´
LONG TERM QUESTION
PAPER ACCOUNTING FOR MGMT
PAPER ACCOUNTING FOR MGMT
´ A FUND FLOW STATEMENT IS A BETTER SUBSTITUTE
THAN A INCOME STATEMENT? ELABORATE?
´
ANSWER
´
MEANING OF FUND FLOW STATEMENT:-
´
ANSWER: IT SHOWS THE SOURCES AND APPLICATION OF
FUNDS BETWEEN TWO BALANCE SHEETS.
´
IT IS HISTORICAL RECORD OF WHERE THE FUNDS CAME
FROM AND HOW THESE FUNDS ARE WERE UTILIZED DURING THE ACCOUNTING PERIOD.
´
IN NARROW SENSE THE TERM FUNDS REFERS TO CASH IN
HAND AND ALSO CASH AT BANK
´
IN BROADER SENSE THE TERM FUNDS REFERS TO ALL THE FINANCIAL
RESOURCES OF THE FIRM INCLUDING THE WORKING CAPITAL
´
MEANING OF FUNDS FLOW
´
IN POPULAR SENSE THE FUND MEANS THE NET WORKING
CAPITAL OF THE FIRM WHICH IS THE DIFFERENCE BETWEEN TOTAL CURRENT ASSETS AND
CURRENT LIABILITIES. IT WILL INCLUDE ALL THE TRANSACTIONS WHICH AFFECT THE
WORKING CAPITAL OF THE FIRM. MOST ACCEPTED DEFINITION OF FUNDS.
´ ANTHONY,”FUND FLOW STATEMENT DESCRIBES
THE SOURCES FROM WHICH ADDITIONAL FUNDS WERE DERIVED AND THE USES TO WHICH
THESE FUNDS WERE PUT. IT IS STATEMENT BY WHICH WE STUDY THE CHANGES IN WORKING
CAPITAL POSITION OF A BUSINESS ENTERPRISE BETWEEN TWO BALANCE SHEET DATES.
´ ALSO KNOWN BY STATEMENT OF SOURCES AND APPLICATION
OF FUNDS
´ WHERE GOT AND WHERE GONE STATEMENT
´
STATEMENT OF FUNDS RECEIVED AND DISBURSED.
´
DIFFERENCE BETWEEN
´
INCOME
•
EXPLAINS THE NET POSITION AND RESULT
•
FAILS TO DISCLOSE ACCURATELY THE FUNDS FROM THE
OPERATIONS
´
BUT FUND FLOW STATEMENT
•
SOURCES AND APPLICATION OF FUNDS
•
EXPLAINS THE SOURCES AND USES OF FUNDS BOTH
OPERATING AND NON OPERATING ACTIVITIES SEPARATELY
´
FLOW OF FUNDS
´
MEANS CHANGES OR MOVEMENT OF FUNDS.
´
IMPLIES CHANGES IN WORKING CAPITAL CAUSED BY
THE TRANSACTIONS WHICH MAY BE RELATED TO OPERATIONS OR FINANCIAL OR INVESTMENT
´
THE FLOW OF FUNDS TAKES PLACE WHEN A
TRANSACTION TAKES AFFECT THE WORKING CAPITAL I. E. THE WORKING CAPITAL
INCREASES OR DECRESES. IF THE EFFECT OF A TRANSACTION RESULT IN DECREASE OF
FUNDS IT IS KNOWN AS APPLICATION OF FUNDS BUT IF THE EFFECT OF TRANSACTIONS
RSULT IN INCREASE OF FUNDS IT IS KNOWN AS SOURCE OF FUNDS
´ RULES FOR THE FLOW OF FUNDS
´
THE FLOW OF FUNDS OCCURS WHEN A TRANSACTION
RESULT ON THE ONE HAND A NON CURRENT ACCOUNT AND CURRENT ACCOUNT VICE VERSA
´
WHEN A TRANSACTION RESULTS IN CHANGES ONE
CURRENT ACCOUNT AND OTHER CURRENT ACCOUNT OR CHANGE IN NON CURRENT ACCOUNT IN
NON CURRENT ACCOUNT . THERE IS NO MOVEMENT OF FUNDS.
´
FLOW OF FUNDS
•
PURCHASE OF FIXED ASSET ON CASH BASIS/OR ON
SHORT TERM CREDIT BASIS
•
ISSUE OF SHARES FOR CASH,REPAYMENT OF LONG TERM
LIABILITIES IN CASH
•
NO FLOW OF FUNDS:
•
PAYMENT MADE TO CREDITORS
• PURCHASE OF FIXED ASSETS BY ISSUING SHARES/DEBENTURES
´ PREPARATION OF FUND FLOW
´ PREPARATION OF SCHEDULE OF CHANGES IN WORKING CAPITAL
´ CALCULATION OF FUNDS FROM OPERATION/OR FUND LOST IN OPERATIONS
´ IDENTIFICATION OF HIDDEN INFORMATION
´ PREPARATION OF FUND FLOW
´ STATEMENT OF SCHEDULE OF CHANGES IN WORKING CAPITAL
´ RULES FOR PREPARING THE SCHEDULE
´ AN INCREASE IN THE CURRENT ASSETS RESULT IN
INCREASE IN WORKING CAPITAL
´
DECREASE IN CURRENT ASSETS RESULT IN DECREASE
IN WORKING CAPITAL
´
AN INCREASE IN CURRENT LIABILITY RESULT IN DECREASE
WORKING CAPITAL
´
A DECREASE IN CURRENT LIABILITY RESULT IN
INCREASE IN WORKING CAPITAL
´ ADJUSTED PROFIT AND LOSS ACCOUNT
´
DR SIDE
´
BY DEPRECIATION AND DEPLETION OF FIXED ASSETS
´
TO AMORTIZATION OF INTANGIBLE ASSETS
´
TO LOSS ON SALE OF FIXED ASSETS
´
TO PREMIUM ON REDEMPTION
´
TO APPROPRIATION OF RETAINED EARNINGS
´
TO PROVISION FOR TAXATION(NOT CL)
´
TO OTHER NON FUND OR NON OPERATING EXPENSES
´
TO CLOSING BALANCE OF PROFIT AND LOSS ACCOUNT
´
CREDIT SIDE
´
BY PROFIT AND LOSS ACCOUNT(LAST BALANCE SHEET)
´
BY PROFIT ON SALE OR REVALUATION OF FIXED
ASSETS
´
BY INCOME FROM TRADING ACTIVITIES
´
BY PROFIT FROM SALE OF INVESTMENTS
´
BY PROFIT ON REDEMPTION
´
BY OTHER NON FUND/NON OPERATING INCOME
´
BY FUND FROM OPERATION
´
SOURCES AND APPLICATION OF FUNDS
´
SOURCES
´
FUND FROM
OPERATION
´
ISSUE OF
SHARE CAPITAL
´
ISSUE OF
DEBENTURES
´
INCREASE IN
LONG TERM LIABILITIES
´
SALE OF FIXED
ASSETS AND LONG TERM INVESTMENTS
´
NET OPERATING
INCOME
´
ANY OTHER
SOURCE
´ DECREASE IN WORKING CAPITAL
´
APPLICATION
´
FUNDS LOST IN OPERATIONS
´
REPAYMENT OF LONG TERM LOANS AND DEBENTURES
´
REDEMPTION OF SHARE CAPITAL
´
PURCHASE OF FIXED ASSETS
´
LONG TERM INVESTMENTS
´
PAYMENT OF CASH DIVIDEND AND TAX
´
ANY OTHER APPLICATION
´
INCREASE IN WORKING CAPITAL
´
MERITS
I.
IT EXPLAINS THE LIQUIDITY AND ADEQUACY OF FUNDS
II. EXPLAINS THE FACTORS WHICH BRINGS CHANGES IN
WORKING CAPITAL
III.
HELPS MGMT IN ALLOCATING THE RESOURCES
IV.
HELPS IN ASSESSING THE CREDIT WORTHINESS OF THE
FIRM
V.
HELPS IN PLANNING THE SOURCE OF REPAYMENT OF
LONG TERM DEBTS,,REDEMPTION OF PREFERENCE SHARE CAPITAL AND OTHER LIABILITIES
´
LIMITATION
I.
DOES NOT PROVIDE ANY THING NEW AS IT IS JUST RE ARRANGEMENT OF FINANCIAL DATA
II.
HISTORICAL STATEMENT AND NOT APPLICATION FOR
FUTURE PROJECTION
III.
IMPORTANT ITEMS LIKE ISSUE OF SHARES AGAINST
THE PURCHASE OF FIXED ASSETS ARE IGNORED.
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