Ascertaining Cross transactions by comparing Balance Sheet figures

A preliminary conclusion with regard to cross transactions can be drawn by a simple comparison of the balance sheet figures pertaining to non-current accounts.

A change in the non-current account balance is an indication of a flow. Based on the following logic we can identify whether the change indicates an inflow or outflow.

Non-Current Asset

increase - outflow

Assets increase when we acquire them. We employ funds/capital in acquiring assets. There would be an outflow of funds on account of employing funds for acquisition.

We can assume an outflow of funds when there is an increase in the value of non-current assets.

decrease - inflow.

Assets decrease when we dispose (assume sale) them. Disposal of assets would bring in sale proceeds which can be used (as capital) for acquiring other assets or for disposing liabilities. There would be an inflow of funds on account of disposal of assets.

We can assume an inflow of funds when there is a decrease in the value of non-current assets.

Non-Current Liability

increase - inflow

Liabilities (assume loan) increase when we take up new ones. We get funds by taking up new/additional liabilities. There would be an inflow of funds on account of such new/enhanced liabilities.

We can assume an inflow of funds when there is an increase in the value of non-current liabilities.

decrease - outflow.

Liabilities decrease when we clear them. We employ funds/capital to clear liabilities. There would be an outflow of funds on account of clearing liabilities.

We can assume an outflow of funds when there is a decrease in the value of non-current liabilities.

From the above balance sheet, we can identify the inflows and outflows

Statement of changes in Non-Current Accounts
Account	Balance as on 31^st Dec		Change		Type	Result
Account	2004	2005	Amount	Direction	Type	Result
Share Capital P/L Appropriation account Long Term Loans Machinery Land	10,000 5,000 6,000 3,000 4,000	15,000 8,000 4,000 5,000 4,000	5,000 3,000 2,000 2,000 -	Increase Increase Decrease Increase No Change	Liability Liability Liability Assets Assets	Inflow Inflow outflow outflow No Flow

Limitations

Such assumptions just based on the balance sheet amounts would be possible only in the absence of any other information to the contrary.

When there is other information available the changes have to be analysed taking that information also into consideration. In such cases the alternate method is the one to be followed for identifying cross transactions.

Note

You will have a better understanding of how to deal with the Profit and Loss appropriation account after getting aware of the idea of funds from operations.

For now, consider it as just another non-current liability.

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