FUNDS FLOW ANALYSIS ne INTRODUCTION nancial statements, £e,, the balance sheet and profit and loss account or income statement ion of the The basic ff business, reveal the net effect of the various transactions on the ope SFmany. The balance sheet wives a summary of the assets and liabilities of an undertaking at particulur point cetime, It reveals the Finacial statns of the company, The assets side of a bakince sheet shows the deployment fr resources of at undertaking while the Habiliies side indicates its obligations, fe. the manner in which these resources were ObIained. The profit and loss account refleets the results of the business operations for period oF time. I contsins a surimary of expenses incurred and the revenue realised in an accounting period uth these statements provide the essential basic information on the financial activities of a business, but their usefulness ig limited for analysis and planning purposes. ‘The balance sheet gives a static view of the resources (liabilities) of a business and the uses (assets) to which these resources have been put at a certain point of time. Tt does not disclose the causes for changes in the assets und 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 ealled @ Statement fof changes in Financial Position or a Funds Flow Statemen 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. NM indicates various means by which finds were tained during a particular period and the ways in vhich these funds were employed. In simple words, in is a statement of sources and applications of funds, MEANING AND CONCEPT OF FUNDS The term “funds? has been defined in a mumber of ways. (a) In anareow sense, it means cash only and a funds flow statement prepared on this basis is called aah ee eecitat Such a statement enumerates net effects of the various business transactions on cash and takes into account receipts and disbursements of cash. (6) Ina broader sense, the term “funds” refers to money values in whatever form it may exist. Here ha ge seine all financial Fesources, used in business whether in the form of men, material, money, machinery and others. Jo) tna popular sense, the ferm ‘funds, means working capital, Le, the excess of current over cunt bilities’ ‘The working capital concept of funds has emerged due to the fact that total resourees Or an ie iveated partly in fixed assets inthe form of fied cnpital and party Kept in form of liquid or near liquid form as working capital The narrower concept of “funds’, ke. , cash oF work inthe to eee concer of a business. Some significant items, such as purchase of building in eachange of shares or payment of bonus in the form of shares, which do not directly affect cash or working capital are not revealed from the analysis based on these concepts. However, the concept of funds as working capital is the most popular one and i this chapter we shall generally’ refer to ‘funds’ as working capital and a funds foe eeatement as a statement of sources and application of funds. 1g capital concept, fails to reveal the changes62 MEANING AN? CONCE! The cert “How” mea means ransfer of econamic fe whet! alt Wasa Pe van ifthe effect of transaction Its in the des funds, it is said to have not t m “How of fi does not chang concept of funds, the te action results in the the decrease of workin, Rute ease of funds, it is known as an ds’ refers to the case in working capital, itis said to bi sl, itis said to be an application or out-flow of funds. Faas Fw nay sis * FLOW OF FUNDS’ nis movement and inchides both “inflow and ‘outflow’, “The term “flow of fy tues fram ane asset of equity to another, Flow of funds is said to have rian makes changes in the amount of finds available before happening oF thy results in the inerease of funds, it is called cation of funds, Furthe ulted in the How of funds. According (0 the working capita movement of funds in the working capital, und? taken source of funds ang in case the transaction Wany source or inflow of funds and if it results The flow of finds 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 ¢.g., fixed assets, long-term liabilities, reserves and surplus, fictitious assets, ctc., is followe funds, This is because of the Similarly, when a change in one current account results in # cl J by a change in another non-current account, it does not amount to flow of 4 that in such cases neither the working capital increases nor decreases, ange in another current account, it does not affect funds. Funds move from non-current to current traxsactions or vice-versa only. In simple language funds move when a transaction affeets (i) a current asset and afixed asset, or (ii) a fixed and a current liability, or (ui) a current asset and a fixed liability, or (ix) a fixed lability and current liabili and funds do not move when the transaction affects fixed assets and fixed liability or current assets and current liabilities. CURRENT AND ‘To understand flow of funds, it is essential imo current and non-current categories. (ON-CURRENT ACCOUNTS to classify various accounts and balance sheet items Current Accounts can either be current assets or current liabilitics. 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 liabilities are those liabilities which are intended to be paid in the ordinary course of business in a short period of normally one accounting year out of the current assets or the income of the business. ‘The following is the list of Current or Working Capital Accounts : LISTOFCURRENTOR WORKING CAPITALACCOUNTS Current Liabitities Sundry Creditors or Accounts Pay; ‘Accured or Outstanding Expenses Dividends Payable tank Overdeatt Short-term loans advances & deposits Provision ayainst Current Assets Provision for taxation, iit does notamount a appropriae ion Of profits Proposed Dividend (May be a current or a Non-current liability) Current Assets ash in hand Cash at bank Bills Receivable Sundry Debtors or Accounts Receivable Short-term loans & advances ‘Temporary or Marketable Investments Inventories o stocks such as (a) Meow materials () Work-in-process (6) Stores and Spares () Vinished Goods Prepaid Expenses Accured IncomesCapital 1 2 Prolerence Share Capital : ‘pita 1. Goodwill 3. Redecmable Preterctce Share 2 i Rater ‘Share Capita Shanti 5. Lense Loans 4. Plant and Mach 6 Share Pentium Account 8. Furniture apd Fitin & Share P niture ard Fittings 7. Shane Perfsited Account & Trade Maks 8. Prot nd Less Aczount (balance g Patou Rigs ot profit. ie. etelt balance) 8 Longsterm investment 9. Capital Reserve 1 Capa Reston Reserve 8, Debit Balanes of Petit and Loss account Provision for depreciation upainst & Disteuet antec ce antes 12 Appropriate ee OH MENS fed assets, Ur Disount on seo Debuts a 2. Peliminiany Expenses, (b) Dividend Equalisation Fund "5: Other Deferred Expenses, fe) Insurance Fund (4) Compensation Pond (©) Sioking Fund Investment Fluctuation Fund (@) Provision for Taxation (h) Proposed Dividend “As per Revised Schedule VI of the Companies Act, 1956, debit balance inthe Profit and Loos Account needs to be shown as a negative figure under the head Surplus. Therefore, Reserves and Surplus can have negative balance and should be shown as Equity and Liabilities, PROCEDURE FOR KNOWING WHETHER A TRANSACTION RESULTS IN THE FLOW OF FUNDS OR NOT: (V) Analyse the transaction and find out the to accounts involved. @) Make Jounal Eniry of the transaction. . G) Determine whether the accounts involved in the transaction are current oF non-current, (@) If both the accounts involved are current i.e, either erent assets or curzent ligblitice & does not result in the flow of funds. _— ‘ () IF both the accoust involved are non-current, Fe, either permanent assets or permanent liabilities, it still does mot result in the flow of funds. . (© Ff the accounts involved are such that one is a current account while the other is a non-current fecount, ie, current asset and permanent liability, or current asset end fixed asset, or current Tiability and fixed asset, or current liability and permanent liability then it results in the flow of funds, Examples w “Transactions whieh involve only the current accounts and hence do not result in the flow of funds : Cash collected from debtors. Bills receivables realised. Cash paid to creditors. Payment or discharge of bills payable. Issued bills payable to trade creditors Received acceptances from customers. sing, of short-term loans. see ek temporary or marketable investments Goods purchased for cash or credit Analysis of the above transactions SRN aheeNehate 1 ett 7 bares, “tales Be Funds Flira Analgsig 64 1. Cash collected from debtors ; the journal entry shall be : Cash Ale Dr. To Sundry Debtors A’c Both Cash A‘ and Suny Debtors A oc cure ‘ion results in increase in cash but at the same tim crease i tend curren liabilee romain unchanged and consequentially the working capi way, the following also do not result in the flow of funds. cu founts and hence do not affect funds, The eared decrease in debtors. The total current assets ita! remains the seme. In ————— Flow OFFENDS] “1 HE WHEN One CUARENT BOTH CURRENT oR OTHER NONCURRNET NON-CURRENT "ACCOUNTS ARE ACCOUNTS ARE INVOLVED gare DIAGRAMS DEPICTING FLOW OF FUNDS FLOW OF FUNDS? xo CURRENT ASSETS (CURRENT LIABILITIES NON-CURRENT LIABILITIES 2 _ Bills receivable realised = Cash Alc Dr. (Current Asset) To Bills Receivable A/c (Current Asset) 3. Cash paid to creditors : Sundry creditors A/c. Dr (Current Liability) To Cash Alc (Current Asset) The transaction results in decrease in creditors ‘an equal decrease in cash (current assets) ; and hence ‘capital remains unchanged. 4, Payment or discharge of Bills Payable : Bills Payable A/c Dr (current ligbilities) on the one hand and at the same the difference between the two (C. A-C.L.) or working 7 (Current Liability) To Cash Ale (Current Asset) 5. Issued Bills Payable to trade creditors : Sundry creditors Ale Dr. Cl a To Bills Payable Alc ° (cane tei) 6 Received acceptance from customers ay) Bills Receivable A/c. (Curent. Asses To Short-term Loan A/c Asset) 7. Raising of Shon-term loans (Current Liability) Cash or Bank A/c To Short-term Loan Alc (Current Asset) (Current Liability)eeAl Wee Funds Flew Analysis Mlustration 8. Extracts from Balance Sheets avon Aron SUst March, 2012 Bist oreh, 2013 7 equity Share Capital & Sve Preforence Share Capital sonc0 sone 2,004 ‘Additional Information + Equity shares were issued durin ) Ee e 1g the year against purchase of machinery for € 50,000. (ii) 8% Preference shares worth & 100,000 were redeemed during the == Prepare necessary mae accounts to find out sources/applications of funds. Solution : Equity ShareCapital A/e t 3,00,000 | By Balance bid By Machinery Ac By Cashelssue (balancing figure Source) To Balance cfd 5,00,000 8% Preference Share Capital Alc z ‘To Cash (Application) 700,000 [By Balance bd ‘ToBalance old 1,50,000_| By Cash-Issue (balancing figure Souree) Tanne oF equity shares agninst purchase of machinery is neither a souree nor application of funds. 2. Issue of shares worth © 50,000 for cash is a source of funds. 5. Redemption of preference shares worth & 1,00,000 is an application of funds, 4. Issue of preference shares of € 50,000 is a source of funds. ‘Try yourself 7. Extracts from Balance Sheets As on 30-6-2010 Equity Share Capital 72,00,000 ‘As on 30-6-2011 Ot 3,00,000 Shore Premium A/e 20,000 30,000 9% Debentures 400,000 1,350,000 ‘Additional Information due Debentures worth % 30,000 were redeemed during the year. Prepare necessary accounts t0 find out sources/applications of funds. Tans (i). Issue of Equity Shares for &1,00,000 isa source of funds, (ii) Share Premium oF 10,000 is asource of funds, Gin) Redemption of Debentures worth€ 30,000 isan application of funds. ivy Issue of Debentures For € 80,000 isa source of funds). a investments: The treetment of investments while preparing funds low statement depends wpe” their nature, Ne hetvr they are current assets oF fixed (long-term) or non-curtent assets. If he invests Teprevert surplus funds temporarily invested in marketable or short-term securities they "6 be trented as tepresent surpls funds Wreatments are ong-lrM, permanent or trade investments, these should be teated as fixed assets a) Temporary Investments. When the surplus funds are temporstly invested in marketable securities, they ate treated as current assets and hence shown in the schedule of changes in Working Capital,626 Funds Flow Analysis Temporary investments do not require any farther treatment while preparing funds flow statement Tike all other current assets. (b) Long-term, Permanent or Non-Current lnvestments, nature, these shovtld not be shown in the schedule of chang asccts, However. in this case, an investment account should be prepared as. it is prepared in the books fof accounts te find out the cost of investments purchased or sold during the year and the profit or loss on sale of such investments, if any. Sometimes, the investments are purchased-cum-dividend and the pre- acquisition dividend received is credited to the investment account, If there is a loss on sale of such investments and it has been debited to P/L Ale, it should be added back while finding funds from operations for shown on the debit side of adjusted profit and loss account (depending upon which method is followed) for the reason that such loss is not an operating loss. However, for the same reason, if a profit on sale ‘of such investments has been credited to profit and loss account, it should be deducted while finding funds from operations or shown on the credit side of adjusted profit and loss account, as the case may be. ‘The purchase of non-current or trade investments is an application of funds while the proceeds realised from the sale of such investments are a source of funds. Af the investments are of non-current n working capital because they are not current Mustration 9, The extracts of a balance sheet reveal that there is an opening balance of trade investments amounting to 7 20,000 and a closing balance of % 30,000, % 3,000 by way of dividends have been received during the year including & 1,000 from pre-acquisition profits which have been credited to Investments Account. You are required to find out the cost of investments purchased during the year to be shown as application of funds. Solution : Investment Account = ‘To Balance b/d (Opening balance) 20,000 | By Dividend Afe (Pre-acquisition) To Cash (Purchases during By Balance c/d the year-balancing figure) 11,000 | (Closing balance) 31,000, Alternatively : Calculation of Purchase of Investments Opening Balance mon Less: Dividend being, pre-acquisition credited to Investments A/c 1,000 Closing Balance eo Purchase of Investments during the year (balancing figure) joo 11,000 Try yourself 8. Extracts ofa Balance Sheet: 2010 011 Trade Investments 50 z z },000 Additional Information : 70,000 (i) © 5,000 by way of di nd has been teqastion pois Wich hve bein seus eC I Year inluing €2,000 from pe (i) vestments costing & 10,000 hove been sold during the sear os & 19 Find out sourees/applications of funds. for & 10,000, LAns. (9 Dividend of € 5,000 received on trade investments is a source F fund: of funds.rjow Analyst Funds Flow Analy at @ Fa rele om sale of trade investments is a source of funds. ves antec feet co during the year for Rs 32,000. is an application of funds). . Faxation : There are two ways of dealing with provision for taxation + (i) Asa current Viabiligy (ii) As an appropriation of profits. () Asa current liability. Provision for taxation may be treated asa curent liability 28 i, generally, represents an_ immediate obligation of the company to pay tax to the Government. When it is treated as searrent liability, provision for taxation will appear in the schedule of changes in working capital Ike all 2 per eurrent Habiities and no further treatment is required. white preparing the finds flow statement. In this sine. there is no need 10 prepare the provision for Taxation Account and the payment of tax made during the year shall not be shown 83 an application of funds because in that case both the accounts involved for the payment of tax shall be current accounts, ¢g, the entry for taxes paid during the year shall be : Provision for Taxation A/c Dr. (already taken as Current Liability) To Cash Ale (Current Asset) It is. clear from the above entry that only the current accounts are involved and hence there is no movement of funds (Working Capital). (ii) As on appropriation of profits, When the provision for taxation is treated a5 an appropriation of profits and not as a current liability, then it shall nt appear in the schedule of changes /n working capital. Pronion_ for toxation made during the year then shall be the appropriation of profits made during the Yay rer ll have to be added back while finding funds from operations being a non-fund tem. HF an adjusted profits and loss account is prepared, provision for taxation’ made during the eA shall appear on the debit rer for the same reasons. Moreover, the taxes paid during the year shall be an application of funds (not have to be shown in the funds flow statement on the application side. may have also to be prepered in ease of hidden information, Ze, when the provision for taxation made during the year or the taxes paid during the year are not given, However, the studems may note that itis preferable to assume provision for taxation as a current liability as generally it is an immediate ‘obligation of the company fo pay it and it rarely represents an ‘appropriation of profits. Iltustration 10. The opening balance in the Provision for Taxation Account as on Ist January 2013 was £30,000 and the closing balance on 31st December 2013. was 40,000. The taxes. paid during the year dmounted to % 25,000, Howw will you deal with this item in the funds flow statement ? + taxation is treated as a current liability. (A) When provision fo Provision for taxation shell simply be shown i the schedule of changes in working capital and init have no further effect on te finds flow statenert * being a current liability) and will A provision for taxation account Sehedule of Changesin Working Capital 74-2013 31-12-2013 Tncrease in ‘Decrease int WorkingCapital Working Copitat z t e ¥. Current Liabilities Provision for Taxation 30,000 (8) When provision for taxation is treated as 4” ppropriation of profits : (1) Mt will not be Shown in the schedule of changes in working capital. 7 ® Taxes paid during the year Le, Z 25,000 is an application of funds and will appear on the application side of funds flow statement,Funds Flow Analysis Funds FlowStatement “for the year ended 31-12-2013 | Apptication G) Provision for taxation made during the year ie, % 35,000 shall have to be caleulated as below and it will be added back (or shall be shown on the debit side of adjusted profit and loss account) while finding funds from operations. Calculation of Provision for taxation made during the year. Opening balance of provision for tax on 1-1-2013 Less: tases paid during the year Closing batance of provision on 31-12-2013, Provision made during the year OR Provision for Taxation A/e ig To Cash (ax paid) 25,000 | By Balance bid To Balance cfd 40,000 | By Adjusted P/L, Ac (Provision made- balancing figure) 65,000 ‘Try yourself 9, Extracts from the Balance Sheets: 0-6-2010 0-6-2011 z z Provision for Taxation (Nen-current) 30,000 75,000 Profit and Loss Ale (Cr) 2,00,000 3,00,000 Additional Information + Tax paid during the year is %_ 30,000, Find out sources and applications of funds [Ans. (7) Tax paid of € 30,000 is an application of funds, (i) Funds from operations of & 1,55,000 is a source of funds]. 4. Proposed Dividends : Proposed dividend though shown on th ities si s a he liabilities side of a Balance Sheet is not a Tiability in real sense until itis formally declared to be paid to the shareholders the Amal Gena Meeting of the Company. Till such declaration of dividends, it simply represents an appropriation of profits and is like a reserve or surplus. But generally, declaration of dividends proposed by the directors are accepted in the shareholders meeting, In that case, proposed dividend cannot be said to be a ° ri or profs as these become payable within a short time afler they are proposed. So there. mre te en el ‘with this item in the same way as that of provision for tavation « al @ As a current tiabitiy. When proposed dividend is treated obligation of the company which is payable ina short period. Henee, itis shown in the schedule of ehanges i king it urrent liability @ ec . m — es in working capital as a current lability and it requires no farther treatment in the funds flow statement * 8 a current liability it represents an (ii) As an appropriation of profs. When proposed divid lend is treates f fits it is mot a current liability and henee will not be shown in the hein ore pis a 7 Eat In this case, dividends proposed during the year, being an appropriation, ar ide os eno the debit side of adjusted prota! oss account) site finding nde rom open chi ei Perations, Thus, dividends paisands Flow Analysis m 629 during the year Fepresent an application of funds and hav featement. nthe absence of any ee fe 10 be shown on the application side of funds flow ‘ ep abisic information, proposed dividend for the previows year may be assumed tobe paid during the year and taken as an application of funds while the proposed dividend of the current year, being an appropriation, may be added while finding funds from operations irene {he students may note that the treatment of propoved dividend és much similar to the Pade nd it is also preferable to weat proposed dividend as a current liability because generally ihe dividends proposed by the directors are accepted by the sharcholders in the Annual General Meeting and these become payable within a short period. 5. Interim Dividend : ‘The expression ‘interim dividend’ denotes a dividend paid to the members of the company during a financial year, before the finalisation of annual accounts. The dividend paid or declared in bonveen the two Annual General Meetings, i, interim dividend, should be added back (or debited in the adjusted profit and loss aceount) while calculating funds trom operations, However, if the figure of profit is taken prior to the debit of interim dividend this adjustmer dividend is also an application of funds and has to appear on the appli Mlustration 11. Extracts from the Balance Sheets + nt is not required. ‘The interim on side of funds flow statement. BESIOND 315-2013 z z Proposed Dividend 50,000 Too Profit and Loss Ale (Cr) 2,00.000 3,01,060) Additional Information + Dividend paid during the year is % 50,000. Find out sources and applications of funds. Solution : Proposed Dividend A/e 7 To Cash-Dividend Paid 30000 | By Botanes bd Tmo Torco 70.000 | By Adjusted PIL A/c (balancing figure) 70,000 120,600 [120.4001 ‘Adjusted P/L A/C z z| 70,000 | By Balance bid 3,00.000 | By Funds from operations (balancing figure) 3,210,000, Ae “To Proposed Dividend To Balance eld ivi i jeation of funds. 7) Dividend paid % 50,000 is an application o “i Funds. from operations of & 1,70,000 is a source of funds. Note, in ease proposed dividend is taken as a current libility and shown in the schedule of changes in working capital payment of dividend of % $0,000 is not an application of funds and no adjustment is required to calculate funds from operations. ‘Try yourself 10. Extracts from Balance Sheets + 7016 2 7 € 80,000 1,00,000, Proposed Dividend 3,00,000 4,00,000 ___ Retained Fasnings eaFunds Flow Analysis 630 Additional Information : a ividend proposed daring the year and debited to Retained Earnings ne hile svc and Adjusted Profit and Loss Agcount 10 find out sources ang applications of funds. . . 7 eam Ans._ (i) Dividend paid during the year © £0,000 is an aplication of feds {ii) Funds from operations of Rs. 2,00,000 fs a source 0 , / 6. rovian Azainst Current Aste + vison seis cue SCs a, povisn i bad and doubtful debts, provision for loss an stock, ete. may be treated by any 1g methods, (a) The opening. and closing balance of provision against current assets should be deducted from the respective opening and closing balance of the concerned asset. The net amount of the current assets should then be shown in the schedule of changes in working capital. It does not require any further treatment inthe funds flow statement. (b) The amount of the opening and closing balance of the current assets may be taken as gross in the schedule of changes in working capital, ie, without deducting the amount of provision. But, then, the opening and closing balance of the provision against current assets shall have to be taken as a current liability in the schedule of changes in working capital and it will not need any further treatment in the funds statement. (c). Wexcess. provision has been created, it may be treated as an appropriation of profits and should be added while calculating funds from operations. The amount of the excess provision will not be shown in the schedule of changes in working capital. DEPRECIATION AS A SOURCE OF FUNDS Depreciation may be regarded as the capital cost of an assets. allocated over the life of the asset In simple language, it means the sradual decrease inthe value of an asset due to wear and tear, use and passage of time, Ineal sense, depreciation is simply a book entry having the effect of reducing the book See ren be aed tees Sete curent yer forthe same amount. It does not affect eurret asses or curren Joes not result in the flow ; ' the flow of funds or to say more precisely it is a nonefund. item Hence, although depreciation is an operating cost there is mn how ting '© actual outflow the deprecation charged during the year is added back to profits vile tg hae fn kee Ba, then, is depreciation a source of funds ? ing funds from operations. But, There cannot be any definite answer in + opinion on this important point. But it can by not amount t0 a source of funds. However, yes" oF ‘no? . Said With ets uestion as there are differences of under ceria chee, that depreciation, directly at least does Goncem 0 effect savings in payment” of tax and dividends and eee AePFeciation helps a business generated through normal trading operatic os and amounts to fndect souce of fund However, iis not even i S88 that depreciation ten be on oes for example, a company is runnin inact Source of funds under all eireneeaces. 50) charged to profit and loss account Securitas no profits, In this case, depreci A of funds at all. On the other hand, if a con withhol din, generation of funds. tn case a concern cams huge P3™*M OF tax as ty a omOunt of depreciation charged Income-iax Act is charged to profit and loss aesoyer nt 2 eXCessive degre, CWvidend and shall help it the savings in the payment of dividends, Unt it shall sti eration than permitted under the To conclude, it may be said that to th SHE generation “of funds thro . i 1 extent . of tax and dividends, it may be regarded ag coe Sepreciatio € of n hel fh 1S in effecting savings i 7 COMPREHENSIVE ILLUSTRATIONS nds, ‘ecting savings in the payme®" (A) When only Balance Sheets are given « Mlustration 12. Fro i: as there are I resule he following Balance g Pets of * Company for the snding Sh i 8 Of th any’ fe ; If 5yee Funds Flow Analysis ost | 2012 and 31st December 2013, prepare schedule of changes in working, capital and a statement showing s and application of funds. souree ‘Particulars 2012 © 23 }guty and Liabilities | Shareholders” Funds 5 | Share capit 3,00,000 4,00,000 | Reserves and surplus P&LAK 15,000 30,000 Non-current Liabilities: Curren Liabilities * = - Sundry Creditors 1,00,090 70,00 Total 415,000 000 M, Assets Nomeurrent sels Plant and Machinery 50,000 60,000 Fumiture and Fixtures 10,000 15,000 Current Assets: Stock-in-trade 85,000 1,05,000 Debtors 1,60,000 150,000 Cash 410,000 70,000 | Total 4.15,000 $,00,000 Solution : ‘Schedule of Changes in Working Capital Effect on 2012 2013 Working Capital Trerease ‘Decrease t z z z Current Assets Cash 1,10,000 1,70,000 60,000 = Debtors 160,000 150,000 — 10,000 Stock-in-rade 85.000 20,000 - 3.55.00, 4.25.00 Current Liabilities Sundry Creditors 100,000 70,000 30,000 100,000. 710,000, Working Capital 2,55,000 3,55,000 Net Increase in Working Capital 100,000. 100,000 3,55,000 3,55,000 110,000 1,10,000 Statement ofSourceand Application of for the year ended 31-12-2013 unds ‘unds from operations : Balance af PL. Ale 2011 Less Balance of PAL A/¢ in the beyinning of the year Funds trom operations Re Soares © | Applications i Gi \ssue of Share Capital 1,00,000 | Purchase of Pinnt & Machinery (60,000 ~ $0,000) 70.000 Funds from Operations 15,000 | Purchase of Furniture & Fixtures( 15,000 ~ 10,000) 5,000 J} Net tnerease in Working, Capital |__1,00,000 | |_1.15,000 | 115,000 e 30,000 15,000 15,000yee toe : : Funds Flow Analy Mlustration 13, From the following two balanee sheets as on 31st December 2010 and 20) 1, you ae required to prepare statement showing flow of find December 37 2010 x z 01, y 30,000 47.000 1,20,000 115,000 80,000 50,000 30.000 66,000 30.000, 318.006 Caysital and Liabilities : Share Capital 2,00.000 2,50.000 Trade Creditors 70.000 45.000, Retained Eamings 10,000, ise 18,000 Solution Schedule of Changesin Working Capital Sor the year ended 31-12-2011 Tncrease tn Decreasein 2010 201 Working Capital | Working Capitat z z 7 z Current Assers Cash 30,000 47,000 17,000 Debtors 1,20,000 1.15.00 ‘Stock-in-trade 30.000 90,000 10,000 5,000 2,52,000 Current Liabilities Trade Creditors 45,000 25,000 45,000 : Working Capital 2,07,000 Net Increase in Working Capital = 47,000 2.07.00, 32,000 00 StatementofSoureesand Application of Funds forthe year ended 31-12-29] Sources ©] Applications : Issue of Share Capital 50.000 | Purchase or : asco Land Funds from Operations | —13.000_| Net increase in Workin it 63,000 Capital Notes RRO Retained Earaingsin2011 2 ‘Less : Balance of Retained Earnings in 2010 sae Funds from Operations 200 2, Purchase of Land : is Openingbalance 10,00 Closing balance 400 eh $0,000 Purchased during the yeat sa 16,000Funds Flow Analysis 7 Mustration 14. From the following Bake Sheet of Mr. A, prepare a schedule of changes in working capital and a finds flow statement : Liabilities 2010 2011 Assets 200 201T z a e ie Ciilvonings 63,000 1,00;000 Cash 73,000 20,000 ong-erm Borrowings 50,000 60,000 Debtors 30,000 28,000 Tre < 7 an 42,000 39,000 Stock-instrade 55,000 72,000 nk Overda 35,000 25,000 — Landand Buildings 80,000 100.000 Outstanding 5,000 6,000 Furniture 15,000 10,000 1,95,000 2,30,000. 1,953,000, 2,30,000 Solution : Schedule of Changes in Working Capital 2010 OI Working Capital e e Decrease z Cuurem Assets Cash 15,000 20,000 Debtors 30,000 28,000 Stock-in-Trade 35,000 72.000 1, 00,000 720,000 42,000 39,000 Bank dverdrafl 35,000 23,000 Outstanding Expenses 5.000 6,000 $2,000 770,000 Working Capital (C.A-C.L.) 18,000 50,000 Net Inerease in Working Capital 32,000 $0,000 0,000. Fund FlowStatement @ | Applications Raising of Long-term Borrowings Purchase of Land & Building (60,000-50,000) (1,00,000-80,000) Sales of Furniture (15.000-10,000) Net Increase in Working Capital Funds from Operations Sources Working Notes: Long-term Borrowings Ale e z To Balance od 60.000 By Balance b/d S000) By Cash (balancing figure) —10,000_ G00 ee e Furniture A/e z z ToDalance ba 75,000 By Cash-Sale (bafancing figure) es By Balance ofd ison 00 —15,000_Funuls Flow Anclysis 634 QB) Landand Building A/c v z To Balance Wat 80,000 sostnin ‘ToCash-Purchases (balancing figure) _ spon. By Balance o/d Loan 5) CapitalAle e e ToBatance e/a 1,00,000 By Balance bid 63,000 By Profit (balancing figure) 37,000. 1,00.000, 1,00,000 ()_In the case of an individual the difference in Capital A/c in the beginning and at the end of the year is on account of profit or loss made during the year as no other information as regards to drawings, etc. is given in the problem. (6) As there is no information as regards non-fund and non-operating items, the profit made during the year % 37,000 amounts to funds from operations. Illustration 15. Prepare a fund flow statement from the following Balance Sheet of Indian XL Ltd, (in Laks) Liabilities 20 2010 Assets: 2017 2010 ‘Share Capital, S45 545 Fixed Assets 4,933 3,994 Reserves. 2.459 1,660 Less: Depreciation 1,927, ‘L651 3,004 2,205 3,006, 2,343 ‘Loan Funds 2.796 2.295 Investments (Long-term) 62 62 $,800 4,500 Inventories (2,075 1,804 Curent Liabilities 1241 1,533 Debtors 1187 ‘687 Provisions 434 327 Cash Bank Balance ‘si2 3H ——_ _ —_______ Loans &: Advances 663 21 7 620 EH —— 2.475. 6360 Solution = Schedule of Changesin Working Capital (@in Lakhs) 2010 2011 Increase in Decrease itt Working Working Current Assets = Capitat Capital Inventor Debio g 2,075 2 Cash & Bank Balances, 8 (57 470 Loans and Advances af 512 332 (Assumed t0 be short-term) Curren Liabiluies | * 3.255 4,407 a ‘Current Liabilities Provisions ‘3 12a (Assumed to be Current Liabilities) 327 ” ,——} 434 Working Capital (CA~CL) [8011975 —| 107 Not increase in WC. ‘oo || J—a7_— | | aap ——t eeus Flow Analysis FundsFlow Statement Amount z Applications Raising of Loans 301 1,075 Purchase of Fixed Assets (4,933-3,994) Increase in Working Capital Funds from Operations Working Notes = 1,576 (1) Calewlation of Raising of Loans z Loan funds in the beginning of 2011 2,295 ‘Loan funds at the end of 2011 2796 Loans raised during the year (balancing figure, i¢.,2,796-2,295) 301 2) Calculation of Furids from Operations z Reserves in the beginning of 2011 1,660 Reserves ut the end of 2011 2.459 Profit for the year (2,459-1,660) 799 Add: Depreciation (1927-1651) —216 1,075 Reserves A/c z i 276 | By Balance bid 1,660 To Depreciation (1927-1651) To Balance cfd Illustration 16, The following are the summarises 2,459 By Funds from Operations (balancing figure) 2,735 .d balance sheets of Ess Kay Ltd. as on December, 2012 ae O12 2017 Particulars i A L_ Equity and Liabitities Shareholder’s Funds ' ‘Share Capital 1,10,000 1,00,000 ~10% Preference share capital oll ooo 1 — Equity share capital | Reserve and surplus anon Soon Securities premium pap 1.01000 ~Profit and Loss account ‘Non-current Liabilities 64,000 70,000 12% Debentures i , Current Liabilities ~Trade Payables : : ago 38,000 { Creditors 09 3900, ae 12,000 1.000 rovision for taxation 1 ~Hividends payable ZS 373,000 WL Assets Non-current Assets Fixed Assets 230,000 2,00,000 Machinery 176.000 1,$0,000 on 18,000 18,000Funds Flow Anaya, 36 98.000 i009 38,000 Hy 62,000 204 d f ication of funds alongwith @ supponin ¥ red to prepare a statement of sources and application of fund: poring ‘ou are required to : of changes in working capital, Solution : Schedule of Changes in Working Capital PONT 2012 e Current Assets c 5 42,000 32,000 10,000 Debtors 38,000 38,000 HitlsReccivable 42,600 62,000 20,000 Suck on hand 84.000 98,000 14,000 2.06,000 230,000 Current Liabilities Creditors 38,000 46,000 8,000 Bills Payable 5,000 4,000 1,000 Provision fur taxation 10,600 12000 : Dividends Payable Working Capital CA,-C.Ly Nattneteazein Working Capital tence Share Cepital sue of Equity Shate Capital State Premium Funds from Operations Working Notes Se eens . 1,34,000 Mustration 17. The fallowing ape 104,00 December 2010 and 2011, . SRR aeTiabitities 9% Myatt Funds Flow Analysis ai Balance Sheets of Paschim Corporation Ltd, a 201] Assets 2010 2017 id ~ 7 e z Shore Capital (Pan) ee Shae Landand Buildings 60,000 0,000 11g¢Curiative PyesSrence Sieres ~ 30,000 Pant and Machinery 30,000 30.000 . 1,10,000 1,20,000 Sundry Debtors 40,000 General Reserves 4,000 4,000 Stock 0.000 2,000 2,400 Bank 2,400 ah 12,000 14,000 Cash 600 Provision for Taxation 6,000 2.400 Proposed Dividend 10,000 i600 Current Liabilities 49,000 send 1,93.000 193.000 You are required to prepare a Schedule of Changes in Working Capital and a Statement of Flow of Funds. Solution Schedule of Changesin Working Capital Saleof Land & Buildings Funds from Operations Working Notes = 1." Ascurent ibis are separate abilities 2. Catewlation of tssue of Preference Shares Preference Share Capital in the beginning of 2011 nee Share Capital Equity Sha Equity Share Capi Equity $ 4. Issue of Debentures : 20.400 [72.400 | ised during the year yee Share Capital at the end of 2011 3. Calenfation of lssve of Equity Shares: ital in the beginning of 2011 al at the end of 2011 ares issued during the Sear 9% Debentures in the beginning of 2011 2010 2011 dncrease z= z in WE in WG = Current Assets : Sundry Debtors 40,000 48,000 8,000 Stock 60,000 70,000 10,000 Bank 2,400 7,000 4.600 Cash 600 1.000 400 1,03.000 1,26,000 Current Liabilities : Current Liabilities 49,000 35.600___| 13,400 49.000, 35.600, Working Capital (CA -CL) ‘54,000 90,400 Net Inerease in Working Capital 36.400 36.400 90,400, 90,400 36.400 I 36.400 Funds Flow Statement ‘Sources 2] Applications T = Tssuc of Preference Shares 39,000 | Purehase of Plant and Machinery 20,000 Issue of Equity Shares 70,000 | Provision for taxation (for 2006 assumed to be paid) 6.000 Issue of Debentures. 2,000 | Proposed Dividend (for 2006 assumed to be paid) | 10.000 10,000 | Net Increase in Working Capital 36.400 Jy given, provision fortaxationand proposed dividend have nat been taken as corest 7 Nil 30,000 m0 ~“Too0 12,0009% Debentures at the end of 2011 Debentures Issued during the year 6. Calculation of Sale of Land and Buildings Opening Balan ‘of Land and Buildings in 2011 Closing Batance of Land and Buildings in 2011 Land & Buildings sold during the year 7, Purchase of Plant and Machinery’: Opening Balance in 2011 Closing Balance in 2011 Pure ed during the year 8 Calculation of funds from Operations + Closing Balance of PA. Aecount in 2011 Add: Non-fund and Non-operating it Provision for taxation Proposed Dividend Less : Opening Balance of P/L Ate Funds from Operations Alternatively : To Provision for taxation To Proposed dividend ToBalance eld items debited to PIL Ale: 5, Provision for taxation and proposed dividend for 2010 have been presumed to be paid in Funds Flow Analysis 2011. ‘Adjusted Profit and Loss Account = 8400 By balance b/d 11,600 By Funds from Operations 2.400. (balancingfigure) 22,400 2,000 20,400 22,400 Tilustration 18. The summarised Balance Sheet of Alpha Ltd., as on 31st March 2006, 2007 and 2008 are given below : Liabittes ‘As on 31st March 2006 2007 2008 7 (Zin Lakhs) Paid up Capital (owrowings Tong term) 14 4 (@) From Banks 68 y tat iy From Others 21 343 379 Current Liabilities 52 34 99 Toul 595 688 196 Asses Gross Block ee 1s 2% Fa Current Assets an 261 239 Profit and Loss Account 166 199 a “Toul $e ns ee Prepare a Statement of Net Sources , Sources and Uses 2008 and give your comments on the same, a Solution : Statement of Chany ges in Working Capits forthe year ended 31st March 200? Funds for the years ended on 31st March 2007 and | Curent Aas Cunent iabitities 2006 (ln taktsy Ta 32 =< a ie, Ia WC In WC. int lakbis) (ln bakiss) (®in lakhs) oo prae 5Funts Flow Analysis 639 pital Working ” Net Increase In W.C, 34 Ms 36 Staten Capital - forthe y Alsi March, 2008 2007 “| 2008 Increase | tn tatty (€ln taht) (®in takhs) (@hn lakhs) Cartent Assets Waa — c sa 09 = Working, Capital M5 135 Net Decrease in WAC. —= 4s | (ln Lakhs) (Fin bakhsy Sources ———- Applicuttons — 2007 2007 2008, Borrowing (long-term) Tnorease in Gross Block 1 5 Gi ¥rom banks 29 27 | Funds Lost in Operations 36 os |! (ii) From Others a 36_] Net Increase in W.C. 3 | Net Deerease in WAC. 10 | on n | a Funds from Operations : 2007 2008 Closing Balance of PL Are (Dr) ~22 —323 ‘Add: Depscciation charged year 426 42 02 -296 Less: Opening, Balance of PIL Ale (Dr) ELGG 4228 Funds Lost in Operations (1.asses) 36 8 Comment The Stavenent of Net Sources and uses of funds reveals that the company is losing a tot ot fands due to heavy losses. The net Fun lost i trading operations in 2007 amounted to ® 36 lakhs which further incressed in 2008 to & 6B lakhs. In spite of much of funds fost in operations, the met clecres is only @ 10 lakhs in 2008. ‘This is due to th funds (lost in operations) mainly by lon ie in working, capital the requirements of working capital tern borrowings from banks and other outsiders. (18) Comprehensive IMlustrations (Where 60 Balance S! Mlustration 19, From the followiny showing your workings clearly + Tatitiies i 201 “WH Assets 3010 0 © ¢ that the company cots are given alongwith additional information) Balance Sheets of S.M. Industries Prepare a Funds Flow Statement 5,00 6,000 Goosdill - 30,000 34,000 26,000 Plant & Muchinery 60,000 17.000 1,000 Cuntcat Assets im 4,000 4) Depreciation of & 20,000 on plant and machinery was charged to Profit and Loss Account (i) Dividends of © 12,000 were paid during the year,Winona —— 6.40 Solution : Scheduleof Changesin Working Capital Funds Flow Analysis Working Notes = 2010 it Increase In WC. Decrease in W.C, z v e z Current Assets 16,000 19,000 3,000 Current Liabilities 12,000 __| ___3,000 9,000 Working Capital (C.A-C.L) 4,000 76,000 Y 12,000 Net Increase inW.C 12,000 ‘ 16,000 16,000 12,000 12,000 Funds Flow Statement Sources Z| Applications 3 Issue of Shares 5,000 | Purchase of Plant and Machinery To.00) Funds from Operations 29,000 | Payment of Dividend 12,000 Net Increase in W.C. 12.000) [__ 34.000} (1) Share Capital Afe e z To Balance dd 65,000 By Balance bid 60,000 By Cash Issue (balancing figure) 5,000. — 65,000 85.000 @) Plantand Machinery Ale e e To Balance bid 60,000 By Depreciation 20,000 To cash - Purehase (balancing figure) 10,000. By Balance cfd 30,000 70,000, 70,000, ‘@) Goodwill Ale z 7 To Balance b/ 30,000 By Adjusted P/L Ale (balancing figure) 3,000 By Balance ofd 25,000. 30,000 30,000 (@Adjusted Profitand Loss Ale ¥ e To Depreciation 20,000 By Balance bt ,¢ 34,000 a coe an By Funds from Operations 29,000 Taped. $2,000 (alancing figure) 63,000 aren)CASH FLOW ANALYSIS St tRoDUCTION cash plays a very important role in the entire economic life ofa business. A firm needs cash to make pesto its supplier, to incur day-to-day expenses and to pay salaries, wages, interest and dividend, etc. tat blood is to a human body, eash is to a business enterprise. I is very essential for a business jn adequate balance of cash. But many a times, 2 concern operates profitably and yet it becomes aiuto pay taxes and dividend. This may be because /)) although huge profits have been eamed yet ve ay not have been received or (7) even if cash has been received, it may have Grained out (used) for cere oir purposes. This movement of cash is of vital importance to the mangement. ve have studied in the previous chapter that the tvo basic financial statements, i the balance sheet sed prafit and loss account, provide the essential basic information on the financial activites of a business, ce ter usefulness is limited for analysis and planning purposes. The balance sheet does no! disclose the oe changes in the assets and abilities between to different points of time. The profit and loss account nil, to disclose the reasons for shortage of cash in spite of positive net income. Thus, another stternent, ade Flow Statement, was prepared to show the changes in the assets and liabilities from the end of od of time to the end of another period of time. To underline the importance of funds statement, the Accounting Standard-3 dealing with inttute of Chartered Accountants of India (ICAI) issued in June, 1981 equation of Siatement of Changes in Financial Position. The statement of changes in Financial position sunnarsed, forthe period covered by it, the changes in the financial position including the sources from which funds were obtained by the enterprise and the specific uses to whi ich such funds were applied. For this purpose, ie tem “funds? was defined ¢¢ cash and cash equivalents or as working capital, The statement of changes i arsal position, also called Funds Flow Statement, was intendet ~ tot bee waa pe tad | | } oil oe 4 Cash Flos Analy, sh receipts from dividends or ite, ‘The prospects for those cash receip, ations when due and is of ng and uncertainty oF prospective oa ities or loans. imi of secur the amounts. agers in assessing a fond proceeds from the sales. redemption or mat P rs ike “dy an enterprise's ability 1° vrenerate enouglt cash 0 meet the obli operating 020d tions and to pay cash dividends “, (sEeBL) amended clause 32 of the Listing “ho reinvest in opera In June 1995, the Securities am ereement requiring every ‘d company 10 give al0ns Se yow statement prepared in the preseribed format. sh investing activities an ing activities. Recosnisin: Faunce sheet and profit and 1035 accou, rately cash flows from operating ‘ce of cash flow statement, the low Statements in March, operating nee with the bal showing sepa 1g. the importan Revised : Cash fl a cash id financil of India (ICA) issued. A S-3 x Trentute of Chastered Accountants ed: Cash M0 issued i pepe revise accounting standard Supersedes Mtg _2 Changes in Financial Positions issued in June 198 eee ane cash flow statement as giver i "AS-3 (Revised) are as under: .rs of financial statements objocuves “Information about the cash flows fo ascess the ability of the enterp erprises 10 utilise those cash flows. The ec S biligy of an enterprise f0 generate cas ran enterprise is useful in providing US ar exo generate cash and cash equivalents and the needs of te require an evaluation fonomiz decisions that are taken By users hand cash equivalents and the timing and certainty of tht ical changes in cash end ch of information 2bout the histori ‘ash flows during the peried ‘The statement deals with the provision flow statement which classified ¢ ‘lente of an enterprise by means of a cash ing and financing activites.” from operating. inv MEANING CCach Flow Statement is 2 statement whieh describes the inflows (s during 2 specified period of time. Such a statement enumerate net effecs od cash equivalents in an enterprise vciness ransactions on cash end its equivalents and takes into account receipts and disbursemet® f changes in cash position of a business enter fof verious busines flow statement summarises the causes 01 — 7 ne talons et According to 'AS-3 (Revised). an enterprise should prepare # cash fig* shoe a it for each periou for which financial statements ere prepared. The term® cash 28 cash flows are used in this statement with the following meanings: prises cash on hand and demand deposits with banks, - highly liquid investments that are readily convertible into Ia nificant risk of changes in value. Cash eguiv na tment or ob sources) and outflows (uses) of cas 1. Cash & 2. Cash equivalents are short te amounts of cash and which are subject to an i are beld for the 2 of meeting e it spose of meeting short-term cash commitments rather than for inves! oH Je to 2 kn" ese or Sess parposes. For an invesmnent to investment to qualify 2s 2 cash equivalent, it must be readily convertibl ificant risk of change in value. Therefore, 20 in¥ a ty whe it hes 2 short-maturity, of say, thr meena ry excluded from cash equivalents unless ee re zequired shortly O here is only en insignificant risk of failure of the oe th nts, Flow of cash is said 10 hare » 3. th of cash and ash is ald ple te effect of trensection results cash equivalents ao 2 source) and if i etults in the increase of cash °F ) and if resus in the decrease of total cash #8 act Cash flows exclode movement ts between i compuoeets are part of th een items that constitu Coeeetee, Cit macaw ences ro mete cash orcas equivalents DOS a Z ca i ing, invest Sa ee in cash equival a1 or CASH FLOWS cAloN CLAS ing 10 AS-3 (Revised) the cash flow slatement should report cash flows during the period cori, investing and finaneing activites, Thus, tush flows are classified into three main ass «fed bY ops ah ows from operating ativiies. Cash flows from investing activities. ows from financing, activities. Flows from Operating Activities + Operating activities are Pete activities that are not investing oF financing activities ‘ie amount of cash ffows arising fom operating activities is a key indicator of the extent to which vine enterprse have generated sufficient cashflows fo maintain the operating capability of the sere py dividends, cepay Toons. and take net Favestments without recourse to external sources oF er Inretion about the specifie components historical operating cash flows is useful, in conjunction jie ober information, in forecasting future ‘operating cash flows. ch flows fom operating activities are primarily derived from the principal revenue-producing aves ofthe enterprise. Therefore, they generally result from the transactions and other events that enter tithe determination of net profit or loss. Examples of eash flows from operating activ (a) cash receipts from the sale of goods and the rendering of services; (6) cash receipts from coyalties, fees, commissions, and other revenuc; {c) eash payments to suppliers of goods and services; (a) cash payments to and on behalf of employees; (©) cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits; 6) cash payments or refunds of income taxes unless they ean be specifically identified with financing and investing activities ; and (a) cash receipts and payments relating to futures contracts, forward contracts, option contracts, and swap contacts when the contracts are held for dealing or trading purposes. ° i sgn tanssion, such as the sale of an item of plant, may give rise to a gain or loss which is included Se nesing of net profit or loss. However, the cash flows relating to such transactions are cash flows, reo g 2 the principal revenue-producing 1.Cash aijes of he emterrise operations of ies are: s. long, 22 Cash F ing Activiti ing, acti "ke sts eae From Investing Activities : Investing activities are the acquisition and disposal of i om mon other investments rot included in cash equivalents. The separate disclosure of cash flow “e been made hn activities is important because the cash flows represent the extent to which expendi : re sores intended to generate future income and cash flows. —_ fa te of cash flows arising from investing activities are Sah payments to seat fixed assets (including intangibles). These payments include th y Ta to capitalised research & development costs and self constructed fixed assets; vs a ri from disposal of fixed assets (including intangibles); * Sash payments to acquire shares, warrants, oF debt it nts of 6 om , warrants, or debt instruments of other enterpris i ino ventures (thr than poymets. Tor those suns considered te cal reavalens ant these held for dealing oF trading purpess) abe cach caivalents Teceipts from disposal of sh ‘ ieee A SP shares, warrants, or debt instruments of oth i hose held for dealing i = ealing ot trading purposes ); 7 >Cash Flo ny (e) ash advances and loans mae to third panes (other than advances and Teams mode by a ng enterprise (cash receipts from the repayment of advances and loans made to thi advances and loans of a financial enterprise); Ih payments for fulures contracts, forward contracts, option contracts, and swap contacts excep! when the contracts are held for dealing or trading purposes, or the payments are clasineg as f ies; and (h) cash receipts from futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities, 3. Cash Flows From Financing Activities : Financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowings of the enterprise. Parties (other thoy ‘The separate discolosure of cash flows arising from financing activiti portant because itis useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise, Examples of eash flows arising from financing activities are : (a) cash proceeds from issuing shares or other similar instruments : (6) cash proceeds from issuing debentures, loans, notes, bonds, and other short-or long-term borrowings; and (c) cash repayments of amounts borrowed such as redemption of debentures, bonds, preference shares. ENT OF SOME TYPICAL ITEMS AS ~ 3 (Revised) has also provided for the treatment of cash flows from some peculiar items as discussed below : TREAT) I. Extraordinary Items : The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed in the cash flow statement to enable users to understand their nature and effect on the present and future cash flows of the enterprise. 2. Interest and Dividends : Cash flows from interest and dividends received and paid should be disclosed separately. Further, the total amount of interest paid during the period should be disclosed in the cash flow statement whether it has been recognised as an expense in the statement of profit and loss or capitalised. ‘The treatment of interest and dividends received and paid depends upon the nature of the enterprise. For this purpose, the enterprises are classified as (i) financial enterprises, and (ii) other enterprises. @ Financial Enterprises. In the case of financial enterprises, cash flows arising from interest paid and interest and dividend recived should be classified as cash flows arising from operating activities. (4) Other Enterprises. In the case of other enterprises, cash flows arising from interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities. Dividends p: 3. Taxes on Income : Cash flows arising from taxes on income should be separately disclosed and should be classified as cash Nlows from operating activities unless they can be specifically identified with financing and investing activities. id should be classified as cash flows from financing activities.