Example
Consider the Income Statement of Company X given as under by internal staff.
Consider the Income Statement of Company X given as under by internal staff.
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| Income Statement of Company X for Year Ending 31.3.1995 |
Work out the operational flow (i.e. funds flow on WC basis), by each of the three methods.
Note : Item 2(b), viz. operating cash expenses, includes (i) wages and salaries.(ii) manufacturing expenses, (iii) advertising expenses, (iv) insurance expenses, and (v) office expenses. These could as well have been given separately individually. It may include any other operating expenses (like consultancies and incidental charging of drill bits), any interest charges payable in connection with the above items, as well as any taxes payable in these connections.
Solution
Method of Adjustment to Working Result
Method of Recasting P & L A/c (by Considering Retained Earnings) Notes :
(a) Rather than compute as in the previous two methods, the
computations are done here better by the two-column format - Dr. on left side for outgoings and Cr. on right side for receipts or incomes.However, for aiding in clearer understanding, the entries are put in sequential lines, rather than closely under each column.
(b) Balance bld and Balance old are noted as per the Question.
(c) Doubtful debts are provided for as they affect retained earnings.
(d) Notional profit on revaluation of stock is only notional and does not add to capital.
(e)Since provision for tax is also made, any balancing figure must provide for tax also; and hence, will be for gross operational results.This balancing is shown by difference between provisional totals on either side; these provisional totals are meant for your help and need not be made and recordedlentered in working out any question.
Note : Item 2(b), viz. operating cash expenses, includes (i) wages and salaries.(ii) manufacturing expenses, (iii) advertising expenses, (iv) insurance expenses, and (v) office expenses. These could as well have been given separately individually. It may include any other operating expenses (like consultancies and incidental charging of drill bits), any interest charges payable in connection with the above items, as well as any taxes payable in these connections.
Solution
Method of Adjustment to Working Result
Method of Recasting P & L A/c (by Considering Retained Earnings) Notes :
(a) Rather than compute as in the previous two methods, the
computations are done here better by the two-column format - Dr. on left side for outgoings and Cr. on right side for receipts or incomes.However, for aiding in clearer understanding, the entries are put in sequential lines, rather than closely under each column.
(b) Balance bld and Balance old are noted as per the Question.
(c) Doubtful debts are provided for as they affect retained earnings.
(d) Notional profit on revaluation of stock is only notional and does not add to capital.
(e)Since provision for tax is also made, any balancing figure must provide for tax also; and hence, will be for gross operational results.This balancing is shown by difference between provisional totals on either side; these provisional totals are meant for your help and need not be made and recordedlentered in working out any question.
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