Learning Materials For Accounting, Management , Finance And Economics.

Thursday, April 29, 2010

Concept And Meaning Of Store Routing

What Is Store Routing ?

The process set by a manufacturing company to control materials is called store routing. Store routing consists of all the process involved in proper purchasing, storing, and issuing of materials to the concerned departments. The store routing can be summarized as follows.

1. Purchasing and receiving of materials

* Request for purchase of materials
* Inquiry and tender quotation forms issued to potential suppliers
* Selecting suitable supplier
* Placing order

2. Storing of materials

* Classification and codification of materials
* Keeping records of materials in Bin cards, store ledger and so on.

3. Issuing of materials

* Requisition form
* Pricing of materials issued

Essentials Of Materials Control

The main essentials of materials control are as follows.

* There should be a proper co-operation and co-ordination among the departments dealing with material purchasing, receiving, testing, storing, production planning and accounting.

* There should be a centralized purchasing department.

* There should be a proper perpetual inventory system, which reflects physical movement of stocks and their current balance.

* There should be a good method of classification and codification of materials.

* There should be a standard forms for requisitions, order, issue, return and transfer of materials.

* There should be carefully planned materials storage facilities to avoid losses from damage, evaporation, pilferage, theft and deterioration.

* Materials and supply should be properly stored.

* Stock of different levels should be fixed to ensure that there is no under and over-stocking of materials.

* The quantity of each type of materials to be ordered should be fixed to reduce the ordering and carrying costs.

* There should be an effective system of internal check to ensure that all transactions relating to materials are automatically checked.

* Receiving and inspecting procedures must be fixed in advance.

Saturday, April 24, 2010

Objectives Of Materials Control

Material controls basically aims at efficient purchase, storage and consumption of materials. The following are the major objectives of materials control.

1. To ensure better quality of materials at right quantity at right time for efficient and uninterrupted production of output.

2. To maintain the cost of materials at the minimum level.

3. To purchase materials at a reasonable price.

4. To minimize the handling cost and time in storing and using the materials.

5. To provide information to the management about raw materials, their costs and availability.

6. To protect materials against loss by fire, theft and leakage.

7. To avoid obsolescence of materials by adopting an appropriate method of materials issue.

Needs And Importance Of Materials Control

Materials control is necessary for making efficient purchase, storing and consumption of materials. Every manufacturing company requires to maintain a materials control system that facilitates efficient purchase, storage and use of the materials. The needs for materials control system in the company arise due to the following reasons.

1. Economical Purchase

Every manufacturing company should purchase high quality materials at the most economical price. An efficient materials control system ensures how better quality materials can be bought at the economical price, which will finally help reduce the total cost of the production.

2. Minimum Investment

The over-stocking of materials is undesirable to the company, as it raises the cost of production. Therefore, an efficient materials control system helps to avoid over-stocking of materials and thus keeps the investment in materials to minimum.

3. Minimum Wastage

An efficient materials control system helps to carefully handle the materials to and from store houses and factory by trained and efficient store keepers and workers. With the help of an efficient materials control system, therefore , the wastage and losses of materials by fire, theft, leakage and so on can be kept at minimum.

4.Balance On Hand

An efficient materials control system is one which always provides the ready balance of materials on hand in terms of their quantity and value. The perpetual system of inventory control always shows the physical movement of stocks of materials and their current balance in terms of quantity and value.

5. Source Of Information

A proper system of recording materials is a great source of information of materials which helps in the preparation of materials purchasing and production plans.

Concept And Meaning Of Materials control

Material Control

Materials control can be defined as a systematic control over purchasing, storing and consumption of materials. Materials control helps to maintain a regular and timely supply of materials by avoiding over and under-stocking. Materials control ensures that the right quality and quantity of materials is available to the company at the right time. Materials control helps to reduce the losses and wastage of materials by maintaining their efficient purchase, storage and use or consumption in the factory. The importance of materials control lies in its role in reducing the cost of production and increasing the profitability of the company.

Types Of Materials

Manufacturing a product needs input of raw materials. Raw materials are main component of the product. There are two types of materials; direct materials and indirect materials.

1. Direct Materials

The materials required for producing a product are called direct materials. Direct materials are also known as raw materials or input materials. Direct raw materials constitute the main component or part of a finished product. It is identified in terms of cost per unit of output. Wood for furniture industry, sugarcane for sugar mills. textile for garment industry are some of the examples of direct materials.

2. Indirect Materials

The materials that can not be form as the main part of a finished product are called indirect materials. Therefore, such materials can not be easily identified with the product. Nails used in furniture industry and threads used in garment industry are some example of indirect materials.

Concept And Meaning Of Material

A manufacturing company incurs different types of costs to produce a unit of output.Such costs includes material costs, labor costs and other costs.Among them, material costs are important because in many manufacturing companies such costs are greater than all other costs combined.

Material is one of the most important elements of production. The term 'Material' refers to raw material used for production, sub-assemblies and fabricated parts. Materials include components, consumable stores, maintenance, spare parts and tools. They are used in manufacturing industries in their fundamental forms and they constitute a part of the physical form of product. Wool, cotton, glass, sugarcane, rubber are the some examples of materials. The cost of all such materials constitute part of the cost of jobs, operations, products or service for which they are utilized. Materials represents nearly 65-70 percent of the costs of production in most manufacturing firms.

Thursday, April 22, 2010

Concept Of Cash Flow From Financing Activities And Its Determination

Financing activities are concerned with cash collection by issuing shares and debentures, raising long-term loan and so on. It also involves cash outflows in terms of redemption of debentures and preference shares, repurchase of shares, repayment of long-term loan and payment of cash dividend.The specimen showing the determination of cash flow from financing activities are as follows.






Particulars...............................................................Amount

Issue of equity shares............................................................xxx
Increase in share premium...................................................xxx
Issue of preference share.......................................................xxx
Issue of debentures.................................................................xxx
Long-term loan obtained........................................................xxx
Repurchase of shares..............................................................(xxx)
Redemption of preference share...........................................(xxx)
Redemption of debentures.....................................................(xxx)
Repayment of long-term loan................................................(xxx)
Payment of cash dividend........................................................(xxx)

Cash from financing activities......................................(xxx)

Cash Flow From Investing Activities

Investing activities refer to those activities which are concern with acquisition or sales of long-term assets or investment.Cash inflows from investing activities include the cash received from sales of fixed assets as well as investment and cash outflows include cash paid for the purchase of fixed assets and investment made.The specimen showing the determination of cash flow from investing activities are as follows.





Particulars                                                                    Amount

Purchase of plant and equipment...................................(xxx)
Sale of plant and equipment............................................xxx
Purchase of furniture.......................................................(xxx)
Sale of furniture.................................................................xxx
Purchase of land and building...........................................(xxx)
Sale of land and building.....................................................xxx
Purchase of other fixed assets.............................................(xxx)
Sale of other fixed assets......................................................xxx
Long-term investment made................................................(xxx)
Sale of long-term investment................................................xxx

Cash flow from investing activities....................................(xxx)

Friday, April 16, 2010

Concept Of Cash Flow From Operaring Activities And Its Determination And Specimen

Operating activities refer to day to day revenue generating activities of a firm. These activities are considered to be the major sources of internally generated cash. Cash inflows from operating activities include the cash from sale and collection from debtors. Cash outflows for operating activities include cash purchase, payment to suppliers, payment for other operating expenses, payment for interest and taxes. Cash flow from operating activities could be determined by using two methods.

1. Cash flow from operating activities under direct method

Under direct method, only those items from income statement are selected that result into actual flow of cash. So non cash expenses such as depreciation and amortized amount appeared in income statement are ignored. The changes in some components of current assets and current liabilities except cash balance are also incorporated that result into cash inflows and outflows. This method classifies cash flows from operating activities into five categories.
* Cash sales and collection from debtors
* Cash purchase and payment to suppliers
* Payment to employees and other operating expenses
* Payment for interest and taxes
* Cash from extra-ordinary activities

Alternatively, however, marketable securities and short-term investment may also be categorized as cash flows linked with investing activities instead of cash flows from operating activities .Unlike that bank overdraft and notes payable may be treated as cash flows from financing activities. Such options are available since those are non-regular activities of every firms.

The following specimen shows the calculation of cash flow from operating activities under direct method.
Cash Flows From Operating Activities
For The Year Ended ................

Particulars..........................................................................................Amount
A. Cash sales and collection from debtors.......................................XXXX
B. Cash purchase and payment to suppliers...................................XXXX
C. Payment to employees and other expenses...............................XXXX
D. Payment for interest and taxes....................................................XXXX
E. Cash flows from extra-ordinary activities...................................XXXX
Cash flows from operating activities(A+B+C+D+E)........................XXXX

2. Cash flows from operating activities under indirect method

Indirect method to determine cash flow from operating activities is used if net income is available instead of sales revenue in the income statement information.Under indirect method first the funds from operation is ascertained by adjusting the net income by non-cash expenses included in the income statement. The funds from operation so ascertained is again adjusted by the changes in current assets (except cash) and the changes in current liabilities to determine the cash flows from operating activities.
To apply this method, all the amount of non-operating and non-cash expenses are added to the net income and then the amount of non-operating incomes are deducted. The resulting figure known as funds from operation. The changes in current assets and changes in current liabilities are adjusted to funds from operations so that the resulting figure is known as cash from operating activities. The specimen showing the determination of cash flows from operating activities under indirect method is as follows.

Cash Flows From Operating activities
For The Year Ended ..............
Particulars.......................................................................................................Amount
Net Income......................................................................................................XXXX
Add: Non-operating and non-cash expenses..............................................XXXX
Less: Non-operating incomes.......................................................................(XXXX)
Add: Decrease in current assets....................................................................XXXX
Add: Increase in current liabilities.................................................................XXXX
Less: Increase in current assets.....................................................................(XXXX)
Less: Decrease in current liabilities...............................................................(XXXX)
Total= Cash flows from operating activities ................................................XXXX

Preparation Of Cash Flow Statement

The cash flow statement is prepared by showing inflows and outflows of cash from a major activities of a firm. The activities that result in cash inflows are referred to as sources of cash and the activities that result into cash outflows are referred to as uses of cash. For the purpose of preparing cash flow statement,the firms activities are classified into three categories that result into inflows and outflows of cash.

1. Cash Flow From Operating Activities
* Direct Method
* Indirect Method

2. Cash Flow From Investing Activities

3. Cash Flows From Financing Activities

Wednesday, April 14, 2010

Differences Between Cash Flow Statement And Funds Flow Statement

Followings are the main differences between cash flow statement and funds flow statement.

1. Concept

Cash flow statement is based on narrow concept of funds, which considers changes in cash. Funds flow statement is based on the changes in working capital which considers both the changes in cash as well as other components of current assets and current liabilities.

2. Basis Of Preparation


Cash flow statement is prepared on cash basis. Funds flow statement is prepared on accrual basis.

3. Working capital


Cash flow statement does not require use of changes in working capital because all the changes in assets and liabilities are summarizes in cash flow statement. Funds flow statement requires to use of separate statement of changes in net working capital.

4. Link

The preparation of cash flow statement considers only those transactions that are linked with flow of cash. The preparation of funds flow statement considers those transactions that are linked with flow of funds along with actual cash.

5. Usefulness

Cash flow statement is more useful in short term analysis and cash planning. Funds flow statement is more useful in long-term analysis of financial planning.

Importance Of Cash Flow Statement

The cash flow statement provides information regarding inflows and outflows of cash of a firm for a period of one year. Therefore cash flow statement is important on the following grounds.

1. Identifying The Sources Of Cash Inflow And Outflow

Cash flow statement helps to identify the sources from where cash inflows have arisen within a particular period and also shows the various activities where in the cash was utilized.

2. Better Cash Planning

Cash flow statement is significant to management for proper cash planning and maintaining a proper matching between cash inflows and outflows.

3. Showing The Firm's Efficiency

Another importance of cash flow statement is that it shows efficiency of a firm in generating cash inflows from its regular operations.

4. Reporting Of Long-term Investment

Cash flow statement reports the amount of cash used during the period in various long-term investing activities, such as purchase of fixed assets.

5. Reporting Of Financial Activities

Cash flow statement reports the amount of cash received during the period through various financing activities, such as issue of shares, debentures and raising long-term loan. Therefore, cash flow statement is important to know entire financial activities of the business firm.

6. Appraisal Of Capital Investments

Cash flow statement helps for appraisal of various capital investment programs to determine their profitability and viability.

Monday, April 12, 2010

Concept Of Cash Flow Statement And Its Objectives

Concept Of Cash Flow Statement

Every big and small firms performs cash transactions. Cash transaction refers to cash inflows and outflows.Cash inflows and outflows help to review success, failure of a firm and its ability to meet maturing debts. Such review and evaluation are possible if the statement of cash flow is prepared.Accounting standard Board(ASB) at international level in 1996 suggested every firm to publish the statement of cash flow along with the final accounts. Since then the statement of cash flow is getting more recognition than funds flow statement.

The statement that shows cash inflows and outflows of a firm for a specified period is called the cash flow statement. Cash flow statement demonstrates where the cash has come during the period and what the firm has done with the available cash. Therefore, cash flow statement shows a picture of cash movement occurred in and out from a firm during a year in a summarized form. Cash flow statement gives a picture of sources and applications of cash of a firm for a year.

The cash flow statement is not a cash book because it demonstrates inflows and outflows of cash and near to cash items. Cash and near to cash cover entire items of current assets and current liabilities. The cash flow statement reports increase and decrease in cash by listing in meaningful categories in terms of operating,investing and financing activities.

Objectives Of Cash Flow Statement

1. To provide information about the cash inflows and cash outflows from operating, financing and investing activities of the firm.

2. To show the impact of the operating, financing and investing activities on cash resources.

3. To tell how much cash came in during the period, how much cash went out and what the net cash flow was during the period.

4. To explain the causes for changes in cash balance.

5. To identify the financial needs and help in forecasting future cash flows.

Sunday, April 11, 2010

Difference Between Net Profit And Funds From Operation

Following are the differences between net profit and funds from operation:

1. Meaning

Net Profit: Net profit is the difference of total revenues and total expenses and losses which include both operating and non-operating items.
Funds From Operation: Funds from operation excludes both non-operating incomes and non-operating losses/expenses.

2. Objective

Net Profit: Net profit represents the operating result of a business.
Funds From Operation: Funds from operation represents the flow of working capital from the operating activities.

3. Determination

Net Profit: Net profit is determined on the basis of nominal accounts.
Funds From Operation: Funds from operation is determined on the basis of profit and loss account and balance sheet.

4. Calculation

Net Profit: Both cash and non-cash expenses are deducted while calculating net profit.
Funds From Operation: Non-cash items are not related to funds from operation.

Difference between Income Statement And Funds Flow Statement

Income statement and funds flow statement can be distinguished as below:

1. Meaning

Income Statement: Income statement is a summary of total income and total expenses and losses of a particular period.
Funds Flow Statement: Funds flow statement is the statement of changes in financial position.

2. Objective

Income Statement: Income statement is prepared to ascertain the profit earn or loss suffered by a firm.
Funds Flow Statement: Funds Flow Statement is prepared to identify how the profit has been utilized

3. Preparation

Income Statement: Income statement is prepared on the basis of nominal accounts.
Funds Flow Statement: Funds flow statement is prepared on the basis of balance sheet.

4. Measurement

Income Statement: Income statement is helpful in measuring the profitability of a firm.
Funds Flow Statement: Funds flow statement is helpful in determining the net changes in working capital.

Difference Between Balance Sheet And Funds Flow Statement

The main differences between balance sheet and fund flow statement are as below:

1. Meaning

Balance Sheet: Balance sheet is a statement of assets, liabilities and capital.
Funds Flow Statement: Funds flow statement is a statement if changes in assets, liabilities and capital accounts.

2. Objective

Balance Sheet: Balance sheet is prepared to ascertain the financial position of a firm.
Funds Flow Statement: It is prepared to ascertain the sources and application of funds.

3. Preparation

Balance Sheet: It is prepared with the help of trial balance.
Funds Flow Statement: It is prepared with the help of balance sheets of two subsequent dates.

4. Information

Balance Sheet: It provides static view of financial affairs.
Funds Flow Statement: It provides the changes in assets, liabilities and capital accounts.

Funds Flow Statement

After ascertaining the increase or decrease in net working capital and funds or loss from operation, the next step is to prepare the funds flow statement. The purpose of preparing the funds flow statement is to know about the funds obtained and used by the firms. The funds flow statement has two sides. On the left hand side, the sources of funds are shown and on the right hand side, the uses or applications of funds are shown.






Sources                                                         Amt                  Applications                          Amt

Funds from operation ...................................xxx........Increase in working capital...........xxx

Decrease in working capital.....................xxx.........Loss from operation....................xxx

Issue of share............................................xxx.....Redemption of preference share......xxx


Issue of debenture....................................xxx..........Redemption of debenture............xxx


Increase in long term liabilities................xxx.........Purchase of fixed assets...............xxx


Sales of fixed assets...................................xxx..........Investment made.........................xxx


Sale of long term investment....................xxx.....Repayment of long term liabilities... xxx


non trading receipt....................................xxx..........Non trading payment...................xxx

Concept Of Statement Of Funds From Operations And Its Preparation

After preparing the schedule of changes in net working capital, the second step is to determine the amount of funds(loss) from business operations. It refers to the funds or loss, which is generated or suffered in the business as a result of its regular operations during the period. The funds from operation is an important source of fund, while loss from operation is one of the important applications of funds. The funds or loss from operation is determined by adjusting the firm's net income in a statement called the statement of funds from operations. In this statement, the items such as non-operating incomes and non-cash expenses are adjusted while determining the amount of funds(loss) from operations.

Non-cash expenses such as depreciation and amortization of intangible assets do not result in actual cash outflow. Non-operating expenses are those which are not treated as regular expenses of the business. These expenses matter while ascertaining the business income, but are irrelevant in determining the funds(loss) from operations. Therefore non-operating incomes should be deducted from and non-operating and non-cash expenses should be added back to the business income shown by the income statement.
Non-operating and non-cash expenses
* Depreciation for the year
* Amortization of goodwill,copyright,patent,trademark,preliminary expenses
* Discount on issue of share and debenture written off
* Loss on sale of fixed assets or investment
* Loss of revaluation of fixed assets
* Premium on redemption of debentures and preference share

Incomes and gains which are not earned from the normal business operations are called non-operating incomes. These incomes are included while ascertaining the business income, but are excluded while determining the funds(loss)from operations. The following are the examples of non-operating incomes.
*Gain on sale of fixed assets or investment
* gain on revaluation of fixed assets
* Discount on redemption of debentures and preference share
* Compensation received
* Interest received
* Refund of tax
* Transfer fees received
* Appreciation on fixed assets

Preparation Of Statement Of Funds From Operation

Funds from operations can be determined by using one of the two following methods.
1.Add Back Method
Under this method,net profit is taken as the base. All the non-operating and non-cash expenses are added to net profit and non-operating incomes are deducted.

Funds from operations = Net profit+Non-operating and non-cash expenses-Non operating Incomes.

2.Profit And Loss Adjustment Account Method

Funds from operations can also be determined by preparing an account called profit and loss adjustment account begins with opening balance of profit on its credit side and closing balance on the debit side. Instead of opening and closing balance of profit and loss account, only the amount of net profit for the year can also be brought down to the debit side of this account. Then the items of non-operating expenses and non-cash expenses are adjusted to the debit side and the items of non-operating incomes are adjusted to the credit side to determine the amount of funds(loss) from operations.

Wednesday, April 7, 2010

Preparation Of Statement Or Schedule Of Changes In Net Working Capital

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.

2. 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.

Tuesday, April 6, 2010

Preparation Of Funds Flow Statement

Funds flow statement is prepared mainly with the help of balance sheets of any two successive dates. Funds flow statement is prepared by comparing the balance sheets of the two dates and using the income statement of the year for which the funds flow statement is being prepared.The following steps are taken for the preparation of the funds flow statement.

Step -1:
Preparation of statement or schedule of changes in Net Working Capital
.
*Using only one current account
*Using both current and non-current accounts

Step -2
Statement of funds from operation

* Add Back Method
* Profit and loss Adjustment Account Method

Step -3
Funds Flow Statement




Saturday, April 3, 2010

Concept of "Statement" In Funds Flow Statement

A statement is a written record which presents some kind of information and facts about some events in a systematic manner.The funds flow statement is,therefore, a written record of the source of funds in terms of net working capital and its application on different heads during a particular period of time. It is also called statement of sources and application of funds or how funds come and where funds gone statement.The funds flow statement is prepared by using one of the following forms.

1. Horizontal Form

The funds flow statement can be prepared by using the horizontal form. In this form,sources of funds are shown on the left-hand side and uses or applications of funds on the right-hand side of the statement.

2. Vertical form

The funds flow statement can be prepared by using the vertical form. In this form,sources of funds are shown on the upside and uses or applications of funds on the down-side of the statement.