Sunday, 23 October 2011

What are main sources of company to repay his debts?

So, above questions’ answer can be given after making fund flow statements.

Definition of Fund

Fund means working capital. If current assets of company is more than current liability of business, it is called working capital and working capital’s other name is Fund.

Fund = Working capital = Current assets – Current liability

Definition of Flow of Fund

Flow of fund means movement of fund. I take the example of air; we can feel its movement or flow of air. Same thing is happen with fund, due to the activity of business fund is transfer from one asset to another assets. If fixed assets are converted into current asset or fixed liability is converted into current liabilities, these are the flow of fund. But if current assets are changed with current assets or current assets are changed into current liabilities, then, there is no flow of fund because there is no change working capital. Suppose, we get the money from debtor, this is not flow of fund because, working capital is not changed. Both items of current assets and when current assets change into current assets, there will not be change in working capital.

Flow of Fund = Fixed asset changes into current asset or current asset changes into fixed assets

Or

Fixed liability changes into current liability or current liability changes into fixed liability.


Definition of fund flow statement

Fund flow statement is a statement which shows the inflow and out flow of funds between two dates of balance sheet. So, it is known as the statement of changes in financial position. We all know that balance sheet shows our financial position and inflow and outflow of fund affects it. So, in company level business, it is very necessary to prepare fund flow statement to know what the sources are and what are applications of fund between two dates of balance sheet. Generally, it is prepare after getting two year balance sheet.

According to Prof. Anthony, “The funds flow statement describes the sources from which additional funds were derived and the use of which these funds were put.”

Fund flow statements are known with different names

Statement of source and uses of funds

Or summary of financial operations

Movement of working capital statement

Or

Fund received and distributed statement

Or

Fund generated and expended statement.

Steps for making Fund flow statement

First Step

Making of statement of Changes of Working Capital

For making of fund flow statement. It is very necessary to make statement of changes of working capital. Because net increase in working capital is use of fund and net decrease in working capital is source of fund. So, it is duty of accountant to make statement of changes of working capital. Making of statement of changes working capital is very easy and simple.

We take two balance sheets, one is current year balance sheet and other is previous year balance sheet. Then we separate current assets and current liabilities.

If current assets are more than previous year current assets, it means increase in working capital.
If current assets are less than previous year current assets, it means decrease in working capital. Because, relationship between current assets and working capital is positive and if any changes in current assets, working capital will change in same direction.
If current liabilities are more than previous year current liabilities, it means decrease in working capital.
If current liabilities are less than previous year current liabilities, it means increase in working capital. Relationship between working capital and current liabilities are inverse.

Statement or schedule of changes in working capital

----------------------------------------------------------------------------------------
Particular--------------- ↓ previous year ↓ Current year ↓ Effect on working capital
-----------------------------------------------------------------------------------------
-----------------------------------------------------------↓ Increase ↓ Decrease
----------------------------------------------------------------------------------------
Current Assets

Þ Cash in hand
Þ Bills receivable
Þ Sundry debtors
Þ Temporary investments
Þ Stocks / inventories
Þ Prepaid expenses
Þ Accrued incomes
--------------------------------------------------------------------------------------------
Total current assets----------- ↓xxxx ↓ xxxxx↓
----------------------------------------------------------------------- -----------------

Current liabilities

Þ Bills payables
Þ Sundry creditors
Þ Bank overdraft
Þ Short term advances
Þ Dividends payables
Þ Provision for taxation
---------------------------------------------------------------------------------------
Total current Liabilities ----------↓xxxx ↓xxxx ↓
------------------------------------------------------------------ -------------------
Working capital
CA- CL
---------------------------------------------------------------------------

Net increase or decrease in working capital =

Increase in working capital – Decrease in working capital

2nd Step

Statement showing the fund from operation

Because is the source of fund and will show in fund flow statement’s source side. So before making fund flow statement, we must make statement showing the fund from operation.

Operation means business activity and fund from operation means profit from business activity. So, you will easy understand that profit from business activity between two accounting period must be the source of fund.


Statement of fund from operations
------------------------------------------------------------------------------------------
------------------------------------------------------------------------>↓ Amount ↓
-------------------------------------------------------------------------------------------

Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non –fund and non operating items which have been already
Debited to profit and loss account1. depreciation
2. amortization of fictitious and intangible assets

Þ goodwill
Þ patents
Þ trade marks
Þ preliminary expenses
Þ discount on issue of shares

3. Appropriation of retained earning such as

Þ Transfer to general reserve
Þ Dividend equalization fund
Þ Transfer to sinking fund
Þ Contingency reserve etc.

4. Loss on sale of any non current or fixed assets such as

Þ Loss on sale of land and building
Þ Loss on sale of machinery
Þ Loss on sale of furniture
Þ Loss on sale of long term investments

5. Dividends including

Þ Interim dividend
Þ Proposed dividend

(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account

-----------------------------------------------------------------------------------

Total ( A)-------------------------------------------------------> ↓ XXXXX ↓
-------------------------------------------------------------------------------------
Less Non –Fund or non operating items which have already been credited to profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as

Þ Profit on sale of land and building
Þ Profit on sale of plant and machinery
Þ Profit on sale of long term investment etc.

2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the balance sheet
-------------------------------------------------------------------------------------
Total ( B)--------------------------------------------------------------> ↓ XXXXX ↓
----------------------------------------------------------------------------------------
Funds received from operation or business activities = total ( A) – Total ( B)

You can make also above statement in t shape adjusted profit and loss account form .

3rd Step

Fund flow statement

--------------------------------------------------------------------------------------
-------------------------------------------------------------------> ↓ Amount ↓

-------------------------------------------------------------------------------------
A ) Source of funds
1.fund from operation ( balance of second step )
2.issue of shares capital
3.issue of debentures
4.raising of long term loans
5.receipts from partly paid shares , called up
6.amount received from sales of non current or fixed assets
7.non trading receipts such as dividend received
8.sale of investments ( Long term )
9.decrease in working capital as per schedule of changes in working capital
----------------------------------------------------------------------------------
total -------------------------------------------------------------> ↓ XXXXX ↓
---------------------------------------------------------------------------------
Applications or uses of funds
1. Funds lost in operations ( Balance negative in second step )
2. redemption of preference share capital
3. redemption of debentures
4. repayment of long term loans
5. purchase of long term loans
6. purchase of long term investments
7. non trading payments
8. payment of tax
9. payment of dividends
10. increase in working capital ( As per positive balance of ist step )
-------------------------------------------------------------------------------------
total --------------------------------------------------------> ↓ XXXXX ↓
--------------------------------------------------------------------------------------
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Chapter 7: Funds Analysis, Cash Flow Analysis, and Financial Planning


--------------------------------------------------------------------------------

1. According to the accounting profession, which of the following would be considered a cash-flow item from an "investing" activity?

cash inflow from interest income.

cash inflow from dividend income.

cash outflow to acquire fixed assets.

all of the above.

2. According to the Financial Accounting Standards Board (FASB), which of the following is a cash flow from a "financing" activity?

cash outflow to the government for taxes.

cash outflow to shareholders as dividends.

cash outflow to lenders as interest.

cash outflow to purchase bonds issued by another company.

3. If the following are balance sheet changes:
$5,005 decrease in accounts receivable
$7,000 decrease in cash
$12,012 decrease in notes payable
$10,001 increase in accounts payable
a "use" of funds would be the:

$7,000 decrease in cash.

$5,005 decrease in accounts receivable.

$10,001 increase in accounts payable.

$12,012 decrease in notes payable.

4. On an accounting statement of cash flows an "increase(decrease) in cash and cash equivalents" appears as

a cash flow from operating activities.

a cash flow from investing activities.

a cash flow from financing activities.

none of the above.

5. Uses of funds include a (an):

decrease in cash.

increase in any liability.

increase in fixed assets.

tax refund.

6. Which of the following would be included in a cash budget?

depreciation charges.

dividends.

goodwill.

patent amortization.

7. An examination of the sources and uses of funds statement is part of:

a forecasting technique.

a funds flow analysis.

a ratio analysis.

calculations for preparing the balance sheet.

8. Which of the following is NOT a cash outflow for the firm?

depreciation.

dividends.

interest payments.

taxes.

9. Which of the following would be considered a use of funds?

a decrease in accounts receivable.

a decrease in cash.

an increase in account payable.

an increase in cash.

10. The cash flow statement in the United States is most likely to appear using

a "supplementary method."

a "direct method."

an "indirect method."

a "flow of funds method."

11. For a profitable firm, total sources of funds will always total uses of funds.

be equal to

be greater than

be less than

have no consistence relationship to
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(i) When T > S



W = TR + R (S – T)/100



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W = SR



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(i) Workers get only a percentage of return on their over-achievement (for example: 1% in above example).



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In this plan incentive is given to a worker, who is fast and completes work before the standard time to complete a job, However, a minimum base-wage is guaranteed to a worker, who completes the job up to the standard time, fixed for this job.
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Saturday, 22 October 2011



Factory Overhead -Primary Distribution Homework Help, Tutoring
Home > Accounting > Cost Accounting > Types of Cost > Machinery Cost / Overhead > Factory Overhead -Primary Distribution
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Factory Overhead -Primary Distribution Assignment / Homework Help
Factory Overhead -Primary Distribution:
Commonly Used Bases of Primary Distribution:
  1. Area Occupied (i.e. floor space occupied):
    2. On the basis of area occupied, expenses which are related to accommodation such as payment of rent, rates & taxes etc. are primarily distributed. Lighting expense, in the absence of other more specific basis, is also distributed on this basis. If no other appropriate basis is available, distribution of the salary paid to the floor supervisor or floor manager should be done on this basis.
  1. Kilowatt Hours/ Horse Power of Machines:
    2. Cost incurred with respect to power is distributed on this basis. However, when in different departments, the hours of work rapidly vary, in that case, instead of the horse power only, Horse power * Machine hours should the basis.
  1. Number of Employees:
    2. Distribution of canteen expenses, time-keeping, personnel department expenses, first aid etc. are done on basis of the number of employees. In fact, on this basis, all welfare expenses which are dependent upon the number of employees should be distributed. Even on this basis, distribution of employer’s liability insurance is also made.
  1. Departmental Direct Wages:
    2. For the purpose of distributing expenses of factory overhead, this basis is commonly used in practice. On this basis, distribution should be done of only those items which may vary according to the direct wages, for example, premia paid for the workmen’s compensation insurance. Again, expense relating to supervision, although it does not appear very appropriate, is often distributed on this basis.
  1. Production hours of direct workers:
    2. On this basis distribution of those expenses are done which are related to the works management, expenses of general overtime & most of the general expenses. Machine hours instead of production hours of direct workers should be used as the basis, if the work is done mainly with the help of machines.
  1. Light Points & Wattage:
    2. On the basis of number of light points, distribution of the lighting expenses i.e. electricity is done. If the wattage of the points is in uniformity, then in that case, this becomes appropriate. On the other hand, if the wattage vary, then instead of the number of light points ,distribution should be done on the basis of wattage . Again, the basis of distribution should be Wattage * Hours of work, in case the hours of work in the department vary.
  1. Capital Values of Respective Assets:
    2. On the basis of capital values of the respective assets, distribution of repairs & insurance of building, plant & machinery, depreciation of building, plant & machinery etc. are made. Similarly, on the basis of the stock value, distribution of the insurance of stock is done & so on.
  1. Technical Estimates:
    2. On the basis of technical estimates, distributions of some of the expenses are made amongst the departments. For example, charges relating to steam.
Illustration: ABC ltd has five departments of which X, Y & Z are production departments while A & B are service departments. The following are the particulars relating to the departments:
X Y Z A B
Floor area occupied (sq. meters) 360 240 200 140 60
No of employees 40 30 24 16 10
Horse power of machines 1200 800 1000 __ __
Wages ($) 100000 80000 60000 30000 10000
Value of plant ($) 480000 400000 320000 200000 100000
Value of buildings ($) 1000000 600000 400000 200000 100000
No of light points 60 40 30 20 10
Value of stocks ($) 300000 200000 100000 ___ ___
Distribute the following costs to the various departments on the most suitable basis:
Rent, rates & taxes $ 10000, Repairs to building $ 23000, Repairs to plant $ 15000, Depreciation of plant $ 45000, Insurance of stock $ 3000, Insurance of plant $ 1500, Power $ 9000, Lighting $ 1600, Supervision $ 12000, Premia for workmen’s compensation insurance $ 2800
Note: The direct materials & wages of the service departments should be included in the total overhead of those service departments.
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Wages are one of the major portion in the total cost of production. There is always a chance of fraud in wage payment. Therefore, an effective administrative and accounting control system must be implemented by the management to minimize fraud and to keep the labor cost minimum. As already stated, a number of departments are set up for the effective utilization of labor force and its proper accounting and controlling. These departments are required to work in a coordinated manner and to support the management in controlling labor cost by recording and reporting their activities on regular basis. The management should evaluate and revise its controlling system to find out leakages and to stop such leakages in time. Fraud in wage payment may result in various ways like inclusion of dummy worker in pay-roll, manipulating hours, recording extra overtime, using a wrong wage rate and registering absent workers.
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Wages are one of the major portion in the total cost of production. There is always a chance of fraud in wage payment. Therefore, an effective administrative and accounting control system must be implemented by the management to minimize fraud and to keep the labor cost minimum. As already stated, a number of departments are set up for the effective utilization of labor force and its proper accounting and controlling. These departments are required to work in a coordinated manner and to support the management in controlling labor cost by recording and reporting their activities on regular basis. The management should evaluate and revise its controlling system to find out leakages and to stop such leakages in time. Fraud in wage payment may result in various ways like inclusion of dummy worker in pay-roll, manipulating hours, recording extra overtime, using a wrong wage rate and registering absent workers.
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A store refers to raw materials, work-in-progress and finished goods remaining in stock. Store-keeping means the activities relating to purchasing, issuing, protecting, storing and recording of the materials. Store-keeping includes the receipts and issues of materials, their recording, movements in and out of the store and safeguarding of materials. The store is a service department headed by a store-keeper who is responsible for a proper storage, protection and issue of all kinds of materials.
 
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