[00:04.78]text 7.1 Funds inflow and outfl
[00:10.27]Sources and uses of fun
[00:12.77]The sources and uses of funds can be set out as follow
[00:16.30](a) funds generated by trading operations, cash received from sales net of cash paid out for expenses ( the term cash flow is sometimes given to this amount
[00:28.94](b) funds injected into the business on a long-term basis;issues of shares plus any premium received on issue,debentures and other long-term loan
[00:41.40](c) funds released from long-term applications for use elsewhere in the business;sales of fixed assets such as land,buildings ,plant and vehicles;loans to subsidiary companies repaid by the
[00:56.01](d) funds lent to the business on a short-term basis; trade creditors;bank loans and overdrafts;amounts payable to the Inland Revenue;bills of exchange payabl
[01:08.73]Uses:(a) funds lost in trading operations,i.e.when the payment of expenses exceeds receipts from sale
[01:18.71](b) funds used to acquire permanent assets such as land,buildings ,plant,vehicles, fixtures and fittings and long-term investment
[01:27.90](c) funds paid away outside the business to repay debentures and loan stock,or to redeem share capita
[01:35.56](d)funds invested outside the business in loans made to subsidiary companie
[01:41.98](e) funds used to acquire assets of a short_term nature,stocks of material,work in progress and finished goods;
[01:50.60]trade credit allowed to debtors who have not yet paid for goods sold to them;
[01:55.02]short-them investments as a temporary repository of idle funds;bills of exchange receivable.
[02:02.12]Note that already with this simple analysis shown above items concerning funds moved into and out of the business on a long-term basis are being mixed in with short-term movement
[02:13.22]and source and applicatioin of funds from changes in the asset structur
[02:17.93]The funds generated by trading operations can be computed as in sources (a) above
[02:24.85]but an alternative method of calculating the same figure is to take the net profit before tax and add back all non-cash costs that have been deducted in the profit calculatio
[02:35.92]A good example of a cost which has not caused an outflow of cash during the year is depreciation,because it is a means of spreading over a period of years the cash spent when a fixed asset was originally purchase
[02:49.43]The term cash flow is often used for net profit plus depreciation and any other non-cash costs identified during the yea
[02:58.00]If sources exceed uses there will be a balance of cash representing funds provided but not yet put to use in the busines
[03:06.17]The capital employed in figure 1 acts as a reservoir into which funds flow from four major stream
[03:13.80]The funds are then tapped off as a result of managerial decisions to irrigate the five fields shown ,and any funds remaining in the reservoir will be represented by the bank balanc
[03:24.98]If ,however,uses exceed sources, the reservoir will run dry and ,unless extra short-term credit can be arranged at short notic
[03:34.47]some of the users will not receive all the funds they need and the business will suffer as a resul
[03:39.98]Funds ,like water, can run in different directings, so funds from any source can be used to finance any use
[03:47.40]although it is imprudent to use short-term funds to acquire fixed assets, unless long-term funds will be raised to cover the position quickl
[03:56.04]Circumstances such as these would be highlighted in a funds flow statemen
[04:00.56]Funds flow stateme
[04:02.21]This statement has several alternative name
[04:05.08]Some accountants refer to it as a movement of funds statement,while to others it is source and application of funds statemen
[04:14.07]When projected forward from a recent balance sheet to a budgeted position is sometimes called a long-term cash budge
[04:21.90]There are, of course, alternative forms of statement which express the flow of fund
[04:26.53]The statement is computed by finding the differences between the opening and closing balance sheets and arranging them in groups as illustrated in figure
[04:36.11]For example ,if the stock figure in the earlier balance sheet is deducted from stock in the later balance shee
[04:42.70]the extent of investment or disinvestment in stocks can be ascertaine
[04:47.22]The basic rule is that if an asset has increased during a period,this is an application of fund
[04:53.25]Whereas if an asset is reduced, this is counted as a source, since funds have been withdrawn from that asset for use in some other wa
[05:00.96]If a liability has increased, more funds have been loaned to the business and this is a source,but if a liability is reduced,funds have been applied to repay the liabilit
[05:12.27]The statement shows more than just the extra funds used during the year; it is extended to show changes in the way in which the funds are use
[05:21.44]Text 7.2 Preparing the source and application of funds stateme
[05:27.44]Heading
[05:28.78]Not all of expense charged to the profit and loss account will be represented by a cash outflow of fund
[05:36.43]For instance, any amount charged for depreciation or reduction in goodwill will not have involved the business in reducing its cash resource
[05:46.10]These payments are really a use or appropriation of profit and so the amount set aside must be added back to the profit before ta
[05:54.12]Similarly, certain items credited to the profit and loss account ,such as an overprovision for bad debts or a reduction in depreciatio
[06:03.00]will not have been represented by a cash inflow into the busines
[06:06.94]If this has been the case, the amount credited to the profit and loss account must be deducted from the retained profit figure because it does not represent a cash inflo
[06:16.95]Heading
[06:18.31]Sometimes when fixed term debt is sold or redeemed, the amount of cash received or parted with may be more(premium) or less (discount) than the loan stock's nominal valu
[06:31.99]In either case the amount paid or received should be shown in the source and application of funds statement and a check should then be mad
[06:40.35]by referring to the nominal value of the loan stock in the balance sheet, to see whether a premium or discount has been incurred on its issue or redemptio
[06:49.47]Heading
[06:50.96]The business may have sold surplus fixed assets during the yea
[06:55.45]The sale price is unlikely to be the same as the assets'net book value as shown in the balance sheet.so the firm will have made either a profit or loss on the sal
[07:05.56]These profits or losses will have then been transferred to the firm's profit and loss accoun
[07:11.83]When preparing a source and application of funds statement, the profit from the sale should be deducted from the retained profit figure and any loss should be added to i
[07:21.50]The amount of money received from the sale must then be shown as a source of fund
[07:26.17]By doing this the statement will show the cash received from the sale and the profit made from tradin
[07:32.34]Heading
[07:33.80]Dividend and tax payments are always made in the following financial year (except for interim dividend
[07:41.58]Any opening balance for dividends or taxation in the opening balance sheet will be shown as an application in the source and application of funds statemen
[07:50.94]for it will have been paid during the last financial year, thereby reducing the firm's cash resource
[07:57.86]Similarly ,any proposed dividend or tax owing in the closing balance sheet will not yet have been paid and so the amount will be added back to the before tax profit figur
[08:09.95]When these adjustments have been made ,the sources and applications of funds should be equa
[08:16.93]The next step is to distinguish between long and short terms sources of fund
[08:21.97]A source and application of funds statement follows the same principles as a balance shee
[08:27.72]and so anything which is not part of the current assets and current liabilities must be regarded as either a long term source or application of fund
[08:36.62]Heading
[08:38.32]The statement shows that during the year the firm's long term sources of funds were $ 96,000,of which $ 46,000 was generated by the firm,and the balance was received by an increase in share capita
[08:53.13]These funds were used to purchase additional fixed assets which, in total, cost $80,000,leaving a surplus of $ 16,00
[09:02.96]During the year the business has seen a deterioration in its liquidity positio
[09:08.44]At the year end more money has been invested in stock and the firm is owed more money from its debtor
[09:14.79]In order to be able to finance trading the bank account has become overdrawn and there has been an increase in creditor
[09:21.97]The increase in stocks and debtors has led to the deterioration in liquidity and, in the coming year
[09:28.14]stocks and debtors must be more effectively managed, releasing cash which can be used to repay the bank overdraft and the creditor |