22-02-2013, 12:06 PM
FUND FLOW STATEMENT QUESTION ANSWERS
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1. What is meant by funds flow statement?
Funds flow statement is a statement of sources and uses of funds. It analyses and explains changes in net working capital between two balance sheet dates.
According to S. C. Kuchhal. “The statement of showing sources and uses of funds is popularly known as funds flow statement. It is a condensed report of how the activities of the business have been financed and how the financial resources have been used during the period covered by the statement.”
2. What are the uses of the funds flow statement?
The funds flow statement is useful in the following ways.
a) It is helpful in knowing the sources and uses of funds.
b) It suggests the ways in which working capital position can be improved.
c) It can be used in planning a sound dividend policy.
d) It is useful in forecasting the flow of funds and in projecting the working capital requirements.
3. What are the limitations of fund flow statement?
Funds flow statement suffers from the following limitations:
a) The fund flow statement ignores the non-fund items.
b) The information used for the preparation of the funds flow statement is essentially historical in nature. So, it is not of much use.
c) The funds flow statement is not a substitute for the balance sheet or profit and loss account. It is only a supplementary statement.
4. What are the main sources and uses of funds?
The major sources of funds are:
a) Funds from operation.
b) Issue of equity/ preference shares.
c) Raising long-term loan.
d) Sale of fixed assets.
e) Sale of debentures.
f) Non-trading receipts.
The main uses or applications of funds are:
a) Funds used in operation - loss.
b) Purchase of fixed assets/ investments.
c) Redemption of preference shares.
d) Redemption of debentures.
e) Repayment of long-term loans.
f) Non-trading payments.
5. Mention the steps involved in the preparation of funds flow statement.
In the preparation of funds flow statement, the following steps are involved:
A. Preparation of schedule of changes in working capital:
The schedule of changes in working capital or the statement of changes in working capital is the statement which shows the changes in the working capital that have occurred during the current year. This schedule considers only current assets and current liabilities at the beginning and at the end of the year. This schedule shows either increase or decrease in working capital.
The following rules are followed while preparing a schedule of changes in working capital:
a) An increase in current assets results in increase in working capital.
b) A decrease in current assets results in decrease in working capital.
c) An increase in current liabilities results in decrease in working capital.
d) A decrease in current liabilities results in increase in working capital.
B. Ascertainment of fund from operations through the preparation of Adjusted Profit and Loss Account:
Net profit of a business disclosed by the profit and loss account cannot be treated as funds from operations because this profit is affected by some items which do not affect flow of funds, but which have been debited or credited. Therefore funds from operations can be calculated by adding or deducting these non-fund items from the net profit.
C. Finally it is the preparation of funds flow statement.
6. What are the items to be added back to the current year’s net profit while calculating funds from operations?
Important items to be added back are
a) Depreciation of fixed assets.
b) Amortization of fictitious or intangible assets.
c) Loss on sale of fixed assets or investments.
d) Gifts given, damages paid, etc.
e) Appropriation of profits such as transfer to general reserve, or any specific reserve.
f) Proposed dividend.
g) Provision for taxation.
7. What are the items to be subtracted from current year’s net profit while calculating funds from operations?
Important items are:
a) Profit on sale of fixed assets, investments, etc.
b) Receipt of dividend, interest, gifts, etc.
c) Compensation received.
8. How do you treat the following while preparing funds flow statement?
a) Provision for taxation.
b) Proposed dividend.
a) Provision for taxation: This can be treated in two ways