The document discusses the purpose and analysis of funds flow statements. It explains that a funds flow statement measures changes in a firm's financial position between two balance sheet dates by analyzing sources and uses of funds. Sources typically include profits, debt increases, and asset sales, while uses typically include asset purchases, debt repayments, dividends, and working capital increases. The document then provides details on calculating sources and uses of funds, and constructing a funds flow statement.

1. Why Analysis?
To answer these questions related
with--
The factors responsible for the
difference in the owner’s equity, assets
and liabilities of the firm at two
consecutive balance sheet dates.
The premier financing and investment
activities of the firm during this period.

2.  Are long term sources adequate to
finance fixed assets purchases?
 Does the firm posses adequate WC?
 Why did the firm not pay the dividend
in spite of adequate profits?
 How much funds have been generated
from operations?
 Has the liquidity position improved?

3. FUNDS FLOW STATEMENT
What is FFS?
The funds flow statement or
statement of changes in financial
position is a statement of flows,
it measures the changes that
have taken place during two
balance sheet dates.

4. A summary of a firm’s changes in
financial position from one period to
another; it is also called a sources and
uses of funds statement or a statement
of changes in financial position.

5. What are “funds”?
All of the firm’s investments and claims
against those investments.
Extends beyond just transactions
involving cash.

6. Analyzing the Sources and Uses
Statement
Sources
Primarily through net profit from
operations and long-term debt increases.
Uses
Primarily through an increase in
inventories and expenditures on capital
assets.

7. Sources and uses
 Source
 Funds from business
operations.
 Other incomes
 Sale of non current
assets.
 Long term borrowings
 Issue of additional
share capital.
 Decrease in WC
 Uses
 Loss from business
operations.
 Purchase pf non
current assets.
 Redemption of
debentures or pref.
shares.
 Payment of dividend
and tax.
 Increase in WC

8. Rule for sources and uses of
funds
A L
S - +
U + -

9. Transactions not affecting WC
 A simultaneous increase in CA and
increase in CL does not affect WC.
 A simultaneous decrease in CL and
decrease in CA does not affect WC.
 A simultaneous increase/ decrease in
CA and CL does not affect WC.
 Eg. Payment of cr. (-cash and – Cr.)

10. General Rules
Transactions affecting WC:
 An increase in CA –Increases WC
 A decrease in CA- Decreases WC
 An increase in CL- Decreases WC
 A decrease in CL – Increases WC.

11. Step 1: Schedule of changes in WC.
Particulars Amt. PY Amt. CY Inc.
Rs
Dec.
Rs.
A. Current Assets
e.g. Cash
Inventory
10,000
12,000
12,000
8,000
2,000
Nil
Nil
4,000
Total current assets
B. Current Liabilities
Creditors
Bills Payable
22,000
7,000
5,000
20,000
5,000
8,000
2,000
Nil
Nil
3,000
Total current liabilities
Net WC(A-B)
12,000
10,000
13,000
7.000
Net Increase/ Decrease in
WC. 10,000
3,000
10,000
3,000
7,000 7,000

12. Calculation of FFO/FLO
A. Net income as per
P&L a/c
 B. Add:
 Dep. Expenses
 Amortization of
Goodwill, Patents
and other
intangibles.
 Discount on
debenture or share.
 Extraordinary
losses.
 Loss on sale of non
current assets.
C . Less:
 Premium on
Debenture.
 Revaluation of non
CA.
 Dividends and
interest received.
D. Funds from /lost in
Operations:
(A+B-C)

13. Alternative method
 A. Sales Revenue
 B. Less: Expenses
Cost of RM
Wages and Salary
Manu. Expenses
Advt. Exp.
Insurance exp.
Office exp.
other operating exp.
interest
Income Tax
C. Funds form Operations (A-B)

14.  The cash flow statement
simultaneously provides an
explanation of why a firm’s cash
position has changed between
successive balance sheet dates and
explains changes that have taken place
in the firm’s noncash asset, liability,
and stockholders’ equity accounts over
the same time period.

15. Revised cash flow AS-3
 Net Cash flow from operating activities.
(Cash in flows – cash out flows)
 Net Cash flow from investing activities.
(Cash in flows – cash out flows)
 Net Cash flow from financing activities.
(Cash in flows – cash out flows)

16. Solution statement of changes in
working capital
Particulars 2005 2006 Inc. Dec.
A. Current Assets:
Cash 30,000 10,000 Nil 20,000
A/c s Receivable 70,000 1,40,000 70,000 Nil
Stock in Trade 1,50,000 2,25,000 75,000 Nil
Work in Progress 80,000 90,000 10,000 Nil
Total CA 3,30,000 4,65,000

17. B. Current
Liabilities
2005 2006 Inc. Dec.
Tax Payable 77,000 43,000 34,000 Nil
A/cs Payable 96,000 1,92,000 Nil 96,000
Interest Payable 37,000 45,000 Nil 8,000
Dividend
Payable
50,000 35,000 15,000 Nil
Total CL 2,60,000 3,15,000
Net WC (A-B) 70,000 1,50,000
Net Increase in
WC
80,000 80,000
1,50,000 1,50,000 2,04,000 2,04,000

18. Solution statement of changes in
working capital
Particulars 2005 2006 Inc. Dec.
A. Current Assets:
Cash
Debtors
Stock – in –trade
1,10,000
1,60,000
85,000
1,70,000
1,50,000
1,05,000
60,000
Nil
20,000
Nil
10,000
Nil
Total CA 3,55,000 4,25,000
Current liabilities
Sundry Creditors 1,00,000 70,000 30,000 Nil
Total CL 1,00,000 70,000
Net Working Capital
Net Increase in WC
2,55,000
1,00,000
3,55,000
3,55,000
3,55,000 1,10,000
1,00,000
1,10,000

19. Statement of Sources and
Application of Funds.
Sources Amt. Rs. Application Amt. Rs.
Issue of Share
Capital
Funds from
Operations
Total
1,00,000
15,000
1,15,000
Purchase of Plant
& Machinery
Purchase of
Furniture & Fix.
Net increase in
WC
Total
10,000
5,000
1,00,000
1,15,000

20. Solution statement of changes in working capital
Particulars 2005 2006 Inc. Dec.
A. Current Assets:
Stock
Bank
Debtors
3,00,000
20,000
69,000
3,50,000
40,000
61,000
50,000
20,000
Nil
Nil
Nil
8,000
Total 3,89,000 4,51,000
B. Current Liabilities:
Creditors
Provision for Doubtful
Debts
1,15,000
6,000
90,000
3,000
25,000
3,000
Nil
Nil
Total 1,21,000 93,000
Net Working Capital (A-B) 2,68,000 3,58,000
Net Increase in WC 90,000 90,000
3,58,000 3,58,000 98,000 98,000

21. Provision for Depreciation on
P&M A/c
Particulars Amt. Rs Particulars Amt. Rs
To P & M A/c
(dep on sold
Machinery)
To Bal C/d
2,000
35,000
By Bal b/d
By Adj P&L
A/c
(Balancing
Fig)
30,000
7,000
Total 37,000 Total 37,000

22. Provision for Depreciation
on Land & Building A/c
Particulars Amt. Rs Particulars Amt. Rs
To Bal C/d 24,000 By Bal B/d
By Adj P&L A/c
20,000
4,000
Total 24,000 Total 24,000

23. Plant & Machinery A/C
Particulars Amt. Rs Particulars Amt. Rs
To Bal B/d
To Cash
(purchases)
4,00,000
3,15,000
By Cash (sale)
By Prov. For
Dep
By Adj P&L a/c
By Bal C/d
6,000
2,000
62,000
6,45,000
Total 7,15,000 Total 7,15,000

24. Adjusted P& L A/c
Particulars Amt. Particulars Amt.
To Prov for Dep
P & M
L & B
To Pre. Exp
W / off
To Dividend
To loss on sale
To Bal C/d
7,000
4,000
1,000
50,000
62,000
2,50,000
By Bal B/d
By FFO
1,25,000
2,49,000
3,74,000 3,74,000

25. Funds Flow Statement
Sources Amt.Rs. Uses Amt.Rs.
Issue of Sh.
Issue of Debt
Sale of Mach.
FFO
2,00,000
1,00,000
6,000
2,49,000
Purch. P& M
Purch. L & B
Dividend paid
Net Inc in WC
3,15,000
1,00,000
50,000
90,000
Total 5,55,000 5,55,000

26. Common Size Income Statement
s.n Particulars Top
Rs %
Ten
Rs. %
1.
2.
3.
4.
5.
Sales
-Cost of
sales
GP (1-2)
-OP exp
(inc int).
Dep
OPBIT(3-4)
10,00,000
6,00,000
4,00,000
1,32,500
10,000
2,57,500
100
60
40
13.25
1.00
25.75
12,00,000
8,00,000
4,00,000
1,97,500
20,000
1,82,500
100
66.67
33.33
16.45
1.67
15.21

27. 6.
7.
8.
9.
10.
11.
-Int on Debt
NPBT(5-6)
-Taxes
Net PAT(7-8)
-Dividend
-Retained
Earning(9-10)
7,500
2,50,000
1,00,000
1,50,000
70,000
80,000
0 .75
25.00
10.00
15.00
7.00
8.00
7,500
1,75,000
70,000
1,05,000
75,000
30,000
0.63
14.58
5.83
8.75
6.25
2.50