Report Writing

HOW TO PREPARE FUNDS FLOW AND CASH FLOW ANALYSIS

by : DR. T.K. JAINAFTERSCHOOL centre for social entrepreneurship sivakamu veterinary hospital roadbikaner 334001 rajasthan, indiawww.afterschoool.tkmobile : 91+9414430763

WHAT IS A FUND?

WORKING CAPITAL(DIFFERENCE BETWEEN CURRENT ASSETS AND CURRENT LIABILITIES IS CALLED NET WORKING CAPITAL)

WHEN DO WE HAVE FLOW OF FUNDS?

When working capital increases or decreases, it is called flow of funds.

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)

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

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.

Statements to be prepared ...

Funds flow statement (FFS) which shows all the transactions involving flow of fundsstatement 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

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)

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.

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)

Examples of transactions

Purchase of machine = FFSissue of equity = FFSincrease in debtors = SCWCdecrease 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)

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

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.)

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.

Prepare funds flow from the following :

Statement of changes inworking capital

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

Funds flow statement

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

Funds from operations

Opening balance 4000 closing balance = 6000difference = 2000

Prepare funds flow statement

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 + =46700net = -14350

Funds from operations

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

Funds flow statement

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

assumptions...

it has been assumed that dividend and taxes are current liabilities

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)

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=+5Net change in working capital = +17

Funds from Operations

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

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

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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liabilities20062007assets 20062007

share1000015000fxd assets1000020000

profit40006000current asst1300014500

prov. For tax20003000prop. Div10001500creditor40006000outs. Exp20003000tax paid during 2007 was 2500 dividend paid = 1000

???Page ??? (???)04/01/2010, 20:26:47Page / liability 20072008assets 20072008

share 100000125000land 10000094400

premium 5000plant7500084500

reserve2500030000stck7000037000

preference 40000debtors5500032100

P & L 1525010400cash 64501300

bank loan35000bank4000

creditor 7500067500goodwill3100

prov. For tax1500017500

prov. For debt12001000dividend of 11000 was paid during the year 2008 depreciation on plant 7000 prov for income tax in 2008 was 16500redeemed preference shares at 103 during the year 50% of premium on redemption charged on P & L account

???Page ??? (???)04/01/2010, 20:26:47Page /