ADVANTAGES OF PREPARING FUND FLOW STATEMENT - Accounts and Finance for Managers

Structured analysis on the Working capital of a firm:

It is the only statement to study the changes in the working capital in between two different periods from the balance sheet of a firm through structured analysis on the basis of working capital position.

Illustrative Statement of Financing
It is a statement which highlights the role of various kinds of financing not only in the dimension of project development and expansion but also growth rate of the organization.

Advantages of Funds Flow Statement

To fulfil the Primary Objective of the Financial Management

It not only elucidates the mode of financing but also the application of resources after raising. It answers to the following queries viz:

  • How the outsider's liabilities are redeemed?
  • What is the role of the fund from operation generated?
  • How the raised funds applied into business?
  • How the decrease in working capital was applied?
  • What is the mode of raising of financial resources for an increase in the working capital?

Facilitation through Financial Planning

The projected fund flow statement from the past performance facilitates the firm to anticipate the future requirement of financial resources. It guides the management to prioritize the application in the future to the tune of scarce resources.

Guide to Working Capital Management

It acts as a guide to the management to maintain the working capital at optimum level through either purchase or sale of marketable securities during the periods of adequate and inadequate working capital respectively.

Indicator of Yester Track Path of the Firm

The insight on the financial performance of the firm can be had by the lending institutions through fund flow statement at the time of extending financial assistance to the firm.

Limitations:

  • It is an extension of financial statements but it cannot be leveled with the emphasis of them.
  • It is not a resultant of the transaction instead it is an arrangement of among the available information.
  • Projected fund flow statement ever only to the tune of financial statements which are historic in feature.

Illustration

Form the following details prepare a statement showing changes in working capital during 1985:

changes in working capital during 1985

The first step is to prepare the schedule of changes in working capital.

schedule of changes in working capital

Illustration

From the following two balance sheet as at December 31, 2004 and 2005. Prepare the statement of sources and uses of funds.

two balance sheet as at December 31, 2004 and 2005

The first step is to prepare the schedule of changes in working capital.

schedule of changes in working capital.

The next step is to prepare the non current accounts of the firm.

non current accounts of the firm

Next non-current account item is the share capital account in the liability side.

The closing balance of the share capital is more than that of the opening balance which means that the firm has undergone the issue of further more share capital.

During the issue of share capital, the cash resources are raised by the firm through the sale of shares.

share capital

Then the next step is to prepare the adjusted profit and loss account to determine the fund from the operations

adjusted profit and loss account

The next step is to prepare the fund flow statement of the firm

fund flow statement of the firm

Illustration

From the following relating to Panasonic ltd., prepare funds flow statement.

prepare funds flow statement

Additional information:

  • The company issued bonus shares for Rs.1,00,000 and for cash Rs.1,00,000
  • Depreciation written off during the year Rs.30,000

The first step is prepare the statement of changes in working capital

Schedule of changes In working capital

Schedule of changes In working capital

The next step is to prepare the non - current account
First non-current asset account should have to be prepared

Fixed assests A/c

The next non-current account is that non-current liability which is nothing but Share capital.

Shared capital A/c

And another non current account is to be prepared that General reserve account

General reserve account

The next step is to prepare the Adjusted Profit & Loss A/c

Adjusted Profit

The next step is to prepare the fund flow statement of the enterprise

fund flow statement of the enterpris

Illustration

Balance sheets of M/s Black and White as on 1-1-1986 and 31-12-1986 were as follows:

Balance sheets of M/s Black and White

Additional information

During the year machine costing Rs.10,000 (accumulated depreciation Rs.3,000) was sold for Rs.5,000 . The provision for depreciation against machinery as on 1-1-1986 was Rs.25,000 and on 31-12-1986 Rs.40,000 Net profit for the year 1986 amounted to Rs.45,000. You are required to prepare funds flow statement (M.Com MKU April 1980).

The very first step is to prepare the statement of changes in working capital

Changes in working capital in between the various current assets and current liabilities are as follows:

Statement of changes in working capital

The next step is to determine the cost of the machinery before the charge of depreciation i.e., to find out the Gross value of the assets, in other words Original cost of the assets to be found out at the moment of purchase.

The ultimate aim is to find out the original cost of the machinery for the preparation of the machinery account:

machinery for the preparation of the machinery account:

Before preparing the Machinery account, the worth of the sale transaction of the machinery should be found out .

Advantages

Machinery A/c

The next one is the provision for depreciation account or Accumulated depreciation account.

Accumulated depreciation account.

Adjusted profit and loss account

Fund Flow Statement

Illustration

From the following balance sheets of A Ltd on 31st Dec, 1982 and 1983, you are required to prepare Fund flow statement

The following are additional information has also been given

  • Depreciation charged on plant was Rs.4,000 and on building Rs.4,000
  • Provision for taxation of Rs.19,000 was made during the year 1983
  • Interim Dividend of Rs.8,000 was paid during the year 1983

Balance sheet

The first step is to prepare the Statement of changes in the working capital.

Statement of changes in the working capital.

The next step is to prepare the non current accounts.

First, Non current asset account to be prepared.

The first non-current asset account is Building account

Building accounts

The next non- current asset account is Plant account

Plant account

The next non-current asset account is Investments account

Investments account

The next one is the non-current liability account

General Reserve account

The next non-current liability account is Provision for taxation account

Provision for taxation account

The next step is to prepare the Adjusted profit and loss account

Adjusted profit and loss account

The next step is to prepare the fund flow statement.

prepare the fund flow statement


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