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November 2012

Bachelor of Computer Application (BCA) – Semester 3

BC0044 – Accounting and Financial Management – 4 Credits

(Book ID: B0805)

Assignment Set – 1

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1. Journalise the following transactions:

01.01.09 Bought goods for Rs. 10000

02.01.09 Purchased goods from X Rs. 20000

03.01.09 Bought goods from Y Rs. 30000 against a current dated cheque

04.01.09 Purchased goods from Z [price list is Rs. 30000 and trade discount is 10%]

05.01.09 Bought goods of the list price of Rs. 125000 from m less 20% trade discount and 2% cash discount. Paid 40% of the amount by cheque

06.01.09 Returned 10% of the goods supplied by X

07.01.09Returned 10% of the goods supplied by Y

Ans.Journal Entries

Date Particulars Debit Credit01.01.09 Purchase A/c Dr.

To Cash A/c10000

1000002.01.09 Purchase A/c Dr.

To X A/c20000

2000003.01.09 Purchase A/c Dr.

To Bank A/c30000

3000004.01.09 Purchase A/c Dr.

To Z A/c To Discount Received A/c

30000270003000

05.01.09 Purchase A/c Dr. To Bank A/c To M A/c To Discount Received A/c

123000392005880025000

06.01.09 X A/c Dr. To Purchase Return A/c

200020000

07.01.09 Y A/c Dr. To Purchase Return A/c

30003000

1. Explain errors of omission and errors of commission.Ans. There are certain errors which will disturb the Trial Balance in the sense that the Trial Balance will not agree. These errors are easy to detect and their rectification is also simple. For example, if the debit column total of the Trial Balance exceeds the credit column total, the possibilities may be a casting error in any account, posting of a wrong amount and a balancing error. These errors are easy to detect and you can, within a short time, arrive at an agreed Trial Balance. In the era of advanced information

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technology, when you will be using software packages for accounting purposes, the possibility of these types of errors and consequently, a disagreed Trial Balance is nil.

However, there are certain errors which are not detected through a Trial Balance. In other words, a Trial Balance would agree in spite of these errors. These errors are very difficult to detect because you will not be aware of such errors. The examples of such errors are errors of principle, errors of omission, errors of commission, compensating errors, etc. An error committed because of lack of knowledge of the basic accounting principles is called an error of principle. For example, wages paid for installation of machinery is debited to Wages Account instead of Machinery Account. If a transaction is not recorded in the journal, it will not be reflected in the ledger and subsequently, in the Trial Balance. This is an error of omission. If the amount received from Mr. X is wrongly posted in the account of Mr. Y, an error of commission has occurred. Finally, if the effect of one error is set off by another error, then it is a case of a compensating error. For example, if the Sales Account is undercast by Rs.10,000 and say, the salary account is also undercast by the same amount, these errors get cancelled and hence will not affect the Trial Balance.

Rectification of ErrorsRectification of errors depends on the stage at which the errors are detected. There are mainly two stages in the accounting process when errors can be detected:Stage 1: Before preparation of the Trial Balance.Stage 2: After the Trial Balance but before preparation of the final accounts.

Stage 1: Before preparation of the Trial BalanceAs the Trial Balance is not prepared it implies that the ledger balances are not drawn, i.e., account is not closed. So, it becomes easy to rectify errors detected at this stage. There can be two types of errors.(a) An error affecting only one account or more than one account in such a way that no journal entry is possible for its rectification;(b) An error affecting two or more accounts in such a way that a complete journal entry can be passed for its rectification.

In case of type (a) errors, we have to go to the relevant account(s) and put the figure on the right side of the account. No journal entry is necessary.

2. Goods returned by the customer Mr. X of R 5,650 has been posted in the Return Inward Account as Rs.5,560 and in Mr. X A/c. as Rs.6,550. Mr. X’s AccountDr. Cr.Date Particulars JF Amount (Rs.) Date Particulars JF Amount (Rs.)

To Rectification(6,550 – 5,650)

900

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Return Inward Account

Dr. Cr.Date Particulars JF Amount (Rs.) Date Particulars JF Amount (Rs.)

To Rectification(5,650- 5,560) 90

In case of type (b) errors rectifications will be done with the help of a journal entry. Here, please note that rectification entries are passed in the Journal Proper.Example1. Cash received from Ram posted to Shyam account Rs.7,000. Here both Ram’s and

Shyam’s accounts are affected by an equal amount. The rectification entry to be passed will be:

Shyam’s Account Dr. 7,000To Ram’s Account 7,000(Cash received from Ram wronglyCredited to Shyam, now rectified)

2. Salary paid Rs.6,000 has been posted to Rent accountThe rectification entry will be:Salary Account Dr. 6,000To Rent Account 6,000(Salary paid wrongly debited to Rent Account, now rectified)

3. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s Account.Here although both Jadu’s and Madhu’s accounts are affected, a journal entry is not possible for rectification because the error is on the same side of both the accounts. In order to rectify the error both Jadu’s and Madhu’s accounts are to be credited. So, to rectify the error we have to straightway open the ledger accounts:

Jadu’s AccountDr. Cr.Date Particulars JF Amount (Rs.) Date Particulars JF Amount (Rs.)

By Rectification 8,640

Madhu’s AccountDr. Cr.

Date Particulars JF Amount(Rs.)

Date Particulars JF Amount(Rs.)

By Rectification 8,640

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Stage: 2 After the trial but before the final accountsOnce the Trial Balance is prepared, all ledger balances are drawn. In that case, to rectify any error, it should be done in such a way that the Trial Balance agrees. In other words, if an account is to be debited for rectification, another account has to be credited by the same amount. Otherwise, the Trial Balance will not tally. This is possible only if the rectification is done with the help of journal entries.So far as type (b) errors of stage 1 are concerned, the process of rectifying the errors is exactly the same in stage 2 as well. The same journal entries are to be passed. The difficulty arises with type (a) errors of stage 1. This is because type (a) errors do not have necessary information to complete a journal entry. You may note here that type (a) errors are of such a nature that the Trial Balance will not agree if there exist such errors. Thus, if you are in a hurry and your Trial Balance is not tallying, you can put the difference to an artificial account created temporarily and make the Trial Balance tally. Such an artificial account is called the Suspense Account. The existence of the ‘Suspense Account’ in the Trial Balance implies that there exist type (a) errors.Once type (a) errors are detected, these are to be rectified by passing journal entries and, upon rectification of all such errors, the Suspense Account will be automatically eliminated from the Trial Balance. The technique for passing journal entries in these cases is to put the Suspense Account to fill in the unknown side or the difference in amount.Example1. Purchase Account undercast by Rs.1,500Here we have only one account, i.e., purchases account. But to complete the journal entry, we need at least two accounts. The unknown side will be taken care of by the Suspense Account. Thus, the rectification entry will be:Purchases Account Dr. 1,500To Suspense Account 1,500Cash received from Ram Rs.650 was debited in his account.Here, Ram’s account should have been credited. But erroneously, his account has been debited. To rectify the error, his account should be credited by double the amount – one for setting off the error and the other for making the correct entry. Thus, the rectification entry will be:Suspense Account Dr.1,300To Ram’s Account 1,300

2. From the following balances extracted from Trial balance, prepare Trading Account. The closing stock at the end of the period is Rs. 56,000

Particulars Amount in Rs. Stock on 1-1-2004 70700

Returns inwards 3000

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Returns outwards 3000

Purchases 102000

Debtors 56000

Creditors 45000

Carriage inwards 5000

Carriage outwards 4000

Import duty on materials received from abroad

6000

Clearing charges 7000

Rent of Business shop 12000

Royalty paid to extract materials 10000

Fire insurance on stock 2000

Wages paid to workers 8000

Office salaries 10000

Cash discount 1000

Gas, electricity and water 4000

Sales 250000

Ans.Trading Account

Particulars Amount (Rs.) Particulars Amount (Rs.)To Opening Stock 70700 By Sales 250000

To Purchases102000 Less Return

Inwards3000 247000

Less Returns Outwards 3000 99000 By Closing Stock 56000

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To Carriage Inwards 5000

To Wages 8000

To Fire Insurance on stock

2000

To Gas, Electricity and Water

4000

To Import duty 6000

To Clearing charges 7000

To Royalty paid to extract materials

10000

To Gross Profit 91300

303000 303000

3. Why wealth maximization is superior to profit maximization?Ans. The firm’s investment rationale and financing decisions are continuous. It is generally agreed that the financial goal of the firm should be the maximization of the owners’ economic welfare. The owners’ economic welfare can be maximized by maximizing the shareholders’ wealth as reflected in the market value of shares. Profit maximization and wealth maximization are two important aspects.

Profit Maximization: Profit maximization means increasing the rupee income of firms. Pricing of goods is a very important function and is determined by the type of economy in which the firm is functioning. This may be done by market competitive forces if the economy is a market economy and by Government in a Government -controlled economy. Firms in a market economy can function the best only if they produce goods and services desired by the customers and prices are as competitive as possible for the customers to have a wide choice of products available at very competitive prices. It is generally held that under conditions of free competition, businessmen pursuing their own self-interests also serve the interest of society. When individual firms pursue the interest of maximizing the profits, society’s resources are efficiently used.

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The profit maximization objective has been criticized in recent years. This objective developed in the early 19th century when private property, self-financing and single entrepreneurship were the order of the day. With the passage of time, businesses have had a complete change-over and now there is a divorce between ownership and management. Today’s corporates are financed by shareholders and lenders but are run by professional managers. In reality, the objectives of these two constituents – owners and managers may conflict with each other. In the present circumstances, profit maximization is regarded as unrealistic and difficult.

An alternative to profit maximization is the objective of wealth maximization which is discussed below.

Wealth Maximization: This is also known as value maximization and net present worth maximization. Shareholders’ Wealth Maximization (SWM) is an appropriate an operationally feasible criterion to choose among the alternative financial actions. SWM is the maximization of the net present value or wealth of a course of action to shareholders. A financial action that creates wealth for shareholders is desirable. The benefits are measured in terms of cash flows. In investment and financing decisions the flow of cash is important and not the accounting profits.

Increasing the shareholders’ economic welfare is equal to increasing the utility of their consumption over time. The wealth created by the company is echoed in the market value of company’s shares which in other words is a reflection of the firm’s financial decisions.

Other Objectives

Besides the above objectives, there are other objectives of financial management. These include:

Ensuring operational efficiency by efficient and effective utilization of finances and other resources.

Ensuring financial discipline in the management. Building reserves for growth and expansion.

4. Following are the extracts from the Trial Balance of a firm as on 31 March 20X7

Dr. Cr.Sundry Debtors 205000

Provision for Doubtful Debts10000

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Provision for Discount on Debtors 1800

Bad Debts 3000

Discount 1000

Additional Information:1. Additional Bad Debts required Rs. 40002. Additional Discount allowed to Debtors Rs. 10003. Maintain a provision for bad debts @10% on debtors4. Maintain a provision for discount @ 2% on debtorsRequired: Pass the necessary journal entries and show the relevant accounts including final accounts.

Ans. Journal entries as on 31 March 20X7

Particulars Debit CreditBad Debts A/c Dr.To Sundry Debtors A/c

40004000

Provision for Doubtful Debts A/c Dr.To Bad Debts A/c

70007000

P & L A/c Dr.To Provision for Doubtful debts A/c

1710017100

Provision for Discount A/cTo Discount on Debtors A/c

10001000

P & L A/c Dr.To Provision on Doubtful Debts A/c

28182818

Provision for Doubtful Debts A/c

Particulars Amount Particulars AmountTo Bad Debts A/c 7000 By Bal b/d 10000

To Bal c/d 20100 By P & L A/c 17100

27100 27100

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Provision for Discount on Debtors A/c

Particulars Amount Particulars AmountTo Discount on Debtors A/c 1000 By Bal b/d 1000

To Bal c/d 3618 By P & L A/c 2828

4618 4618

Bad Debts A/c

Particulars Amount Particulars AmountTo Bal b/d 3000 By Provision for Doubtful Debts A/c 7000

To Sundry Debtors 4000

7000 7000

Calculation of Provision required Debtors as per Trial Balance 205000Less Additional Bad Debts - 4000

20100010% on 201000 = 20100

Opening Balance in Provision Account 10000Less Bad Debts w/o - 7000

3000

Provision needed 201000Therefore Provision required to be made 20100-3000 = 17100

Calculation of Provision of Discount Debtors as per Trial Balance 205000Less Additional bad Debts - 4000

201000

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Less Additional Provision - 20100 180900

2% of 180900 = 3618

Profit and Loss Account

Particulars Amount Particulars AmountTo Bad Debts 3000

+New Bad Debts 4000

+New R .D.D 20100

27100

-Old R.D.D -1000017100

Discount as per Trial Balance 1000

+New Provision 3618

4618

-Old Provision 1800

2818

Balance Sheet

Particulars Amount Particulars AmountCurrent AssetsSundry Debtors 205000

-Bad Debts-4000

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-R.D.D-20100

180900 -Reserve for Discount on Debtors -3618

177282

February 2011

Bachelor of Computer Application (BCA) – Semester 3

BC0044 – Accounting and Financial Management – 4 Credits

(Book ID: B0805)

Assignment Set – 2

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1. What is over capitalization? How do we know overcapitalization has occurred?Ans. Over-capitalizationOver-capitalization arises when the present capital of the company is not effectively or properly used. There is excess capital available in the company than the actual requirement. A firm is said to be over-capitalized when its earnings are not sufficient to pay dividends to the investors. For example, if the company’s rate of return is 12% and it earns a profit of Rs. 100000 on an investment of Rs. 1200000, we get the fair rate of return to be less than the profits earned. Fair rate of return is 1200000*12% which is Rs. 144000. The company is earning less than the fair return in the industry. The company is said to be over-capitalized because the earning of the company is (100000/1200000)*100 which is 8.33% and this is less than the fair rate return of the industry.

How do we know over-capitalization has occurred?

Actual capitalization of the company exceeds the capitalization warranted by the activity levels.

Earnings are lower than the expected returns. There is a fall in the rate of dividends declaration. There is a fall in the market value or the market price of the shares of the company.

Causes of over-capitalization:

If a company acquires assets at inflated prices than the book values, over-capitalization occurs.

Acquiring unproductive assets, mostly intangible in nature like goodwill, patents, etc. High initial costs by way of preliminary expenses.

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A company being set up in boom time pays more on acquisition of assets. Once the boom time subsides, it will find the capital over capitalized.

Raising more capital than the required amount. Company borrows money at high rates of interest than the moneys could be put into

profitable use. A company postponing plant repairs and maintenance will find itself over-capitalized

as the efficiency of the plant stands reduced. Excessive taxation by government leaves very little money with the company. The

money may be insufficient to meet its daily requirements and the company may resort to borrowings. Borrowing beyond a certain limit leads to over-capitalization

Effects of over-capitalization Fall in profits Fall in dividend rates Loss of investors’ confidence Fall in market prices of shares.

2. Explain permanent and temporary working capital.

Ans. Working capital management involves managing the different components of current assets and current liabilities. It is an effort to try to maintain a healthy relationship between these two so that a satisfactory level of working capital is maintained. It is very important for a firm to maintain a satisfactory level of working capital, otherwise there are chances of the firm becoming insolvent and going bankrupt. The interface between CA and CL is therefore very important and forms the main subject under working capital management.

Permanent and Temporary Working Capital:Permanent working capital is the minimum investment in the form of inventory of raw materials, work-in-progress, finished goods, stores and book debts to facilitate uninterrupted operations in a firm. This minimum level is called the permanent or fixed working capital. It is permanent like the firm’s fixed assets are. Over and above this, the firm’s working capital requirements fluctuate depending upon the cyclicality and seasonality of product demands. This is referred to as the variable or fluctuating or temporary working capital. These two aspects can be graphically shown as follows:

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3A. What are the assumptions of EOQ Model?Ans. Economic Order Quantity (EOQ)EOQ refers to the optimal order size that will result in the lowest ordering and carrying costs for an item of inventory based on its expected usage. Answers to questions such as: What should be the quantity ordered for each replenishment of stock, how many orders should be placed to get the raw materials or should the entire requirement be procured once or in installments and if installments, how many of them – these are sought to be explained by the EOQ model. The optimum level of inventory is referred to as the Economic Order Quantity. It is the economic lot size. EOQ is defined as that level of inventory order that minimizes the total cost associated with the inventory management. It is that level one unit beyond which is additional cost to the firm and one unit below may hamper production process. The model is based on the following assumptions; nevertheless, it is the most widely used technique in inventory control.Constant or uniform demand: The firm knows with certainty the annual consumption of a particular item of inventory. Constant unit price: The EOQ model is based on the assumption that the per unit price of material does not change and is constant irrespective of the order size.

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Constant carrying costs: Unit carrying costs are known to vary substantially as the size of inventory increases or decreases. Firms derive economies of scale by increasing order size. However, the EOQ model assumes the carrying costs to be constant. Constant ordering costs: Ordering costs are assumed to be constant whatever the number of orders are and whatever the size is.

B. Consider the following data of X Ltd. Calculate EOQ Annual Usage = 10000 units Fixed cost per order= Rs. 150 Purchase price per unit= Rs. 20 Carrying cost= 25%Ans. EOQ = sqrt2 x A x S/CA = Annual UsageS = Ordering CostC = Cost of carrying inventory per unit per annumAnnual Usage = 10000 unitsCost per order = Rs.150Carrying Cost = 25%Purchase price per unit = Rs.20

EOQ = sqrt2 x 10000 x 150/5EOQ = sqrt2 x 1500000/5EOQ = sqrt2 x 300000EOQ = sqrt600000EOQ = 774.59Note: (C = 20 x 25% = 5)

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4. Explain the objectives of cash managementAns. Cash ManagementCash is the most important current asset for a business operation. It is the force that drives business activities and also the ultimate output expected by the owners. The firm should keep sufficient cash at all times. Excessive cash will not contribute to the firm’s profits and shortage of cash will disrupt its manufacturing operations. The term ‘cash’ can be used in two senses – in a narrow sense it means the currency and other cash equivalents such as cheques, drafts and demand deposits in banks. In a broader sense, it includes near-cash assets like marketable securities and time deposits in banks. The distinguishing nature of this kind of asset is that they can be converted into cash very quickly. Cash in its own form is an idle asset. Unless employed in some form or another, it does not earn any revenue.Cash management is concerned with (a) management of cash flows into and out of the firm, (b) cash management within the firm and (c) management of cash balances held by the firm – deficit financing or investing surplus cash. Cash management tries to accomplish at a minimum cost the various tasks of cash collection, payment of outstandings and arranging for deficit funding or surplus investment. It is very difficult to predict cash flows accurately. Generally, there is no correlation between inflows and outflows. At some points of time, cash inflows may be lower than outflows because of the seasonal nature of product sale thus prompting the firm to resort to borrowings and sometimes outflows may be lesser than inflows resulting in surplus cash. There is always an element of uncertainty about the inflows and outflows. The firm should therefore evolve strategies to manage cash in the best possible way. These can be broadly summarized as:Cash planning: Cash flows should be appropriately planned to avoid excessive or shortage of cash. Cash budgets can be prepared to aid this activity Managing cash flows: The flow of cash should be properly managed. Steps to speed up cash collection and inflows should be implemented while cash outflows should be slowed down. Optimum cash level: The firm should decide on the appropriate level of cash balance. Balance should be struck between excess cash and cash deficient stage. Investing surplus cash: The surplus cash should be properly invested to earn profits. Many investment avenues to invest surplus cash are available in the market such as, bank short term deposits, T-Bills, inter corporate lending etc.The ideal cash management system will depend on a number of issues like, firm’s product, competition, collection program, delay in payments, availability of cash at low rates of interests and investment opportunities available.Motives of Holding CashObjectives of Cash Management:This can be studied under two heads: (a) meeting payments schedule and (b) minimize funds committed to cash balances.Meeting payments schedule: In the normal course of functioning, a firm will have to make many payments by cash to its employees, suppliers, infrastructure bills, etc. It will also receive cash through sales of its products and collection of receivables. Both these

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do not happen simultaneously. A basic objective of cash management is therefore to meet the payment schedule in time. Timely payments will help the firm to maintain its creditworthiness in the market and to foster good and cordial relationships with creditors and suppliers. Creditors give a cash discount if payments are made in time and the firm can avail this discount as well. Trade credit refers to the credit extended by the supplier of goods and services in the normal course of business transactions. Generally, cash is not paid immediately for purchases but after an agreed period of time. There is deferral of payment and is a source of finance. Trade credit does not involve explicit interest charges, but there is an implicit cost involved. If the credit terms are, say, 2/10, net 30, it means the company will get a cash discount of 2% for prompt payment made within 10 days or else the entire payment is to be made within 30 days. Since the net amount is due within 30 days, not availing discount means paying an extra 2% for 20-day period.The other advantage of meeting the payments in time is that it prevents bankruptcy that arises out of the firm’s inability to honour its commitments. At the same time, care should be taken not to keep large cash reserves as it involves high cost.Minimize funds committed to cash balances: Trying to achieve the second objective is very difficult. A high level of cash balances will help the firm to meet its first objective discussed above, but keeping excess reserves is also not desirable as funds in its original form is idle cash and a non-earning asset. It is not profitable for firms to keep huge balances. A low level of cash balances may mean failure to meet the payment schedule. The aim of cash management is therefore to have an optimal level of cash by bringing about a proper synchronization of inflows and outflows and check the spells of cash deficits and cash surpluses. Seasonal industries are classic examples of mismatches between inflows and outflows.

5. The income statement of Vignesh Ltd is as follows:

To Opening Stock 200000 By Sales 1200000 Purchases 800000 Closing Stock 100000

Direct Expenses 100000

Gross Profit 200000

1300000 1300000

To Admn Expenses 100000 By Gross Profit 200000

Selling Expenses 80000 Profit on sale of investments

60000

Non-Operating exp 40000 Dividends received 40000

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Net Profit 80000

3000000 300000

Calculate the Gross Profit Ratio, Net Profit Ratio, Operating Ratio, Operating Profit Ratio and Expense Ratio.Ans.Gross Profit Ratio = (Gross Profit/Net Sales) x 100

= (200000/1200000) x 100 = 16.67%

Net Profit Ratio = (Net Profit/Net Sales) x 100= (80000/1200000) x 100= 6.67%

Operating Ratio = (Cost of Goods sold + Operating Expenses)/Net SalesCost of Goods sold = Opening stock + Purchases + Direct Expenses – Closing

Stock = 200000 + 800000 + 100000 - 100000

= 1000000Operating Expenses = Administrative expenses + Financial Expens4es + Selling

expenses = 100000 + 80000 = 180000

Operating Ratio = (1000000 + 180000)/1200000 = 1180000/1200000 x 100 = 98.33%

Operating Profit Ratio = (Operating Net Profit/Net Sales) x 100 Operating Net Profit = Net Profit + Non-Operating Expenses – Non-Operating

Incomes = 80000 + 40000 - (60000 + 40000) = 120000 - 100000 = 200000

Operating Profit Ratio = (200000/1200000) x 100 = 1.67%

Expense RatioExpense Ratio = Operating Expenses/Net Sales x 100

= 1,80,000/ 12,00,000 x 100 = 15.00 %

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6. Explain the steps involved in Funds Flow Statement.Ans. Meaning of Fund Flow StatementFund may be interpreted in various ways as (a) Cash, (b) Total current assets, (c) Net working capital, (d) Net current assets. For the purpose of fund flow statement the term fund means net working capital. The flow of fund will occur in a business, when a transaction results in a change i.e., increase or decrease in the amount of fund.According to Robert Anthony, the Fund Flow Statement describes the sources from which additional funds were derived and the uses to which these funds were put.

Different Names of Fund-flow StatementA Funds Statement A statement of sources and uses of fund A statement of sources and application of fund Where got and where gone statement Inflow and outflow of fund statementObjectives of Fund Flow Statement

The main purposes of Fund Flow Statement are:1. To help to understand the changes in assets and asset sources which are not

readily evident in the income statement or financial statement.2. To inform as to how the loans to the business have been used.3. To point out the financial strengths and weaknesses of the business.

Format of Fund Flow Statement

Sources Applications

Fund from operation -Fund lost in operationsNon-trading incomes -Non-operating expensesIssue of shares -Redemption of redeemable preference shareIssue of debentures -Redemption of debenturesBorrowing of loans -Repayment of loansAcceptance of deposits -Repayment of depositsSale of fixed assets -Purchase of fixed assetsSale of investments -Purchase of long term instruments(Long Term)Decrease in working capital -Increase in working capital

Steps in Preparation of Fund Flow Statement1.Preparation of schedule changes in working capital (taking current items only).2.Preparation of adjusted profit and loss account (to know fund from [or] fund lost in operations).3.Preparation of accounts for non-current items (Ascertain the hidden information).

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4.Preparation of the fund flow statement.

Format of Schedule of Changes in Working CapitalParticulars Previous Year Current Year Increase in W/c Decrease in W/cCurrent AssetsCash in handCash at bankBills ReceivableDebtorsInventoryPrepaid expensesShort-term investment(A)TotalCurrent LiabilityBills payableCreditorsOutstanding expensesAccrued ExpensesIncome received in advanceBank overdraftCash credit from banksShort-term loanShort-term depositProvision for taxationProposed dividendProvision against current assets(B)TotalWorking Capital ©(C=A-B)Increase in W/CDecrease in W/CFund from operation can be ascertained by preparing adjusted profit and loss account. It may be prepared in statement form or account form.

Format of Adjusted Profit and Loss Account To Bal. B/d (P&L Account Dr. Bal.) By Bal. B/d(P&L account Cr. Bal.)To Non-operating expenses By Non-operating incomesTo Depreciation on fixed assets By Profit on sale of investmentTo Goodwill written-off By Profit on sale of Fixed assetTo Patent & trademark off By Dividend on investmentTo Preliminary expenditure By Interest on investment

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To Discount on issue of shares and By Rent received, gift received debenturesTo Loss on sale of investment By Damages received under lawTo Loss on sale of fixed assets By Transfer from general reserveTo Damages paid under lawTo Premium on redemption of profit share and debenturesTo Interim dividendTo Dividend declared(A)TotalTo ascertain the hidden information, we have to prepare accounts for all non-current items of assets and liabilities (whether adjustment is given or not) then only easier to find the inflow and outflow of funds.