5.

14 Statement of Changes in Financial Position (Funds Flow Statement)

Illustration 2. From the following balance sheets of Bharat Company prepare a statement showing
changes in Working Capital.
31st Dec. 2007 31st Dec. 2006
Rs Rs.
Assets
Goodwill
5,000 10,000
Cash 70,000
Debtors 25,000
90,000 98,000
Closing Stock
Long-term Investments 1,20,000 87,000
Land
10,000 15,000
27,000 15.000
Preliminary Expenses
3,000 5,000
Liabilities 3,25,000 2,55,000
Trade Creditors
Bills Payable 45,000 50,000
Loans (Payable during 2008) 35,000 20,000
Share Capital 20,000
Profit & Loss Account 1,50,000 1.25,000
75,000
3. 0 60,000
3,25,000 2,55,000
Solution
Solution

Statement Showing Changes in Working Capital

Effect on

Particulars
Working Capital
2006 2007 Increase Decrease
Rs. Rs. Rs. Rs.
Current Assetss.
Cash 25,000 70,000 45,000
Debtors 98,000 90,000 8,000
Closing Stock 87.000 1,20,000 33,000
2,10,000 2.80,000
Current Liabilities
Trade Creditors 50,000 45,000
Bills Payable 20,000
5,000
35,000 15,000
Loans (Payable during 2005) 20,000 20,000
70,000 1.00,000
Working Capital (CA-CL) 1,40,000 1,80,000
Net increase in
Working Capital 40,000
1,80,000 1,80,0000 83,000
40.000
83,000
Note. Loans (payable during 2008) is a current liability.
SOURCES OF FUNDS
The following are the sources from which funds
generally flow (come), into the business
(1) Funds From Operations Trading or
Profits. Trading profits or the
busines are the most important and
major source of funds. Sales are the main
profits from operations of the
into the business as they inerease current assets source of inflow of
funds
flow out of business for
(cash, debtors or bills receivable) but at the same time
expenses and cost of goods sold. Thus, the net effect of funds
source of funds if inflow from sales
exceeds the outflow for expenses and cost of operations will be a
But it nmust be remembered that funds from goods sold and vice-versa,
operations do not necessarily mean the
profit as shown by the
profit and loss account of a fim, because there are many non-fund or
been either debited or credited to non-operating items which may have
profit and loss account. The examples of such items on the debit
of a profit and loss account are: Amortization
of fictitious and intangible assets such as
side
expenses and Discount on issue of shares and goodwill, Preliminary
debentures written off; Appropriation of Retained
such Transfers to Reserves, etc.,
as
Depreciation and depletion; Loss on sale of fixed assets; Payment Earnings,
dividend. etc. The non-fund items are those which of
may be operational expenses but they do not affect
funds of the business, eg., for
out of business.
depreciation charged to profit and loss account, funds really do not move
not related to the
Non-operating items are those which
although may result in the outflow of funds but are
trading operations of the business, such as loss on sale of machinery or
dividends. The methods of payment of
calculating funds from operations have been discussed in the following
pages.
Basically, there are two methods of calculating funds from
operations:
(a) The first method is to
prepare the profit and loss account afresh by taking into consideration
only fund and operational items which involve funds
and are related to the normal
The balancing figure in this case will be either operations of the business.
funds generated from operations or funds lost in
depending upon whether the income or credit side of profit and loss account exceeds the operations
expense or debit
side of profit and loss account or vice-versa.
(b) The second method (which is
generally used) is to from the proceed figure of net profit or
net loss as arrived from the profit
at and loss account already prepared. Funds from operations by this
method can be calculated as under

(a) Calculation of Funds from Operation

Closing Balance of P &L Ac or Retained Earnings (as given Rs

in the balance sheet)
Add Non-fund and Non-operating items
Depreciation and Depletion
which have been already debited to P & LAlc:
(ii) Amortization of fictitious and Intangible Assets such as:
(a) Goodwill
(b) Patents
c) Tradc Marks
(dy Preliminary Expenses
(e) Discount on Issue of Shares, etc.
(iii) Appropriation of Retained Earnings, such as
a) Transfer to General Reserve
(b) Dividend Equalisation Fund
(c) Transfer to Sinking Fund
(d) Contingency Reserve, etc.
(iv) Loss on Sale of any non-current (fixed) assets
such as :
(a) Los on sale of land and building
(b) Loss on sale of machinery
(c) Loss on sale of furniture
(d) Loss on sale of long-term investments, etc.
(v) Dividends including:
(a) Interim Dividend
(b) Proposed Dividend (if it is an
appropriation of profits and not taken current
as
liability)
tProvision for Taxation (ifit is not taken as current liability)
l Any other non-fund/non-operating items which have been debitcd to P/L A/c
Total (A)
test Non-fund or Non-operating items which have already been creditcd to P &1, A/c
Profit or Gain from the sale ofnon-current (fixed) assets such as
(a) Profit on sale of land and building
(b) Profit on sale of plant & machinery
C) Profit on sale of long-term investments, etc.
Appreciation in the value of fixed assets, such as increase in the value of land if
it has been credited to P/L A/c
fii) Dividends Received

(iv) Excess Provision retransferred to P/L Alc or written off

(v) Any other non-operating item which has been credited to P/L Ac balance
vi) Opening balance of P &LA/c or Retained Earnings (as given in the sheet)
Total (B)
Total (A)- Total (B) = Funds generated by operations
Profitand Loss Account as follows:
6) Funds fromoperations can alsobe calculated by preparing Adjusted
Adjusted Profitand Loss Account
Rs.
Rs
To Depreciation & Depletion or amortization By Opening Balance (of P & LA/c)
such as:
of fictitious and intangible assets, By Transfers from excess provisions
in the value of
Goodwill. Patents, Trade Marks, By Appreciation
fixed assets
Preliminary Expenses etc. By Dividends received
fo Appropriation ofRetained Earnings, such as Interest on investments
Transfers to General Reserve, Dividend By
By Profit on sale of fixed or
Equalisation Fund, Sinking Fund, etc.
non-current assets
To Loss on sales of any non-current or fixed asset
By Funds from Operations
To Dividends (including interim dividend) (balancing figure in case debit
To Proposed Dividend (if not taken side exceeds credit side)
as a current liability)
fo Provision for taxation (if not taken
as a current liability)
o Closing balance (of P & L A/c)
lo Funds lost in Operations (balancing figure,
in case credit side exceeds the debit side)

Illustration 3. B.M. Company presents the following information and you are required to calculate

funds from operations

Profit and Loss Account
Rs. Rs.
To Expenses By Gross Profit 2,00,000
1,00,000 By Gain on Sale of Plant 20,000
Operation 40,000
Depreciation 10,000
To Loss on Sale of building
To Advertisement Suspense A/c 5,000
To Discount (allowed to customers) 500
Issue of Shares written off 500
ODiscount on
To Goodwill 12,000
To Net Profit 52,000
2,20,000 2,20,000

Solution:
Calculation of Funds from Operations
Rs.
Net Profit (as given) 52.000
Add: Non-fund or non-operating items which have been debited to P/L Alc: Rs
 Statement of Changes in Financial Position (Funds Flow Statement)
5.18

40,000
Depreciation 10,000
Loss on sale of building 5,000
Advertisement written ofî
written of 500
Discount on issue of shares
Goodwill written off 12.000 67,500
1,19.500
Non-fund or non-operating items which have
been
Less
credited to P/L A/c: Gain on sale of Plant
20,000
20,000
Funds from Operations 99.500

Alternatively
AdjustedProfit and Loss Account
Rs. Rs
To Depreciation 40,000 By Opening balance
To Loss on sale of building 10,000 By Gain on sale of plant 20,000
To Advertisement Suspense A/c 5,000 By Funds from Operations
To Discount on issue of shares 500 (balancing figure) 99.500
To Goodwill 12,000
To Closing balance 52,000
1,19,500 1,19.500

Try vourself 3.
COMPREHENSIVE ILLUSTRATIONS

are given:
(A) When only Balance Sheets for the ending 3ist December
Balance Sheets of the Company
llustration 12. From the following and aa statement showing
and
2007. schedule of changes in working capital
2006 and 31st December prepare
Sources and application of funds.
31st December
31st December
2006 2007 2006 2007
Assets Rs Rs
Rs. Rs.
Liabilities
60.000
3,00.000 4,00,000 Plant& Machinery 50.000
Share Capital 15.000
Sundry Creditors 1.00.000 70,000 Furniture & Fixtures 10.000
30.000 Stock-in-trade 1.05.000
15.000 85.000
P/LAlc
Debtors 1.60.000 1.50.000
Cash 1.10.000 1.70.000
4,15.000 5,00,000 4,15,000 5,00.000
S o l u t i o n :

Schedule of Changes in Working Capital

Effect on
2006 2007 Working Capital
ncrease Decrease
Rs. Rs. Rs. Rs.
Current dssets
Cash 1,10,000 1,70,000 60,000
Debtors 1,60,000 1,50,000 10.000
Stock-in-trade 85.000 I.05,000 20.000
3,55,000 4,25,000
Current Liabilities
Sundry Creditors 1.00.000 70.000 30,000
1,00,000 70,000
Working Capital 2,55,000 3,55,000
Net Increase in Working Capital 1,00,000 1.00.000
3,55,000 3,55,000 1.10.000 1.10.000
StatementofSource and Application of Funds
for the year ended 31-12-2007
Rs.
Sources Rs Applications
Purchase of Plant & Machinery (60,000 50,000) 10.000
1,00,000D
-

Issue of Share Capital

Purchase of Furniture & Fixtures(15.000- 10,000) 5.000
Funds from Operations 15,000
Net Increase in Working Capital 1.00.000
1.15.000
1,15.000
Funds from operations
Rs.
Balance of P/L A/c 2007
30,000
Less Balance of P/L A/c in the beginning of the year 15.000
15,000
Funds from operations
 TII UUTTUWIITS
capiav unas (roSt n operattons) many oy UgUn von
(B) Comprehensive Illustrations (Where two Balance Sheets are given
alongwith additional information)
Prepare a Funds Flow Statement
Illustration 19. From the following Balance Sheets of S.M. Industries
showing your workings clearly
2007 2008 Assets 2007 2008
Liabilities
Rs. Rs. Rs. Rs.

Share capital 60,000 65,000 Goodwil 30,000 25.000

Profit and Loss A/c 34,000 26,000 Plant & Machinery 60,000 50.000
Current Liabilities 12.000 3.000 Current Assets 16.000 19.000
1.06.000 94,000 1.06.0000 94,000

Additional Information
Denreciation of Rs. 20,000 on plant and machinery was
charged to Profit and Loss Account
(ii) Dividends of Rs. 12,000 were paid during the year.
Statemen of Changes in Financi Position (Funds Flow
Statement) 5.39
Solution:

Schedule of Changes in
2007
Working Capital
2008 Increase in W.C.
Rs Rs. Decrease in W.C.
Rs.
Current Assets 16,000 19.000 Rs
Current Liabilities 12,000 3,000
3,000 9,000
Working Capital (C.A-C.L) 4,000 16,000
Net Increase inW.C. 12,000
16,000 16,000 12.000
12,000 12,000
Funds Flow Statement
Sources Rs. | Applications
Rs.
Issue of Shares 5,000 Purchase of Plant and Machinery
Funds from Operations 29,000 Payment of Dividend 10.000
Net Increase in W.C. 12,000
34,000 12.000
34.000
Working Notes
(1) Share Capital A/c
Rs. Rs.
To Balance c/d 65,000 By Balance b/d 60.000
By Cash-Issue(balancing figure) 5.000
65,000 65.000
(2) Plant and Machinery A/c
Rs. Rs
To Balance b/d 60,000 By Depreciation 20.000
To cash Purchase (balancing figure) 10,000 By Balance c/d 50.000
70,000 70,000
(3) Goodwill A/c
Rs. Rs.
To Balance b/d 30,000 By Adjusted P/L A/c (balancing figure) 5.000
By Balance c/d 25,000
30,000 30.000
(4) Adjusted Profitand Loss Ac
Rs. Rs.

To Depreciation 20,000 By Balance b/d 34,000

To Goodwill 5,000 By Funds from Operations 29.000
To Dividend 12,000 (balancing figure)
To Balance c/d 26,000
63,000 63.000