Note on Funds Flow Statement- Adjustments 2/2

  • Note
  • Things to remember

Adjustment related to provision for tax & dividend

Provision for tax is treated as below:

Dr. Provision for Taxation a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Cash/Bank (paid)

To Balance c/d

xxx

xxx

By Balance b/d

By Adj. P/L a/c (provision-Dr.)

xxx

xxx

xxx

xxx


Dr. Adjusted P/L a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Provision for taxation

xxx

xxx


Funds Flow statement

Sources of fund

Rs.

Uses of fund

Rs.

Payment of tax

xxx

xxx


Illustration:

Liabilities

2072 (in Rs.)

2073 (in Rs.)

Provision for tax

1,00,000

1,50,000

Required:

  • Provision for taxation
  • Adjusted Profit or Loss account
  • Funds flow statement

Solution:


Dr. Provision for Taxation a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Cash (last yr tax paid)

To Balance c/d

1,00,000

1,50,000

By Balance b/d

By Adj. P/L a/c (this yr tax)

1,00,000

1,50,000

2,50,000

2,50,000


Dr. Adjusted P/L a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Provision for taxation

1,50,000

1,50,000


Funds Flow statement

Sources of fund

Rs.

Uses of fund

Rs.

Payment of tax

1,00,000

1,00,000

Note: Last year’s balance is assumed to be paid and current year’s balance is assumed to be provisioned.

Adjustment related to share capital & debentures

Share capital and debentures are the sources of funds in funds flow statement. Premium or discount on shares or debentures is calculated as below:


Dr. Preference shares/Debenture a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Cash (redemption)

To Discount on redemption

To Balance c/d

xxx

xxx

xxx

By Balance b/d

By Premium on redemption

By Cash (issue)

xxx

xxx

xxx

xxx

xxx


Dr. Share capital a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Balance c/d

xxx

By Balance b/d

By Stock dividend/Bonus share (if)

By Cash (issue)

xxx

xxx

xxx

xxx

xxx


Dr. Adjusted P/L a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Premium on redemption

To Stock dividend/Bonus share (if)

xxx

xxx

By Discount on redemption

xxx

xxx

xxx


Funds Flow statement

Sources of fund

Rs.

Uses of fund

Rs.

Issue of shares/debentures/capital

xxx

Redemption on shares/debentures

xxx

xxx

xxx


Illustration:

Liabilities

2072 (in Rs.)

2073 (in Rs.)

Equity share capital

12% preference share capital

7% debenture

3,00,000

2,00,000

2,50,000

5,50,000

1,80,000

1,50,000

Required:

  • Equity share capital a/c
  • 12% preference share capital a/c
  • 7% debenture a/c

Solution:


Dr. Equity share capital a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Balance c/d

5,50,000

By Balance b/d

By Cash (issue)- bal. figure

3,00,000

2,50,000

5,50,000

5,50,000


Dr. 12% Preference shares a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Cash (redemption)

To Balance c/d

20,000

1,80,000

By Balance b/d

2,00,000

2,00,000

2,00,000


Dr. 7% debentures a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Cash (redemption)

To Balance c/d

1,00,000

1,50,000

By Balance b/d

2,50,000

2,50,000

2,50,000

Adjustment related to interim dividend

Interim dividend is the dividend paid out by the company to its shareholders, before the determination of it’s current year profit. It is added back with profit for the year and goes to (+) in funds from operation and goes to (-) in funds flow statement because it is an application of funds.

Funds from operation

xxx (Adj. P/L a/c – Dr. side)

Funds flow statement

xxx (Uses side)

Adjustment related to Investment account (non-depreciable)

Investments can be either current assets or fixed assets. Investments are treated as fixed assets if they are on long term run, such as trade investments. On the other hand, if they represent surplus, temporarily invested in marketable securities, they are current assets.


Dr. Investment a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Balance b/d

To Profit on sale

To Cash & purchase

xxx

xxx

xxx

By Cash/Bank (sale)

By Loss on sale

By Balance c/d

xxx

xxx

xxx

xxx

Xxx


Dr. Adjusted P/L a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Loss on sale

xxx

By Profit on sale

Xxx

xxx

Xxx


Funds Flow statement

Sources of fund

Rs.

Uses of fund

Rs.

Cash/Bank (sale)

xxx

Cash & purchase

Xxx

xxx

Xxx


Illustration:

Liabilities

2072 (in Rs.)

2073 (in Rs.)

Investment in shares

1,00,000

2,50,000

Additional information:

  • Investment costing Rs. 25,000 was sold for Rs. 15,000.
  • The loss was charged to P/L a/c.

Required: Investment in shares a/c


Solution:


Dr. Investment in shares a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Balance b/d

To Cash a/c – bal. figure

1,00,000

1,75,000

By Cash a/c (sale)

By Loss on sale (P/L a/c)

By Balance c/d

15,000

10,000

2,50,000

2,75,000

2,75,000


Dr. Adjusted P/L a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Loss on sale

10,000

10,000

Funds Flow statement

Sources of fund

Rs.

Uses of fund

Rs.

Cash a/c (sale)

15,000

15,000

Adjustments related to Retained earnings or Profit & Loss appropriation a/c

If not given any provision for dividend, the amount of dividend paid is found out by preparing profit & loss a/c like below:


Dr. Retained earnings a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Cash/Bank (dividend paid)

To Balance c/d

xxx

xxx

By Balance b/d

By Net profit b/d (profit for the year)

xxx

xxx

xxx

Xxx


Dr. Adjusted P/L a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Net profit b/d (profit for the year)

xxx

xxx


Funds Flow statement

Sources of fund

Rs.

Uses of fund

Rs.

Cash/Bank (dividend paid)

xxx

xxx


Illustration:

Find out the dividend paid.

Liabilities

2072 (in Rs.)

2073 (in Rs.)

Profit & Loss a/c

1,00,000

1,50,000

Additional information: Net profit for the year Rs. 1,20,000.


Solution:


Dr. Retained earnings a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Dividend paid (bal. figure)

To Balance c/d

70,000

1,50,000

By Balance b/d

By Net profit b/d (profit for the year)

1,00,000

1,20,000

2,20,000

2,20,000


Dr. Adjusted P/L a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Net profit b/d (profit for the year)

1,20,000

1,20,000


Funds Flow statement

Sources of fund

Rs.

Uses of fund

Rs.

Cash/Bank (dividend paid)

70,000

70,000

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. Share capital and debentures are the sources of funds in funds flow statement.
  2. Investments are treated as fixed assets if they are on long term run, such as trade investments. 

Funds Flow Statement: Adjustments

  • Related to tax & dividend
  • Related to share capital & debentures
  • Related to interim dividend
  • Related to investment accounts (non depreciable)
  • Related to retained earnings & P/L appropriation account
.

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