Note on Funds Flow Statement: Determination of funds from operation

  • Note
  • Things to remember

STEP 2: Determination of Funds from Operation

Determination of Funds from operation by using add back method

Under add back method, all the non-cash expenses, non-operating losses and non-operating expenses are added to the back with net profit, for the purpose of determining funds from operation.

On the other hand, all the non-operation revenues, gain, and incomes are subtracted from the net profit. Here, all the items of profit & loss account are paid in cash and business related operations are ignored. Below is the procedure for determining funds from operation under add back method:

Calculation of Funds from Operation

Particulars

Details

Rs.

Net profit

Add: Non-operating and non-cash expenses and losses

Depreciation on fixed assets

Loss on sales of assets

Intangible assetswrittenoff

(Goodwill, trademark, copyright, patent)

Fictitious assets writtenoff

Provision for taxation

Premium on redemption of debentures

Other non-operating expenses/ loss

Less: Non-operating incomes and gain

Rent, dividend, interest, etc. received

Gain on sales of assets

Revaluationgainon non-current asset

Other non-operating incomes and gain

Funds from Operation (FFO)

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Fictitious assets written off include Preliminary expenses, Discount onissueof shares/ debentures, underwriting commission, other assets written off, etc.

Illustration:Consider the following Trading and Profit & Loss account.

Trading and Profit & Loss account
For the year ending 31stDecember,2015

Particulars

Rs.

Particulars

Rs.

To Purchase

To Wages

To Gross profit

To Salaries

To Office expenses

To Discount on issue of shares

To Depreciation

To Goodwill written off

To Preliminary expenseswrittenoff

To Loss on sale of furniture

To Net profit

2,00,000

50,000

1,00,000

By Sales

By Gross profit

By Dividend received

By profit on sales of plant

3,50,000

3,50,000

3,50,000

20,000

10,000

2,000

10,000

8,000

10,000

14,000

42,000

1,00,000

6,000

10,000

1,16,000

1,16,000

Required:Funds from operation.

Solution:

Calculation of Funds from Operation

Particulars

Details

Rs.

Net profit

Add: Non-operating and non-cash expenses and losses

Depreciation

Preliminary expenseswrittenoff

Goodwillwrittenoff

Discount on issue of shares

Loss on sale of furniture

Less: Non-operating incomes and gain

Dividend received

Gain on sales of plant

Funds from Operation (FFO)

10,000

10,000

8,000

2,000

14,000

42,000

44,000

6,000

10,000

86,000

16,000

70,000

Determination of Funds from operation by adjusted profit & loss account

An adjusted P/L account is prepared by debiting all the non-cash expenses, non-operating losses and non-operation expenses with net profit whereas, all the non-operation revenues, gain, and incomes are credited to an adjusted P/L account. Likewise, in add back method, all the P/L account items are paid in cash and any business related operations are ignored.

1. When net profit or loss is given:
Following adjusted P/L account is prepared when net profit or loss is given, excluding the items of P./L appropriation account:

Dr. Adjusted Profit & Loss Account Cr.

Particulars

Rs.

Particulars

Rs.

To net profit

To loss on sales of assets

To intangible assets written off

To depreciation on fixed assets

To fictitious assets written off

To provision for taxation (if non-current)

To premium on redemption of debenture

To other non-operating expense/losses

To loss from operation (Bal. fig. uses)

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

By gain on sales of assets

By interest received

By dividend received

By discount on redemption of debentures

By non-operating income/gain

By funds from operation (Balancing fig. sources)

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Intangible assets – Goodwill, Patent, Trademark, and Copyright.

Fictitious assets written off include Preliminary expenses, Discount on the issue of shares/ debentures, underwriting commission, other assetswrittenoff, etc.

Illustration:Consider the following information and prepare Funds from the operation.

Trading and Profit & Loss account
For the year ending 31stDecember,2015

Particulars

Rs.

Particulars

Rs.

To Purchase

To Wages

To Gross profit

To Salaries

To Office expenses

To Discount on issue of shares

To Depreciation

To Goodwill written off

To Preliminary expenseswrittenoff

To Loss on sale of furniture………..

To Net profit………………………………

2,00,000

50,000

1,00,000

By Sales

By Gross profit

By Dividend received

By profit on sales of plant……

3,50,000

3,50,000

3,50,000

20,000

10,000

2,000

10,000

8,000

10,000

14,000

42,000

1,00,000

6,000

10,000

1,16,000

1,16,000


Solution:

Dr. Adjusted Profit & Loss Account Cr.

Particulars

Rs.

Particulars

Rs.

To net profit

To loss on sales of furniture

To preliminary expenses written off

To depreciation

To goodwill written off

To discount on issue of shares

42,000

14,000

10,000

10,000

8,000

2,000

By profit on sales of plant

By dividend received

By funds from operation (Balancing fig. sources)

10,000

6,000

70,000

86,000

86,000

2. When net profit or loss is not given:

When net profit or loss is not given, P/L appropriation account or Retained earnings or Reserve and surplus or Reserve fund, whichever is given, is used. Below is the format.

Dr. Adjusted Profit & Loss Account Cr.

Particulars

Rs.

Particulars

Rs.

To Balance c/d (closingbal. of P/L a/c or Retained earning)

To loss on sales of assets

To intangible assets written off

To depreciation on fixed assets

To fictitious assets written off

To profit transfer to reserve & funds

To provision for taxation (if non-current)

To provision for dividend (if non-current)

To dividend

To premium on redemption of debenture

To other non-operating expense/losses

To transfer to reserves

To loss from operation (Bal. fig. uses)

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

By Balance b/d (openingbal. of P/L a/c or Retained earning)

By gain on sales of assets

By interest received

By dividend received

By refund of tax

By discount on redemption of debentures

By non-operating income/gain

By funds from operation (Balancing fig. sources)

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Intangible assets – Goodwill, Patent, Trademark, and Copyright.

Fictitious assets are written off – Preliminary expenses, Discount on the issue of shares / debentures, underwriting commission, other assets writtenoff, etc.

Profit transfers – General reserve, Reserve fund and Capital reserve.

Illustration:Prepare Funds from Operation from the following financial statements.

Balance Sheet

Liabilities

1992

1993

Assets

1992

1993

Share capital

Creditors

Debentures

General reserve

P/L app. a/c

1,00,000

40,000

50,000

-

60,000

2,50,000

1,00,000

-

10,000

75,000

Fixed assets, net of depreciation

Debtors

Stock

Cash balance

50,000

80,000

70,000

50,000

2,35,000

40,000

1,00,000

60,000

2,50,000

4,35,000

2,50,000

4,35,000

Dr. Profit & Loss A/C for 1992Cr.

Particulars

Rs.

Particulars

Rs.

To depreciation on fixed assets

To office expenses

To net profit

15,000

35,000

50,000

By gross profit

By refund of tax

80,000

20,000

1,00,000

1,00,000

Dr. Profit & Loss Appropriation A/C for 1992Cr.

Particulars

Rs.

Particulars

Rs.

To dividend paid

To general reserve

To Balance c/d

25,000

10,000

75,000

By Balance b/d

By net profit b/d

60,000

50,000

1,10,000

1,10,000

Solution:

Adjusted P&L A/C for 1992 (on the net profit basis)

Dr.Cr.

Particulars

Rs.

Particulars

Rs.

To depreciation

To net profit (as per P/L a/c)

15,000

50,000

By refund of tax

By Funds from operation (bal. fig.)

20,000

45,000

65,000

65,000

Dr. (a) Adjusted P&L Appropriation A/C for 1992Cr.

Particulars

Rs.

Particulars

Rs.

To dividend paid

To general reserve

To depreciation

To Balance c/d

25,000

10,000

15,000

75,000

By Balance b/d

By refund of tax

By Funds from operation (bal. fig.)

60,000

20,000

45,000

1,25,000

1,25,000

Alternatively,

Dr. (b) Adjusted P&L Appropriation A/C for 1992Cr.

Particulars

Rs.

Particulars

Rs.

To increase in P/L app. a/c

To dividend paid

To general reserve

To depreciation

15,000

25,000

10,000

15,000

By refund of tax

By Funds from operation (bal. fig.)

20,000

45,000

65,000

65,000

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu

  1. Under add back method, all the non-cash expenses, non-operating losses and non-operation expenses are added to the back with net profit, for the purpose of determining funds from operation.
  2. An adjusted P/L account is prepared by debiting all the non-cash expenses, non-operating losses and non-operation expenses with net profit.
  3. When net profit or loss is not given, P/L appropriation account or Retained earnings or Reserve and surplus or Reserve fund, whichever is given, is used. Below is the format.

 

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