Page 88 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 5: Fund Flow Statement

(c) Neither sources nor applications Notes

(d) None of the above
5.4 Preparing Fund Flow Statement

The next step is to prepare the fund flow statement. The proforma of the fund fl ow statement:

Sources of Funds Uses of Funds
Funds from Business Operation Funds Lost in Operations
Non-trading Incomes Redemption of Preference Share Capital
Sale of Non-current Assets Repayment of Loans
Sale of Long-term Investments Purchase of Long-term Investments
Issue of Shares Purchase of Fixed Assets
Acceptance of Deposits Payment of Taxes
Long-term Borrowings Payment of Dividends
Decrease in Working Capital Drawings
Loss of Cash
Increase in Working Capital

Important Adjustments

1. Provision for Tax: At the time of preparation of fund flow statement, there are two

approaches to treat this item. These are:
(i) Treat it as a current liability
(ii) Treat it as an appropriation of profi t

As per first approach, the provision for taxation is assumed as a current liability. Therefore,
it must be shown in the schedule of working capital changes. All the information relating
taxation should be ignored as in the case of other current liabilities. In this approach, the
provision, for taxation is neither used in the fund from operation nor in the uses of fund in
the Fund Flow Statement as payment of tax liability.
Under second approach, the provision for taxation is treated as an appropriation of profi t.
Provision for taxation is not shown in the Schedule of Working Capital Changes. As other
appropriations it is added back in the net profits to calculate the Fund from Operation. To

find the payment of tax of the year provision for taxation account is prepared. Payment of

the tax of the year is disclosed in the Uses of Fund in the Fund Flow Statement. Provision
for taxation a/c is prepared as hereunder:
Provision for Taxation

` `
To Cash (Payment of tax) - By balance b/d -
(Balancing figure) By P & L a/c (current year’s provision) -

To balance c/d -
– –

However, it is advised to the students to adopt the first approach. This approach is more
convenient for the students. Provision for taxation is also disclosed under the heading of
current liabilities and provisions in the Balance Sheet of the Company as per the Indian
Companies Act. This approach is adopted in the book also.

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