Financial Statements

 Profit and Loss A/c

 Balance Sheet

Discloses the financial position of the business on a

particular date.

Don’t Disclose the changes or the movement of the

funds between two periods.
 For Example
 If Fixed Asset of Rs. 5,00,000 is purchased by
raising Share Capital of Rs. 5,00,000.
Balance Sheet will simply show higher F.A.
value and higher Share Capital.
 If loan is raised for Rs. 2,00,000 and is paid in

accounting year.
It will not find place in the Balance Sheet.
 To Know the answers

 Where have the funds come from

 Where they have been used
 Fund
Flow
Statement
 Fund
 Working Capital

Excess of Current Assets over Current

Liabilities
(Current Assets- Current Liabilities)
 Flow of Fund
 When fund is working capital flow of fund
means movement of funds which cause a
change in working capital of the organisation.
 The flow of fund only takes place only if a
current account is involved to identify a flow
journalise the transaction identify the two
accounts involved as current and non current
and apply the general rule
 Transaction that involve one current and one
non current account result in a flow of fund

Eg. When shares are issued for cash

Bank A/c Dr.
To Share Capital A/c
Transaction that involves only current
accounts do not result in a flow
Eg. When debtors are realised
Bank A/c Dr.
To Sundry Debtors A/c
Transaction that involves only non-current
accounts do not result in a flow
Eg. When shares are issued for purchase of
building
Building A/c Dr.
To Share Capital A/c
 Steps in preparing Fund Flow
Statement

 Statement or Schedule of Changes in Working

Capital.
 Fund from Operation
 Statement of Sources and Uses of Funds or
Funds Flow Statement.
Schedule or Statement of changes in working capital

 It discloses the changes in the individual item of

current asset and current liability between two periods
and their effect on working capital. Working capital
will increase when there is an increase in current asset
and decrease in current liabilities, whereas, working
capital will decrease when there is a decrease in
current asset & increase in current liabilities.
 Net increase in working capital is treated as use of
funds & the net decrease in working capital is treated
as source of funds.
 Statement of changes in working capital
Particulars Current Year Previous Increase in Decrease in Working Capital
Year Working Capital

Current Assets:
Cash at bank
Cash in hand
Stock in trade
Debtors
Bills receivable
Advance payment
Short term investment
Prepaid expense
Accrued income

Total Current Assets

xxx xxx
Current Liabilities
(1) Short term loans
(2) Bank overdraft
(3) Creditors
(4) Bills payable
(5) Outstanding expenses
(6) Unclaimed dividend

Total Current Liabilities

xxx xxx
Net Working Capital xxx xxx
Net Increase/Decrease in Working
Fund From Operation
Fund from operation means the net
working capital provided by the operating
activities of the business.

Direct method:
Indirect method:
 Direct Method
Profit & Loss Adjustment A/c
Particular Amount(Rs.) Particular Amount(Rs.)

Depreciation Profit or gain on sale

Loss on sale of fixed of
assets fixed asset
Under writing Dividend received
commissions Interest received of
Discount on issue of investment
shares & Profit on revaluation
debentures of asset
Preliminary expense
written off Fund from operation
Deferred revenue
expenses
Goodwill written off
Patent or trademark
Provision for taxes
(If treated non current)
 Indirect Method
Net Profit earned during the year xxxx
Add: Non Fund and Non Operating Items (which are already debited to P/L A/c)
Depreciation on Fixed Assets xxxx
Goodwill Written Off xxxx
Discount on issue of Shares Written Off xxxx
Preliminary Expense Written Off xxxx
Patents Written Off xxxx
Transfer to General Reserve xxxx
Loss on sale of Fixed Assets xxxx xxxx

________
Less : Non Fund and Non Operating Items (which are credited to P/L A/c)
Profit on sale of Fixed Assets xxx
Profit on revaluation of assets xxxx
Rent received xxxx
Refund on Income Tax xxxx
Dividend Received xxx xxxx

________
Fund From Operation xxxx
 Fund Flow Statement
 While preparing a fund flow statement current assets and current liabilities are to be
ignored. Attention is given to changes in fixed assets and fixed liabilities.
This fund flow statement has two parts:

Sources of fund
Application of fund

The difference between these two parts that is sources & uses of funds represents
Net changes in working capital.

 The excess of sources of funds over uses of fund is the net increase in working
capital & excess of uses over sources of fund is net decrease in working capital.
 The amount of net increase or decrease as shown in fund flow statement should be
equal to the amount shown by schedule of working capital changes.
 Fund Flow Statement
Sources of Fund Amount(Rs.) Uses of Funds Amount(Rs.)
Fund from operation Loss from operation
Issue of share Redemption of
Issue of debenture preference shares
long term loans Redemption of
Sale of fixed assets / debentures
Investment Repayment of
Non trading receipts long term loans
Decrease in working Purchase of fixed
capital assets
(if any) / Investments
Payment of dividend
& taxes
Increase in working
capital
(if any)
 Q- Following is the summarized Balance sheet of X Ltd. As on 31st
December 2004 and 2005. You are required to prepare a fund flow
statement for the year ended 31st December 2005.
Liabilities 2004(Rs. 2005(Rs.) Assets 2004(Rs.) 2005(Rs.)
)
Share Capital 1,00,000 1,25,000 Goodwill -- 2,500
General Reserve 25,000 30,000 Building 1,00,000 95,000
Profit and Loss 15,250 15,300 Plant 75,000 84,500
A/c Stock 50,000 37,000
Bank Loan 35,000 67,600 Debtors 40,000 32,100
(Long Term) Bank -- 4,000
Creditors 75,000 -- Cash 250 300
Provision for tax 15,000 17,500
2,65,250 2,55,400 2,65,250 2,55,400

Additional Information
 Dividend of Rs. 11,500 was paid.
 Depreciation written off on plant Rs. 7,000 and on building Rs. 5000.

Provision for tax was made during the year Rs. 16,500.
 Schedule of Changes in Working Capital
Items 2004Amount( 2005Amount( Increase in Decrease in
Rs.) Rs.) Working Capital Working Capital
Current Assets –
Cash
Bank 250 300 50
Debtors -- 4,000 4,000
Stock 40,000 32100 7,900
50,000 37,000 13,000
Total Current 90,250 73,400
Assets (A)
Current 75,000 -- 75,000
Liabilities:-
Creditors
Total Current 75,000 --
Liabilities (B)
Working capital 15,250 73,400
(A-B) Net Increase 58,150
in Working Capital
73,400 73,400 79,050 79,050
 Calculation of Fund From Operation
Net Profit earned during the year (15,300-15,250) 50
Add: Non Fund and Non Operating Items (which are already debited to P/L A/c)
Depreciation on: Building 5,000
Plant 7,000
Transfer to General Reserve 5,000
Provision for Tax 16,500
Dividends Paid 11,500 45,000
_______
Less: Non Fund and Non Operating Items (which are credited to P/L A/c) --
_______
Fund from Operation 45,050
_______
 Fund flow statement

Sources of fund Amount (Rs.) Application of Amount (Rs.)

fund
Fund from Purchase of Plant 16,500
Operations 45,050 Income Tax Paid 14,000
Issue of Shares 25,000 Dividend Paid 11,500
Bank Loan 32,600 Goodwill Paid 2,500
Net increase in 58,150
Working Capital
1,02,650 1,02,650
 Provision for Taxation A/c
Particular Amount(Rs.) Particulars Amount (Rs.)

To Income Tax A/c 14,000 By balance b/d 15,000

(tax paid) 17,500 By Profit & Loss 16,500
To balance c/d A/c

31,500 31,500
 Land and Building A/c
Particular Amount(Rs.) Particulars Amount (Rs.)
To balance 1,00,000 By Profit and Loss A/c 5,000
b/d (Depreciation) 95,000
By balance b/d

1,00,000 1,00,000

Plant A/c
Particular Amount(Rs.) Particulars Amount (Rs.)
To balance b/d 75,000 By Profit and Loss A/c 7,000
To Bank A/c 16,500 (Depreciation) 84,500
By balance b/d
91,500 91,500
 Users
 Owner or Shareholders
Owner or Shareholders are interested in ascertaining the financial position of business. Funds Flow
statement helps them to find out:
 Whether the business has enough funds to pay them dividends at reasonable rate?
 Whether the business is in a position to meet its present liabilities in time?
 Whether the management is making effective use of funds at their disposal?

 Financial institutions:
 The financial institutions are interested in the safety of their funds. A careful analysis of the fund flow
statement will help them in ascertaining :
 Overall creditworthiness of the enterprise:
 The resources from which the enterprise will be in a position to make repayments of the loan taken.
 Is the business generating sufficient funds from its normal business operations?

 Employees:
 The employees also have a stake in the business. Their growth and security of job depend on the
profitability of the firm which is directly related to the effective utilisation of the funds. The funds should
be managed in a manner that the business is in a position to make payments of salaries to the employees
in time beside meeting other business costs.
 Limitation
 Not a substitute for an income statement. The fund flow statement simply
tells about the working capital position of the business. It does not explain
how much profit the business has really earned. This can be found out only
by an income statement.

 It is not an original statement it is only a rearrangement of data given in

financial statement.

 It is essentially historic in nature. A projected fund flow statement, on the

basis of it can not be prepared with much accuracy. It does not estimate the
sources and application of funds of the near future.

 It cannot reveal continuous changes.

 Misleading the fund flow statement may prove to be misleading. A heavy

balance of working capital does not necessarily mean that the business has
made large profits. Similarly, lower amount of working capital does not
necessarily mean that the business has suffered a heavy loss.
Thank You
Submitted By
Anuradha Nimesh
MBA Sem-I
Roll No. 15