UNIT -5

FINANCIAL ANALYSIS THROUGH RATIO’S

 CONCEPT OF RATIO ANALYSIS
Ratio analysis refers to the analysis of various pieces of financial information in the financial statements of a business.
They are mainly used by external analysts to determine various aspects of a business, such as its profitability, liquidity,
and solvency.

Analysts rely on current and past financial statements to obtain data to evaluate the financial performance of a
company. They use the data to determine if a company’s financial health is on an upward or downward trend and to
draw comparisons to other competing firms.

Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and
profitability by studying its financial statements such as the balance sheet and income statement. Ratio analysis is a
cornerstone of fundamental equity analysis.

Investors and analysts employ ratio analysis to evaluate the financial health of companies by scrutinizing past and
current financial statements. Comparative data can demonstrate how a company is performing over time and can be
used to estimate likely future performance. This data can also compare a company's financial standing with industry
averages while measuring how a company stacks up against others within the same sector.

Investors can use ratio analysis easily, and every figure needed to calculate the ratios is found on a company's financial
statements.

Ratios are comparison points for companies. They evaluate stocks within an industry. Likewise, they measure a company
today against its historical numbers. In most cases, it is also important to understand the variables driving ratios as
management has the flexibility to, at times, alter its strategy to make its stock and company ratios more attractive.

Generally, ratios are typically not used in isolation but rather in combination with other ratios. Having a good idea of the
ratios in each of the four previously mentioned categories will give you a comprehensive view of the company from
different angles and help you spot potential red flags.
  Limitations of Ratio Analysis
While ratios are very important tools of financial analysis, they do have some limitations, such as

 The firm can make some year-end changes to their financial statements, to improve their ratios. Then the ratios
end up being nothing but window dressing.

 Ratios ignore the price level changes due to inflation. Many ratios are calculated using historical costs, and they
overlook the changes in price level between the periods. This does not reflect the correct financial situation.

 Accounting ratios completely ignore the qualitative aspects of the firm. They only take into consideration the
monetary aspects (quantitative)

 There are no standard definitions of the ratios. So firms may be using different formulas for the ratios. One such
example is Current Ratio, where some firms take into consideration all current liabilities but others ignore bank
overdrafts from current liabilities while calculating current ratio

 And finally, accounting ratios do not resolve any financial problems of the company. They are a means to the
end, not the actual solution.

 CLASSIFICATION OF RATIO’S / TYPES OF RATIO’S

TYPES OF
RATIO’S

Liquidity Activity Solvency Profitability

Ratio’s Ratio’s
RRatio Ratio’s Ratio’s

1. Liquidity Ratios
This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher
liquidity ratio represents that the company is highly rich in cash.

The types of liquidity ratios are: – a. Current Ratio or Working Capital Ratio

b. Quick Ratio or Liquid Ratio or Acid-Test-Ratio

a. Current Ratio: The current ratio is the ratio between the current assets and current liabilities of a company.
The current ratio is used to indicate the liquidity of an organization in being able to meet its debt obligations in
the upcoming twelve months. A higher current ratio will indicate that the organization is highly capable of
repaying its short-term debt obligations.

Ideal ratio = 2:1

Current assets = Cash in Hand + cash at bank + marketable securities + short term investments + bills receivable +
debtors + inventory or stock + work-in-progress + pre-paid expenses + incomes receivable or (accrued income) etc.
Current liabilities = Bill’s payable + creditors + short term loans + income tax to be paid + dividend payable + bank
overdraft + long term loans and debentures to be paid within one year + provision for tax + short term advances etc.

b. Quick Ratio: The quick ratio is used to ascertain information pertaining to the capability of a company in paying
off its current liabilities on an immediate basis.

The formula used for the calculation of a quick ratio is-

Ideal Ratio = 1:1

Quick assets = All current assets except stock and prepaid expenses. [ All Current assets – stock – prepaid expenses]
If any Bank over draft is given less from the current liabilities. (Current liabilities- Bank over draft)

Example 1:

From the Balance Sheet of XYZ Co. Ltd., calculate liquidity ratios.

Capital & Liabilities Amount Assets Amount

Land and
Preference share capital 100 225
Buildings

Equity share capital 150 Plant and machinery 250

Furniture and
General reserve 250 100
Fixtures

Debentures 400 Stock 250

Creditors 200 Debtors 125

Bills payable 50 Cash at Bank 250

Outstanding expenses 50 Cash in hand 125

Profit and loss account 100 Prepaid expenses 50

Bank loan(Long term) 200 Marketable securities 125

1500 1500

Solution:
Current assets = Stock + Debtors + Cash at Bank + Cash in hand + Prepaid expenses + Marketable securities.

= 250 + 125 + 250 + 125 + 50 + 125 = 925

Current liabilities = Creditors + Bills payable + Outstanding expenses.

= 200+ 50 + 50 = 300

Quick assets = Debtors + Cash at Bank + Cash in hand + Marketable securities. = 125 + 250 + 125 + 125 = 625

C. Absolute Liquid Ratio

This ratio measures the total liquidity available to the company. This ratio only considers marketable securities and cash
available to the company. This ratio only tests short-term liquidity in terms of cash, marketable securities, and current
investment.

Formula

Where: Cash + Bank balances + Marketable Securities

Ideal Ratio = 1:2

D. Inventory to working Capital

The inventory to working capital ratio is used by investors as an indicator of a company's operationally efficiency. The
ratio is calculated by dividing inventory by working capital. A value of 1 or less implies a company is highly liquid in terms
of its current assets or it could mean that that there is insufficient inventory to meet productivity demand. On the other
hand, a high inventory to capital ratio could mean that a company has too much inventory. Too much inventory is costly
because it increases warehousing costs and can lead to wastage.

Inventory to working capital = Inventory / working capital

(or)
Ideal Ratio= 2:1

2. Activity Ratio’s / Turnover Ratios

Turnover ratios are used to determine how efficiently the financial assets and liabilities of an
organization have been used for the purpose of generating revenues.

The types of turnover ratios are: – a. Inventory Turnover Ratio

b. Debtors Turnover Ratio

c. Creditors Turnover Ratio

a. Inventory Turnover Ratio (or) Stock Turnover Ratio:

Inventory turnover ratio is used to determine the speed of a company in converting its inventories into sales.

The formula used for calculating inventory turnover ratio is-

Cost of goods sold = Sales – Gross profit (or)

= Opening stock + Purchases + Manufacturing expenses – Closing stock

Note 1. When cost of goods sold is not given, sales amount should be taken into account.

2. When opening stock is not given, closing stock is considered as ‘average stock’.

Example:
A firm sold goods worth Rs. 5,00,000 and its gross profit is 20% of sales value. The inventory at the
beginning of the year was Rs. 16,000 and at end of the year was 14,000. Compute inventory turnover ratio and
also the inventory holding period.
Solution:
Cost of goods sold = Sales – Gross profit = 5,00,000 – (5,00,000 x 20%) = 4,00,000.
opening stock +closingstock 16000+14000
Average stock= = =15000
2 2
365 days 365
b ¿ Inventory Holding Period= = =14 days
Inventory Turnover Ratio 26.66

b) Debtors Turnover Ratio: -

It reveals the number of times the average debtors are collected during a given accounting period. The firms
usually prepare the aged list of debtors showing the details of when to collect and how much to collect from
debtors. The higher the ratio, the better is the performance of the firm in collecting money from debtors.

Net Credit Sales = Credit sales – Sales Returns (or) Total sales – cash sales – sales return
Note: When credit sales are not given, total sales are taken.

Opening debtors+Closingdebtors '

(or) + Bill s Receivables
2
Note: 1. If opening debtors are not given, closing debtors should be considered as average debtors.
2. If any Bill’s Receivables are given add it to the average debtors.

Example:
A firm’s sales during the year were Rs. 400000 of which 60% were credit sales. The balance of debtors at the
beginning and ending year were 25000 and 15000 respectively. Calculate debtor’s turnover ratio of the firm
and also find out debt collection period.
Solution:

Net credit sales = Sales x 60 % = 400000 x 60/100 = 2,40,000

 C. Creditors Turnover Ratio: -
It reveals the number of times the average creditors are paid during a given accounting period. The firms
usually prepare the aged list of creditors showing the details of when to pay and how much to pay to its
creditors. It shows how promptly the firm is in a position to pay its creditors.

Net Credit Purchases = Credit Purchases – Purchase Returns (or) Total purchases – cash Purchases – Purchase
Returns
Note: 1. When credit purchases are not given, total purchases are taken.

Opening creditors+Closing creditors '

+ Bil l s Payables
2
Note: 1. If opening creditors are not given, closing creditors should be considered as average creditors.
2. If any Bill’s Payables are given add it to the average creditors.

Example:
A firm’s purchases during the year was Rs. 400000 of which 50% were credit purchases. The balance of
creditors at the beginning and ending year were 30000 and 10000 respectively. Calculate creditors turnover
ratio of the firm. Also find out creditors payment period.

Solution:

Net credit purchases = Purchases x 50/100 = 400000 x 50/100 = 200000

d) Fixed Asset Turnover Ratio

The Fixed Asset Turnover Ratio measures the efficiency at which a company is capable of utilizing its long-term
fixed asset base (PP&E) to generate revenue. The fixed asset turnover ratio (FAT) is, in general, used by
analysts to measure operating performance. This efficiency ratio compares net sales (income statement) to
fixed assets (balance sheet) and measures a company's ability to generate net sales from its fixed-asset
investments, namely property, plant, and equipment (PP&E).
Formula:

where: Average Net Fixed Assets= Beginning balance +Ending Balance/2

3. Solvency Ratios (or) Capital structure ratio’s (or) Leverage Ratio’s

Solvency ratios can be defined as a type of ratio that is used to evaluate whether a company is solvent and
well capable of paying off its debt obligations or not.
The types of solvency ratios are: –
1. Debt Equity Rati
2. Interest coverage Ratio
3. Proprietary Ratio
4. Total Assets to Debt Ratio

1. Debt Equity Ratio:

The debt-equity ratio can be defined as a ratio between total debt and shareholders fund. The debt-equity
ratio is used to calculate the leverage of an organization.
The formula for debt-equity ratio is-

Debt = Debentures + bonds + mortgage loan + other long term loans.

Equity = Equity share capital + preference share capital + capital reserve + revenue reserve + sinking fund +
contingent reserve – artificial assets.
Note: Artificial assets = preliminary expenses + deferred revenue expenses + discount on issue of shares/
debentures + profit and loss A/C debit balance + underwriting commission.

Example:
Calculate Debt – Equity ratio from the following data.
Debentures Rs. 4,00,000, Long term loans Rs. 2,00,000, Preference share capital Rs. 1,00,000, Equity share
capital Rs. 1,50,000, General reserve Rs. 2,50,000, Profit & Loss account Rs. 1,00,000.
Solution:
Debt = 4,00,000 + 2,00,000 = 6,00,000
Equity = 1,00,000 + 1,50,000 + 2,50,000 + 1,00,000 = 6,00,000
Debt 6 , 00,000 1
Debt −Equity= = = =1 :1
Equity 6 , 00,000 1

2. Interest Coverage Ratio: -

This ratio judges the firm’s capacity to pay the interest on debt it borrows. The higher the ratio, better it is. A
ratio implies that the company has no problems in paying interest.

EBIT = Earnings Before Interest and Tax

PBIT = Profit Before Interest and Tax
Interest = Fixed interest on long term loans

Example:
EBIT of a company is Rs. 560000. Its fixed commitments include payment of 10 percent on 7000 debentures of
Rs. 100 each. It is subject to tax of 30 percent per annum. Calculate interest coverage ratio.

Solution:

EBIT = Rs. 5,60,000

Debentures Amount = 7000 debentures x Rs. 100 each = Rs. 7,00,000
Fixed interest charges on debentures = 700000 x 10/100 = 70000

3. Proprietary Ratio:
The proprietary ratio is the proportion of shareholders' equity to total assets, and as such provides a rough
estimate of the amount of capitalization currently used to support a business.
If the ratio is high, this indicates that a company has a sufficient amount of equity to support the functions of
the business, and probably has room in its financial structure to take on additional debt, if necessary.
Thus, the equity ratio is a general indicator of financial stability.
Proprietors’ Funds = Equity share capital + Preference share capital + General reserve + Employee Provident
Fund + profit and loss account.
Total Assets = Tangible assets and Current assets

Example 1:
From the Balance Sheet of XYZ Co. Ltd., calculate liquidity ratios.

Capital & Liabilities Amount Assets Amount

Preference share capital 100 Land and Buildings 225
Equity share capital 150 Plant and machinery 250
Furniture and
General reserve 250 100
Fixtures
Debentures 400 Stock 250
Creditors 200 Debtors 125
Bills payable 50 Cash at Bank 250
Outstanding expenses 50 Cash in hand 125
Profit and loss account 100 Prepaid expenses 50
Bank loan(Long term) 200 Marketable securities 125
1500 1500

Solution:
Proprietors’ Funds = 100+150+250+100=600
Total assets = 225+250+100+250+125+250+125+50+125=1500

4. Total Assets to Debt Ratio

Total Assets to Debt Ratio = Total Assets / Debt
 4. PROFITABILITY RATIOS
Profitability ratios indicate how well the firm is operating its Activities in a profitability manner. Owners want a
reasonable rate of return on their investment. So, the firm has to generate profits to meet the expectations of
shareholders and also for further expansion of the business.
The following are the common profitability ratios.
1. Gross Profit Ratio
2. Net Profit Ratio
3. Operating Ratio
4. Return On Investment (ROI)
5. Return On Equity (ROE)
6. Earnings Per Share (EPS)
7. Dividend Yield Ratio (D/Y Ratio)
8. Price/Earnings Ratio (P/E Ratio)

1. Gross Profit Ratio: -

It is the ratio between gross profit and net sales. It is expressed in percentage.

Gross profit = Net sales – Cost of goods sold

Example:
Net sales is Rs. 50,000 for a firm and cost of goods sold is Rs. 20,000.
Calculate gross profit ratio.

Solution:
Gross profit = Net sales – Cost of goods sold = 50000-20000 = 30000

2. Net Profit Ratio:

It is the ratio between net profit after tax and net sales. It is expressed in percentage.
Net Profit after Tax = Gross profit – All expenses and losses + All incomes –Tax

Example: Particulars Rs Rs

Calculate net profit Sales 50000 ratio from the following

data.
Less: Cost of goods sold 20000
Net sales Rs. 50000
Gross Profit
30000
Cost of goods sold Rs. 20000
Administration Less: Administration 3000 Expenses Rs. 3000
expenses Selling and 7000
4000
Selling and Distribution expenses Net Distribution expenses Rs
4000 Profit 23000
Loss on sale of fixed assets Rs. 3000
Add: Interest on investments 2000
Interest on investment received Rs.
2000 25000

Tax 20% Less: Loss on sale of Asset 3000

Solution: 22000

Tax 20% (22000x20/100) 4400

Net Profit After Tax
17600
 3. Operating Ratio: -
It is the ratio between cost of goods sold plus operating expenses and net sales. It is expressed as
percentage to sales.

Example:
Calculate operating ratio from the following data.
Net sales Rs. 50000
Cost of goods sold Rs. 20000
Administration Expenses Rs. 3000
Selling and Distribution expenses Rs 4000
Loss on sale of fixed assets Rs. 3000
Interest on investment received Rs. 2000
Tax 20%

Operating cost = (cost of goods sold + Operating Expenses)

= (20000+3000+4000) = 27000

4. Return On Investment (ROI): -

This ratio is also called as Return On Capital Employed (ROCE). The firm is interested to assess the return on
capital employed.

Profit Before Interest and Tax (PBIT) = Gross profit – All expenses and losses + All incomes
Capital employed = Equity share capital + Preference share capital + Reserves + Long term loans + Debentures
– Intangible assets
(or) = Fixed assets + Current assets – Current liabilities

5. Return On Equity (ROE): -

The equity shareholders are interested to assess the return on equity capital employed.

Equity Shareholders Funds = Equity Share capital + Reserves and Surpluses

6. Earnings Per Share (EPS): -

EPS is the relationship between net profit and the number of equity shares outstanding at eth end of the given
period.

Example
Given that the number of share is 10000 and the net profit after taxes for a given period is Rs. 450000, the
EPS can be calculated as follows

Solution:

7. Dividend Yield Ratio (D/Y Ratio):-

Yield means the amount of total return the investor will receive for a given period of time for the amount of
his investment. Dividend yield refers to the percentage return on the price paid for shares. It is calculated as
given below:

Example:

Given that current market price of a share Rs. 300; face value of the share is Rs. 100; percentage of dividend
declared is 20%, the yield is;

Solution:

Dividend Per Share = Face value of share * 20/100 = 100 * 20/100 = 20

8. Price/Earnings Ratio (P/E Ratio): -

This is the ratio of the market value of a share and Earnings Per Share.

Example: Given that market price of a share is Rs. 340 and EPS is 10, calculate P/E ratio. Solution:

Problem 1:
The following an extract of a balance sheet of a company during the last year. Compute current ratio and
quick ratio.

Land and buildings 50000 Plant and machinery 100000

Furniture and 25000 Closing stock 25000
fixtures
Sundry debtors 12500 Wages prepaid 2500
Sundry creditors 80000 Rent outstanding 2000
Problem 2:
Calculate inventory turnover ratio and Average period of holding the stocks.

Sundry debtors 45000 Closing stock 30000

Sales 400000 Sales returns 20000

Stock as on 1-1-2014 40000 Stock as on 31-12-2014 60000

Problem 5:

Given the following data, calculate Debt-equity ratio, Interest coverage ratio and
Proprietary funds to total assets ratio.

Liabilities and Capital Rs Assets Rs

Share Capital: Motor vehicles 105000

10% Preference Capital 60000 Plant and machinery 235000
Equity shares Capital 300000 Sundry debtors 90000
Reserve fund 240000 Land and buildings 440000
Bank over draft 60000 Furniture and 140000
fixtures
Provision for taxation 78000 Stock 60000
15% Debentures 420000 Short term 75000
investments
Creditors 36000 Cash in hand 25000
Rent outstanding 6000 Cash at bank 30000
1200000 1200000

EBIT = Rs. 204000

  FUNDS FLOW AND CASH FLOW ANALYSIS
What is ‘FUND’ and ‘FLOW’?
A layman can describe word FUND as cash or cash equivalents. In technical terms, the word FUND means
“Net Working Capital”.
Funds may mean:
 Cash only
 Net working capital, i.e., current assets fewer current liabilities
 Total resources or total funds
 Internal resources only
 Net worth, i.e., owner’s equity capital plus reserves

The term FLOW refers to change or transfer. The term „Fund flow‟ or „Flow of funds‟ may thus mean
transport of:

 One asset to another

 One liability to another
 Assets to liabilities or vice versa
 The changes in working capital are also an inflow or outflow of funds, and thus it is called fund
flow.

“Fund” is considered as working capital while preparing “Funds flow statement”. Fund flow means change in
the working capital. In other words, any increase or decrease in working capital means
“Flow of funds”. Any transaction which has one current account and the other non-current account results in
change in the working capital.

Current accounts: - Current assets accounts and current liabilities accounts are called current accounts.
Assets which are converted into cash within a year are called current assets. Liabilities which are to be paid
within a year are called current liabilities.
Non-current account: - Accounts which are not current accounts are called non-current accounts. For
example, fixed assets accounts long term liabilities accounts, and capital & reserves accounts.

Preparation of funds flow statements

Funds flow statement is prepared by observing the items taken place during the periods of two balance sheets
along with the adjustments into consideration.

Three statements are to be prepared.

I. Statement of changes in working capital

II. Statement of funds from operations
III. Funds flow statement

I. Statement of changes in working capital: - this statement reveals the net change in the working capital
(CA – CL). Current assets and current liabilities are as follows.

FORMAT OF STATEMENT OF CHANGES IN WORKING CAPITAL

Previous Current Working capital
Particulars Increase Decrease
year year
 A. Current Assets
Cash in hand xxx xxx
Cash at bank xxx xxx
Bills receivables xxx xxx
Debtors etc A xxx xxx
xxx xxx
B. Current Liabilities
Bills payables xxx xxx
Creditors xxx xxx
Bank overdraft etc. xxx xxx
xxx xxx
B
Working capital (A – B) xxx xxx
Increase/Decrease in working capital
xxx xxx
B/F
xxx xxx xxx xxx

Procedure for preparation

1. The figures of current assets and current liabilities of two balance sheets given are recorded in the
respective columns provided. Don’t take the adjustments. Then find working capital and
increase/decrease in working capital.
2. By observing the current assets and current liabilities, the differences are shown in the working
capital columns against to each account and balance those columns. Increase or decrease in working
capital can be recognized as follows:

II. Statement of funds from operations

FORMAT OF FUNDS FROM OPERATIONS

Particulars Rs Rs
 Net profit xxx
Add:
Provision for depreciation xxx
Amortization of goodwill, patents,
xxx
etc.
Preliminary expenses xxx
Loss on sale of investments xxx
Loss on sale of fixed assets xxx
Provision for tax xxx
Discount on issues of debentures xxx xxx
Less:
Dividend from investments xxx
Profit on sale of investments xxx
Profit on sale of fixed assets xxx
Interest received xxx xxx
Funds from operations xxx

Procedure for preparation

1. Prepare the accounts for the items given in the adjustments to know the hidden information.
Generally, the hidden information is as follows:

a) Purchase price of a fixed asset

b) Sale value of a fixed asset
c) Profit/loss on sale of a fixed asset
d) Depreciation provided on a fixed asset
e) Depreciation of the asset sold
f) Provision for tax for the year
g) Tax paid during the year
h) Dividend proposed during the year
i) Dividend paid during the year

2. By observing balance sheets and accounts for adjustments, non-Operating expenses and non-cash
payment items (debit items of profit and loss account) are to be added to given net profit and all non-
operating incomes & non-cash received items (credit items of profit and loss A/C) are to be deducted
from given net profit to find the funds from operations.

Dr Fixed Asset A/C Cr

Particulars Amount Particulars amount
 To Balance b/d *** By Depreciation ***
(opening) *** ( for asset sold)
To P/L A/C (profit) *** By Bank ( sale value) ***
To Bank (purchase) By P/L A/C (loss) ***
By Balance c/d ***
*** ***

Dr Cumulative Depreciation A/C Cr

Particulars Amount Particulars amount
To Fixed Asset A/C *** By Balance b/d ***
(Depreciation of Asset (opening) ***
sold) *** By P/L A/C (provided)
To Balance c/d (closing) *** ***

Dr Provision for Tax A/C Cr

Particulars Amount Particulars amount
To Bank A/C (paid) *** By Balance b/d ***
To Balance c/d (closing) *** (opening) ***
*** By P/L A/C (provided) ***

Note:- When tax paid is not given, it is considered that the tax provided in the previous
year is paid in the current year.

Dr Proposed Dividend A/C Cr

Particulars Amount Particulars amount
To Bank A/C (paid) *** By Balance b/d ***
To Balance c/d (closing) *** (opening) ***
*** By P/L A/C (provided) ***

Note: - When dividend paid is not given, it is considered that the dividend proposed in the previous year is
paid in the present year.
Note: - It can be found even if any one of the items is not given in the above said accounts.

2.In case provision for tax and proposed dividend are taken as current liabilities, there is no need to
prepare those accounts. These should be shown in the “statement of changes in working capital” only.
If these both are taken as an appropriation of profit (unlike current liabilities), there is a need to
prepare their accounts to know the hidden information. Provision for tax and proposed dividend are to
be added to the net profit to know the funds from operations and tax paid & dividend paid are shown
on the applications‟ side in the funds flow statement.

III. Funds Flow Statement

FORMAT OF FUNDS FLOW STATEMENT
 Particulars Amount
SOURCES OF FUND
Issue of shares xxx
Issue of debentures xxx
Sale of investments xxx
Long-term loans xxx
Non-operating incomes xxx
Funds from operations xxx
Decrease in working capital Total Sources xxx
xxx
APPLICATION OF FUND
Redemption of pref. shares xxx
Redemption of debentures xxx
Purchase of investments xxx
Purchase of fixed assets xxx
Payment of long-term loans xxx
Payment of tax xxx
Payment of dividend xxx
Increase in working capital xxx
Total Uses xxx

Procedure for preparation

1. By examining the non-current assets and liabilities, show as a source if cash comes and as an
application if cash goes out.
2. Show non-operating income as a source and non-operating expenses as an application.
3. Through adjustment items, if cash comes in show as a source and if cash goes out show as an
application.
4. If goodwill shows increase, take on the applications‟ side.

Note: - In order to say in single sentence, except the items taken in the “statements of changes in
working capital and funds from operations”, take as a source when cash comes through all other items
and take as an application when cash goes out through all other items.

PRACTICE PROBLEMS

1. Prepare:
1. Statement of changes in working capital and
2. Funds flow statement from following balance sheets of Vijaya Mitra Ltd., as on 31-03-2016 and 31-03-
2017:

Liabilities 31-03-2016 31-03-2017

 Equity capital 200000 300000
Preference capital 200000 100000
Profit and loss 50000 75000
account 40000 60000
General resource 10000 50000
Unsecured loans 40000 5000
Current liabilities
Total 540000 590000
Assets 31-03-2016 31-03-2017
Land and buildings 100000 80000
Plant and Machinery 90000 120000
Cash at Bank 60000 40000
Stock 120000 140000
Sundry Debtors 30000 50000
Vehicles 140000 160000
Total 540000 590000

Adjustments:
1. Dividend declared and paid Rs. 25000
2. Additional plant purchased Rs. 5000
3. Tax paid during the year Rs. 45000

Solution:

STATEMENT OF CHANGES IN WORKING CAPITAL

Previous Current Working capital
Particulars year year Increase Decrease
A. Current Assets
Cash at bank 60000 40000 20000
Stock 120000 140000 20000
Debtors 30000 50000 20000
A 210000 230000
B. Current Liabilities
Current liabilities 40000 5000 35000

B Working capital (A – B) 40000 5000

170000 225000
Increase in working capital B/F 55000 - 55000
225000 225000 75000 20000

FUNDS FROM OPERATIONS

Particulars Amount Amount
 Net profit (75000-50000) 25000
Add:
General reserve 20000
Provision for dividend 25000
Provision for tax 45000
Depreciation on plant 20000 110000
Funds from
135000
operations

FUNDS FLOW STATEMENT

Particulars Amount
SOURCES OF FUND
Issue of equity capital 100000
Unsecured loans procured 40000
Sale of land and building 20000
Funds from operations 135000
Total Sources 295000
APPLICATION OF FUND
Redemption of pref. capital 100000
Purchase of vehicles 20000
Purchase of plant 50000
Dividend paid 25000
Tax paid 45000
Increase in working capital 55000
Total Uses 295000

Working notes:
Plant and Machinery A/C
Particulars Amount Particulars Amount
To Opening By P&L A/C (Depn.)
balance 90000 b/f 20000
To Bank
(purchase) 50000 By Closing balance 120000
140000 140000
Dividend A/C
Particulars Amount Particulars Amount
By P&L A/C (provi.)
To Bank A/C 25000 b/f 25000
25000 25000
Tax A/C
Particulars Amount Particulars Amount
By P&L A/C (provi.)
To Bank A/C 45000 b/f 45000
45000 45000

2. Prepare a funds flow statement from the following balance sheets

 Liabilities 31-3-16 31-3-17 Assets 31-3-16 31-3-17
E.S.C 100000 200000 Machinery 120000 160000
P.S.C 170000 180000 Furniture 240000 140000
P & L A/C 260000 350000 Goodwill 12000 4000
G.R 110000 230000 Patents 8000 1000
9% Debentures 60000 140000 Cash 415000 1023000
Creditors 80000 200000 Preliminary 5000 2000
Bills payable 20000 30000 exp.
800000 1330000 800000 1330000

1. Depreciation on Machinery Rs. 15000 and on Furniture Rs. 12000

2. Dividend paid Rs. 18000

Solution:
STATEMENT OF CHANGES IN WORKING CAPITAL
Previous Current Working capital
Particulars year year Increase Decrease
A. Current Assets
Cash 415000 1023000 608000
A 415000 1023000
B. Current Liabilities
Credotors 80000 200000 120000
Bills payables 20000 30000 10000

B Working capital (A – B) 100000 230000

315000 793000
Increase in working capital B/F 478000 - 478000
793000 793000 608000 608000

FUNDS FROM OPERATIONS

Particulars Amount Amount
Net profit (350000-260000) 90000
Add:
General reserve 120000
Provision for dividend 18000
Depreciation on furniture 12000
Depreciation on machinery 15000
Goodwill written off 8000
Patents written off 7000
Preliminary expenses 183000
3000
written off
Funds from operations 273000

FUNDS FLOW STATEMENT

Particulars Amount
SOURCES OF FUND
Issue of equity capital 100000
 Issue of preference capital 10000
Issue of debentures 80000
Sale of furniture 88000
Funds from operations 273000
Total Sources 551000
APPLICATION OF FUND
Purchase of machinery 55000
Dividend paid 18000
Increase in working capital 478000
Total Uses 551000

Working Notes:
Machinery A/C
Particulars Amount Particulars Amount
To Opening balance 120000 By P&L A/C (Depn.) 15000
To Bank (purchase)
b/f 55000 By Closing balance 160000
175000 175000
Furniture A/C
Particulars Amount Particulars Amount
To Opening balance 240000 By P&L A/C (Depn.) 12000
By Bank (Sale) b/f 88000
By Closing balance 140000
240000 240000

Dividend A/C
Particulars Amount Particulars Amount
By P&L A/C (provi.)
To Bank A/C 18000 b/f 18000
18000 18000

3. Balance sheets of M/s. Divya as on 1st January 2016 and 1st January 2017 were as follows:
Liabilities 2016 2017 Assets 2016 2017
Creditors 40000 44000 Cash 12000 27000
Overdraft 2000 3000 Debtors 30000 50000
Long term loan 40000 50000 Stock 35000 25000
Capital 125000 150000 Machinery 80000 55000
Reserves 10000 10000 Land building 40000 50000
P& L 15000 30000 35000 80000

232000 287000 232000 287000

During the year machine costing Rs. 10000 (accumulated depreciation Rs. 3000) was sold for Rs.
5000.

Solution:
STATEMENT OF CHANGES IN WORKING CAPITAL
Particulars Previous Current Working capital
 year year Increase Decrease
A. Current Assets
Cash 12000 27000 15000
Debtors 30000 50000 20000
Stock A 35000 25000 10000
77000 102000
B. Current Liabilities
Credotors 40000 44000 4000
Overdraft 2000 3000 1000
42000 47000
B
Working capital (A – B) 35000 55000
Increase in working capital B/F 20000 20000
55000 55000 35000 35000

FUNDS FROM OPERATIONS

Particulars Rs Rs
Net profit (30000-15000) 15000
Add:
General reserve
Provision for dividend
Depreciation on furniture
Depreciation on machinery 18000
Loss on sale of machinery 2000 20000
Funds from operations 35000

FUNDS FLOW STATEMENT

Particulars Amount
SOURCES OF FUND
Issue of capital 25000
Long-term loan 10000
Sale of machinery 5000
Funds from operations 35000
Total Sources 75000
APPLICATION OF FUND
Purchase of land 10000
Purchase of building 45000
Increase in working capital 20000
Total Uses 75000

Working Notes:
Machinery A/C
Particulars Amount Particulars Amount
To Opening
balance 80000 By P&L A/C (Depn.) 3000
By P&L A/C (loss on 2000
 sale)
By Bank (sale) 5000
By Closing balance 55000
By P&L A/C (Depn.) b/f 15000
80000 80000

4. Prepare a funds flow statement from the following:

Liabilities 2002 2003 Assets 2002 2003
Share capital 200000 250000 Cash 30000 47000
Creditors 70000 45000 Debtors 120000 115000
Retained 10000 23000 Stock 80000 90000
earnings Land 50000 66000

280000 318000 280000 318000

Solution:
STATEMENT OF CHANGES IN WORKING CAPITAL
Previous Current Working capital
Particulars year year Increase Decrease
A. Current Assets
Cash 30000 47000 17000
Debtors 120000 115000 5000
Stock 80000 90000 10000
A 230000 252000
B. Current Liabilities
Creditors 70000 45000 25000
B Working capital (A – B) 70000 45000
160000 207000
Increase in working capital B/F 47000 - 47000
207000 207000 52000 52000

FUNDS FROM OPERATIONS

Particulars Rs Rs

Net profit (23000-10000) Funds from 13000

operations

13000

Particulars Amount FUNDS FLOW

STATEMENT SOURCES OF FUND
Issue of capital 50000
Funds from operations 13000
Total Sources 63000
APPLICATION OF FUND
Purchase of land 16000
Increase in working capital 47000
Total Uses 63000
5. From the information given below, prepare funds flow statement of Global Co. Ltd.
Liabilities I year II year Assets I year II year
Share capital Goodwill 190000 140000
Equity capital 450000 600000 Plant 160000 250000
Preference capital 225000 150000 Building 240000 195000
Profit and loss A/C 60000 75000 Inventories 92000 235000
Proposed dividend 55000 67000 trade 175000 125000
Trade creditors 72000 90000 Debtors 45000 57000
Bills payable 32000 25000 Bills receivables 52000 77000
Provision for tax 60000 72000 cash
954000 1079000 954000 1079000
Additional information:
1. An interim dividend of Rs. 35000 has been paid in II year.
2. Payment of income tax Rs. 52000 was paid during II year.
3.Depreciation of Rs. 35000 and Rs. 42000 have been charged on plant and building
respectively in II year.
4. A part of the plant worth Rs. 20000was sold for Rs. 30000.
Solution:
STATEMENT OF CHANGES IN WORKING CAPITAL
Previous Current Working capital
Particulars
year year Increase Decrease
A. Current Assets
Cash 52000 77000 25000
Inventories 92000 235000 143000
Debtors 175000 125000 50000
Bills receivables A 45000 57000 12000
364000 494000
B. Current Liabilities
Credotors 72000 90000 18000
Bills payables 32000 25000 7000
104000 115000
B
Working capital (A – B) 260000 379000
Increase in working capital B/F 119000 119000
379000 379000 187000 187000
FUNDS FROM OPERATIONS
Particulars Rs Rs
Net profit (75000-60000) 15000
Add:
Goodwill written off 50000
Provision for dividend 47000
 Provision for tax 64000
Depreciation on plant 35000
Depreciation on building 42000 238000
Less: 253000
Profit on sale of plant 10000 10000
Funds from operations 243000

FUNDS FLOW STATEMENT

Particulars Amount
SOURCES OF FUND
Issue of equity capital 150000
Sale of building 3000
Sale of plant 30000
Funds from operations 243000
Total Sources 426000
APPLICATION OF FUND
Redemption of preference shares 75000
Purchase of plant 145000
Dividend paid 35000
Tax paid 52000
Increase in working capital 119000
Total Uses 426000

Working Notes: Plant A/C

Particulars Amount Particulars Amount
By P&L A/C
To Opening balance 160000 (Depn.) 35000
To P & L A/C
(porofit) 10000 By Bank (Sale) 30000
To Bank (purchase)
b/f 145000 By Closing balance 250000
315000 315000

Building A/C
Particulars Amount Particulars Amount
To Opening balance 240000 By P&L A/C (Depn.) 42000
By Bank (Sale) b/f 3000
By Closing balance 195000
240000 240000

Proposed dividend A/C

Particulars Amount Particulars Amount
To Bank A/C 35000 By Opening balance 55000
To Closing By P&L A/C (provi.)
balance 67000 b/f 47000
102000 102000
 Provision for tax A/C
Particulars Amount Particulars Amount
To Bank A/C 52000 By Opening balance 60000
To Closing By P&L A/C (provi.)
balance 72000 b/f 64000
124000 124000

ADVANTAGES OF FUND FLOW STATEMENTS

1. Funds flow statement reveals the net result of Business operations done by the company during the year.

2. In addition to the balance sheet, it serves as an additional reference for many interested parties like
analysts, creditors, suppliers, government to look into financial position of the company.

3. The Fund Flow Statement shows how the funds were raised from various sources and also how those
funds were deployed by a company.

4. It reveals the causes for the changes in liabilities and assets between the two balance sheet dates.

5. Funds flow statement helps the management in deciding its future course of plans and also it acts as a
control tool for the management.

Disadvantages of Fund Flow Statements

1. Funds Flow statement has to be used along with balance sheet and profit and loss account for inference of
financial strengths and weakness of a company it cannot be used alone.

2. Fund Flow Statement does not reveal the cash position of the company, and that is why company has to
prepare cash flow statement in addition to funds flow statement.

3. Funds flow statement only rearranges the data which is there in the books of account and therefore it lacks
originality.

4. Funds flow statement is basically historic in nature, that is it indicates what happened in the past and it
does not communicate anything about the future, only estimates can be made based on the past data and
therefore it cannot be used the management for taking decision related to future.

CASH FLOW ANALYSIS

INTRODUCTION

A Cash Flow Statement is a statement showing changes in cash position of the firm from one period to
another. It explains the inflows (receipts) and outflows (disbursements) of cash over a period of time. The
 inflows of cash may occur from sale of goods, sale of assets, receipts from debtors, interest, dividend, rent,
issue of new shares and debentures, raising of loans, short-term borrowing, etc. The cash outflows may occur
on account of purchase of goods, purchase of assets, payment of loans loss on operations, payment of tax and
dividend, etc

The cash shows how much cash comes in and goes out of the company over thr ee-quarter the year. At first
glance, that sounds a lot like the income in that it records financial performance over a specified period. But
there is a big difference between the two.

What distinguishes the two is accrual which is found on the income statement. Accrual accounting requires
companies to record revenues and expenses when transactions occur, not when cash is exchanged. At the
same time, the income statement, on the other hand, often includes non-cash revenues or expenses, which the
statement of cash flows does not include.

Just because the income statement shows net income of Rs.10 does not mean that ca.10 net cash inflow, that's
exactly what it means. The company has Rs.10 more in cash than at the end of the last financial period. You
may want to think of net cash from operations as the company's "true" cash profit.

Because it shows how much actual cash a company has generated, the statement of cash flows is critical to
understanding a company's fundamentals. It shows how the company is able to pay for its operations and
future growth.

Indeed, one of the most important features you should look for in a potential investment is the company's
ability to produce cash. Just because a company shows a profit on the income statement doesn't mean it
cannot get into trouble later because of insufficient cash flows. A close examination of the cash flow
statement can give investors a better sense of how the company will fare.

OBJECTIVES OF CASH FLOW STATEMENT

1. Highlighting cash flow from different activities

2. Short-term Planning
3. Cash Flow information helps to understand liquidity
4. Efficient cash management
5. Prediction of sickness
6. Comparison with budget
7. Cash position

CURRENT ASSESTS AND CURRENT LIABILITIES

CURRENT ASSETS CURRENT LIABILITIES

1. Cash in hand 1. Bills payables
2. Cash at bank 2. Creditors
3. Bills receivables 3. Outstanding expenses
4. Debtors 4. Dividends to be paid
5. Short term advances 5. Bank over draft
6. Short term investments 6. Short term loans
7. Inventories or stock 7. Provisions for current assets (ex: RBD)
8. Pre- paid expenses 8. Taxes to be paid
9. Incomes to be received 9. Provision for tax
 10. Loose tools, etc. 10. Proposed dividend

The general rules that develop from the above discussion are:

1. An increase in current assets leads to decrease in cash.

2. A decrease in current assets leads to an increase in cash.

3. An increase in current liabilities leads to an increase in cash.

4. A decrease in current liabilities leads to a decrease in cash.

PREPARING A CASH FLOW STATEMENT

Cash flow statements have three distinct sections, each of which relates to a particular component –
operations, investing and financing – of a company's business activities.

The indirect method of presentation is very popular, because the information required for it is relatively easily
assembled from the accounts that a business normally maintains in its chart of accounts. The indirect method
is less favored by the standard-setting bodies, since it does not give a clear view of how cash flows through a
business. The alternative reporting method is the direct method.

Three Sections of the Cash Flow Statement

Companies produce and consume cash in different ways, so the cash flow statement is divided into three
sections: cash flows from operations, financing and investing. Basically, the sections on operations and
financing show how the company gets its cash, while the investing section shows how the company
spends its cash.

1. Operating Activities: Operating activities include cash flows from all standard business operations. Cash
receipts from selling goods and services represent the inflows. The revenues from interest and dividends
are also included here. The operational expenditures are considered as outflows for this section. Although
interest expenses fall under this section but the dividends are not included. Dividends are considered as a
part of financing activity in financial accounting terms.

2. Investing Activities: Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash inflow.
Purchasing property, plant and equipment or marketable securities are considered as cash outflows. Loans
made to borrowers for long-term use is another cash outflow. Collections from these loans, however, are
cash inflows.

3. Financing Activities: Financing activities on the statement of cash flows are much more defined in
nature. The receipts come from borrowing money or issuing stock. The outflows occur when a company
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with other activities
on the statement of cash flows depend on activities rather than actual general ledger accounts.

CASH FLOW STATEMENT FORMAT

Cash Flow Statement of -------------- Company for the year ended -------
Particulars Rs. Rs.
 A. Cash Flow from Operating Activities
Net Profit xxx
Adjustments: (to convert net profit to cash provided by
operating activities)
Good will written off xxx
Loss on sale of investments xxx
Loss on sale of fixed assets xxx
Preliminary expenses written off xxx
Discount on issue of debentures xxx
Provision for tax xxx
Patents written off xxx
Transfer to reserve xxx
Provision for dividend xxx
Loss on sale of fixed assets/investments xxx
Profit on sale of fixed assets/investments (xxx)
Profit from investments (xxx)
Increase in current liabilities xxx
Decrease in current liabilities (xxx)
Increase in current assets (xxx)
Decrease in current assets xxx
Cash from operations xxx
B. Cash Flows from Investing Activities
Purchase of fixed assets (xxx)
Proceeds from sale of fixed assets xxx
Purchase of long-term investments (xxx)
Proceeds from sale of long-term investments xxx
Cash from investing activities xxx
C. Cash Flows from Financing Activities
Issue of shares xxx
Issue of debentures xxx
Share capital repaid (xxx)
Debentures repaid (xxx)
Cash from financing activities xxx
Net increase/decrease in cash
xxx
Cash at the beginning of the year xxx
Cash at the end of the year xxx

Procedure for preparation

1. Prepare accounts for adjustments to find hidden information.
2. Observe balance sheets and accounts for adjustments. Adjust non-cash items, non-operating items
and current assets & current liabilities to net profit except cash and bank balances.
3. Observe all fixed assets and their adjustment accounts. Show purchase and sale of assets.
 4. Observe all capital & long-term liabilities and their adjustment accounts. Show capital & loans
received and repaid.

ADVANTAGES OF CASH FLOW STATEMENT

1. It shows the actual cash position available with the company between the two balance sheet dates which
funds flow and profit and loss account are unable to show. So, it is important to make a cash flow report if
one wants to know about the liquidity position of the company.

2. It helps the company in accurately projecting the future liquidity position of the company enabling it
arrange for any shortfall in money by arranging finance in advance and if there is excess than it can help
the company in earning extra return by deploying excess funds.

3. It acts like a filter and is used by many analysts and investors to judge whether company has prepared the
financial statements properly or not because if there is any discrepancy in the cash position as shown by
balance sheet and the cash flow statement, it means that statements are incorrect.

DISADVANTAGES OF CASH FLOW STATEMENT

1. Since it shows only cash position, it is not possible to deduce actual profit and loss of the company by just
looking at this statement.

2. In isolation this is of no use and it requires other financial statements like balance sheet, profit and loss
etc…, and therefore limiting its use.

PRACTICE PROBLEMS AND SOLUTIONS

1. From the following balance sheets as on 31-12-2016 and 31-12-2017. You are required to prepare a
cash flow statement.
Liabilities 31-12-2016 31-12-2017
Share capital 100000 150000
Profit and loss A/C 50000 80000
General reserve 30000 40000
12% Bonds 50000 60000
Sundry creditors 30000 40000
Outstanding expenses 10000 15000
Total 270000 385000
Assets 31-12-2016 31-12-2017
Fixed assets 100000 150000
Goodwill 50000 40000
Inventories 50000 80000
Bank 10000 15000
Bills receivables 10000 20000
Sundry debtors 50000 80000
Total 270000 385000

Solution:

Cash Flow Statement for the year ended 31-12-2017

 Particulars Rs. Rs.
A. Cash Flow from Operating Activities
Net Profit (80,000 - 50,000) 30000
Adjustments:
Goodwill written off 10000
Transfer to reserve 10000
Increase in creditors 10000
Increase in outstanding expenses 5000
Increase in inventory (30,000)
Increase in receivables (10,000)
Increase in debtors (30,000)
Cash from operations (5,000)

B. Cash Flows from Investing Activities

Purchase of fixed assets (50,000)
Cash from investing activities (50,000)

C. Cash Flows from Financing Activities

Issue of shares 50,000
Issue of bonds 10,000
Cash from financing activities 60,000
Net increase in cash
5,000
Bank at the beginning of the year 10,000
Bank at the end of the year 15,000

2. Prepare a cash flow statement from the following balance sheets of Kumar Ltd.
Liabilities 2016 2017 Assets 2016 2017
Capital 150000 175000 Land & Building 110000 150000
Loan from bank 160000 100000 Machinery 200000 140000
Creditors 85000 93000 Stock 50000 45000
Outstanding expenses 5000 7000 Debtors 70000 80000
Bills payable 50000 40000 Cash 15000 22000
Long term loan -------- 25000 Pre – paid expenses 5000 3000
450000 440000 450000 440000

Net profit during the year 2017 was Rs/ 60000. During 2017 machinery costing Rs. 25000
(Accumulated depreciation Rs. 10000) was sold for Rs. 25000. The tax payable and dividend payable
were Rs. 50000 and Rs. 35000 respectively during 2017.

Solution:

Cash Flow Statement for the year ended 31-12-2017

Particulars Rs. Rs.
A. Cash Flow from Operating Activities
 Net Profit 60000
Adjustments:
Depreciation on machinery 45000
Profit on sale of machinery (10000)
Provision for tax 50000
Provision for dividend 35000
Increase in creditors 8000
Increase in outstanding expenses 2000
Decrease in bills payable (10000)
Decrease in stock 5000
Increase in debtors (10000)
Decrease in prepaid expenses 2000
Cash from operations 177000

B. Cash Flows from Investing Activities

Purchase of land and building (40000)
Sale of machinery 25000
Cash from investing activities (15000)
C. Cash Flows from Financing Activities
Bank loan repaid (60000)
Long-term loan repaid 25000
Tax paid (50000)
Dividend paid (35000)
Drawings (35000)
Cash from financing activities (155000)
Net increase/decrease in cash 7000
Cash at the beginning of the year 15000
Cash at the end of the year 22000

Working notes:
Note: For working notes given in the problem, accounts are to be prepared to extract the hidden
information.
Machinery Account
Particulars Amount Particulars Amount
To Opening balance 200000 By Bank (Sales) 25000
To P & L A/C (Profit) 10000 By Depreciation B/F 45000
By Closing balance 140000
210000 210000

Tax Account
Particulars Amount Particulars Amount
To Bank Account 50000 By P & L A/C (provided) B/F 50000
50000 50000
Dividend Account
 Particulars Amount Particulars Amount
To Bank Account 35000 By P & L A/C (provided) B/F 35000
35000 35000

3. From the following balance sheets of 1993 and 1994, prepare the cash flow statement.
Liabilities 2016 2017 Assets 2016 2017
Equity capital 20000 25000 Plant 46000 45000
Debentures 15000 12000 Debtors 9000 7000
Creditors 16000 18000 Stock 5000 9000
Profit and loss A/C 11000 14000 Cash 2000 8000
62000 69000 62000 69000

Solution:
Cash Flow Statement for the year ended 31-12-2017
Particulars Rs. Rs.
A. Cash Flow from Operating Activities
Net Profit (14000-11000) 3000
Adjustments:
Increase in creditors 2000
Decrease in debtors 2000
Increase in stock (4000)
Cash from operations 3000

B. Cash Flows from Investing Activities

Sale of plant 1000
Cash from investing activities 1000
C. Cash Flows from Financing Activities
Issue of equity capital 5000
Debentures repaid (3000)
Cash from financing activities 2000
Net increase/decrease in cash 6000
Cash at the beginning of the year 2000
Cash at the end of the year 8000

4. Prepare a cash flow statement from the following balance sheets as on 31-12-2016 and 31-
122017.
Liabilities 2016 2017 Assets 2016 2017
Share capital 100000 150000 Fixed assets 100000 150000
Profit and loss A/C 50000 80000 Goodwill 50000 40000
General reserve 30000 40000 Inventories 50000 80000
6% bonds 50000 60000 Debtors 50000 80000
Creditors 30000 40000 Bills receivables 10000 20000
Outstanding 10000 15000 Bank 10000 15000
 expenses 270000 385000 270000 385000

Solution:
Cash Flow Statement for the year ended 31-12-2017
Particulars Rs. Rs.
A. Cash Flow from Operating Activities
Net Profit (80000-50000) 30000
Adjustments:
General Reserve 10000
Goodwill written off 10000
Interest on bonds (50000x6/100) 3000
Increase in creditors 10000
Increase in outstanding expenses 5000
Increase in inventory (30000)
Increase in debtors (30000)
Icrease in bills receivables (10000)
Cash from operations (2000)

B. Cash Flows from Investing Activities

Purchase of fixed assets (50000)
Cash from investing activities (50000)
C. Cash Flows from Financing Activities
Issue of equity capital 50000
Issue of bonds 10000
Interest on bonds paid (3000)
Cash from financing activities 57000
Net decrease in cash 5000
Bank at the beginning of the year 10000
Bank at the end of the year 15000

5. Financial statements of Mr. Ram are as follows

Liabilities 2016 2017 Assets 2016 2017
Bills payable 29000 25000 Cash 40000 30000
Capital 731000 615000 Debtors 20000 17000
Stock 8000 13000
Buildings 92000 80000
machinery 600000 500000
760000 640000 760000 640000
Additional information:
a) Proprietor has not taken any drawings.
b) There are no purchases and sales in buildings and machinery. Prepare cash
flow statement.
 Cash Flow Statement for the year ended 31-12-2017
Particulars Rs. Rs.
A. Cash Flow from Operating Activities
Net Profit (116000)
Adjustments:
Depreciation on buildings 12000
Depreciation on machinery 100000
Decrease in bills payable (4000)
Decrease in debtors 3000
Increase in stock (5000)
Cash from operations (10000)

B. Cash Flows from Investing Activities

0
Cash from investing activities 0
C. Cash Flows from Financing Activities
0
Cash from financing activities 0
Net decrease in cash (10000)
Cash at the beginning of the year 40000
Cash at the end of the year 30000
Working Notes:

Capital Account
Particulars Amount Particulars Amount
To P & L A/C (loss) By Opening
B/F 116000 balance 731000
To Closing balance 615000
731000 731000

DIIFERENCES BETWEEN FUNDS FLOW STATEMENT AND CASH FLOW STATEMENT

Table of Difference between Funds Flow Statement and Cash Flow Statement

Basis of
Cash Flow Statement Funds Flow Statement
Difference

1. Meaning Funds means only cash which is a Fund means net working capital (i.e.
of component of net current assets. current assets minus current liabilities).
fund
2. Objective Its objective is to know about the Its objective is to know about the
changes occurred in cash position changes occurred in net working capital
between two balance sheet dates. between two balance dates.
3. Basis ofIncrease in current liability or Increase in current liability and
preparation decrease in current asset (except decrease in current asset results in a
cash) results in an increase in cash. decrease in net working
4. Effect ofEffect of a transaction on cash is Effect of a transaction on net working
transaction considered. capital is considered.

5. Utility Cash flow statement is useful for Fund flow statement is useful for long-
short-term analysis. term analysis
6. Statement of No such statement is prepared A separate statement for changes in
changes in separately in cash flow statement. working capital is prepared in fund flow
Working statement or analysis.
Capital
7 Cash Opening and closing balances of Such balances of cash are shown in
Balances cash are shown in this statement statement of changes in working capital.

**************** THE END *****************