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

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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

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