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Preparation of Schedule of Changes in Working Capital

The information relating to the changes in current natured accounts between two periods of time presented in the form of a statement is what we call the schedule/statement of changes in working capital.

Preparing the schedule/statement of changes in working capital requires us to present the information relating to the current area of the balance sheets pertaining to the two periods in the format given below and deriving and presenting the changes within them.

In the preparation of funds flow statement, the first step is to find out the net amount of increase or decrease of working capital, as increase in net working capital is a use of funds and decrease in net working capital is a source. Since net working capital is excess of current assets over current liabilities, the increase or decrease in the net working capital can be found out by comparing the current assets and current liabilities contained in the balance sheets of two following dates. For this purpose, a statement is prepared which is called statement or schedule of changes in net working capital. This statement helps to identify the change in position of the working capital. While preparing the statement of changes in working capital, the following points are taken into account.

* Increase in current assets, increase in net working capital

* Decrease in current assets, decrease in net working capital

* Increase in current liabilities, decrease in net working capital

* Decrease in current liabilities, increase in net working capital

The statement or schedule of changes in net working capital can be prepared by using one of the following forms.

  1. Using only current account

The statement or schedule of changes in net working capital can be prepared by using only current account,viz. account of current assets and current liabilities. While preparing the statement, the current assets and current liabilities of the previous year are compared with those of the current year and changes (increase or decrease) therein are determined. If the total of increase is more than that of decrease, there is an increase in net working capital, or vice verse.

  1. Using both current and non-current accounts

The statement or schedule of changes in net working capital can also be prepared by using both current as well as non-current accounts. Current account is the account of current assets and current liabilities and non-current account of non-current assets and non-current liabilities and owner’s equity. Increase in an item of current assets or decrease in an item of current liabilities from previous year to this year is debited, while increase in an item of current liabilities or decrease in an item of current assets is credited to current account. On other hand, increase in an item of non-current assets or decrease in an item of non-current liabilities from the previous year to this year is debited, while increase in an item of non-current liabilities and owner’s equity and decrease in an item of non-current assets is credited to non-current account.

The preparation of statement of changes in networking capital under this method is advantageous as compared to the previous method as it is easy to prepare funds flow statement there from.

Liabilities 2004 2005 Assets 2004 2005
Share capital 150000 180000 Land and building 85000 85000
Profit and loss a/c Loans 35000 42000 Plant and machinery 54000 70000
Loans 2000 15000 stock 30500 50000
Creditors 17000 23000 Debtors 25500 45000
Bills payable 3000 1000 Bills receivable 5000 2000
Cash 7000 9000
207000 261000 207000 261000

Solution

The solution is as follows:

                    Working capital= current assets – current liabilities

Changes in working capital

Particulars 2004 (Rs.) 2005 (Rs.) Incharge (Rs.) Decharge (Rs.)
Current Assets
Stock 30500 50000 19500
Debtors 25500 45000 19500
Bills Receivable 5000 1000 2000
Cash 7000 9000 2000
Total (X) 68000 106000
Current liabilities
Creditors 17000 23000 6000
Bills payable 3000 1000 2000
Total (Y) 20000 24000 43000 8000
X-Y 48000 82000 35000
Increase in W.C. 34000 34000 43000 43000

Funds Flow Statement

Source Rs.

Application

Rs.
Issued share capital 30000 Purchase of plant and machinery 16000
Loan 13000 Increase in working capital 34000
Funds from operations 7000
50000 50000

Funds from operations = 42000-35000 = 7000 (profit and loss a/c)

Increase in working capital = 82000-48000 = 34000

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