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Steps in Preparation of Fund Flow Statement

STEPS IN PREPARATION OF FUND FLOW STATEMENT 

            (i) Preparation of fund flow statement

            (ii) Preparation of statement of changes in working capital.

            (iii) Preparation of adjusted profits and loss account (to find out fund from operation or fund lost in operation)

            (iv) Adjustment and their treatment

            (v) Preparation of separate ledger

            (vi) Treatment about the provision for taxation and proposed divider 

NOTE: Fund flow statement alone is a major part of the solution; remaining other things i.e., working capital statement, P.L. A /c, preparation of ledger, treatment of provision for taxation and proposed dividend, adjustment etc. were supported to work the fund flow statement. 

I. Preparation Fund Flow Statement

Here we have to prepare the fund flow statement in the T shape. 

I. Fund Flow Statement (Specimen form)

II. Working Capital Statement 

For the purpose of finding out increase or decrease in working capital, we have to prepare statement of changes in working capital. [TCA - TCL = WC] 

Particulars                                         Year I                                Year II

 

Current Assets                                     XX                                          XX

Cash in hand                                       XX                                          XX

Cash at bank                                       XX                                          XX

Sundry debtors                                   XX                                          XX

Bills receivable                                    XX                                          XX

Marketable securities                          XX                                          XX

Inventory                                            XX                                          XX

Prepaid expenses                                 XX                                          XX

Short term investment                         XX                                          XX

Accrued incomes                                XX                                          XX

                                                                                                                       

Total Current Assets (TCA) (A)   XX                                            XX

 

Current Liabilities

Sundry Creditors                                XX                                          XX

Bills payable                                        XX                                          XX

Outstanding expenses                         XX                                          XX

Bank overdraft                                    XX                                          XX

Income received in advance               XX                                          XX

Short term loans                                  XX                                          XX

Cash credit from bank                                    XX                                          XX

Provision for taxation                         XX                                          XX

Proposed dividend                              XX                                          XX

Provision against current assets          XX                                          XX

Provision for doubtful debts               XX                                          XX

                                  

Total Current Liabilities (TCL) (B)     XX                                          XX

 

Working Capital (A-B)                       XX                                          XX

Increase or Decrease                           XX

lTAC- TCL = WC]

After the computation of working capital, we have to find out the increase or decrease in working.

(iii). Fund from Operation: Fund from operation is found out by two methods

            (i) Statement method

            (ii) Accounting method.

Normally, accounting method is easy and convenient. So, we have to adopt accounting method i.e., profit and loss account is used to find out the fund from operation. Here profit and loss account is prepared in a usual procedure.

 

Profits and Loss account for the year ended

 

IV. Important adjustments and their treatment

All the adjustments appear in two places :

            Adjustment                                                Treatment

1. Depreciation                                                P.L. A/c debit side

Respective asset A/c credit side

2. Dividend paid                                             P.L. A/c debit side

Fund flow statement-Application side

 

3. Income tax paid                                          Income tax A/c debit side

fund flow statement-Application side

 

 

4. Income tax provision                                  P.L. A/c debit side

Income tax A/c credit side

 

5. Loss on sale of fixed Assets                       P.L . A/c debit side.

Respective asset A/c credit side.

 

6. Interim dividend paid                                 P.L. A/c debit side

Fund flow statement-Application side.

 

V. Preparation of separate ledger A/c, if necessary i.e., about the non-current (either Assets or Liability) items related information given in the adjustment means we have to prepare separate ledger. Balances from this ledger can be transferred to fund flow statement means we have to prepare a separate ledger. Balances from this ledger can be transferred to fund flow statement.

VI. Treatment about the provision for taxation and proposed dividend

Provision for taxation and proposed dividend taken as current liability means it should appear under working capital statement.

Some times, regarding the provision for taxation, information is given in the adjustment. So, it should be treated as non current liability. Provision for taxation taken as non-current liability means proposed dividend is also taken as a non-current liability.

(a) Treatment of provision for taxation

(i) Income Tax provided given in the adjustment, we have to find the tax paid-

P. L. A/c debit side

Income Tax A/c credit

(Balancing figure of taxation Ale is called tax paid and then it is transferred to Applications side)

 

TEST QUESTIONS

1. What is meant by fund flow statement ?

2. Describe the various steps involved in preparation of fund flow statement.

3. What do you meant by funds from operation.

4. Explain the basic objectives of compiling a statement of sources and Application of Funds.

5. Explain the advantages and limitations of fund flow statement.