 Dear students, let us study today funds flow statement. We will have a brief recap of funds flow and then we will go into more detail analysis of financial statements. Last few sessions we have been studying cash flow and funds flow statement. Do you remember now what is meant by cash flow statement? This is the statement which makes a summary of cash inflows and outflows which have been categorized specifically as operating flows, investing flows and financing flows. Same way, we have also seen what is the fund flow statement. Fund flow statement is in a way developed prior to cash flow statements. Here, we give a list of from where the funds have come and from where the funds have gone. But, we do not specifically categorize the items into investing or financing. They are simply listed as inflows on one side and outflows on other side. In fund flow statement, there is one important item funds from operations which shows the profit which is realized and which gives inflow to the business. And usually there is an item on application or use side that is increase in the working capital because as the funds are generated from business, some fund gets locked in working capital. That is what is shown in fund flow statement. Let us have a look at PPT for few moments and then we will solve the problem which we are solving in the last session. So, we have seen what is the fund flow statement. Let us have a look at it once again. This is what is a calculation of funds from operation. Here, we calculate the net profit, add non-cash expenses, depreciation, adjust for non-operating item and the figure which we get is funds from operations. To this, we adjust for, we also calculate the changes in working capital and this is the format of the final statement where we show inflows on one side. You can see what are the inflows. One of the most important inflows is as I have just now told you is funds from operations. Then, there are inflows by selling fixed assets, there are inflows by selling investments or by issue of shares or debentures and so on. Same way, outflows are listed. Here, major outflow is increase in the working capital. Sometimes, if there is a loss, that will be an outflow and then there will be purchases of assets. There could be redemption of shares, dividend paid. All these are outflows. We had seen the concepts of fund flow statement. If you remember, last time, we were solving a problem on calculation of fund flow for reliance industries. Have a look at it. I had told you that, try to solve it yourself. So, this is where we had started. We were given the balance sheet for two years and some extract of P and L account also for two years. From this, we were to make fund flow statement. So, how do you start? How will you make fund flow statement from this much of info? You are right. First, what we have to do is, find the difference between the figures, because that is something which tells you the flow. So, any increase or decrease in the assets and liabilities indirectly shows or hints that there is some flow. So, we calculate the difference. Then, we identify those differences as inflows or outflows and from that, we try to make the final statement. Before making the final statement of fund flow, we have to calculate funds from operations and we also have to calculate the changes in the working capital. Let us see what we had done in the last session. So, we were here, if you remember. First, we calculated the difference in this column. So, all the figures were simply subtracted, I mean 10 figures were subtracted 9 and 10. So, you get the difference. Then, we have identified the difference as inflow or outflow. So, let us have a brief recap at it. So, equity share capital, you can see there is an increase in the equity capital that represents inflow. Why does it represent inflow? Anyone can tell. So, what happens is the capital has increased. So, probably it has come by issue of shares for cash. So, it is an inflow. Of course, there is a possibility that it might have also been because of bonus shares. In that case, it is not an inflow, but right now no such information is provided to us. So, we will take it as an inflow. Next is reserves. Reserves, you can see there is a decrease in the reserve. This is FFO. So, it has come. We have taken it as fund from operations because it represents the changes. Then we have gone into secured loan. There is an increase in the secured loan. It is an inflow. Decrease, it is an outflow. On asset side or on application side, if you see there is a gross block, there is an increase in the gross block that represents the purchase of fixed assets. So, it is an outflow. Accumulated depreciation, this is charged or adjusted from profit and loss account. So, it represents, it is an item of fund flow, FFO, sorry fund from operations. So, we have marked it as FFO and so on. The items which were not to be considered have been marked as XX. For example, net block. Then some items like inventories, debtors, cash, they are marked as W cap because they represent the changes in working capital. So, if you remember for all the items, we have marked them as inflows, outflows, working capital, FFO and so on. In case of profit and loss account items, the difference has no relevance. We have to only look at the current year figures. In our case, March 10 is the latest figures. So, we will look at those figures and identify whether they will have any impact on the fund flow statement. So, you can see first item is sale turnover. It is not to be considered for fund flow statement. So, we marked it as XX, then XI is duty XX, net sales XS. Other income is marked as I because it represents an inflow and it will also have to be adjusted in FFO. Same way, all expenses are marked XX except interest which is an outflow and it will also need to be adjusted in FFO. So, this is where we were. Do you remember? Now, from this let us try to go to the next level and try to prepare fund flow statement. So, I will try to make a copy of the sheet and now let us work on it. So, what will be the first step? We need to make two working nodes, one for calculation of FFO, other for calculation of working capital. So, let us make those nodes first. Once they are ready, we will go for final statement or the fund flow statement. So, let us make a working node first which is on calculation of working capital. I am requesting that you also try to solve with me, so that you really understand exactly what I am doing. So, first we will make it for FFO, full form is funds from operations. So, here we are trying to start with profit and make relevant adjustments to know what was the money coming in from operations. Here you can see the change in the reserve, we take it as a proxy for profit. So, the amount which is given here is in negative. So, same amount we will take as changes in the reserves. Now, look for FFO items as we have marked. So, first one this one we have already taken care now. The next is accumulated depreciation, will it be added or deducted to reserves? Answer is it will be added, why it is added anyone is able to remember? We have discussed it at the time of making cash flow and also at the time of making fund flow. What happens is depreciation is charged as an expense, but there is no outflow for it. So, when we are calculating the fund from operations or cash from operations it needs to be added. So, 13319 that is 13319 represents the amount of depreciation provided. So, we have accounted for this also. Now, the next one you look for all the FFO items, next item you can see here other income. Now, other income this is something which is added to for calculation of profit, but it comes from it is a separately to be shown as a inflow item. So, we should not include it in FFO that is why we will reduce it the amount for the current year is 3088. So, I will try to adjust that amount. So, other income now in this case it should be deducted and not added. So, I will specifically say less other income. So, that it is more clear to you again go back go down you will realize that interest one more item. Now, interest is a outflow specifically to be shown, but it also appears in P and L that is why we will reduce it from P and L sorry we will add it. So, we will say add interest this represents interest paid amount is 2000. So, if I try to calculate now fund from operations you can see here I will add the depreciation minus other income plus interest paid. So, 4259 represents the funds from operations as we have calculated. Now, next calculation we have to do is for changes in working capital. Now, naturally you will look for items which are marked as W cap. So, take a look at the items which have been marked as working capital waiter movement first let us mark this FFO. So, amongst the working capital items you will see starting from inventory we have inventory debtors and cash these 3 items there is a change in the working capital. So, let us take these 3 items this represents the change then again there is a item loans and advances which is one of the current assets. Please do not confuse it with the loan received that is a source these loans and advances are working capital item they represent short term advances given. So, it is a working capital item now we have 2 items on liabilities also current liabilities and provisions. So, total changes in the current assets. So, you will realize that there is no increase there is a decrease of current asset by 6 7 6 6 and there is a increase in the liability by 5 9 0 8 change in the working capital I am trying to find. So, it will be increase in the working capital minus increase in the sorry increase in the current asset minus increase in the current liability. So, I get a figure of minus 12000 because it is minus 6 minus 5. So, this is the overall you can see is a decrease in working capital for more clarity I am specifically writing that since the figure is in negative it represents the decrease in the working capital. So, now we can mark all these W cap items because we have recorded them fine take a look there is no other item left now. Now, we have to go to the main statement where in we will record all the inflows and outflows as given and we will also take the items which are taken from working note that is funds from operations and decrease in the working capital. So, now, let us try to make the final statement that is the statement of fund flow keep in mind that these statements are for a particular year in this case it is for March 0 10. So, it is for year ended 31 0 3 2 0 1 0 now we will list out all the inflows first. So, take a look at the statement there are number of items where inflows are given. So, we will take those items first. So, first inflow is share capital. So, equity share capital has increased by 1696. Now, this increase 1697 this is an inflow because probably there is an issue of share it is also possible that there is some bonus share, but since information is not available to us right now we will just go for recording it as an inflow. Now, the next item take a look at again the main sheet you will realize that the secured loans have gone up. So, that is an inflow to us. So, we will record secured loans. So, it is 972 next is. So, we have considered 2 inflows so far this outflow we will take later next inflow you can see is investment in case of investment what has happened is investments are actually gone down. Take a look at figure from 20000 they have reduced to 19000. So, there is a sale of investment. So, I would like to specifically state that there is a sale of investment in equity shares also you may specify that it is equity shares issued and secured loans taken because new loans were taken in the year. Then there is a sale of investment which is to the tune of 1013 next inflow you can see. So, all the inflows in the main statement are over I think I hope you are getting it clearly there is one item other income we have marked it as IFFO that is to show that inflow. So, there is a inflow to the tune of 3088 that is because of other income. Can you imagine what does this other income likely to include it is likely to include dividend received income or interest received from investments. So, it is not a inflow from operations it is a separate item that is why it is shown separately under the inflows as other income 3088. Now, apart from this fund from operations 4259 this is also one of the important inflows. So, 4259 is an inflow which we call as FFO or fund from operations. Then there is a decrease in working capital this also represents an inflow. Most of the cases we observe that as business increases the working capital requirement tends to increase, but in case of this company in case of reliance you can see that for March 0 10 there was a decrease in working capital. So, it releases the funds for day to day operations that is why we have marked it as inflow. So, it is 12685 we have calculated it we got the figure as minus 12000. So, we concluded that it is a decrease and we have shown it as an inflow. So, total inflows we have calculated. Now, let us try to calculate the total outflows. Now, for outflows you again go back to the main statement take a look at various items as are given. So, first one you can see unsecured loan. So, there is a decrease of unsecured loan from 63 to 50. So, company must have paid for repayment of unsecured loan. So, I will take it as an outflow. So, you can say unsecured loan repaid for more clarity. Next item of outflow is gross block as we have already discussed there is a increase in the gross block which shows purchase of fixed assets for the company. So, I will mark it as purchase of fixed assets. Now, next if you see now there is no item left directly from a P and L account the last item which you can see is interest. This represents the interest paid. So, it is an outflow the amount we will take the current year figure which is 2000. So, we have marked 3 items now take total and verify is it matching. So, you can see it is matching there is a minor difference that is because of error in rounding off. So, we will ignore it, but total of inflows and outflows comes to 23715. Is it clear to everyone please have a look at balance sheet again. So, this is we were we were given only the data for 2 years we have first calculated differences then we have identified the items as inflows outflows and then we have made 2 working notes. One was on fund from operation second was change in working capital and then we have made the final statement or statement of fund flow. I hope it is clear to everyone keep in mind that whenever you are doing profit and loss items actually there are 2 adjustments required and in case of balance sheet item it has only one effect. So, we will stop here for this particular topic now we are moving to the next topic that is on analysis of financial statement. So, what we have done so far is we have covered a topic on balance sheet. So, that you understand the basic figures then we have gone into profit and loss account next level we have also seen the recording part as to how the profit and loss account or balance sheet is prepared. So, before that you need to know how the entries are recorded in the transactions that we have seen. Next we have also seen how do you make cash flow and fund flow statement. Now, we will try to go into interpretation of financial statements before going into that first let us see how to interpret a cash flow statement or fund flow statement. Now, you have this fund flow statement in front of you which we have just solved. So, what do you see from it how do you interpret it. So, as you can clearly see during the year company has the biggest amount the available with the company was from decrease of working capital. So, company has taken a decision to reduce its day to day assets especially its cash balance has been significantly reduced you can look at the figures in the working capital you can see the cash balance. So, reliance was flush with money lot of cash was available. So, they have reduced their cash balance substantially and that is why there is a decrease in working capital of 12000. There was also some money received from operations and money received from investment to the tune of 4000 and 3000 that gives us explanation as to from where the funds came. Now, look at the outflows the biggest outflow was repayment of unsecured loan which is to the tune of 12000. So, perhaps companies try to reduce its interest burden by repaying the unsecured loan. Secondly, company is also improving its financial position because it is debt equity ratio will improve the loans totally taken by the company have gone down. We are going to look at the ratios today, but I am just explaining as to what will be the impact of this repayment of 12000 on the financial position of the company. You will also see that 9000 crores was used for purchase of fixed assets which is required investment for expansion and also for maintaining the current machinery conditions maintaining not in a sense of repair, but lot of old machines would have been worn out. So, company has to replace them and also add few more items in plant and machinery or other current assets. So, that is 9000 and interest paid is of course, 2000. So, this is how you can understand how the fund flow statement is made. I think let us make one more fund flow statement which will make the things more clear to you. So, please look at the balance sheet of general motors as you know one of the biggest corporates in the world one of the largest company in US. So, I have tried to show you the balance sheet for two quarters March 31st and June 30th of 2011. Then we have also calculated the difference between the two. Using this data now we have to calculate or prepare fund flow statement. Now, how to proceed? Just give me a hint as to what is a way now for us to go ahead with this. Anyone is able to recollect how shall we go ahead? You are right these are the figures in dollars. First what we have to do is we have to identify the items into inflows, outflows, working capital FFO and so on. Once they are identified we will try to prepare next statements. So, you can also see the format as per the US gap which is much different than the format of as per the Indian gap. So, here under current assets the first item shown is cash and cash equivalence. You can see there is a difference of 504. We have been asked to make a fund flow statement. So, how to go ahead? What will be the first step? You make a fund flow statement. Look at cash and cash equivalent. There is a decrease minus 504. We are comparing June quarter with the March quarter. So, this is a working capital item. So, I will mark it as W cap. Next is short term investment. Short term investment you can see there is a major increase from 8000. It has become 12000. So, there is a increase of 36000. Again it is an item of working capital. Net receivables, there is a decrease in net receivables. Again it is an item of working capital. Net receivables or debtors represents the money which is recoverable from the customers. Next item given is inventories. You can see there is a small change in inventory, small increase in the inventory, but it is a working capital item. Other current assets again a working capital item. So, total current assets is given. We will not consider this item. Next is long term investment. Now, long term investment you can see there is a increase in the long term investment. Under what head we will put it? It is not a working capital item. It is not going to be an inflow. It represents the outflow because company must have invested some money in the securities or in some other markets. That is why long term investment has increased. Next is property, plant and investment. Again you can see there is a increase. So, we will mark it as outflow. Next item is good will. Now, this is a very important item. You can see there is a small increase in the good will. Again it is an outflow. As per US gap good will is shown as a separate item. When we saw the balance sheet of reliance it was not shown as a separate item. In this case it is a separate item and there is a outflow. So, we will mark it. There is a increase. So, we have marked it as an outflow. Next is intangible assets. You will see there is a decrease in the intangible assets. So, how should I put it? Inflow, outflow, where will it come? This is slightly a tricky item. You may feel that decrease means it is an inflow. We might have sold the assets. It could have been true if it would have been tangible assets. In this case what has happened is intangible assets represents items like software, patents which are essentially written off. So, decrease in the intangible assets is due to writing off of those assets not because of sale or any other way. So, writing off is going to affect the fund from operations. So, we have to mark it as FFO. Next you can see other assets. Again there is a small increase. Increase is because of purchase. So, we will mark it as outflow. Then total assets we will ignore. Now, let us go to liability side. We have finished asset side. Maybe you can have a look at asset side once again. Now, let us go to liability side. Liability again it starts with current liabilities. The first item is accounts payable. So, how will you mark it as? For us it is simple. It is a working capital item. So, we will mark it as working capital. Next is short or current long term liabilities. Again it is a working capital item because either they are short term liabilities or even if they are long term liabilities only the current portion of long term liabilities. So, it is a working capital item. There are no other current liabilities. Total we will just mark it as XX. Next is long term debt. You can see there is a marginal increase in the long term debt. So, it should be marked as inflow or outflow. There is an increase in the loan. So, company has taken new loans. So, it is an inflow for the company. Other liabilities again they are long term in nature because we are under other liabilities not under the current liabilities. So, there is a decrease in the liability which represents an outflow. Why it is an outflow? Company must have paid cash to decrease its liabilities. So, it is an outflow. So, total we have to ignore. So, now we have tried to mark all items from balance sheet. Now, let us go down and balance sheetness assets and liabilities. Now, we are looking at stockholders equity. Again note that in case of US gap balance sheets, it is given separately. In Indian balance sheet, we only show assets and liabilities. Here they are showing assets liabilities and equity separately. First item prefers stock or preference shares. There is no change. Common stock or equity shares again there is no change. Retain earnings. You can see there is a significant increase in the retained earnings. It represents inflow or outflow. Actually, none of them it represents the profit earned and accumulated. So, we are going to mark it as FFO. Next, you can see is capital surplus. Now, you will note that the capital surplus has increased. Now, we are not given exactly the reason why capital surplus has increased. It could be because of sale of assets and the profit earned or it could be because of shares issued at premium. In this case, you can see that there is no issue of shares. So, capital surplus is probably the reason it has happened because of sale of assets. You have to also look at asset side whether there was any sale. We do not see any major sale of asset. In fact, the properties have increased. So, there is a purchase of asset. So, we assume that it has because of transfer of money from revenue or day to day surpluses to capital surpluses. So, we will mark it as FFO. Of course, this is because of our assumption. Next is other stockholder equity. Again, there is a small increase. It represents inflows because money should have come from something. So, we will mark it as inflow. Then, total we can just mark it as XX net intangible assets also are not important for making fund flow statement. So, we are marking it as XS. Now, let us go to revenue statement or PNL items. The first item is total revenue. How will we mark it? Total revenue. Is it an inflow or outflow? It is neither inflow nor outflow because we are going to separately consider the profits. So, we will not consider revenues. Next is cost of revenue. Again, not to be considered. Gross profit. Again, we have to ignore gross profit. R and D costs are anyway not given. Selling and general expenses, you will find that there is a decrease, but decrease is not important. In fact, we are not going to consider this item at all. They have also mentioned some non-recurring expenses. We will not consider total operating expenses. We need not consider interest expense. Now, this we need to consider because interest is regarded as separately as an outflow and it also has an impact on profits. So, we will mark it as O and FFO. All revenue statement PNL items are going to have two effects in the fund flow statement. So, we are marked as O and also as FFO. So, take a look now. We have marked all the items. I hope it is clear to you why we have marked those items like that. Now, using this data, we have to make fund flow statement. Before that, we need to make two working nodes. Which are those two working nodes? First working node is for preparation of changes in working capital, calculation of changes in working capital. Next is related to calculation of FFO. Now, let us look at changes, statement of changes in working capital. So, all the items which are marked as W cap, they will go into this statement. We will start first with current assets. So, this is the information as is given. So, you can see that cash has we will just shift this side. Cash has actually gone down. Short term loans have increased etc. So, you see that there is a net position of we will just take the total. So, this is a total increase in the current assets. Now, take a look at current liabilities. So, in case of current liabilities also there is a increase. So, you can see here once again that all the current both the current liabilities have actually gone up. So, there is a increase of current assets to the tune of 3035000 and there is a increase in the current liabilities as well. So, we will calculate the increase in working capital. So, this is a increase in C A minus increase in C L. So, net increase is this amount. Now, we will try to calculate the second working node that is on calculation of F F O or funds from operations. Now, again go back to the balance sheet look at the items which were marked as F F O. Before that let us specifically mark the current assets item as done. Current assets and current liabilities. Now, working capital you will see that sorry F F O you will see that the first item is on intangible assets. So, intangible assets which have gone down must have been because of write off. If you go down you will see one item on retained earnings that represents the profits on. So, let us take that first. So, increase in retained earnings is one item which we have taken then there is a increase in the capital surpluses. Let us take that as well. So, these two items of F F O are over then we have one more item on intangible assets which have been written off. Now, should this item be added or deducted intangible assets have been written off I will specifically write that. Try to guess add or less you are right this should be added because it is like depreciation which is a non cash expense it is for writing off of intangible assets. So, they will be added. Next F F O item you can see you can have a look at the whole balance sheet. Now, any F F O item has remaining you can see in the end there is a item interest expense you need not see old figures. Now, there is nothing like a difference you will just look at the current item of current interest in this case will it be added or deducted interest expense you are right it is also added. So, interest as and when paid has to must have been reduced from profits. Now, we are adding it back because we are going to separately show interest expense. So, we will mark interest also as recorded. So, for funds from operations there is a increase in return earnings increase in capital surplus intangible assets written off and interest expense all of them will be added. So, this is a total F F O which is an inflow. Now, based on this information let us try to make the main statement or the statement of fund flow. Keep in mind this was a statement for a quarter these are not fund flow and cash flow are not for not a statement like balance sheet as on a date their statements for a particular quarter. So, we will record them for quarter ended 362012. Now, we need to record the inflows and outflows. So, one of the important inflows is funds from operations. So, let us record it first. Now, look at the balance items which are given in the balance sheet and which are still unrecorded. So, we see all these outflow outflow outflow there is one item long term debt there is a inflow. So, what has happened is new long term debt is taken that is why company has received money I have marked it that way. You can look at the item for more clarity long term debt has increased from 93 to 9 to 95 7 1. So, there is a inflow same way there is a inflow in others stockholder equity. So, might be there is some small issue of share or there might have been conversion of ESOPs. So, they also represent inflows. Now, you will see all inflows are over. Now, try to look at the outflows mainly outflows are from assets because of purchase of new assets. So, let us all record them together I hope you are with me. We have calculated we have already marked these items as outflow. Now, we are transferring it to the main statement. So, I will mark it here as well. Now, go down you will see one more outflow from other liabilities because other liabilities have been paid off they have been reduced. So, that cost some outflow, but this is not a negative item. So, this outflow also we have considered other liabilities. Now, if you see all the balance sheet items are accounted, but we should also account for interest expense because it is also interest paid only the current year figure is relevant that is 155. So, we have recorded almost all the items. Now, let us take the total. So, you will see that total inflows are more than outflows. So, you must have excluded some of the items take a look at balance sheet once again what have we excluded just try to guess. Actually, we have not considered working capital we have included all other items we have not considered working capital. So, where will it go we have calculated the statement of working capital there is a increase in working capital that also we are aware. So, where should it go increase when happens it represents an outflow. So, it should be considered as a outflow. So, I will record it as a outflow. So, now you can see it is exactly matching keep in mind that increase in the working capital is one of the important outflows and FFO or fund from operation is one of the important inflows. So, here the statement is ready now try to look at the statement carefully. I hope you understood the process of making. So, now you will realize that out of 3722 main amount 3403 is fund from operations and as far as the outflows are considered the biggest is new purchase of plant and also to an extent increase in the working capital they have also paid off some old liabilities. This is how fund flow statement gives you an idea as to inflows and outflows. So, we stop here and in the next session we will look at more details of the analysis of statements in this session we have covered mainly preparation of fund flow statement. Where in what we do is we find the difference mark the items as inflow outflow, mark the items as working capital, mark the items as FFO. Then we make two working notes for working capital and for fronts from operations and then all the inflows outflows and these two items need to be taken in the main statement ensure that the total of inflows match with total of outflow then you have considered all the effects correctly. Thank you so much we will meet in the next session.