Blackberry is falling backward in the race of smartphone with the advent of Android from Google and Microsoft’s new enigma with mobile phones by taking charge of Nokia with an existing market share and also completely unbelievable renovation with Windows Mobile 7.5 Mango updates. This is really making the Blackberry falls poorly in the race of multi prolonged smartphone market. With the existing price structure of Nokia Lumia courtesy Microsoft touching the 16,000 bracket and the smart phone competition is
Profit is always a matter of primary concern to management. The volume of sale never remains constant. It fluctuates up and down and income also goes up and down with fluctuations in volume. Profit is actually the result of interplay of different factor like cost, volume and selling price. Effectiveness of a manager depends on his capabilities to make right predictions about future profits. This can
ABSORPTION COSTING VS MARGINAL COSTING
|1) Both fixed and variable cost are considered for product costing and inventory valuation.||1) Only variable cost is considered for product costing and inventory valuation.|
|2) The fixed cost is charged to cost of production. Each product is to bear a reasonable share of fixed cost and profitability of product is thus influenced by subjective apportionment of fixed cost.||2) Treatment of fixed overhead is different. |
Margin of Safety represents the difference between sales at a given activity nd sales at Break even point (BEP is the point of sale where company makes neither profit nor loss). Consequently it indicates the extent to which a fall in demand could be absorbed before the company begins to sustain losses. The margin of safety is expressed as percentage of sale. The validity of safety always depends on the accuracy of cost estimates. The wide margin of safety is advantageous for the company. Margin of safety depends upon the level of fixed cost, rate of contribution and level of sales.
Sales – Sales at BEP = Margin of safety.
Improvement in Margin of Safety-
The Margin of Safety can be improved by adopting the following steps-
i) Increase in sale volume- It widens the difference between sales at activity level and sales at break even point.
ii) Increase in selling price- If it is not possible to increase sales volume, selling price is increase to increase the margin of safety.
iii) Change in product mix thereby increasing contribution – This will lead to improvement in margin of safety , because it widens the gap of sales specified activity level and sales at break even point.
iv) Lowering fixed cost- It increases the margin of safety , because break even point goes down by lowering fixed cost.
v) Lowering fixed variable cost- It increases margin of safety by improvement in P/V ratio.
Angle of Incidence- The angle which the sales line makes the total cost lines, is known as angle of incidence. This angle gives pictorial relationship between products and sales. This angle indicates the profit earning capacity of a company over the break even point. A large angle of incidence will indicate earning of high margin of profit. Low angle of incidence indicates that variable cost forms a major part of cost of sales. Normally margin of safety and angle of incidence are considered together. For example, a high margin of safety with a large angle of incidence will indicate the most favorable condition of a company. Under such a situation, the company is monopolizing in the market. On the other hand, low margin of safety with low angle of incidence indicates bad financial shape of the company.
Main features of Marginal Costing-
i) Costs are divided in to two categories i.e. Fixed cost and variable cost
ii) Fixed costs are considered as period cost and remains out of consideration for determination of product cost and value of inventories.
iii) Prices are determined with reference to marginal cost and contribution margin.
iv) Profitability of departments and products is determined with reference to their contribution margin.
v) In presentation of cost data, display of contribution assumes dominant role.
vi) Closing stock is valued on marginal cost.
Where S= Sales
F= Fixed Cost
V= Variable cost
Profit /Volume Ratio – Profit Volume Ratio may be expressed as:-
P/V Ratio = (Sales – Marginal Cost of Sales )/ Sales
Or = Contribution/ Sales.
Or = Change in contribution/ Change in Sale
Or = Change in Profit/ Change in Sale
Suppose the sale price and marginal cost of a product are Rs20 and Rs 12 respectively, The P/V Ratio will be (Rs 20-Rs12) X100 = 40%
P/V Ratio remains constant at different levels of operation. A Change in fixed cost does not result in change in P/V ratio since P/V expresses relationship between contribution and sales.
Advantages of P/V Ratio –
i) It helps in determining the break even point.
ii) It helps in determining profit at various sales levels.
iii) It helps to fins out the sales volumes to earn a desired quamtum of profit.
iv) It helps to dertermine relative profitability of different products, processes and deoartments.
Limitations of P/V Ratio-
i) P/V Ratio heavily leans on excess of revenue over variable cost.
ii) The P/V Ratio fails to take in to consideration the capital outlays required by the additional productive capacity and the additional fixed cost, tha t are added.
iii) Inspection of P/V ratio of products can suggest profitable product lines that might be emphasized and unprofitable lines that may be re-evaluated or eliminated. Mere inspection of P/V ratio will not help to take final decision. For this purpose, analysis has to be broadened to take in to consideration differential cost of the decision and opportunity cost etc, . Thus it indicates only the area to be probed.
iv) The P/V ratio has been referred to as the questionable device for decision-making because it only gives an indication of the profitability of the product/product lines: that too if other things are equal, P/V ratio is good for forming impression and not for making decision.
Definition- The cost of one unit of product or service that would be avoided if that unit were not produced or provided.
Marginal Costing –
The accounting system in which variable cost are charged to the cost units and fixed costs of the period are writing off in full against the aggregate contribution. Its special value is in decision-making.
Break Even Point- Break even point is the point of sale in which the company makes neither profit nor loss. The marginal costing technique is based on the idea that difference of sale and variable cost of sales provides for a fund which is referred to as contribution. Contribution provides for fixed cost and profit. At break even point, the contribution is just sufficient to provide for fixed cost. If actual sake level is above break even point, the company will make profit. If actual sale level is below break even point the company will incur loss. When cost volume profit relationship is presented graphically and it is the point at which total cost line and total sale line intersect each other will be the point of break even point.
Key Factor or Limiting Factor-
Key factor is the factor whose influence must be first ascertained to ensure that there is maximum utilization of resources. Gearing the production process in the light of key factor’s influences will lead to maximization of profits. Key factor contains managerial action and limits output of the company. Generally sale is the limiting factor, but any of the following factors can be limiting factor.
c) Plant & machinery
e) Government action.
When a limiting factor is in operation and a decision is to be taken regarding relative profitability of different products, contribution for each products is divided by key factor to select the most profitable alternative.
Budget Committee- The responsibility fo the preparation of budgets generally rests with the budget committee which generally includes the following executives:-
i) Chief Executive who will be the chairman of the committee.
ii) Production Manager
iii) Sales Manager
iv) Materials manager
v) Standard & Quality Control Manager
vi) Finance Manager
vii) Other Departmental Head.
Functions of Budget Committee-
The main functions are as follows-
i) Assisting the manager in making budget by giving them information about past performances,
ii) Circulating the broad outline of the policies framed by the top management which should be taken under consideration while preparing the budgets.
iii) Reviewing the budget estimate prepared by the various departments and suggesting modifications if necessary.
iv) Preparing the master budget after the functional budgets are prepared.
v) Comparing the reports of actual performances with budget policies and procedure.
vi) Assisting the preparation of budget manual.
Budget Manual- It is a document that contains the guidelines for the preparation of various budgets and sets out the responsibilities of the persons engaged in the routine of and the forms and records required for budgetary control. All departments refer this manual for clarification regarding procedural details and formats to be used at every stage from preparation of budgets till reporting of actual and deviations from budgets.
Budget Variance- A budget variance represents the difference between plan and achievements expressed in monetary terms, that is the difference between budget figure and actual figure. Variance analysis is the process of ascertaining variances from budget and finding reasons for variances. Variance is unfavorable if actual is more than budget. The same is favorable if actual is less than budget. Variance report is prepared showing budget and variances and sent to persons responsible for each functional budgets for comments and action. When standard costing is employed along with a system of flexible budgeting variance analysis is greatly facilitated.
|budget (Photo credit: 401(K) 2012)|
a) Planning- To achieve its goal, an enterprise must plan what it must do and how it will reach the goal. In the processes of assessing the factors that will help reaching the goals, the enterprise should also anticipate problems that would make the process of reaching its goals difficult. Having identified some of these problems, it can decide well in advance how it would overcome them, if and when they came up.
b) Coordination- This involves proper balancing of all factors and coordinating the efforts put together by various departments and persons to reach the goals of the enterprise. If they do not work in synchronized manner, the organization will never be able to reach its goals.
c) Control- It is a process of keeping watch over actions and taking immediate planned action at the first signs of deviation from the planned course of action. In this way, events are compelled or directed to confirm the plans.
Types of Budgets-
Generally a master budget is prepared which in turn, is broken in to functional budgets. Budgets may be classified as follows-
i) Basic Budget & Current Budget.
ii) Fixed budget a& Flexible budget.
iii) Master budget & Functional Budget.
Basic Budget is based on a long term plan and is used on a long term plan and is used as a basis for developing current budget. A basic budget is much broader in scope and less detailed than a current budget. It may be fixed or flexible. The basic data are not updated whenever there are change in conditions such as increase in material price or wage rates. As a result, the use of basic budgets gives rise to operating variances. That is why for control purposes current budgets are more useful.
Current Budget- It is established for use over a short period of times usually one year but sometimes even less and related to current conditions that is average conditions which are likely to prevail during the budget period.
Fixed Budget- A fixed budget is designed to remain unchanged irrespective of the volume of output or turnover attained. The budget remains fixed over a given period and does not change with the change in the volume of production or level of activity attained . Normally, such a budget is prepared in respect of expenses of a fixed nature. As such this budget is of limited application.
Flexible Budget- A flexible budget by recognizing the difference in behaviour between fixed and variable costs in relation to fluctuation in output or turnover is designed to change appropriately with such fluctuations. A flexible budget changes according o the level of activity.
It is the results of two factors, a) the passage of time and b) the productive activity. The concept of cost variability gives rise to three categories of costs such as –
i) Fixed cost
ii) Variable cost
iii) Semivariable cost
Fixed cost does not vary with the volume or production activity but accrue with the passage of time. They are time or period cost. They remain constant over a period of time irrespective of the volume or level of activity. Variable cost vary in proportion to the volume of activity. They accrue as a result of efforts, activity or work done. They are product cost. They would not arise if there are no activity. Semi variable costs contain elements of both fixed and variable costs.
Master Budget- A Master Budget is prepared from and summaries, the various functional budgets. It is also called summary budget. It is a summary plan of the overall activities of the enterprise for a definite period. It generally includes details relating to production , sales, stocks, debtors, cash position, fixed assets etc, in addition to important control ratios.
The Master Budget embraces both operating decisions and financial decisions. When all budgets are ready they can finally produce budgeted profit & Loss A/C or incomes statement and budgeted balance sheet. Such results can be projected monthly, quarterly, half yearly and year end. When the budgeted profit falls short of the target it may be reviewed and all budgets may be reworked to reach the target or to achieve a revised target approved by the budget committee.
Functional Budget- It is a budget of income or expenditures appropriate to or the responsibilities of a function such as production, sales, purchase etc. Each functional department prepares its own budget and all these functional budgets are then integrated in to the master budget. The following functional budgets are generally prepared.
Budget Prepared by
Sale- Quantity & Value Sales Manager
Selling & Distribution Cost Sales MANAGER
Production- Units & plant Production manager
Utilization Personal Personnel Manager
Materials Purchase Manager
Factory Expenses Production Manager
Administrative Expenses Finance Manager
Cash Finance Manager
Capital Expenditure Chief Executive
Research & Development R & D manager
|Winners of the accountancy awards 2008 at Birmingham City University (Photo credit: Birmingham City University)|
|1) It involves the preparation of a set of final accounts for each accounting period in accordance with the accounting standards and company legislation. It gives the overall financial picture of a company.||1) It is an internal management tool which provides appropriate timely information of management to help them for taking better decisions by applying the techniques viz; standard costing, budgetary control, marginal costing.|
|2) It can not provide information for future period||2) It can forecast for future period by the techniques of budgeting.|
|3) It can not provide information for day to day decision making .||3) It can provide day to day decision by applying the concepts of marginal costing , budgetary control etc.|
|4) It can not provide information to assess the performance of various persons of the department to see that cost don not exceed the reasonable limit for a given quantum of work.||4) The techniques of budgeting and standard costing enable the management to perform the function.|
Besides above, the following distinction between financial and cost accounting has been discussed –
|i) Purpose- |
To provide investors, creditor or other external parties with useful information about the financial position, financial performance and cash flow prospect of an enterprise.
|i) To provide the manager with information useful for planning, evaluation and rewarding performance and sharing with other outside parties and to apportion decision making authority over the firm resources.|
|ii) Types of report- |
Primarily financial statements (profit & loss a/c and balance sheet and cash flow statement and related notes) provides investors, creditors and other users of information to support external decision making process.
|ii) Many different types of report depending on the nature of business and the specific information needs of the management. Example; Budget financial projection, bench mark studies, activity based cost report and cost of quality assessment.|
|iii) Standards for presentation - |
It follows generally accepted accounting principles including those formally established in the authoritative accounting literature and standard industry practice.
|iii) rules are set within the organization to produce information relevant to the needs of management.|
|i) Time Periods- |
Usually a year, quarter or month. Most report focus on completed periods. Emphasis is pl aced on the current period with prior periods often shown for comparison.
|v) Any period- year, quarter , month,week,day even a work shift .Some reports are historical in nature. Other focus on estimates and results expected in the future period.|
|ii) User of information- |
Outsiders as well as managers . These outsiders includes shareholders, creditors, prospective investors, regulatory authorities and the general public.
|vi) Management (Different reports to different managers), customers, auditors, suppliers and others involved in an organization value chain.|
1.1 Where accounts are maintained on the integral system, there are no separate cost accounts and financial accounts. Hence, the question of reconciliation of cost and financial accounts does not arise. However, where separate sets of books are maintained for cost accounting and financial accounting system, it is imperative that periodically the two accounts are reconciled. A memorandum of reconciliation is prepared, indicating the reasons for difference between the results disclosed by each system.
1.2. The difference between the two sets of accounts arises because of the following reasons-
a) Items includes only in financial accounts-
There are number of items which appear only in financial accounts, and not in cost accounts, since they do not relate to the manufacturing activities, such as,
i) Purely financial charges, reducing profit
- Losses on Capital assets.
- Stamp duty & expense son issue and transfer of stock , shares and bonds.
- Loss on debentures.
- Discount on debentures, bond.
- Fines & penalties.
- Interest on bank loans.
ii) Purely financial income, increasing financial profit
- Rent received.
- Profit on sale of assets.
- Share transfer fee
- Share premium.
- Interest on investment, bank deposits.
- Dividend received.
iii) Appropriation of Profit- Donations and charities.
b) Items included only in cost accounts-
There are very few items, which appears in cost accounts, but not in financial accounts. Because, all expenditure incurred, whether for cash or credit, passes through the financial accounts, and only relevant expenses are incorporated in cost accounts. Hence, only items which can appear in cost accounts but not in financial accounts is a notional charge., such as, I) interest on capital which is not paid but included in cost accounts to show the notional cost of employing capital,
Or II) Rent i.e. charging a notional rent of premises owned.
c) Items included for differently in cost and financial accounting –
i) Overheads- in cost accounts, overheads are applied to cost units at predetermined rates based on estimates, and the amount recovered may differ from actual expenses incurred. If such under-or –over recovery of overheads are not charged off to costing profit & loss a/c, the profits on two sets of books will differ.
ii) Stock Valuation – in financial accounts, stock is valued at lower of cost or market value. In cost accounts, stock is valued at cost adopting one of her methods such as FIFO, LIFO, average etc, which is suitable to the unit. Thus, there may be difference in stock valuation which will reflect difference in profit between the two sets of books.
iii) Depreciation- if different basis is adopted for charging depreciation in cost accounts as compared to financial accounts, the profits will vary.
Cost Classification refers to the process of grouping costs according to their common characteristics such as nature of expenses, function, variability, controllability and normality. Cost Classification can be done on the basis of time, their relation with the product and accounting period. Cost classification is also made for planning and control and decision making. Thus classification is essential for identifying costs with cost centers or cost units for the purpose of determination and control of cost.
A) Nature of expenses – Costs can be classified in to material labour and expenses.
B) By function-
- Production cost – It begins with the process of supplying material labour and services and ends with primary packing of the finished product.
- Administration cost is the aggregate of the costs of formulating the policy , directing the organization and controlling the operation of an undertaking, which is not related directly to production, selling, distribution, research and development activity or function.
- Selling costs refers to the expenditure incurred in promoting sales and retaining customers.
- Distribution costs begins with the process of making the packed product available for dispatch and ends with making the reconditioned empty package available for use.
- Research & development cost relates to the costs of researching for new or improved products, new application of materials or new or improved methods, processes, and cost of implementation of the decision including the commencement of commercial production of that product or by that process or method.
- Preproduction cost refers to the part of development cost incurred in making trial production run preliminary to formal production, either in a new or running factory , this cost then represents research and development costs also. Pre-production costs are normally considered as deferred expenditure and are charged to the cost of future production.
C) By Variability –
Costs are classified in ti fixed, variable and semi fixed/ semi-variable costs according to their tendency to vary with the volume of output.
- Fixed Cost- It tends to remain unaffected by the variation or changes in the volume of output, such as supervisory salary, rent, taxes, etc.
- Variable costs- It tends to vary directly with volume of output, such as direct material, direct labour and direct expenses.
- Semi-fixed/semi—variable cost – it is partly fixed and partly variable, such as telephone expenses, electricity charges, etc.
D) By Controllability-
Costs can be classified under controllable and uncontrollable cost.
- Controllable cost can be influenced by the action of a specified member of an undertaking.
- Uncontrollable costs can not be influenced by the action of a specified member of an undertaking.
E) By Normality- Costs can be divided in to normal and abnormal cost.
- Normal costs refers to the cost, at given level of output in the conditions in which that level of output is normally attained.
- Abnormal cost is a cost which is not normally incurred at a given of output in the conditions in which that level of output is normally attained.
F) On the basis of time - Costs can be classified in to historical or actual costs and predetermined or future cost.
- Historical cost- It relates to the usual method of determining actual cost of operation based on actual expenses incurred during the period. Such evaluation of costs takes longer time, till the accounts are closed and finalized, and figures are already for use in cost calculations.
- Predetermined cost- It is prepared in advance before the actual operation starts on the basis of specializations and historical cost data of the earlier period and all factors effecting cost. Predet3ermined cost is therefore future cost and may be either estimated or standard.
- Estimated cost is prepared before accepting an order for submitting price quotation. It is also used for comparing actual performance.
- Standard cost is scientifically predetermined cost of a product or service applicable during a specific period of immediate future under current or anticipated operating conditions. The method consists of setting standards for each elements of cost, evaluating the variance from standard cost and finding reasons for such variance, so that remedial steps can be taken promptly to check inefficient performance.
G) In relation to Product – Costs may be classified in to direct and indirect costs.
- Direct costs are those, which are incurred for a particular cost unit and can be conveniently linked with that cost unit. Direct costs are termed as product cost.
- Indirect costs are those which are incurred for a number of cost units and also include cost which through incurred for a particular cost unit are not linked with the cost unit. Since such costs are incurred over period and the benefit is mostly derived within the same period, they are called period costs.
H) Cost analysis for decision making- Costa are classified under relevant costs (eg. Marginal cost, additional fixed cost , incremental costs, opportunity cost and irrelevant cost( e.g. Sunk cost, committed costs, etc)
In earlier concept, costing was defined as the technique and process of ascertaining costs of a given thing. In sixties, the definition of cost accounting was modified as the “ application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability of goods or services.” It includes the presentation of information derived there from for the purposes of managerial decision making. It clearly emphasizes the importance of cost accountancy achieved during the period by using cost concepts in ore and more areas and helping management to arrive at good business decisions. To day the scope of cost accounting has enlarged to such an extent that it now refers to the collection and providing all sorts of information that assists the executives in fulfilling the organization goals. Modern cost accounting is being termed as management accounting, since managers being the primary user of accounting information are increasingly using the data provided by the accounts, setting objectives and controlling the operation of the business.
Cost accounting deals with the ascertainment of the cost of product or service. It is a tool of management that provides detailed records and reports on the costs and expenses associated with the operations, mainly for internal control and decision making. Cost accounting basically relates to utilization of resources, such as material , labour, machines,etc and provides information like product cost, process cost, service or utility cost, inventory value etc, so as to enable the management taking important decisions like fixing price, choosing products, preparing quotations, releasing or withholding inventory etc.
OBJECTIVE – The objective of cost accounting is to provide information to internal managers for better planning and control of operations and taking timely decisions. In the early stages, cost accounting was considered as an extension of financial accounting. Cost records were maintained separately. Cost information and data aware collected from financial books, since all monetary transactions are entered in the financial books only. After developing product cost or service cost and valuation of inventory , the costing profit and loss account is prepared. The profit and loss figures so derived by the two sets of books i.e. financial accounts and cost accounts would have to be reconciled, since some of the income and expenditure recorded in financial books do not enter into product cost, while some of the expenses are included in cost accounts on notional basis i.e. without having incurred actual expenses. However a system of integrated accounts has been developed subsequently wherein cost and financial accounts are integrated and one set of books can be maintained.
Definition – (By Institute of Cost and Works Accountants of India) Management accounting is defined as a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision making.
(By Institute of Chartered Accountants of India)-Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively have come to be known as management accounting.
(By International Federation of Accountants)- Management Accounting is the process of:
Identification and Measurement – The recognition and valuation of business transactions or their economic events that have occurred or may occur;
Accumulation- The discipline and consistent approach to recording and classifying appropriate business transactions and other economic events;
Analysis – The determination of reasons for and the relationship of the reported activity with other economic events and circum stances;
Preparation and interpretation – The meaningful coordination of accounting and/ or planning data to satisfy needed for information presented in logical format and if appropriate, include the conclusion drawn from the data;
Management Accounting – Concept, Need, Importance, and Scope, Cost Accounting: Classification of cost, Reconciliation of profit between financial and cost Accounting. Difference between Financial Accounting and cost Accounting.
Introduction – Cost accounting no doubt serves the internal management by directing their attention on inefficient operations and assisting in a day-to-day control of activities of the enterprise. But even costing information fails to meet informational needs for management functions. The costing data needs to be arranged, re-analyzed and processed further for playing more effective role in the managerial process. In addition to costing and accounting data, managerial functions need the use of socio-economic and statistical data( eg; population break up, income structures etc). These information’s are beyond the scope of cost accounting and financial accounting which pave the way for emergence of management accounting. Management accounting provides all possible information required for managerial purposes.
Management Accounting is comprised of two words ‘Management ‘ and ‘Accounting’ . it is the study of managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in formation of policy, control of execution and appreciation of effectiveness. It is that system of accounting which helps management in carrying out its function more effectively.
The term management accounting is of recent origin. This term was first used in 1950 by a team of accountants visiting USA under the banner of Anglo- American council on Productivity. The terminology of cost accountancy had no reference to the word management accountancy before the report of this study group. The complexities of business environment have necessitated the use of management accounting for planning, co-coordinating and controlling functions of management.
A small undertaking with a local character is generally \managed by him. The owner is in touch with day-to-day working of the enterprise and he plans and coordinate the activities himself. The use of simple accounting enables the preparation of profit & loss account and balance sheet for determining profitability and assessing financial position of the enterprise. All information needs for management purposes are met by simple financial statements. Since the owner is both the decisions- maker and implementer of such decisions, he does not feel the necessity of any communication system and no additional information is required for managerial purposes. The evolution of joint stock company form of organization has resulted in large-scale production and separation of ownership and management.
Depreciation means decrease in the value of an asset due to wear and tear, lapse of time, obsolescence, exhaustion and accident. Depreciation is taken as an operating expenses while calculating funds from operation. The accounting entries are as follows-
i) Depreciation A/C Dr
To Fixed Assets A/C
ii) Profit & Loss A/C Dr
To Depreciation A/C
Both the profit & loss A/C and depreciation are non-current asset and depreciation is an non fund item. It is neither a source nor an application of funds. It is added back to the operating profits to find out funds from operation since it has all been charged to profit & loss a/c bur it does not decrease fund from operations. Depreciation should not therefore be taken as source of funds. If depreciation were really a source of fund by itself then any enterprise would have improved its position at will by merely increase the periodical depreciation charge.
Fund flow statement Vs Income statement
1) It deals with financial resources required for running the business activities. It explains how were they used.
1) It discloses the results of the business activities i.e. how much has been earned and how it has been spent.
2) It matches the fund raised and fund applied during a particular period. The sources and applications of fund may be of capital as well as revenue nature.
2) It matches the income of a period with the expenditure of that period which are both of a revenue nature. For examples when shares are issued for cash, it becomes a sources of fund while preparing a fund flow statement but it is not an item of income for an income statement.
3) Sources of fund are many besides opearations such as shares capital , debentures, sale of fixed assets.
3) It discloses the results of operations can not even accurately tell about the funds from operations alone because of non-funds items (such as depreciation, writing off fictitious assets etc being included there in.
Fund flow statement Vs Balance Sheet
1).It depicts the overall increase or decrease in working capital during a particular period.
1) shows the financial position of a business on a particular date
2) It incorporates the different sources and applications of funds during a period.
2) It incorporates all assets and liabilities on a particular date .
3) It depicts the changes that have taken place in the fixed assets and fixed liabilities, which have a bearing on the funds during a particular period.
It shows all assets and liabilities of a business on a particular date.
4) It is a dynamic statement since it focuses on those major transactions, which have been behind the balance sheet changes.
4) It is merely a statement of assets and liabilities on a particular date.
However, the technique of cash flow statement when used in conjunction with ratio analysis serves as barometer in measuring the profitability and financial position of the business.
Preparation of fund flow statement
The preparation of fund flow statement has the following steps-
A) Schedule of changes in working capital-
B) FUND flow Statement
A) Schedule of hanges in Working Capital-
It can be prepared by comparing the current assets and current liability of two periods.
Net increase/ decrease in Working Capital
Rules for preparing the schedule-
i) An increase in current assets results in increase in working cpital.
ii) Decrease in current assets result in decrease in working capital
iii) Increase in a current liability results in decrease of working capital.
iv) Decrease in a current liabilities results in increase in working capital.
B) FUND FLOW STATEMENT
Source of Funds:
Issue of shares
Issue of debenture
Long term borrowing
Sale of fixed assets
Application of Funds-
Redemption of redeemable preference shares
Redemption of debentures
Payment of other long term loans
Purchase of Fixed Assets
Payment of Dividends, Tax etc
Net increase/ Decrease in working capital
( Total Sources – Total Uses)