Funds Flow Statement And Cash Flow Statement

FUNDS FLOW STATEMENT AND CASH FLOW STATEMENT AFTERSCHO☺OL

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FUNDS FLOW STATEMENT AND CASH FLOW STATEMENT Dr. T.K. Jain.

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WHAT IS FUND? • It denotes working capital

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What is working capital ? • Current assets • Total of gross current assets is called gross working capital • Net working capital = current assets – current liabilities

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What is current assets? • All those assets which will be converted into cash in the next one year are called current assets • Examples of current assets : • Cash, inventory, debtors, bills receivables, prepaid expenditure, etc.

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What is current liabilities? • All those dues, which we have to pay in the next year are called current liabilities : • Example : • Overdraft, short term loan, creditors, bills payable, outstanding expenditure

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What is a flow of fund? • When there is change in fund (working capital), it is called flow of fund. • Example: you purchase furniture, there is increase in fixed assets (furniture) and decrease in current assets (cash). Thus there is flow of funds

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Which of these have flow of funds? • Purchase of raw material : • No – as there is no change in working capital, raw material is current asset and cash is also current asset. • Payment of creditors : • No – as there is no change in working capital. Creditors are current liabilities and cash is current asset thus net working capital remains the same. PGPSE - ONLINE PROGRAMME FROMwww.afterschoool.tk AFTERSCHOOOL 8

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Are these flow of funds? • Purchase of building against shares: • No – as there is no change in working capital (fund). Building is long term asset and shares are long term liabilities, there is no impact on current asset or current liabilities. • Sale of Plant against long term investment : • No – as there is no change in working capital (fund). Plant is long term asset (fixed assets) and long term investments are also fixed assets. there is no impact on current asset or current liabilities. PGPSE - ONLINE PROGRAMME FROMwww.afterschoool.tk AFTERSCHOOOL 9

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When do you have a flow of funds? • Flow of funds is possible when one of the item is from working capital and other item is from fixed asset / liability. • Example: Purchase of furniture against cash. : it involves furniture and cash. Furniture is fixed assets, but cash is current assets, thus there is change in working capital and therefore there is flow of funds. When you buy furniture, you are reducing your working capital or you are reduciing your funds. PGPSE - ONLINE PROGRAMME FROMwww.afterschoool.tk AFTERSCHOOOL 10

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How do you prepare funds flow statement:? • • • •

You have to prepare three statements : 1. statement of changes in working capital 2. statement of sources of funds 3. Statement of applications of funds.

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What are sources of funds? • Whenever there is increase in fund (working capital), it is called source of fund • Whenever there is decrease in fund, it is called application of fund. • Example : issue of fresh equity shares / debenture / bonds/ rights issue / preference issue are all example of incrrease in funds. PGPSE - ONLINE PROGRAMME FROMwww.afterschoool.tk AFTERSCHOOOL 12

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What are applications of funds? • When working capital gets reduced, it is called application of funds. • Example : • Purchase of fixed assets • Payment of long term liability • Payment of debenturers / bonds / preference shares etc. PGPSE - ONLINE PROGRAMME FROMwww.afterschoool.tk AFTERSCHOOOL 13

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What are the key issues in preparation of cash flow statement? • Cash flow statement is similar to funds flow statement, but here we are looking at flow of cash – not on working capital. • Thus when there is change in working capital, it will be flow of fund, but it will be flow of cash only if it involves cash transaction. • Thus non-cash transactions will not affect flow of cash. PGPSE - ONLINE PROGRAMME FROMwww.afterschoool.tk AFTERSCHOOOL 14

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What are the issues,, which require adjustments: • There are some issues which require adjustments in profits. • Example : depreciation: it is one such mattere, which doesn’t affect working capital or cash, therefore it is adjusted in the profit.

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What are the statements that you prepare in cash flow statements? • Cash flow from operations • Cash flow from financing activities • Cash flow from investing activities

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What is cash from operations: • Cash from operations denotes cash profits. Therefore you have to adjust profits. All noncash items are adjusted in profits. Thus it is called cash from operations. Following items are added to profits – as they are non-cash expenditures : • Depreciation, amortisation, non-cash expenditure, Similarly, we will adjust all non-cash revenues. All non-cash revenues will be deducted from profit.

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What is cash from investing ? • Investing refers to dealing in fixed assets. When you buy a fixed assets, there is cash outflow. When you sell a fixed assets, there is cash inflow. Thus cash from investing is positive, when we are selling some fixed assets. • When we are buying fixed assets, there is cash outflow. PGPSE - ONLINE PROGRAMME FROMwww.afterschoool.tk AFTERSCHOOOL 18

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What is cash from financing ? • It refers to transactions relating to shares / debentures / bonds / loans etc. • When we issue shares, there is cash inflow. When we pay back (redeem) our debentures / preference shares / bonds, there is cash outflow.

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Why is it interesting to prepare funds flow and cash flow statement? • First, you come to know about real conditions of an enterprise. It may be possible that the firm may be earning profit, but it may be in negative cash flows and in deep financial problems and it may also be possible that the firm may be in losses but actually have huge positive cash inflows so having good financial position. • Cash flow statement and funds flow statement always match therefore it is always interesting to prepare these statements.

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Some typical situations: • Increased share capital from 1000 crores to 1200 crores: • There is increase in cash from financing of 200 Crores (Cash flow) and there is source of working capital (funds flow statement). • Debt of 200 cr. Paid: (it is cash outflow in cash from financing in cash flow statement and application of funds in funds flow statement.

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