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

Funds Flow Cash Flow • Funds Flow Analysis • Study Notes •     ... 1314

Changes in working Capital, Funds From operations, Funds Flow Statement - illustration

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,
Liabilities As on 31st December Assets As on 31st December
2005 2006 2005 2006
Share capital
Debentures
Reserve
Profit & Loss a/c
Creditors
Bank Loan
Fixed Deposits
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
4,50,000
8,00,000
2,00,000

12,000
40,000

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

6,000
48,000

70,000
1,20,000  		Goodwill (at Cost)
Plant and Machinery (Cost)
Furniture
Buildings
Investments
Land
Debtors
Stock
Bank
Preliminary expenses 		6,00,000
8,00,000
2,00,000
6,00,000
2,20,000
3,50,000
3,38,000
6,00,000
40,000
14,000  		5,50,000
14,90,000
2,00,000
10,00,000
-
4,70,000
3,72,000
8,00,000
80,000
12,000 
37,62,000  49,74,000  37,62,000  49,74,000 

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. All the Investments are sold at a profit of Rs. 24,000 and the sale proceeds are utilised for clearing the fixed deposits and purchasing new furniture.
5. Dividends of Rs. 1,00,000 were paid during the year.
6. Provision for taxation in 2006 Rs. 1,10,000.
7. 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.

Soution » Working Notes - Identify the Current and Non Current Accounts

Identify the Current and Non-Current accounts from within the balance sheet distinctly.

Balance Sheet of M/s BROYHILL Industries Ltd,
Liabilities As on 31st December Assets As on 31st December
2005 2006 2005 2006
Share capital
Debentures
Reserve
Profit & Loss a/c
Creditors
Bank Loan
Fixed Deposits
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
4,50,000
8,00,000
2,00,000

12,000
40,000

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

6,000
48,000

70,000
1,20,000  		Goodwill (at Cost)
Plant and Machinery (Cost)
Furniture
Buildings
Investments
Land
Debtors
Stock
Bank
Preliminary expenses		 6,00,000
8,00,000
2,00,000
6,00,000
2,20,000
3,50,000
3,38,000
6,00,000
40,000
14,000  		5,50,000
14,90,000
2,00,000
10,00,000
-
4,70,000
3,72,000
8,00,000
80,000
12,000 
37,62,000  49,74,000  37,62,000  49,74,000 

We need not redraw the total balance sheet, but we should ensure that we are taking all the accounts into consideration.

Marking in the problem itself is an option. But in examination conditions, we may not be allowed to mark anything on the question paper. In such situations, a list of the account names would help.

Liabilities Assets
Share capital
Debentures
Reserve
Profit & Loss a/c
Creditors
Bank Loan
Fixed Deposits
Provision for Depreciation
on Buildings
on Plant & Machinery
Provision for:
Bad & Doubtful Debts
Taxation
Goodwill (at Cost)
Plant and Machinery (Cost)
Furniture
Buildings
Investments
Land
Debtors
Stock
Bank
Preliminary expenses
  • Non-Current Accounts
  • Current Accounts

Solution » Schedule of Changes in Working Capital

The schedule/statement of changes in working capital is an abstract of the information relating to all the current natured accounts i.e. all accounts that are part of current assets and current liabilities in a specified format.

M/S BROYHILL Industries Ltd
Schedule/Statement of Changes in Working Capital for the period from 31/12/05 to 31/12/06
Particulars/Account Balance as on 31st March Working Capital Change
2005 2006 Increase Decrease
a) CURRENT ASSETS
1) Debtors
2) Stock
3) Bank

3,38,000
6,00,000
40,000 
3,72,000
8,00,000
80,000 
34,000
2,00,000
40,000 
-
-
- 
TOTAL 9,78,000  12,52,000  2,74,000  - 
b) CURRENT LIABILITIES
1) Creditors
2) Provision for Bad Debts
2) Provision for Taxation

4,50,000
60,000
50,000 
3,80,000
70,000
1,20,000 
70,000

 

10,000
70,000 
TOTAL 5,60,000 5,70,000 70,000 80,000
Working Capital [(a) - (b)] 4,18,000 6,82,000
TOTAL 3,14,000 4,78,000
Net Change in Working Capital 2,64,000

There is an increase in working capital to the extent of 2,64,000.

The net change can also be obtained from the working capital figures relating to the two balance sheet dates.

Change in Working Capital = Working Capital as on 31/12/06 - Working Capital as on 31/12/05
= 6,82,000 - 4,18,000
= + 2,64,000
Positive value indicates an increase in working capital.

Assumption : Provision for Taxation is a current account.

Solution » Altered Non Current Accounts

Altered non current accounts are the non current accounts which have been affected by the accounting transactions during the period for which the funds flow is being analysed.

These are non Current Accounts which are

  • Present in both the Balance Sheets having different balances.

    Share Capital a/c, Plant and Machinery a/c are examples

  • Present in only one of the balance sheets

    Fixed Deposits a/c and Investments a/c

  • Present in both the Balance Sheets and whose balance does not differ.

    Furniture a/c

    A non current account balance might be the same in the two balance sheets, even if it had been affected by the transactions during the period for which the funds flow is being analysed, if the change on account of one or more transactions is offset by the change on account of one or more other transactions.

  • Not present in both the balance sheets.

    Non current accounts which would have been created and closed during the period for which the funds flow is being analysed will not be present in the balance sheets. Interim Dividend account is an example.

Altered non current accounts not revealed by the balance sheet information should be assessed from the additional information provided along with the two balance sheets.

Preparing the altered Non Current Ledger Accounts

Non current Ledger account should be prepared so as to reveal all the information relating to that account for the period for which the funds flow is being analysed.
  • Draw all the altered ledger accounts filling them with the information in the balance sheets.

    Balance Sheet information is used only once.

  • Additional information represents accounting transactions.

    Identify the journal entries for the transactions and where they affect the non-current accounts, post them into the ledgers.

  • Close the account holding the appropriated profits (Profit and Loss a/c in this problem) to obtain the figure of funds from operations.

    Preparing the account holding the accumulated profits towards the end would aid understanding.

If in doubt prepare all the non-current ledger accounts.

Soution » Working Notes - Journal Entries for additional information

A part of the machinery costing Rs. 1,40,000 (Accumulated depreciation Rs. 12,000) was sold for Rs. 1,20,000.
Book value of Machine sold
= Cost - Accumulated Depreciation
= 1,40,000 - 12,000
= 1,28,000

Profit/Loss on sale

= Sale price - Book Value
= 1,20,000 - 1,28,000
= - 8,000 [Loss]

Writing off Machinery Dr. Machine Sale a/c
Cr. Plant and Machinery a/c
Writing off Depreciation Reserve Dr. Provision for Depreciation on Plant and Machinery a/c
Cr. Machine Sale a/c
Recording Machine Sale Dr. Bank a/c
Cr. Machine Sale a/c
Recording Loss Dr. Profit/Loss Appropriation a/c
Cr. Machine Sale a/c

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

Book value of Building sold
= Cost - Accumulated Depreciation
= 1,00,000 - 10,000
= 90,000

Profit/Loss on sale

= Sale price - Book Value
= 1,10,000 - 90,000
= + 20,000 [Profit]

Writing off Building Dr. Building Sale a/c
Cr. Building a/c
Writing off Depreciation Reserve Dr. Provision for Depreciation on Building a/c
Cr. Building Sale a/c
Recording Building Sale Dr. Bank a/c
Cr. Building Sale a/c
Recording Profit Dr. Building Sale a/c
Cr. Profit/Loss Appropriation a/c

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

Recording Land Sale Dr. Bank a/c
Cr. Land a/c
Recording Profit Dr. Land a/c
Cr. Profit/Loss Appropriation a/c

This being a simple transaction we may avoid using the asset sale account.

All the Investments are sold at a profit of Rs. 24,000 and the sale proceeds are utilised for clearing the fixed deposits and purchasing new furniture.

Sale proceeds of investments
= Book Value of investments + Profit
= 2,20,000 + 24,000
= 2,44,000

Value of Furniture Purchased

= Investment Sale proceeds - Fixed Deposits Cleared
= 2,44,000 - 2,00,000
= 44,000

Recording Investment Sale Dr. Bank a/c
Cr. Investments a/c
Recording Profit Dr. Investment a/c
Cr. Profit/Loss Appropriation a/c
Clearing Fixed Deposits Dr. Fixed Deposits a/c
Cr. Bank a/c
Purchasing Furniture Dr. Furniture a/c
Cr. Bank a/c

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

Since there is no Reserve/Provision for dividend account either at the beginning or the end, the payment of dividend is to be treated as an equivalent of interim dividend. The dividend is paid and appropriated from profits during the current accounting period itself.
Payment of Dividend Dr. Dividend a/c
Cr. Bank a/c
Appropriation of Dividend Dr. Profit/Loss Appropriation a/c
Cr. Dividend a/c

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

Since provision for taxation has been shown along with other current natured accounts it is treated as a current account.

Provision for taxation being a current natured account, the transaction of creation of provision would result in a charge to the profit and loss account.

Provision created Dr. Profit and Loss a/c
Cr. Provision for Taxation a/c
Payment of Tax Dr. Provision for Taxation a/c
Cr. Bank a/c

Since we know the opening and closing balances, the amount paid towards taxation would be revealed by the Provision for taxation account as the balancing figure.

Since both the provision for taxation account and the bank account are current natured, the transaction of payment of tax would not be a cross transaction.

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.

In financial accounting, this transaction of purchase of assets for consideration other than cash is assumed to involve three distinct transactions.
  1. Purchase of Asset
  2. Falling due to the vendor on account of the purchase
  3. Clearing vendors due
Purchase of Assets Dr. Building a/c
Dr. Stock a/c
Cr. Asset Purchase a/c
Falling due to the vendor Dr. Asset Purchase a/c
Cr. Vendor a/c
Clearing Vendor dues Dr. Vendor a/c
Cr. Equity Share Capital a/c

In analysing funds flow, we avoid considering the transactions in such detailed. However we consider the transactions of acquisition of the assets separately as transaction representing the acquisition of the current asset will form a cross transaction and the other transaction is a non-cross transaction.

Purchase of Building Dr. Building a/c
Cr. Equity Share Capital a/c
Purchase of Stock Dr. Stock a/c
Cr. Equity Share Capital a/c

In preparing the Funds flow statement, we neither record journal entries nor post ledger accounts. We only take the help of the formats in financial accounting to help us derive the information needed.

Solution » Working Notes : Altered Non Current Ledger Accounts

  • From Balance Sheets
  • From additional information
  • Appropriations/Losses
  • Funds Flow - Posting relevant to transaction resulting in flow of fund

Share Capital

Dr Share Capital a/c Cr
Particulars Amount Particulars Amount
To Balance c/d 16,00,000
  		By Balance b/d
By Buildings
By Stock
By Bank (?)		 12,00,000
50,000
50,000
3,00,000 
16,00,000  16,00,000 
By Balance b/d 16,00,000 
From additional information - 7.

Assumption :

1. The balancing figure represents additional capital raised during the current period in consideration for cash or any other current assets.

Debentures

Dr Debentures a/c Cr
Particulars Amount Particulars Amount
To Balance c/d 6,00,000
  		By Balance b/d
By Bank (?)		 4,00,000
2,00,000 
6,00,000  6,00,000 
By Balance b/d 6,00,000 

Assumption :

1. The balancing figure represents additional capital raised through debentures during the current period in consideration for cash or any other current assets.

Reserve

Dr Reserve a/c Cr
Particulars Amount Particulars Amount
To Balance c/d 3,50,000
  		By Balance b/d
By Land
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 
From additional information - 3.

Assumption :

1. The balancing figure represents reserve created by appropriating profits during the current period.

Profit and Loss a/c

Dr Profit and Loss a/c Cr
Particulars Amount Particulars Amount
To Balance c/d 5,00,000
  		By Balance b/d
By P/L Appr. a/c (?)		 2,50,000
2,50,000 
5,00,000  5,00,000 
By Balance b/d 5,00,000 

Assumption :

1. The balancing figure represents net profit of the current period.

Bank Loan

Dr Bank Loan a/c Cr
Particulars Amount Particulars Amount
To Balance c/d 13,00,000
  		By Balance b/d
By Bank a/c (?)		 8,00,000
5,00,000 
13,00,000  13,00,000 
By Balance b/d 13,00,000 
From additional information - 3.

Assumption :

1. The balancing figure represents additional loan taken during the current period.

Fixed Deposits

Dr Fixed Deposits a/c Cr
Particulars Amount Particulars Amount
To Bank a/c 2,00,000
  		By Balance b/d 2,00,000 
2,00,000  2,00,000 
 

Since there is no change in the balance and we find no transactions affecting this account in the additional information, we may avoid preparing this account.

If in doubt prepare all non-current accounts.

Goodwill

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

Assumption :

1. The balancing figure represents goodwill written off as loss from the profits of the current period.

Plant and Machinery

Dr Plant and Machinery a/c Cr
Particulars Amount Particulars Amount
To Balance b/d
To Bank a/c		 8,00,000
8,30,000  		By Machinery Sale a/c
By Balance b/d		 1,40,000
14,90,000 
16,30,000  16,30,000 
To Balance b/d 14,90,000 
From additional information - 1.

Assumption :

1. The balancing figure represents value of machinery purchased during the current period for a consideration in cash or other current asset.

Dr Reserve for Depreciation on Plant and Machinery a/c Cr
Particulars Amount Particulars Amount
To Machinery Sale 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 
From additional information - 1.

Assumption :

1. The balancing figure represents the depreciation charged to profits in the current period.

Dr Machinery Sale a/c Cr
Particulars Amount Particulars Amount
To Plant and Machinery a/c
 1,40,000
  		By Res. Depr. Pl/Mach a/c
By Bank a/c
By P/L Appr. a/c		 12,000
1,20,000
8,000 
1,40,000  1,40,000 
From additional information - 1.

Assumption :

1. The balancing figure represents loss on sale of machinery charged to profits during the current period.

Furniture

Dr Furniture a/c Cr
Particulars Amount Particulars Amount
To Balance b/d
To Bank a/c		 2,00,000
44,000  		By P/L Appr. a/c (?)
By Balance b/d		 44,000
2,00,000 
2,44,000  2,44,000 
To Balance b/d 2,00,000 
From additional information - 4.

Assumption :

1. The balancing figure represents depreciation on furniture charged to profits during the accounting period.

Buildings

Dr Buildings a/c Cr
Particulars Amount Particulars Amount
To Balance b/d
To Equity Share Cap a/c
To Bank a/c		 6,00,000
50,000
4,50,000  		By Building Sale 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 
From additional information - 2., 7.

Assumption :

1. The balancing figure represents value of building purchased during the current period for a consideration in cash or other current asset.

Dr Reserve for Depreciation on Building a/c Cr
Particulars Amount Particulars Amount
To Building Sale a/c
To Balance c/d		 10,000
6,000  		By Balance b/d
By P/L Appr. a/c		 12,000
4,000 
16,000  16,000 
By balance b/d 6,000 
From additional information - 2.

Assumption :

1. The balancing figure represents the depreciation charged to profits in the current period.

Dr Building Sale a/c Cr
Particulars Amount Particulars Amount
To Building a/c
To P/L Appr. a/c		 1,00,000
20,000  		By Res. Depr. Bldg a/c
By Bank a/c		 10,000
1,10,000
1,20,000  1,20,000 
From additional information - 2.

Assumption :

1. The balancing figure represents profit on sale of building included in profits during the current period.

Land

Dr Land a/c Cr
Particulars Amount Particulars Amount
To Balance b/d
To Reserve a/c
To Bank a/c (?)		 3,50,000
20,000
2,70,000  		By Bank a/c
By Balance c/d		 1,70,000
4,70,000 
6,40,000  6,40,000 
To Balance b/d 4,70,000 
From additional information - 3.

Assumption :

1. The balancing figure represents value of land purchased during the current period for a consideration in cash or other current asset.

Investments

Dr Investments a/c Cr
Particulars Amount Particulars Amount
To Balance b/d
To P/L Appr. a/c		 2,20,000
24,000  		By Bank a/c
 2,44,000
 
2,44,000  2,44,000 
 
From additional information - 4.

Preliminary Expenses

Dr Preliminary Expenses a/c Cr
Particulars Amount Particulars Amount
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 

Assumption :

1. The balancing figure represents value of preliminary expenses written off to profits during the current period.

Solution » Working Notes - Funds from Operation

We have to ascertain funds from operations to prepare the funds flow statement.

To ascertain funds from operations, prepare a ledger account by name ... Profit and Loss Appropriation account. Sometimes we may find this account in the balance sheet, in which chase, use that account here for finding the funds from operations.

After preparing the altered non-current accounts, look out for the postings by name "To P/L Appr. a/c" or "By P/L Appr. a/c" and complete the postings in the "Profit and Loss Appropriation account".

The balancing figure in that account would be the Fund From Operations. If the balancing figure appears on the credit side it represents a source and if it appears on the debit side it represents an application of fund.

Dr Profit and Loss Appropriation a/c Cr
Particulars Amount Particulars Amount
To Reserve a/c
To Profit and Loss a/c
To Goodwill a/c
To Reserve for Depreciation
    on Plant and Machinery
To Machine Sale a/c
To Depreciation on Furniture
To Reserve for Depreciation
    on Building
To Preliminary Expenses 		30,000
2,50,000
50,000

20,000
8,000
44,000

4,000
2,000  		By Building Sale a/c
By Investments a/c
By Funds From Operations (?)		 20,000
24,000
3,64,000
4,08,000  4,08,000 
 

Since the Funds From Operations appears on the credit side, it represents a Source of Funds.

Statement Method

Statement for Calculation of Funds from Operations
Particulars Amount Amount
Current Period Profit Capitalised
Add: Losses/Appropriations debited to Profit/Loss a/c
1) Reserve created
2) Goodwill written off
3) Reserve for Depreciation on Plant and Machinery
4) Loss on Sale of Machine
5) Depreciation on Furniture
6) Reserve for Depreciation on Building
7) Preliminary Expenses Written off


30,000
50,000
20,000
8,000
44,000
4,000
2,000  		2,50,000







1,58,000 
Less: Gains and Adjustments credited to Profit/Loss a/c
1) Profit on Sale of Building
1) Profit on Sale of Investments

20,000
24,000  		4,08,000

44,000 
Funds From Operations 3,64,000 

Since the Funds From Operations is positive, it represents a Source of Funds.

You may use a method that is convenient to you. We recommend that you know both the methods.

Solution » Funds Flow Statement - Statement Form

To prepare the funds flow statement, we only need the information relating to the non-current ledger accounts and the funds from operations.

In the non-current ledger accounts prepared, all postings of Bank/Cash (or any other current natured accounts) on the

  • Credit side represents sources/inflows of funds
  • Debit side represents applications/outflows of funds
Collect that information and fill it in the statement to make up the funds flow statement.

Funds Flow Statement of M/s BROYHILL Industries Ltd,
for the period from 31/12/05 to 31/12/06
Particulars Amount Amount
a) 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) Investments Sale
8) Land Sale
9) Funds from Operations

50,000
3,00,000
2,00,000
5,00,000
1,20,000
1,10,000
2,44,000
1,70,000
3,64,000 








20,58,000
b) Applications (Outflow) of Funds
1) Purchase of Plant and Machinery
2) Purchase of Furniture
3) Purchase of Buildings
4) Fixed Deposits Cleared
5) Purchase of Land

8,30,000
44,000
4,50,000
2,00,000
2,70,000 




17,94,000 
Change in Working Capital [a - b] + 2,64,000 

Since the Net change is positive, there is an increase in Working Capital (Fund)

Cross Check

The change in working capital as shown by the "Statement of Chanes in Working Capital" and the "Funds Flow Statement" should be the same.

Solution » Funds Flow Statement - T Form

Statement of Sources and Applications of Funds for the period from __ to __
Sources/Inflows of Funds Amount Applications/Outflows of Funds Amount
Share Capital (Stock)
Share Capital (Cash/Bank)
Debentures
Bank Loan
Plant Sale
Building Sale
Investments Sale
Land Sale
Funds from Operations 		50,000
3,00,000
2,00,000
5,00,000
1,20,000
1,10,000
2,44,000
1,70,000
3,88,000  		Purchase of Plant and Machinery
Purchase of Furniture
Purchase of Buildings
Fixed Deposits Cleared
Purchase of Land 		8,30,000
44,000
4,50,000
2,00,000
2,70,000 
20,58,000  17,94,000 
Change in Fund (Working Capital) 2,64,000 

Since the Sources/inflows are more, there is a Net increase in Fund (Working Capital)

... 1314
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