reserve 1,00,000
By Balance b/d 6,00,000
8,00,000 8,00,000
Rs Rs
To Share capital 1,00,000 By Balance b/d 2,00,000
To Balance c/d 1,00,000

2,00,000 2,00,000
Rs Rs
To (Fixed Assets) depreciation 30,000 By Balance B/d(Retained
Earnings)
60,000
To Balance c/d 1,20,000 By Fund from operation
Balancing fig.
90,000
1,50,000 1,50,000
Sources Rs Applications Rs
Issue of Shares 1,00,000 Purchase of Land 70,000
Funds from operation 90,000 Increase in working capital 1,20,000
1,90,000 1,90,000
Liabilities 1-1-86
Rs
31-12-1986
Rs
Assets 1-1-86
Rs
31-12-1986
Rs
Creditors 40,000 44,000 Cash 10,000 7,000
Mrs.WhitesLoan 25,000 - Debtors 30,000 50,000
Loan from
P.N.Bank
40,000 50,000 Stock 35,000 25,000
Captial 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
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Accounting and Finance
for Managers
Additional information
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 1-1-1986 was
Rs.25,000 and on 31-12-1986 Rs.40,000 Net profit for the year 1986 amounted to
Rs.45,000. You are required to prepare funds flow statement (M.Com MKU April 1980).
The very first step is to prepare the statement of changes in working capital
Changes in working capital in between the various current assets and current liabilities
are as follows:
Statement of changes in working capital
The next step is to determine the cost of the machinery before the charge of depreciation
i.e., to find out the Gross value of the assets, in other words Original cost of the assets to
be found out at the moment of purchase.
The ultimate aim is to find out the original cost of the machinery for the preparation of
the machinery account:
Before preparing the Machinery account, the worth of the sale transaction of the
machinery should be found out .
Original cost of the Machinery Rs.10,000
(-)Depreciation Rs.3,000
Machinery worth for sale Rs.7,000
(-)Machinery sold Rs.5,000
Loss on sale of the portion of the machinery sold Rs.2,000
Dr Machinery A/c
Cr
The next one is the provision for depreciation account or Accumulated depreciation
account.

1-1-86
Rs
31-12-1986
Rs
Increase
In working
capital
Decrease
In working
capital
Current asset:
Cash 10,000 7,000 ----------- 3,000
Debtors 30,000 50,000 20,000 ---------Stock 35,000 25,000 --------- 10,000
75,000 82,000
Current liability
Sundry creditors 40,000 44,000 ----------- 4,000
Working capital 35,000 38,000 20,000 17,000
Increase in working capital 3,000 3,000
38,000 38,000 20,000 20,000
1-1-1986 31-12-1986
Written down value of the machinery extracted
from the balance sheet as on dated
Rs.80,000 Rs.55,000
Add: Accumulated depreciation or
Provision for depreciation
25,000 40,000
Original Cost of Machinery 1,05,000 95,000
Rs Rs
To Balance B/d 1,05,000 By Cash (Sales) 5,000
By Provision for machinery 3,000
By loss on sale(Adjusted profit
and loss account)
2,000
By Balance c/d 95,000
1,05,000 1,05,000
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Dr Provision for Depreciation A/c Cr Fund Flow Statement Analysis
Dr Capital A/c Cr
Dr Loan P.N. Bank Cr
Dr Mr. White's A/c Cr
The next step is to prepare the Adjusted Profit & Loss Account.
Adjusted Profit & Loss Account
The next step is to prepare the fund flow statement.
Fund flow statement
Illustration 5
From the following balance sheets of A Ltd on 31st Dec, 1982 and 1983, you are required
to prepare Fund flow statement
The following are additional information has also been given
l Depreciation charged on plant was Rs.4,000 and on building Rs.4,000
l Provision for taxation of Rs.19,000 was made during the year 1983
l Interim Dividend of Rs.8,000 was paid during the year 1983
Balance sheet
(M.Com.Madras,1984)
Rs Rs
To Machinery A/c 3,000 By Balance B/d 25,000
To Balance c/d 40,000 By depreciation provided during

the current year

18,000
43,000 43,000
Rs Rs
To Drawings (Balancing fig) 17,000 By Balance B/d 1,25,000
To Balance c/d 1,53,000 By Net profit 45,000
1,70,000 1,70,000
Rs Rs
By BalanceB/d 40,000
To Balance c/d 50,000 By Cash (Balancing fig) 10,000
50,000 50,000
Rs Rs
To Cash( Loan paid) 25,000 By Balance B/d 25,000
To Balance c/d ----------25,000 25,000
Rs Rs
To Machinery (Loss on sale) 2,000 By Balance B/d ----------To Provision for taxatio 18,000 By fund from operations 65,000
To Balance c/d(Net profit) 45,000
65,000 65,000
Sources Rs Applications Rs
Sale of machinery 5,000 Purchase of land 10,000
Loan from P.N.Bank 10,000 Purchase of Building 25,000
Fund from operation 65,000 Drawings 17,000
Repayment of Mr White Loan 25,000
Increase working capital 3,000
80,000 80,000
Liabilities 1982 Rs 1983 Rs Assets 1982 Rs 1983 Rs
Share capital 1,00,000 1,00,000 Good will 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 Bill receivable 2,000 3,200
Provision for doubtful debts 400 600 Debtors 18,000 19,000
Cash 6,600 15,200
1,55,600 1,55,800 1,55,600 1,55,800
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Accounting and Finance
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The first step is to prepare the Statement of changes in the working capital
Statement of changes in working capital
The next step is to prepare the non current accounts.
First, Non current asset account to be prepared.
The first non-current asset account is Building account.
Dr
Building account Cr
The next non- current asset account is Plant account
Dr
Plant account Cr
The next non-current asset account is Investments account.
Dr Investments account Cr
The next one is the non-current liability account.
Dr
General Reserve account Cr
The next non-current liability account is Provision for taxation account
Dr Provision for taxation account Cr
1982
Rs
1983

Rs
Increase
In working
capital
Decrease
In working
capital
Current asset:
Stock 30,000 23,400 6,600
Bill receivable 2,000 3,200 1,200
Debtors 18,000 19,000 1,000
Cash 6,600 15,200 8,600
56,600 60,800
Current liability
Sundry creditors 8,000 5,400 2,600
Bills payable 1,200 800 400
Provision for doubtful debts 400 600 200
9,600 6,800
Working capital 47,000 54,000 13,800 6,800
Increase in working capital 7,000 7,000
54,000 54,000 13,800 13,800
Rs Rs
To Balance B/d 40,000 By (Depreciation)Adjusted profit &
Loss A/c
4,000
By Balance c/d 36,000
40,000 40,000
Rs Rs
To Balance B/d 37,000 By (Depreciation)Adjusted profit &
Loss A/c
4,000
To Cash (Purchase)
balancing fig.
3,000 By Balance c/d 36,000
40,000 40,000
Rs Rs
To Balance B/d 10,000
To Cash(purchase) Balancing
figure
1,000 By Balance c/d 11,000
Rs Rs
By Balance B/d 14,000
To Balance B/d 18,000 By Adjusted profit and loss A/c
(Profit transferred during the
current year)
4,000
18,000 18,000
Rs Rs
To Cash(Tax paid previous
year taxation) Balancing figure
17,000 By Balance B/d 16,000
To Balance B/d 18,000 By Adjusted profit & Loss A/c
(provision for taxation made
during the year)
19,000
35,000 35,000
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The next step is to prepare the Adjusted profit and loss account. Fund Flow Statement Analysis
Adjusted Profit & Loss Account
The next step is to prepare the fund flow statement.
Fund flow statement
Check Your Progress
(1) Purchase of plant & machinery Rs.10 lakh through the issue of 1 Lakh
shares at Rs.10 per share ; affect the following accounts
(a) Non current asset and Non current liability accounts
(b) Non current asset and Current liability accounts
(c) Current asset account and Non current liability accounts
(d) Current asset and current liability accounts
(2) XYZ Ltd. has made a credit purchase of Rs.1 lakh worth of goods led to
Rs.1 lakh worth of additional stock of tradable goods for the enterprise,
leads to
(a) Increase in the working capital - Applications
(b) No change in the working capital position -Neither an application nor resource
(c) Decrease in the working capital-Resource
(d) None of the above
(3) The meaning of the "To cash ( Tax paid)" entry posted in the Provision for
taxation account is
(a) Last year taxation is paid through the current year provision
(b) Current year taxation is paid through the current year provision
(c) Last year tax is paid through the last year taxation
(d) Current year taxation is paid through the last year provision
(4) Profit on sale of the fixed assets are considered to be
(a) Resource to the enterprise
(b) Non operating income
(c) Application of the enterprise
(d) None of the above
(5) The treatment of current year depreciation with the closing balance of profit
in determining the fund from operations
(a) To be added
(b) To be multiplied
(c) To be deducted
(d) To be divided
Rs Rs
To Depreciation Building 4,000 By Balance B/d 16,000
To Depreciation Plant 4,000 By Fund from operations 36,000
To Transfer to General Reserve 4,000
To Provision for taxation 19,000
To Interim dividend 8,000
To Balance c/d 13,000
52,000 52,000
Sources Rs Applications Rs
Fund from operations 36,000 Purchase of the plant 3,000
Purchase of the Investment 1,000
Increase working capital 7,000
Tax paid 17,000
Interim dividend 8,000
36,000 36,000
Contd...
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Accounting and Finance
for Managers
(6) The redemption bank term loan leads to change in the
(a) Non current liability account and current asset account
(b) Current asset account and current liability account

(c) Non current asset account and current liability account

(d) Non current asset account and current liability account
7.5 LET US SUM UP
Normally, Balance sheet reveals the status of the firm only at the end of the year, not at
the beginning of the year. It never discloses the changes in between the value position of
the firm at two different time periods/ dates. A report on the movement of funds or
working capital. In a narrow sense, the term fund means cash and the fund flow
statement depicts the cash receipts and cash disbursements/payments. The projected
fund flow statement from the past performance facilitates the firm to anticipate the
future requirement of financial resources. It guides the management to prioritize the
application in the future to the tune of scarce resources.
7.6 LESSON-END ACTIVITY
In the long run, is it more important for a business to have positive cash flows from its
operating activities, investing activities, or financing activities? Why? Give your opinion.
7.7 KEYWORDS
Fund: Fund means working capital
Flow: Flow means changes occurred in between two different time periods
Statement of changes in working capital: Enlisting the changes taken place in between
the Current assets and current liabilities of two different time horizons
Current assets: Assets which are in the form of cash, equivalent to cash or easily
convertible into cash .
Current liabilities: Short term financial resources of the firm
Non-current assets: Long term assets
Non current liabilities: Long term financial resources
Increase in working capital: Increase in Net working capital i.e. Excess of current
assets over the current liabilities- Applications side of the fund flow
Decrease in working capital: Decrease in Net working capital i.e. Excess of current
liabilities over the current assets - Resources side of the fund flow
Fund from operations: Income generated from only operations
Fund lost in operations: Loss incurred in the operations
7.8 QUESTIONS FOR DISCUSSION
1. Define fund.
2. Define flow.
3. What is meant by fund flow ?
4. List out the various objectives of preparing the fund flow statement.
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Fund Flow Statement Analysis
5. Enumerate the various advantages in the preparation of fund flow statement.
6. Briefly explain the limitations of fund flow statement.
7. What are the steps involved in the process of fund flow statement ?
8. Explain the various methods of determining the fund from/lost (in ) operations.
9. Explain the process of preparing the statement of changes in working capital.
10. Draft the pro forma of the Fund flow statement.
11. Explain any non current account transactions affecting the fund position of the
firm.
7.9 SUGGESTED READINGS
R.L. Gupta and Radhaswamy, "Advanced Accountancy".
V.K. Goyal, "Financial Accounting", Excel Books, New Delhi.
Khan and Jain, "Management Accounting".
S.N. Maheswari, "Management Accounting".
S. Bhat, "Financial Management", Excel Books, New Delhi.
Prasanna Chandra, "Financial Management - Theory and Practice", Tata McGraw
Hill, New Delhi (1994).
I.M. Pandey, "Financial Management", Vikas Publishing, New Delhi.
Nitin Balwani, "Accounting & Finance for Managers", Excel Books, New Delhi.
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