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CHAPTER 4

STATEMENT OF CHANGES IN
FINANCIAL POSITION
LEARNING OBJECTIVES
After studying this chapter, you
should be able to :
l
Explain the meaning of term
funds (working capital) and flow
of funds;
l
State the meaning and need of
Statement of Changes in
Financial Position (SCFP);
l
Prepare Statement of changes
in financial position on
working capital basis;
l
Explain the usefulness of SCFP
and its limitations;
l
State the purpose and
preparation of statement of cash
flows;
l
Distinguish between operating
activities, investing activities
and financing activities;
l
Prepare the statement of cash
flows using direct method;
l
Prepare the statement of cash
flows using indirect method;
l
Distinguish between Statement
of Changes in Financial Position
(SCFP) on working capital basis
and statement of cash flows;
l
Analyse SCFP and statement of
cash flows.

The users of financial statements are


many times eager to find the answers
to some of the following questions:
(1) How could company pay
dividends in excess of its current
profits?
(2) Why dividends are not paid
though company earned higher
profit than previous year?
(3) Why have current assets
decreased over the year whereas
the profits were higher?
(4) How the fixed assets were
financed?
(5) How the proceeds from fresh issue
of share/debenture were used?

Most often, investors are


interested to get answers to such
questions Financial statements
communicate about financial
performance and financial position
of an enterprise to the users of such
statements. Though they are useful
to an investor but questions like
above, remain unanswered. For
this purpose, we need to prepare
and analyse these statements.

158

ACCOUNTANCY

Such statements are called Statement of Changes in Financial Position


(SCFP) and Statement of Cash Flows(SCF). The chapter is divided into
two sections first section deals with the preparation of statement of
changes in financial position, whereas second section deals with the
preparation of cash flows.
4.1 Meaning
The term Funds has different interpretations. We can understand this
by a simple example of arguments between father and son over purchase
of a new computer system. Son is insisting on purchase of a new
computer system and the father replies that he does not have funds to
purchase the same. Here, father is referring to funds in the context of
cash required to buy the system. Thus, funds are taken in this case as
synonymous for cash (on hand and at bank). The son argues that funds
can be arranged by taking loan against a fixed deposit with the bank or
by sale of investment in shares. Now, funds used by son represents
other resources held by his father, which could be converted into cash.
However, in the context of statement of changes in financial position,
the term Funds is used to represent net working capital. Net working
capital represents that portion of current assets which is financed
through long-term sources. Net working capital is, thus, computed by
subtracting current liabilities from current assets.
Net Working Capital = Current Assets Current Liabilities

Current Assets are cash and other assets that are expected to be
converted into cash or consumed in the process of operating main
activities of the business, either in a year or operating cycle, whichever
is longer. The operating cycle is the average time required between the
acquisition of materials and the realisation of cash through the sales of
product/service for which the materials were acquired. All assets other
than current assets are called as non-current assets. Current assets
include stock/inventory, accounts receivable, bills receivable, prepaid
expenses, accrued revenue, short-term investment, cash on hand and
at bank.

159

STATEMENT OF CHANGES IN FINANCIAL POSITION

Current Liabilities are those obligations which are expected to be


liquidated usually out of existing resources, which are classified as
current assets or incurrence of other current liabilities within the period
of one year or operating cycle whichever is longer. Current liabilities are
accounts payable, bills payable, outstanding expenses, revenues,
provision for taxation, etc.
The Balance Sheet of a company is shown below categorizing the different
assets and liabilities into current and non-current components:
Format of Balance Sheet
Component-I

Component-3

Equity and Non-Current Liabilities

Fixed Assets

Share Capital
Reserve and Surpluses
Debenture
Long-Term Loans

Intangible Assets
Land
Plant and Machinery
Long-term Investments

Components-2

Component-4

Current Liabilities

Current Assets

Accounts Payable
Bill payable
Short-Term Loans
Accrued Expenses
Revenues Received in Advance
Other current
Liabilities and Provisions
Bank Overdraft

Stock
Accounts Receivable
Bills Receivable
Accrued Revenues
Marketable Securities
Loan and Advances
Cash on hand and at Bank

Funds are to be computed by substracting the total of current liabilities (component 2)


from the total of current assets (component 4)
Funds (Net Working Capital) = Current Assets

(Total of component 4)

Current Liabilities
(Total of component 2)

Example 4.1
Given below is the summarized balance sheet of Ram Rahim Ltd. as at
March 31, 2002

160

ACCOUNTANCY

Balance Sheet of Ram Rahim Ltd. as at March 31, 2002


2001
Rs.

2002
Rs.

Liabilities
Equity Share Capital

10,00,000

10,00,000

Reserve and Surpluses

3,18,000

5,44,600

10% Debenture

6,00,000

5,00,000

Accounts Payable

1,40,000

1,71,200

Bills Payable

54,400

72,800

Expenses Payable

18,600

27,800

21,31,000

23,16,400

5,00,000

5,00,000

Assets
Land
Building at cost
Less Accumulated Depreciation

6,80,000
1,50,000

5,30,000

6,80,000
1,63,600

Plant and Machinery at cost


Less : Accumulated Depreciation

5,16,400

7,50,000
2,50,000

5,00,000

9,00,000
3,25,000

5,75,000

Furniture
Less : Accumulated Depreciation

1,50,000
15,000

1,35,000

1,50,000
30,000

1,20,000

Stock on hand

1,85,000

2,57,000

192,000

2,25,000

Bills Receivable

43,000

38,000

Cash on hand

46,000

85,000

21,31,000

23,16,400

Accounts Receivable

Total

Required : Analyse Current Assets and Current Liabilities of Ram Rahim Ltd.,
as at March 31, 2001.
Solution
Current Assets :

Stock

Accounts
Bills Receivables
Receivable
= {Rs. 1,85,000 + 1,92,000
+ 43,000
= Rs. 4,66,000

Current Liabilities : Account


Receivable
{ Rs. 1,40,000 +
= Rs. 2,13,000

Bills payable Accrued Expenses


54,400

+ 18,600 }

Cash
+ 46,000}

161

STATEMENT OF CHANGES IN FINANCIAL POSITION


Net Working Capital (as at 31.03.2001)
Current Assets

Current Liabilities

= Rs. [4,66,000 2,13,000]


= Rs. 2,53,000

Stock

Accounts
Receivable

= Rs.[2,57,000 +
= Rs. 6,05,000

2,25,000

Account
Receivable

Bills Payable Accrued Expenses

= Rs. (1,71,200 + 72,000


= Rs. 2,71,000

Bills Receivable
+ 38,000

Cash
+

85,000]

+ 27,800)

Net Working Capital (as on 31.03.2002)

= Rs. [6,05,000 2,71,000]


= Rs. 3,34,000

4.2 Flow of Funds


Flow refers to change or movement. Whenever a transaction takes
place, it affects the items contained in one or more of the components of
balance sheet. If a transaction results in simultaneous increase or
decrease in current assets and current liabilities components or it
does not result in any change in these components, it will not affect
funds of the business. On the other hand, if there is an increase or
decrease in one of these two components, then it results in flow of
funds.
Equity and Non current Liabilities

+ -

Non-Current Assets

+ -

Current Liabilities

+ - + Current Assets

Exhibit 4.1 : Transaction resulting in change in funds

+ -

162

ACCOUNTANCY

Equity and Non-current


Liabilities

Current Liabilities

Non-Current Assets

Current Assets

Exhibit 4.2 : Transactions not affecting funds

If a transaction results in net increase in current assets or net decrease in


current liabilities, it is referred to as sources of funds. On the other hand, if a
transaction results in net decrease in current assets or net increase in current
liabilities, it is referred to as uses of funds.
Example 4.2
Analyses the following transactions and ascertain the impact of these transactions
on the working capital of the company :
(i)

Goods purchased on cash

(ii)

Paid amount due to creditors

(iii) Debenture issued for cash


(iv) Repaid bank loan (long-term)
(v)

Sold old furniture for cash

Solution
Analysis of transactions and their effect on working capital
(i) This transaction will result in increase in stock (current assets) and
decrease in cash (current assets) simultaneously with the same amount.
Thus, it does not result in change in working capital or there is no flow
of funds.

STATEMENT OF CHANGES IN FINANCIAL POSITION

(ii)

163

This transaction will decrease cash (current assets) and creditors (current
liabilities) simultaneously with the same amount. Thus, this transaction
does not result in the change of working capital.

(iii) This transaction will result in increase in debenture (long-term) and


increase in cash (current assets) simultaneously. Thus, it will increase
current assets and results in change in working capital or flow of
funds. It will increase the working capital, and therefore, is called a
source of working capital.
(iv) This transaction will result in decrease in bank loan (non-current
liability) and decrease in cash (current assets) simultaneously. Thus,
this will result in flow of working capital. It will decrease the working
capital, and therefore, is called use of working capital.
(v)

This transaction will result in decrease in furniture (fixed assets) and


increase in cash (current assets). Thus, this transaction results in
flow of funds. Since, it results in increase in current assets, therefore,
is called sources of funds.

4.2.1 Schedule of Changes in Net Working Capital


Schedule of changes in net working capital is a statement prepared to ascertain
the net change (increase or decrease) in working capital over a period of time.
We learned from the above analysis, (shown in example 4.2 and exhibits 4.1
and 4.2), that transactions take place in a business can be categorised as :
(i)

Transactions which result in change in net working capital, and

(ii) Transactions which do not result in change in net working capital.


The effect of all these transactions is reflected in the balance sheet of an
enterprise. We need to analyse the changes in current assets and current
liabilities of an enterprise over the period (in the beginning and at the end of
the year) to compute the net changes in working capital. The following statement
is prepared to compute the net changes in working capital (increase or decrease)
over a period of time.

164

ACCOUNTANCY
Exhibit 4.3 : Schedule of Changes in Working Capital

Particulars

Current Assets

Current
Liabilities

Beginning of

End of the

the period(0)

Period (1)

Rs.

Rs.

C.A.(0)*

C.A.(1)*

C.A.(0)*

C.A.(1)*

C.L.(0)*

C.L.(1)*

C.A.(0)*

C.L.(1)*

Net increase or
(decrease) in
Working Capital

Effect on Net Working capital


Increase in
Working Capital
Rs.
C.A.(1) C.A (0)
(increase in Current
Assets)
C.A.(0) C.A.(1)
(Decrease in
Current Assets)
C.L.(0) C.L. (1)
(Decrease in Current
Liabilities)

Balancing
Figure
Total

* C.A. (0) Current Assets at beginning of period


C.A. (1) Current Assets at end of period
C.A. (0) Current Liabilities at beginning of period
C.L. (1) Current Liabilities at end of period

Decrease in
Working Capital
Rs.

or

C.A.(1) C.L.(0)
(Decrease in
Current
Liabilities)
Balancing
Figure

Total

165

STATEMENT OF CHANGES IN FINANCIAL POSITION

Example 4.3
The Balance Sheet of Robert, Rakesh and Rehman Ltd. is given below :
Balance Sheet of Robert, Rakesh
and Rehman Ltd. as at March 31, 2002
Particulas
Rs.
Assets
Land
14,50,000
4,80,000

Plant and Machinery


Less : Accumulated
Depreciation

Accounts Receivable

Rs.

8,00,000

Building Cost
Less : Accumulated
Depreciation

Furniture
Less : Accumulated
Depreciation
Stock

2001
Rs.

2002
Rs.
8,00,000

9,70,000

16,80,000
5,20,000

11,60,000

18,75,000
6,80,000

11,95,000

19,95,000
7,85,000

12,10,000

2,89,000
69,000

2,20,000

3,65,000
75,000

2,90,000

2,50,000

3,35,000

3,45,000

3,40,000

85,000

1,30,000

38,65,000

42,65,000

Equity Share Capital

20,00,000

20,00,000

Reserve & Surpluses

10,44,000

12,28,000

12% Debentures

5,00,000

7,00,000

Accounts Payable

Cash on hand and at bank


Total
Liabilities

2,16,000

2,36,000

Bills Payable

70,000

61,000

Expenses Payable

35,000

40,000

38,65,000

42,65,000

Total

Required : Prepare schedule of changes in working capital.

166

ACCOUNTANCY

Solution
Schedule of changes in Working Capital of Robert, Rakesh and Rehman Ltd.
for the year ended March 31, 2002
2001
Amount
Rs.

2002
Amount
Rs.

Particulars
Current Assets
Stock
Accounts Receivable
Cash Balance

2,50,000
3,45,000
85,000

3,35,000
3,40,000
1,30,000

Total

6,80,000

8,05,000

Accounts Payable
Bills Payable
Expenses Payable
Net Increase in
Working Capital

2,16,000
70,000
35,000

2,36,000
61,000
40,000

Total

3,21,000

Amount
Rs.

Amount
Rs.

Increase in Net
working Capital

Decrease in Net
working Capital

85,000
5,000
45,000

Current Liabilities
20,000
9,000
5,000
1,09,000
3,37,000

1,39,000

1,39,000

4.3 Statement of Changes in Financial Position


The schedule of changes in working capital reveals only the net changes in working
capital over a period of time. This does not throw any light on how these changes
have taken place. For this purpose we need to prepare statement of changes in
financial position. Statement of changes of financial position shows the sources
of working capital on one side and the application (uses) of working capital on
the other side of the statement. The difference between the two sides will reveal
net increase/decrease in working capital.
4.3.1 Sources and Uses of Funds
When a transaction increases the current assets or decrease the current liabilities,
it is called as a source of funds. When a transaction decreases the current assets
or increases the current liabilities, it is called application or use of funds. Sources
and Uses of funds are depicted in figure 4.1.

167

STATEMENT OF CHANGES IN FINANCIAL POSITION

1*

2*

3*

4*

5*

Sources of net working capital

Net Working Capital

uses of working capital

(i)**

(ii)**

(iii)**

(iv)**

(v)**

(vi)**

Fig. 4.1

*Sources of Funds :

**Uses of Funds :

1.
2.
3.
4.
5.

(i)
(ii)
(iii)
(iv)
(v)
(vi)

Sale of long-term assets


Issue of shares
Issue of debenture
Long-term loans raised
Funds from operation

Purchase of long term assets


Redemption and buy back of shares
Redemption of debentures
Repayment of long term loans
Payment of dividends
Funds used for operations

168

ACCOUNTANCY

4.3.2 Preparation of Statement of Changes in Financial Position


Statement of changes in financial position is prepared by listing sources on left
side of the statement and the uses on the right side. The difference between the
two sides reveal net increase/decrease in working capital. To determine the sources
and uses of funds, the following steps are taken :
(i)

Compute funds from operations

(ii)

Analyse the changes in non-current assets and liabilities in the balance sheet
in the beginning and at the end of the period with the help of additional
information provided to determine the net decreases in non-current assets
and net increases in non-current liabilities and equity, which or inflow of
funds. The net decreases in non-current liabilities and equity, and increases
in non-current assets, which, represent outflow or uses of funds.

(iii) List all the sources on the left side of the statement and uses on the right
side of the statement.
(iv) The two sides are totalled and the difference between them is recorded on
the side which is shorter in order to make the totals equal. Write net
increases (if it appears on the right side) or decreases (if it appears on the
left side) in working capital. This must be equal to the amount of net
increase or decrease computed while preparing schedule of changes in
working capital.
4.3.3 Funds from Operation
The Profit and Loss account shows income generated from operation. Income
is determined on the basis of revenue recognition and matching principle.
Items included for determining income may or may not affect funds of the
enterprise. Therefore, we need to adjust those items which affect the income
but do not affect funds or may appear as sources or uses under any other
head. Thus, such items need to be adjusted for computing funds from operation.
Items deducted while computing income but which do not use working capital
are listed below :
l

Depreciation, Depletion and Amortisation of intangible assets;

Amortisation of discount on issue of debenture, preliminary expenses,


deferred revenue expenditure;

Loss on sale of non-current assets.


Above items are added to the net income to arrive at funds from operation.

STATEMENT OF CHANGES IN FINANCIAL POSITION

169

There are several items which are added to income, but these do not provide
working capital.
l

Gain from sale of non-current assets for the year which needs to be
subtracted from the net income to arrive at funds from operations.

Sometimes, the net income for the year may not be given. But instead of
this, profit and loss appropriation account balance in the beginning and
at the end of the period are given. Thus, we need to start with the net
change in the two balances and also adjust the following items along with
the above items of adjustments :
(i) Transfer to general reserve
(ii) Dividends proposed/declared

Example 4.4
Profit and Loss Account of Navroj Ltd. for the year ended March 31, 2002 is
given below :
Profit and Loss Account of Navroj Ltd. for the year ended March 31, 2002
Particulars

Amount
(Rs.)

Salaries

4,90,000

Depreciation

1,85,000

Preliminary expenses
written-off
Rent

15,000
18,000

Administrative expenses

2,62,000

Selling and Distribution


expenses

2,54,000

Total

15,80,000

1,84,000

Commission

Net profit

Gross profit

Amount
(Rs.)

12,000

Interest

Insurance expenses

Particulars

36,000
1,24,000
15,80,000

Required : Compute funds from operation.

15,80,000

170

ACCOUNTANCY

Solution
Funds from Operation
Particulars

Amount (Rs.)

Net profit for the year


Add : Depreciation charged
Preliminary expenses written-off

1,24,000
1,85,000
12,000

Funds from Operation

3,21,000

Example 4.5
Following items have been drawn from the balance sheet of Rangaswami Metal
Works Ltd. on at March 31, 2001 and 2002

Profit and Loss Appropriation (Cr.)


General Reserve(Cr.)
Goodwill (Dr.)

As at
31.03.2001

As at
31.03.2002

6,00,000

7,50,000

11,00,000

12,50,000

2,85,000

2,35,000

60,000

45,000

3,85,000

4,70,000

Preliminary Expenses (Dr.)


Accumulated Depreciation
on Fixed Assets (Cr.)

* Relevant items only


The dividend paid in June, 2002 were Rs. 1,50,000. During the year and
there were no purchase or sale of fixed assets.
Required : Compute funds from operation.
Solution
Funds from Operation
Particulars

Amount (Rs.)

Increase in Profit and Loss Appropriation balance


( 7,50,000-6,00,000)
Add : Transfer to general reserve
Dividend paid

1,50,000

Net Income for the year

4,50,000

Add : Goodwill written-off


Preliminary expenses written-off
Depreciation written-off
Funds from Operation

1,50,000
1,50,000
50,000
15,000
85,000
6,00,000

171

STATEMENT OF CHANGES IN FINANCIAL POSITION

4.3.4 Computation of Other Sources and Uses of Funds


The other sources of funds are issue of shares, debenture, raising long term
loans, sale of fixed assets and long term assets. The uses of funds are
redemption of shares, debenture, repayment of long term loans, purchase of
fixed assets and long term assets.
The information relating to issue or redemption of shares and about long
term loans will be available from the balance sheet in the beginning and at the
end of the year. Any discount or premium on issue/redemption of shares and
debentures is given in the form of additional information. Similarly, the balances
of fixed assets and long term investments in the beginning and at the end of
the year along with information relating to sale, or purchase and depreciation
charged on fixed assets is ascertained to compute the amount of purchases or
sales of fixed assets and investments. The information available may be written
in the accounts and missing figures can be ascertained, the following accounts
may be prepared to find out the missing information.
Fixed Assets Account
Dr.
Date

Cr.
Particulars

Rs.

Opening Balance
Purchase of Assets

Total

Date

Particulars

Rs.

Sale of Assets
(at cost)

Closing Balance

Total

Accumulated Depreciation on Fixed Assets Account


Dr.
Date

Cr.
Particulars

Rs.

Accumulated depreciation
written-off on Assets sold

Date

Particulars

Rs.

Balance b/f

Balance c/f

Depreciation charged
for Current year

Total

Total

Fixed Assets Sold Account


Dr.
Date

Cr.
Particulars

Rs.

Fixed Assets

Gain on sale of assets


Total

or

Date

Particulars

Rs.

Accumulated
depreciation
Bank
(Amount realised on sale)
Loss on sale of assets

Total

172

ACCOUNTANCY

Example 4.6
Balance Sheet of Zeal Ltd. as at March 31, 2002 is given below :
Balance Sheet of Zeal Ltd. as at March 31, 2002
Liabilities

2001
Amount
(Rs.)

2002
Amount
(Rs.)

10,00,000

15,00,000

Land

Reserve and
Surplus

8,10,000

10,15,000

10% Debenture

4,00,000

Accounts Payable

3,20,000

Equity Capital

2001
Amount
(Rs.)

2002
Amount
(Rs.)

9,00,000

11,00,000

Buildings

16,50,000

26,00,000

6,00,000

Accumulated
Depreciation

(4,00,000)

(7,00,000)

2,90,000

Inventory

2,10,000

2,15,000

Accounts
Receivable

1,70,000

1,85,000

25,000

90,000

15,000

10,000

Outstanding
Expenses

20,000

65,000

Provision for
taxation

20,000

30,000

Total

25,70,000

Assets

Cash on hand
Preliminary
Expenses

35,00,000

25,70,000 35,00,000

Additional Information :
(i)

A building costing Rs. 9,50,000 and land Rs. 2,00,000 was purchased for
cash.

(ii) Equity share and debenture were issued for cash at par.
(iii) Dividend paid during the year were Rs. 3,00,000.
Required :
Prepare schedule of change in working capital, compute fund from operation,
and prepared statement of changes in financial position.
Solution
Computation of Funds from Operation
Particulars

Amount(Rs.)

Increase in Reserve and Surpluses


(10,15,000 8,10,000)
Dividends paid
Preliminary Expenses written-off
Depreciation Charged

2,05,000
3,00,000
5,000
3,00,000

Funds from Operation

8,10,000

173

STATEMENT OF CHANGES IN FINANCIAL POSITION

Schedule of Changes in Working Capital of Zeal Ltd.


for the year ended March 31, 2002
Particulars

Current Assets :
Inventory
Accounts Receivable
Cash

Increase in
Net Working
Capital
Rs.

2001

2002

2,10,000
1,70,000
25,000

2,15,000
1,85,000
90,000

5,000
15,000
65,000

3,20,000
20,000

2,90,000
65,000

30,000

20,000

30,000

Decrease in
Net Working
Capital
Rs.

Current Liabilities :
Accounts Payable
Outstanding
Expenses
Provision for Taxation
Net increase in
Working Capital
Total

45,000
10,000
60,000
1,15,000

1,15,000

Statement of Changes in Financial Position


Sources
Funds from operation
Issue of Share
Issue of Debenture

Total

Amount(Rs.)
8,10,000
5,00,000
2,00,000

15,10,000

Uses
Dividends paid
Purchase of land
Purchase of Buildings
Net increase in
Working Capital

Amount(Rs.)
3,00,000
2,00,000
9,50,000
60,000
15,10,000

Example 4.7
The balance sheet of Rohan Manufacturers Ltd. as at March 31, 2002 is given
here :

174

ACCOUNTANCY

Balance Sheet of Rohan Manufacturers Ltd. as at March, 31, 2002

Particulars

2001
Amount(Rs.)

2002
Amount(Rs.)

20,00,000
6,00,000
5,00,000
2,70,000
70,000
45,000

20,00,000
8,60,000
7,00,000
3,60,000
1,50,000
30,000

34,85,000

41,00,000

Liabilities
Equity Share Capital
Reserve & Surpluses
12% Debenture
Accounts Payable
Bills Payable
Expenses Payable
Total
Assets
Goodwill
Land
Building Cost
Less : Accumulated
Machinery
Less : Accumulated
Depreciation
Investment
Stock
Accounts Receivable
Bills Receivable
Prepaid Expenses
Cash at Bank
Cash on Hand
Total

50,000
8,00,000
11,85,000
2,85,000
1,95,000
45,000

9,00,000
1,50,000

9,50,000
14,55,000
3,25,000
2,45,000
75,000

11,30,000
1,70,000

5,60,000
4,90,000
2,80,000
80,000
25,000
1,10,000
40,000

6,50,000
5,30,000
3,10,000
60,000
40,000
1,90,000
70,000

34,85,000

41,00,000

The following additional information is provided :


(i)

A piece of machinery costing Rs. 50,000 (accumulated depreciation


Rs. 10,000) was sold for Rs. 36,000.

(ii) During the year dividends were paid for Rs. 2,00,000.
Required
Prepare schedule of changes in working capital and statement of changes in
financial position.

175

STATEMENT OF CHANGES IN FINANCIAL POSITION

Solution
Schedule of Changes in Working Capital of Rohan Manufactures Ltd.
for the year ended March 31, 2002
Particulars

2001

2002

Changes in working capital

Amount
Rs.

Amount
Rs.

Increase in
Net working
Capital

Stock

4,90,000

5,30,000

40,000

Accounts Receivable

2,80,000

3,10,000

30,000

Bills Receivable

80,000

60,000

Prepaid expenses

25,000

40,000

15,000

Cash at bank

1,10,000

1,90,000

80,000

Cash on hand

40,000

70,000

30,000

Decrease in
Net working
Capital

Current Assets

20,000

Current Liabilities
Bill payable

70,000

1,50,000

80,000

Accounts Payable

2,70,000

3,60,000

90,000

Expenses Payable

45,000

30,000

Net Increase in
Working Capital

20,000
2,10,000

2,10,000

Computation of Funds from Operation


Amount(Rs.)
Net Increase in Reserve and
Surpluses (8,60,000 6,00,000)

2,60,000

Add Dividends paid

2,00,000

Depreciation on Buildings

40,000

Depreciation on Machinery

40,000

Loss on sale of Machinery


Goodwill written-off
Funds from Operation

4,000
50,000
5,94,000

176

ACCOUNTANCY

Statement of Changes in Financial Position


Sources of Funds

Amount(Rs.)

Funds from Operation


Issue of Debenture
Sale of Machinery

Total

5,94,000
2,00,000
36,000

8,30,000

Uses of Funds

(Amount)Rs.

Purchase of Land
Purchase of Buildings
Purchase of Machinery
Purchase of Investment
Payment of Dividends
Net Increase in
Working Capital

1,50,000
2,70,000
1,00,000
90,000
2,00,000

Total

8,30,000

20,000

Machinery Account
Dr.

Cr.

Date

Amount(Rs.) Date

Amount(Rs.)

Balance b/f
Purchase of Machinery

1,95,000
1,00,000

Machinery sold
Balance c/f

50,000
2,45,000

Total

2,95,000

Total

2,95,000

Machinery sold Account


Dr.

Cr.

Date

Amount(Rs.) Date
Machinery

Total

50,000

50,000

Amount(Rs.)
Accumulated
Depreciation
on Machinery Sold
Bank
Loss on sale

10,000

36,000
4,000

Total

50,000

Accumulated Depreciation on Machinery Account


Dr.

Cr.

Date

Amount(Rs.) Date

Amount(Rs.)

Accumulated Depreciation on Machinery Sold

10,000

Balance b/f
Depreciation

Balance c/f

75,000

charged

Total

85,000

Total

Example 4.8
Following is the balance sheet of Zircon Limited.

45,000
40,000
85,000

177

STATEMENT OF CHANGES IN FINANCIAL POSITION

Balance Sheet of Zircon Ltd. as at March 31, 2003.


Capital and
Liabilities

2002
Amount
Rs.

2003
Amount
Rs.

Equity share capital

80,00,000

88,00,000

Land

26,00,000

44,00,000

Reserves
9% Debenture

14,50,000

26,00,000
40,00,000

Building
(at cost)

36,00,000

36,00,000

9,00,000
75,000

10,00,000
95,000

Accumulated
depreciation

6,00,000

6,72,000

36,00,000

49,80,000

8,00,000

8,90,000

Stock

9,18,000

10,12,000

Accounts
Receivable

6,54,000

8,37,000

Accounts Payable
Expenses Payable

Assets

2002
Amount
Rs.

Plant and
Machinery
Accumulated
depreciation

Cash at Bank
Total

1,04,25,000 1,64,95,000

Total

2003
Amount
Rs.

4,53,000

32,28,000

1,04,25,000

1,64,95,000

Additional information
1.

Land purchased during the year was for Rs. 20,00,000.

2.

Plant and Machinery costing Rs. 4,20,000(Accumulated Depreciation


thereon Rs. 3,80,000) was sold for Rs. 25,000.

3.

Plant and Machinery purchased for Rs. 18,00,000.

4.

Depreciation charged on Plant and Machinery Rs. 4,70,000 and on building


Rs. 72,000.

5.

Dividend paid during the year were Rs. 8,00,000.

Required
Prepare schedule of changes in financial position on working capital basis
(Funds Flow Statement).

178

ACCOUNTANCY

Solution
Schedule of changes in Working Capital
Particulars

2002

2003

Changes in Working Capital

Amount
Rs.

Amount
Rs.

Increase in
Net working
Capital

Stock

9,18,000

10,12,000

94,000

Accounts Receivable

6,54,000

8,37,000

1,83,000

Cash at Bank

4,53,000

32,28,000

27,75,000

Accounts Payable
Expenses Payable

9,00,000
75,000

10,00,000
95,000

Decrease in
Net working
Capital

1,00,000
20,000

Net increase in
Working Capital

29,32,000

Total

30,52,000

30,52,000

Computation of Funds from Operations


Amount (Rs.)
Net increase in Reserves
(26,00,000 14,50,000)

11,50,000

Dividends paid

8,00,000

Depreciation on Building

72,000

Depreciation on Plant and Machinery

4,70,000

Loss on sale of plant and machinery

15,000

Funds from Operation

25,07,000

Statement of Changes in Financial Position


Sources of Funds
Funds from operations
Issue of shares
Issue of debentures
Sale of Plant and Machinery
Total

Amount(Rs.)

Uses of Funds

Amount(Rs.)

25,07,000 Dividend paid

8,00,000

8,00,000 Land purchased


40,00,000 Plant and Machinery purchased
25,000 Net increase in
working capital
73,32,000 Total

18,00,000
18,00,000
29,32,000
73,32,000

179

STATEMENT OF CHANGES IN FINANCIAL POSITION


Plant and Machinery Account
Dr.

Cr.

Date

Amount(Rs.)

Date

Amount(Rs.)

Balance b/f

36,00,000

Plant and
Machinery sold

Plant and Machinery

18,00,000

Balance c/f

Total

54,00,000

Total

4,20,000
49,80,000
54,00,000

Plant and Machinery Sold Account


Dr.

Cr.

Date

Amount(Rs.)
Plant and Machinery

Total

Date

4,20,000

Amount(Rs.)
Accumulated depreciation on plant

4,20,000

3,80,000

Bank

25,000

Loss on sale

15,000

Total

4,20,000

Accumulated Depreciation on Plant and Machinery Account


Dr.

Cr.

Date

Amount(Rs.)
Plant and
Machinery sold
Balance c/f
Total

3,80,000
8,90,000
12,70,000

Date

Amount(Rs.)
Balance b/f
Depreciation
charged
Total

8,00,000
4,70,000
12,70,000

4.4 Uses and Limitations of Statement of Changes in Financial Position


The statement of changes in financial position is useful to understand how the
funds have been generated and used during the period. It ascertains total
funds generated from operations, which, normally is a major source of funds
for a healthy company. It also helps in evaluating the funds generated from
financing and investing activities of the business. It also throws light on how
these funds were used. It helps the lenders to evaluate the ability of an enterprise
to meet its financial obligations. It help in ascertaining the funds that needs to
be generated to meet the expansion requirements.
Though Statement of Changes in Financial Position (SCFP) is of immense
help to management and external users, yet, it suffers from some limitations.
It only rearranges the information contained in the financial statements

180

ACCOUNTANCY

therefore, the limitation of financial statements do not make Statement of Changes


in Financial Position (SCFP) more reliable than the financial statements. It does
not help in ascertaining whether the cash will be available to meet future
obligations or not. This Statement reveals his historical information only and
does not reveal future flows. Also, current assets financed through current
liabilities are not revealed by statement of changes in financial position.
4.5 Statement of Cash Flows Meaning and Purpose
As discussed earlier in this chapter, the term Funds have different interpretations.
It is also interpreted as cash. Therefore, statement of changes in financial position
may also be prepared by taking cash as the basis instead of working capital.
This statement is more commonly known as Cash Flow Statement or Statement
of Cash Flows(SCF). Accounting Standard 3 issued by The Institute of Chartered
Accountants of India deals with preparation and presentation of statement of
changes in Cash Flows. The Companies listed on recognized stock exchanges of
India and other commercial, industrial and business enterprises in the public
and private sectors are required to prepare and report statement of cash flows
along with the profit and loss account and balance sheet.
The purpose of the Statement of Cash Flows is to provide the information
about an enterprises cash receipts(cash inflows) and payments(cash outflows)
during the period. For this purpose, the cash flows are divided into operating,
financing and investing activities. The statements concludes with the amount of
net cash flow drawn from all these three activities. The opening balance of cash is
added to the net flow during the period which will give the cash balance at the
end of the period. The net flow is already known(being equal to the difference
between opening and closing balance). It is, therefore, not the net flow but the
reasons for this net flow which is highlighted by the statement.
Cash flow statement is considered to be better than Statement of Changes in
Financial Position on working capital basis. It focuses on cash flow rather than
on working capital. Since the company must convert its current assets into cash
to meet its financial obligations. Thus, Statement of cash flow helps the users to
ascertain in a more accurate manner the liquidity of the firm and is considered to
be superior to Statement of Changes in Financial Position.
Cash includes cash on hand, cash at bank and cash equivalent assets. Cash
equivalent are those investments which are readily convertible into known amount
of cash and are subject to insignificant risk of changes in value. Cash equivalents
are not held for the purpose of investment.

STATEMENT OF CHANGES IN FINANCIAL POSITION

181

4.5.1. Usefulness Statement of Cash Flows


The information provided by Statement of Cash Flows (SCF) helps investors,
creditors and other users to assess different aspects of financial position of the
firm. It helps to ascertain the ability of the enterprise to generate future cash
flows. It helps to ascertain about the ability of the enterprises to pay dividends
and meet its obligations. It also explains the difference between the net income
and cash provided by operating activities of an enterprise. It provide information
about cash flows from investing and financing transactions.

4.6 Preparation of Statement of Cash Flows


The information required to prepare Statement of Cash Flows (SCF) is obtained
from comparative balance sheet, profit and loss account and additional
information given along with these two statements. The changes in assets,
liabilities and equity are to be interpreted in the light of additional information
provided to determine the cash flows from purchase and sale of fixed assets,
cash flows from issue and redemption of share and debenture and raising and
repayment of long term loans. The income statement along with balance sheet
and other information provided will help in ascertaining cash flow from
operations. Accounting Standard 3 required these cash flows to be categorised
into flows from operation, investing and financing activities. The ascertainment
of cash flows from these categories is discussed below :
4.6.1 Cash from Operating Activities
The net income is computed on the basis of accrual basis. To compute cash
provided by operating activities we need to convert the operating activities being
considered from accrual basis to cash basis. For this purpose, we can follow
either Direct Method or Indirect Method. The cash provided will be same,
whatever method is used for computation. Accounting Standard 3 allows both
methods for reporting cash from operating activities among Indian Companies.
Cash from Operating Activities Direct Method
Under this method, we need to adjust each item in the income statement from
accrual basis to cash basis. Cash receipts and cash payments related to revenues and expenses are determined and listed as cash inflows and outflows
from operating activities. The net amount is reported in the last column as
cash provided from operations.
Step 1 : Determine cash provided by operating activities
(i)

Cash receipts from customers : The revenue from sales is reported on


accrual basis in the income statement. We add the amount of opening

182

ACCOUNTANCY

receivables to the net sales and to this we subtract amount of receivables


at the end, bad debts written-off during the period and discount allowed
to customers.
Particulars
Net Sales
Add : Opening Receivables
Less : Closing Receivables
Discount allowed
Bad Debts written off
Net cash received from customers

(ii)

Amount(Rs.)
xxx
xxx
(x x x)
(x x x)
(x x x)
xxx

Other Cash receipts : The amount of other revenue like rent, income,
commission earned, etc. are adjusted for any amounts not received or
received in advance to determine cash received.
Particulars
Other revenues earned
Add : Receivable in the beginning
Less : Receivable at the end
Add : Received in advance at the end
Less : Received-in-advance
in the beginning
Cash received from other revenues

Amount(Rs.)
x
xxx
(x x x)
xxx
(x x x)
xxx

Step 2 : Cash used from operating activities


(i)

Cash payment to suppliers : The income statement reports cost of goods


sold on accrual basis. To determine the cash paid to suppliers, we need to
first ascertain the purchases made during the year and then compute the
amount paid to suppliers. The closing stock of goods is added to cost of
goods sold and opening stock is subtracted therefrom to compute the
purchases during the period.
Particulars

Amount(Rs.)

Cost of Goods sold


Add : Closing Stock
Less : Opening Stock
Purchases

xxx
(x x x)
xxx

STATEMENT OF CHANGES IN FINANCIAL POSITION

183

We need to add the creditors (Account Payables) in the beginning of the


period to the amount of purchases and subtract closing creditors (Accounts
Payables) therefrom for computing the amount paid to suppliers.
Particulars

Add : Opening creditors

Less : Closing creditors


Cash payment to suppliers

(ii)

Amount(Rs.)

Purchases

(xxx)
xxx

Cash payment for operating expenses : Operating expenses are reported in


the income statement on accrual basis. We need to adjust the operating
expenses for outstanding expenses and prepaid expenses to ascertain cash
payment for operating expenses.
Particulars
Operating expenses

Amount(Rs.)
xxx

Add : Prepaid Expenses at the end of the period

xxx

Less : Prepaid Expenses in the begining of the period

(xxx)

Less : Outstanding Expenses at the end of the period

(xxx)

Cash payment for operating expenses

xxx

(iii) Cash payment for Income Tax : The income statement indicates the provision made for income tax. The comparative balance sheet indicates the
amount of tax payable in the beginning and and at the end of the period.
We can compute the cash payment for income tax as follows :Particulars
Provision for Income Tax
Add : Tax Payable in the beginning
Less : Tax Payable at the end
Cash payments for Income Tax

Amount(Rs.)
xxx
xxx
(xxx)
xxx

(iv) Payment for Interest : Though interest expense is subtracted from revenues
to compute net income, according to Accounting Standard 3 cash flows
arising from interest paid and interest/dividend received in cash of
financial enterprises should be reported as cash flow from operating
activities. In the case of other enterprises, cash flows from interest paid
should be classified as financing activities and cash flows from interest
and dividends received should be reported as cash flows from Investing
activities.

184

ACCOUNTANCY

Cash from operating activities Indirect Method


Under this method, we need to start with the net income and make adjustments
for those items which affected net income but do not affect cash. The steps
followed under this indirect method are as follows :(i)

Add to the net income for the year the amount of expenses charged to
current years income but do not result in outflow of cash. These are
depreciation on fixed assets written-off, deferred revenue expenditure
written off, loss on sale of fixed assets. Gain on sale of fixed assets, on the
other hand, increases the income for the current year but it is included in
cash flow from sale of fixed assets. Therefore, gain on sale of fixed assets
is to be substracted from the profit. The changes in current assets and
current liabilities are also to be adjusted to ascertain the cash flow from
operating activities. Increases in current liabilities and decreases in current
assets over the period are added to the net profit. Interest paid is treated
as cash flow from financing activities, therefore, it is added back to profit.
The Interest and dividends received are sub-stracted from the net profit
and reported as cash flow from investing activities. The format to ascertain
the cash flow from operating activities is given below :
Computation of Cash Flow from Operating Activities
Particulars

Amount(Rs.)

Cash Flow from Operating Activities


Net Income after tax
Add : Depreciation
Add : Fixed Assets written-off
Add : Loss on sale of Fixed Assets
Add : Deferred revenue expenses written-off
Add : Interest period expenses
Add : Provision for Income Tax
Less : Gain on sale of Fixed Assets
Add : Increases in Current Liabilities (Other than bank overdraft)
Add : Decrease in Current Assets (Other than cash)
Less : Decrease in Current Liabilities (Other than bank overdraft)
Add : Increase in Current Assets (Other than cash)
Net Cash Provided from operating by operating activities
Less : Payment for Income Tax
Net Cash after tax provided by Operating Activities

xxx
xxx
xxx
xxx
xxx
xxx
xxx
(xxx)
xxx
xxx
(xxx)
xxx
(xxx)
xxx

STATEMENT OF CHANGES IN FINANCIAL POSITION

185

4.6.2 Cash Flow from Investing Activities


The amount of fixed assets and long term investments in the beginning and at
the end of the year are available from the comparative balance sheet. The
additional information provides inputs required to evaluate the amount and
reason for changes in these items. We may ascertain the cash used for purchase
of fixed assets and investments and cash received from sale of these items by
preparing the account on the basis of information available as discussed at
the time of preparation of Statement of Changes in financial position.
The cash flows from investing activities :
(i)

Cash payments to acquire fixed assets;

(ii) Cash receipts from sale of fixed assets;


(iii) Cash payments to acquire shares, warrants or debt instruments of other
enterprises (other than cash payment for those instruments which are
considered to be cash equivalents and those which are held for trading
purposes);
(iv) Cash received with respect to interest and dividend on investments;
(v)

Cash advances and loans made to third parties. In case of financial enterprises these will be treated as cash flows from operating activities;

(vi) Cash receipts from the repayments of advances and loans made to third
parties. In case of financial enterprises these will be treated as cash flows
from operating activities.
4.6.3 Cash Flow from Financing Activities
The cash flows from financing activities reveals how the cash is provided to the
enterprises by the owners and lenders. Cash flows from financing activities is
ascertained by analysing the differences in equity and long-term liabilities in
the beginning and at the end of the year.
The cash flows from financing activities include :
(i)

Cash proceeds from issue of share;

(ii) Cash proceeds from issue of debenture;


(iii) Cash proceeds from loan raised;
(iv) Cash payments for redemption of share;
(v)

Cash payments for redemption of debenture;

(vi) Cash payments for repayment of loan;

186

ACCOUNTANCY

(vii) Cash payments for dividends on share;


(viii) Cash payments for interest on debenture and loan.
Format of Statement of Cash Flows (Direct Method)
Amount (Rs.)

Amount (Rs.)

Cash Flows from Operating Activities


Cash receipt from customers

xxx

Cash paid to suppliers

(xxx)

Cash paid to employees

(xxx)

Cash paid for expenses

(xxx)

Cash generated from operations


Cash paid for Income Taxes

xxx
(xxx)

Net Cash from operating activities

xxx

Cash Flow from Investing Activities


Purchase of fixed assets and investments

xxx

Cash from interest and dividends on


investment received

xxx

Net cash flows (used for) investing activities

xxx or (xxx)

Cash Flows from Financing Activities


Cash from issue of shares capital

xxx

Cash from issue of debenture

xxx

Cash from loans raised

xxx

Redemption of share

(xxx)

Redemption of debenture

(xxx)

Repayment of loans

(xxx)

Payment of interest

(xxx)

Payment of dividend

(xxx)

Net cash from (used for) financing activities

xxx or (xxx)

Net Increase (Decrease) in Cash


Cash in the beginning of the period
Cash at the end of the period

xxx or (xxx)
xxx
xxx

Statement of Cash Flows (Indirect Method)


Under this method there will be change in cash flows from operating activities section only
which is given here :

187

STATEMENT OF CHANGES IN FINANCIAL POSITION


Format of Statement of Cash Flows (Indirect Method)
Amount(Rs.)
Cash Flows from Operating Activities
Net profit before tax
Adjustments for :
Depreciation
Interest Income
Dividend Income
Interest expense
Provision for tax
Loss on sale of fixed assets
Gain on sale of fixed assets
Other non-cash items

Operating profit before


working capital changes
Add : Increases in current liabilities
Decrease in current assets
(other than cash)
Less : Decrease in current liabilities
Increases in current assets
(other then cash)
Net cash from operating activities

xxx
xxx
(xxx)
(xxx)
xxx
xxx
xxx
(xxx)
xxx
Or
(xxx)
xxx

(xxx)
(xxx)
xxx
Rs.

Purchase of fixed assets and investments


Cash flows from sale of fixed assets
and investments
Cash from interest and dividends
on investments
Net cash from (used for) investing activities

xxx
xxx

Cash from issue of share


Cash from issue of debenture
Cash from loan raised
Redemption of share
Redemption of debenture
Payment of interest
Payment of dividends
Net cash from (used for) financing activities
Net increase (decrease) in cash
Cash at the end of the period

or (xxx)

xxx
xxx

Cash from Investing Activities

Cash from Investing Activities

Amount(Rs.)

Rs.

xxx
xxx or (xxx)
Rs.

Rs.

xxx
xxx
(xxx)
(xxx)
(xxx)
(xxx)
(xxx)
xxx or (xxx)
xxx
xxx

188

ACCOUNTANCY

Example 4.9
Ganga Yamuna Ltd. reported profit of Rs. 12,50,000 for the year ended
31, 2003 after considering the following :
Depreciation on building
Depreciation on Plant and Machinery
Depreciation on furniture
Amortization of goodwill
Loss on sale of machinery

Rs.
Rs.
Rs.
Rs.
Rs.

March

35,000
75,000
18,000
12,000
20,000

The current assets and liabilities in the beginning and at the end of the
year are given below :
March 31 2002
Accounts Receivable
Stock on hand
Cash on hand
Accounts Pabable
Expenses Payable

Rs.
Rs.
Rs.
Rs.
Rs.

38,000
75,000
18,000
34,000
7,000

March 31 2003
Rs.
Rs.
Rs.
Rs.
Rs.

42,000
68,000
32,000
32,000
10,000

Solution
Amount(Rs.)
Cash Flow from Operating Activities
Net profit for the year

12,50,000

Add : depreciation on buildings


depreciation on plant & machinery
depreciation on furniture
Amortization of goodwill
Loss on sale of machinery
Operating profit before working capital changes
Increase in Accounts Receivable
Decrease in stock
Decrease in Accounts Payable
Increase in expenses payable

35,000
75,000
18,000
12,000
20,000
14,10,000
(4,000)
7,000
(3,000)
3,000

Net Cash from Operating Activities

14,13,000

189

STATEMENT OF CHANGES IN FINANCIAL POSITION

Example 4.10
Given below is the summarised balance sheet and profit and loss account of an
enterprise
Balance Sheet of ........ as at March 31, 2002, 2003
Liabilities

March 31 March 31 Assets


2002
2003
Rs.
Rs.

Capital
Reserves

90,000
60,000

Long-term loans(9%)
Dividend Proposed
Accounts payable
Outstanding
Expenses

70,000
8,000
40,000

Total

32,000

March 31
2002
Rs.

March 31
2003
Rs.

1,30,000 Plant (Cost)


1,60,000
96,000 Accumulated
Depreciation
(30,000)
50,000 Patents
10,000 Stock
80,000
30,000 Sundry Debtors
60,000
Prepaid Expenses
10,000
19,000 Cash
20,000

1,65,000

3,00,000 3,35,000 Total

3,00,000

(38,000)
29,000
90,000
55,000
12,000
22,000
3,35,000

Profit and Loss Account for the year ending March 31, 2003
Particulars
Raw Material Consumed
Wages paid
Expenses
Depreciation
Patents Amortized
Net Profit

Rs.
2,00,000
40,000
80,000
8,000
1,000
46,000

Particulars
Sales

3,75,000

Rs.
3,75,000

3,75,000

Dividend Proposed
Profit Retained

10,000
36,000

Net Profit

46,000

Total

46,000

Total

46,000

Additional information
Loan was repaid to the extent of Rs. 20,000 on June, 2002, Interest is paid on
monthly basis at the end of each month which is included in expenses.
Required
Prepare Statement of Cash Flows.

190

ACCOUNTANCY

Solution
Statement of Cash Flows (Indirect Method)
Amount(Rs.) Amount(Rs.)
Cash Flows from Operating Activities
Net profit
Add: Depreciation

46,000
8,000

Patents Amortized

1,000

Interest paid

4,800

Operating profit before working capital changes


Add: Decrease in Debtors
Less : Increase in Stock
Increase in Prepaid

59,800
5,000
(10,000)
(2,000)

Decreased in Accounts Payable

(10,000)

Less : Decrease in outstanding Expenses

(13,000)

Cash provided by Operating Activities

29,800

Cash Flows from Investing Activities


Cash payment for purchase of Plant
Cash payment for purchase of Patents

(5,000)
(30,000)

Net Cash used for Investing Activities

(35,000)

Cash Flows from Financing Activities


Cash from issue of shares
Cash paid for Repayment of Loans

40,000
(20,000)

Cash paid for dividends

(8,000)

Cash paid for Interest

(4,800)

Cash provided by financing activities

7,200

Net increase in cash

2,000

Cash balance in the beginning of the year


Cash Balance at the end of the year

20,000
22,000

Example 4.11
The balance Sheet of software services Ltd. as on March 31, 2003 and profit and
loss account for the year ended March 31, 2003 are given here :

191

STATEMENT OF CHANGES IN FINANCIAL POSITION

Balance Sheet of Software Securities Ltd. as at March 31, 2002


(Rs. in000)
2001

2002

Amount

Amount

Equity Share Capital

108.0

396.0

Retained Earnings

244,8

370.8

9% Debenture

270.0

198.0

Capital and Liabilities

Accounts Payable

72.0

41.4

Expenses Payable

18.0

694.8

1024.2

Total
Assets an Properties
Land

126.0

81.0

Buildings

360.0

360.0

Accumulated Depreciation on Buildings

(19.8)

(37.8)

Equipments

122.4

347.4

Accumulated Depreciation on Equipments

(18.0)

(50.4)

Stock on hand

10.8

97.2

Accounts Receivable

36.0

122.4

Cash on hand

66.6

97.2

Preliminary Expenses

10.8

7.2

694.8

10,24.2

Total

Income statement of Software Securities Ltd. for the year ended March 31, 2002
(Rs. in000)
Amount
Sales

16,02.0

Less Cost of goods sold

837.0

Operating expenses

397.8

Interest expenses
Loss on sale of Equipment

Amount

21.6
3.6

1260.0

Net Income before tax

342.0

Provision for tax

117.0

Net income after tax

225.0

192

ACCOUNTANCY

Additional Information
1.
2.
3.
4.
5.
6.
7.
8.

Operating expenses include depreciation of Rs. 59,400 and charges from


preliminary expenses of Rs. 3,600.
Land was sold at its book value.
Cash dividend paid for the year 2002 amounted to Rs. 27,000 and fully paid
bonus shares were given in the ratio of 2 shares for every 3 shares held.
Interest expense was paid in cash.
Equipment with a cost of Rs. 2,98,800 was purchased for cash. Equipment
with a cost of Rs. 73,800 (book value Rs. 64,800) was sold for Rs. 61,200.
Debenture for Rs. 18,000 were redeemed for cash and for Rs. 54,000 were
redeemed by converting into equity shares at par value.
Equity shares of Rs. 1,62,000 were issued for cash at par.
Income Tax paid during the year amounted to Rs. 1,17,000.

Required : Prepare statement of cash flows.


Solution
Statement of Cash Flows
Particulars

Amount(Rs.)

Cash Flows from Operating Activities


Net income before tax

3,42,000

Depreciation charged

59,400

Preliminary expenses

3,600

Loss on sale of equipment

3,600

Interest expenses

21,600

Operating Profit before Working Capital Changes

4,30,200

Working Capital Changes


Increase in stock

(86,400)

Increase in debtors

(86,400)

Decrease in sundry creditors

(30,600)

Increase in expenses payable

18,000

Cash generated from operations

2,44,800

Less : Income tax paid

1,17,000

Net Cash Flows after Tax from


Operating Activities

1,27,800

193

STATEMENT OF CHANGES IN FINANCIAL POSITION

Cash from Investing Activities


Cash paid for purchase of equipment

(2,98,800)

Proceeds from sale of equipment

61,200

Proceeds from sale of land

45,000

Net Cash used for Investing Activities

(1,92,600)

Cash from Financing Activities


Proceeds from issue of equity share capital

1,62,000

Cash paid for redemption of debentures

(18,000)

Cash paid for dividends

(27,000)

Cash paid for interest

(21,600)

Net Cash Flows from Financing Activities

95,400

Net increase in cash

30,000

Cash in the beginning of the year

66,600

Cash at the end of the year

97,200

Notes to Solution
Equipment Account
Dr.
Date

Cr.
Particulars
Opening balance
Purchase of equipment

Amount(Rs.) Date
1,22,400
2,98,800

Particulars
Equipment sold
Closing balance

4,21,200

Amount(Rs.)
73,800
3,47,000
4,21,200

Equipment Sold Account


Dr.
Date

Cr.
Particulars
Equipment

Amount(Rs.) Date
73,800

Accumulated
Depreciation
Bank
Loss on sale
73,200

Cost book value = Accumulated Depreciation


Rs. 73,800 Rs. 64,800 = Rs. 9,000

Particulars

Amount(Rs.)
9,000
61,200
3,600
73,200

194

ACCOUNTANCY
Accumulated Depreciation on Equipment

Dr.

Cr.

Date

Particulars

Amount(Rs.) Date Particulars

Equipment sold

9,000

Closing balance

50,400

Amount(Rs.)

Opening balance

18,000

Depreciation charged
in current year

41,400

59,400

59,400

Equity share capital on March 31, 2002

3,96,000

Less : Equity share capital at March 31, 2001

1,08,000

Bonus issue

72,000

Redemption of debenture

54,000

Issue of Equity shares for cash

2,34,000
1,62,000

Depreciation charged on buildings = Rs. 37,800 Rs. 19,800 = Rs. 18,000


Total depreciation charged for the current year = Rs. 41,400 + Rs. 18,000 = Rs. 59,400

Terms Used in the Chapter


Funds
Flow of Funds
Investing Activities
Working Capital
Net Working Capital

Cash Flows
Operating Activities
Financing Activities
Statement of Changes in
Financial Position

Summary
Funds : There are many questions like how the company paid dividends in excess
of its currents profits, how the assets are financed, how the proceeds from shares
are used? Investors and other users of financial statements are interested to get
answers to these questions. Statement of changes in Financial Position (SCFP)
helps in answering such questions. The term funds in this context is used to indicate
net working capital (current assets-current Liabilities)
Statement of Cash Flow : The statement of cash flows is considered to be superior
to SCFP to ascertain the liquidity of an enterprise. SCF is to be prepared and

STATEMENT OF CHANGES IN FINANCIAL POSITION

195

reported by Indian enterprises according to AS-3 issued by the Institute of Chartered


Accountants of India. The cash flows are categorized into flows from operating,
investing and financing activities. This statement helps the users to ascertain the
amount and certainty of cash flows to be generated by an enterprise.
Exercises
I
A.

Objectives type Questions


State whether the following transaction will result in flow of funds or not :
(i)

Cash received from debtors

(ii)

Share issued for cash

(iii)

Old furniture written-off

(iv)

Deferred reserve expenditure charged to profit

(v)

Sale of goods on credit

(vi)

Discount received on making payment to supplies

(vii)

Purchase of fixed assets against issue of shares

(viii)

Wages paid for the current months

(ix)

Payments outstanding rent for previous month

(x)

Cash withdrawn from business by the owners

B. State True or False

C.

(i)

Cash received from sale of fixed assets at less than the book value is a
source of funds

(ii)

Payment of cash against purchase of stock is use of fund,

(iii)

Dividends paid is not a source of funds,

(iv)

Sale of goods on credit is not a source of funds.

(v)

Funds from operation is not a major source of funds for an enterprises.

Tick the right choices


(i)

Which of the following is incorrect about the statement of cash flows?

(a)

it provides information about the cash receipt and cash payments of an


enterprise.

(b)

it reconciles ending cash balance with the balance as per bank statement.

(c)

it provides information about the operating, investing and financing


activities.

(ii)

The statement of cash flows clarifies cash flows according to:

(a)

operating and non-operating flows

(b)

investing and non-operating flows

196

ACCOUNTANCY
(c)

inflows and outflows

(d)

operating, investing and financing activities

(iii) Example of cash flow from financing activity is:

D.

(a)

payment of dividend

(b)

receipt of dividend on investment

(c)

cash received from customer

(d)

purchase of fixed asset

(iv)

An example of cash flow from investing activity is:

(a)

issue of debenture

(b)

repayment of long-term loan

(c)

purchase of raw materials for cash

(d)

sale of investment by non-financial enterprise.

(v)

An example of cash flow from operating activity is;

(a)

purchase of own debenture

(b)

sale of fixed assets

(c)

interest paid on term-deposits by a bank

(d)

Issue of equity share capital

Mention the net amount of source or use of funds in each of the following
case:
(i)

Fixed asset sold for Rs.12,480 (book value Rs.14,000).

(ii)

Received Rs.17,980 from a debtor and allowed Rs.220 as discount


(Amount due from debtor is Rs.18,200).

(iii) Goods sold for Rs.18,500 for cash costing Rs.14,900.

E.

(iv)

Paid wages for current month Rs.24,000.

(v)

Issue of shares for Rs.8,50,000 against purchase of business comprising


of fixed assets Rs.7,60,000; current assets Rs.2,15,000 and took over
current liabilities Rs.1,25,000.

State in each case whether the cash flows resulting from the transaction are
from operating investing or financing activities;
(i)

Issue of shares capital for cash

(ii)

Redemption of debenture at premium for cash

(iii) Purchase of machinery for cash


(iv)

Purchase of inventory for cash

(v)

Sale of goods for cash

(vi)

Payment of interest on debenture

(vii) Receivied interest on investments by a trading enterprise.


(viii) Payment of income tax

STATEMENT OF CHANGES IN FINANCIAL POSITION

197

(ix) Payment of income tax


(x)
F.

Sale of old furniture at a loss.

Fill in the blanks:


(i)

Schedule of changes in working capital reveals net...............

(ii)

Statement of financial position (on working capital basis) shown............


and ........... of funds.

(iii) The balancing figure in funds flow statement reveals.............

2.

(iv)

Schedule of changes in working capital emphasises on ......... whereas


funds flow statement emphasises on ............... and ....... of .....................

(v)

Cash flows are categorised in .....................and .............. activities.

Short Answer Questions


(i)

What is funds?

(ii)

What is statement of changes in financial position?

(iii) What is statement of cash flow ?


(iv)

What is schedule of changes in working capital?

(v)

Distinguish between schedule of changes in working capital and funds


flow statement?

(vi)

Distinguish between statement of changes in financial position and statement of cash flows?

(vii) What are the major uses of funds ?


(viii) What are the major reserves of funds?
(ix)

What are the major uses of funds?

(x)

What is funds from operation?

(xi)

Describe the Direct method of computing cash flows from operating


activities?

(xii

Describe the Indirect method of computing cash flows from operating


activities?

(xiii) Describe the computation of funds from operation?


(xiv) What are major cash inflows and outflows from investing activities?
(xv) What are major cash inflows and outflows from financing activities?
(xvi) What are the limitations of statement of changes in financial position?
(xvii) Why is statement of cash flow preferred over statement of changes in
financial position?
3. Essay Type Questions
(i)

Describe the procedure to prepare statement of changes in financial


position.

(ii)

Describe the procedure to prepare statement of cash flows.

(iii) Describe Direct and Indirect method of ascertaining cash flows from
operating activities.

198

ACCOUNTANCY
(iv)

What are the advantages and limitations of Statement of changes in


Financial Position? Distinguish between statement of changes in Financial
Position and Statement of Cash Flows?
Problems

4.

Following is the Balance Sheet of Chandra Foods Ltd.


Balance Sheet of Chandra Foods Ltd. as at March 31, 2002, 2003
Liabilites

2002
Rs.

2003
Rs.

2,50,000

2,50,000

Accounts payable

55,000

Bills Payable

20,000

Mortgage

10,000

Share Capital

Total

Assets

2002
Rs.

2003
Rs.

Land & Building

1,40,000 1,40,000

80,000

Stock

1,00,000 1,30,000

40,000

Accounts Receivable

28,000

30,000

15,000

Cash on hand
Goodwill

7,000
60,000

25,000
60,000

3,35,000 3,85,000

Total

3,35,000 3,85,000

Required : Prepare Schedule of Changes in Working Capital


5.

Following is the Balance Sheet of Rajeshwari Co. Ltd.


Balance Sheet of Rajeshwari Co. Ltd. as at March 31, 2002 and 2003
Liabilites

2002
Rs.

2003
Rs.

Share Capital
Profit & Loss
8% Debenture

6,50,000 7,80,000
40,000
65,000
3,00,000 2,50,000

Accounts Payable
Bills Payable
Outstanding Expenses

1,70,000 1,60,000
40,000
50,000
20,000
30,000

Total

12,20,000 13,35,000

Assets

2002
Rs.

2003
Rs.

Fixed Assets
8,30,000 8,60,000
Stock in Trade
2,90,000 3,70,000
Cash on Hand
80,000
90,000
and at Bank
Prepaid Expenses
10,000
15,000
Preliminary
10,000
Expenses
Total

12,20,000 13,35,000

Required : Prepare Schedule of Changes in Working Capital.


6.

Following are two Balance Sheet of Rose Ltd. as at March 2002 and 2003
Balance Sheet of Rose Ltd. as at March 31, 2002 and 2003
2002
Rs.

2003
Rs.

Cash on hand
Accounts Receivable
Stock on hand
Buildings

30,000
1,20,000
80,000
50,000

47,000
1,15,000
90,000
66,000

Total

2,80,000

3,18,000

Assets

199

STATEMENT OF CHANGES IN FINANCIAL POSITION

Capital and liability


Equity Share Capital
Accounts payables
Retained Earnings
Total

2,00,000
70,000
10,000

2,50,000
45,000
23,000

2,80,000

3,18,000

Required : Prepare Schedule of Changes in working capital


7.

Following Balance Sheet of Palash Ltd. as at March 31, 2002-2003


Balance Sheet of Palash Ltd. as at March 2002 and 2003
Liabilities

March 31, 2002


Rs.

March 31, 2003


Rs.

80,000
14,500
9,000
1,000

85,000
24,500
5,000
5,000
1,300

1,04,500

1,20,000

50,000
24,000
9,000
17,500
4,000

50,000
34,000
7,000
20,800
9,000

1,04,500

1,20,000

Capital and Liabilities


Profit and Loss Appropriation
Accounts Payable
Mortgage
Provision for doubtful debts
Total
Assets and Properties
Land and Building
Plant and Machinery
Stock on hand
Accounts Receivables
Cash at Bank
Total

Required : Prepare Schedule of Changes in Working Capital.


8.

Following are the Balance Sheets of Pawan Hans Ltd. as at 31st March, 2002
and 2003.
Balance Sheet of Pawan Hans Ltd. as at March 31, 2002 and 2003
Liabilities
Share Capital
Accounts Payable
Accrued expenses
Income Tax payable
Retained earnings

Total

2002
Rs.

2003
Rs.

90,000 1,11,000
60,000
54,000
6,000
12,000
3,000
3,300
37,950
40,950

1,96,950 2,21,250

Assets

2002
Rs.

2003
Rs.

Cash at bank
15,000
18,000
Accounts Receivable 42,000
42,000
Stock on hand
66,000
24,000
Prepaid Rent
450
300
Prepaid Insurance
600
750
Prepaid property tax
900
1,200
Land
12,000
24,000
Building and
Equipment
90,000 1,44,000
less Accumulated
Depreciation
(30,000) (33,000)
Total

Required : Schedule of Changes in Working Capital

1,96,950 2,21,250

200

ACCOUNTANCY
Funds from Operations

9.

Following are the balances extracted from the Profit and Loss account for the
year ended March 31, 2000 of Surbhi Ltd.
Profit and Loss Account of Surbhi Limited
for the year ended March 31, 2000
Particulars

Rs.

Expenses Paid

1,50,000

Depreciation

35,000

Loss on sale of machine

Particulars
Gross Profit
Profit on Sale of Land

Rs.
8,00,000
30,000

2,000

Goodwill

10,000

Net Profit

6,33,000

Total

8,30,000

8,30,000

10. The net income of Fresh Dairy Ltd. for the year ended March 31, 2003 was
Rs. 14,87,000. The income was arrived at after adjusting the following :
(i)
depreciation on tangible assets Rs. 86,000 and amortization of goodwill
and patents Rs. 18,000.
(ii)

writing-off preliminary expenses Rs. 5,000.

(iii) loss on sale of old furniture Rs. 800 and on old machinery Rs. 4,600.
(iv)

payment of interest on debenture Rs. 80,000.

Compute funds from operations.


11. Following are the balances extracted from the Profit and Loss account of Grejim
Ltd. for the year ended March 31, 2003.
Profit and Loss Account of Grejim Ltd.
for the year ended March 31,2003
Particulars
Expenses Paid
and Outstanding
Depreciation
Loss on sale of machine
Discount
Goodwill
Net Profit
Total

Rs.
6,000

Particulars
Gross Profit
Gain on sale of land

Rs.
9,000
1,200

1,400
80
4
400
2,316
10,200

Total

10,200

Hint : Discount is assumed to be discount allowed to customers.


Required : Calculate funds from operation.
12. Following is the Profit and Loss account of Aakash Ltd. for the year ended
March 31, 2003.

201

STATEMENT OF CHANGES IN FINANCIAL POSITION


Profit and Loss Account of Aakash Ltd.
for the year ended March 31,2003
Particulars

Rs.

Depreciation
Discount on issue of share
Loss on sale of machinery
Goodwill (written off)
Preliminary expenses
Business expenses
Net Profit
Total

900
200
400
2,200
650
2,500
5,650
12,500

Particulars

Rs.

Gross Profit
Profit on sale of plant

Total

8,500
4,000

12,500

Requird : Calculate Funds from operation


13.

Following is the Profit and Loss account of Apple Ltd.


Profit and Loss Account of Apple Ltd.
for the year ended March 31, 2003
Particulars

Rs.

Salaries to employees
Rent

60,000
22,500

Provision for bad debts


Preliminary expenses
written-off
Goodwill written-off
Depreciation on machinery
Loss on sale of plant
Book Balance
15,000
Sold for
12,000
Provision for Taxation
Net Profit

7,500
15,000

Total

Particulars
Gross Profit
Profit on sale of
buildings :
Sold for
15,000
Book Value 7,500

Rs.
1,50,000

7,500

7,500
7,500

3,000
7,500
27,000
1,57,500

Total

Required : Calculate Funds from operation


14. Following is the Profit and Loss Account of Sapphire Ltd.

1,57,500

202

ACCOUNTANCY
Profit and Loss Account of Sapphire Ltd.
for the year ended 2000
Particulars

Rs.

Particulars

Salaries
Expenses
Depreciation
Loss on sale of furniture
Net Profit

50,000
12,000
30,000
5,000
2,18,000

Gross Profit
Profit on sale of plant
and equipments
Interest received

Total

3,15,000

Total

Rs.
3,00,000
12,000
3,000
3,15,000

Hint : Interest received will be treated as non-operating income, because the


firm does not seem to be involved in financial business.
Required : Ascertain Funds from operation
15. During the year 2001 Kocher Txt. Ltd. earned a profit of Rs. 1,75,720 after
adjusting the following :
(i)

Depreciation written off as follows : Plant Rs. 12,800 and Furniture


Rs. 2,500.
(ii) Profit on sale of fixed assets Rs. 15,000.
(iii) Discount on issue of debenture written off Rs. 20,000.
(iv) Investment costing Rs. 30,000 were sold for Rs. 28,000
(v) Preliminary expenses appears in the books at Rs. 40,000; out of that 20
per cent has been written off.
(vi) Proposed dividend Rs. 50,000.
(vii) Dividend received Rs. 2,500.
(viii) Transfer to sinking fund Rs. 20,000.
Required : Ascertain the funds from operation.
Cash Flow Statement
16. Valcano Ltd reported net income of Rs. 84,50,000 in 2003. Depreciation for
the year was Rs. 14,95,000 debtors at the end of the year were Rs. 87,000
more than that in the beginning of creditors increased by Rs 43,000 over the
year and stock decreased by Rs. 9,000 over the year. Compute net cash provided by operating activities.
17. For each of the following items, state how it should be reported in the cash
flow statement for the year :
(i)

Issue of 20,00,000 equity shares of Rs. 10 each at a premium of Rs. 4


per share,

(ii)

Purchase of equipment for Rs. 4,85,000

(iii) Sale of old equipment for Rs. 87,000 (book value Rs. 98,000)
(iv)

Declared and paid dividend Rs. 1,25,000.

(v)

Received interest Rs. 18,000 on investment.

18. Following are the comparative balance sheets of Mudra Ltd. as at


March 31,2000 and 2001.

203

STATEMENT OF CHANGES IN FINANCIAL POSITION


Balance Sheet of Mudra Ltd. as at March 31, 2000 and 2001
Liabilities

2000
Amount
Rs.

2001
Amount
Rs.

Assets

Share Capital
Debenture
Provision for
Doubtful debts
Profit and Loss

1,40,000
24,000
1,400

1,48,000
12,000
1,600

20,080

21,120

Cash on hand
Accounts Receivable
Stock in Trade
Land
Goodwill

Total

2,06,200

2,06,400

Total

2000
Amount
Rs.

2001
Amount
Rs.

18,000
29,800
98,400
40,000
20,000

15,600
35,400
85,400
60,000
10,000

2,06,200

2,06,400

Required : Calculate : (1) Operating Net Profit (2) Cash from Operation.
19.

Read the following data carefully :


Summarised Balance Sheet of Plastic Product Ltd.
as at March 31, 200 and 2001
Liabilities

Accounts payable
Bills payable
Other current
Liabilities
6% Debentures
Profit and Loss
Total

On
31-3-2000
Amount
Rs.

On
31-3-2001
Amount
Rs.

20,000
20,000
40,000

25,000
5,000
45,000

60,000
80,000

80,000
1,10,000

2,20,000

2,65,000

Assets

Cash on hand
Marketable
Securities

On
On
31-3-2000 31-3-2001
Amount
Amount
Rs.
Rs.
20,000

10,000

40,000

30,000

Stock on hand
Accounts Receivable
Gross Block

30,000
30,000
1,00,000

45,000
40,000
1,40,000

Total

2,20,000

2,65,000

Required : (1) Calculate net operating Profit


(2) Cash from operations
20. The following is the comparative balance sheet of Sundram Ltd.
Balance Sheet of Sundram Ltd.
as at March 31, 2000, 2001
Liabilities

Share Capital
Profit & Loss
Accounts payable
Mortgage Loans
Total

31-03-02 31-03-03 Assets


Amount
Amount
Rs.
Rs.
48,000
51,000 Cash at Bank
85,00 1,05,000 Accounts Receivable
5,400
6,000 Stock on hand
2,800
10,000 Land
Plant
1,41,200 1,72,000 Total

Required : (1) Operating net Profit


(2) Calculate Cash from operations
(3) Prepare Cash flow statement.

31-03-02 31-03-03
Amount Amount
Rs.
Rs.
2,400
5,400
99,000 1,19,000
5,400
4,200
20,000
20,000
14,400
23,400
1,41,200 1,72,000

204

ACCOUNTANCY

21. Consider the following information.


Liabilities

2002
Amount
Rs.

2003
Amount
Rs.

Assets

Equity share
Capital
Accounts Payable
Bills Payable
General Reserve
Profit & Loss
Appropriation

50,000

60,000

Cash on hand

10,000
8,000
6,000

22,000
5,000
10,000

40,000

55,000

Bank at bank
Accounts Receivable
Land
Building
Machinery

1,14,000

1,52,000

Total

Total

2002
Amount
Rs.

2003
Amount
Rs.

3,000

5,000

8,000
9,000
10,000
50,000
34,000

14,000
12,000
16,000
70,000
35,000

1,14,000

1,52,000

Required : Prepare Cash flow Statement


Funds Flow Statement
22. Following is the comparative Balance Sheet of Kota Stone Ltd.
Balance Sheet of Rama Textiles Ltd. as at 31, 2002, 03
Liabilities
Amount

2002
Amount
Rs.

2003

Share Capital
Profit and Loss
Appropriation
Accounts Payable
Mortgage

2,40,000

2,55,000

43,500
27,000
-

73,500
15,000
15,000

Total

3,10,500 3,58,500

Assets

2002
Amount
Rs.

2003
Amount
Rs.

Land and
Building
Plant
Stock on hand
Cash on hand

1,50,000

1,50,000

75,000
24,000
13,500

1,05,000
18,000
28,500

Total

3,10,500

3,58,500

Rs.

Required : Prepare Fund Flow Statement.


23. Following is the Balance Sheet of Kumars Ltd.
Balance Sheet of Kumars Ltd. as at March 3, 2002, 2003
Capital and Liabilities

March 31
2002
Rs.

March 31
2003
Rs.

Capital
Profit and Loss Appropriation
Accounts Payable
Mortgage

1,60,000
29,000
18,000
-

1,70,000
49,000
10,000
10,000

2,07,000

2,39,000

205

STATEMENT OF CHANGES IN FINANCIAL POSITION

Assets
Land and Buildings
Plant and Machinery
Stock on hand
Accounts Receivable
Cash at Bank

1,00,000
48,000
18,000
33,000
8,000

1,00,000
68,000
14,000
39,000
18,000

2,07,000

2,39,000

Required : Prepare Fund Flow Statement.


24.

Following is the balance sheet of R. K. Enterprises Ltd.


Balance Sheet of R.K. Enterprises Ltd. as at March 31, 2002, 2003
Liabilities

Capital and Liabilites


Profit and Loss Appropriation
Accounts Payable
Mortgage
Provision for Doubtful Debts
Total
Assets
Land and Buildings
Plant and Machinery
Stock on hand
Accounts Receivable
Cash at Bank
Total

March 31
2002
Rs.

March 31
2003
Rs.

80,000
14,500
9,000
1,000

85,000
24,000
5,000
5,000
1,300

1,04,500

1,20,800

50,000
24,000
9,000
17,500
4,000

50,000
34,000
7,000
20,800
9,000

1,04,500

1,20,800

Required : Prepare Funds flow Statement


25. Following is the balance of Mahindra Films Ltd. as at March 31, 2002, 2003
Ltd.
Assets
Furniture (at cost)
Less : Depreciation Reserve
Stock
Account Receivable
Cash at Bank
Prepaid Expenses
Total

31-03-2002
40,000
18,000

31-03-2003
50,000
23,000

22,000
70,000
17,000
12,000
2,500

27,000
78,000
16,000
34,000
1,600

1,23,500

1,56,600

206

ACCOUNTANCY

Liabilities
Equity Share Capital
Preference Share Capital
Profit and Loss Account
Accounts Payable
Total

50,000
25,000
20,000
28,500

1,00,000
37,000
19,600

1,23,500

1,56,600

Required : Prepare funds flow Statement


26. The Balance Sheets of Super Six Limited as on March 31, 2002 and 2003 are
as follows :
Balance Sheet of Super Six Limited as at March 31, 2002, 2003
Liabilities
Equity Share Capital
Securities Premium
General Reserve
Profit and Loss Account
5% Debentures
Income Tax
Accounts Payable
Total

2002
Rs.

2003
Rs.

80,000
8,000
6,000
19,500
9,800
33,500

1,20,000
12,000
9,000
20,800
26,000
10,900
36,400

1,56,800

2,35,100

55,400
35,600
2,400
22,100
36,500
4,800

1,13,200
51,300
1,500
26,000
39,100
4,000

1,56,800

2,35,100

Assets
Freehold Premises
Plant and Machinery
Furniture and Fixtures
Stock on hand
Accounts Receivable
Bank Balance
Total
Additional information
Depreciation written off during the year 1989 was :
Plant and Machinery
Rs. 12,800
Furniture and Fixtures
Rs. 400
Required : Prepare a funds flow statement, showing your computation of
funds from operation.
27. The Following are the Balance Sheets of M/s Rajdhani Corporation Ltd. as on
31st March, 2001 and 2002.

207

STATEMENT OF CHANGES IN FINANCIAL POSITION

Liabilities

2001
Rs.

Equity Share
Capital
11% Preference
Shares (Redeemable)
General Reserves
Profit and Loss
Proposed Dividend
Bills Payable
Outstanding
Expenses
Provision for
Taxation
Total

2002
Rs.

Assets

2001
Rs.

2002
Rs.

80,000 1,20,000

Goodwill
Land & building

20,000
40,000

16,000
20,000

40,000
8,000
7,200
11,200
14,000
3,200

20,000
12,000
10,800
15,600
21,200
2,400

Plant
Investments
(Long-term)
Sundry Debtors
Stock on hand
Cash on hand
Preliminary
Expenses

36,000

76,400

4,000
30,000
34,000
6,800
4,000

14,000
43,200
31,200
11,200
2,800

11,200

12,800
1,74,800

2,14,800

1,74,800 2,14,800

Total

Required : Prepare a schedule of changes in working capital and statement


of flow of funds. Show working notes also.
28. Following is the balance sheet of Maya & Sons as at 31st March 2001 and
31st March 2002.
Liabilities

31-3-2001
Rs.

31-3-2002
Rs.

Equity Share Capital


Securities Premium
General Reserve
Profit and Loss
Debenture
Bills Payable
Accounts Payable
Outstanding Expenses

1,50,000
50,000
20,000
1,00,000
25,000
35,000
2,000

2,00,000
5,000
60,000
35,000
75,000
20,000
40,000
1,000

Total
Assets

3,82,000

4,36,000

Goodwill
Furniture (Cost)
Less : Depreciation

10,000
50,000
28,000

8,000
60,000
34,000

Long-term investments
Stock on hand
Accounts Receivable
Cash at Bank
Discount on Debenture

22,000
40,000
2,54,000
31,000
22,000
3,000

26,000
52,000
2,89,000
28,000
31,000
2,000

Total

3,82,000

4,36,000

Required : Prepare funds flow Statement

208

29.

ACCOUNTANCY
Following is the Balance Sheets of M/s Taran & Co. as on March 31, 2002 and
March 31, 2003 were as follows :
Assets

March 31, 2002


Rs.

March 31, 2003


Rs.

80,000
5,00,000
1,00,000
1,50,000
20,000
8,50,000

1,20,000
8,00,000
75,000
1,60,000
20,000
11,75,000

5,00,000
1,00,000
50,000
1,53,000
40,000
7,000

7,00,000
1,60,000
70,000
1,90,000
50,000
5,000

8,50,000

11,75,000

Land and Buildings


Plant and Machinery
Stock on hand
Accounts Receivable
Cash
Liabilities and Capital
Share Capital
Profit and Loss and Account
General Reserve
Accounts Payable
Bills Payable
Outstanding Expenses

Additional Information given by the company is :


(i)

Rs. 50,000 depreciation has been charged to Plant and Machinery during the year, 2003

(ii)

A piece of machinery was sold for Rs. 8,000 during 1989. It had cost Rs.
12,000 depreciation of Rs. 7,000 had been provided on it.

Required : Prepare a schedule of changes in working capital and a statement


of funds flow.
30. Read the data carefully :
Balance Sheet as on March 31, 2001 and 2002
Liabilities
Equity Share Capital
General Reserve
Profit and Loss
Accounts Payable
Short-term Loan
Provision for Tax
Provision for
Doubtful Debts
Total

2001
Rs.

2002
Rs.

6,00,000
1,04,000
76,000
48,000
7,200
96,000

6,00,000
1,08,000
78,000
32,400
4,800
1,08,000

2,400

3,600

Assets
Goodwill
Land
Building
Short-term
Investments
Stock on hand
Accounts
Receivable
Cash at Bank

9,33,600 9,34,800

2001
Rs.

2002
Rs.

72,000
2,40,000
2,22,000
60,000

72,000
2,16,000
2,16,000
66,000

1,80,000
1,20,000

1,40,000
1,33,200

39,600

91,200

9,33,600 9,34,800

Additional Information : (a) A piece of land has been sold for Rs. 24,000, (b)
Depreciation of Rs. 42,000 had been charged to Building, (c) An Interim
Dividend paid the year Rs. 30,000.
Required : Prepare Funds flow statement

209

STATEMENT OF CHANGES IN FINANCIAL POSITION


31.

Read the data carefully :


Balance Sheet of Ruchita Creation Ltd.
as at on March 31 2001 and 2002
Liabilities

2001
Rs.

2002
Rs.

Equity Share Capital 1,60,000


Pref. Share Capital
40,000
General Reserve
8,000
Profit & Loss A/c
4,800
13% Debentures
28,000
Creditors
44,000
Provisions for Tax
16,800
Proposed Dividend
23,200
Bank Overdraft
27,200

1,10,000
50,000
8,000
4,000
24,000
48,000
12,000
20,000
50,000

Assets

2001
Rs.

2002
Rs.

Fixed Assets
Less : Accum.
Depreciation

1,60,000

1,64,000

(60,000)

(44,000)

Debtors
Stock
Prepaid Expen
Cash at Bank

1,00,000
96,000
2,000
14,000

1,20,000
80,000
1,200
4,800

3,52,000 3,26,000

3,52,000 3,26,000

Additional Information : (a) Taxes paid Rs. 14,000 (b) Fixed assets sold for
Rs. 20,000, their, cost Rs. 40,000 and accumulated depreciation till date of
sale on them Rs. 12,000, (c) An interim Dividend paid during the year Rs.
18,000.
Required : Prepare funds flow statement
32. The balances in Equipment account and Accumulated depreciation account
as on March 31, 2002 and 2003 are given below :
Balance as at
Equipment
Accumulated depreciation

March 31, 2002

March 2003

65,00,00

78,70,000

10,80,000

16,32,000

The Equipment costing Rs. 12,30,000 accumulated depreciation thereon Rs.


7,18,000 was sold for Rs. 4,68,000.
Required :
(i)

Compute the amount of equipment purchased, depreciation charged for


the year and toss on sale of equipment.

(ii)

How each of the item related to the equipment will be reported in


statement of cash flows.

33. The net income of Blue Sky Ltd. for the year ended March 31, 2003 was Rs.
4,89,000. Depreciation charged for the year was Rs. 87,000. Income for the
year was arrived at after adjusting for gain on sale of land Rs. 1,05,000, loss
on sale of equipment Rs. 48,000 and writing off cost of equity issue Rs. 25,000.
The current assets and current liabilities of Blue Sky Ltd. as at March 31,
2002 and 2003 are given here :

210

ACCOUNTANCY

March 31
2002

March 31
2003

Stocks

1,85,000

1,67,000

Receivables

1,42,000

1,45,000

Prepaid Expenses

12,000

8,000

Cash in hand and at bank

87,000

1,02,000

Payables

95,000

1,07,000

Expenses outstanding

13,000

9,000

Required : Prepare cash flow statement


34.

Balance Sheets of Flowers Ltd. as at March 31,2002 and 2003 are given
below :
Balance Sheet of Flowers Ltd. as at March 31, 2002, 2003
2002
Rs.

2003
Rs.

15,00,000

17,50,000

Liabilities & Equity


Equity share capital
Reserves & Surpluses
9% Debenture

3,90,000

6,27,000

10,00,000

10,00,000

67,000

1,20,000

Accounts Payable
Outstanding Expenses

18,000

23,000

29,75,000

35,20,000

Rs

Rs

10,00,000

13,00,000

8,00,000

9,00,000

Accumulated Depreciation on Buildings

(1,20,000)

(1,60,000)

Equipment

14,00,000

16,50,000

(4,35000)

(5,80,000)

Assets
Land
Buildings

Accumulated Depreciation on Equipments


Furniture & Fitting

85,000

1,25,000

Accumulated Depreciation on Furniture

(17,000)

(38,000)

Accounts Payable

1,28,000

1,43,000

Cash on hand

47,000

84,000

29,75,000

35,20,000

Additional information
(i)

Cash dividends declared and paid Rs 1,50,000.

(ii)

25,000 Equity shares of Rs 10 each were issued for cash at a premium of


Rs. 2 per share.

211

STATEMENT OF CHANGES IN FINANCIAL POSITION

(iii) Equipment costing Rs 2,20,000 (accumulated depreciation Rs 1,20,000)


was sold at a loss of Rs 15,000
Required :
(i)

Compute net change in working capital.

(ii)

Prepare funds flow statement.

(iii) Prepare statement of cash flows.


35. The balance Sheet and income statement of Orange Ltd. are presented below :
Balance Sheet of Orange Ltd.
Assets

Rs.

Fixed Assets

7,80,000

Less Accumulated

3,00,000

Rs.

Rs.

Rs.

9,75,000
4,80,000

2,40,000

7,35,000

Depreciation
Stock on hand

78,000

93,000

Accounts Receivable

85,000

1,02,000

Cash on hand

47,000

95,000

6,90,000

10,25,000

Rs.

Rs.

Equity Share Capital

3,00,000

5,00,000

Reserves & Surpluses

1,18,000

3,74,000

10% Debenture

2,00,000

1,00,000

Debenture Redemption
Premium

20,000

10,000

Accounts Payable

38,000

32,000

Outstanding expenses

14,000

09,000

6,90,000

10,25,000

Equity and liabilities

Additional information
(i) Cash dividends paid Rs. 45,000.
(ii)

Equipment purchased for cash Rs. 4,00,000

(iii) Old piece of machinery was sold for Rs. 45,000 at a loss of Rs. 20,000
(iv)

Equity share capital was issued for cash at par.

(v)

Debentures were redeemed at a premium of 10%.

Required
(i)

Prepare schedule of changes in working capital and statement of changes


in financial position.

(ii)

Prepare statement of Cash flows.

212

ACCOUNTANCY

Answers
4.

Net Increase in Working Capital

Rs.

5,000

5.

Net Increase in Working Capital

Rs.

85,000

6.

Net Increase in Working Capital

Rs.

47,000

7.

Net Increase in Working Capital

Rs.

10,000

8.

Net Decrease in Working Capital

Rs.

39,000

9.

Funds from operation

Rs.

6,50,000

10.

Funds from operation

Rs.

16,01,400

11.

Funds from operation

Rs.

2,996

12.

Funds from operation

Rs.

6,000

13.

Funds from operation

Rs.

60,000

14.

Funds from operation

Rs.

2,38,000

15.

Funds from operation

Rs.

2,73,520

16.

Cash provided by operating


activities

Rs.

99,10,000

17.

Cash inflow from financing


activities

Rs.

2,80,000

Cash used for investing activities

Rs.

4,85,000

18.
19.
20.
21.
22.

23.

Cash inflow from investing activities

Rs.

87,000

Cash used for financing activities

Rs.

1,25,000

Cash used for investing activities

Rs.

18,000

Operating net profit

Rs.

11,040

Cash from operation

Rs.

21,600

Operating net profit

Rs.

30,000

Cash from operation

Rs.

10,000

Operating net profit

Rs.

20,000

Total Cash flow statement

Rs.

14,400

Operating net profit

Rs.

19,000

Total Cash flow statement

Rs.

46,000

Increase in Working Capital

Rs.

30,000

Funds from operation

Rs.

30,000

Total funds flow statement

Rs.

60,000

Net Increase in Working Capital

Rs.

24,200

Total of fund flow statement

Rs.

30,200

213

STATEMENT OF CHANGES IN FINANCIAL POSITION


24. Increase in Working Capital

Rs.

10,000

Funds from operations

Rs.

10,000

Total of funds flow statement

Rs.

20,000

25. Increase in Working Capital

Rs.

37,000

Funds from operation

Rs.

22,000

Total of funds flow statement

Rs.

72,000

Rs.

1,700

Funds from operations

Rs.

17,500

Total funds of statement

Rs.

88,000

27. Increase in Working Capital

Rs.

6,800

Funds from operations

Rs.

28,400

Total funds flow statement

Rs.

88,400

28. Total funds flow statement

Rs.

1,46,000

29. Decrease in Working Capital

Rs.

60,000

Funds from operations

Rs.

1,27,000

30. Total fund flow statement

Rs.

2,10,000

31. Total fund flow statement

Rs.

1,70,800

32. (i)

Equipment purchased
(It will reported as cash used
for investing activities)

Rs.

26,00,000

Loss on sale of equipment


(it will be added to net income
for compuring cash flow from
operating activities)

Rs.

44,000

33. Cash provided by operating activities

Rs.

5,71,000

34. (i)

Net changes in Working Capital

Rs.

3,000

Funds from operation

Rs.

6,78,000

Rs.

10,93,000

Total uses of funds

Rs.

10,90,000

(iii) Cash provided by


operating activities

Rs.

8,02,000

Cash used for investing activities

Rs.

8,25,000

Cash provided by financing activities

Rs.

60,000

26. Increase in Working Capital

(ii)

(ii)

Total source of funds

214

35.

ACCOUNTANCY

Net increase in Working Capital

Rs.

91,000

Funds from operation

Rs.

4,01,000

Total sources of funds

Rs.

6,46,000

Total uses of funds

Rs.

5,55,000

Cash used for investing activities

Rs.

3,55,000

Cash provided by financing activities

Rs.

45,000