Cost Accounting Part-I
At what rate will we calculate closing stock ?
Accounting is very interesting subject .Simplicity is not the feature of accounting . Different complex problems , you will face in the field of accounting . Today , I am telling you about valuation of stock .Because businessmen buy different stock at different time at different cost . But when we will show our closing stock , we will face this problem . There have many rates at which we charge our cost of closing stock but I am giving you solution of this problem very simply
Suppose Rajpura alcon company buys raw material of wire at different cost but we this company records closing stock of this raw material , this company can use first in first out method for calculation of closing stock . This method is also called fifo . It means that the stock which bought first , it sent for sale first so last stock cost will the rate for calculating closing stock. There is another method last in first out or average cost method . I always suggests businessmen and accountant to use average cost method for calculating closing stock.
Introduction of Inventory Management
Inventory management is main duty of an accountant of any company . He is responsible both quantity and monetary record of all the material in which company deals . We know that trader buys the goods and sometime he returns to his suppliers . He also sells the goods and some time his customers return him his goods . So , Inventory will convert from buying to selling step by step. Accountant have to give the reports
I) What is total amount and quantity of goods purchased and sold of different kind .
II) What is value and quantity of total closing stock
Quotation is just proposal for sale . It is not sale but offer of sale given by seller to the buyer of goods . When any company want to buy with minimum cost he publish tender for that buying if any body sends offer for sale with his selling rates , discount rate , delivery time and other such term and condition then that statement is called Quotation .
We can divide terms and condition of quotation in following way
•Taxes
•Prices , releases and set off
•Delivery
•Quantities
•Term and method of payment
•Contingencies and force majeure
•Legal compliance
•Warranty conditions
•Patent conditions
•Termination and cancellation
•Inspection , size and Tolerance
•Release of Information
Delivery Note and Invoice Delivery note is issued when goods physically delivered by seller to buyer. Its other name is delivery challan. But Invoice is just description of credit sale .
Accountant can prepare both Invoice -cum - Delivery note at the time of delivery.
There for to complete the sale transaction , the seller
•Delivers goods against order or without order (where order does not exist)
•Prepares delivery note or sales invoice ( Bill-cum- delivery note )
•Prepares sales invoice linking the delivery note where sales invoice was not prepared at the time of delivery.
Debit Note
When A business organisation purchases the goods from other business organisation . Some goods out of them can be rejected by a business organisation to other . At this time for recording the purchase return , there is two method of making the voucher of this record .
Ist Method
We wait our supplier , when he accepts our rejected goods and send us credit note . This credit note will be the debit note for our purchase return entry. With this purchase return entry our stock will reduce with the amount of goods return outward.
and We make voucher Entry in Debit Note in tally 9
2nd Method
In this we issue the debit note with return goods and pass the voucher entry of purchase return in debit note.
Steps of voucher entry in tally 9
1st Step
Yes the feature of debit and credit note
2nd Step
Create the Ledger of Purchase return under the head of purchase
3rd Step
Pass the voucher entry of purchase return in debit note voucher of tally 9
Credit Note
When A business organisation sells the goods to other business organisation . Some goods out of them can be rejected by other business organisation . At this time for recording the sale return , there is two method of making the voucher of this record .
Ist Method
We wait our customer , when he send us Debit note . This Debit note will be the Credit note for our Sale return entry. With this Sale return entry our stock will increase with the amount of goods return inward.
and We make voucher Entry in Credit Note in tally 9
2nd Method
In this we issue the credit note as we accept rejected goods and pass the voucher entry of Sale return in Credit note. Steps of voucher entry in tally 9
1st Step
Yes the feature of debit and credit note
2nd Step
Create the Ledger of Sale return under the head of Sale
3rd Step
Pass the voucher entry of Sale return in Credit note voucher of tally 9
Cost Accounting Part-II
Definition of Labour Cost and main reasons of increasing labour cost
Labour is very important part of production . Its cost is very important in total cost of production . So we should know what is meaning of labour cost .
Definition
Labour cost means all amount which direct or indirect is given to labourer or employee for his work for production .
In labour cost we include two type cost relating to labour
Ist type - Monetary cost of labour
In monetary cost of labour includes
1.basic wages/salary of employee
2.dearness allowance
3.provident fund
4.Employee state Insurance ( ESI)
5.Employee's share in profit of business
6.pension of employee
7.Gratuity and other monetary benefits
2nd Type - Non monetary labour cost
1.Free food facility to labourers
2.Subsidised housing facility
3.free educational facility to employee's children
Main Reasons of Increasing labour cost
It is the duty of cost accountant to reduce the cost of labour so that cost of production will reduce and businessmen can sell their products at lower price. So he must know what exact reasons beyond increasing labour cost .
Ist Reason
•Increasing labour turnover
•Increasing idle time
•forgery names in wage sheet
Affect of Business Activities on Stock Calculation
There are many business activities and events which affect the quantity and value of stock.
1st Affect
When company buys the material , it increase the quantity and value of stock.
2nd Affect
When company returns the goods to supplier , it reduces quantity and value of stock.
3rd Affect
When company sells the goods to buyers then it reduces quantities and value of stock.
4th Affect
When our customers returns us the goods at this time our quantity and value of stock will increase .
5th Affect
Today is most important effect is the effect of of inflation and deflation . It affect only on the value of stock . But there is no change the value of stock.
6th Affect
There are different method of calculating of stock can affect the value of stock . Calculating the value of stock with FIFO will differ the calculated stock with LIFO method .
Management Accounting Part-I
Cash Flow Statement
When we compare two or more years total cash flow may be in three type of activities (i)In operating activities from one financial year to another financial year we can get cash from selling of goods , receiving the money or any other operating activities or we can outflow of cash in B/p , creditors or any buying of goods . So different can be said as net flow of operating activities .
(ii) Investing activities
You know very well that with two years any company can buy or sell any assets buying of fixed assets is outflow and selling any asset is inflow of cash difference of both is net cash flow from investing activities .
(iii) Financial activities
Financial activities are related to buying and selling of shares and debentures .Selling of shares and debenture is inflow of cash and opposite if company buys shares of other company , this is called outflow of shares .
After calculating all net inflow and this is called flow of cash and statement making for this is called cash flow statement .
Benefit is it only for cash management who wants to make different planning . An account manager easily calculate what is the real cash flow position . Company’s overall flow of cash is favorable or not . Some time cash book shows good current cash balance but a good account manager should investigate the overall flow of cash before buying high funded assets . This decision should be taken after complete analyzing of cash flow statement . Cash flow statement shows more outflow than inflow this is unbalanced situation .So be careful .
Q: Define inflation accounting or price level accounting ? what are the main method of price level accounting ? What are its main advantages and disadvantages ?
Ans : Definition of inflation
Inflation accounting is recording ,classifying and summarizing of all transaction on current or market cost and update recording amount according to time and changes .In price level accounting ,the value of money is changed , our balance sheet ‘s figure unit also changed .
Method of price level /Inflation accounting :-
1.Current purchasing power accounting
According to current purchasing power method , we calculate current cost with following method
I Take current price index
II Calculate
Current value of asset
= Value of asset (Actual basis ) X Current index / previous price index
For example
Record value of Rs. 40000 machine on inflation accounting basis if 2005 index 100 and 2006 price index =200
=40000x 200/180 =80000
B/S
Machine 80000
2. current cost accounting
In the current cost accounting following point must take in mind :-
1 value of fixed asset
Will be take on current cost
Not historical cost basis
2. stock will be taken on market cost basis
3. Transfer of difference between historical cost and current cost of asset to revaluation reserve account
4. Calculate current operating profit
3. Replacement cost accounting method
This method is just improvement of current purchasing price method .In replacement cost accounting , we calculate current value basis of respective asset price index
Suppose book value of machinery is 300000and price index of machinery is 2005 is 100 and 2006 is 300 then book value of furniture Rs. 200000 price index of furniture 2005=200 and 2006=400
Current value of machinery =300000x 300/100
Current value of furniture =200000x400/200
1. Current value accounting method
2. In current value accounting method , we take all asset of business in balance sheet on their current value
Definition of current ratio
This ratio is a relationship of current asset and current liabilities . It states the business current position to pay the current liabilities in time as when due .
There are two components of this ratio
current assets
1.cash in hand
2.cash at bank
3.marketable securities
4.sundry debtors
5.bills receivable
6.stock in trade
7.prepaid exp.
current liabilities
1.sundry creditors
2.bill payable
3.outstanding bill
4.bank overdraft
current ratio = current assets /current liabilities
Importance of Calculating Average Collection period and Average Payment period Average collection period and and Average payment period is basic test of the business's good or bad activity or operation . This is the main part of financial analysis to calculate these type of ratio . Even a small business man want to time in which he gets his debt from his debtors in whole year . He also wants to know at what period he pays his creditors .
•These two ratios are the good symbol for calculating the efficiency and capacity of any type of organisation
•These two ratios are the good symbol for making good planning for increase or decrease working capital efficiently . Because working capital is more effected from sundry debtors and sundry creditors.
Lets start for calculating these two ratios
1.Average Collection Period
12 months or 365 days
= __________________
Debtors Turnover ratio
Because it is based on debtors turnover ratio . So we should also know debtor turnover ratio
Net Credit Sale
= _______________
Average Debtors amount
Average debtors amount is equal to sum of opening and closing debtors and after divide 2 , we can calculate the average debtors amount.
2. Average Payment Period
12 months or 365 days
= __________________
Creditors Turnover ratio
Because it is based on Creditors turnover ratio . So we should also know Creditors turnover ratio
Net credit Purchase
= _______________
Average Creditors amount
Average Creditors amount is equal to sum of opening and closing Creditors and after divide 2 , we can calculate the average Creditors amount.
What are Profitability Ratios Profitability ratios are so important , because of these ratios , we can take several decision for improving our business concern . These ratios tells us the basic relationship between profit and net sale . What amount of return we have receive on the basis of our sale . Is it good or not . If this is not good then what should we do in the improve actions of company.
There following main profitability ratios which is calculated in any company type of business.
1.Gross profitability ratio = Gross profit / Net Sale X 100
2.Operating Ratio = Operating Cost / Net Sale X 100
3.Operating Profit ratio = Operating Profit / Net Sale X 100
4.Net Profit ratio = Net profit / Net Sale X 100
5.Rate on Investment = Net profit before interest and tax / Capital Employed X 100
6.Earning Per Share (EPS)
Net profit after interest , tax and pref. dividend
= ____________________________________ X 100
Numbers of equity shares
7. Dividend Per Share (DPS ) Price Earning Ratio
Dividend on equity shares
= ____________________________________ X 100
Numbers of equity shares
8. Price Earning Ratio = current market price of share / earning per share
Management Accounting Part-II
Responsibitlity Accounting Some business organisation are now adopting responsibility accounting in their management section , though adopting
advance computer and internet facility they are setting each and every person's responsibility .
So you should know about responsibility accounting .
Responsibility accounting is system of control where responsibility is a signed of control on cost . The proper
authority is given to person so that they are given to persons so that they are able to keep up their performance .
"In other words , the responsibility accounting is that type of management accounting that collects and reports both
planed actual accounting informations in the terms of responsibility centers."
Types of responsibility center
1. Cost center
The cost center relates to that segment in which the managers are responsible for incurring the cost. But there have no
responsibility of revenue. It is also known as expenses center.
2. Profit Center
When a responsibility center gets revenue from output then it is known as profit center. The difference between revenue
earned and cost incurred will be the amount of profit .
3.Investment Center
An investment centre is an entry segment in which a manager can control not only revenue or cost but also investments .
In this , the manager who is given the responsibility of investment center is under obligation for proper utilisation
of assets .
Steps of responsibility accounting
1.The organisation should be divide
2.Making of Responsibility Center
3.Making of targets or set the targets in different centers
4.Count actual performance
5. Analysis of performance
5.Timely improved action.
Definition of working Capital and benefits of its analysis As an accountant, you must know working the working capital and benefits of its analysis. Dear working capital means
excess of current asset over current liabilities. In other word. If your current assets are more than your current
liabilities. These more current assets are known as working capital. For doing your business with better way, the
business must have working capital every time. If you have more current assets than your current Liabilities , it means
you can buy your stock of business , you can pay your creditors . All time when your investor or any body who want to
give you loan will see you working capital . If your liquid capital is non , nobody will give you any debt or goods on
credit . So it is the duty of accountant of business . To make some working capital so that your business will grow
with the help of loan and debt. For this I am giving some tips.
Each time when you pass the voucher entry in tally or any other computer accounting software , then see what is the
position of your working capital.
If you see that there is no working capital, when current assets are equal to current liabilities , or current
liabilities are more than current assets this will be very serious position when working capital is in negative. At
this time, you must sell some fixed assets so that you can keep your working capital position in positive.
Never give goods on credit to any body who has not good dealing with you
Financial accounting, cost accounting and management accounting are interrelated because without co-ordination and co-
operation with each other, we will never succeed in achieving the objectives of business. Financial accounting provides
different financial statements. On these statements we calculate different cost, like cost of material, cost of labour,
and cost of overheads. On the basis we calculate cost of goods sold and then we include our profit margin in it and the
ascertain our product price. In management accounting, financial and cost accounting supply different useful accounting
information. On these accounting data manager makes the plans of business. Organize different works. Even standard
costing and budgeting is very useful toots for controlling the organization. In a business the requirement of funds has
to be carefully estimated. Certain funds are required for long term purpose investment in fixed assets etc. A careful
estimation of such funds depends different ratio analysis which tells us that what is rate on capital employed, if this
rate is very high then we can get more fund for more production and for more production give more money. Even financial
management is also part of management accounting. If system of financial accounting will complete with good way and
rules and regulation, then other system of cost accounting and management accounting will gives good result.
Leverage analysis is the part of management accounting. This is the duty of finance manager to use the technique for
making ideal structure of capital. Leverage analysis is the best technique of finance manager. With this technique he
can make wonderful structure of capital. For doing leverage analysis he has to calculate three leverage
1st leverage – Operating Leverage
Operational leverage is calculate by following formula
Operational leverage =
% change in Earning before interest and tax
____________________________________
% Change in Sales
Analysis of operating leverage of a firm is very useful to the financial manager. It tells the impact of changes in
sales on operating income. A firm having higher Degree of operating leverage can experience a magnified effect on
E.B.I.T. for even a small change in sales level. Higher D.O.L. can dramatically increase the operating profit. But if
there is decline in sales level, E.B.I.T. may be wiped out and a loss may be operated.
2nd leverage - Financial Leverage
Financial leverage can be calculate with following formula
% change in Earning per share
= ____________________________________
% change in Earning before interest and tax
Financial leverage helps the finance manager in designing the appropriate capital structure. One of the objectives of
planning an appropriate capital structure is to maximize the return on equity shareholders’ funds or maximize the
earning per share.
Financial leverage is doubled edged sword. On the one hand it increase earning per share and on the other hand it
increase financial risk. A high financial leverage means high fixed financial costs and high financial risk i.e. as the
debt component in capital structure increases , the financial leverage increases and at the same time the financial
risk also increase .
So the finance manager therefore is required to trade off i.e. has to bring a balance between risk and return for
determining the appropriate amount of debt in the capital structure of a firm. Thus the analysis of financial leverage
is most important tool in the hands of finance managers who are engaged in financing the capital structure of business
firms, keeping in view the objectives of their firm.
3rd leverage – Combined leverage
The combined leverage measures the effect of a % change in sales on % change in Earning per share.
Combined leverage = operating leverage X financial leverage
Or
Combined leverage=
% change in E.B.I.T. % change in E.P.S.
________________ X ___________________
% change in sales % change in E.B.I.T.
The ratio of contribution to earning before tax , given by combined leverage shows the combined effect of financial and
operating leverage . A high operating and high financial leverage combination is very risky. If the company is
producing and selling at a high level , it will make extremely high profit for its shareholders. But even a small fall
in the level of operations would result in a tremendous fall in earning per share. A company must , therefore maintain
a proper balance between these two leverage.
Comparative financial statement This is main tool of financial analysis. This type of analysis is useful when the accounting data of two periods is
given. Generally two statements are prepared
i) Comparative balance sheet
ii) Comparative income statement
The figures of two periods are taken in their respective columns and increase or decrease after which percentage is
taking into account previous year as base year. After showing the increase or decrease the interpretation in form of
comment is also to be specified. However the various comparative statements are to be prepared as follow.
i) Comparative balance sheet:-
To analysis the financial statement as per the technique of comparative statement analysis the first one is the
comparative balance sheet for preparation comparative balance sheet with following steps
Ist step
Take the given balance sheet of two period in years
2nd step
Make the difference of each item of balance sheet in the vertical or horizontal form determining the increase or
decrease ( in absolute figure)
3rd Step
Make the % of increasing or decreasing ( Previous year as base year)
4th step
Interpretation (Comments)
a) Long term financial position
b) Working capital position
c) profitability position
d) Overall financial position
ii) Comparative Income Statements
The income statement shows results of operation of business .The comparative income statement indicate the variation
with different item which are to be recorded in income statement .Over a particular period of time that is one year. It
shows the amount of gross profit, operating profit and net profit. However a comparative income statement is to be
prepared in following form.
Interpretation or Comments can be given
? On the increasing sale or cost of sale increasing or decreasing
? Operating expenses and incomes affecting the amount of profit or loss
? Overall profitability position
Making of Cash flow Statement with both direct and indirect methods.
In good question of making cash flow statement , the examiner must give you two year balance sheet of company , a
profit and loss account and some additional information for making cash flow statement . With above three basic
information you can easily make cash flow statement with direct or indirect method .
Here we are taking one practical question , then we solve it both direct method and indirect method. This question can
be asked in CA , ICWA , MCA ,MCOM and MBA exams
The following is the abstract of balance sheet of Software securities ltd for the year 2005 and 2006
Liabities
Provision for depreciation 2005 –Rs. 108000 and 2006 –RS. 396000
Retained earning 244800 370800
9% debenture 270000 198000
Account payable 72000 41400
Expense payable 0 18000
Assets
Land 2005 - Rs. 126000 and 2006 - Rs. 81000
building 360000 360000
Accumulated depreciation
on building 19800 37800
Equipment 122400 347400
Accumulated depreciation on
equipement 18000 50400
stock in hand 10800 97200
Account receivable 36000 122400
cash in hand 66600 97200
Preliminary expenses 10800 7200
Question gives you also income statememtn of software securities ltd
Sales 1602000
less cost of sale 837000
less operating exp. 397800
less interest exp. 21600
loss on sale of equipments 3600
126000
-------------------------
Net income before tax 342000
provision of tax 117000
----------------------
Net Income after tax 225000
__________________________________________
Additional information
1. Operating expenses include depreciation of rs. 59400 and charges from preliminary expenses of rs. 3600
2. Land was sold at its book value
3. cash dividend paid for the year 2006 amounted to rs. 27000 and fully paid bonus shares were given in the ratio of 2
shares for every 3shares held.
4. Interest expenses was paid in cash.
5. Equipment with a cost of rs .298800 was purchased for cash .Equipment with a cost of rs . 73800 ( book value rs.
64800) was sold for rs. 61200
6. Debenture for rs. 18000 were redeemed for cash and for rs.54000 were redeemed by converting into equity shares at
par value.
7.Equity shares of rs. 162000 were issued for cash at par.
8. Income tax paid during the year amounted to rs. 117000
Prepare cash flow statement with
direct method
indirect method
Cash flow statement with direct method
__________________________________________________________
Particularv Amount Amount
--------------------------------------------------------------------------------------------------
A- catagory
Cash flow from operating
activity
Inflow of cash
Cash sale & amount from debtors
calculation
= sale + opening bal. of debtors -
closing balance of debtors
= 1602000+36000-122400= (+) 1515600
Any other operating income (+) nil
Less
Cash outflow
1. Cash purchase and amount paid to creditors
Calculation
= Cost of goods sold +opening creditors
-closing creditors =
= 837000+72000-41400= (-) 867600
2. Cash operating Expenses
Operating expenses as per profit and
Loss account -depreciation - preliminary exp.
- Outstanding expense closing
= 397800 - 59400 -3600 -18000 = (-) 316800
Out flow of stock
+ opening stock (-) 86400
-closing stock =10800-97200
____________________________________________
244800
Less income tax paid (-) 117000
__________________________________________
127800 127800
________________________________________
B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
______________________________________________
192600 192600
______________________________________________
C- catagory
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600
_______________________________________________
95400 95400
_______________________________________________
Add opening cash balance + 66600
____________________________________________________________
Closing balance of cash 97200
_____________________________________________________________
Cash flow statement with Indirect method
__________________________________________________________
Particularv Amount Amount
--------------------------------------------------------------------------------------------------
A-category
Cash flow of operating activity
1st Point
Net Profit before taxation and extraordinary
Items 342000
2nd Point
Add for non cash and non operating expenses
And losses
1. Depreciation 59400
2. Preliminary expenses written off 3600
3. Discount on issue of shares and deb. w/o nil
4. Goodwill written off nil
5. Patent and trade marks written off nil
6. Interest on borrowing and deb. 3600
7. Loss on sale of fixed assets 21600
______________
430200
3rd Point
Less non –cash and non operating incomes (-) nil
1. Dividend income(For non financial co.)
2. Rental income
3. Profit on sale of fixed asset
_________________
4th point ( Ist point +2nd Point -3rd Point ) 430200
Adjustment of working capital changes
5th point
Add Decrease in current assets and increase in
Current liabilities (+) nil
1. Decrease in stock
2. Decrease in debtors
3. Decrease in accrued income
4. Decrease in prepaid expenses
5. Increase in creditors
6. Increase in bill payables
7. increase in outstanding expenses (+) 18000
8. Increase in advance incomes
9. Increase in provision for doubtfull debts
____________________
448200
6th Point
Less increase in current assets and decrease in (-)
Current liabilities
1. Increase in stock 86400
2. Increase in debtors 86400
3. increase in accrued incomes nil
4. increase in prepaid expenses nil
5. decrease in creditors 30600
6. Decrease in bill payables nil
7. decrease in outstanding expenses nil
8. decrease in advance incomes nil
9. Decrease in provision for d/d nil
________________________________________________________
244800
Less income tax paid (-) 117000
________________________________________________________
127800 127800
_____________________________________________________
B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
______________________________________________
192600 192600
______________________________________________
C- catagory
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600
_____________________________________________________________________
95400 95400
________________________________________________
Add opening cash balance + 66600
____________________________________________________________________
Closing balance of cash 97200
________________________________________________________________________ | |
| |
Management Accounting Part-III
The indirect method for calculating cash flow statement
Indirect method
Cash flow statement
A-cash flow from operating activity + B- Cash flow from investing activity + C- cash flow from financing activity +
opening balance of cash book = Closing balance of cash book
A- category regarding cash flow from operating activity is different from direct method , other part is as same as
direct method
According to indirect method when we calculate cash flow statement, we will care 8 points. The main aim is to calculate
cash net profit or loss for operating activity like sale and purchase of goods. Now I am explaining all 8 points deeply
1st point
Taking the net profit as per profit and loss account. This is (+) item. This is the base for calculating cash net
profit. Other 7 points are the just games of (+) and (-)
2nd point
Now we add all non cash and non operating expenses and losses in Ist point.
I want to tell you why we will (+) it in net profit. The answer is that because when we made of profit and loss account
we had deducted these non cash and non operating expenses in our profit and loss account. Now our duty is to add them .
Now I am telling about these expenses and losses
1) Depreciation
2) Preliminary expenses written off
3) Discount on issue of shares and deb. w/o
4) Goodwill written off
5) Patent and trade marks written off
6) Interest on borrowing and deb.
7) Loss on sale of fixed assets
One more question you can ask to me
Why non operating expenses are added in net profit?
Ans. Because it is true that these expenses in cash but we deems as cash outflow from financing activity or investing
activity so there is no need to adjust in operation.
3rd Point
After adding 2nd point items , we must deduct 3rd point items. It means that all non cash or non operating income must
be deducted from net profit for calculating cash net profit. In this , we can include
1) Dividend income (For non financial co.)
2) Rental income
3) Profit on sale of fixed asset
4th point
= Ist point + 2nd point – 3rd point
5th point
Now we add decrease in current assets because it must increase the cash inflow and also add increase in current
liabilities
1) Decrease in stock
2) Decrease in debtors
3) Decrease in accrued income
4) Decrease in prepaid expenses
5) Increase in creditors
6) Increase in bill payables
7) increase in outstanding expenses
8) Increase in advance income
9) Increase in provision for doubtful debts
6th point
Increase in current assets and decrease in current liabilities must be deducted
1) Increase in stock
2) Increase in debtors
3) increase in accrued incomes
4) increase in prepaid expenses
5) decrease in creditors
6) Decrease in bill payables
7) decrease in outstanding expenses
8) decrease in advance incomes
9) Decrease in provision for d/d
General hint
· Increase in current assets means cash outflow so deduct
· Decrease in current liabilities is also cash outflow so deduct
· Decrease in current assets means cash inflow so add
· Increase in current liabilities is also cash inflow so add
7th point
Total cash flow from operating activity
= 4th point + 5th point – 6th point
8th point
Deduct income tax paid from 7th point
After this you can get net cash flow from operating activity
All other B and C category as same as first method.
Definition of Securitisation
Securitisation is the process of getting cash on the basis of different security notes and papers .Even some company
issues shares or debenture for getting fixed assets , this is also securitisation . In simple english securitisation
create the relationship of company with outer world in which company gets fund for doing work .
Benefit of Securitisation
1.Increase the rate of return
2.Raise of fund or finance through securitisation when other source are not supported .
3.I take one example explaining the third benefit
suppose a person want to purchase a building for giving it rent , if he purchases with his cash then all risk of fund
is his own . But if he takes loan to make building then he becomes issuer of finance so from earning of building , he
can pay the debt of building .
Factors to provide Loans:
1st Financial factors
a) Rate of Return
It is the duty of account manager to find the rate of return. Select all those party which want to give us high rate on
our investment in the form of loan.
b) Risk Factor
Before giving credit to company, we also see our risk factor. i) personal risk- dishonesty , corruption ii) trade risk
– see previous profit and loss account iii) Debt equity ratio iv) Income interest ratio
c) Security
Before giving credit or loan account manager have to see what asset of business , businessman want to give as security
for getting loan .
d) Marginal of requirement
Before giving loan or credit , it is the duty of bank's account manager under govt. policies that he must see
difference between security and loan Suppose Security $ 10000 – Loan $ 8000 = Marginal requirement $2000 If our
providing loan is less than the value of asset which we have received in the form of security , then this is good .
2nd Non- financial factors
1. Social factors
Through social responsibility accounting, account manager is also check, whether providing of loan at low rate is
benefited for social popularity or not.
2. Political factors
Account manager also check political and tax policies regarding providing of loan.
How to prepare Fund Flow statement
Before preparing of fund flow statement, you must know different accounting terms in fund flow statement.
Academic need to learn the fund flow statement
1. AS – 3 units 1.
Accounting standard 3 units 1 of Institute of Chartered Accountant of India explains preparation and presentation of
statement of changes in financial position or fund flow statement
2. UGC – NET – Commerce
If you want to clear UGC –NET in commerce subject, you should also learn fund flow statement. Because it includes in
paper 11 and paper 111 A syllabus in the form of fund flow analysis.
3. Graduate / Post Graduate Classes
Fund flow statement is full subject in B.Com. , B.B.A., B.C.A. and M.Com. , M.B.A., M.C.A. classes . For succeeding in
these classes, you should know the whole system of fund flow statement.
4. Helpful in Practical business environment
Fund flow statement is very helpful for solving following practical problems of business
Why are current assets are decreasing, even there are high profit?
1.Why did Company not issue dividend, even company has obtained profit?
2.What happened with net profit, where did it go?
3.What did Company do with the fund received from selling of shares and debentures?
What are main sources of company to repay his debts?
So, above questions’ answer can be given after making fund flow statements.
Definition of Fund
Fund means working capital. If current assets of company is more than current liability of business, it is called
working capital and working capital’s other name is Fund.
Fund = Working capital = Current assets – Current liability
Definition of Flow of Fund
Flow of fund means movement of fund. I take the example of air; we can feel its movement or flow of air. Same thing is
happen with fund, due to the activity of business fund is transfer from one asset to another assets. If fixed assets
are converted into current asset or fixed liability is converted into current liabilities, these are the flow of fund.
But if current assets are changed with current assets or current assets are changed into current liabilities, then,
there is no flow of fund because there is no change working capital. Suppose, we get the money from debtor, this is not
flow of fund because, working capital is not changed. Both items of current assets and when current assets change into
current assets, there will not be change in working capital.
Flow of Fund = Fixed asset changes into current asset or current asset changes into fixed assets
Or
Fixed liability changes into current liability or current liability changes into fixed liability.
Definition of fund flow statement
Fund flow statement is a statement which shows the inflow and out flow of funds between two dates of balance sheet. So,
it is known as the statement of changes in financial position. We all know that balance sheet shows our financial
position and inflow and outflow of fund affects it. So, in company level business, it is very necessary to prepare fund
flow statement to know what the sources are and what are applications of fund between two dates of balance sheet.
Generally, it is prepare after getting two year balance sheet.
According to Prof. Anthony, “The funds flow statement describes the sources from which additional funds were derived
and the use of which these funds were put.”
Fund flow statements are known with different names
Statement of source and uses of funds Or summary of financial operations Movement of working capital statement Or Fund received and distributed statement Or Fund generated and expended statement.
Steps for making Fund flow statement
First Step
Making of statement of Changes of Working Capital
For making of fund flow statement. It is very necessary to make statement of changes of working capital. Because net
increase in working capital is use of fund and net decrease in working capital is source of fund. So, it is duty of
accountant to make statement of changes of working capital. Making of statement of changes working capital is very easy
and simple.
We take two balance sheets, one is current year balance sheet and other is previous year balance sheet. Then we
separate current assets and current liabilities.
If current assets are more than previous year current assets, it means increase in working capital.
If current assets are less than previous year current assets, it means decrease in working capital. Because,
relationship between current assets and working capital is positive and if any changes in current assets, working
capital will change in same direction.
If current liabilities are more than previous year current liabilities, it means decrease in working capital.
If current liabilities are less than previous year current liabilities, it means increase in working capital.
Relationship between working capital and current liabilities are inverse.
Statement or schedule of changes in working capital
----------------------------------------------------------------------------------------
Particular--------------- ? previous year ? Current year ? Effect on working capital
-----------------------------------------------------------------------------------------
-----------------------------------------------------------? Increase ? Decrease
----------------------------------------------------------------------------------------
Current Assets
Þ Cash in hand
Þ Bills receivable
Þ Sundry debtors
Þ Temporary investments
Þ Stocks / inventories
Þ Prepaid expenses
Þ Accrued incomes
--------------------------------------------------------------------------------------------
Total current assets----------- ?xxxx ? xxxxx?
----------------------------------------------------------------------- -----------------
Current liabilities
Þ Bills payables
Þ Sundry creditors
Þ Bank overdraft
Þ Short term advances
Þ Dividends payables
Þ Provision for taxation
---------------------------------------------------------------------------------------
Total current Liabilities ----------?xxxx ?xxxx ?
------------------------------------------------------------------ -------------------
Working capital
CA- CL
---------------------------------------------------------------------------
Net increase or decrease in working capital =
Increase in working capital – Decrease in working capital
2nd Step
Statement showing the fund from operation
Because is the source of fund and will show in fund flow statement’s source side. So before making fund flow statement,
we must make statement showing the fund from operation.
Operation means business activity and fund from operation means profit from business activity. So, you will easy
understand that profit from business activity between two accounting period must be the source of fund.
Statement of fund from operations
Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non –fund and non operating items which have been already
Debited to profit and loss account
1. depreciation
2. amortization of fictitious and intangible assets
Þ goodwill
Þ patents
Þ trade marks
Þ preliminary expenses
Þ discount on issue of shares
3. Appropriation of retained earning such as
Þ Transfer to general reserve
Þ Dividend equalization fund
Þ Transfer to sinking fund
Þ Contingency reserve etc.
4. Loss on sale of any non current or fixed assets such as
Þ Loss on sale of land and building
Þ Loss on sale of machinery
Þ Loss on sale of furniture
Þ Loss on sale of long term investments
5. Dividends including
Þ Interim dividend
Þ Proposed dividend
(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account
-----------------------------------------------------------------------------------
Total ( A)-------------------------------------------------------> ? XXXXX ?
-------------------------------------------------------------------------------------
Less Non –Fund or non operating items which have already been credited to profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as
Þ Profit on sale of land and building
Þ Profit on sale of plant and machinery
Þ Profit on sale of long term investment etc.
2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit
and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the balance sheet
-------------------------------------------------------------------------------------
Total ( B)--------------------------------------------------------------> ? XXXXX ?
----------------------------------------------------------------------------------------
Funds received from operation or business activities = total ( A) – Total ( B)
You can make also above statement in t shape adjusted profit and loss account form .
3rd Step
Fund flow statement
--------------------------------------------------------------------------------------
-------------------------------------------------------------------> ? Amount ?
-------------------------------------------------------------------------------------
A ) Source of funds
1.fund from operation ( balance of second step )
2.issue of shares capital
3.issue of debentures
4.raising of long term loans
5.receipts from partly paid shares , called up
6.amount received from sales of non current or fixed assets
7.non trading receipts such as dividend received
8.sale of investments ( Long term )
9.decrease in working capital as per schedule of changes in working capital
----------------------------------------------------------------------------------
total -------------------------------------------------------------> ? XXXXX ?
---------------------------------------------------------------------------------
Applications or uses of funds
1. Funds lost in operations ( Balance negative in second step )
2. redemption of preference share capital
3. redemption of debentures
4. repayment of long term loans
5. purchase of long term loans
6. purchase of long term investments
7. non trading payments
8. payment of tax
9. payment of dividends
10. increase in working capital ( As per positive balance of ist step )
-------------------------------------------------------------------------------------
total --------------------------------------------------------> ? XXXXX ?
--------------------------------------------------------------------------------------
|
