Statement Of Changes In

Financial Position
 IMPORTANT QUESTIONS
Managers, shareholders, creditors and other interested groups
seek answers to the following important questions about a
firm:
• What is the financial position of the firm at a given point of
time?
• How has the firm performed financially over a given period of
time?
• What have been the sources and uses of cash over a period of
time?
The accountant prepares the balance sheet, the profit and
loss account, and the statement of cash flows to answer the
above questions
 PROFIT AND LOSS ACCOUNT
Current Previous
Year Year
Rs. in Crores
Net Sales 701 623
Less : Cost of Goods Sold (552) (475)
Gross Profit 149 148
Less : Operating Expenses (26) (24)
( Admin & Selling)
EBITDA 123 124
Less : Depreciation (30) (25)
Operating Profit (EBIT) 93 99
Net Non-operating Income/(Expense) (4) 6
Profit Before Intererest & Tax (PBIT) 89 105
Interest (21) (22)
Profit Before Tax (PBT) 68 83
Tax (34) (41)
Profit after Tax (PAT) 34 42
Dividends (28) (28)
Retained Earnings 6 14
 BALANCE SHEET
Rs. in Crores
Current Previous
year year
I. Sources of Funds
a) Shareholders Funds
(i) Share Capital 150 150
(ii) Reserves & Surplus 112 106
Shareholders Funds 262 256

b) Loan Funds
(i) Secured 143 131
(ii) Unsecured 69 25
Loan Funds 212 156

Sources of Funds 474 412

II. Application of Funds

I) Fixed Assets 330 322

ii) Investments 15 15
iii) Current Assets, Loans & Adv.
a) Inventories 105 72
b) Sundry Debtors 114 68
c) Cash & Bank Balance 10 6
d) Loans & Advances 5 10
234 156

Less : Current Liabilites (105) (81)

Net Current Assets 129 75

Application of Funds 474 412

Fund/Cash flow statements- Why
The Income statement gives the performance for a
given period whereas the Balance sheet shows the
financial position as at a particular date.
For assessing the financial management
efficiencies it is necessary to know how the
management has acquired the funds(sources) and
how they were used(application).
By comparing the balances between the two
balance sheet dates ,one can assess the sources
and uses of funds/cash for a particular period.
 Fund flow V/S Cash flow
The difference between closing and opening
cash/bank/marketable securities balance is
explained through cash flow statement i.e.it
is a statement of cash inflows and outflows
reflecting the efficiency in the acquisition and
use of cash during a particular period.
The term ‘funds’ is a wider concept and
involves working capital in contrast to ‘cash’
which is one of the elements of funds(W.C.)
 Fund flow statement
• The term fund signifies ‘working capital’ i.e
excess of current assets over current
liabilities.
• The basic objective of the statement is to
explain the changes in the working capital
for a specified period of time.
• An increasse in W.C. is considered as a
source of funds and a decrease in W.C. is
considered as an application of funds.
• The basic 3 causes of such changes are
operating activities,investing activities and
financing activities.
 Format of fund flow statement
A. Sources of funds :
Funds(profits) from business operations
sale of fixed assets &/or investments
issue of share capital
Long term Borrowings : Loans , Debentures
B. Application of funds:
Losses from business operations
purchase of fixed assets &/or investments
repayment of long term loans
Redemption of debentures / Preference shares
payment of dividends
Payment of taxes
 Funds from Operations
Net profit/Loss (after tax and appropriations)
Add:
1. Transfer to reserves
2. Depreciation provided for the year
3. Other non-cash expenses (amortisation)
4. Loss on sale of assets/investments
5. Provision for taxation and proposed dividend
Less:
1. Non – operating incomes(Dividend ,interest
received)
2. Profit on sale of fixed assets and investments
How to prepare fund flow statement
1. Prepare a statement of changes in working
capital and determine the net increase or
decrease in working capital.
2. Based on the additional information
available, prepare the adjustment(ledger)
accounts and give effect to the
adjustments
3. Calculate funds from operations after
considering adjustments &/or balancing
figures available from the ledger accounts
 Contd.
4.Compare each non-current account in the
balance sheet to identify source or
application of funds & prepare fund flow
stt.
5.The difference between sources and
application shows increase or decrease in
W.C. which should match with the change
in W.C. as calculated in step 1.
Cash flow statement
 Cash flow statement
Provides the information about the flow of
cash into and out of a company.
As per AS -3 ,the statement of deals with
the provision of information about the
historical changes in cash and cash
equivalents of an enterprise by means of a
cash flow statement which classifies cash
flows during the period from operating,
investing and financing activities
 Definition of cash & cash
equivalents
Cash comprises cash on hand and
demand deposits with banks.
Cash equivalents are short term,highly
liquid investments that are readily
convertible into known amounts of cash
and which are subject to insignificant risks
of changes in value.
 Classification of cash flows
Operating activities :
 Core business income generating activities
Investing activities :
 Purchase and sale of long term assets,
investments.
Financing activities:
 Acquiring cash funds through equity , borrowings
and returns to investors in the form of dividends
and interest payments.
 Cash from Operations
Cash flow from operations
PAT (– loss)
+ Depreciation
+ Other non-cash expenses
+ Provision for taxation
– Non-cash incomes
+ Loss from the sale of fixed assets
– Gain from the sale of fixed assets
+ Decrease in C.A./Increase in C.L.
– Increases in C.A. / Decrease in C.L
- Taxes paid
CASH FLOW STATEMENT FOR XYZ LTD, FOR THE
PERIOD 1.4.2005 TO 31.3.2006
(Rs. in crore)
(A) Cash Flow from Operating Activities
Net profit before tax and extraordinary items 6.8
Adjustments for
Interest paid 2.1
Depreciation 3.0
Operating profit before working capital changes 11.9
Adjustments
Debtors (4.6)
Inventories (3.3)
Advances 0.5
Trade credit 1.5
Advances 0.7
Provisions 0.2
Cash generated from operations 6.9
Income tax paid (3.4)
Cash flow before extraordinary items 3.5
Extraordinary item –
Net cash flow from operating activities 3.5

(Contd.)
(Contd.)
(Rs.in crore)

(B) Cash Flow from Investing Activities

Purchase of fixed assets (3.8)
Net cash flow from investing activities (3.8)
(C) Cash Flow from Financing Activities
Proceeds from term loans 1.2
Proceeds from inter-corporate deposits 4.4
Interest paid (2.1)
Dividend paid (2.8)
Net cash flow from financing activities 0.7
(D) Net Increase in Cash and Cash Equivalents 0.4
Cash and cash equivalents as on 1.04.20x0 0.6
Cash and cash equivalents as on 31.03.20x1 1.0
Uses of Funds and Cash Flow
Statements
Liquidity position
Capital expenditures
Dividends paid
Retained earnings
External financing
Repayment of loans
Non-performing assets