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Sources/inflow − Application/outflow = Change in Working Capital !! |
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There are a number of ways working capital can be interpreted. One of those interpretations in terms of Fund Assets and Fund Liabilities is Working Capital = Fund Liabilities − Fund Assets
Where Sources/Inflows are greater than Applications/Outflows, there will be a Net increase in Working Capital Similarly,
Where Applications/Outflows are greater than Sources/Inflows, there will be a Net decrease in Working Capital |
Relevance of Working Capital in Funds Flow |
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Changes in Fund Assets and Fund Liabilities need not always bring about a Change in working capital. • Working Capital Unaffected by Changes in Fund Assets/Liabilities
Where there is a transaction that involves change in a Fund Asset and a similar change in a Fund Liability, the net effect would be zero change in Working Capital. The change in Working Capital on account of a change in the Fund Asset would be set off by a change in the Fund Liability
» Eg: Acquiring a Fixed Asset issuing Shares as Purchase Consideration
Where Land valued at Rs. 25,00,000 is acquired by issuing equity shares in return, there would be an increase in Equity Share Capital (Fund Liability) to the extent of Rs. 25,00,000 and also an increase in the value of Land and Buildings to the extent of Rs. 25,00,000.
This transaction has no effect on Working Capital. • Funds Flow only when transactions effect a change in working capital
To emphasise the effect of funds flow on working capital, transactions that do not effect a working capital change are eliminated in analysing funds flow and preparation of Funds Flow Statement.
To bring about a change in the working capital, transactions should involve an account within the fund area and another account within the current area of the balance sheet. Such transactions are commonly identified as Cross transactions. » Transactions effecting Funds Flow - Cross Transactions
Transactions involving
» Transactions not effecting Funds Flow
Transactions involving
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Schedule/Statement of Changes in Working Capital |
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The Funds Flow Statement reveals the Net Change in working capital over the period for which the flow is being measured. The information relating to the changes in working capital can also be derived using the information relating to the accounts/items within the Current Area of the Balance Sheet.
A statement presenting the information relating to the changes in the various items/accounts within the current area of the balance sheet is called a "Statement/Schedule of Changes in Working Capital" • Preparing the Schedule of Changes in Working CapitalBalance Sheet » Hide/Show
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Is Funds Flow analysis meant only for Company form of Organisation? |
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One major difference we find in analysing balance sheets relating to other forms of business organisation is the absence of Equity Share Capital and Preference Share Capital. Moreover, certain items which are specific to the company form of organisation may not be present in those balance sheets. But for these, there is no difference in analysing Funds Flow for a Corporate entity and a Non-Corporate entity. Data present in the balance sheet pertaining to any organisation can be identified under the two areas - the Fund Area and the Current Area, which is the basis for the preparation of the Funds Flow Statement and the Statement/Schedule of Changes in Working Capital. |
Author Credit : The Edifier | ... Continued Page 6 |