This document provides guidance on preparing funds flow and cash flow analysis statements, including: 1) It explains the key terms like working capital, funds flow, and the differences between capital and revenue receipts/transactions. 2) It provides examples of the types of transactions that would be included in a funds flow statement, statement of changes in working capital, and funds from operations statement. 3) It walks through examples of how to prepare each of these key financial statements from sample business data.

1. HOW TO PREPARE FUNDS FLOW AND CASH FLOW ANALYSIS by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india www.afterschoool.tk mobile : 91+9414430763

2. WHAT IS A FUND? WORKING CAPITAL (DIFFERENCE BETWEEN CURRENT ASSETS AND CURRENT LIABILITIES IS CALLED NET WORKING CAPITAL)

3. WHEN DO WE HAVE FLOW OF FUNDS? When working capital increases or decreases, it is called flow of funds.

4. Examples of funds flow All those transactions, when either working capital increases or decreases – examples : increase in capital (with increase in capital, cash will increase, so flow of funds) purchase of furniture (when you purchase, cash will reduce, so flow of funds take place) payment of long term loans (cash will decrease so flow of funds)

5. When we dont have funds flow?? When both the aspects of transations are related either to long term sources or to short term sources, there is no flow of funds. Example : issue of equity against fixed assets like building – there is no impact on working capital, so there is no funds flow

6. Rule of funds flow : Out of the two aspects of a transactions, one should be related to short term and the second should be related to long term, then only funds flow is possible.

7. Statements to be prepared ... Funds flow statement (FFS) – which shows all the transactions involving flow of funds statement of changes in working capital (SCWC) – all the transactions, which depict increase or decrease in working capital funds from operations (FFO) - adjusted profit and loss account, which removes all those transactions, which dont have any impact on funds

8. FUNDS FLOW STATEMENT Only those transactions, which are related to long term resources or long term applications – they do affect working capital, so they will come. We will not take short term resources or short term applications here. However, the other aspect of all these transactions is related to working capital. Example : purchase of building (for long term) against cash (from short term)

9. SCWC Statement of changes in working capital will show only items of working capital – like debtors, cash, inventory, BR, BP, short term liability, creditors, overdraft etc. They will be compared over the period (one year generally) and we will show whether they increased or decreased during the period.

10. FFO Profit from P&L account contains many items which dont affect flow of funds. These items will be adjusted in FFO. For example, depreciation doesnt involve any outflow of money or working capital, so depreciation has to be added back to profit (as it was deducted earlier in Profit in P& L account)

11. Examples of transactions Purchase of machine = FFS issue of equity = FFS increase in debtors = SCWC decrease in stock = SCWC (decrease in stock results in decrease in working capital, so it will come in SCWC) depreciation = FFO (there is no flow of funds in depreciation, so it will be added back to profit)

12. WHAT IS CAPITAL RECEIPT? Receipt which are of the nature of fixed capital are called capital receipt. In all these cases, there is also increase in money / bank balance, so this item will come in funds flow statement. Example : issue of equity / debenture / bonds

13. WHAT IS REVENUE RECEIPT? Receipts which are of the nature of circulating capital are called capital receipt Circulating capital is that part of the capital which is turned over in the business and which ultimately results in profit or loss. These transactions will not be recorded in FFS. The net difference of these will appear in SCWC (where we look at difference of bank balance over the period). Example : sales (it is not recorded in FFS,FFO etc.)

14. Machinery in the hands of a manufacturer is .... Fixed capital - therefore purchase / sale of machinary against bank / cash will come in FFS. However, purchase / sale against equity / debenture / bond will not come in any statement.

15. Prepare funds flow from the following :

16. Statement of changes inworking capital Currant assets : +1500 current liabilities = -4500 creditors (-2000), outs. Exp (-1000), prov. Tax (-1000), proposed divident (-500) net change in working capital = -3000

17. Funds flow statement Application : fixed asssets = -10000, sources: share = +5000, funds from operations = +2000 difference is change in working capital = change in working capital = -3000

18. Funds from operations Opening balance 4000 closing balance = 6000 difference = 2000

19. Prepare funds flow statement

20. Statement of changes in working capital Stock = - 33000, debtors = - 22900, cash = - 5150, bank = + 4000 , bank loan = +35000, creditors = + 7500, Prov. For debt = +200, total - = 61050, total + =46700 net = -14350

21. Funds from operations Difference = - 4850 add reserve =+ 5000 add depreciation = + 7000, +600 funds from operations = 2750

22. Funds flow statement Sources :share+premium : 30000, land : 5600, funds from operations 2750 total : 38350 application : plant : 16500 , preference share :41200 total : 60800 decrease in working capital = -14350

23. assumptions... it has been assumed that dividend and taxes are current liabilities

24. Prepare funds flow statement from the following : Data of (2008,2009) : Capital (40,40), preference share(0,10), Reserve (3,14), Debenture (6,7), Creditors (12,11), Prov. For tax (3,4), Proposed dividend(5,6)Overdraft(12,7) Fixed assets (41,50), Depreciation (11,15), Debtors(20,24), Stock (30,35), Cash (1,3),Prepaid exp (0,2)

25. Statement of changes in working capital Debtors = +4, Stock =+5, Prepaid exp. = +2, Cash = +2, Creditors =+1, Prov. For tax = -1, proposed dividend =-1, Overdraft=+5 Net change in working capital = +17

26. Funds from Operations Difference in reserve = 11 add : difference of depreciation +4 funds from operations = 15

27. Funds flow statement Sources of funds : Preference share : 10, Debentures : 1, Funds from operations : 15 application of funds : Purchase of fixed assets 10, Net change in funds : 17

28. Important notes... We have treated provisions for tax, proposed dividend as current liabilities. We have assumed that difference in reserve is due to changes in profit and loss account only. We have assumed that difference in assets is due to purchase of fixed assets and not due to revaluation or any other such reasons.

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