FACULTY OF COMMERCE

& MANAGEMENT

rd
COURSE: B.COM 3 SEMESTER
SUBJECT: MANAGEMENT ACCOUNTING

SUBJECT CODE: BCH 302

LECTURE: 5
NAME OF FACULTY: DR. R. S. BISARIYA
Lecture-5

Fund Flow Statement

 Fund Flow Statement

Notes

CONTENTS
Objectives
Introduction
5.1 Meaning of Fund Flow Statement

5.2 Preparation of Statement of Changes in Working Capital

5.3 Preparing Funds from Operations

5.3.1 Net Profit Method

5.3.2 Sales Method

5.4 Preparing Fund Flow Statement

5.5 Summary

5.6 Keywords

5.7 Review Questions

5.8 Further Readings

Objectives
After studying this Chapter, you will be able to:
Explain the meaning of fund flow statement
Prepare the statement of changes in working capital
Construct fund flow statement

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 analysis of
fund flow statement.

5.1 Meaning of Fund Flow Statement

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,

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Management Accounting

Notes i.e. especially due to either increase or decrease in the working capital. Some of the transactions
may lead to increase or decrease the volume of working capital. Some other transactions register
neither an increase nor decrease in the volume of working capital.
According to 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:
1. Statement of sources and application of funds
2. Statement changes in financial position
3. Analysis of working capital changes and
4. Movement of funds statement
5. Depreciation charged on assets
6. Appropriation of profits to reserves
7. Payment of interim dividends
8. Payment and appropriations in relation to provisions for taxation/dividends where they
are treated as non-current liabilities.
Fund flow statement has following objectives:
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, investments, liquidity and dividend
decision of the firm during the given point of time.

Notes Steps in the Preparation of Fund Flow Statement:

  First and foremost step 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.
  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.
  Third step is the preparation Adjusted Profit & Loss A/c, which already elaborately
discussed in the early part of the Chapter.
  Last step is the preparation of fund flow statement.

Self Assessment

Fill in the blanks:

The fund flow statement depicts the ………………… receipts and cash disbursements/
payments.
Fund flow means a study of …………………

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5.2 Preparation of Statement of Changes in Working Capital Notes

The ultimate purpose of preparing the schedule of changes in the working capital illustrates the
changes in the volume of net working capital which envisages either sources or application of
fund. The schedule of changes is focused as follows:

Increase in Current Assets Increase in Working Capital

Decrease in Current Assets Decrease in Working Capital

Increase in Current Liabilities Decrease in Working Capital

Decrease in Current Liabilities Increase in Working Capital

Particulars Previous Current Increase in Working Decrease in

Year Year Capital (+) Working 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

Example: From the following details prepare a statement showing changes in working
capital during 2006.

Balance Sheet of Pioneer Ltd

as on 31st December
Liabilities 2005 (`) 2006 (`) Assets 2005 (`) 2006 (`)
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
Contd…

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Notes Preliminary expenses 20,000 15,000

12,20,000 13,35,000 12,20,000 13,35,000

Solution: Schedule of Changes in Working Capital

2005 2006 Increase in Working Decrease in

Capital Working Capital
Current Assets:
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 Liabilities:
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

Self Assessment

State whether the following statements are true or false:

Normally, working capital means current assets.
Increase in current assets means increase in working capital.
Purchase of plant and machinery ` 10 lakh through the issue of 1 Lakh shares at ` 10 per
share; affect the non-current asset and current liabilities accounts.
XYZ Ltd. has made a credit purchase of ` 1 lakh worth of goods led to ` 1 lakh worth of
additional stock of tradable goods for the enterprise, leads to increase in the working
capital.

5.3 Preparing Funds from Operations

The following are the key methods of preparing fund from operations:
Net Profit Method
Sales Method

Figure 5.1 Methods of Funds from Operations

Method of Fund from

Operations

Net Profit Method Sales Method

Add: Non-operating Expenses Less: Payments (Application)
Less: Non-operating Incomes

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Notes

!
Caution The first method is widely used method by all in determining the volume of
Fund from Operations (FFO).

5.3.1 Net Profit Method

Under the Net Profit Method, fund flow from operations can be computed. 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:
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

2. Non-operating Expenses:
Depreciation of Fixed Assets xxxx
Intangible Assets:

Amortization of Goodwill xxxx

Amortization of Patent xxxx
Amortization of Trade Mark xxxx

4. Fictitious Assets:
Writing off Preliminary Expense xxxx
Writing off Discount on Shares/Debentures xxxx
Profit Appropriation
Transfer to General Reserve xxxx

Less:
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

7. Non-operating Incomes:
Dividend Received xxxx
Interest Received xxxx
Rent Received xxxx
Fund From Operations/Fund Lost in Operations xxxxx

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Notes 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
To Depreciation xxxx By Opening Balance Profit Xxxx
To Goodwill Written off xxxx By Profit on Sale of Fixed Assets Xxxx
To Patent Written off xxxx By Profit on Sale of Investments Xxxx
To Loss on Sale of Fixed Asset xxxx By Profit on Redemption of Liability Xxxx
To Loss on Sale of Investment xxxx By Transfer from General Reserve Xxxx
To Loss on Redemption of Liability xxxx By Balancing Figure fund from Xxxx
Operations (FFO)
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)

5.3.2 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 xxxx

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Notes
Example: From the following details calculate funds from operations:
`
Salaries 10,000
Rent 6,000
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
Goodwill written off 4,000
Dividend Received 10,000
Proposed Dividend 12,000

Solution:

Calculation of fund from operation

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
Goodwill Written off 4,000

Proposed Dividend 12,000

1,22,000

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Notes Less: Refund of Tax 6,000

Profit on Sale of Building 10,000

Dividend Received 10,000

Fund from Operations 96,000

Second Method:

Adjusted Profit & Loss A/c

To Depreciation on Plant 10,000 By Opening Balance b/d 50,000

To Provision for Taxation 8,000 By Profit on Sale of Building 10,000
To Loss on Sale of Plant 4,000 By Dividend Received 10,000
To Discount on issue of debentures 4,000 By Refund of Tax 6,000
To Provision for bad debts 2,000 By Balancing Figure 96,000
To Transfer to general reserve 2,000 Fund from Operations
To Preliminary expenses off 6,000
To Goodwill written off 4,000
To Proposed Dividend 12,000
To Closing Profit c/d 1,20,000

1,72,000 1,72,000

Task Discuss any non-current account transactions affecting the fund position of a firm
of your choice..

Self Assessment

Choose the appropriate answer

Adjusted profit and loss account is prepared for
Determining the fund from operations
Determining the fund lost in operations
Either (a) or (b)
None of the above
Fund flow statement is categorized into two parts
Fund inflow and Fund outflow
Cash inflow and Cash outflow
Sources and Applications
None of the above
Fund from operations is
Sources of the firm
Applications of the firm

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(c) Neither sources nor applications Notes

None of the above

5.4 Preparing Fund Flow Statement

The next step is to prepare the fund flow statement. The proforma of the fund flow statement:

Sources of Funds Uses of Funds

Funds from Business Operation Funds Lost in Operations
Non-trading Incomes Redemption of Preference Share Capital
Sale of Non-current Assets Repayment of Loans
Sale of Long-term Investments Purchase of Long-term Investments
Issue of Shares Purchase of Fixed Assets
Acceptance of Deposits Payment of Taxes
Long-term Borrowings Payment of Dividends
Decrease in Working Capital Drawings
Loss of Cash
Increase in Working Capital

Important Adjustments

Provision for Tax: At the time of preparation of fund flow statement, there are two
approaches to treat this item. These are:
Treat it as a current liability
Treat it as an appropriation of profit
As per first approach, the provision for taxation is assumed as a current liability.
Therefore, it must be shown in the schedule of working capital changes. All the
information relating taxation should be ignored as in the case of other current liabilities.
In this approach, the provision, for taxation is neither used in the fund from operation
nor in the uses of fund in the Fund Flow Statement as payment of tax liability.
Under second approach, the provision for taxation is treated as an appropriation of
profit. Provision for taxation is not shown in the Schedule of Working Capital Changes.
As other appropriations it is added back in the net profits to calculate the Fund from
Operation. To find the payment of tax of the year provision for taxation account is
prepared. Payment of the tax of the year is disclosed in the Uses of Fund in the Fund
Flow Statement. Provision for taxation a/c is prepared as hereunder:

Provision for Taxation

` `
To Cash (Payment of tax) - By balance b/d -
(Balancing figure) By P & L a/c (current year’s provision) -
To balance c/d -
– –

However, it is advised to the students to adopt the first approach. This approach is more
convenient for the students. Provision for taxation is also disclosed under the heading of
current liabilities and provisions in the Balance Sheet of the Company as per the Indian
Companies Act. This approach is adopted in the book also.

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Notes 2. Proposed Dividend and Dividend Paid: Dividend paid during the year should be treated
as an application of fund, therefore, it must be shown in the fund flow statement. Proposed
dividend is not accumulated therefore, it should not be treated as a current liability. It is
assumed that the proposed dividend of the previous year is paid during the year whether
it is said or not. Therefore, it will be a use of fund. Proposed dividend and interim dividend
are the appropriations against profit. So to calculate the fund from operation it must be
added back to net profits like other appropriations. It must be noted that the closing balance
of the P & L account of a year should be equal to the opening balance of P & L A/c in the
next year. If there is any difference between these two figures, difference should be treated
as payment of dividend during the year.
3. Depreciation of the Assets: It is an item considered to be non-recurring expenditure. It was
considered at par with the other expenditures/expenses which do not reduce the volume
of working capital. The charge of depreciation never indulges in the payment of cash
resources from the firm.
Writing off Fictitious and Intangible Assets:

Fictitious Assets Intangible Assets

Preliminary expenses Goodwill
Discount on issue of shares/ debentures Patents
Trade Mark

The writing off of the above enlisted item of fictitious and intangible assets do not involve any
payments.

Example: From the following relating to Panasonic Ltd., prepare funds flow statement.

Balance Sheet of Panasonic Ltd.

as on 31st December

Liabilities 2005 (`) 2006 (`) Assets 2005 (`) 2006 (`)
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

Additional Information:
The company issued bonus shares for ` 1,00,000 and for cash ` 1,00,000.
Depreciation written off during the year ` 30,000.
Solution:
The first step is prepare the statement of changes in working capital.

Schedule of Changes in Working Capital

2005 2006 Increase in Decrease in

Working Capital Working Capital
Total Current Assets (A): (TCA)
Cash 60,000 1,80,000 1,20,000 —
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
Contd…

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 Chapter 5: Fund Flow
Statement

Total Current Liabilities (B): (TCL) Notes

Accounts payable 90,000 2,70,000 1,80,000
Working capital (A-B) 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

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

Particulars ` Particulars `
To Balance b/d 3,80,000 By Depreciation (Adjusted Profit 30,000
&Loss A/c)
To Cash (Purchase) Balancing fig. 70,000 By Balance c/d 4,20,000
4,50,000 4,50,000

The next non-current account is that non-current liability which is nothing but Share capital

Dr Share Capital A/c Cr

Particulars ` Particulars `
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

And another non-current account is to be prepared that general reserve account.

Dr General Reserve A/c Cr

Particulars ` Particulars `
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

The next step is to prepare the Adjusted Profit & Loss A/c.

Dr Adjusted Profit & Loss A/c Cr

Particulars ` Particulars `
To (Fixed Assets ) 30,000 By Balance b/d (Retained Earnings) 60,000
depreciation
To Balance c/d 1,20,000 By Fund from operation Balancing fig. 90,000
1,50,000 1,50,000

The next step is to prepare the fund flow statement of the enterprise.

Fund Flow Statement

Sources ` Applications `
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

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Notes Solved Problems for Practice

Balance sheets of M/s Black and White as on 1-1-2006 and 31-12-2006 were as follows:

Balance Sheet

Liabilities 1-1-06 ` 31-12-06 ` Assets 1-1-06 ` 31-12-06 `

Creditors 40,000 44,000 Cash 10,000 7,000
Mrs.Whites’Loan 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

Additional Information:
During the year, machine costing `10,000 (accumulated depreciation `3,000) was sold for
`5,000. The provision for depreciation against machinery as on 1-1-2006 was `25,000 and
on 31-12-2006 `40,000. Net profit for the year 2006 amounted to `45,000. You are required
to prepare funds flow statement.
The very first step is to prepare the statement of changes in working capital.
Changes in working capital between the various current assets and current liabilities are
as follows:
Current Assets:
Cash
Debtors
Stock
Current Liabilities:
Sundry creditors

Statement of changes in Working Capital

1-1-2006 ` 31-12-2006 ` Increase Decrease

in Working in Working
Capital Capital
Current Assets:
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

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.

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1-1-2006 31-12-2006 Notes

Written down value of the machinery extracted `80,000 `55,000
from the balance sheet as on dated
Add: Accumulated depreciation or 25,000 40,000
Provision for depreciation
Original Cost of Machinery 1,05,000 95,000

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 `10,000
(-) Depreciation `3,000
Machinery worth for sale `7,000
(-) Machinery sold `5,000
Loss on sale of the portion of the machinery sold `2,000
The entry for the loss on sale of machinery sold
Loss on sale a/c Dr `2,000
To Machinery a/c `2,000
The next entry is for the adjusted profit and loss account.
Adjusted Profit & Loss A/c Dr `2,000
To Loss on sale a/c `2,000

Dr Machinery A/c Cr
Particular ` Particulars `
To Balance B/d 1,05,000 By Cash (Sales) 5,000
By Provision for Depreciation 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

The next one is the provision for depreciation account or accumulated depreciation
account.

Dr Provision for Depreciation A/c Cr

Particulars ` Particulars `
To Machinery A/c 3,000 By Balance B/d 25,000
To Balance c/d 40,000 By depreciation provided during 18,000
the current year
43,000 43,000

The next non-current liability account to be prepared is that capital account.

In the additional information net profit for the year 2006 ` 45,000 is given.
Net profit is transferred to capital account.
Why the net profit is transferred to capital account?

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Notes Income earned in the form of net profit should be added to the capital account.
Net profit A/c Dr ` 45,000
To Capital A/c ` 45,000

Dr Capital A/c Cr
Particulars ` Particulars `
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
At the end of the year, the total volume of the capital should be equivalent to `1,70,000 but it
amounts ` 1,53,000. It is only due to the personal drawings of the owner of the enterprise.
The next non-current liability account is loan from P.N. Bank.
The closing volume of the loan is more than the opening balance of loan; it means that the
firm has recently borrowed an amount of `10,000 in addition to opening balance of the
loan borrowings.
While borrowing, what happens in the firm?
Debit what comes in - Cash resources are coming inside the business.
Credit the giver/liabilities - Register the name of the banker who is nothing but the giver
of the loan.

Dr Loan P.N. Bank A/c Cr

Particulars ` Particulars `
By Balance B/d 40,000
To Balance c/d 50,000 By Cash (Balancing fig) 10,000
50,000 50,000

The next non-current liability is Mr. White’s loan amount of `25,000.

The opening balance of the loan amount is greater than the closing balance which
amounted to `25,000; it means that the initial loan amount was paid during the year.

Dr Mr. White’s A/c Cr

Particulars ` Particulars `
To Cash (Loan paid) 25,000 By Balance B/d 25,000
To Balance c/d -----------
25,000 25,000

While repaying the loan amount, what happens in the firm?

The name of the party that receives the amount of loan repayment should be mentioned.
Debit the receiver - Cash resources are going out of the firm during the moment of
making the repayment of the loan. Credit what goes out of the firm.
The closing balances of the land and building are greater than the opening balances: this
means that additional land and building was procured by the firm for its future
prospects.
The purchase of the land & building leads to applications -outflow of fund

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Statement

The next step is to prepare the Adjusted Profit & Loss Account. Notes

Adjusted Profit & Loss Account

Particulars ` Particulars `
To Machinery (Loss on sale) 2,000 By Balance B/d -----------
To Provision for Depreciation 18,000 By fund from operations 65,000
To Balance c/d (Net profit) 45,000
65,000 65,000

The next step is to prepare the fund flow statement.

Fund Flow Statement

Sources ` Applications `
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 in working capital 3,000
80,000 80,000

From the following balance sheets of A Ltd. on 31st Dec, 2008 and 2009, you are required
to prepare fund flow statement.
The following additional information has also been given:
Depreciation charged on plant was `4,000 and on building `4,000.
Provision for taxation of `19,000 was made during the year 2009.
Interim Dividend of `8,000 was paid during the year 2009.

Balance Sheet

Liabilities 2008 ` 2009 ` Assets 2008 ` 2009 `

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 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

The following items are considered for the statement of changes in the working capital:
Current Assets:
Stock
Bills receivable
Debtors
Cash

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Notes Current liabilities:

Sundry creditors
Bills payable
Provision for doubtful debts
Provision for Taxation: It is nothing but non-current liability account which extends more
than a year in duration.
The first step is to prepare the statement of changes in the working capital.

Statement of changes in Working Capital

2008 ` 2009 ` Increase Decrease

in Working in Working
Capital Capital
Current Assets:
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

The next step is to prepare the non-current accounts.

First, non-current asset account is to be prepared.
The first non-current asset account is the Building account.

Dr Building Account Cr
Particulars ` Particulars `
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

The next non- current asset account is the Plant account

Dr Plant Account Cr
Particulars ` Particulars `
To Balance B/d 37,000 By (Depreciation) Adjusted profit 4,000
& Loss A/c
To Cash (Purchase) balancing fig. 3,000 By Balance c/d 36,000
40,000 40,000

To cash balancing figure means that the firm has undergone a purchase of new plant
which amounted ` 3,000.

90 RAMA UNIVERSITY, KANPUR

 Chapter 5: Fund Flow Statement

During the purchase, what happens in the firm? Notes

The cash resources are going out of the firm and plant is coming into the business
enterprise.
Debit what comes in - Plant
Credit what goes out - Cash
Plant A/c `3,000
To Cash A/c `3,000
The next non-current asset account is Investment account.
The opening balance is less than that of the closing balance; which means that the firm
has made a purchase of investments worth of `1,000. The following is the journal entry:
Investments A/c Dr `1,000
To cash A/c `1,000

Dr Investments account Cr
Particulars ` Particulars `
To Balance B/d 10,000
To Cash(purchase) Balancing fig 1,000 By Balance c/d 11,000
11,000 11,000

The next one is the non-current liability account. The first non-current liability account is
General reserve. The opening balance is less than the closing balance of the general
reserve account, which means that some portion of the current year profit is transferred
to General reserve. The actual entry is as follows:
Net profit A/c Dr `4,000
To General reserve A/c `4,000
For finding out the fund from operations, the amount which was transferred from the net
profit to general reserve should be added back in order to identify the original volume.
Adjusted Profit & Loss A/c `4,000
To General Reserve A/c `4,000

Dr General Reserve Account Cr

Particulars ` Particulars `
By Balance B/d 14,000
To Balance B/d 18,000 By (Adjusted profit and loss A/c) Profit 4,000
transferred during the current year
18,000 18,000

The next non-current liability account is Provision for taxation account.

Dr Provision for Taxation Account Cr

Particulars ` Particulars `
To Cash (Tax paid previous 17,000 By Balance B/d 16,000
year taxation) Balancing fig.
To Balance B/d 18,000 By (Adjusted profit & Loss A/c) provision 19,000
for taxation made during the year
35,000 35,000

RAMA UNIVERSITY, KANPUR 91

Management Accounting

Notes The next step is to prepare the Adjusted profit and loss account.

Adjusted Profit & Loss Account

Particulars ` Particulars `
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

The next step is to prepare the fund flow statement.

Fund Flow Statement

Sources ` Applications `
Fund from operations 36,000 Purchase of the plant 3,000
Purchase of the Investment 1,000
Increase in working capital 7,000
Tax paid 17,000
Interim dividend 8,000
36,000 36,000

The following are the summarized balance sheets of PTC Ltd., as on 31st March 2009 and
2010:
Balance Sheet 2009

Liabilities ` Assets `
Share capital 9,00,000 Fixed Assets 8,00,000
General Reserve 6,00,000 Investments 1,00,000
Profit & Loss A/c 1,12,000 Stock 4,80,000
Sundry creditors 3,36,000 Sundry Debtors 4,20,000
Provision for taxation 1,50,000 Bank 2,98,000
20,98,000 20,98,000

Balance Sheet 2010

Liabilities ` Assets `
Share capital 9,00,000 Fixed Assets 6,40,000
General Reserve 6,20,000 Investments 1,20,000
Profit & Loss A/c 1,36,000 Stock 4,20,000
Mortgage Loan 5,40,000 Sundry Debtors 9,10,000
Sundry creditors 2,68,000 Bank 3,94,000
Provision for taxation 20,000
24,84,000 24,84,000

Additional Information:
⠀   ⤀Ā                            Ā                            Ā                            Ā                           
nvestments costing `16,000 were sold during the year for `17,000 and further
investments purchased during the year for `36,000.
⠀   ⤀Ā                            Ā                            Ā                            Ā                           
he net profit for the year was `1,24,000 after charging depreciation on fixed assets of
`1,40,000 for the year and provision for taxation `20,000.

92 RAMA UNIVERSITY, KANPUR

 Chapter 5: Fund Flow
Statement

(iii) During the year, part of fixed assets costing `20,000 was disposed for `24,000 and the Notes
profit is included in the profit and loss account.
(iv) Dividend paid during the year amounted to ` 80,000.
The following are the components to be considered for preparation of the statement of
changes working capital:
Current Assets:
Stock
Debtors
Bank
Current Liability:
Sundry creditors
The first step is to prepare the schedule of changes in the working capital.

Statement of changes in Working Capital

2009 ` 2010 ` Increase Decrease

in Working in Working
Capital Capital
Current Assets:
Stock 4,80,000 4,20,000 60,000
Debtors 4,20,000 9,10,000 4,90,000
Bank 2,98,000 3,94,000 96,000
11,98,000 17,24,000
Current Liability:
Sundry creditors 3,36,000 2,68,000 68,000

Working capital 8,62,000 14,56,000 6,54,000 60,000

Increase in working capital 5,94,000 5,94,000
14,56,000 14,56,000 6,54,000 6,54,000

The next step is to prepare the non-current accounts.

At first, the non-current asset account is to be prepared.
The first non-current asset account is fixed assets account.
In the additional information, the firm has sold the fixed assets worth `10,000 at `12,000.

The next step is to determine the worth of the sale transaction of the fixed assets.
Sale value of the fixed assets `24,000
Cost of the fixed assets sold `20,000
Profit on the sale of fixed assets `4,000
The following is the journal entries
Entry for sale of the asset
During the sale, what happens in the firm
Debit - What comes in? Cash resources are coming inside.

RAMA UNIVERSITY, KANPUR 93

Management Accounting

Notes Credit-What goes out? Sold fixed asset is going out of the firm.
Cash A/c Dr `24,000
To Fixed Assets A/c `24,000
Entry for Profit on the sale of the transaction:
Fixed Assets A/c Dr ` 4,000
To Profit on sale A/c ` 4,000
In the next step, the earned profit during the sale of the fixed asset should be transferred to
the Profit & Loss a/c
Profit on sale of the Fixed Assets A/c ` 4,000
To Profit & Loss A/c ` 4,000

Dr Fixed assets account Cr

Particulars ` Particulars `
To Balance B/d 8,00,000 By Cash (Sale) 24,000
To Profit on sale 4,000 By Adjusted Profit & Loss 1,40,000
A/c(Depreciation)
By Balance c/d 6,40,000
8,04,000 8,04,000

The next non-current asset account is Investment account.

The purchase of the investment has taken place in the firm.
Investment A/c Dr `20,000
To Cash A/c `20,000
The worth of the sale of the transaction of the investment:
Sale value of the investment `,17,000
Cost of the investment `16,000
Profit of the sale of the investment `1,000
The profit on sale of the investment should be transferred to Profit & Loss account.

Profit on sale of the investment A/c `1,000

To Profit & Loss A/c `1,000
Then, the transferred profit on sale of investment should be deducted for the computation
of fund from the operations, for which it should be appropriately effected in the Adjusted
Profit & Loss Account.

Dr Investment Account Cr
Particulars ` Particulars `
To Balance B/d 1,00,000 By cash (sale) 17,000
To (profit on sale )Adjusted Profit 1,000 By Balance c/d 1,20,000
&Loss A/c
To Cash(Purchase) Balancing fig. 36,000
1,37,000 1,37,000

94 RAMA UNIVERSITY, KANPUR

 Chapter 5: Fund Flow
Statement

The next non-current liability account is General Reserve account. Notes

The opening balance is less than the closing balance of the general reserve account, which
means that some portion of the current year profit is transferred to General Reserve. The
actual entry is as follows:
Net profit A/c Dr `20,000
To General Reserve A/c `20,000
For finding out the fund from operations, the amount that was transferred from the net
profit to general reserve should be added back in order to identify the original volume.
Adjusted Profit & Loss A/c `20,000
To General Reserve A/c `20,000

Dr General Reserve A/c Cr

Particulars ` Particulars `
By Balance B/d 6,00,000
To Balance C/d 6,20,000 By (Adjusted profit &Loss A/c)Profit 20,000
transferred to general reserve
6,20,000 6,20,000

The next non-current liability is the Mortgage A/c.

The raising of mortgage loan leads to incoming of cash resources as well as further
building up of the liabilities.
Debit what comes in - Cash resources are coming in.
Credit all liabilities - Mortgage loan is a liability/responsibility of the firm to repay it to
the lender.
Cash A/c Dr `5,40,000
To Mortgage loan A/c `5,40,000

Dr Mortgage A/c Cr
Particulars ` Particulars `
To Balance C/d By Balance B/d ----------
5,40,000 By Cash(New Mortgage Loan) 5,40,000
Balancing fig.
5,40,000 5,40,000

The next important non-current liability is provision for taxation.

Dr Provision for Taxation Cr

Particulars ` Particulars `
To Cash (Tax paid previous 1,50,000 By Balance B/d 1,50,000
year taxation)
To Balance C/d 20,000 By (Adjusted Profit & Loss A/c) 20,000
Provision made during the current year
1,70,000 1,70,000

RAMA UNIVERSITY, KANPUR 95

Management Accounting

Notes The next step is to prepare the Adjusted Profit & Loss account.

Adjusted Profit & Loss Account

Particulars ` Particulars `
To Fixed Assets Depreciation 1,40,000 By Balance B/d 1,12,000
To Transfer of profit to general reserve 20,000 By Profit on sale of fixed assets 4,000
To Provision for taxation made during 20,000 By Profit on sale of Investments 1,000
the current year
To Dividend paid 80,000
To Balance c/d 1,36,000 By Fund from operations 2,79,000

3,96,000 3,96,000

The next step is to prepare the fund flow statement.

Fund Flow Statement

Sources ` Applications `
Sale of fixed assets 24,000 Purchase of Investments 36,000
Sale of investments 17,000 Payment of previous year taxation 1,50,000
Mortgage loan raised 5,40,000 Payment of dividend 80,000
Fund from operations 2,79,000 Increase in working capital 5,94,000
8,60,000 8,60,000

Self Assessment

Choose the appropriate answer

The meaning of the “To cash ( Tax paid)” entry posted in the Provision for taxation
account is
Last year taxation is paid through the current year provision
Current year taxation is paid through the current year provision
Last year tax is paid through the last year taxation
Current year taxation is paid through the last year provision
Profit on sale of the fixed assets are considered to be
Resource to the enterprise
Non-operating income
Application of the enterprise
None of the above
The treatment of current year depreciation with the closing balance of profit in
determining the fund from operations
To be added
To be multiplied
To be deducted
To be divided

96 RAMA UNIVERSITY, KANPUR

 Chapter 5: Fund Flow Statement

13. The redemption bank term loan leads to change in the Notes
Non-current liability account and current asset account
Current asset account and current liabilities account
Non-current asset account and current liabilities account
Non-current asset account and current liabilities account
Flow of funds means the change in
(a) funds (b) working capital

(c) either (d) both

Which of the following is not an objectives fund-flow analysis?

It pinpoints the mobilization of resources and the further utilization of resources
It highlights the financing of the general expansion of the business firms
It exemplifies the utilization of debt finance in the structure of financing
None of these.
Which of the following is not a source of fund?
Purchase of Long-term Investments
Acceptance of deposits
Sale of Non-current Assets
Decrease in Working Capital

5.5 Summary
Fund flow statements summarize a firm's inflow and outflow of funds.
Simply put, it tells investors where funds have come from and where funds have gone.
The statements are often used to determine whether companies efficiently source and
utilize funds available to them.
Fund flow statements are prepared by taking the balance sheets for two dates
representing the coverage period.
The increases and decreases must then be calculated for each item. Finally, the changes
are classified under four categories: (1) Long-term sources, (2) Long-term uses, (3) Short-
term sources and (4) Short-term uses.
It is also important to zero out the non-fund based adjustments in order to capture only
the changes that are accompanies by flow of funds.
However, income accrued but received and expenses incurred but not received reckoned
in the profit and loss statement should not be excluded from the profit figure for the fund
flow statement.
Fund flow statements can be used to identify a variety of problems in the way a company
operates.
Meanwhile, a company that is using long-term money to finance short-term investments
may not be efficiently utilizing its capital.

RAMA UNIVERSITY, KANPUR 97

Management Accounting

Notes 5.6 Keywords

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.
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.
Flow: Flow means changes occurred in between two different time periods.
Fund from Operations: Income generated from only operations.
Fund Lost in Operations: Loss incurred in the operations.
Fund: Fund means working capital
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.
Non-current Assets: Long-term assets.
Non-current Liabilities: Long-term financial resources.
Statement of changes in Working Capital: Enlisting the changes taken place in between the
current assets and current liabilities of two different time horizons.

5.7 Review Questions

From the following two balance sheet as at December 31, 2004 and 2005. Prepare the
statement of sources and uses of funds.

2004 (`) 2005 (`) 2004 (`) 2005 (`)

Liabilities
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

From the following balance sheets of XYZ Co. Ltd. Prepare Funds Flow Statement.

(` ‘000)
Liabilities 2006 2007 Assets 2006 2007
Equity share capital 600 800 Goodwill 230 180
Preference capital 300 200 Land and buildings 400 340
General reserve 80 140 Plant and machinery 160 400
Profit & Loss account 60 96 Debtors 320 400
Proposed dividend 84 10 Stock 154 218
Creditors 110 166 Bills receivable 40 60
Contd…

98 RAMA UNIVERSITY, KANPUR

 Chapter 5: Fund Flow Statement

Bills payable 40 62 Cash 30 20 Notes

Tax provision 80 100 Bank 20 16
1,354 1,634 1,354 1,634

Additional Information:
Proposed dividend made during 2006 has been paid during 2007.
Depreciation: (i) ` 20,000 on plant and machinery, and (ii) ` 40,000 on land and
buildings.
Interim dividend has been paid ` 40,000 in 2007.
Income-tax ` 70,000 has been paid during 2007.
Discuss the various methods of determining the fund from/lost (in) operations.
Explain the process of preparing the statement of changes in working capital.
Draft the pro forma of the Fund Flow Statement.
The summarised balance sheets of KSBS Products for the years ended 31-03-2006 and
31-03-2007 are given below:

(` ‘000)
Capital and Liabilities 31.3.2006 31.3.2007 Assets 31.3.2006 31.3.2007
Share capital 500 500 Land and buildings 180 200
General reserve 200 220 Plant and machinery 210 276
Profit & Loss account 40 32 Other fixed assets 30 45
Bank loan (long-term) - 100 Investments 50 50
Creditors 158 172 Stock 200 190
Provision for taxation 45 30 Debtors 170 195
Cash at bank 103 98
943 1,054 943 1,054

Prepare a statement of sources and application of funds given the following additional
information relating to the year ended 31-3-2007.
Dividend amounting to ` 30,000 was paid during the year.
Provision for taxation made ` 12,000.
Machinery worth ` 15,000 (book value) was sold at a loss of ` 3,000.
Investment costing ` 10,000 was sold for ` 12,000.
Depreciation provided on assets: Land and buildings ` 5,000, Plant and machinery `
20,00,000.
Prepare schedule of changes in Working Capital and Funds Flow Statement from the
following Balance Sheets as on December 31, 2008.

Liabilities 2008 2009 Assets 2008 2009

(`) (`) (`) (`)
Capital 10,000 10,000 Cash 5,600 5,400
Profit & Loss A/c 5,200 15,400 Debtors 3,400 6,600
Long-term Loan 6,000 8,000 Stock 5,400 9,200
Short-term Loan 2,400 2,400 Long-term 7,000 12,000
Investments
Contd…

RAMA UNIVERSITY, KANPUR 99

Management Accounting

Notes Creditors 3,600 3,600 Plant 10,600 9,600

Outstanding Wages 1,400 800 Prepaid Insurance 400 800
Income Tax Provision 3,800 3,400
32,400 43,600 32,400 43,600

Plant was sold at its book value, i.e., ` 1,000

From the following Balance Sheets, prepare a Schedule of changes in Working Capital
and Funds Flow Statement:

Liabilities 31.12.07 31.12.08 Assets 31.1 2.07 31.12.08

(`) (`) (`) (`)
Capital 4,80,000 5,10,000 Cash at Bank 24,000 54,000
Profit & Loss a/c 8,50,000 10,50,000 Debtors 9,90,000 11,90,000
Creditors 54,000 30,000 Stock 54,000 42,000
Mortgage Loans 28,000 1,00,000 Land 2,00,000 2,00,000
Plant 1,44,000 2,04,000
14,12,000 16,90,000 14,12,000 16,90,00

The following is the abstract of balance sheet of Software securities Ltd. for the year 2005
and 2006

2005 2006 2005 2006

Liabilities (`) (`) Assets (`) (`)
Provision for 108000 396000 Land 26000 81000
depreciation
Retained earning 244800 370800 Building 60000 360000
9% Debenture 270000 198000 Accumulated depreciation 19800 37800
on building
Account payable 72000 41400 Equipment 122400 347400
Expense payable 0 18000 Accumulated depreciation 18000 50400
on Equipment
Stock in hand 10800 97200
Account receivable 36000 122400
Cash in hand 66600 97200
Preliminary expenses 10800 7200

The income statement of Software Securities Ltd. is as under

Sales 1602000
less cost of sale 837000
less operating exp. 397800
less interest exp. 21600
loss on sale of equipments 3600
126000
Net income before tax 342000
Provision of tax 117000
Net Income after tax 225000

100 RAMA UNIVERSITY, KANPUR

 Chapter 5: Fund Flow Statement

Additional Information: Notes

Operating expenses include depreciation of ` 59400 and
charges from preliminary expenses of ` 3600.
Land was sold at its book value.
Cash dividend paid for the year 2006 amounted to ` 27000
and fully paid bonus shares were given in the ratio of 2
shares for every 3 shares hel(d).
Interest expenses was paid in cash.
Equipment with a cost of ` 298800 was purchased for cash.
Equipment with a cost of ` 73800 (book value ` 64800)
was sold for ` 61200.
Debenture for ` 18000 were redeemed for cash and for ` 54000
were redeemed by converting into equity shares at par
value.
Equity shares of ` 162000 were issued for cash at par.
Income tax paid during the year amounted to ` 117000.
Prepare the fund flow statement with both the methods.
“Fund flow statements can be used to identify a variety of
problems in the way a company operates.” Illustrate the
statement by the help of suitable examples.

Answers: Self Assessment

1. cash 2. Working capital change

3. False 4. True
5. False 6. False
7. (c) 8. (a)
9. (a) 10. (a)
11. (b) 12. (a)
13. (a) 14. (d)
15. (d) 16. (a)

5.8 Further Readings

Books B.M. Lall Nigam and I.C. Jain, Cost Accounting, Prentice-Hall of India (P) Ltd.
Hilton, Maher and Selto, Cost Management, 2nd
Edition, Tata McGraw-Hill Publishing Company
Ltd.
M.N. Arora, Cost and Management Accounting, 8th
Edition, Vikas Publishing House (P) Ltd.

M.P. Pandikumar, Management Accounting, Excel Books.

Online links www.authorstream.com

www.allinterview.com
RAMA UNIVERSITY, KANPUR 101
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