UNIT III

SUBJECT
SUBJECT NAME SEMESTER PREPARED BY
CODE
Dr.K.Karthikai,
Management Accounting I8BBA23C II
Assistant professor in BBA

FUNDS ANALYSIS

Funds Flow Statement

The basic financial statements, i.e., the balance sheet and profit and loss account or income
statement of business, reveal the net effect of the various transactions on the operational and
financial position of the company. It reveals the financial status of the company. The profit
and loss account reflects the results of the business operations for a period of time. It contains
a summary of expenses incurred and the revenues realised in an accounting period. Both
these statements provide the essential basic information on the financial activities of a
business, but their usefulness is limited for analysis and planning purposes. The balance sheet
does not disclose the causes for changes in the assets and liabilities between two different
points of time, The profit and loss account in a general way, indicates the resources provided
by operations. But there are many transactions that take place in an undertaking and which do
not operate through profit and Loss account. Thus, another statement has to be prepared to
show the change in the assets and liabilities from the end of one period of time to the end of
another period of time. The statement is called a Statement of changes in Financial Position
or a Funds Flow Statement.
The Funds Flow Statement is a statement which shows the movement of funds and is a report
of the financial operations of the business undertaking. It indicates various means by which
funds were obtained during a particular period and the ways to which these funds were
employed. In simple words, it is a statement of sources and applications of funds.
MEANING AND CONCEPT OF FUNDS
The term ‘funds’ has been defined in a number of ways.
(a)In a narrow sense, it means cash only and a funds flow statement prepared on this basis is
called a cash flow statement, Such a statement enumerates net effects of the various
business transactions on cash and takes into account receipts and disbursements of cash.
(b) In a broader sense, the term ‘funds’ refers to money values to whatever form it may
exist. Here ‘funds’ means all financial resources, used in business whether in the form of
men, material, money, machinery and others.
 (c) In a popular sense the term ‘funds’ means working capital, i.e., the excess of current
assets over current liabilities. The working capital concept of funds has emerged due to the
fact that total resources of a business are invested partly in fixed assets in the form of fixed
capital and partly kept in form of liquid or near liquid form as working capital.
Meaning and Concept of ‘Flow of Funds’
The term ‘flow’ means movement and includes both ‘inflow’ and ‘outflow’. The term ‘flow
of funds’ means transfer of economic values from one asset of equity to another . Flow of
funds is said to have taken place when any transaction makes changes in the amount of funds
available before happening of the transaction. If the effect of transaction results in the
increase of funds, it is called as source of funds and if it results in the decrease of funds, it is
known as an application of funds. Further, in case the transaction does not change funds, it is
said to have not resulted in the flow of funds.
Rule
The flow of funds occurs when a transaction changes on the one hand a non- current account
and on the other a current account and vice-versa, When a change in a non-current account
e.g., fixed assets, long-term liabilities, reserves and surplus, fictitious assets, etc., is followed
by a change in another non-current account, it does not amount to flow of funds, This is
because of the fact that ‘in such cases neither the working capital increases nor decreases.
Similarly when a change in one current account results in a change in another current
account, it does not affect funds. Funds move from noncurrent to current transactions or vice-
versa only. In simple language funds move when a transaction affects (i) a current asset and a
fixed asset, or (ii) a fixed and a current liability, or (iii) a current asset and (iv) fixed liability,
or (v) a fixed liability and current liability; and funds do not move when the transaction
affects fixed assets and fixed liability or current assets and current liabilities.

To understand flow of funds, it is essential to classify various accounts and balance sheet
items into current and non-current categories,
Current Accounts can either be current assets or current liabilities, Current assets are those
assets which in the ordinary course of business can be or will be converted into cash within a
short period of normally one accounting year. Current Assets include - Cash in hand, Cash at
bank, Bills Receivable, Sundry Debtors or Accounts Receivable, Short-term loans &
advances Temporary or marketable Investments, Inventories or stocks such as (a) Raw
materials (b) Work-in-process Stores and Spares (d) Finished Goods, Prepaid Expenses,
Accrued Incomes etc.
Current liabilities are those liabilities which are intended to be paid in the ordinary course of
business within a short period of normally one accounting year out of the current assets or the
income of the business. Current Liabilities include - Bills Payable, Sundry Creditors or
Accounts Payable, Accrued or Outstanding Expenses, Dividends Payable, Bank Overdraft
Short-term loans & deposits, Provision against Current Assets , Provision for taxation, if it
does not amount to appropriation of profits, Proposed Dividend (May be a current or a
noncurrent liability) etc.
Meaning and Definition of Funds Flow Statement
Funds Flow Statement is a method by which we study changes in the financial position of a
business enterprise between beginning and ending financial statement dates. It is a statement
showing sources and uses of funds for a period of time.
Foulke defines this statement as:
“A statement of sources and application of funds is a technical device designed to analyse the
changes in the financial condition of a business enterprise between two dates.”
In the words of Anthony, ‘‘The funds flow statement describes the sources from which
additional funds were derived and the use to which these sources were put’’
Thus, funds flow statement is a statement which indicates various means by which the funds
have been obtained during a certain period and the ways to which these funds have been used
during that period. The term ‘funds’ used here means working capital, i.e. the excess of
current assets over current liabilities.
Uses, Significance and Importance of Funds Flow Statement
A funds flow statement is an essential tool for the financial analysis and is of primary
importance to the financial management, Now-a-days, it is being widely used by the financial
analysts, credit granting institutions and financial managers. The basic purpose of a funds
flow statement is to reveal the changes in the working capital on the two balance sheet dates.
It also decribes the sources from which additional working capital has been financed and the
uses to which working capital has been applied. Such a statement is particularly useful in
assessing the growth of the firm, its resulting financial needs and in determining the best way
of financing these needs. The significance or importance of a funds flow statement can be
well followed from its various uses given below :
1. It helps in the analysis of financial operations. The balance sheet gives a static view
of the resources of a business and the uses to which these resources have been put at a
certain point of time. But it does not disclose the causes for changes in the assets and
liabilities between two different points of time. The funds flow statement explains
 causes for such changes and so the effect of these changes on the liquidity position of
the company. The funds flow statement gives a clear answer to such a situation
explaining what has happened to the profits of the firm.
2. It throws light on many perplexing questions of general interest which otherwise
may be difficult to be answered, such as:
(a) Why were the net current assets lesser in spite of higher profits and vice-versa?
(b) Why more dividends could not be declared in spite of available profits?
(c) How was it possible to distribute more dividends than the present earnings?
(d) What happened to the net profit? Where did they go?
(e) What happened to the proceeds of sale of fixed assets or issue of shares,
debentures, etc.?
(f) What are the sources of the repayment of debt?
(g) How was the increase in working capital financed and how will it be financed in
future?
3. It helps in the formation of a realistic dividend policy. Sometimes a firm has
sufficient profits available for distribution as dividend but yet it may not be advisable
to distribute dividend for lack of liquid or cash resources. In such causes, a funds
flow statement helps in the formation of a realistic dividend policy.
4. It helps in the proper allocation of resources. The resources of a concern are
always limited and it wants to make the best use of these resources. A projected funds
flow statement constructed for the future help in making managerial decisions. The
firm can plan the deployment of its resources and allocate them among various
applications.
5. It acts as a future guide. A projected funds flow statement also acts as a guide for
future to the management. The management can come to know the various problems
it is going to face in near future for want of funds. The firm’s future needs of funds
can be projected well in advance and also the timing of these needs. The firm can
arrange to finance these needs more effectively and avoid future problems.
6. It helps in appraising the use of working capital. A funds flow statement helps in
explaining how efficiently the management has used its working capital and also
suggests ways to improve working capital position of the firm.
7. It helps knowing the overall creditworthiness of a firm. The financial institutions
and banks such as State Financial Institutions. Industrial Development Corporation,
Industrial Finance Corporation of India, Industrial Development Bank of India, etc. all
ask for funds flow statement constructed for a number of years before granting loans to
know the creditworthiness and paying capacity of the firm. Hence, a firm seeking
financial assistance from these institutions has no alternative but to prepare funds flow
statements.
Limitations of Funds Flow Statement
The funds flow Statement has a number of uses, however, it has certain limitations also,
which are listed below:
1. It should be remembered that a funds flow statement is not a substitute of an income
statement or a balance sheet. It provides only some additional information as regards
changes in working capital.
2. It cannot reveal continuous changes.
3. It is not an original statement but simply a re-arrangement of data given in the financial
statement. . It is essentially historic in nature and projected funds flow statement cannot
be prepared with much accuracy.
5. Changes in cash are more important and relevant for financial management than the
working capital.
Procedure for Preparing a Funds Flow Statement
Funds flow statement is a method by which we study changes in the financial position of
a business enterprise between beginning and ending financial statements dates. Hence, the
funds flow statement is prepared by comparing two balance sheets and with the help of
such other information derived from the accounts as may be needed. Broadly speaking,
the preparation of a funds flow statement consists of two parts:
1. Statement or Schedule of Changes in Working Capital.
2. Statement of Sources and Application of Funds,
1. Statement or Schedule of Changes in Working Capital
Working Capital means the excess of current assets over current liabilities, Statement of
changes in working capital is prepared to show the changes in the working capital
between the two balance sheet dates. This statement is prepared with the help of current
assets and current liabilities derived from the two balance sheets.
As, Working Capital = Current Assets –Current liabilities.
So, (i) An increase in current assets increases Working Capital;
(ii) A decrease in current assets decreases Working Capital;
(iii) An increase in Current liabilities decreases Working Capital and
(iv) A decrease in Current liabilities increases Working Capital.
 STATEMENT OR SCHEDULE OF CHANGES IN WORKING CAPITAL

(2) Statement of Sources and Application of Funds

Funds flow statement is a statement which indicates various sources from which funds
(working capital) have been obtained during a certain period and the uses or applications
to which these funds have been put during that period. Generally, this statement is
prepared in two formats:
(a) Report Form (b) ‘T’ Form or an Account Form or Self Balancing Type.
SPECIMEN OF REPORT FORM OF FUNDS FLOW STATEMENT
Sources of Funds Rs. Applications or Uses of Funds Rs.
Funds from Operations Funds Lost in Operations
Issue of Share Capital Redemption of Preference
Share Capital
Issue of Debentures Redemption of Debentures
Raising of long term loans Repayment of long-term loans
Receipts from partly paid shares, Purchase of non-current
called up (fixed) assets
Sales of non-current (fixed) Purchase of long-term
 assets Investments
Non-trading receipts such as Non-trading payments
dividends
Sale of Investments (long-term) Payments of dividends
Net Decrease in Working Capital Payment of tax
Net Increase in Working
Capital
Total Total

SOURCES OF FUNDS The following are the sources from which funds generally flow
(come), into the business :
(1) Funds from operations or Trading Profits
Trading profits or the profits from the operations of the business are the most important
and major source of funds.
Basically, there are two methods of calculating funds from operations :
1. 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 operations of the business. The balancing figure in this case will be either
funds generated from operations or funds lost in operations depending upon whether
the income or credit side of profit and loss account exceeds the expense or debit side
of profit and loss account or vice-versa.
2. The second method (which is generally used) is to proceed from the figure of net
profit or net loss as arrived at from the profit and loss account already prepared. Funds
from operations by this method can be calculated as under .
(a) Calculation of Funds From Operations
Rs.
Closing Balance of P & L-A/c or Retained Earnings (as given in the balance sheet)
Add: Non-fund and Non-operating items which have been already debited to P & LA/c:
(i) Depreciation and Depletion
(ii) Amortization of fictitious and Intangible Assets such as:
(a) Goodwill (b) Patents (c) Trade Marks (d) 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) Loss on sale of land and
building (5) 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 as current liability)
(vi) Provision for Taxation (if it is not taken as Current Liability)
(vii) Any other non-fund/non-operating items which have been debited to P/L a/c
Total (A)
Less: Non-fund or Non-operating items which have already been credited to
P & L a/c
(i)Profit or Gain from the sale of non-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.
(ii) 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
(iii) Dividends Received
(iv) Excess provisions retransferred to P/L A/c or written off
(v) Any other non-operating item which has been credited to P/L A/c
(vi) Opening balance of P & L A/c or Retained Earnings (as given in the balance sheet)
Total (B)
Total (A) - Total (B) = Funds generated by operations

(b) Funds from operations can also be calculated by preparing Adjusted Profit
and Loss Account as follows :
Adjusted Profit And Loss Account
Rs. Rs.
To Depreciation & Depletion or By Opening Balance (of P & L
amortization of fictitious and intangible A/c)
assets, such as:
Goodwill, Patents, Trade Marks,
Preliminary Expenses etc,
 To Appropriation of Retained Earnings Transfers from excess
such as: Transfers to General Reserve, provisions
Dividend
Equalisation Fund, Sinking Fund, etc.
To Loss on sale of any non-current or Appreciation in the value of
fixed asset fixed assets
Dividends (including - interim dividend) Dividends received

Proposed Dividend (if not taken as a Profit on sale of fixed of or

current liability) non-current assets
Provision for taxation (if not taken as a. Funds from Operations
current liability) (balancing figure in case debit
side exceeds credit side)
Closing balance (of P & L a/c)
To Funds lost in Operations (balancing
figure, in case credit side exceeds the
debit side)

Ex 1: Find out the changes in the working capital from the balance sheet data given below:
Balance Sheet data given below :

Dec. 31,2015 Dec. 31,2016

Rs. Rs.
Capital & Liabilities
Share Capital 3,00,000 3,75,000
Trade Creditors 1,06,000 70,000
Profit and Loss A/c 14,000 31,000
4,20,000 4.76,000
Assets
Machinery 70,000 1,00,000
Stock-in-trade 1,21,000 1,36,000
Debtors 1,81,000 1,70,000
Cash 48,000 70,000
4,20,000 4,76,000
Solution:

Schedule of changes in working Capital

2015 2016 Increase in Decrease in

working Capital working Capital
Current Assets: Rs. Rs. Rs. Rs.
Cash 48,000 70,000 22,000 -
Debtors 1,81,000 1,70,000 - 11,000
Stock-in-trade 1,21,000 1,36,000 15,000 -
3,50,000 3,76,000
Current Liabilities :
Trade Creditors 1,06,000 70,000 36,000 -
1,06,000 70,000
Working Capital (CA-CL) 2,44,000 3,06,000
Net Increase in W.C 62,000 62,000
3,06,000 3,06,000 73,000 73,000

Ex 2: Calculate Funds from operation from the following Profit and Loss account.
Profit and Loss account
Rs. Rs.

To Salaries 10,000 By Gross Profit 2,00,000

To Rent 3,000 By Profit on sale of Machine 5,000
To Commission 2,000 By Refund of tax 3,000
To Discount allowed 1,000 By Dividends received 2,000

To Provision for Depreciation 14,000

To Transfers to General Reserves 20,000

To Provision for tax 10,000

To Loss on Sale of Investments 5000
To Discount on Issue of 2,000
Debentures
To Preliminary Expenses 3,000
To Selling Expenses 20,000
To Net Profit 1,20,000
2,10,000 2,10,000

Solution: Calculation of Funds from Operations

Rs.
Net Profit (as given) 1,20,000
Add: Non-fund or non-operating items which have been
debited to Profit and Loss Account :
 Rs.
Provision for Depreciation 14,000
Transfers to General Reserves 20,000
Provision for tax 10,000
Loss on Sale of Investments 5,000
Discount on Issue of Debentures 2,000
Preliminary Expenses 3,000
54,000
1,74,000
Less: Non-fund or non-operating items which have been
credited to P/L A/c:
Profit on sale of machine 5,000
Refund of tax 3,000
Dividends Received 2,000
10,000
Funds from Operations 1,64,000

Alternatively,
Adjusted Profit and Loss Account

Rs. Rs.
To Provision for Depreciation 14,000 By Opening balance -
To Transfers to General Reserves 20,000 By Profit on Sale of machine 5,000
To Provision for tax 10,000 By Refund of tax 3,000
To Loss on Sale of Investments 5,000 By Dividends Received 2,000
To Discount on Issue of Debentures 2,000 By Funds from Operations 1,64,000
(balancing figure)
To Preliminary Expenses 3,000
To Closing balance 1,20,000
1,74,000 1,74,000

Ex 3:From the following summarised balance sheets as on 31st December 2016 and 2017.

2016 2017
Rs. Rs.
Capital :
10% Preference share capital
Equity share capital
Share Premium
Profit and Loss Account
Liabilities (Non-Current):
12% Debentures
Current Liabilities :
Creditors
Bills Payable
Provision for taxation
Dividends Payable
Total Liabilities and Capital
Non-Current Assets
Machinery
Buildings
Land
Current Assets :
Cash
Debtors
Bills Receivable
Stock in hand
Total Assets

You are required to prepare a statement of sources and application of funds along with a
supporting schedule of changes in Working capital. funds along with a supporting schedule of
changes in working capital.
Solution:

SCHEDULE OF CHANGES IN WORKING CAPITAL

2016 2017 Increase in Decrease in

Working Working
Capital Capital
Rs. Rs.
Current Assets :
Cash 42,000 32,000 - 10,000
Debtors 38,000 38,000 - -
Bills Receivable 42,000 62,000 20,000 -
Stock on hand 84,000 98,000 14,000 -
2,06,000 2,30,000
Current Liabilities :
Creditors 38,000 46,000
Bills Payable 5,000 4,000
Provision for taxation 10,000 12,000
Dividends Payable 7,000 8,000
Working Capital (C.A.—C.L.) 1,46,000 1,60,000
Net Increase in Working Capital 14,000 14,000
1,60,000 1,60,000 35,000 35,000

Statement of sources and application of Funds

Sources Rs. Applications Rs.

Issue of Preference Share Capital 10,000 Redemption of Debentures 6,000
Issue of Equity Share Capital 30,000 Purchase of Machinery 30,000
(2,30,000-2,00,000)
Share Premium 6,000 Addition/Purchase of Building 26,000
(1,76,000-1,50,000)
Funds from Operations 30,000 Net Increase in Working Capital 14,000
76,000 76,000
Working Notes :

Calculation of Funds from Operations:

Balance of P/L A/c at the end of the year Rs.1,34,000

Less:
Balance of P/L A/c in the beginning of the year Rs.1,04,000
----------------
Funds from Operations Rs.30,000
----------------

CASH FLOW STATEMENT

The term ‘funds’, in a narrow sense, is used to denote cash. A Statement of changes in the
financial position of firm on cash basis is called a cash flow statement. Such a statement
enumerates net effects of the various business transactions on cash and takes into account
receipts and disbursements of cash. A cash flow statement summarises the causes of changes
in cash position of a business enterprise between dates of two balance sheets. This statement
is very much similar to the statement of changes in financial position prepared on working
capital basis, It is called a cash flow statement because it describes the inflow (sources) and
outflow (uses) of cash.

Comparison between Funds Flow Statement and Cash Flow Statement

The term ‘funds’ has a variety of meanings . In a narrow sense ‘it means cash and the
statement of changes in the financial position prepared on cash basis is called a cash flow
statement. In the most popular sense, the term ‘funds’ refers to working capital and a
Statement of changes in the financial position prepared on this basis is called a funds flow
statement. A cash flow statement is much similar to a funds flow statement as both are
prepared to summarise the cases of changes in the financial position of a business. However,
following are the main differences between a funds flow and a cash flow statement.

(1) Funds flow statement is based on a wider concept of funds, i.e., working capital, while
cash flow statement is based on the narrower concept of funds, i.e., cash only, which is only
one element of working capital, the others being debtors, stock, temporary investment, bills
receivable, etc.
(2) Funds flow statement is based on accrual basis of accounting while cash flow statement is
based on cash basis of accounting. In cash flow statement while calculating operating profits,
adjustments for prepaid and outstanding expenses and incomes are made to convert the data
from accrual basis to cash basis ; but no such adjustments are required to be made while
preparing a funds flow statement.
(3) A funds flow statement does not reveal changes in current assets and current liabilities,
rather these appear separately in a schedule of changes in working capital. No such schedule
of changes in working capital is prepared for a cash flow statement and changes in all assets
and liabilities fixed as well as current, are summarised in the cash flow statement.
(4) Cash flow statement is prepared by taking the opening balance of cash, adding to this all
the inflows of cash and deducting the outflows of cash from the total. The balance, i.e.,
opening balances of cash and inflows of cash—outflows of cash, is reconciled with the
closing balance of cash. No such opening or closing balances appear in a funds flow
statement. The net difference between sources and applications of funds does not represent
cash rather it reveals the net increase or decrease in working capital.
(5) Funds flow statement is useful in planning intermediate and long-term financing while a
cash flow statement is more useful for short-term analysis and cash planning of the business.
Uses and Significance of Cash Flow Statement
Cash flow statement is of vital importance to the financial management. It is an essential tool
of financial analysis for short term planning. The chief advantages of cash flow statement are
as follows :
(1) Since a cash flow statement is based on the cash basis of accounting, it is very useful in
the evaluation of cash position of a firm.
(2) A projected cash flow statement can be prepared in order to know the future cash position
of a concern so as to enable a firm to plan and coordinate its financial operations properly. By
preparing this statement, a firm can come to know as to how much cash will be generated into
the firm and how much cash will be needed to make various payments and hence the firm -
can well plan to arrange for the future requirements of cash.
(3) A comparison of the historical and projected cash flow statements can be made so as to
find the variations and the deficiency or otherwise in the performance w as to enable the firm
to take immediate and effective action.
(4) A series of intra-firm and inter-firm cash flow statements reveal whether the firm’s
liquidity (short-term paying capacity) ie. improving or deteriorating over a period of time and
19 comparison to other firms over a given period of time.
(5) Cash flow statement helps in planning the repayment of loans, replacement of fixed assets
and other similar long-term planning of cash. It is also significant for capital budgeting
decisions,
(6) It better explains the causes for poor cash position in spite of substantial profits in a firm
by throwing light on various applications of cash made by the firm.
(7) Cash flow analysis is more useful and appropriate than funds flow analysis for short-term
financial analysis as in a very short period it is cash which is more relevant then the working
capital for forecasting the ability of the firm to meet its immediate obligations.
Limitations of Cash Flow Statements

Despite a number of uses, Cash flow statements suffer from the following limitations :
(a) It is difficult to precisely define the term ‘cash’. There are controversies over a number of
items like cheques, stamps, postal orders, etc. to be included in cash.

(b)A Cash flow statement reveals the inflow and outflow of cash but the exclusion of near
cash items from cash conceals the true reporting of the firm’s liquidity position.

(c) Working Capital being a wider concept of funds, a funds flow statement presents a more
complete picture than cash flow statement,

Procedure for Preparing a Cash Flow Statement

The preparation of cash flow statement involves the determining of:
(a) Inflows of cash. (b) Outflows of cash.

(a) Sources of Cash Inflows

The main sources of cash inflows are:
(1) Cash flow from, Operations. (2) Increase in existing liabilities of creation of new
liabilities.(3) Reduction in or Sale of Assets. (4) Non-trading Receipts.

(b) Application of Cash or Cash Outflows (1) Cash lost in operations. ; (2) Decrease in or
discharge of liabilities. (3) Increase in or purchase of assets, (4) Non-trading payments.

Generally, cash flow statement is prepared in two forms:

(a) Report form - (b) T Form or an Account Form or Self Balancing Type.

SPECIMEN OF REPORT FORM OF CASH FLOW STATEMENT

Rs. Rs.
Cash balance in the beginning Applications or Outflow of cash:
Add : Cash inflows : Redemption of Preference shares
Cash flow from operations Redemption of debentures
Sale of assets Repayment of loans
Issue of shares Purchase of assets
Issue of debentures Payment of dividend
Raising of loans Payment of taxes
Collection from debtors Cash lost in operations
Non trading receipts such as :
Dividend received
Income-tax refund
Cash Balance at the end

How to Calculate Cash from Operations or Cash Operations Profit ?

There are three methods of determining cash from operations:

(1) From Cash Sales - Cash from operations can be calculated by deducting cash
purchases and cash operating expenses from cash sales, i.e., Cash from Operations = (Cash
Sales) - (Cash Purchases + Cash Operating Expenses).
CALCULATION OF CASH FROM OPERATIONS
Sales
Less : Credit Sales or Increase in accounts receivables, i e., Cash Sales
Less: Cash Purchases (Purchases - Credit Purchases or increase in payables)
Less : Cash Operating expenses (after adjusting prepaid and Outstanding expenses)
Cash from Trading Operations

2) From Net Profit/Net Loss - Cash from operations can also be calculated with the help of
net profit or net loss. Under this method, net profit or net loss is adjusted for non-cash and
non-operating expenses and incomes as follows:

Calculation of Cash From Trading Operations

Net Profit (as given)

Add: Non cash and non-operating items which have already been debited to P/L A/c.

Depreciation, Transfer to Reserves, Transfer to Provision, Goodwill written off, Preliminary

expenses written off, Other intangible assets written off, Loss on sale or disposal of fixed
assets, Increase in Accounts Payable, Increase in outstanding expenses, Decrease in prepaid
expenses.

Less : Non-cash and non-operating items which have already been credited to P/L a/c.:
Increase in Accounts Receivables, Decrease in Outstanding Expenses, Increase in Prepaid
Expenses.

Cash from operations

(3)Cash Operating Profit - Cash operating profit is also calculated with the help of net
profit or net loss. The difference in this method as compared to the above discussed method is
that increase or decrease in accounts payable and accounts receivable is not adjusted while
finding cash from operations and it is directly shown in the cash flow statement as an inflow
or outflow of cash as the case may be. The cash from operations so calculated is generally
called operating profit.
CALCULATION OF CASH OPERATING PROFIT

Net Profit (as given) or Closing Balance of Profit and Loss A/c

Add: non-cash and non-operating items which have already been to debited to P/L A/c:

Depreciation, Transfers to Reserves and Provisions, Writing off intangible assets,

Outstanding Expenses (current year), Prepaid Expenses (previous year), Loss on Sale of fixed
Assets, Dividend Paid, etc.

Less ; Non-cash and non-operating items which have already been credited to P/L A/c:

Profit on Sale or disposal of fixed assets, Non-trading receipts such a8 dividend received, rent
received, etc., Re-transfers from provisions (excess provisions charged back), Outstanding
income (current year), Pre-received incomes in previous year), Opening balance of P/L A/c.

Cash Operating Profit

Ex: 4 From the following details prepare Cash Flow statement.

31-12- 31-12- 31-12- 31-12-

2018 2019 2018 2019
Rs. Rs. Rs. Rs.
Share Capital 70,000 74,000 Cash 9,000 7,800
Debentures 12,000 6,000 Debtors 14,900 17,700

Reserve for doubtful 700 800 Stock 49,200 42,700

debts
Trade Creditors 10,360 11,840 Land 20,000 30,000
P/L A/c 10,040 10,560 Goodwill 10,000 5,000
1,03,100 1,03,200 1,03,100 1,03,200

In addition, you are given :

(1)Dividend paid total Rs.3,500,(2) Land was purchased for Rs. 10,000. Amount provided for
amortisation of goodwill Rs. 5,000, (3) Debentures paid off Rs. 6,000.

Prepare Cash Flow Statement.

Solution:

Cash Flow Statement

Rs. Rs.
Opening balance of cash 9000 Cash Outflows :
on 1-1-2019
Add : Cash Inflow: Purchase of Land 10,000
Issue of Share Capital 4000 Increase in Debtors 2,800
Increase in trade creditors 1,480 Redemption of Debentures 6,000
Cash inflow from operations 9,120 Dividends Paid 3,500
Decrease in stock 6,500 Closing balance of cash 7,800
on 31-12-2019
30,100 30,100

Working Notes:

Adjusted Profit and loss Account

Rs. Rs.
To Dividend (non- operating) 3,590 By Balance b/d 10,040
To Goodwill (non-fund/cash) 5,000 Cash inflow from operations 9,120
Reserve for doubtful debts 100
(non-cash)
Balance c/d 10,560
19,160 19,160

Ex 5. Balance Sheets of M/s A and B as on 1st January, 2018 and on 31st December 2018
were as follows:

01/01/18 31/12/18 01/01/18 31/12/18

Liabilities Rs. Rs. Assets Rs. Rs.
Capital 1,50,000 1,90,000 Cash 20,000 26,000
Mrs. B’s Loan 30,000 - Debtors 54,000 76,000
Loan from State Bank 60,000 80,000 Stock 48,000 42,000
of India
Sundry Creditors 50,000 56,000 Furniture 2,000 2,000
Machinery 90,000 65,000
Land 36,000 45,000
Building 40,000 70,000
2,90,000 3,26,000 2,90,000 3,26,000
During the year a machine costing Rs. 12,000 (accumulated depreciation Rs. 4,000) was sold
for Rs. 5,500. The provision for depreciation against machinery as on Ist January 2018 was
Rs. 24,000 and on 3lst December, 2018 Rs. 37,000. Net profit for the year 2014 amounted to
Rs. 60,000. You are required to prepare :

(a) Cash Flow Statement.

(b) Funds Flow Statement.
Solution:
(a) Cash Flow Statement
for the year ended 31st Dec 2018.
Rs. Rs.
Opening Balance of Cash on Ist 20,000 Out flows of Cash :
January 2018
Sources of Cash Inflow : Repayment of Mrs B’s Loan 30,000
Loan from State Bank of India 20,000 Increase in Debtors 22,000
Increase in Sundry Creditors 6,600 Purchase of Land 9,000
Decrease in Stock 6,000 Purchase of Building 30,000
Sale of machine 5,500 Drawings 20,000
Operating profit (including non- 73,500 Cash Balance on 31st Dec. 2018 26,000
cash items)
1,37,000 1,37,000

Working Notes:

Operating Profit:
(including non-fund cash item)
Net Profit for the year as given : Rs.50,000
Add: Non-fund/cash and non-operating items:
Depreciation on Machinery Rs.17,000
Loss on sale of machinery Rs.2500
--------------
Rs.79,500
-------------
Depreciation on machinery:
Accumulated depreciation as on 1-1-2018 Rs.24,000
Less: depreciation on machinery Rs.20,000
--------------
Sold during the year Rs.20,000
Accumulated Depreciation at the end
of the year on 31-12-2018 Rs.37,000
-------------
Depreciation provided during the year Rs.17,000
--------------
Drawings :
Capital on 1-1-2016 Rs.1,50,000
Add: Profit for the year Rs.60,000
Rs.2,10,000
Less: Capital at the end of the year on 31-12-2018 Rs.1,90,000
Drawings Rs.20,000

Schedule of changes in Working Capital

1st Jan 31st Jan Increase Decrease

2018 2018 in W.C in W.C
Rs. Rs. Rs. Rs.
Current Assets:
Cash 20,000 26,000 6,000 -
Debtors 54,000 76,000 22,000 -
Stock 48,000 42,000 - 6,000
1,22,000 1,44,000
Current Liabilities:
Sundry creditors 50,000 56,000 6,000
50,000 56,000
Working Capital 72,000 88,000
Net increase in W.C 16,000 16,000
88,000 88,000 28,000 28,000
 Funds Flow Statement

Sources Rs. Applications Rs.

Loan from S.B.I 20,000 Repayment of Mrs, B’s Loan 50,000
Sale of machine 5,500 Purchase of Land 9,000
Funds from operations 79,500 Purchase of Buildings 30,000
Drawings 20,000
Net increase in W.C. 16,000
1,05,000 1,05,000

The contents in the E-Material have been prepared from the Text books and Reference books given in the Syllabus.