Notes on lesson on Statement of Changes in Financial Position |

Statement of Changes in Financial Position

Meaning, objectives and preparation of statement of changes in financial position on working capital and cash basis- determination of funds operations. Cash Flow Statement and Funds Flow Statement.


Funds Flow Statement

Statement of changes in financial position refers to the statement which is prepared on the basis of all financial resources like capital, assets and liabilities. In simple words, this statement summarizes all the sources from which the funds have been obtained and the uses to which and where they have been applied. Funds flow statement is the statement that shows the various sources from where the funds have been collected, within a certain time period along with their uses during that period. Working capital is the difference between current assets and current liabilities.

Funds Flow Statement: Determination of funds from operation

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

Cash Flow Statement: Introduction

Cash flow statement indicates a number of cash receipts and the amount of cash payments or disbursements during a specified time. The major business activities that result either net cash inflow or net cash outflow are Operating, Financing and Investing activities. Cash flow statement is prepared to disclose the causes of changes in working capital. All the cash transactions which are related to the firm’s ongoing business are cash flow from operating activities.

Cash from Operation under Direct Method

Cash from operating activities can be determined under 2 methods: Direct and Indirect method.Cash collection from customers includes the cash sales amount and cash received an amount from customers or credit sales. Interest expense is to be included in operating section and dividend paid is under financing section, if there is no additional information given.

Cash from Operation under Indirect Method

Investing activities related dividend and interest received are deducted from net income to determine funds from operation. Dividend received and interest received can be both included under either operating activities or investing activities. In other words, investing activities explain the overall changes in cash position between 2 balance sheets which occur while buying or selling of non-current assets.

Funds Flow Statement- Adjustments 1/2

If given any additional information on fixed assets, fixed assets account must be opened to find the hidden information. The gradual decrease in the value of fixed assets, due to their continuous use or permanent use is called depreciation. If accumulated depreciation is given in the balance sheet or in additional information, the depreciation charged for the year is not credited in assets a/c.

Funds Flow Statement: Flow & No flow of fund, differences & limitations

After preparing the statement of changes in working capital and determination of funds from operation, funds flow statement is finally prepared. While a transaction is taking place, any increase or decrease in funds or working capital is called Flow of Fund. Funds flow statement is a statement depicting all the various sources of funds from where they have been obtained as well as the applications to which those funds have been used on. This note also describes different limitations of fund flow statement which must be considered by the company.

Funds Flow Statement- Adjustments 2/2

Share capital and debentures are the sources of funds in funds flow statement. The interim dividend is the dividend paid out by the company to its shareholders, before the determination of its current year profit. 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.