Problem 1

Prepare a fund flow statement from the following information:

  • Increase in working capital: $4,000
  • Net profit of $10,750 before written-off goodwill
  • Depreciation on fixed assets: $1,750
  • Dividend paid: $3,500
  • Goodwill written-off: $5,000 out of profits
  • $5,000 in share capital was issued for cash
  • Machinery purchased for $10,000

Solution

An overview of the funds from operations is shown as follows:

Net profit before writing off goodwill $10,750
Add: Depreciation $1,750
$12,500

In turn, the fund flow statement can be prepared as follows:

Sources of Funds $ Application of Funds $
Income from operations 12,500 Payment of dividend 3,500
Issue of share capital 5,000 Purchase of machinery 10,000
Increase in working capital 4,000
17,500 17,500

Problem 2

Prepare a fund flow statement from the balance sheet of John Trading Co. for the year 2018-19.

John Trading Co. Balance Sheet 
For the year 2018-19

2018 2019 2018 2019
$ $ $ $
Share capital 500,000 650,000 Goodwill 20,000 15,000
Share premium 50,000 Investments 150,000 200,000
P & L A/c 25,000 Fixed Assets 550,000 550,000
Debentures 200,000 Debtors 60,000 40,000
Bank overdraft 80,000 100,000 Stock 120,000 80,000
Creditors 60,000 75,000 Cash 12,000 5,000
Proposed dividend 10,000 15,000 Prepaid
Provision of tax 20,000 25,000 Expenses 8,000
920,000 890,000 920,000 890,000

The following information is also given:

  • Adjustments: Net profit before tax and dividend is $63,000, provision of tax during the year is $23,000, actual tax paid is $18,000, and provision of dividends is $15,000
  • Depreciation charged: $80,000
  • Bonus shares of $50,000 out of share premium

Solution

Income From Operations

$
Net profit 63,000
Less: Income tax dividend provision 23,000 + 15,000 38,000
Add: Depreciation (Fixed Assets) 80,000 25,000
Goodwill written off 5,000 5,000 85,000
Proposed tax 23,000 + Proposed dws 15,000 38,000
148,000

Change in Working Capital

Current assets (Dr.) $
Increase
$
Decrease
Drs. 20,000
Stock 40,000
Cash 7,000
Prepaid expenses 8,000
Current liabilities
Bank overdraft 20,000
Crs. 15,000
Decrease in working capital 110,000

Proposed Dividend

$ $
To bank 10,000 By balance b/d 10,000
To c/d 15,000 By P & L 15,000
25,000 25,000

Proposed Income Tax

$ $
To balance c/d 25,000 By balance b/d 20,000
To bank 18,000 By P & L 23,000
43,000

Fixed Assets

$ $
To b/d 550,000 By depreciation 80,000
To bank 80,000 By balance c/d 550,000
630,000 630,000

Fund Flow Statement

Sources of Funds $ Application of Funds $
Share capital (50,000 bonus shares out of premium) 100,000 Deb. redemption 200,000
Income from operations 148,000 Tax paid 18,000
Decrease in working capital 110,000 Dividend paid 10,000
Investment purchased 50,000
Fixed assets purchased 80,000
358,000 358,000

Frequently Asked Questions

What is a fund flow statement?

A fund flow statement reveals the periodic increase or decrease in a business enterprise’s funds.

What is a balance sheet?

An accounting balance sheet is a financial document that shows the relationship between a company’s assets, liabilities, and shareholder equity at a particular point in time.

What is a debenture?

A Debenture is a debt vehicle that is backed solely by the credit worthiness of the issuer.

What are current liabilities?

Current liabilities are short-term financial obligations that are due either in one year or within the company’s operating cycle. Current liabilities are different from long-term liabilities, which refer to debts or obligations that are due in more than a year.

What are prepaid expenses?

Unexpired or prepaid expenses are the expenses for which payments have been made, but full benefits or services have yet to be received during that period.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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