FUNDS FLOW STATEMENT

NUMERICAL 1
Item # 1. Provision for Taxation:

There are two ways of treating this item in the fund flow statement:

(a) As a Current Liability:

When provision for taxation is being treated as current liability the following points are

notable:
(i) It will appear in the schedule of changes in working capital like other current liabilities.

(ii) Any payment of tax will not be an application of fund as decrease in cash or bank balance (i.e.,

Current Assets) is matched by a corresponding decrease in current liability (i.e., provision for

Taxation). Hence, while attempting a practical problem on fund flow statement, the item of tax (if
any) given outside the trial balance should be ignored under this approach.

(b) As a Non-current Item:

Provision for taxation may be taken as internal reserve created by appropriation of profit. In this
case it will be treated like any other non-current account. Thus

(i) It will not be shown in the Schedule of Changes in Working Capital.

(ii) The amount of current provision for taxation made during the year will be shown on the debit
side of Adjusted Profit and Loss Account or added to net profit after tax to find out fund from
operation.

(iii) Any payment of tax during the year will be shown as an application of fund in fund flow
statement.

Item # 2. Proposed Dividend:

Like provision for taxation, proposed dividend may be treated either as an item of current liability

or an item of appropriation of profit. If, proposed dividend is treated as a current liability, it will

appear as one of the item, decreasing working capital in the schedule of changes in working capital.
It will not be shown as an application of funds when dividend is paid later on.

On the other hand, if proposed dividend is considered as appropriation of profit, it will not be
shown in the schedule of changes in working capital. The amount of dividend proposed during the
year will be debited to Adjusted Profit and Loss Account and actual payment of dividend once
proposed will be shown as application of fund.

If, in the given problem nothing is mentioned regarding the actual payment of dividend, the

proposed dividend of the opening balance sheet has to be supposed to have been paid fully during
the current year. This is so because dividend has to be paid compulsorily.

Item # 4. Interim Dividend:

Interim dividend is the dividend which is paid during the middle of the year or in between two

annual general meeting of a company. It is a non-operating item. Thus the amount of interim

dividend proposed during the year will be debited to Adjusted Profit and Loss Account and actual
payment of such dividend will be shown as an application of fund.