FFA- Statement of Schedule of Changes in Working Capital

Statement Of Schedule Of Changes In Working Capital
This statement is prepared with the help of current assets and current liabilities relating to two different periods.

An increase or decrease in respect of each of such items should be recorded to ascertain the net increase or decrease in the working capital.

An increase in the value of current assets between two different periods indicates an increase in the working capital. It is an application of funds.

An increase in the value of current liabilities between two different periods indicates decrease in the working capital. It is sources of funds.

1. MANAGEMENT ACCOUNTING Funds flow statement By: Smt.UMA MINAJIGI REUR HEAD, DEPT. OF COMMERCE & Management Smt. V G Degree College for Women, Kalaburagi

2. MANAGEMENT ACCOUNTING B.COM SIXTH SEMESTER & BBA FOURTH SEMESTER 6.3: PRINCIPLES OF MANAGEMENT ACCOUNTING

3. B.COM SIXTH SEMESTER 6.3: PRINCIPLES OF MANAGEMENT ACCOUNTING   Unit I: Management Accounting (08 Hours): Definition and objectives of Management Accounting - Relationship between Cost, Financial and Managerial Accounting.   Unit II : Financial Statements (15 Hours): Nature, uses and limitations. Analysis and interpretations – meaning, procedure, objectives, and importance. Comparative statement, Common Size Statements and Trend Analysis - practical problems.   Unit III: Ratio Analysis (15 Hours): Definition and meaning of Ratio Analysis, importance and limitations, Profitability Ratio – Gross profit Ratio, operating Ratio, Overall profitability ratio – Earning per share. Turnover Ratios- Inventory Turnover Ratio, Debtors Turnover Ratio, Debt collection period , Creditors Turnover Ratio, Debt payment period, Liquidity Ratio- current ratio, liquid ratio. Financial positions and Leverage Ratios- Debt Equity Ratio, Proprietary Ratio - Problems thereon.   Unit IV: Analysis through Leverages (12 Hours): Meaning- types of Leverages- operating – financial and combined leverages- problems thereon.   Unit V: Fund Flow Statement (15 Hours): Meaning , uses and limitations – preparation of fund-flow statement. Cash Flow Statement: Meaning and preparation of Cash flow statement- problems thereon.

4. Management Accounting The term Management Accounting consists of two words: “Management” and “Accounting”.   Management is a technique of managing men. Its an art of getting things done by others.   Hence, for a successful execution of all activities, management has to to take various decisions at every level. To take proper decisions, correct information is required. Such information is provided by accounting.   Accounting is the process of identifying, measuring and communicating economic information to management and outsiders. Such information’s help management to take decisions.   Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information in order to plan the formulation of policies to plan and control the operations of the controlling of business operations.

5. Definition: J.S. Batty defines, “Management accounting is the term used to describe the accounting methods, systems and techniques which coupled with special knowledge and ability to assist management in its task of maximising profit and minimising losses.”   Management Accounting is a system for gathering data and other financial information primarily for the internal needs of management. It is designed to assist internal management in the efficient formulation, execution and appraisal of business plans.

6. Meaning of Funds Flow Statement: It is a statement which discloses the analytical information about the different sources of a fund and the application of the same in an accounting cycle. It deals with the transactions which change either the amount of current assets and current liabilities (in the form of decrease or increase in working capital) or fixed assets, long-term loans including ownership fund. It gives a clear picture about the movement of funds between the opening and closing dates of the Balance Sheet. It is also called the Statement of Sources and Applications of Funds, Movement of Funds Statement; Where Got-Where Gone Statement: Inflow and Outflow of Fund Statement etc. No doubt, Funds Flow Statement is an important indicator of financial analysis and control. It is valuable and also helps to determine how the funds are financed. The financial analyst can evaluate the future flows of a firm on the basis of past data. Funds Flow Statement

7. Funds Flow Statement statement supplies an efficient method for the financial manager in order to assess the growth of the firm, its resulting financial needs, and to determine the best way to finance those needs. In particular, funds flow statements are very useful in planning intermediate and long-term financing.

8. Objective of Preparing a Funds Flow Statement: The main purpose of preparing a Funds Flow Statement is that it reveals clearly the important items relating to sources and applications of funds of fixed assets, long-term loans including capital. It also informs how far the assets derived from normal activities of business are being utilised properly with adequate consideration. Secondly, it also reveals how much out of the total funds is being collected by disposing of fixed assets, how much from issuing shares or debentures, how much from long-term or short- term loans and how much from normal operational activities of the business. Thirdly, it also provides the information about the specific utilisation of such funds, i.e. how much has been applied for acquiring fixed assets, how much for repayment of long-term or short-term loans as well as for payment of tax and dividend etc. Lastly, it helps the management to prepare budgets and formulate the policies that will be adopted for future operational activities.

9. Advantage of Funds Flow Statement: It gives us information about how the funds are collected and how they are used. It helps in analysing the changes taking place in the working capital position during a particular period. It helps in measuring the efficiency in the utilization of funds. It helps for making financial decisions. It helps in estimating the future working capital requirements. It helps in locating the idle funds. It helps for better control over the financial activities of a firm by comparing with the budgeted figures.

10. Limitations of Funds Flow Statement: Profit ascertained is not correct, as it does not include non cash items. It is historical in nature and does not provide any basis for future. It does not contain any original information, as the figures are extracted from financial statements. Management may manipulate the working capital position.

11. Sources of Funds: Transactions which result in an increase in the amount of fund or working capital are called sources of fund. The following are the sources of funds: Funds from operations, operating profit or trading profit. Non operating incomes. Refund of Income Tax (received). Issue of Shares for cash or for any other current asset. Issue of debentures for cash or for any other current asset. Long term and medium term loans borrowed. Long term or medium term deposits accepted. Sale of long term investments for cash or for any other current asset. Sale of fixed assets for cash or for any other current asset.

12. Application of Funds: Transactions which result in decrease in fund are called uses or applications of fund. The following are the application of funds: Funds lost in operations, operating loss or trading loss. Non operating expenses. Redemption of redeemable preference Shares for cash or for any other current asset. Redemption of debentures for cash or for any other current asset. Redemption of Long term and medium term loans in cash or in any other current asset. Redemption of Long term or medium term deposits in cash or in any other current asset. Purchase of long term investments for cash or for any other current asset. Purchase of fixed assets for cash or for any other current asset. Drawings.

13. Preparation of Funds Flow Statement Preparation of Statement of changes in working capital. Preparation of Fixed Assets accounts. Ascertain the funds from operations. Finally preparation of Funds flow statement.

14. Statement Of Schedule Of Changes In Working Capital This statement is prepared with the help of current assets and current liabilities relating to two different periods. An increase or decrease in respect of each of such items should be recorded to ascertain the net increase or decrease in the working capital. An increase in the value of current assets between two different periods indicates an increase in the working capital. It is an application of funds. An increase in the value of current liabilities between two different periods indicates decrease in the working capital. It is sources of funds.

15. Particulars Previous Year Current Year Increase in Working Capital Decrease in Working Capital a) Current Assets I Current Investments Temporary Investment Short Term Investment II Inventories Stock III Trade Receivable Sundry Debtors Bills Receivable IV Cash & Cash Equivalent Cash Balance Bank Balance V Short Term Loans & Advances Prepaid Expenses VI Other Current Assets Outstanding Incomes Format: Statement of schedule of changes in working capital

16. Particulars Previous Year Current Year Increase in Working Capital Decrease in Working Capital a) Current Liabilities I Short Term Borrowings Bank Overdraft Short Term Loans & Advances II Trade Payable Sundry Creditors Bills Payable III Other Current Liabilities Outstanding expenses IV Short Term Provisions Dividend Payable Proposed dividends Provisions for taxation Working Capital (A-B) Increase or Decrease in Working Capital

17. Rules for preparing the Statement Of Schedule Of Changes In Working Capital Increase in a current asset result in increase(+) in working capital. Decrease in a current asset result in decrease(-) in working capital. Increase in a current liability result in decrease(-) in working capital. Decrease in a current liability result in increase(+) in working capital.

18. Illustration 1: The following are the statement of Assets and Liabilities of a concern as on 31-12-2017 and 2018. Prepare statement of schedule of changes in working capital. Statement of Assets & Liabilities Particulars 31-12-2017 31-12-2018   Amount Amount Amount Amount I. Equity & Liabilities         Shareholders fund Share Capital 6,00,000 6,00,000 Reserves & Surplus 6,92,000 12,92,000 8,64,000 14,64,000 2. Non-Current Liabilities Long Term Borrowings 1,00,000 2,35,000 3. Current Liabilities Trade Payables 6,39,000 9,41,000 Total 20,31,000 26,40,000 II. Assets 1. Non-Current Assets a. Fixed Assets Tangible Assets 11,13,000 13,98,000 2. Current Assets Current Investments 87,000 Inventories 4,32,000 6,83,000 Trade receivables 3,46,000 5,28,000 Cash & Cash Equivalents 53,000 9,18,000 31,000 12,42,000 Total 20,31,000 26,40,000

19. Notes to Accounts Particulars 31-12-2017 31-12-2018   Amount Amount Note 1: Share Capital 60,000 Equity Shares of Rs.10 each 6,00,000  6,00,000  Share Capital 6,00,000  8,00,000  Note 2: Reserves & Surplus Profit & Loss 6,92,000 8,64,000 Reserves & Surplus 6,92,000 8,64,000 Note 3: Long Term Borrowings Loan from Bank 1,00,000 2,35,000 Long Term Borrowings 1,00,000 2,35,000 Note 4: Trade Payable Sundry Creditors 4,13,000 6,27,000 Bills Payable 2,26,000 3,14,000 Trade Payable 6,39,000 9,41,000

20. Particulars 31-12-2017 31-12-2018   Amount Amount Note 5: Tangible Assets  11,13,000  13,98,000 Tangible Assets  11,13,000  13,98,000 Note 6: Current Investments 87,000 Note 7: Inventories Stock 4,32,000 6,83,000 Inventories 4,32,000 6,83,000 Note 8: Trade Receivables Sundry Debtors 3,46,000 5,28,000 Trade Receivables 3,46,000 5,28,000 Note 10: Cash & Cash Equivalents     Cash  53,000 31,000 Cash & Cash Equivalents  53,000 31,000

21. Solution: Statement of schedule of changes in working capital Particulars 2017 2018 Increase in Working Capital Decrease in Working Capital A. Current Assets Current Investments Inventories Trade Receivables Cash & Cash Equivalents B. Current Liabilities Trade Payables Sundry Creditors Bills Payable Working Capital (A-B) Increase in Working Capital 87,000 4,32,000 3,46,000 53,000 9,18,000 6,83,000 5,28,000 31,000 12,42,000 2,51,000 1,82,000 4,13,000 2,26,000 6,39,000 6,27,000 3,14,000 9,41,000 4,33,000 2,14,000 88,000 22,000 87,000 2,79,000 22,000 3,01,000 3,01,000 3,01,000 4,33,000 4,33,000 4,11,000 22,000 --

22. Particulars 2017 2018 Increase in Working Capital Decrease in Working Capital A. Current Assets Current Investments 87,000 87,000 Inventories 4,32,000 6,83,000 2,51,000   Trade receivables 3,46,000 5,28,000 1,82,000   Cash & Cash Equivalents 53,000 31,000   22,000 9,18,000 12,42,000 B. Current Liabilities Trade Payables Sundry Creditors 4,13,000 6,27,000 2,14,000 Bills Payable 2,26,000 3,14,000 88,000 6,39,000 9,41,000 4,33,000 4,11,000 Working Capital (A-B) 2,79,000 3,01,000 Increase in Working Capital 22,000 22,000 3,01,000 3,01,000 4,33,000 4,33,000 Solution: Statement of schedule of changes in working capital

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