The term “Flow” means change and therefore, the term “Flow of Funds” means “Change in Funds” or “Change in Working Capital “. In other works, any increase or decrease in working capital means “Flow of Funds”. There are two concepts of working capital – gross concept and net concept. • Gross working capital refers to the firm’s investment in current assets • Net working capital means excess of current assets over current liabilities.
In business several transactions take place. Some of these transactions increase the funds while others decrease the funds. Some may not make any change in the funds position. In case a transaction results in increase in funds, it will be termed as “source of funds”. Eg. 1. Issue of shares inflow of funds source of fund 2. Purchase of assets leads to outgo of funds application of funds
According to the International Accounting Standard 7, the term ‘Fund’ refers to cash, to cash and cash equivalent, or to working capital. The term ‘flow’ refers to change and therefore the term ‘Funds flow” refers to ‘change in funds’ or ‘change in working capital’. In other words, any increase or decrease in working capital means ‘flow of funds’. Working capital = Current Assets – Current Liabilities
| | | |CURRENT ASSETS |CURRENT LIABILITIES | | | | | | | |Cash and bank balances |Accounts payable | |Inventory |Sundry creditors | |Sundry Debtors |Bank overdraft | |Temporary investments |Unclaimed dividends | |Pre-paid expenses |Provision for taxation* | |Outstanding incomes |Proposed dividends* | |Accounts receivables |Short term loans | |Bills receivables | | | | |
*Provision for Taxation: It can be treated in two ways:
1. Treated as current liability: when there is no income tax paid or additional provision made it is treated as current liability. It can be taken to schedule of changes in working capital. No further treatment is required.
2. Treated as non-current liability: A ledger account (Provision for taxation a/c) is prepared. Sometimes we may have to arrive at income tax paid during the year from the given information. *Proposed Dividend: It can be treated in two ways:
1. Treated as current liability: Proposed dividend may be taken as Current liability since declaration of dividends by share holders is simply a formality. It is taken to schedule of changes in working capital with no further treatment.
2. Treated as non-current liability: Proposed dividend can be taken as an appropriation of profit. In such a case, proposed dividend for the current year will be added...