chapter4.pdf

CHAPTER 4

STATEMENT OF CHANGES INFINANCIAL POSITION

LEARNING OBJECTIVES

After studying this chapter, youshould be able to : Explain the meaning of term

funds (working capital) and flowof funds;

State the meaning and need ofStatement of Changes inFinancial Position (SCFP);

Prepare Statement of changesin financial position onworking capital basis;

Explain the usefulness of SCFPand its limitations;

State the purpose andpreparation of statement of cashflows;

Distinguish between operatingactivities, investing activitiesand financing activities;

Prepare the statement of cashflows using direct method;

Prepare the statement of cashflows using indirect method;

Distinguish between Statementof Changes in Financial Position(SCFP) on working capital basisand statement of cash flows;

Analyse SCFP and statement ofcash flows.

The users of financial statements aremany times eager to find the answersto some of the following questions:

(1) How could company paydividends in excess of its currentprofits?

(2) Why dividends are not paidthough company earned higherprofit than previous year?

(3) Why have current assetsdecreased over the year whereasthe profits were higher?

(4) How the fixed assets werefinanced?

(5) How the proceeds from fresh issueof share/debenture were used?

Most often, investors areinterested to get answers to suchquestions Financial statementscommunicate about financialperformance and financial positionof an enterprise to the users of suchstatements. Though they are usefulto an investor but questions likeabove, remain unanswered. Forthis purpose, we need to prepareand analyse these statements.

ACCOUNTANCY158

Such statements are called Statement of Changes in Financial Position(SCFP) and Statement of Cash Flows(SCF). The chapter is divided intotwo sections first section deals with the preparation of statement ofchanges in financial position, whereas second section deals with thepreparation of cash flows.

4.1 Meaning

The term Funds has different interpretations. We can understand thisby a simple example of arguments between father and son over purchaseof a new computer system. Son is insisting on purchase of a newcomputer system and the father replies that he does not have funds topurchase the same. Here, father is referring to funds in the context ofcash required to buy the system. Thus, funds are taken in this case assynonymous for cash (on hand and at bank). The son argues that fundscan be arranged by taking loan against a fixed deposit with the bank orby sale of investment in shares. Now, funds used by son representsother resources held by his father, which could be converted into cash.However, in the context of statement of changes in financial position,the term Funds is used to represent net working capital. Net workingcapital represents that portion of current assets which is financedthrough long-term sources. Net working capital is, thus, computed bysubtracting current liabilities from current assets.

Net Working Capital = Current Assets Current Liabilities

Current Assets are cash and other assets that are expected to beconverted into cash or consumed in the process of operating mainactivities of the business, either in a year or operating cycle, whicheveris longer. The operating cycle is the average time required between theacquisition of materials and the realisation of cash through the sales ofproduct/service for which the materials were acquired. All assets otherthan current assets are called as non-current assets. Current assetsinclude stock/inventory, accounts receivable, bills receivable, prepaidexpenses, accrued revenue, short-term investment, cash on hand andat bank.

STATEMENT OF CHANGES IN FINANCIAL POSITION 159

Current Liabilities are those obligations which are expected to beliquidated usually out of existing resources, which are classified ascurrent assets or incurrence of other current liabilities within the periodof one year or operating cycle whichever is longer. Current liabilities areaccounts payable, bills payable, outstanding expenses, revenues,provision for taxation, etc.The Balance Sheet of a company is shown below categorizing the differentassets and liabilities into current and non-current components:

Format of Balance Sheet

Component-I Component-3

Equity and Non-Current Liabilities Fixed Assets

Share Capital Intangible AssetsReserve and Surpluses LandDebenture Plant and MachineryLong-Term Loans Long-term Investments

Components-2 Component-4

Current Liabilities Current Assets

Accounts PayableBill payable StockShort-Term Loans Accounts ReceivableAccrued Expenses Bills ReceivableRevenues Received in Advance Accrued RevenuesOther current Marketable SecuritiesLiabilities and Provisions Loan and AdvancesBank Overdraft Cash on hand and at Bank

Funds are to be computed by substracting the total of current liabilities (component 2)from the total of current assets (component 4)

Funds (Net Working Capital) = Current Assets Current Liabilities(Total of component 4) (Total of component 2)

Example 4.1Given below is the summarized balance sheet of Ram Rahim Ltd. as atMarch 31, 2002

ACCOUNTANCY160

Balance Sheet of Ram Rahim Ltd. as at March 31, 2002

2001 2002Rs. Rs.

Liabilities

Equity Share Capital 10,00,000 10,00,000

Reserve and Surpluses 3,18,000 5,44,600

10% Debenture 6,00,000 5,00,000

Accounts Payable 1,40,000 1,71,200

Bills Payable 54,400 72,800

Expenses Payable 18,600 27,800

21,31,000 23,16,400

Assets

Land 5,00,000 5,00,000

Building at cost 6,80,000 6,80,000Less Accumulated Depreciation 1,50,000 5,30,000 1,63,600 5,16,400

Plant and Machinery at cost 7,50,000 9,00,000Less : Accumulated Depreciation 2,50,000 5,00,000 3,25,000 5,75,000

Furniture 1,50,000 1,50,000Less : Accumulated Depreciation 15,000 1,35,000 30,000 1,20,000

Stock on hand 1,85,000 2,57,000

Accounts Receivable 192,000 2,25,000

Bills Receivable 43,000 38,000

Cash on hand 46,000 85,000

Total 21,31,000 23,16,400

Required : Analyse Current Assets and Current Liabilities of Ram Rahim Ltd.,as at March 31, 2001.

Solution

Current Assets : Stock Accounts Bills Receivables CashReceivable

= {Rs. 1,85,000 + 1,92,000 + 43,000 + 46,000}= Rs. 4,66,000

Current Liabilities : Account Bills payable Accrued ExpensesReceivable

{ Rs. 1,40,000 + 54,400 + 18,600 }= Rs. 2,13,000


Net Working Capital (as at 31.03.2001) = Rs. [4,66,000 2,13,000]= Rs. 2,53,000

Current Assets Stock Accounts Bills Receivable CashReceivable

= Rs.[2,57,000 + 2,25,000 + 38,000 + 85,000]= Rs. 6,05,000

Current Liabilities Account Bills Payable Accrued ExpensesReceivable

= Rs. (1,71,200 + 72,000 + 27,800)= Rs. 2,71,000

Net Working Capital (as on 31.03.2002) = Rs. [6,05,000 2,71,000]= Rs. 3,34,000

4.2 Flow of Funds

Flow refers to change or movement. Whenever a transaction takesplace, it affects the items contained in one or more of the components ofbalance sheet. If a transaction results in simultaneous increase ordecrease in current assets and current liabilities components or itdoes not result in any change in these components, it will not affectfunds of the business. On the other hand, if there is an increase ordecrease in one of these two components, then it results in flow offunds.

Equity and Non current Liabilities Non-Current Assets


+ -

+

+ -

+ -

+ -

+ -

+ -

+

Exhibit 4.1 : Transaction resulting in change in funds

ACCOUNTANCY162

Equity and Non-current Non-Current AssetsLiabilities


If a transaction results in net increase in current assets or net decrease incurrent liabilities, it is referred to as sources of funds. On the other hand, if atransaction results in net decrease in current assets or net increase in currentliabilities, it is referred to as uses of funds.

Example 4.2

Analyses the following transactions and ascertain the impact of these transactionson the working capital of the company :

(i) Goods purchased on cash

(ii) Paid amount due to creditors

(iii) Debenture issued for cash

(iv) Repaid bank loan (long-term)

(v) Sold old furniture for cash

Solution

Analysis of transactions and their effect on working capital(i) This transaction will result in increase in stock (current assets) and

decrease in cash (current assets) simultaneously with the same amount.Thus, it does not result in change in working capital or there is no flowof funds.

+

+

+

+

Exhibit 4.2 : Transactions not affecting funds


(ii) This transaction will decrease cash (current assets) and creditors (currentliabilities) simultaneously with the same amount. Thus, this transactiondoes not result in the change of working capital.

(iii) This transaction will result in increase in debenture (long-term) andincrease in cash (current assets) simultaneously. Thus, it will increasecurrent assets and results in change in working capital or flow offunds. It will increase the working capital, and therefore, is called asource of working capital.

(iv) This transaction will result in decrease in bank loan (non-currentliability) and decrease in cash (current assets) simultaneously. Thus,this will result in flow of working capital. It will decrease the workingcapital, and therefore, is called use of working capital.

(v) This transaction will result in decrease in furniture (fixed assets) andincrease in cash (current assets). Thus, this transaction results inflow of funds. Since, it results in increase in current assets, therefore,is called sources of funds.

4.2.1 Schedule of Changes in Net Working Capital

Schedule of changes in net working capital is a statement prepared to ascertainthe net change (increase or decrease) in working capital over a period of time.

We learned from the above analysis, (shown in example 4.2 and exhibits 4.1and 4.2), that transactions take place in a business can be categorised as :

(i) Transactions which result in change in net working capital, and

(ii) Transactions which do not result in change in net working capital.

The effect of all these transactions is reflected in the balance sheet of anenterprise. We need to analyse the changes in current assets and currentliabilities of an enterprise over the period (in the beginning and at the end ofthe year) to compute the net changes in working capital. The following statementis prepared to compute the net changes in working capital (increase or decrease)over a period of time.

ACCOUNTANCY164

Exhibit 4.3 : Schedule of Changes in Working Capital

Particulars Beginning of End of the Effect on Net Working capital

the period(0) Period (1) Increase in Decrease inWorking Capital Working Capital

Rs. Rs. Rs. Rs.

Current Assets C.A.(0)* C.A.(1)* C.A.(1) C.A (0)(increase in CurrentAssets)

C.A.(0)* C.A.(1)* C.A.(0) C.A.(1)(Decrease inCurrent Assets)

Current C.L.(0)* C.L.(1)* C.L.(0) C.L. (1)Liabilities (Decrease in Current

Liabilities)

C.A.(0)* C.L.(1)* C.A.(1) C.L.(0)(Decrease inCurrentLiabilities)

Net increase or Balancing or Balancing(decrease) in Figure FigureWorking Capital

Total Total

* C.A. (0) Current Assets at beginning of period

C.A. (1) Current Assets at end of period

C.A. (0) Current Liabilities at beginning of period

C.L. (1) Current Liabilities at end of period


Example 4.3

The Balance Sheet of Robert, Rakesh and Rehman Ltd. is given below :

Balance Sheet of Robert, Rakeshand Rehman Ltd. as at March 31, 2002

Particulas 2001 2002Rs. Rs. Rs. Rs.

AssetsLand 8,00,000 8,00,000

Building Cost 14,50,000 16,80,000Less : Accumulated 4,80,000 9,70,000 5,20,000 11,60,000 Depreciation

Plant and Machinery 18,75,000 19,95,000Less : Accumulated 6,80,000 11,95,000 7,85,000 12,10,000 Depreciation

Furniture 2,89,000 3,65,000Less : Accumulated 69,000 2,20,000 75,000 2,90,000 Depreciation

Stock 2,50,000 3,35,000

Accounts Receivable 3,45,000 3,40,000

Cash on hand and at bank 85,000 1,30,000

Total 38,65,000 42,65,000

Liabilities


Reserve & Surpluses 10,44,000 12,28,000

12% Debentures 5,00,000 7,00,000


Bills Payable 70,000 61,000


Total 38,65,000 42,65,000

Required : Prepare schedule of changes in working capital.

ACCOUNTANCY166

SolutionSchedule of changes in Working Capital of Robert, Rakesh and Rehman Ltd.

for the year ended March 31, 2002

2001 2002Amount Amount Amount AmountRs. Rs. Rs. Rs.

Particulars Increase in Net Decrease in Networking Capital working Capital

Current AssetsStock 2,50,000 3,35,000 85,000Accounts Receivable 3,45,000 3,40,000 5,000Cash Balance 85,000 1,30,000 45,000

Total 6,80,000 8,05,000

Current Liabilities

Accounts Payable 2,16,000 2,36,000 20,000Bills Payable 70,000 61,000 9,000Expenses Payable 35,000 40,000 5,000Net Increase inWorking Capital 1,09,000

Total 3,21,000 3,37,000 1,39,000 1,39,000

4.3 Statement of Changes in Financial Position

The schedule of changes in working capital reveals only the net changes in workingcapital over a period of time. This does not throw any light on how these changeshave taken place. For this purpose we need to prepare statement of changes infinancial position. Statement of changes of financial position shows the sourcesof working capital on one side and the application (uses) of working capital onthe other side of the statement. The difference between the two sides will revealnet increase/decrease in working capital.

4.3.1 Sources and Uses of Funds

When a transaction increases the current assets or decrease the current liabilities,it is called as a source of funds. When a transaction decreases the current assetsor increases the current liabilities, it is called application or use of funds. Sourcesand Uses of funds are depicted in figure 4.1.


Sources of net working capital

Net Working Capital

uses of working capital

(i)** (ii)** (iii)** (iv)** (v)**

1* 2* 3* 4* 5*

*Sources of Funds :

1. Sale of long-term assets2. Issue of shares3. Issue of debenture4. Long-term loans raised5. Funds from operation

**Uses of Funds :

(i) Purchase of long term assets(ii) Redemption and buy back of shares(iii) Redemption of debentures(iv) Repayment of long term loans(v) Payment of dividends(vi) Funds used for operations

(vi)**

Fig. 4.1

ACCOUNTANCY168

4.3.2 Preparation of Statement of Changes in Financial Position

Statement of changes in financial position is prepared by listing sources on leftside of the statement and the uses on the right side. The difference between thetwo sides reveal net increase/decrease in working capital. To determine the sourcesand uses of funds, the following steps are taken :

(i) Compute funds from operations

(ii) Analyse the changes in non-current assets and liabilities in the balance sheetin the beginning and at the end of the period with the help of additionalinformation provided to determine the net decreases in non-current assetsand net increases in non-current liabilities and equity, which or inflow offunds. The net decreases in non-current liabilities and equity, and increasesin non-current assets, which, represent outflow or uses of funds.

(iii) List all the sources on the left side of the statement and uses on the rightside of the statement.

(iv) The two sides are totalled and the difference between them is recorded onthe side which is shorter in order to make the totals equal. Write netincreases (if it appears on the right side) or decreases (if it appears on theleft side) in working capital. This must be equal to the amount of netincrease or decrease computed while preparing schedule of changes inworking capital.

4.3.3 Funds from Operation

The Profit and Loss account shows income generated from operation. Incomeis determined on the basis of revenue recognition and matching principle.Items included for determining income may or may not affect funds of theenterprise. Therefore, we need to adjust those items which affect the incomebut do not affect funds or may appear as sources or uses under any otherhead. Thus, such items need to be adjusted for computing funds from operation.Items deducted while computing income but which do not use working capitalare listed below :

Depreciation, Depletion and Amortisation of intangible assets;

Amortisation of discount on issue of debenture, preliminary expenses,deferred revenue expenditure;

Loss on sale of non-current assets.

Above items are added to the net income to arrive at funds from operation.


There are several items which are added to income, but these do not provideworking capital.

Gain from sale of non-current assets for the year which needs to besubtracted from the net income to arrive at funds from operations.

Sometimes, the net income for the year may not be given. But instead ofthis, profit and loss appropriation account balance in the beginning andat the end of the period are given. Thus, we need to start with the netchange in the two balances and also adjust the following items along withthe above items of adjustments :

(i) Transfer to general reserve(ii) Dividends proposed/declared

Example 4.4

Profit and Loss Account of Navroj Ltd. for the year ended March 31, 2002 isgiven below :

Profit and Loss Account of Navroj Ltd. for the year ended March 31, 2002

Particulars Amount Particulars Amount(Rs.) (Rs.)

Salaries 4,90,000 Gross profit 15,80,000

Depreciation 1,85,000

Preliminary expenses 12,000written-off

Rent 1,84,000

Interest 15,000

Commission 18,000

Administrative expenses 2,62,000

Selling and Distribution 2,54,000expenses

Insurance expenses 36,000

Net profit 1,24,000

Total 15,80,000 15,80,000

Required : Compute funds from operation.

ACCOUNTANCY170

Solution

Funds from Operation

Particulars Amount (Rs.)

Net profit for the year 1,24,000Add : Depreciation charged 1,85,000Preliminary expenses written-off 12,000

Funds from Operation 3,21,000

Example 4.5

Following items have been drawn from the balance sheet of Rangaswami MetalWorks Ltd. on at March 31, 2001 and 2002

As at As at31.03.2001 31.03.2002

Profit and Loss Appropriation (Cr.) 6,00,000 7,50,000

General Reserve(Cr.) 11,00,000 12,50,000

Goodwill (Dr.) 2,85,000 2,35,000

Preliminary Expenses (Dr.) 60,000 45,000

Accumulated Depreciation

on Fixed Assets (Cr.) 3,85,000 4,70,000

* Relevant items onlyThe dividend paid in June, 2002 were Rs. 1,50,000. During the year and

there were no purchase or sale of fixed assets.

Required : Compute funds from operation.

SolutionFunds from Operation

Particulars Amount (Rs.)

Increase in Profit and Loss Appropriation balance 1,50,000( 7,50,000-6,00,000)Add : Transfer to general reserve 1,50,000

Dividend paid 1,50,000

Net Income for the year 4,50,000

Add : Goodwill written-off 50,000Preliminary expenses written-off 15,000Depreciation written-off 85,000



4.3.4 Computation of Other Sources and Uses of Funds

The other sources of funds are issue of shares, debenture, raising long termloans, sale of fixed assets and long term assets. The uses of funds areredemption of shares, debenture, repayment of long term loans, purchase offixed assets and long term assets.

The information relating to issue or redemption of shares and about longterm loans will be available from the balance sheet in the beginning and at theend of the year. Any discount or premium on issue/redemption of shares anddebentures is given in the form of additional information. Similarly, the balancesof fixed assets and long term investments in the beginning and at the end ofthe year along with information relating to sale, or purchase and depreciationcharged on fixed assets is ascertained to compute the amount of purchases orsales of fixed assets and investments. The information available may be writtenin the accounts and missing figures can be ascertained, the following accountsmay be prepared to find out the missing information.

Fixed Assets Account

Dr. Cr.

Date Particulars Rs. Date Particulars Rs.

Opening Balance Sale of Assets Purchase of Assets (at cost)

Closing Balance

Total Total

Accumulated Depreciation on Fixed Assets AccountDr. Cr.


Accumulated depreciationwritten-off on Assets sold Balance b/f

Balance c/f Depreciation charged for Current year

Total Total

Fixed Assets Sold AccountDr. Cr.


Fixed Assets Accumulated depreciation

Bank (Amount realised on sale)

Gain on sale of assets or Loss on sale of assets

Total Total

ACCOUNTANCY172

Example 4.6

Balance Sheet of Zeal Ltd. as at March 31, 2002 is given below :

Balance Sheet of Zeal Ltd. as at March 31, 2002

Liabilities 2001 2002 Assets 2001 2002Amount Amount Amount Amount

(Rs.) (Rs.) (Rs.) (Rs.)

Equity Capital 10,00,000 15,00,000 Land 9,00,000 11,00,000

Reserve and 8,10,000 10,15,000 Buildings 16,50,000 26,00,000Surplus

10% Debenture 4,00,000 6,00,000 Accumulated (4,00,000) (7,00,000)Depreciation

Accounts Payable 3,20,000 2,90,000 Inventory 2,10,000 2,15,000

Outstanding Accounts 1,70,000 1,85,000Expenses 20,000 65,000 Receivable

Provision for Cash on hand 25,000 90,000taxation 20,000 30,000 Preliminary

Expenses 15,000 10,000

Total 25,70,000 35,00,000 25,70,000 35,00,000

Additional Information :

(i) A building costing Rs. 9,50,000 and land Rs. 2,00,000 was purchased forcash.

(ii) Equity share and debenture were issued for cash at par.

(iii) Dividend paid during the year were Rs. 3,00,000.

Required :

Prepare schedule of change in working capital, compute fund from operation,and prepared statement of changes in financial position.

Solution

Computation of Funds from Operation

Particulars Amount(Rs.)

Increase in Reserve and Surpluses(10,15,000 8,10,000) 2,05,000Dividends paid 3,00,000Preliminary Expenses written-off 5,000Depreciation Charged 3,00,000



Schedule of Changes in Working Capital of Zeal Ltd.for the year ended March 31, 2002

Particulars Increase in Decrease in2001 2002 Net Working Net Working

Capital CapitalRs. Rs.

Current Assets :Inventory 2,10,000 2,15,000 5,000Accounts Receivable 1,70,000 1,85,000 15,000Cash 25,000 90,000 65,000

Current Liabilities :

Accounts Payable 3,20,000 2,90,000 30,000Outstanding 20,000 65,000 45,000ExpensesProvision for Taxation 20,000 30,000 10,000Net increase in 60,000Working Capital

Total 1,15,000 1,15,000

Statement of Changes in Financial Position

Sources Amount(Rs.) Uses Amount(Rs.)

Funds from operation 8,10,000 Dividends paid 3,00,000Issue of Share 5,00,000 Purchase of land 2,00,000Issue of Debenture 2,00,000 Purchase of Buildings 9,50,000

Net increase in 60,000Working Capital

Total 15,10,000 15,10,000

Example 4.7

The balance sheet of Rohan Manufacturers Ltd. as at March 31, 2002 is givenhere :

ACCOUNTANCY174

Balance Sheet of Rohan Manufacturers Ltd. as at March, 31, 2002

Particulars 2001 2002Amount(Rs.) Amount(Rs.)

Liabilities

Equity Share Capital 20,00,000 20,00,000Reserve & Surpluses 6,00,000 8,60,00012% Debenture 5,00,000 7,00,000Accounts Payable 2,70,000 3,60,000Bills Payable 70,000 1,50,000Expenses Payable 45,000 30,000

Total 34,85,000 41,00,000

Assets

Goodwill 50,000Land 8,00,000 9,50,000Building Cost 11,85,000 14,55,000Less : Accumulated 2,85,000 9,00,000 3,25,000 11,30,000Machinery 1,95,000 2,45,000Less : Accumulated 45,000 1,50,000 75,000 1,70,000DepreciationInvestment 5,60,000 6,50,000Stock 4,90,000 5,30,000Accounts Receivable 2,80,000 3,10,000Bills Receivable 80,000 60,000Prepaid Expenses 25,000 40,000Cash at Bank 1,10,000 1,90,000Cash on Hand 40,000 70,000

Total 34,85,000 41,00,000

The following additional information is provided :

(i) A piece of machinery costing Rs. 50,000 (accumulated depreciationRs. 10,000) was sold for Rs. 36,000.

(ii) During the year dividends were paid for Rs. 2,00,000.

Required

Prepare schedule of changes in working capital and statement of changes infinancial position.


Solution

Schedule of Changes in Working Capital of Rohan Manufactures Ltd.for the year ended March 31, 2002

Particulars 2001 2002 Changes in working capital

Increase in Decrease inAmount Amount Net working Net working

Rs. Rs. Capital Capital

Current Assets

Stock 4,90,000 5,30,000 40,000

Accounts Receivable 2,80,000 3,10,000 30,000

Bills Receivable 80,000 60,000 20,000

Prepaid expenses 25,000 40,000 15,000

Cash at bank 1,10,000 1,90,000 80,000

Cash on hand 40,000 70,000 30,000

Current Liabilities

Bill payable 70,000 1,50,000 80,000

Accounts Payable 2,70,000 3,60,000 90,000


Net Increase in 20,000Working Capital

2,10,000 2,10,000

Computation of Funds from Operation

Amount(Rs.)

Net Increase in Reserve andSurpluses (8,60,000 6,00,000) 2,60,000

Add Dividends paid 2,00,000

Depreciation on Buildings 40,000

Depreciation on Machinery 40,000

Loss on sale of Machinery 4,000

Goodwill written-off 50,000


ACCOUNTANCY176


Sources of Funds Amount(Rs.) Uses of Funds (Amount)Rs.

Funds from Operation 5,94,000 Purchase of Land 1,50,000Issue of Debenture 2,00,000 Purchase of Buildings 2,70,000Sale of Machinery 36,000 Purchase of Machinery 1,00,000

Purchase of Investment 90,000Payment of Dividends 2,00,000Net Increase inWorking Capital 20,000

Total 8,30,000 Total 8,30,000

Machinery AccountDr. Cr.

Date Amount(Rs.) Date Amount(Rs.)

Balance b/f 1,95,000 Machinery sold 50,000Purchase of Machinery 1,00,000 Balance c/f 2,45,000

Total 2,95,000 Total 2,95,000

Machinery sold AccountDr. Cr.


Machinery 50,000 Accumulated 10,000Depreciationon Machinery SoldBank 36,000Loss on sale 4,000

Total 50,000 Total 50,000

Accumulated Depreciation on Machinery AccountDr. Cr.


Accumulated Deprecia- 10,000 Balance b/f 45,000tion on Machinery Sold Depreciation 40,000

Balance c/f 75,000 charged


Example 4.8

Following is the balance sheet of Zircon Limited.


Balance Sheet of Zircon Ltd. as at March 31, 2003.

Capital and 2002 2003 Assets 2002 2003Liabilities Amount Amount Amount Amount

Rs. Rs. Rs. Rs.

Equity share capital 80,00,000 88,00,000 Land 26,00,000 44,00,000

Reserves 14,50,000 26,00,000 Building 36,00,000 36,00,0009% Debenture 40,00,000 (at cost)

Accounts Payable 9,00,000 10,00,000 Accumulated 6,00,000 6,72,000Expenses Payable 75,000 95,000 depreciation

Plant and 36,00,000 49,80,000Machinery

Accumulated 8,00,000 8,90,000depreciation

Stock 9,18,000 10,12,000

Accounts 6,54,000 8,37,000Receivable

Cash at Bank 4,53,000 32,28,000

Total 1,04,25,000 1,64,95,000 Total 1,04,25,000 1,64,95,000

Additional information

1. Land purchased during the year was for Rs. 20,00,000.

2. Plant and Machinery costing Rs. 4,20,000(Accumulated Depreciationthereon Rs. 3,80,000) was sold for Rs. 25,000.

3. Plant and Machinery purchased for Rs. 18,00,000.

4. Depreciation charged on Plant and Machinery Rs. 4,70,000 and on buildingRs. 72,000.

5. Dividend paid during the year were Rs. 8,00,000.

Required

Prepare schedule of changes in financial position on working capital basis(Funds Flow Statement).

ACCOUNTANCY178

Solution

Schedule of changes in Working Capital

Particulars 2002 2003 Changes in Working Capital

Increase in Decrease inAmount Amount Net working Net working

Rs. Rs. Capital Capital

Stock 9,18,000 10,12,000 94,000

Accounts Receivable 6,54,000 8,37,000 1,83,000

Cash at Bank 4,53,000 32,28,000 27,75,000

Accounts Payable 9,00,000 10,00,000 1,00,000Expenses Payable 75,000 95,000 20,000

Net increase in 29,32,000Working Capital

Total 30,52,000 30,52,000

Computation of Funds from Operations

Amount (Rs.)

Net increase in Reserves 11,50,000(26,00,000 14,50,000)

Dividends paid 8,00,000

Depreciation on Building 72,000

Depreciation on Plant and Machinery 4,70,000

Loss on sale of plant and machinery 15,000



Sources of Funds Amount(Rs.) Uses of Funds Amount(Rs.)

Funds from operations 25,07,000 Dividend paid 8,00,000

Issue of shares 8,00,000 Land purchased 18,00,000

Issue of debentures 40,00,000 Plant and Machinery purchased 18,00,000

Sale of Plant and Machinery 25,000 Net increase in 29,32,000working capital

Total 73,32,000 Total 73,32,000


Plant and Machinery Account

Dr. Cr.


Balance b/f 36,00,000 Plant and 4,20,000Machinery sold

Plant and Machinery 18,00,000 Balance c/f 49,80,000

Total 54,00,000 Total 54,00,000

Plant and Machinery Sold Account

Dr. Cr.


Plant and Machinery 4,20,000 Accumulated depre- 3,80,000ciation on plant

Bank 25,000

Loss on sale 15,000

Total 4,20,000 Total 4,20,000

Accumulated Depreciation on Plant and Machinery AccountDr. Cr.


Plant and 3,80,000 Balance b/f 8,00,000Machinery sold Depreciation 4,70,000Balance c/f 8,90,000 charged

Total 12,70,000 Total 12,70,000

4.4 Uses and Limitations of Statement of Changes in Financial Position

The statement of changes in financial position is useful to understand how thefunds have been generated and used during the period. It ascertains totalfunds generated from operations, which, normally is a major source of fundsfor a healthy company. It also helps in evaluating the funds generated fromfinancing and investing activities of the business. It also throws light on howthese funds were used. It helps the lenders to evaluate the ability of an enterpriseto meet its financial obligations. It help in ascertaining the funds that needs tobe generated to meet the expansion requirements.

Though Statement of Changes in Financial Position (SCFP) is of immensehelp to management and external users, yet, it suffers from some limitations.It only rearranges the information contained in the financial statements

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therefore, the limitation of financial statements do not make Statement of Changesin Financial Position (SCFP) more reliable than the financial statements. It doesnot help in ascertaining whether the cash will be available to meet futureobligations or not. This Statement reveals his historical information only anddoes not reveal future flows. Also, current assets financed through currentliabilities are not revealed by statement of changes in financial position.

4.5 Statement of Cash Flows Meaning and Purpose

As discussed earlier in this chapter, the term Funds have different interpretations.It is also interpreted as cash. Therefore, statement of changes in financial positionmay also be prepared by taking cash as the basis instead of working capital.This statement is more commonly known as Cash Flow Statement or Statementof Cash Flows(SCF). Accounting Standard 3 issued by The Institute of CharteredAccountants of India deals with preparation and presentation of statement ofchanges in Cash Flows. The Companies listed on recognized stock exchanges ofIndia and other commercial, industrial and business enterprises in the publicand private sectors are required to prepare and report statement of cash flowsalong with the profit and loss account and balance sheet.

The purpose of the Statement of Cash Flows is to provide the informationabout an enterprises cash receipts(cash inflows) and payments(cash outflows)during the period. For this purpose, the cash flows are divided into operating,financing and investing activities. The statements concludes with the amount ofnet cash flow drawn from all these three activities. The opening balance of cash isadded to the net flow during the period which will give the cash balance at theend of the period. The net flow is already known(being equal to the differencebetween opening and closing balance). It is, therefore, not the net flow but thereasons for this net flow which is highlighted by the statement.

Cash flow statement is considered to be better than Statement of Changes inFinancial Position on working capital basis. It focuses on cash flow rather thanon working capital. Since the company must convert its current assets into cashto meet its financial obligations. Thus, Statement of cash flow helps the users toascertain in a more accurate manner the liquidity of the firm and is considered tobe superior to Statement of Changes in Financial Position.

Cash includes cash on hand, cash at bank and cash equivalent assets. Cashequivalent are those investments which are readily convertible into known amountof cash and are subject to insignificant risk of changes in value. Cash equivalentsare not held for the purpose of investment.


4.5.1. Usefulness Statement of Cash Flows

The information provided by Statement of Cash Flows (SCF) helps investors,creditors and other users to assess different aspects of financial position of thefirm. It helps to ascertain the ability of the enterprise to generate future cashflows. It helps to ascertain about the ability of the enterprises to pay dividendsand meet its obligations. It also explains the difference between the net incomeand cash provided by operating activities of an enterprise. It provide informationabout cash flows from investing and financing transactions.

4.6 Preparation of Statement of Cash Flows

The information required to prepare Statement of Cash Flows (SCF) is obtainedfrom comparative balance sheet, profit and loss account and additionalinformation given along with these two statements. The changes in assets,liabilities and equity are to be interpreted in the light of additional informationprovided to determine the cash flows from purchase and sale of fixed assets,cash flows from issue and redemption of share and debenture and raising andrepayment of long term loans. The income statement along with balance sheetand other information provided will help in ascertaining cash flow fromoperations. Accounting Standard 3 required these cash flows to be categorisedinto flows from operation, investing and financing activities. The ascertainmentof cash flows from these categories is discussed below :

4.6.1 Cash from Operating Activities

The net income is computed on the basis of accrual basis. To compute cashprovided by operating activities we need to convert the operating activities beingconsidered from accrual basis to cash basis. For this purpose, we can followeither Direct Method or Indirect Method. The cash provided will be same,whatever method is used for computation. Accounting Standard 3 allows bothmethods for reporting cash from operating activities among Indian Companies.

Cash from Operating Activities Direct Method

Under this method, we need to adjust each item in the income statement fromaccrual basis to cash basis. Cash receipts and cash payments related to rev-enues and expenses are determined and listed as cash inflows and outflowsfrom operating activities. The net amount is reported in the last column ascash provided from operations.

Step 1 : Determine cash provided by operating activities

(i) Cash receipts from customers : The revenue from sales is reported onaccrual basis in the income statement. We add the amount of opening

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receivables to the net sales and to this we subtract amount of receivablesat the end, bad debts written-off during the period and discount allowedto customers.


Net Sales x x xAdd : Opening Receivables x x xLess : Closing Receivables (x x x)

Discount allowed (x x x)Bad Debts written off (x x x)

Net cash received from customers x x x

(ii) Other Cash receipts : The amount of other revenue like rent, income,commission earned, etc. are adjusted for any amounts not received orreceived in advance to determine cash received.


Other revenues earned x

Add : Receivable in the beginning x x x

Less : Receivable at the end (x x x)

Add : Received in advance at the end x x x

Less : Received-in-advancein the beginning (x x x)

Cash received from other revenues x x x

Step 2 : Cash used from operating activities

(i) Cash payment to suppliers : The income statement reports cost of goodssold on accrual basis. To determine the cash paid to suppliers, we need tofirst ascertain the purchases made during the year and then compute theamount paid to suppliers. The closing stock of goods is added to cost ofgoods sold and opening stock is subtracted therefrom to compute thepurchases during the period.


Cost of Goods sold

Add : Closing Stock x x x

Less : Opening Stock (x x x)

Purchases x x x


We need to add the creditors (Account Payables) in the beginning of theperiod to the amount of purchases and subtract closing creditors (AccountsPayables) therefrom for computing the amount paid to suppliers.


Purchases

Add : Opening creditors

Less : Closing creditors (xxx)

Cash payment to suppliers xxx

(ii) Cash payment for operating expenses : Operating expenses are reported inthe income statement on accrual basis. We need to adjust the operatingexpenses for outstanding expenses and prepaid expenses to ascertain cashpayment for operating expenses.


Operating expenses xxx

Add : Prepaid Expenses at the end of the period xxx

Less : Prepaid Expenses in the begining of the period (xxx)

Less : Outstanding Expenses at the end of the period (xxx)

Cash payment for operating expenses xxx

(iii) Cash payment for Income Tax : The income statement indicates the provi-sion made for income tax. The comparative balance sheet indicates theamount of tax payable in the beginning and and at the end of the period.We can compute the cash payment for income tax as follows :-


Provision for Income Tax xxx

Add : Tax Payable in the beginning xxx

Less : Tax Payable at the end (xxx)

Cash payments for Income Tax xxx

(iv) Payment for Interest : Though interest expense is subtracted from revenuesto compute net income, according to Accounting Standard 3 cash flowsarising from interest paid and interest/dividend received in cash offinancial enterprises should be reported as cash flow from operatingactivities. In the case of other enterprises, cash flows from interest paidshould be classified as financing activities and cash flows from interestand dividends received should be reported as cash flows from Investingactivities.

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Cash from operating activities Indirect Method

Under this method, we need to start with the net income and make adjustmentsfor those items which affected net income but do not affect cash. The stepsfollowed under this indirect method are as follows :-

(i) Add to the net income for the year the amount of expenses charged tocurrent years income but do not result in outflow of cash. These aredepreciation on fixed assets written-off, deferred revenue expenditurewritten off, loss on sale of fixed assets. Gain on sale of fixed assets, on theother hand, increases the income for the current year but it is included incash flow from sale of fixed assets. Therefore, gain on sale of fixed assetsis to be substracted from the profit. The changes in current assets andcurrent liabilities are also to be adjusted to ascertain the cash flow fromoperating activities. Increases in current liabilities and decreases in currentassets over the period are added to the net profit. Interest paid is treatedas cash flow from financing activities, therefore, it is added back to profit.The Interest and dividends received are sub-stracted from the net profitand reported as cash flow from investing activities. The format to ascertainthe cash flow from operating activities is given below :

Computation of Cash Flow from Operating Activities


Cash Flow from Operating Activities

Net Income after tax xxx

Add : Depreciation xxxAdd : Fixed Assets written-off xxxAdd : Loss on sale of Fixed Assets xxxAdd : Deferred revenue expenses written-off xxxAdd : Interest period expenses xxxAdd : Provision for Income Tax xxxLess : Gain on sale of Fixed Assets (xxx)Add : Increases in Current Liabilities (Other than bank overdraft) xxxAdd : Decrease in Current Assets (Other than cash) xxxLess : Decrease in Current Liabilities (Other than bank overdraft) (xxx)Add : Increase in Current Assets (Other than cash)Net Cash Provided from operating by operating activities xxxLess : Payment for Income Tax (xxx)

Net Cash after tax provided by Operating Activities xxx


4.6.2 Cash Flow from Investing Activities

The amount of fixed assets and long term investments in the beginning and atthe end of the year are available from the comparative balance sheet. Theadditional information provides inputs required to evaluate the amount andreason for changes in these items. We may ascertain the cash used for purchaseof fixed assets and investments and cash received from sale of these items bypreparing the account on the basis of information available as discussed atthe time of preparation of Statement of Changes in financial position.

The cash flows from investing activities :

(i) Cash payments to acquire fixed assets;

(ii) Cash receipts from sale of fixed assets;

(iii) Cash payments to acquire shares, warrants or debt instruments of otherenterprises (other than cash payment for those instruments which areconsidered to be cash equivalents and those which are held for tradingpurposes);

(iv) Cash received with respect to interest and dividend on investments;

(v) Cash advances and loans made to third parties. In case of financial enter-prises these will be treated as cash flows from operating activities;

(vi) Cash receipts from the repayments of advances and loans made to thirdparties. In case of financial enterprises these will be treated as cash flowsfrom operating activities.

4.6.3 Cash Flow from Financing Activities

The cash flows from financing activities reveals how the cash is provided to theenterprises by the owners and lenders. Cash flows from financing activities isascertained by analysing the differences in equity and long-term liabilities inthe beginning and at the end of the year.

The cash flows from financing activities include :

(i) Cash proceeds from issue of share;

(ii) Cash proceeds from issue of debenture;

(iii) Cash proceeds from loan raised;

(iv) Cash payments for redemption of share;

(v) Cash payments for redemption of debenture;

(vi) Cash payments for repayment of loan;

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(vii) Cash payments for dividends on share;

(viii) Cash payments for interest on debenture and loan.

Format of Statement of Cash Flows (Direct Method)

Amount (Rs.) Amount (Rs.)

Cash Flows from Operating Activities

Cash receipt from customers xxx

Cash paid to suppliers (xxx)

Cash paid to employees (xxx)

Cash paid for expenses (xxx)

Cash generated from operations xxx

Cash paid for Income Taxes (xxx)

Net Cash from operating activities xxx

Cash Flow from Investing Activities

Purchase of fixed assets and investments xxx

Cash from interest and dividends oninvestment received xxx

Net cash flows (used for) investing activities xxx or (xxx)

Cash Flows from Financing Activities

Cash from issue of shares capital xxx

Cash from issue of debenture xxx

Cash from loans raised xxx

Redemption of share (xxx)

Redemption of debenture (xxx)

Repayment of loans (xxx)

Payment of interest (xxx)

Payment of dividend (xxx)

Net cash from (used for) financing activities xxx or (xxx)

Net Increase (Decrease) in Cash xxx or (xxx)Cash in the beginning of the period xxx

Cash at the end of the period xxx

Statement of Cash Flows (Indirect Method)

Under this method there will be change in cash flows from operating activities section onlywhich is given here :


Format of Statement of Cash Flows (Indirect Method)

Amount(Rs.) Amount(Rs.)

Cash Flows from Operating ActivitiesNet profit before tax xxxAdjustments for :Depreciation xxxInterest Income (xxx)Dividend Income (xxx)Interest expense xxxProvision for tax xxxLoss on sale of fixed assets xxxGain on sale of fixed assets (xxx)Other non-cash items xxx

Or(xxx) or (xxx)

Operating profit before xxxworking capital changesAdd : Increases in current liabilities xxx

Decrease in current assets xxx(other than cash)

Less : Decrease in current liabilities (xxx)Increases in current assets (xxx)(other then cash)

Net cash from operating activities xxx

Cash from Investing Activities Rs. Rs.

Purchase of fixed assets and investments xxxCash flows from sale of fixed assets xxxand investmentsCash from interest and dividends xxxon investmentsNet cash from (used for) investing activities xxx or (xxx)

Cash from Investing Activities Rs. Rs.

Cash from issue of share xxxCash from issue of debenture xxxCash from loan raised (xxx)Redemption of share (xxx)Redemption of debenture (xxx)Payment of interest (xxx)Payment of dividends (xxx)Net cash from (used for) financing activities xxx or (xxx)Net increase (decrease) in cash xxxCash at the end of the period xxx

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Example 4.9

Ganga Yamuna Ltd. reported profit of Rs. 12,50,000 for the year ended March31, 2003 after considering the following :

Depreciation on building Rs. 35,000Depreciation on Plant and Machinery Rs. 75,000Depreciation on furniture Rs. 18,000Amortization of goodwill Rs. 12,000Loss on sale of machinery Rs. 20,000

The current assets and liabilities in the beginning and at the end of theyear are given below :

March 31 2002 March 31 2003

Accounts Receivable Rs. 38,000 Rs. 42,000Stock on hand Rs. 75,000 Rs. 68,000Cash on hand Rs. 18,000 Rs. 32,000Accounts Pabable Rs. 34,000 Rs. 32,000Expenses Payable Rs. 7,000 Rs. 10,000

Solution

Amount(Rs.)

Cash Flow from Operating Activities

Net profit for the year 12,50,000

Add : depreciation on buildings 35,000depreciation on plant & machinery 75,000depreciation on furniture 18,000Amortization of goodwill 12,000Loss on sale of machinery 20,000

Operating profit before working capital changes 14,10,000Increase in Accounts Receivable (4,000)Decrease in stock 7,000Decrease in Accounts Payable (3,000)Increase in expenses payable 3,000

Net Cash from Operating Activities 14,13,000


Example 4.10

Given below is the summarised balance sheet and profit and loss account of anenterprise

Balance Sheet of ........ as at March 31, 2002, 2003

Liabilities March 31 March 31 Assets March 31 March 312002 2003 2002 2003

Rs. Rs. Rs. Rs.

Capital 90,000 1,30,000 Plant (Cost) 1,60,000 1,65,000Reserves 60,000 96,000 Accumulated

Depreciation (30,000) (38,000)Long-term loans(9%) 70,000 50,000 Patents 29,000Dividend Proposed 8,000 10,000 Stock 80,000 90,000Accounts payable 40,000 30,000 Sundry Debtors 60,000 55,000Outstanding Prepaid Expenses 10,000 12,000Expenses 32,000 19,000 Cash 20,000 22,000

Total 3,00,000 3,35,000 Total 3,00,000 3,35,000

Profit and Loss Account for the year ending March 31, 2003

Particulars Rs. Particulars Rs.

Raw Material Consumed 2,00,000 Sales 3,75,000Wages paid 40,000Expenses 80,000Depreciation 8,000Patents Amortized 1,000Net Profit 46,000

3,75,000 3,75,000

Dividend Proposed 10,000 Net Profit 46,000Profit Retained 36,000



Loan was repaid to the extent of Rs. 20,000 on June, 2002, Interest is paid onmonthly basis at the end of each month which is included in expenses.

Required

Prepare Statement of Cash Flows.

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Solution

Statement of Cash Flows (Indirect Method)

Amount(Rs.) Amount(Rs.)


Net profit 46,000

Add: Depreciation 8,000

Patents Amortized 1,000

Interest paid 4,800

Operating profit before working capital changes 59,800

Add: Decrease in Debtors 5,000

Less : Increase in Stock (10,000)

Increase in Prepaid (2,000)

Decreased in Accounts Payable (10,000)

Less : Decrease in outstanding Expenses (13,000)

Cash provided by Operating Activities 29,800

Cash Flows from Investing Activities

Cash payment for purchase of Plant (5,000)

Cash payment for purchase of Patents (30,000)

Net Cash used for Investing Activities (35,000)

Cash Flows from Financing Activities

Cash from issue of shares 40,000

Cash paid for Repayment of Loans (20,000)

Cash paid for dividends (8,000)

Cash paid for Interest (4,800)

Cash provided by financing activities 7,200

Net increase in cash 2,000

Cash balance in the beginning of the year 20,000

Cash Balance at the end of the year 22,000

Example 4.11

The balance Sheet of software services Ltd. as on March 31, 2003 and profit andloss account for the year ended March 31, 2003 are given here :


Balance Sheet of Software Securities Ltd. as at March 31, 2002

(Rs. in000)

2001 2002

Amount Amount

Capital and Liabilities

Equity Share Capital 108.0 396.0

Retained Earnings 244,8 370.8

9% Debenture 270.0 198.0

Accounts Payable 72.0 41.4

Expenses Payable 0 18.0

Total 694.8 1024.2

Assets an Properties

Land 126.0 81.0

Buildings 360.0 360.0

Accumulated Depreciation on Buildings (19.8) (37.8)

Equipments 122.4 347.4

Accumulated Depreciation on Equipments (18.0) (50.4)

Stock on hand 10.8 97.2

Accounts Receivable 36.0 122.4

Cash on hand 66.6 97.2

Preliminary Expenses 10.8 7.2

Total 694.8 10,24.2

Income statement of Software Securities Ltd. for the year ended March 31, 2002

(Rs. in000)

Amount Amount

Sales 16,02.0

Less Cost of goods sold 837.0

Operating expenses 397.8

Interest expenses 21.6

Loss on sale of Equipment 3.6 1260.0

Net Income before tax 342.0

Provision for tax 117.0

Net income after tax 225.0

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Additional Information

1. Operating expenses include depreciation of Rs. 59,400 and charges frompreliminary expenses of Rs. 3,600.

2. Land was sold at its book value.

3. Cash dividend paid for the year 2002 amounted to Rs. 27,000 and fully paidbonus shares were given in the ratio of 2 shares for every 3 shares held.

4. Interest expense was paid in cash.

5. Equipment with a cost of Rs. 2,98,800 was purchased for cash. Equipmentwith a cost of Rs. 73,800 (book value Rs. 64,800) was sold for Rs. 61,200.

6. Debenture for Rs. 18,000 were redeemed for cash and for Rs. 54,000 wereredeemed by converting into equity shares at par value.

7. Equity shares of Rs. 1,62,000 were issued for cash at par.

8. Income Tax paid during the year amounted to Rs. 1,17,000.

Required : Prepare statement of cash flows.

Solution

Statement of Cash Flows



Net income before tax 3,42,000

Depreciation charged 59,400

Preliminary expenses 3,600

Loss on sale of equipment 3,600

Interest expenses 21,600

Operating Profit before Working Capital Changes 4,30,200

Working Capital Changes

Increase in stock (86,400)

Increase in debtors (86,400)

Decrease in sundry creditors (30,600)

Increase in expenses payable 18,000

Cash generated from operations 2,44,800

Less : Income tax paid 1,17,000

Net Cash Flows after Tax from 1,27,800Operating Activities


Cash from Investing Activities

Cash paid for purchase of equipment (2,98,800)

Proceeds from sale of equipment 61,200

Proceeds from sale of land 45,000

Net Cash used for Investing Activities (1,92,600)

Cash from Financing Activities

Proceeds from issue of equity share capital 1,62,000

Cash paid for redemption of debentures (18,000)

Cash paid for dividends (27,000)

Cash paid for interest (21,600)

Net Cash Flows from Financing Activities 95,400

Net increase in cash 30,000

Cash in the beginning of the year 66,600

Cash at the end of the year 97,200

Notes to Solution

Equipment AccountDr. Cr.

Date Particulars Amount(Rs.) Date Particulars Amount(Rs.)

Opening balance 1,22,400 Equipment sold 73,800Purchase of equipment 2,98,800 Closing balance 3,47,000

4,21,200 4,21,200

Equipment Sold Account

Dr. Cr.


Equipment 73,800 Accumulated 9,000DepreciationBank 61,200Loss on sale 3,600

73,200 73,200

* Cost book value = Accumulated Depreciation

Rs. 73,800 Rs. 64,800 = Rs. 9,000

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Accumulated Depreciation on EquipmentDr. Cr.


Equipment sold 9,000 Opening balance 18,000

Depreciation chargedClosing balance 50,400 in current year 41,400

59,400 59,400

Equity share capital on March 31, 2002 3,96,000

Less : Equity share capital at March 31, 2001 1,08,000

Bonus issue 72,000

Redemption of debenture 54,000 2,34,000

Issue of Equity shares for cash 1,62,000

Depreciation charged on buildings = Rs. 37,800 Rs. 19,800 = Rs. 18,000

Total depreciation charged for the current year = Rs. 41,400 + Rs. 18,000 = Rs. 59,400

Terms Used in the Chapter

Funds Cash FlowsFlow of Funds Operating ActivitiesInvesting Activities Financing ActivitiesWorking Capital Statement of Changes inNet Working Capital Financial Position

Summary

Funds : There are many questions like how the company paid dividends in excessof its currents profits, how the assets are financed, how the proceeds from sharesare used? Investors and other users of financial statements are interested to getanswers to these questions. Statement of changes in Financial Position (SCFP)helps in answering such questions. The term funds in this context is used to indicatenet working capital (current assets-current Liabilities)

Statement of Cash Flow : The statement of cash flows is considered to be superiorto SCFP to ascertain the liquidity of an enterprise. SCF is to be prepared and


reported by Indian enterprises according to AS-3 issued by the Institute of CharteredAccountants of India. The cash flows are categorized into flows from operating,investing and financing activities. This statement helps the users to ascertain theamount and certainty of cash flows to be generated by an enterprise.

Exercises

I Objectives type Questions

A. State whether the following transaction will result in flow of funds or not :

(i) Cash received from debtors

(ii) Share issued for cash

(iii) Old furniture written-off

(iv) Deferred reserve expenditure charged to profit

(v) Sale of goods on credit

(vi) Discount received on making payment to supplies

(vii) Purchase of fixed assets against issue of shares

(viii) Wages paid for the current months

(ix) Payments outstanding rent for previous month

(x) Cash withdrawn from business by the owners

B. State True or False

(i) Cash received from sale of fixed assets at less than the book value is asource of funds

(ii) Payment of cash against purchase of stock is use of fund,

(iii) Dividends paid is not a source of funds,

(iv) Sale of goods on credit is not a source of funds.

(v) Funds from operation is not a major source of funds for an enterprises.

C. Tick the right choices

(i) Which of the following is incorrect about the statement of cash flows?

(a) it provides information about the cash receipt and cash payments of anenterprise.

(b) it reconciles ending cash balance with the balance as per bank statement.

(c) it provides information about the operating, investing and financingactivities.

(ii) The statement of cash flows clarifies cash flows according to:

(a) operating and non-operating flows

(b) investing and non-operating flows

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(c) inflows and outflows

(d) operating, investing and financing activities

(iii) Example of cash flow from financing activity is:

(a) payment of dividend

(b) receipt of dividend on investment

(c) cash received from customer

(d) purchase of fixed asset

(iv) An example of cash flow from investing activity is:

(a) issue of debenture

(b) repayment of long-term loan

(c) purchase of raw materials for cash

(d) sale of investment by non-financial enterprise.

(v) An example of cash flow from operating activity is;

(a) purchase of own debenture

(b) sale of fixed assets

(c) interest paid on term-deposits by a bank

(d) Issue of equity share capital

D. Mention the net amount of source or use of funds in each of the followingcase:

(i) Fixed asset sold for Rs.12,480 (book value Rs.14,000).

(ii) Received Rs.17,980 from a debtor and allowed Rs.220 as discount(Amount due from debtor is Rs.18,200).

(iii) Goods sold for Rs.18,500 for cash costing Rs.14,900.

(iv) Paid wages for current month Rs.24,000.

(v) Issue of shares for Rs.8,50,000 against purchase of business comprisingof fixed assets Rs.7,60,000; current assets Rs.2,15,000 and took overcurrent liabilities Rs.1,25,000.

E. State in each case whether the cash flows resulting from the transaction arefrom operating investing or financing activities;

(i) Issue of shares capital for cash

(ii) Redemption of debenture at premium for cash

(iii) Purchase of machinery for cash

(iv) Purchase of inventory for cash

(v) Sale of goods for cash

(vi) Payment of interest on debenture

(vii) Receivied interest on investments by a trading enterprise.

(viii) Payment of income tax


(ix) Payment of income tax

(x) Sale of old furniture at a loss.

F. Fill in the blanks:

(i) Schedule of changes in working capital reveals net...............

(ii) Statement of financial position (on working capital basis) shown............and ........... of funds.

(iii) The balancing figure in funds flow statement reveals.............

(iv) Schedule of changes in working capital emphasises on ......... whereasfunds flow statement emphasises on ............... and ....... of .....................

(v) Cash flows are categorised in .....................and .............. activities.

2. Short Answer Questions

(i) What is funds?

(ii) What is statement of changes in financial position?

(iii) What is statement of cash flow ?

(iv) What is schedule of changes in working capital?

(v) Distinguish between schedule of changes in working capital and fundsflow statement?

(vi) Distinguish between statement of changes in financial position and state-ment of cash flows?

(vii) What are the major uses of funds ?

(viii) What are the major reserves of funds?

(ix) What are the major uses of funds?

(x) What is funds from operation?

(xi) Describe the Direct method of computing cash flows from operatingactivities?

(xii Describe the Indirect method of computing cash flows from operatingactivities?

(xiii) Describe the computation of funds from operation?

(xiv) What are major cash inflows and outflows from investing activities?

(xv) What are major cash inflows and outflows from financing activities?

(xvi) What are the limitations of statement of changes in financial position?

(xvii) Why is statement of cash flow preferred over statement of changes infinancial position?

3. Essay Type Questions

(i) Describe the procedure to prepare statement of changes in financialposition.

(ii) Describe the procedure to prepare statement of cash flows.

(iii) Describe Direct and Indirect method of ascertaining cash flows fromoperating activities.

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(iv) What are the advantages and limitations of Statement of changes inFinancial Position? Distinguish between statement of changes in FinancialPosition and Statement of Cash Flows?

Problems

4. Following is the Balance Sheet of Chandra Foods Ltd.

Balance Sheet of Chandra Foods Ltd. as at March 31, 2002, 2003

Liabilites 2002 2003 Assets 2002 2003Rs. Rs. Rs. Rs.

Share Capital 2,50,000 2,50,000 Land & Building 1,40,000 1,40,000

Accounts payable 55,000 80,000 Stock 1,00,000 1,30,000

Bills Payable 20,000 40,000 Accounts Receivable 28,000 30,000

Mortgage 10,000 15,000 Cash on hand 7,000 25,000Goodwill 60,000 60,000

Total 3,35,000 3,85,000 Total 3,35,000 3,85,000

Required : Prepare Schedule of Changes in Working Capital

5. Following is the Balance Sheet of Rajeshwari Co. Ltd.

Balance Sheet of Rajeshwari Co. Ltd. as at March 31, 2002 and 2003

Liabilites 2002 2003 Assets 2002 2003Rs. Rs. Rs. Rs.

Share Capital 6,50,000 7,80,000 Fixed Assets 8,30,000 8,60,000Profit & Loss 40,000 65,000 Stock in Trade 2,90,000 3,70,0008% Debenture 3,00,000 2,50,000 Cash on Hand 80,000 90,000

and at BankAccounts Payable 1,70,000 1,60,000 Prepaid Expenses 10,000 15,000Bills Payable 40,000 50,000 Preliminary 10,000 -Outstanding Expenses 20,000 30,000 Expenses

Total 12,20,000 13,35,000 Total 12,20,000 13,35,000

Required : Prepare Schedule of Changes in Working Capital.

6. Following are two Balance Sheet of Rose Ltd. as at March 2002 and 2003

Balance Sheet of Rose Ltd. as at March 31, 2002 and 2003

2002 2003Assets Rs. Rs.

Cash on hand 30,000 47,000Accounts Receivable 1,20,000 1,15,000Stock on hand 80,000 90,000Buildings 50,000 66,000

Total 2,80,000 3,18,000


Capital and liability

Equity Share Capital 2,00,000 2,50,000Accounts payables 70,000 45,000Retained Earnings 10,000 23,000

Total 2,80,000 3,18,000

Required : Prepare Schedule of Changes in working capital

7. Following Balance Sheet of Palash Ltd. as at March 31, 2002-2003

Balance Sheet of Palash Ltd. as at March 2002 and 2003

Liabilities March 31, 2002 March 31, 2003Rs. Rs.

Capital and Liabilities 80,000 85,000Profit and Loss Appropriation 14,500 24,500Accounts Payable 9,000 5,000Mortgage - 5,000Provision for doubtful debts 1,000 1,300

Total 1,04,500 1,20,000

Assets and PropertiesLand and Building 50,000 50,000Plant and Machinery 24,000 34,000Stock on hand 9,000 7,000Accounts Receivables 17,500 20,800Cash at Bank 4,000 9,000

Total 1,04,500 1,20,000

Required : Prepare Schedule of Changes in Working Capital.

8. Following are the Balance Sheets of Pawan Hans Ltd. as at 31st March, 2002and 2003.

Balance Sheet of Pawan Hans Ltd. as at March 31, 2002 and 2003

Liabilities 2002 2003 Assets 2002 2003Rs. Rs. Rs. Rs.

Share Capital 90,000 1,11,000 Cash at bank 15,000 18,000Accounts Payable 60,000 54,000 Accounts Receivable 42,000 42,000Accrued expenses 6,000 12,000 Stock on hand 66,000 24,000Income Tax payable 3,000 3,300 Prepaid Rent 450 300Retained earnings 37,950 40,950 Prepaid Insurance 600 750

Prepaid property tax 900 1,200Land 12,000 24,000Building andEquipment 90,000 1,44,000less AccumulatedDepreciation (30,000) (33,000)

Total 1,96,950 2,21,250 Total 1,96,950 2,21,250

Required : Schedule of Changes in Working Capital

ACCOUNTANCY200

Funds from Operations

9. Following are the balances extracted from the Profit and Loss account for theyear ended March 31, 2000 of Surbhi Ltd.

Profit and Loss Account of Surbhi Limitedfor the year ended March 31, 2000


Expenses Paid 1,50,000 Gross Profit 8,00,000

Depreciation 35,000 Profit on Sale of Land 30,000

Loss on sale of machine 2,000

Goodwill 10,000

Net Profit 6,33,000

Total 8,30,000 8,30,000

10. The net income of Fresh Dairy Ltd. for the year ended March 31, 2003 wasRs. 14,87,000. The income was arrived at after adjusting the following :(i) depreciation on tangible assets Rs. 86,000 and amortization of goodwill

and patents Rs. 18,000.

(ii) writing-off preliminary expenses Rs. 5,000.

(iii) loss on sale of old furniture Rs. 800 and on old machinery Rs. 4,600.

(iv) payment of interest on debenture Rs. 80,000.

Compute funds from operations.

11. Following are the balances extracted from the Profit and Loss account of GrejimLtd. for the year ended March 31, 2003.

Profit and Loss Account of Grejim Ltd.for the year ended March 31,2003


Expenses Paid 6,000 Gross Profit 9,000and Outstanding Gain on sale of land 1,200Depreciation 1,400Loss on sale of machine 80Discount 4Goodwill 400Net Profit 2,316


Hint : Discount is assumed to be discount allowed to customers.

Required : Calculate funds from operation.

12. Following is the Profit and Loss account of Aakash Ltd. for the year endedMarch 31, 2003.


Profit and Loss Account of Aakash Ltd.for the year ended March 31,2003


Depreciation 900 Gross Profit 8,500Discount on issue of share 200 Profit on sale of plant 4,000Loss on sale of machinery 400Goodwill (written off) 2,200Preliminary expenses 650Business expenses 2,500Net Profit 5,650


Requird : Calculate Funds from operation

13. Following is the Profit and Loss account of Apple Ltd.

Profit and Loss Account of Apple Ltd.for the year ended March 31, 2003


Salaries to employees 60,000 Gross Profit 1,50,000Rent 22,500 Profit on sale of

buildings :Provision for bad debts 7,500 Sold for 15,000Preliminary expenses 15,000 Book Value 7,500 7,500written-offGoodwill written-off 7,500Depreciation on machinery 7,500Loss on sale of plantBook Balance 15,000Sold for 12,000 3,000Provision for Taxation 7,500Net Profit 27,000

Total 1,57,500 Total 1,57,500

Required : Calculate Funds from operation

14. Following is the Profit and Loss Account of Sapphire Ltd.

ACCOUNTANCY202

Profit and Loss Account of Sapphire Ltd.for the year ended 2000


Salaries 50,000 Gross Profit 3,00,000Expenses 12,000 Profit on sale of plantDepreciation 30,000 and equipments 12,000Loss on sale of furniture 5,000 Interest received 3,000Net Profit 2,18,000

Total 3,15,000 Total 3,15,000

Hint : Interest received will be treated as non-operating income, because thefirm does not seem to be involved in financial business.

Required : Ascertain Funds from operation

15. During the year 2001 Kocher Txt. Ltd. earned a profit of Rs. 1,75,720 afteradjusting the following :

(i) Depreciation written off as follows : Plant Rs. 12,800 and FurnitureRs. 2,500.

(ii) Profit on sale of fixed assets Rs. 15,000.(iii) Discount on issue of debenture written off Rs. 20,000.(iv) Investment costing Rs. 30,000 were sold for Rs. 28,000(v) Preliminary expenses appears in the books at Rs. 40,000; out of that 20

per cent has been written off.(vi) Proposed dividend Rs. 50,000.(vii) Dividend received Rs. 2,500.(viii) Transfer to sinking fund Rs. 20,000.

Required : Ascertain the funds from operation.

Cash Flow Statement

16. Valcano Ltd reported net income of Rs. 84,50,000 in 2003. Depreciation forthe year was Rs. 14,95,000 debtors at the end of the year were Rs. 87,000more than that in the beginning of creditors increased by Rs 43,000 over theyear and stock decreased by Rs. 9,000 over the year. Compute net cash pro-vided by operating activities.

17. For each of the following items, state how it should be reported in the cashflow statement for the year :

(i) Issue of 20,00,000 equity shares of Rs. 10 each at a premium of Rs. 4per share,

(ii) Purchase of equipment for Rs. 4,85,000

(iii) Sale of old equipment for Rs. 87,000 (book value Rs. 98,000)

(iv) Declared and paid dividend Rs. 1,25,000.

(v) Received interest Rs. 18,000 on investment.

18. Following are the comparative balance sheets of Mudra Ltd. as atMarch 31,2000 and 2001.


Balance Sheet of Mudra Ltd. as at March 31, 2000 and 2001


Rs. Rs. Rs. Rs.

Share Capital 1,40,000 1,48,000 Cash on hand 18,000 15,600Debenture 24,000 12,000 Accounts Receivable 29,800 35,400Provision for 1,400 1,600 Stock in Trade 98,400 85,400Doubtful debts Land 40,000 60,000Profit and Loss 20,080 21,120 Goodwill 20,000 10,000

Total 2,06,200 2,06,400 Total 2,06,200 2,06,400

Required : Calculate : (1) Operating Net Profit (2) Cash from Operation.

19. Read the following data carefully :

Summarised Balance Sheet of Plastic Product Ltd.as at March 31, 200 and 2001

Liabilities On On Assets On On31-3-2000 31-3-2001 31-3-2000 31-3-2001

Amount Amount Amount AmountRs. Rs. Rs. Rs.

Accounts payable 20,000 25,000 Cash on hand 20,000 10,000Bills payable 20,000 5,000 MarketableOther current 40,000 45,000 Securities 40,000 30,000Liabilities6% Debentures 60,000 80,000 Stock on hand 30,000 45,000Profit and Loss 80,000 1,10,000 Accounts Receivable 30,000 40,000

Gross Block 1,00,000 1,40,000

Total 2,20,000 2,65,000 Total 2,20,000 2,65,000

Required : (1) Calculate net operating Profit(2) Cash from operations

20. The following is the comparative balance sheet of Sundram Ltd.

Balance Sheet of Sundram Ltd.as at March 31, 2000, 2001

Liabilities 31-03-02 31-03-03 Assets 31-03-02 31-03-03Amount Amount Amount Amount

Rs. Rs. Rs. Rs.

Share Capital 48,000 51,000 Cash at Bank 2,400 5,400Profit & Loss 85,00 1,05,000 Accounts Receivable 99,000 1,19,000Accounts payable 5,400 6,000 Stock on hand 5,400 4,200Mortgage Loans 2,800 10,000 Land 20,000 20,000

Plant 14,400 23,400

Total 1,41,200 1,72,000 Total 1,41,200 1,72,000

Required : (1) Operating net Profit(2) Calculate Cash from operations(3) Prepare Cash flow statement.

ACCOUNTANCY204

21. Consider the following information.


Rs. Rs. Rs. Rs.

Equity share 50,000 60,000 Cash on hand 3,000 5,000CapitalAccounts Payable 10,000 22,000 Bank at bank 8,000 14,000Bills Payable 8,000 5,000 Accounts Receivable 9,000 12,000General Reserve 6,000 10,000 Land 10,000 16,000Profit & Loss Building 50,000 70,000Appropriation 40,000 55,000 Machinery 34,000 35,000

Total 1,14,000 1,52,000 Total 1,14,000 1,52,000

Required : Prepare Cash flow Statement

Funds Flow Statement

22. Following is the comparative Balance Sheet of Kota Stone Ltd.

Balance Sheet of Rama Textiles Ltd. as at 31, 2002, 03


Rs. Rs. Rs. Rs.

Share Capital 2,40,000 2,55,000 Land and 1,50,000 1,50,000Profit and Loss BuildingAppropriation 43,500 73,500 Plant 75,000 1,05,000Accounts Payable 27,000 15,000 Stock on hand 24,000 18,000Mortgage - 15,000 Cash on hand 13,500 28,500

Total 3,10,500 3,58,500 Total 3,10,500 3,58,500

Required : Prepare Fund Flow Statement.

23. Following is the Balance Sheet of Kumars Ltd.

Balance Sheet of Kumars Ltd. as at March 3, 2002, 2003

Capital and Liabilities March 31 March 312002 2003

Rs. Rs.

Capital 1,60,000 1,70,000Profit and Loss Appropriation 29,000 49,000Accounts Payable 18,000 10,000Mortgage - 10,000

2,07,000 2,39,000


Assets

Land and Buildings 1,00,000 1,00,000Plant and Machinery 48,000 68,000Stock on hand 18,000 14,000Accounts Receivable 33,000 39,000Cash at Bank 8,000 18,000

2,07,000 2,39,000

Required : Prepare Fund Flow Statement.

24. Following is the balance sheet of R. K. Enterprises Ltd.

Balance Sheet of R.K. Enterprises Ltd. as at March 31, 2002, 2003

Liabilities March 31 March 312002 2003

Rs. Rs.

Capital and Liabilites 80,000 85,000Profit and Loss Appropriation 14,500 24,000Accounts Payable 9,000 5,000Mortgage - 5,000Provision for Doubtful Debts 1,000 1,300

Total 1,04,500 1,20,800

AssetsLand and Buildings 50,000 50,000Plant and Machinery 24,000 34,000Stock on hand 9,000 7,000Accounts Receivable 17,500 20,800Cash at Bank 4,000 9,000

Total 1,04,500 1,20,800

Required : Prepare Funds flow Statement

25. Following is the balance of Mahindra Films Ltd. as at March 31, 2002, 2003Ltd.

Assets 31-03-2002 31-03-2003

Furniture (at cost) 40,000 50,000Less : Depreciation Reserve 18,000 23,000

22,000 27,000Stock 70,000 78,000Account Receivable 17,000 16,000Cash at Bank 12,000 34,000Prepaid Expenses 2,500 1,600

Total 1,23,500 1,56,600

ACCOUNTANCY206

LiabilitiesEquity Share Capital 50,000 1,00,000Preference Share Capital 25,000 -Profit and Loss Account 20,000 37,000Accounts Payable 28,500 19,600

Total 1,23,500 1,56,600

Required : Prepare funds flow Statement

26. The Balance Sheets of Super Six Limited as on March 31, 2002 and 2003 areas follows :

Balance Sheet of Super Six Limited as at March 31, 2002, 2003

Liabilities 2002 2003Rs. Rs.

Equity Share Capital 80,000 1,20,000Securities Premium 8,000 12,000General Reserve 6,000 9,000Profit and Loss Account 19,500 20,8005% Debentures - 26,000Income Tax 9,800 10,900Accounts Payable 33,500 36,400

Total 1,56,800 2,35,100

Assets

Freehold Premises 55,400 1,13,200Plant and Machinery 35,600 51,300Furniture and Fixtures 2,400 1,500Stock on hand 22,100 26,000Accounts Receivable 36,500 39,100Bank Balance 4,800 4,000

Total 1,56,800 2,35,100


Depreciation written off during the year 1989 was :Plant and Machinery Rs. 12,800Furniture and Fixtures Rs. 400

Required : Prepare a funds flow statement, showing your computation offunds from operation.

27. The Following are the Balance Sheets of M/s Rajdhani Corporation Ltd. as on31st March, 2001 and 2002.



Equity Share 80,000 1,20,000 Goodwill 20,000 16,000Capital Land & building 40,000 20,00011% PreferenceShares (Redeemable) 40,000 20,000 Plant 36,000 76,400General Reserves 8,000 12,000 InvestmentsProfit and Loss 7,200 10,800 (Long-term) 4,000 14,000Proposed Dividend 11,200 15,600 Sundry Debtors 30,000 43,200Bills Payable 14,000 21,200 Stock on hand 34,000 31,200Outstanding 3,200 2,400 Cash on hand 6,800 11,200Expenses Preliminary 4,000 2,800Provision for ExpensesTaxation 11,200 12,800

Total 1,74,800 2,14,800 Total 1,74,800 2,14,800

Required : Prepare a schedule of changes in working capital and statementof flow of funds. Show working notes also.

28. Following is the balance sheet of Maya & Sons as at 31st March 2001 and31st March 2002.

Liabilities 31-3-2001 31-3-2002Rs. Rs.

Equity Share Capital 1,50,000 2,00,000Securities Premium - 5,000General Reserve 50,000 60,000Profit and Loss 20,000 35,000Debenture 1,00,000 75,000Bills Payable 25,000 20,000Accounts Payable 35,000 40,000Outstanding Expenses 2,000 1,000

Total 3,82,000 4,36,000Assets

Goodwill 10,000 8,000Furniture (Cost) 50,000 60,000Less : Depreciation 28,000 34,000

22,000 26,000Long-term investments 40,000 52,000Stock on hand 2,54,000 2,89,000Accounts Receivable 31,000 28,000Cash at Bank 22,000 31,000Discount on Debenture 3,000 2,000

Total 3,82,000 4,36,000

Required : Prepare funds flow Statement

ACCOUNTANCY208

29. Following is the Balance Sheets of M/s Taran & Co. as on March 31, 2002 andMarch 31, 2003 were as follows :

Assets March 31, 2002 March 31, 2003Rs. Rs.

Land and Buildings 80,000 1,20,000Plant and Machinery 5,00,000 8,00,000Stock on hand 1,00,000 75,000Accounts Receivable 1,50,000 1,60,000Cash 20,000 20,000

8,50,000 11,75,000Liabilities and CapitalShare Capital 5,00,000 7,00,000Profit and Loss and Account 1,00,000 1,60,000General Reserve 50,000 70,000Accounts Payable 1,53,000 1,90,000Bills Payable 40,000 50,000Outstanding Expenses 7,000 5,000

8,50,000 11,75,000

Additional Information given by the company is :

(i) Rs. 50,000 depreciation has been charged to Plant and Machinery dur-ing the year, 2003

(ii) A piece of machinery was sold for Rs. 8,000 during 1989. It had cost Rs.12,000 depreciation of Rs. 7,000 had been provided on it.

Required : Prepare a schedule of changes in working capital and a statementof funds flow.

30. Read the data carefully :

Balance Sheet as on March 31, 2001 and 2002


Equity Share Capital 6,00,000 6,00,000 Goodwill 72,000 72,000General Reserve 1,04,000 1,08,000 Land 2,40,000 2,16,000Profit and Loss 76,000 78,000 Building 2,22,000 2,16,000Accounts Payable 48,000 32,400 Short-term 60,000 66,000Short-term Loan 7,200 4,800 InvestmentsProvision for Tax 96,000 1,08,000 Stock on hand 1,80,000 1,40,000Provision for Accounts 1,20,000 1,33,200Doubtful Debts 2,400 3,600 Receivable

Cash at Bank 39,600 91,200

Total 9,33,600 9,34,800 9,33,600 9,34,800

Additional Information : (a) A piece of land has been sold for Rs. 24,000, (b)Depreciation of Rs. 42,000 had been charged to Building, (c) An InterimDividend paid the year Rs. 30,000.

Required : Prepare Funds flow statement


31. Read the data carefully :

Balance Sheet of Ruchita Creation Ltd.as at on March 31 2001 and 2002


Equity Share Capital 1,60,000 1,10,000 Fixed Assets 1,60,000 1,64,000Pref. Share Capital 40,000 50,000 Less : Accum.General Reserve 8,000 8,000 Depreciation (60,000) (44,000)Profit & Loss A/c 4,800 4,00013% Debentures 28,000 24,000 Debtors 1,00,000 1,20,000Creditors 44,000 48,000 Stock 96,000 80,000Provisions for Tax 16,800 12,000 Prepaid Expen 2,000 1,200Proposed Dividend 23,200 20,000 Cash at Bank 14,000 4,800Bank Overdraft 27,200 50,000

3,52,000 3,26,000 3,52,000 3,26,000

Additional Information : (a) Taxes paid Rs. 14,000 (b) Fixed assets sold forRs. 20,000, their, cost Rs. 40,000 and accumulated depreciation till date ofsale on them Rs. 12,000, (c) An interim Dividend paid during the year Rs.18,000.

Required : Prepare funds flow statement

32. The balances in Equipment account and Accumulated depreciation accountas on March 31, 2002 and 2003 are given below :

Balance as at March 31, 2002 March 2003

Equipment 65,00,00 78,70,000

Accumulated depreciation 10,80,000 16,32,000

The Equipment costing Rs. 12,30,000 accumulated depreciation thereon Rs.7,18,000 was sold for Rs. 4,68,000.

Required :

(i) Compute the amount of equipment purchased, depreciation charged forthe year and toss on sale of equipment.

(ii) How each of the item related to the equipment will be reported instatement of cash flows.

33. The net income of Blue Sky Ltd. for the year ended March 31, 2003 was Rs.4,89,000. Depreciation charged for the year was Rs. 87,000. Income for theyear was arrived at after adjusting for gain on sale of land Rs. 1,05,000, losson sale of equipment Rs. 48,000 and writing off cost of equity issue Rs. 25,000.The current assets and current liabilities of Blue Sky Ltd. as at March 31,2002 and 2003 are given here :

ACCOUNTANCY210

March 31 March 31 2002 2003

Stocks 1,85,000 1,67,000

Receivables 1,42,000 1,45,000

Prepaid Expenses 12,000 8,000

Cash in hand and at bank 87,000 1,02,000

Payables 95,000 1,07,000

Expenses outstanding 13,000 9,000

Required : Prepare cash flow statement

34. Balance Sheets of Flowers Ltd. as at March 31,2002 and 2003 are givenbelow :

Balance Sheet of Flowers Ltd. as at March 31, 2002, 2003

2002 2003Liabilities & Equity Rs. Rs.

Equity share capital 15,00,000 17,50,000

Reserves & Surpluses 3,90,000 6,27,000

9% Debenture 10,00,000 10,00,000

Accounts Payable 67,000 1,20,000

Outstanding Expenses 18,000 23,000

29,75,000 35,20,000

Assets Rs Rs

Land 10,00,000 13,00,000

Buildings 8,00,000 9,00,000

Accumulated Depreciation on Buildings (1,20,000) (1,60,000)

Equipment 14,00,000 16,50,000

Accumulated Depreciation on Equipments (4,35000) (5,80,000)

Furniture & Fitting 85,000 1,25,000

Accumulated Depreciation on Furniture (17,000) (38,000)


Cash on hand 47,000 84,000

29,75,000 35,20,000


(i) Cash dividends declared and paid Rs 1,50,000.

(ii) 25,000 Equity shares of Rs 10 each were issued for cash at a premium ofRs. 2 per share.


(iii) Equipment costing Rs 2,20,000 (accumulated depreciation Rs 1,20,000)was sold at a loss of Rs 15,000

Required :

(i) Compute net change in working capital.

(ii) Prepare funds flow statement.

(iii) Prepare statement of cash flows.

35. The balance Sheet and income statement of Orange Ltd. are presented below :

Balance Sheet of Orange Ltd.

Assets Rs. Rs. Rs. Rs.

Fixed Assets 7,80,000 9,75,000

Less Accumulated 3,00,000 4,80,000 2,40,000 7,35,000

Depreciation

Stock on hand 78,000 93,000

Accounts Receivable 85,000 1,02,000

Cash on hand 47,000 95,000

6,90,000 10,25,000

Equity and liabilities Rs. Rs.


Reserves & Surpluses 1,18,000 3,74,000

10% Debenture 2,00,000 1,00,000

Debenture RedemptionPremium 20,000 10,000

Accounts Payable 38,000 32,000

Outstanding expenses 14,000 09,000

6,90,000 10,25,000


(i) Cash dividends paid Rs. 45,000.

(ii) Equipment purchased for cash Rs. 4,00,000

(iii) Old piece of machinery was sold for Rs. 45,000 at a loss of Rs. 20,000

(iv) Equity share capital was issued for cash at par.

(v) Debentures were redeemed at a premium of 10%.

Required

(i) Prepare schedule of changes in working capital and statement of changesin financial position.

(ii) Prepare statement of Cash flows.

ACCOUNTANCY212

Answers

4. Net Increase in Working Capital Rs. 5,000




8. Net Decrease in Working Capital Rs. 39,000

9. Funds from operation Rs. 6,50,000


11. Funds from operation Rs. 2,996





16. Cash provided by operating Rs. 99,10,000activities

17. Cash inflow from financing Rs. 2,80,000activities

Cash used for investing activities Rs. 4,85,000

Cash inflow from investing activities Rs. 87,000

Cash used for financing activities Rs. 1,25,000

Cash used for investing activities Rs. 18,000

18. Operating net profit Rs. 11,040

Cash from operation Rs. 21,600


Cash from operation Rs. 10,000


Total Cash flow statement Rs. 14,400


Total Cash flow statement Rs. 46,000

22. Increase in Working Capital Rs. 30,000

Funds from operation Rs. 30,000

Total funds flow statement Rs. 60,000


Total of fund flow statement Rs. 30,200



Funds from operations Rs. 10,000

Total of funds flow statement Rs. 20,000


Funds from operation Rs. 22,000

Total of funds flow statement Rs. 72,000



Total funds of statement Rs. 88,000



Total funds flow statement Rs. 88,400

28. Total funds flow statement Rs. 1,46,000

29. Decrease in Working Capital Rs. 60,000

Funds from operations Rs. 1,27,000

30. Total fund flow statement Rs. 2,10,000

31. Total fund flow statement Rs. 1,70,800

32. (i) Equipment purchased Rs. 26,00,000(It will reported as cash usedfor investing activities)

(ii) Loss on sale of equipment Rs. 44,000(it will be added to net incomefor compuring cash flow fromoperating activities)

33. Cash provide

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