ACCOUNTING FOR MANAGEMENT

STATEMENT OF SOURCES AND APPLICATIONS OF FUNDS

Sources Rs. Applications Rs. NOTES
Issue of shares for cash 25,000 Purchase of plant for cash 65,000
Issue of shares for current 15,000 Payment of Dividend 5,000
assets (stock 5000 + Deb
15000)
Sale of plant 1,500
Funds from operation 28,000
Decrease in Working cap. 500
70,000 70,000
1.2.31 Cash Flow Statement

Fund Flow Statement explains the changes in working capital, of which, cash
and bank constitute a small part. At times, management may face a peculiar
situation of huge profits, yet cash strapped to pay dividends or even tax. For
instance, if credit sales remain uncollected, profit may be good, but cash position
will be dismal. If management is interested in knowing the movement of cash, it
should resort to preparation of cash flow analysis through Cash Flow Statement.
Meaning of Cash Flow Statement
A Cash Flow Statement is one which is prepared from income statement and
balance sheet, showing sources of cash and uses of cash. It reveals the inflow and
outflow of cash during a particular period, and explains reasons for changes in
cash position between two balance sheet dates.
1.2.32 Importance or uses of Cash Flow Statement
It indicates the reasons for low cash balance despite huge profits or huge
cash balance inspite of low profits.
By comparing the actual cash flow statement with that of the projected
one, it helps management in identifying the variation, and thus provide a
basis for remedial measures.
It reveals the liquidity position of the firm, by indicating the source of cash
and its uses.
Provides a basis for effective cash management by matching cash receipts
and payments.
It is an essential tool for short term planning.
It helps in taking loans from banks by indicating the repayment capacity of
the firm through cash flow statement.
A projected cash flow statement aids in planning for the investment of
surplus or meeting the deficit.
It explains the reasons for changes in cash position between two balance
sheet dates.

193 ANNA UNIVERSITY CHENNAI

DBA 1606

NOTES 1.2.33 Distinction between Cash Flow and Fund Flow Statements
Cash Flow Statement Fund Flow Statement
1. It deals with cash and bank only 1. It deals with working capital, of
which cash and bank are constituent
parts.
2. Shows the causes for changes in 2. Shows the causes for changes in
cash position. working capital position.
3. Records cash receipts and 3. Records increase or decrease in
payments. working capital.
4. Inflow of cash will definitely 4. Inflow of funds need not necessarily
result in inflow of funds. mean inflow of cash.
5. It starts with opening cash 5. There are no such opening and
balance and ends with closing closing balance of funds.
cash balance.
6. Useful for short-term financing. 6. Useful for long-term financing.
7. MzImproved cash position 7. Improved working capital position
indicate improved working need not necessarily mean sound
capital position. cash position.
1.2.36 Steps for preparing Cash Flow Statement
1) Compute Cash Trading Profit by adding non cash and non-operating
incomes from Net Profit [i.e. Current year profit Previous year profit].
2) Calculate Cash from Operations by adding decrease in current assets and increase
in current liabilities and deducting increase in current assets and decrease in current
liabilities. The above two step can be done in the form of a statement, a specimen
of which is given below:

CALCULATION OF CASH FROM OPERATIONS

Particulars Rs. Rs.
Net Profit [current year profit previous year profit] XXX
Add: Non-cash and non-operating expenses:-
Depreciation XXX
Goodwill, Patents, Pre-liminary expenses, Discount on XXX
issue of shares, etc., written off
Loss on sale of fixed assets XXX
Transfer of Reserves XXX
Proposed Dividends [if treated as non-current liability] XXX
Provision for Taxation[if treated as non-current liability] XXX
XXX
Less: Non-cash and non-operating incomes:
Writing back of excess provision XXX
Profit on sale of fixed assets XXX
Refund of income tax XXX
Dividend and Rent received XXX
XXX
XXX
CASH TRADING PROFIT
Add: Decrease in current assets XXX
Increase in current liabilities XXX
XXX
Less: Increase in current assets XXX
Decrease in current liabilities XXX
XXX
CASH FROM OPERATIONS XXX

195 ANNA UNIVERSITY CHENNAI

DBA 1606
3) If required, prepare non-current assets and non-current liabilities accounts,
NOTES
considering additional information. If any, given regarding such accounts. This is
done to find out cash receipts and cash payments.
4) Prepare a cash flow statement by incorporating the data generated in the
above three steps. Such cash flow statement can be prepared either in (a)
Accounts form [OR] (b) Statement form as given below:
(a) Accounts form:
CASH FLOW STATEMENT
Sources of Cash Rs. Application of Cash Rs.
Opening cash and Bank XXX Cash lost in operation XXX
balance
Cash from operation XXX Purchase of assets XXX
Issue of shares XXX Redemption of Preference XXX
Shares
Loan taken XXX Repayment of Debentures, XXX
Loans
Sale of assets XXX Dividend paid XXX
Interest, Dividend received XXX Closing cash and Bank balance XXX
XXX XXX

(b) Statement form:

CASH FLOW STATEMENT

Particulars Rs. Rs.
Opening cash and Bank balance XXX
Add: Cash Inflows:
Cash from operations** XXX
Issue of shares XXX
Loan taken XXX
Sale of assets XXX
Interest, Dividend received XXX
XXX
Less: Cash Outflows:
Cash lost in operations** XXX
Purchase of assets XXX
Redemption of preference shares XXX
Repayment of debentures, loans XXX
Dividend paid XXX
XXX
Closing cash and Bank balance XXX
** - Either of the two will appear

196 ANNA UNIVERSITY CHENNAI

ACCOUNTING FOR MANAGEMENT

S N
1

From the following Profit and

Loss account you are
required to compute cash
from operations:
Rs.
To Rent 3,000 By
To Salaries 4,000 By
To Depreciation 3,000
To Goodwill written off 3,000
To Loss on sale of share 3,000
To Provision for Taxation 4,000
To Net profit 15,000
35,000

Solution:

CASH FROM
OPERATIONS

Net Profit
Add: Non-operating expens
Depreciation
Goodwill
Loss on sale of shares
Provision for taxation

Less: Non-operating Income:

Profit on Sale of Machinery
Cash
Add: Decrease in Current Asset
Increase in Current Liabilities
Less: Increase in Current Assets
Decrease in Current Liabilities
Cash fro
ACCOUNTING FOR MANAGEMENT

1.2.38 N
Preparation of
Cash Flow
Statements
Comprehensive
Problems

Illustration 33:

Following are the

comparative balance sheets
of Western Systems Ltd.

Liabilities 2006 2005

Rs. Rs.
Share capital 19,000 18,00

Profit and Loss 3,500 2,90

Appropriation a/c
Trade Creditors and 7,600 6,40
Bills payable

30,100 27,30
Required : A Statement of
cash flow.

Solution: CASH FLOW

Opening cash balance

Add: Cash inflows:
Increase in Trade Credito
Issue of shares
Cash from trading operation (3,50

Less: Cash outflows:

Increase in Debtors
Purchase of Land & Build
Purchase of patent right
Closing cash balance
BA 1606

NOTES Illustration 34:

From the following Balance Sheet as on 31st December 2003 and 31st December
2004, Prepare a cash flow statement:
Liabilities 2003 2004 Assets 2003 2004
Rs. Rs. Rs. Rs.
Share capital 1,00,000 1,50,000 Fixed Assets 1,00,000 1,50,000
P&L A/c 50,000 80,000 Goodwill 50,000 40,000
General reserve 30,000 40,000 Inventories 50,000 80,000
6% Bonds 50,000 60,000 Debtors 50,000 80,000
Sundry creditors 30,000 40,000 Bills 10,000 20,000
Receivable
Outstanding 10,000 15,000 Bank 10,000 15,000
expenses
2,70,000 3,85,000 2,70,000 3,85,000

Solution:

CASH FROM OPERATIONS

Rs.
Net profit ( 80,000 50,000) 30,000
Add: Non-operating expenses:
Goodwill written off 10,000
Transfer to General reserve 10,000 20,000
50,000
Less: Non-operating income: Nil
Cash Trading Profit 50,000
Add: Decrease in CA / Increase in CL:
Increase in creditors 10,000
Increase in outstanding expenses 5,000 15,000
65,000
Less: Increase in CA / Decrease in CL:
Increase in inventories 30,000
Increase in Debtors 30,000
Increase in B/R 10,000 70,000
Cash lost in operation (-)5,000
 ACCOUNTING FOR MANAGEMENT
CASH FLOW STATEMENT
Rs. Rs. NOTES
Opening cash balance 10,000
Add: Cash inflows:
Issue of shares 50,000
Issue of Debentures 10,000 60,000
70,000
Less: Cash outflows:
Purchase of Fixed assets 50,000
Cash lost in operation 5,000 55,000
Closing cash balance 15,000

Illustration 35:

From the following Balance sheet of Thamiz Ltd., make out a statement of cash
flow.

Liabilities 2006 2007 Assets 2006 2007

Rs. Rs. Rs. Rs.
Equity share 3,00,000 4,00,000 Goodwill 1,15,000 90,000
capital
8% Redeemable 1,50,000 1,00,000 Land and 2,00,000 1,70,000
Preference share Building
General Reserve 40,000 70,000 Plant and 80,000 2,00,000
Machinery
Profit & Loss a/c 30,000 48,000 Debtors 1,60,000 2,00,000
Proposed 42,000 50,000 Stock 77,000 1,09,000
Dividend
Creditors 55,000 83,000 Bills 20,000 30,000
Receivable
Bills payable 20,000 16,000 Cash in hand 15,000 10,000
Provision of tax 40,000 50,000 Cash at bank 10,000 8,000
6,77,000 8,17,000 6,77,000 8,17,000
BA 1606

NO
TE
S
Addition
al
informat
ion:
a) Deprecia
tion of
Rs.10,00
0 and
Rs.20,00
0 have
been
charged
on Plant
and
Land
and
Building
a/c
respectiv
ely in
2007.
b) Dividen
d of
Rs.20,00
0 has
been
paid in
2007.
c) Income
tax
Rs.35,00
0 was
paid in
2007.

Solution:

Dr. Plant a/c Cr.

 Rs. Rs.
To Balance b/d 60,000 By Adjusted p&l a/c 10,000
Depreciation
To cash purchase 1,30,000 By Balance c/d 2,00,000
(B.F)
2,10,000 2,10,000

Dr. Land and Building a/c Cr.

Rs. Rs.
To Balance b/d 2,00,000 By Adjusted p&l a/c Depreciation 20,000
By cash sales (B/P) 10,000
By Balance c/d 1,70,000
2,00,000 2,00,000

Dr. Provision for Tax a/c Cr.

Rs. Rs.
To Cash Tax paid 35,000 By Balance b/d 40,000
To Balance c/d 50,000 By Adjusted P&L a/c 45,000
Provision (B/F)
85,000 85,000