Funds Flow Statement, Schedule of Changes in Working Capital, Funds from Operations

... From Page 9

Problem

Following are the Balance Sheets of BROYHILL Industries Ltd, as on 31.12.2005 and 31.12.2006

Balance Sheet of M/s BROYHILL Industries Ltd, as on

Liabilities 31-12-2005 31-12-2006 Assets 31-12-2005 31-12-2006

Share capital
Debentures
Reserve
Profit & Loss a/c
Creditors
Bank Loan
Provision for Depreciation
on Buildings
on Plant & Machinery
Provision for:
Bad & Doubtful Debts
Taxation
12,00,000
4,00,000
3,00,000
2,50,000
2,30,000
8,00,000

12,000
40,000

60,000
50,000 16,00,000
6,00,000
3,50,000
5,00,000
1,80,000
13,00,000

6,000
48,000

70,000
1,20,000 Goodwill (at Cost)
Plant and Machinery (Cost)
Buildings
Land
Debtors
Stock
Bank
Preliminary expenses 6,00,000
8,00,000
6,00,000
3,50,000
3,38,000
6,00,000
40,000
14,000 5,50,000
14,90,000
10,00,000
4,70,000
3,72,000
8,00,000
80,000
12,000

33,42,000 47,74,000 33,42,000 47,74,000

You are required to analyse the Funds Flow and the Changes in working Capital in as much detail as possible, using the following additional details available.

1. A part of the machinery costing Rs. 1,40,000 (Accumulated depreciation Rs. 12,000 ) was sold for Rs. 1,20,000.

2. Buildings costing Rs. 1,00,000 (Accumulated depreciation 10,000) was sold for Rs. 1,10,000.

3. Land costing Rs. 1,50,000 was sold for Rs. 1,70,000. Profit of Rs. 20,000 transferred to reserve.

4. Dividends of Rs. 1,00,000 were paid during the year.

5. Provision for taxation in 2006 Rs. 1,10,000.

6. During 2006 Assets of another company were purchased for a consideration of Rs. 1,00,000, payable in shares. These assets included buildings worth Rs. 50,000 and stock worth Rs. 50,000.

Solution » Schedule of Changes in Working Capital

Schedule/Statement of Changes in Working Capital for the period from __ to __

Particulars/Account Previous Period Current Period Working Capital Change

Increase Decrease

A. CURRENT ASSETS
1) Debtors
Less: Bad and Doubtful Debts
Previous Period (3,38,000 − 60,000)
Current Period (3,72,000 − 70,000)
2) Stock
3) Bank

2,78,000

6,00,000
40,000
3,02,000

8,00,000
80,000
24,000

2,00,000
40,000

9,18,000 11,82,000 2,64,000 0

B. CURRENT LIABILITIES/PROVISIONS
1) Creditors
2) Provision for Taxation

2,30,000
50,000
1,80,000
1,20,000
50,000

70,000

2,80,000 3,00,000 3,14,000 70,000

Working Capital (A − B) 6,38,000 8,82,000

Change in Working Capital (8,82,000 − 6,18,000)
(Or) (3,14,000 − 70,000) 2,44,000

• Assumption

In the absence of specific instruction to the contrary, Provision for Taxation is treated as a Current Liability

The additional information indicates payment of dividends. Considering, Provision for Dividend to be a Current Account, this information would be of no importance in the Funds Flow analysis.

Solution » Working Notes

Altered Fund Accounts
Fund accounts are all those accounts which have not been considered in the statement/schedule of changes in working capital.
Make up all those ledger accounts which have been influenced on account of transactions during the period for which the flow is being analysed. These are accounts within the Fund Area where there is a change in values.
Each Ledger account should be prepared so as to reveal all the information relating to that account and for that period
Please make it a habit to make the account holding the appropriated profits (Profit and Loss a/c here) towards the end.
» Share Capital a/c Hide/Show

Share Capital a/c

To Balance c/d 16,00,000 By Balance b/d
By Buildings
By Stock
By Cash/Bank a/c (?) 12,00,000
50,000
50,000
3,00,000

16,00,000 16,00,000

By Balance b/d 16,00,000

(6) : Assets of ... purchased ... consideration of Rs. 1,00,000, payable in shares. ... assets included buildings ... Rs. 50,000 ... stock Rs. 50,000.

(?) : Capital is raised in exchange of current natured accounts (cash/bank).

» Debentures Hide/Show

Debentures a/c

To Balance c/d 6,00,000 By Balance b/d
By Cash/Bank a/c (?) 4,00,000
2,00,000

6,00,000 6,00,000

By Balance b/d 6,00,000

(?) : Additional debentures are issued in exchange for current natured accounts (cash/bank).

» Reserve Hide/Show

Reserve a/c

To Balance c/d 3,50,000 By Balance b/d
By Land a/c
By P/L Appr. a/c (?) 3,00,000
20,000
30,000

3,50,000 3,50,000

By Balance b/d 3,50,000

(3) Profit of Rs. 20,000 transferred to reserve.

(?) : Additional reserve appropriated from the profits.

» Bank Loan Hide/Show

Bank Loan a/c

To Balance c/d 13,00,000 By Balance b/d
By Cash/Bank a/c (?) 8,00,000
5,00,000

13,00,000 13,00,000

By Balance b/d 13,00,000

(?) : Additional loan raised in exchange for current natured accounts (cash/bank).

» Goodwill Hide/Show

Goodwill a/c

To Balance b/d 6,00,000 By P/L Appr. a/c (?)
Balance c/d 50,000
5,50,000

6,00,000 5,50,000

To Balance b/d 5,50,000

(?) : Goodwill written off during the current period.

» Preliminary Expenses Hide/Show

Preliminary Expenses a/c

To Balance b/d 14,000 By P/L Appr. a/c (?)
By Balance c/d 2,000
12,000

14,000 14,000

To Balance b/d 12,000

(?) : Preliminary Expenses written off during the current period.

» Plant and Machinery Hide/Show

Plant and Machinery a/c

To Balance b/d
To Cash/Bank a/c (?) 8,00,000
8,30,000 By Plant Disposal a/c
By Balance c/d 1,40,000
14,90,000

Total 16,30,000 Total 16,30,000

To Balance b/d 14,90,000

(1) : machinery costing Rs. 1,40,000 (__) was sold.

(?) : Machinery acquired in exchange for current natured accounts (cash/bank).

Provision for Depreciation on Plant and Machinery a/c

To Plant Disposal a/c
To Balance c/d 12,000
48,000 By Balance b/d
By P/L Appr. a/c (?) 40,000
20,000

60,000 60,000

By Balance b/d 48,000

(1) : A ... (Accumulated depreciation Rs. 12,000) was sold ...

(?) : Depreciation provided for in the current period

Plant Disposal a/c

To Plant/Machinery a/c 1,40,000 By Depr. Res a/c
By Cash/Bank a/c
By P/L Appr. a/c (?) 12,000
1,20,000
8,000

1,40,000 1,40,000

(1) : A ... was sold for Rs. 1,20,000.

(?) : Loss on sale of plant

» Buildings Hide/Show

Buildings a/c

To Balance b/d
To Share Capital a/c
To Cash/Bank a/c (?) 6,00,000
50,000
4,50,000 By Building Disposal a/c
By Balance c/d 1,00,000
10,00,000

11,00,000 11,00,000

To Balance b/d 10,00,000

(2) : Buildings costing Rs. 1,00,000 ... was sold ...

(6) : ... Assets ... purchased ... consideration payable in shares. ... included buildings ... Rs. 50,000 ...

(?) : Building acquired in exchange for current natured accounts (cash/bank).

Provision for Depreciation on Buildings a/c

To Building Disposal a/c
To Balance c/d 10,000
6,000 By Balance b/d
By P/L Approp. a/c (?) 12,000
4,000

16,000 16,000

By Balance b/d 6,000

(2) : Buildings ... (Accumulated depreciation 10,000) was sold ...

(?) : Depreciation provided for in the current period

Building Disposal a/c

To Building a/c
To P/L Appr. a/c (?) 1,00,000
20,000 By Depr. Res a/c
By Cash/Bank a/c 10,000
1,10,000

1,20,000 1,20,000

(2) : Buildings ... was sold for Rs. 1,10,000.

(?) : Profit on Sale of Building.

» Land Hide/Show

Land a/c

To Balance b/d
To Cash/Bank a/c (?) 3,50,000
2,70,000 By Land Disp a/c
By Balance c/d 1,50,000
4,70,000

6,40,000 6,40,000

To Balance b/d 10,00,000

(3) : Land costing Rs. 1,50,000 was sold ...

(?) : Land acquired in exchange for current natured accounts (cash/bank).

Land Disposal a/c

To Land a/c
To Reserve a/c (*) 1,50,000
20,000 By Cash/Bank a/c 1,70,000

1,70,000 1,70,000

(3) : Land ... was sold for Rs. 1,70,000.

(*) : ... was sold ... Profit of Rs. 20,000 transferred to reserve.

Making up the Funds Flow Statement from these

Every posting reading

By Cash/Bank/Current-Natured a/c indicates a Source/Inflow of fund and

To Cash/Bank/Current-Natured a/c indicates an Application/Outflow of Fund.

Filling these details in the Funds Flow Statement is all that you need to do.

Working Notes » Funds From Operations

Funds from operations may be required to be calculated as a part of the problem. Even if it is not asked to be prepared you need to prepare it as a part of working notes.
To complete the Funds Flow statement, Funds from operations are to be calculated and filled in the Funds Flow Statement.
Funds from Operations is a figure that can be derived by preparing the Profit and Loss Appropriation account.
Preparing the appropriation account requires you to

Take the figures relating to the opening and closing balances from the Balance Sheet
(Only if there is any account that represents the account where accumulated profits are collected).

Fill the other information from the ledger accounts prepared in the above working note.
(Complete the second posting relating to the postings To P/L Appr. a/c and By P/L Appr. a/c).

Profit and Loss (Appropriation) a/c

To Reserve a/c
To Goodwill a/c
To Preliminary Expenses a/c
To Prov. Depr. Plant/Mach
To Loss on Sale of Plant/Mach
To Prov. Depr. Bldgs

To Balance c/d (Net Profit)

30,000
50,000
2,000
20,000
8,000
4,000

5,00,000 By Balance b/d

By Profit/Loss a/c (FFO - ?)

By Profit on Sale of Bldgs 2,50,000

3,44,000

20,000

6,14,00 6,14,000

By Balance b/d 5,00,000

Since the Funds From Operations appears on the credit side of the Appropriation account, it represents a Source of Funds.
Alternative » Statement Method Hide/Show

Statement for Calculation of Funds from Operations

Particulars Amount Amount

Profit and Appropriation a/c:
Closing Balance
Less: Opening Balance
5,00,000
2,50,000

2,50,000

Current Period Profit
Add: Items of Expenses debited to Profit/Loss a/c
not resulting in a flow of funds
1) Reserve
2) Goodwill written off
3) Preliminary Expenses written off
4) Provision for Depreciation on Plant and Machinery
5) Loss on Sale of Plant and Machinery
6) Provision for Depreciation on Buildings

30,000
50,000
2,000
20,000
8,000
4,000 2,50,000

1,14,000

Less: Items of Incomes credited to Profit/Loss a/c
not resulting in a flow of funds
1) Profit on Sale of Buildings

20,000 3,64,000

20,000

Funds From Operations 3,44,000

You may use a method that is convenient to you. We recommend that you know both the methods and we prefer the account method for most cases.

Funds Flow Statement

• Statement Form

Funds Flow Statement for the period from __ to __

Particulars Amount Amount

SOURCES (INFLOW) of FUNDS :
1) Share Capital (Stock)
2) Share Capital (Cash/Bank)
3) Debentures
4) Bank Loan
5) Plant Sale
6) Building Sale
7) Land Sale
8) Funds from Operations

50,000
3,00,000
2,00,000
5,00,000
1,20,000
1,10,000
1,70,000
3,44,000

17,94,000

Less: APPLICATIONS (OUTFLOW) of FUNDS
1) Purchase of Plant and Machinery
2) Purchase of Buildings
3) Purchase of Land

8,30,000
4,50,000
2,70,000

15,50,000

Change in Working Capital + 2,44,000

There is an increase in Net Working Capital to the extent of Rs. 2,44,000

• T Form

Statement of Sources and Applications of Funds for the period from __ to __

Sources (Inflow)
of Funds Amount Applications (Outflow)
of Funds Amount

1) Share Capital (Stock)
2) Share Capital (Cash/Bank)
3) Debentures
4) Bank Loan
5) Plant Sale
6) Building Sale
7) Land Sale
8) Funds from Operations 50,000
3,00,000
2,00,000
5,00,000
1,20,000
1,10,000
1,70,000
3,44,000 1) Purchase of Plant and Machinery
2) Purchase of Buildings
3) Purchase of Land 8,30,000
4,50,000
2,70,000

17,94,000 15,50,000

Change in Working Capital 2,44,000

(Sources/Inflow of Funds) < (Applications/Outflow of Funds)
⇒ There is an increase in Net Working Capital to the extent of Rs. 2,44,000

Author Credit : The Edifier ... [Not yet Ready] Continued Page 11

Funds Flow Statement, Schedule of Changes in Working Capital, Funds from Operations, Adjustments - Illustration

Problem

Solution » Schedule of Changes in Working Capital

• Assumption

Solution » Working Notes

Altered Fund Accounts

» Share Capital a/c Hide/Show

» Debentures Hide/Show

» Reserve Hide/Show

» Bank Loan Hide/Show

» Goodwill Hide/Show

» Preliminary Expenses Hide/Show

» Plant and Machinery Hide/Show

» Buildings Hide/Show

» Land Hide/Show

Making up the Funds Flow Statement from these

Working Notes » Funds From Operations

Alternative » Statement Method Hide/Show

Funds Flow Statement

• Statement Form

• T Form