STATEMENT OF CHANGES IN FINANCIAL POSITION The income statement or profit and loss statement and balance sheet are

the basic financial statements of an organization. P & L a/c gives information about the financial performance and Balance sheet gives the financial position (assets and liabilities) of the firm. Assets and liabilities are also no!n as sources (liabilities) and application (assets) of funds. But trul" spea ing# the balance sheet does not disclose the total funds raised (sources) and the total funds applied (application) during a particular period. To no! ho! much fund has been raised and applied during a particular period or to no! the movement of funds during a particular period# !e stud" the balance sheet of the opening "ear and at the end of the "ear. $or this a statement depicting the inflo! and outflo! of funds is re%uired bet!een t!o balance sheet dates ta ing into account the transaction effecting funds bet!een the t!o dates. $unds have t!o connotations &. 'or ing capital i.e (et !or ing capital i.e )A *)L +. )ash ,)$P is prepared under the above t!o methods -llustration ('or ing capital approach) Liabilities ,hare )apital .eserves and ,urplus ,ecured Loans /nsecured loans (Long Term) )urrent Liabilities .s +#00#00 0 &#10#00 0 &#00#00 0 21#000 &#+1#00 0 5#10#00 0 Assets $i3ed Assets -nvestments )urrent Assets .s. 4#00#000 &#00#000 +#10#000

5#10#000

After this balance sheet date the follo!ing transaction ta e place 6 &. The compan" issues additional share capital .s. &#00#000 and collects cash +. .s. +1#000 secured loans are repaid. 4. Additional fi3ed assets of .s. 10#000 are purchased for cash. 7. -nvestments !orth .s. 50#000 are sold for cash 1. .s. 51#000 collected from debtors. 5. .s. 70#000 paid to creditors. 2. A ne! machine (fi3ed asset) is purchased for .s. 10#000 and purchase price is paid b" issuing additional share capital.

-tems of inflo! &. -ssue of share capital ( issue of bonus shares or issue against ac%uisition of long term asset no inflo!) +. -ssue of debentures 4. 8btaining term loan 7. ,ale of fi3ed assets 1. ,ale of -nvestments 5. 8perational $unds (Profits from P & L statement # but after ad9ustments) -tems of outflo! &. Purchase of fi3ed assets +. Purchase of investments 4. .edemption of shares and debentures 7. .epa"ment of loan 1. )orporate Ta3 and dividend 5. 8perational outflo! (Loss in P & L statement after ad9ustments) 8f all the items of inflo! and outflo!# t!o need more e3planation. A. 8perational inflo! or outflo! B. -nflo! or outflo! on account of sale or purchase of fi3ed assets. 8perational $und $lo! -t has been discussed earlier that funds flo! from operations (inflo! or outflo!) is basicall" profit or loss disclosed b" the P & L account. :o!ever # there are some items !hich do not affect !or ing capital (funds flo! ). ,uch items are called non;fund items. These items are to be ad9usted to bring the boo profit to the level of !or ing capital generated from operations. -t can be done in three !a"s. &. reconstruct the P & L !ithout considering the non;fund items. +. Profit for the "ear is ad9usted for the non;fund items 4. if the profit for the "ear is not no!n but the opening and closing balance of surplus and retained earnings is no!n then also fund flo! from operations is calculated as follo!s. )losing balance of P & L a/c <<< Add 6 (on fund items debited to P & L <<< <<< Less 6 (on fund items credited to P & L <<< <<< Less 6 8pening balance of P & L a/c <<< $unds flo! from operations <<<

-llustration The follo!ing profit and loss account has been prepared for the "ear ended on 4&st =ar +00+ .s 000 ,ales +000 8ther -ncome 6; Ban interest &0 Profit on revaluation of building &00 Profit on sale of a machine +1 &41 Total -ncome Less 6; )ost of goods sold 8ther operating e3penses >ood!ill !ritten off Patents !ritten off Preliminar" e3penses !ritten off Loss on sale of a machine ?epreciation Total )ost Profit before Ta3 Less 6 Provision for ta3 (et profit for the "ear Add 6 8pening balance of P & L A/c Profit available for disposal Less 6 Transferred to general reserve Proposed dividend )losing balance of P & L a/c carried to Balance ,heet )alculate $unds flo! from operations +&41 @00 +10 &1 &0 &0 +0 10 &+11 AA0 410 140 +10 2A0 +00 +10 440

Before calculating the funds flo! from operations it should be noted that the follo!ing items sho!n as income or e3penses are onl" boo entries and do not cause an" inflo! or outflo! of funds (!or ing capital ) and therefore are called non;fund items# hence to be ad9usted to calculate the funds flo! from operations. -ncome side6 &. Profit on revaluation of building +. Profit on sale of machine B3pense side 6 &. >ood!ill !ritten off +. Patents !ritten off 4. Preliminar" e3penses !ritten off 7. Loss on sale of machine 1. ?epreciation 5. Provision for ta3 2. Transferred to general reserve A. Proposed dividend &st method (.ecasting the P & L a/c !ithout considering the non;fund items ,ales 8ther -ncome 6; Ban interest Total -ncome Less 6; )ost of goods sold 8ther operating e3penses Total )ost $unds flo! from operations +nd method ( Ad9usting the profit ) (et profit for the "ear Add6 >ood!ill !ritten off .s 000 140 &1 .s 000 +000 &0 +0&0 @00 +10 &&10 860

Patents !ritten off Preliminar" e3penses !ritten off Loss on sale of a machine ?epreciation Provision for ta3 Less 6 Profit on revaluation of blgd Profit on sale of machine $unds flo! from operations 4rd method based on retained earnings )losing balance of P & L a/c Add 6 >ood!ill !ritten off Patents !ritten off Preliminar" e3penses !ritten off Loss on sale of machine ?epreciation Provision for ta3 Transferred to general reserve Proposed dividend

&0 &0 +0 10 410 @A1 &00 +1 860

440 &1 &0 &0 +0 10 410 +00 +10 &+41 &00 Less 6; Profit on revaluation of building +1 Profit on sale of machine +10 8pening balance of P & L a/c $unds flo! from operations 860

-llustration $rom the follo!ing t!o balance sheets prepare funds flo! statement and schedule of changes in 'or ing capital L-AB-L-T-B, +00+ +004 A,,BT, +00+ +004 B%uit" )apital &#10#00 &#A0#00 Land and Building 21#000 &#11#+00 0 0 ,hare Premium ; &0#000 =achiner" 2&#&00 A&#A00 >eneral .eserve +0#000 40#000 $urniture A#500 @#100 ,urplus (P&L) &0#100 40#A00 ,toc 71#100 7A#200 Term Loan +1#000 10#000 ,undr" ?ebtors 4A#500 7+#100 ,undr" )reditors &&#100 &0#500 Bills .eceivables &2#&00 &@#+00 Bills Pa"able @#200 A#000 Ban Balance 2#100 2#000 B3penses Pa"able 5#+00 2#100 Provision for Ta3ation &&#000 &+#000 Proposed ?ividend +0#000 +1#000

T8TAL

+#54#@0 0

4#54#@0 0

+#54#@0 0

4#54#@00

Additional -nformation 6 &. ?epreciation !ritten off during +00+;04 is as under &. =achiner" * &+#000 +. $urniture * &#+00 + 8ut of .s. 40#000 e%uit" capital raised .s. &0#000 !orth e%uit" shares !ere issued at par for the purchase of a small machiner".