Funds Flow Statement: Determination of funds from operation
Under add back method, all the non cash expenses, non operating losses and non operation expenses are added to the back with net profit, for the purpose of determining funds from operation. Fictitious assets written off include Preliminary expenses, Discount on issue of shares/ debentures, underwriting commission, other assets written off, etc. Fictitious assets written off include Preliminary expenses, Discount on issue of shares/ debentures, underwriting commission, other assets written off, etc.
Summary
Under add back method, all the non cash expenses, non operating losses and non operation expenses are added to the back with net profit, for the purpose of determining funds from operation. Fictitious assets written off include Preliminary expenses, Discount on issue of shares/ debentures, underwriting commission, other assets written off, etc. Fictitious assets written off include Preliminary expenses, Discount on issue of shares/ debentures, underwriting commission, other assets written off, etc.
Things to Remember
- Under add back method, all the non-cash expenses, non-operating losses and non-operation expenses are added to the back with net profit, for the purpose of determining funds from operation.
- An adjusted P/L account is prepared by debiting all the non-cash expenses, non-operating losses and non-operation expenses with net profit.
- When net profit or loss is not given, P/L appropriation account or Retained earnings or Reserve and surplus or Reserve fund, whichever is given, is used. Below is the format.
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Funds Flow Statement: Determination of funds from operation
STEP 2: Determination of Funds from Operation
Determination of Funds from operation by using add back method
Under add back method, all the non-cash expenses, non-operating losses and non-operating expenses are added to the back with net profit, for the purpose of determining funds from operation.
On the other hand, all the non-operation revenues, gain, and incomes are subtracted from the net profit. Here, all the items of profit & loss account are paid in cash and business related operations are ignored. Below is the procedure for determining funds from operation under add back method:
Calculation of Funds from Operation
| Particulars | Details | Rs. |
| Net profit Add: Non-operating and non-cash expenses and losses Depreciation on fixed assets Loss on sales of assets Intangible assetswrittenoff (Goodwill, trademark, copyright, patent) Fictitious assets writtenoff Provision for taxation Premium on redemption of debentures Other non-operating expenses/ loss Less: Non-operating incomes and gain Rent, dividend, interest, etc. received Gain on sales of assets Revaluationgainon non-current asset Other non-operating incomes and gain Funds from Operation (FFO) | xxx xxx xxx xxx xxx xxx xxx | xxx xxx |
| xxx xxx xxx | xxx xxx | |
| xxx |
Fictitious assets written off include Preliminary expenses, Discount onissueof shares/ debentures, underwriting commission, other assets written off, etc.
Illustration:Consider the following Trading and Profit & Loss account.
Trading and Profit & Loss account
For the year ending 31stDecember,2015
| Particulars | Rs. | Particulars | Rs. |
| To Purchase To Wages To Gross profit To Salaries To Office expenses To Discount on issue of shares To Depreciation To Goodwill written off To Preliminary expenseswrittenoff To Loss on sale of furniture To Net profit | 2,00,000 50,000 1,00,000 | By Sales By Gross profit By Dividend received By profit on sales of plant | 3,50,000 |
| 3,50,000 | 3,50,000 | ||
| 20,000 10,000 2,000 10,000 8,000 10,000 14,000 42,000 | 1,00,000 6,000 10,000 | ||
| 1,16,000 | 1,16,000 |
Required:Funds from operation.
Solution:
Calculation of Funds from Operation
| Particulars | Details | Rs. |
| Net profit Add: Non-operating and non-cash expenses and losses Depreciation Preliminary expenseswrittenoff Goodwillwrittenoff Discount on issue of shares Loss on sale of furniture Less: Non-operating incomes and gain Dividend received Gain on sales of plant Funds from Operation (FFO) | 10,000 10,000 8,000 2,000 14,000 | 42,000 44,000 |
| 6,000 10,000 | 86,000 16,000 | |
| 70,000 |
Determination of Funds from operation by adjusted profit & loss account
An adjusted P/L account is prepared by debiting all the non-cash expenses, non-operating losses and non-operation expenses with net profit whereas, all the non-operation revenues, gain, and incomes are credited to an adjusted P/L account. Likewise, in add back method, all the P/L account items are paid in cash and any business related operations are ignored.
1. When net profit or loss is given:
Following adjusted P/L account is prepared when net profit or loss is given, excluding the items of P./L appropriation account:
Dr. Adjusted Profit & Loss Account Cr.
| Particulars | Rs. | Particulars | Rs. |
| To net profit To loss on sales of assets To intangible assets written off To depreciation on fixed assets To fictitious assets written off To provision for taxation (if non-current) To premium on redemption of debenture To other non-operating expense/losses To loss from operation (Bal. fig. uses) | xxx xxx xxx xxx xxx xxx xxx xxx xxx | By gain on sales of assets By interest received By dividend received By discount on redemption of debentures By non-operating income/gain By funds from operation (Balancing fig. sources) | xxx xxx xxx xxx xxx xxx |
| xxx | xxx |
Intangible assets – Goodwill, Patent, Trademark, and Copyright.
Fictitious assets written off include Preliminary expenses, Discount on the issue of shares/ debentures, underwriting commission, other assetswrittenoff, etc.
Illustration:Consider the following information and prepare Funds from the operation.
Trading and Profit & Loss account
For the year ending 31stDecember,2015
| Particulars | Rs. | Particulars | Rs. |
| To Purchase To Wages To Gross profit To Salaries To Office expenses To Discount on issue of shares To Depreciation To Goodwill written off To Preliminary expenseswrittenoff To Loss on sale of furniture……….. To Net profit……………………………… | 2,00,000 50,000 1,00,000 | By Sales By Gross profit By Dividend received By profit on sales of plant…… | 3,50,000 |
| 3,50,000 | 3,50,000 | ||
| 20,000 10,000 2,000 10,000 8,000 10,000 14,000 42,000 | 1,00,000 6,000 10,000 | ||
| 1,16,000 | 1,16,000 |
Solution:
Dr. Adjusted Profit & Loss Account Cr.
| Particulars | Rs. | Particulars | Rs. |
| To net profit To loss on sales of furniture To preliminary expenses written off To depreciation To goodwill written off To discount on issue of shares | 42,000 14,000 10,000 10,000 8,000 2,000 | By profit on sales of plant By dividend received By funds from operation (Balancing fig. sources) | 10,000 6,000 70,000 |
| 86,000 | 86,000 |
2. When net profit or loss is not given:
When net profit or loss is not given, P/L appropriation account or Retained earnings or Reserve and surplus or Reserve fund, whichever is given, is used. Below is the format.
Dr. Adjusted Profit & Loss Account Cr.
| Particulars | Rs. | Particulars | Rs. |
| To Balance c/d (closingbal. of P/L a/c or Retained earning) To loss on sales of assets To intangible assets written off To depreciation on fixed assets To fictitious assets written off To profit transfer to reserve & funds To provision for taxation (if non-current) To provision for dividend (if non-current) To dividend To premium on redemption of debenture To other non-operating expense/losses To transfer to reserves To loss from operation (Bal. fig. uses) | xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx | By Balance b/d (openingbal. of P/L a/c or Retained earning) By gain on sales of assets By interest received By dividend received By refund of tax By discount on redemption of debentures By non-operating income/gain By funds from operation (Balancing fig. sources) | xxx xxx xxx xxx xxx xxx xxx xxx |
| xxx | xxx |
Intangible assets – Goodwill, Patent, Trademark, and Copyright.
Fictitious assets are written off – Preliminary expenses, Discount on the issue of shares / debentures, underwriting commission, other assets writtenoff, etc.
Profit transfers – General reserve, Reserve fund and Capital reserve.
Illustration:Prepare Funds from Operation from the following financial statements.
Balance Sheet
| Liabilities | 1992 | 1993 | Assets | 1992 | 1993 |
| Share capital Creditors Debentures General reserve P/L app. a/c | 1,00,000 40,000 50,000 - 60,000 | 2,50,000 1,00,000 - 10,000 75,000 | Fixed assets, net of depreciation Debtors Stock Cash balance | 50,000 80,000 70,000 50,000 | 2,35,000 40,000 1,00,000 60,000 |
| 2,50,000 | 4,35,000 | 2,50,000 | 4,35,000 |
Dr. Profit & Loss A/C for 1992Cr.
| Particulars | Rs. | Particulars | Rs. |
| To depreciation on fixed assets To office expenses To net profit | 15,000 35,000 50,000 | By gross profit By refund of tax | 80,000 20,000 |
| 1,00,000 | 1,00,000 |
Dr. Profit & Loss Appropriation A/C for 1992Cr.
| Particulars | Rs. | Particulars | Rs. |
| To dividend paid To general reserve To Balance c/d | 25,000 10,000 75,000 | By Balance b/d By net profit b/d | 60,000 50,000 |
| 1,10,000 | 1,10,000 |
Solution:
Adjusted P&L A/C for 1992 (on the net profit basis)
Dr.Cr.
| Particulars | Rs. | Particulars | Rs. |
| To depreciation To net profit (as per P/L a/c) | 15,000 50,000 | By refund of tax By Funds from operation (bal. fig.) | 20,000 45,000 |
| 65,000 | 65,000 |
Dr. (a) Adjusted P&L Appropriation A/C for 1992Cr.
| Particulars | Rs. | Particulars | Rs. |
| To dividend paid To general reserve To depreciation To Balance c/d | 25,000 10,000 15,000 75,000 | By Balance b/d By refund of tax By Funds from operation (bal. fig.) | 60,000 20,000 45,000 |
| 1,25,000 | 1,25,000 |
Alternatively,
Dr. (b) Adjusted P&L Appropriation A/C for 1992Cr.
| Particulars | Rs. | Particulars | Rs. |
| To increase in P/L app. a/c To dividend paid To general reserve To depreciation | 15,000 25,000 10,000 15,000 | By refund of tax By Funds from operation (bal. fig.) | 20,000 45,000 |
| 65,000 | 65,000 |
References:
Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu
Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu
Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu
Lesson
Statement of Changes in Financial Position
Subject
Principles of Accounting
Grade
Grade 12
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