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www.unitedworld.in

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MANAGEMENTACCOUNTINGa TOOL to help managers

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Session plan as per DESCRIPTOR

(Classes 2 to 5; Session 1)

Review of changes in financial position

1. Nature of changes2. Definition of funds3. Cash flow and fund flow statements4. Uses of the statement of changes

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Session Plan(Class 2; Session 1)

1. Meaning of Funds2. Meaning of Flow of Funds

3. Working Capital4. Sources and Uses of Funds5. Funds Flow Statements

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FUNDSThe term FUNDS has many meanings.

Literally it means a supply that can be drawn upon

Some people think it is same as CASH. Othersdifferentiate between CASH and FUNDS.

In India, AS-3 applies to Cash Flow Statements, and is

applicable to all listed companies and to all companieshaving turnover more than Rs. 50 Cr in a financial year.

According to International Accounting Standard 7,the term FUNDS generally refers to Cash and Cash

Equivalents, or to Working Capital.

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FLOW OF FUNDSThe term FLOW means Current, or Change

Funds flow takes place only when there is achange in current assets or current liabilities.

Flow of Funds thus means change in funds

position, or change in Working Capital

In other words, any increase or decrease inworking capital means Flow of Funds

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WORKING CAPITAL

Working Capital = Current Assets Current Liabilities

Working Capital represents amounts invested incurrent assets from long term sources of funds.

Current liabilities finance a part of current assets.

The balance is financed from long term sources.

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Current Assets include :-

Cash and bank balances including fixed deposits

Short term Investments

Accounts Receivable / Bills Receivable

Inventories (raw material, finished goods, stores etc)

Advances to suppliers or against taxes

Pre paid expenses

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Current Liabilities include :-

Bank Overdrafts

Short term loans from banks, or other entities

Accounts Payable / Bills Payable

Provisions against current assets (debtors, discounts etc)

Advances payments received for services to be rendered

Outstanding expensesCurrent maturities, or instalments, of Long term loans

(provided payable out of existing current assets,or by creation of current liabilities)

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USES OF FUNDS1. Funds lost in business operations

2. Payment of dividend / taxes etc

3. Redemption of preference shares

4. Repayment of debentures / bonds

5. Repayment of long term loans

6. Purchase of fixed assets

7. Long term investment

8. Increase in working capital

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FUNDS FLOW STATEMENT1. Analyses the fluctuations of current assets / liabilities

2. Tells where increased working capital is invested, and if

decreased, from where funds have been released

3. Is usually divided in 2 parts

a. Sources of funds (or inflows) Increase theworking capital

b. Uses of funds (or outflows) Decrease theworking capital

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USES OF FUNDS FLOW STATEMENT1. Explains conflicting situations :-a. Lesser liquidity despite more profits

b. Better liquidity despite lossesc. How were dividends distributed despite lossesd. Where have the profits gone

2. Answers Intricate queriesa. Overall creditworthiness of the enterpriseb. Sources of repayment of loans

c. Funds generated through normal operationsd. Projected future generation and uses of funds

3. Helps in better allocation of resources

4. Shows up managements skills in using resources

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FUNDS FLOW STATEMENTVs P & L a/c1. FFS explains the sources and uses of funds,

whereas the P & L a/c shows the results of thebusiness activities

2. FFS matches the sources and application of funds,which may be revenue or capital in nature, whereas P &L a/c matches revenue income with revenue expenditure

3. Sources and uses of funds are many besidesnormal operations

Both perform different functions.Modern management needs both.One can not replace the other.

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RECAP1. Meaning of Funds2. Meaning of Flow of Funds3. Working Capital4. Sources and Uses of Funds5. Funds Flow Statements

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NEXT SESSION

PREPARINGFUNDS FLOW STATEMENTS

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THANK YOU