Fund from operation is the second step of fund flow statement.
It is found out from statement of fund from operation (profit and loss adjustment account).
It is prepared after preparing schedule change in working capital.
Net profit or loss of profit and loss account does not indicate actual funds earned or suffered during an accounting period.
Generally, non-operating and non-cash expenses are added to net profit.
Non-operating and non-cash incomes are deducted from net profit.
Positive value is fund from operation; negative value is loss from operation.
There are two methods to find out FFO; they are as follows:
(a) Add back method
(b) Profit and loss adjustment account
This method is started with net profit or net loss as it is shown by the income statement.
Non-operating and non-cash expenses are added to net profit.
But non-operating incomes are deducted from net profit.
The balancing figure of amount such obtained may be either funds from operation or loss from operation.
Statement of Funds from Operation
Particulars |
Amount |
Amount |
|
Net profit |
|
xxxx |
|
Add: |
Non-operating and non-cash expenses: |
|
|
|
Depreciation on fixed assets |
xxxx |
|
|
Loss on sales of fixed assets |
xxxx |
|
|
Loss on sale of investment |
xxxx |
|
|
Amortization of goodwill |
xxxx |
|
|
Amortization of patent, copy right and trade mark |
xxxx |
|
|
Discount on share written off |
xxxx |
|
|
Preliminary expenses written off |
xxxx |
|
|
Transfer to general reserve |
xxxx |
|
|
Interim dividend |
xxxx |
|
|
Premium on redemption of debenture |
xxxx |
xxxx |
Less: |
Non-operating incomes: |
|
|
|
Profit on sale of fixed assets |
(xxx) |
|
|
Transfer fee |
(xxx) |
|
|
Interest, rent, commission and dividend received |
(xxx) |
|
|
Refund of tax |
(xxx) |
(xxx) |
Funds from operation |
|
xxxx |
This method is also started with net profit or net loss as it is shown by income statement or balance sheet.
Net profit is shown on debit side but net loss is shown on credit side of this account.
All non-operating and non-cash expenses are written on debit side but non-operating incomes are written on credit side.
If debit amount become more credit, it is considered as funds from operation.
Similarly, if credit amount become more than debit, it is considered as loss from operation.
Procedures for profit and loss adjustment account
Step 1: |
First find out non-operating and non-cash expenses and income, |
Step 2: |
Write down non-operating and non-cash expenses in debit side, |
Step 3: |
Write down non-operating income in credit side, |
Step 4:
|
If transaction(s) is in balance sheet as well as additional information, prepare ledger (working note) for fixed assets, investment, provision for tax or dividend, |
Step 5:
|
After transferring, all non-operating and non-cash expenses or income and necessary entry from working note, find out fund from operation (operating profit). |
Profit and Loss Adjustment Account
Non-operating and non-cash expenses |
Amount |
Non-operating income |
Amount |
To Net profit |
xxxx |
By Net loss |
xxxx |
To Depreciation on fixed assets |
xxxx |
By Appreciation on fixed assets |
xxxx |
To Goodwill written off |
xxxx |
By Tax refund |
xxxx |
To Trade mark written off |
xxxx |
By Rent received |
xxxx |
To Patents written off |
xxxx |
By Interest received |
xxxx |
To Preliminary expenses written off |
xxxx |
By Dividend received |
xxxx |
To Discount on issued of shares |
xxxx |
By Compensation received |
xxxx |
To Dividend (proposed/interim) |
xxxx |
By Discount on redemption of debentures |
xxxx |
To Premium on redemption of debentures |
xxxx |
By Premium on issue of shares |
xxxx |
To Reserve fund (increase) |
xxxx |
By Profit on sale of assets |
xxxx |
To General reserve |
xxxx |
By Profit on sales of investment |
xxxx |
To Sinking fund |
xxxx |
By Increase in share forfeiture |
xxxx |
To Dividend equalization fund |
xxxx |
By Operating profit or FFO (b/f) |
xxxx |
To Provision for tax |
xxxx |
|
|
To Tax paid |
xxxx |
|
|
To Loss on sale of assets |
xxxx |
|
|
To Loss on sales investment |
xxxx |
|
|
To Decrease in share forfeiture |
xxxx |
|
|
To Operating loss or LFO (b/f) |
xxxx |
|
|
|
xxxx |
|
xxxx |
#####
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|
Accounting for Share |
|
Share in Nepali |
|
Debentures |
|
Final Accounts: Class 12 |
|
Final Accounts in Nepali |
|
Work Sheet |
|
Ratio Analysis (Accounting Ratio) |
|
Fund Flow Statement |
|
Cash Flow Statement |
|
Theory Accounting Xii |
|
Theory: Cost Accounting |
|
Cost Accounting |
|
LIFO−FIFO |
|
Cost Sheet, Unit Costing |
|
Cost Reconciliation Statement |
#####
Keep in Mind (KIM)
For student: |
|
Operating expenses: |
Non-operating expenses: |
Admission fee |
– |
Monthly fee (tuition fee) |
– |
Exam free |
– |
Coaching expenses |
– |
School/college uniform |
Informal dress |
Canteen expenses |
Restaurant expenses |
Books and stationery |
Novel and magazines |
Internet expenses for study |
Internet expenses for entertainment |
Educational tour |
Entertainment tour |
Picnic from school and college etc. |
Picnic with friends etc. |
|
|
Decrease in goodwill is written off. |
|
It is written in debit side of profit and loss adjustment account. |
|
Increase in goodwill is cash outflow. It is written in outflow of fund flow statement. |
|
Lack of net profit, balance of reserve and surplus, general reserve or reserve fund is taken. |
Bases |
Net profit |
Funds from operation |
Preparation |
It is prepared to show net profit or net loss at the end of accounting period. |
It is prepared to show funds or loss from operation at the end of accounting period |
Record |
It records all types of expenses and incomes. |
It records only non-operating and non-cash expenses and non-operating incomes. |
Format |
Income statement has definite format prescribed by the company act. |
There are two formats to determine funds from operation. |
Bases of preparation |
Trial balance and additional information are the bases of determination net profit. |
Income statement and comparative balance sheet and additional information are the bases of determination of funds from operation. |
Legal requirement |
The determination of net profit is compulsory according to law. |
The determination of funds from operation is optional for management. |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
The information of profit and loss account for a fiscal year is provided to you ($/₹/Rs):
Net profit for the year |
125,000 |
|
Depreciation on fixes assets |
25,000 |
Profit on sale of investment |
10,000 |
|
Amortization of goodwill |
15,000 |
Transfer to reserve fund |
10,000 |
|
Loss on sale of fixed assets |
12,000 |
Discount on share written off |
5,000 |
|
|
|
Required: Funds from operation
[Answer: FFO = Rs 182,000]
SOLUTION:
Profit and Loss Adjustment Account
Particulars |
Amount |
Particulars |
Amount |
To Net profit |
1,25,000 |
By Profit on sale of investment |
10,000 |
To Depreciation on fixed assets |
25,000 |
By Funds from operation (FFO) |
182,000 |
To Amortization of goodwill |
15,000 |
|
|
To Transfer to reserve fund |
10,000 |
|
|
To Loss on sales of fixed assets |
12,000 |
|
|
To Discount on share written off |
5,000 |
|
|
|
192,000 |
|
192,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
The information of profit and loss account for a fiscal year is provided to you ($/₹/Rs):
Net loss for the year |
25,000 |
|
Depreciation on fixes assets |
15,000 |
|
Fixed asset sold (book value of Rs 25,000) |
30,000 |
|
Amortization of copyright |
12,000 |
|
Transfer to general reserve |
10,000 |
|
Preliminary expenses written off |
12,000 |
|
Interim dividend paid |
15,000 |
|
Required: Funds from operation
[Answer: FFO = Rs 34,000]
SOLUTION:
Profit and Loss Adjustment Account
Particulars |
Amount |
Particulars |
Amount |
To Depreciation on fixed assets |
15,000 |
By Net loss |
25,000 |
To Amortization of copyright |
12,000 |
By Profit on sale of fixed asset |
5,000 |
To Transfer to general reserve |
10,000 |
By Funds from operation |
34,000 |
To Preliminary expenses written off |
12,000 |
|
|
To Interim dividend paid |
15,000 |
|
|
|
64,000 |
|
64,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
The following is the trading and profit and loss account of City Book House for the year ended 31st December ($/₹/Rs):
Trading, Profit and Loss Account
Particulars |
Amount |
Particulars |
Amount |
To Opening stock |
2,00,000 |
By Sales |
7,50,000 |
To Purchase |
3,00,000 |
By Closing stock |
1,50,000 |
To Wages |
1,00,000 |
|
|
To Factory overheads |
55,000 |
|
|
To Gross profit c/d |
2,45,000 |
|
|
|
9,00,000 |
|
9,00,000 |
To Administrative expenses |
75,000 |
By Gross profit b/d |
2,45,000 |
To Selling expenses |
55,000 |
By Commission on bike selling |
15,000 |
To Distribution expenses |
50,000 |
By Rent received (sublet) |
25,000 |
To Depreciation |
15,000 |
By Interest received on investment |
15,000 |
To Provision for taxation |
25,000 |
|
|
To Goodwill written off |
10,000 |
|
|
To Loss on sales of plant |
15,000 |
|
|
To Net profit c/d |
55,000 |
|
|
|
3,00,000 |
|
3,00,000 |
Required: Funds from operation
[Answer: FFO = Rs 65,000]
SOLUTION:
After leaving operating financial transactions, remaining transactions are taken to find out FFO
Profit and Loss Adjustment Account
Particulars |
Amount |
Particulars |
Amount |
To Net profit |
55,000 |
By Commission received |
15,000 |
To Depreciation |
15,000 |
By Rent received |
25,000 |
To Provision for taxation |
25,000 |
By Interest received |
15,000 |
To Goodwill written off |
10,000 |
By Funds from operation |
65,000 |
To Loss on sales of plant |
15,000 |
|
|
|
120,000 |
|
120,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2D
The following is the balance sheet of two fiscal years ($/₹/Rs):
Balance Sheet
Liabilities |
2019 |
2020 |
Assets |
2019 |
2020 |
Equity share capital |
5,00,000 |
5,00,000 |
Land and building |
4,45,000 |
6,75,000 |
Reserve and surplus |
20,000 |
40,000 |
Goodwill |
1,00,000 |
75,000 |
Profit and loss account |
80,000 |
100,000 |
Stock |
50,000 |
55,000 |
10% bank loan |
1,50,000 |
1,50,000 |
Debtors |
50,000 |
40,000 |
Bank overdraft |
50,000 |
40,000 |
Cash at bank |
1,75,000 |
125,000 |
Sundry creditors |
1,00,000 |
1,20,000 |
Prepaid expenses |
1,25,000 |
75,000 |
Bills payable |
50,000 |
60,000 |
Preliminary expenses |
40,000 |
30,000 |
Provision for depn |
50,000 |
75,000 |
Discount on share |
15,000 |
10,000 |
|
10,00,000 |
10,85,000 |
|
10,00,000 |
10,85,000 |
Required: Funds from operation
[Answer: FFO = Rs 105,000]
SOLUTION:
Profit and Loss Adjustment Account
Particulars |
Amount |
Particulars |
Amount |
To Transfer to reserve and surplus |
20,000 |
By Balance b/d |
80,000 |
To Depreciation |
25,000 |
By Fund from operating (FFO) |
105,000 |
To Goodwill written off |
25,000 |
|
|
To Preliminary expenses written off |
10,000 |
|
|
To Discount on share written off |
5,000 |
|
|
To Balance c/d |
100,000 |
|
|
|
185,000 |
|
185,000 |
Or
Profit and Loss Adjustment Account
Particulars |
Amount |
Particulars |
Amount |
To Net profit (100,000 – 80,000) |
20,000 |
By Operating profit (FFO) |
105,000 |
To Increase in reserve and surplus |
20,000 |
|
|
To Depreciation for the year |
25,000 |
|
|
To Amortization of goodwill |
25,000 |
|
|
To Amortization of preliminary exp. |
10,000 |
|
|
To Amortization of discount on share |
5,000 |
|
|
|
185,000 |
|
185,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2E
ABC Company Ltd provides you following data:
Trading, Profit and Loss Account
Particulars |
Amount |
Particulars |
Amount |
To Opening stock |
Nil |
By Sales |
350,000 |
To Purchase |
200,000 |
By Closing stock |
Nil |
To Wages |
50,000 |
|
|
To Gross profit |
100,000 |
|
|
|
350,000 |
|
350,000 |
To Salaries |
20,000 |
By Gross profit |
100,000 |
To Office expenses |
10,000 |
By Dividend received |
6,000 |
To Depreciation |
10,000 |
By Profit on sales of plant |
10,000 |
To Discount on issue of shares |
2,000 |
|
|
To Preliminary expenses written off |
10,000 |
|
|
To Goodwill written off |
8,000 |
|
|
To Loss on sales of furniture |
14,000 |
|
|
To Interim dividend |
6,000 |
|
|
To General reserve |
5,000 |
|
|
To Net profit |
31,000 |
|
|
|
116,000 |
|
116,000 |
Required: Funds from operation (FFO)
[Answer: FFO = Rs 70,000]
SOLUTION:
After leaving operating financial transactions, remaining transactions are taken to find out FFO
Profit and Loss Adjustment Account
Particulars |
Amount |
Particulars |
Amount |
To Net profit |
31,000 |
By Dividend received |
6,000 |
To Depreciation on assets |
10,000 |
By Profit on sale of assets |
10,000 |
To Discount on issue of shares |
2,000 |
By Operating profit (FFO) |
70,000 |
To Preliminary expenses written off |
10,000 |
|
|
To Goodwill written off |
8,000 |
|
|
To Loss on sales of furniture |
14,000 |
|
|
To Interim dividend |
6,000 |
|
|
To General reserve |
5,000 |
|
|
|
86,000 |
|
86,000 |
###########
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|
Accounting Equation |
|
Basic Journal Entries in Nepali |
|
Basic Journal Entries |
|
Journal Entry and Ledger |
|
Ledger |
|
Subsidiary Book |
|
Cash Book |
|
Trial Balance & Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
Final Accounts: Class 11 |
|
Adjustment in Final Accounts |
|
Capital and Revenue |
|
Single Entry System |
|
Non-Trading Concern |
|
Government Accounting |
|
Goswara Voucher (Journal Voucher) |
###########
#####
PROBLEMS AND ANSWERS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
The following is the profit and loss account for the March end 2020 ($/₹/Rs):
Profit and Loss Account
Particulars |
Amount |
Particulars |
Amount |
To Salary |
65,000 |
By Gross profit b/d |
1,45,000 |
To Advertisement |
35,000 |
By Dividend received |
7,000 |
To Miscellaneous expenses |
25,000 |
By Interest received |
3,000 |
To Depreciation |
25,000 |
By Net loss c/d |
20,000 |
To Patent written off |
10,000 |
|
|
To Loss on sales of machine |
15,000 |
|
|
|
1,75,000 |
|
1,75,000 |
Required: Funds from operation
[Answer: FFO = Rs 20,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
The information of profit and loss account for a fiscal year is provided to you ($/₹/Rs):
Net profit for the year |
75,000 |
|
Transfer to general reserve |
10,000 |
Depreciation on fixes assets |
25,000 |
|
Loss on sale of fixed assets |
12,000 |
Profit on sale of investment |
10,000 |
|
Discount on share written off |
8,000 |
Amortization of goodwill |
15,000 |
|
|
|
Required: Funds from operation
[Answer: FFO = Rs 135,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
The following is the profit and loss account for the year ended 31st December 2020 ($/₹/Rs):
Profit and Loss Account
Particulars |
Amount |
Particulars |
Amount |
To Administrative expenses |
75,000 |
By Gross profit b/d |
2,45,000 |
To Selling expenses |
55,000 |
By Rent received |
12,000 |
To Distribution expenses |
55,000 |
By Interest received |
28,000 |
To Depreciation |
25,000 |
|
|
To Provision for taxation |
15,000 |
|
|
To Copy right written off |
10,000 |
|
|
To Loss on sales of vehicle |
5,000 |
|
|
To Net profit c/d |
45,000 |
|
|
|
2,85,000 |
|
2,85,000 |
Required: Funds from operation
[Answer: FFO = Rs 60,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2D
The following information is given to you ($/₹/Rs):
Particulars |
Previous year |
Current year |
|
Profit and loss account |
75,000 |
1,25,000 |
|
General reserve |
45,000 |
65,000 |
|
Provision for depreciation |
25,000 |
50,000 |
|
Discount on shares |
25,000 |
15,000 |
|
Patent and copy right |
40,000 |
25,000 |
|
Underwriting commission |
15,000 |
10,000 |
|
Plant and machinery |
1,50,000 |
2,50,000 |
|
Share capital |
3,00,000 |
3,00,000 |
|
Required: Funds from operation
FFO = Rs 125,000]
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