Statement Of Changes In
Financial Position
1
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 2
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.
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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.)
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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.
• The basic 3 causes of such changes are
operating activities, investing activities and
financing activities.
• The 2 main components are:
Statement of changes in working capital
Statement of sources and application of funds
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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
Reduction in working capital(Balancing figure)
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
Increase in working capital(Balancing figure) 6
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 (Refer slide No.9)
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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.
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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
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Cash flow statement
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Cash flow statement
Provides the information about the flow of cash
into and out of a company during an accounting
year.
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
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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.
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Classification of cash flows
Operating activities :
Core business income generating activities affecting cash
inflows/outflows
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.
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FORMAT OF CASH FLOW STATEMENT
( Example)
(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 – 14
Net cash flow from operating activities 3.5
(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
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Calculating cash flow from Operations
PAT (– loss)
+ Provision for taxation
+ Interest paid
EBIT
+ Depreciation provided during the year
+ Other non-cash expenses/ – Non-cash incomes
+/-Loss/Gain from the sale of fixed assets
Cash flow before working capital changes
+ Decrease in C.A./Increase in C.L.
– Increases in C.A. / Decrease in C.L
Cash flow before taxes
– Taxes paid
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Cash flow from operations
Analysis of Fund /Cash Flow
Statements
Liquidity position
Capital expenditures
Dividends paid
Retained earnings
External financing
Repayment of loans
Non-performing assets
Working capital management
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