STATEMENT OF AFFAIRS

WHEN AN INDIVIDUAL OR A BUSINESS IN UNABLE TO PAY ITS OBLIGATION WHEN IT BECOMES DUE ,  IT IS  CALLED INSOLVENCY.
THIS SITUATION IS SOMETIMES REFERRED TO AS  equity concept.

WHEN THE AGGREGATE BUSINESS PROPERTY OF A PERSON OR BUSINESS AT A FAIR VALUATION IS LESS THAN THE TOTAL LIABILITIES,  THIS is   bankruptcy concept of insolvency.

PROCEDURES IN INSOLVENCY

WHEN A BUSINESS BECOMES INSOLVENT THE FOLLOWING PROCEDURES:

1.  request the creditors for the extension of time to settle obligations.
2. request to creditor to reduce the liabilities.  the creditor may accept a certain percentage of their claims as full settlement .
3.  agree to form a creditors committee
4.   execute voluntary assignment of debtor property in trust.

if the above is not satisfactory to the parties , they may file a petition  to   a  court of equity.

ARRANGEMENT

   a debtor may file a petition for arrangement which is a plan  FOR THE SETTLEMENT , SATISFACTION OR EXTENSION OF TIME FOR PAYMENT  OF OBLIGATIONS TO UNSECURED CREDITORS.

REORGANIZATION
  a petition for  companys reorganization may be filed by the debtor or the creditors.
  that petition should include the declaration of insolvency and explanation why ARRANGEMENT IS NOT ACCEPTABLE.

THE ACCOUNTING FOR REORGANIZATION TALKS ABOUT VALUATION PROBLEMS ,THE RECOGNITION OF GAIN OR LOSS RESTRUCTURING .

THE DEBTS CAN BE RESTRUCTURED AS FF:
1.   the debtor may transfer assets  in full settlement of obligation.
2.  the debtor may give an equity interest in the firm to satisfy the liabilities.
3.  the creditor may agree to modify the terms of liability.

the journal entries involved :

1.  write downs of assets.\
2.  reduction of par or stated value of capital stock
3. extension of due date of notes payable
4. exchange of debts securities  to  equity securities .


ILLUSTRATIVE  EXAMPLE OF REORGANIZATION:

  JOY COMPANY filed a pettion for reorganization., it was approved.  the balance sheet is shown below.

   CASH                                21000
   ACCTS RECE.                 30000
   BAD DEBTS                     3,250   26750
INVENTORIES                                35500
FIXED ASSETS                170000
DEPN                                  68750  101250
LAND                                               20,000
TOTAL

ACCRUED EXP  WITH PRIORITY              6000
ACC, INTEREST PAYABLE                        12500
ACCTSPAYABLE  SECURED                     15000
ACTS. PAYABLE UNSECURED                  33500
NOTES PAY    UNSECURED                      50000
BONDS PAY                                              112500

EQUITY
COMMON STOCK  10 PAR                    125000
RETAINED EARNING                             (149500)

the plan provides the ff:

1.  creditors which are unsecured  agree to accept accounts receivble in full payment of their claims. the value of receivable is 25,000
2.  accrued exp with priority are paid in full
3. a creditor holding a 30,000 notes agrees to accept land in full settlment of the note plus accrued interest of 2000. the land has a market value of 23750.
4.  a creditor holding 14% ,20,000 note , on which 1000 interest has accrued agrees to extend maturity of the note for two years and reduce interest to 85
5. bondholder agree to accept equity of 3750 shares .  Market value of stocks 12.50 per share.

JOURNAL ENTRIES

1.      since the realizable value of Accounts receivable is only 25,000 Net, the present gross receivable is 30,000 or  5000 more than the its fair value,  but it has already a 3250  allowance bad debts, so it needs an additional bad debts of 1750.00 but since this is a reorganization there is no need to debit BAD DEBTS ACCOUNTS but a LOSS ACCOUNTS

                 ALLOW. BAD DEBTS              3250
                 loss on revaluation of receivable   1750
                          accts. receivable                                 5000
       to close balance of allowance bad debts, and credit receivable to make it 25,000.

                 accounts payable            33,500
                          accounts receivable                                      25,000
                          GAIN ON RESTRUCTURE OF DEBTS      8500

            To close accounts payable in exchange of accts receivable which receivable has a lower value than the payable , therefore A  BENEFIT OR GAIN  was created.  The creditor has  record in his book this accounts receivable and will collect from the client of the company


2.  accrued expense              6000
         cash                                       6000


3.   there is a notes payable  with principal of 30,000 with accrued interest of 2000.00 . the creditor is willing to exchange that with the land with a fair value of 23,750.   the 30,000 notes payable has to be debited to close it and the accrued interest also , and the 20,000 of the land to be credited , but since the book value of the land is only 20,000 and it was revalued to 23750, the land book value is 23750 , a gain on transfer of  assets was realized because the land value increases. .

         land                  3750
                gain on revaluation of asset        3750
       to revalue the land

         notes payable           30,000
         accd. interest              2000
                  land                                    23750
                gain on restructuring of  debt   8250
      to close  notes payble and its accrued interest,  and credit new value of land in exchange for the notes payable and record the gain due to restructuring  as a result of notes being bigger than the land so exhanged.

4.  there is no exchange of assets here but a restructuring of notes by extending the maturity for another two years.  what will be closed is the accounts notes payable the and accrued interest payable and the notes payable will be renamed as  RESTRUCTURED DEBT.

                NOTES PAY              20,000
                ACCD.INT                  1,000
                      RESTRUCTURED DEBT    21000

5.  THE BONDS PAYABLE WILL BE CONVERTED INTO CAPITAL STOCK, THAT MEANS THE CREDITOR WILL IN TURN BE  A STOCKHOLDER.  IN THIS CASE THE BONDS PYABLE WILL BE DEBITED AND CAPITAL STOCK WILL BE CREDITED AT PAR VALUE.  BUT SINCE THE MARKET VALUE OF THE STOCKS IS HIGHER THAN THE PAR VALUE , THAT EXCESS SHALL BE CREDITED AS CONTRIBUTED CAPITAL AND NOT GAIN.

  BONDS PAYABLE             112,500
         CAPITAL STOCK                      37500
         CONTRIBUTED CAP                  9375
           GAIN ON RESTRUCTURING  65625
=====================================================================


LIQUIDATION

IF THERE IS NO HOPE THAT REORGANIZATION  WILL WORK, THE REMAINING ALTERNATIVE IS LIQUIDATION APPLYING BANKRUPTCY PROCESS.
IF CREDITORS INITIATE IT IS CALLED INVOLUNTARY BANKRUPTCY, IF DEBTOR FILED IT IS VOLUNTARY BANKRUPTCY.


STATEMENT OF AFFAIRS

this is simply  just like a balance sheet format though with a lot of information appearing on it as ff:  THERE ARE TWO TYPES OF FORMAT.
ONE FORMAT  IS CALLED CONVENTIONAL FORMAT, THIS IS IT.

ON THIS SCHEDULE , THE ASSETS ARE ARRANGED AS FOLLOWS

 A.  ALL ASSETS WHERE  IT IS  FULLY PLEDGED(  that is the assets is bigger than the liabilities) TO A CORRESPONDING LIABILITIES ARE GROUP IN THE FIRST SET.

b.  the second group of assets are those which are partially pledged to a liabilities, that means the assets value is below or lesser than the liabilities being secured.
c. the third group of assets are those that are FREE that means it is not pledged in any liabilities, presumably because all liabilities are already either fully secured and partially secured  by other assets mentioned in A. B.

THE PRESENTATION OF THE AMOUNTS
  1.  THE BOOK VALUE OF THE ASSETS AND THE LIABILITIES AND THE STOCKHOLDERS EQUITY ARE WRITTEN
  2. ON EACH BALANCE SHEET ACCOUNTS , THE CORRESPONDING REALIZABLE VALUE OF THAT ASSETS ARE WRITTEN OPPOSITE THE BOOK VALUE.   IF ON THAT ASSETS ACCOUNTS IT IS  PLEDGED TO A CERTAIN LIABILITY ACCOUNT  , THAT LIABILITY AMOUNT SHALL BE DEDUCTED ON THAT REALIZABLE VALUE OF THAT ASSETS.
3.  THE FOURTH COLUMN SHOWS THE DIFFERENCE BETWEEN THE BOOK VALUE OF THE ASSETS AGAINST THE REALIZABLE VALUE OF IT,  AND POSTED EITHER LOSS OR GAIN ON REALIZATION.
4. THE FIFTH COLUMN  COMPOSED OF THE FOLLOWING:
          a.   on the group of assets ( FULLY SECURED )where it is sufficient to cover the liabilities mentioned in letter a above, any excess of the assets over the liabilities it has secured , that amount is written on the fifth column as  ESTIMATED AMOUNT  STILL AVAILABLE..
          b. on the groups of assets where it can only PARTIALLY SECURED a liabilities , no amount is written this fifth column.because nothing is available or excess amounts.
          c.  on the group of assets called FREE ASSETS, all of it shall be placed on this fifth column because all of it are all AVAILABLE since it is not pledged to any liabilities.
           A TOTAL OF THIS COLUMN IS EXTRACTED AND DEDUCT ON IT THE LIABILITIES CONSIDERED AS A PRIORITY , THAT MEANS THIS WAS NOT ASSIGNED TO SECURE  ANY ASSETS.. THE BALANCE IS TERMED AS NET AVAILABLE ASSETS.THEN ADD ON THIS THE DIFFERENCE BETWEEN THE NET AVAILABLE AMOUNT LESS THE  BALANCE OF THE PARTIALLY SECURED LIABILITIES AND THE UNSECURED LIABILITIES. THEN YOU NOW OBTAIN THE FINAL NET AVAILABLE AMOUNT OF ASSETS.

           THE LIABILITIES ARE ARRANGED AS FOLLOWS:

THE LIABILITIES ARE ARRANGED AS FF:
     THE FIRST GROUP ARE THOSE LIABILITIES  OR "  CREDITORS WITH PRIORITY,"  THESE ARE NOT REPRESENTED BY CREDITORS BUT RATHER A LEGAL OBLIGATIONS OF THE COMPANY TO PAY.   SAY  TAXES,,, WAGES PAYABLE., LITIGATION EXP.   ETC

    THE SECOND GROUP ARE THOSE LIABILITIES  OR" CREDITORS THAT ARE FULLY SECURED "BY THE ASSETS WHICH AMOUNT ARE  DEDUCTED ON THE CORRESPONDING ASSETS THAT SECURED IT.

THE THIRD GROUP IS THE LIABILITIES THAT ARE   "   PARTIALLY SECURED " BY THE ASSETS AND WHICH ARE ALSO  DEDUCTED ON THE ASSETS THAT SECURED IT.

THE FOURTH GROUP ARE THOSE LIABILITIES THAT ARE NOT SECURED OR "  UNSECURED CREDITORS "BY ANY ASSETS , OR A BALANCE OF A LIABILITIES THAT WERE NOT FULLY SECURED BY AN ASSET, SAY THE ASSETS VALUE IS ONLY 10,000 BUT THE NOTES PAYABLE IS 15,000, THE 5000 IS PLACE UNDER UNSECURED LIABILITIES.

ON THIS  RIGHT SIDE OF THE SCHEDULE , OF COURSE THE BOOK VALUE OF THE LIABILITIES ARE WRITTEN .
HOWEVER ON THE THIRD COLUMN , OPPOSITE THE BOOK VALUE, THE FOLLOWING AMOUNT MAY BE WRITTEN.

              1.  basically what ever is the book value of the liabilities is the one to be written on the third column , however if there are liabilities or expenses that are incurred but not yet recorded , say an expenses incurred by not yet reimbursed or paid by the company it shall be part of liabilities  WITH PRIORITY OR ON FULLY SECURED LIABILITIES OR ON PARTIALLY SECURED LIABILITIES OR ON UNSECURED CREDITORS OR LIABILITIES.
             2.   now if there is a certain liabilities that are partially secured by an asset , that means the asset amount is smaller than the liabilities, the amount of the assets that partially secured it must be deducted on the liabilities it has secured and the difference shall be written on the FOURTH COLUMN NAMED AS AMOUNT UNSECURED.
            3. ALL UNSECURED CREDITORS OR LIABILITIES , THE AMOUNT SHALL BE WRITTEN ON THE FOURTH COLUMN

NATURALLY , THE TOTAL OF THE ASSETS FALLING UNDER ESTIMATED AMOUNT AVAILABLE  MUST TALLY WITH THE FOURTH COLUMN OF THE LIABILITIES SIDE.


OTHER CLARIFICATIONS

A.  assets pledged to more than one creditor or liabilities .  where an assets is pledged to two say mortgage  but its realizable value is more than the claims of the two mortgage, both claims to be deducted on that assets and excess extended to amount available column.  example
                                                                                       AMT AVAILABLE
  ASSETS                                           20,000
  TOTAL TO MORTGAGE                12,000
        EXCESS                                                                   8000    
     when the asset is expected to bring amount where it can cover the first mortgage but not enough to cover the 2nd mortgage, still the assets is placed under assets pledged with fully secured creditors.  the excess of the assets over the first mortgage shall be brought down to the "  assets pledged with partially secured creditors" where the mortgage amount of the second mortgage is deducted .
as for the liabilities section, the first mortgage is shown under fully secured creditors, whle the second to the partially secured creditors, the unsecured extended to the unsecured column.

ASSETS                                                      20,000
FIRST MORTGAGE                                   15,000
   EXCESS                                                     5,000

THE SAME ASSET                                        5000
LESS 2ND MORTGAGE                              10,000
    SHORTAGE                                                 5,000

this  shortage of 5000 shall also be  presented on the the partially secured creditors on LIABILITY SIDE  as ff

     mortgage amount                                              10,000
     asset amount                                                       5000
           shortage                                                                       5000 unsecured column
                  

if the assets is expected to be sold less than the first mortgage , it is classified under assets pledged wiht partially secured creditors, with only the first mortgage claim shown as a deduction.  ON THE LIABILITIES SIDE, this mortgage amount is of course reflected and the asset amount is deducted and the balance is extended to the unsecured column. the second mortgage is also written and fully extended to the unsecured column.
    ASSETS                           1,000                              LIABILITIES SIDE
    FIRST MORTGAGE        2,000                     FIRST MORTGAGE               2000
            DIFFERENCE          1,000                     ASSETS                                  1000               1000
                                                                          SECOND MORTGAGE                                   1000

b.    single asset in different classification-  when an asset is partly pledged and partly unpledged, it requires a split of the lump sum book value as well as the expected realizable value.  whether the realizable value is given in total , it is proper to divide it on the basis of book value of the component parts.

c.  inventories of manufacturing concern.  if the raw materials inventory is not pledged , realizable amount of it is extended in full to the AVAILABLE AMOUNT.  IF the portion of the materials will be used to complete a work in process , only the expected realization from the portion to be sold would appear on the AMOUNT AVAILABLE.
  if the work in process is unpledged and to be sold  , the realizable value is extended in full the AMOUNT AVAILABLE.
 where additional expenditure will be incurred for the completion for the completion of the inventory , this cost are deductible to the realizable value  before extending the net figures to AMOUNT AVAILABLE.
d.    accrued interest on assets or liabilities.   = accrued interest should be added to the principal .
e.  subscription receivable    this is reported to the FREE ASSETS.
f.   prepaid expense.   if this prepaid represent items that can be sold like supplies , the realizable value is extended to the AVAILABLE COLUMN.  but rent , insurance, may expire before liquidation , no realizable value is reported.


======================================================================

APPLYING THIS THEORY, THIS ILLUSTRATIVE EXAMPLE:

ASSETS

CASH                                                                 5000
RECEIVABLE  LESS BAD DEBTS                 150,000
raw materials                                                       80,000
finished goods                                                     130,000
marketable securities                                             40,000
land                                                                      26,000
building net depn                                                  180,000
machinery net of depn                                           240,000
goodwill                                                                  40,000
prepaid expenses                                                       5,000
   total                                                                 901,000

LIAB. AN CAPITAL
ACCOUNTS PAYABLE                                160,000
NOTES PAYABLE                                         270,000
ACCRUED WAGES                                         30,000
MORTGAGE PAYABLE                                260,000
COMMON STOCK                                      220,000
RETAINED EARNINGS                                  39,000
    TOTAL                                                     901,000

ADDITIONAL DATA

1.  CASH INCLUDES  CASH ADVANCE FOR SPENT FOR TRAVELLING 1,000
2   accounts receivable of 90,000 have been pledged to for the notes payable of  50,000
3. the marketable securities is valued at  20,000 plus a 500 shares of PLDT STOCK. THE market value of the stock si 36.00 per share. the securities have accrued interest due of 400.00 . the securities are collateral for a 40,000 notes payable.
4. appraised value of raw materials is 60,000 and finished good is 100,000 . for an additional cost of  20,000 the  the raw materials would realize 140,000 finished goods.
5. the appraised value of  fixed assets is land  50,000, building 220,000, machinery 150,000, but pledged to the mortage payable
6.  prepaid expense is exhausted during liquidation period.
7. accounts payable inlcude  30,000  of witholding tax  and 12,000 to creditors  which are assured of full pay.  there are unrecorded SSS PAYABLE 1000.00
8.  WAGes payable are preferred claims
9. mortgage payable consist of 200,000 on land and buildings and a 60,000 chattel mortgage on machinery.  total unrecorded accrued interest on mortgage is 4,800
10. legas fees are 10,000
11.  probable judgment on legal case is 100,000
12   unpaid audit fee 10,000 and estimated 2000 for liquidation work

                               STATEMENT OF AFFAIRS.

PARTICULARS                           BOOK      REALIZABLE   LOSS          ESTIMATED
                                                VALUE           VALUE            GAIN           AMT AVAILABLE

ASSETS PLEDGED WITH FULLY SECURED CREDITORS:

Accts receivable                    80,000                 80,000  
less: notes payable                                             50,000                                    30,000
land                                      26,000                  50,000           24,000
building                               180,000                 220,000          40,000
machnery                            240,000                 150,000           90,000
 total                                                                 420,000
less mortgagepayable/interest                             264,800                                    155,200

 ASSETS PLEDGED TO PARTIALLY SECURED CREDITORS

Marketable securities          40,000                     38,000           2000
add accrued interest                                                400                                 
total                                                                     38,400
less notes payable                                                40,000


FREE ASSETS:
CASH                                5,000                          4,000           1000                4,000
ACCts receivable                70,000                        70,000

finished goods                  130,000                        100,000       30,000            100,000
raw mat                                              140,000
less cost to complete         80,000         20,000     120,000        40,000           120,000
goodwill                              40,000                            -               40,000    
prepaid expense                 5,000                                                 5 ,000

total                                                                                                                 409,200
Less: creditors with priority                                                                                83,000
_______________________________________________________________________
net amount of assets available                                                                           326.200
add deficiency to unsecured creditors(326,200 less 421600                               95,400
_______________________________________________________________________

GRAND TOTAL                                                                                            421,600      
+++++++=======================================================

LIABILITIES SIDE

CREDITORS WITH PRIORITY
                                                                                               UNSECURED AMOUNT
Witholding tax                  30,000                         30,000                           
social security payable                                            1000
wages payable                  30,000                         30,000
liquidation exp                                                       10,000
promised liabilities                                                  12,000
--------------------------------------------------------------  total                                                                      83,000

 CREDITORS FULLY SECURED/

NOTES PAYABLE        60,000                          60,000
MORTGAGE PAY      260,000                        260,000
INTEREST                                                          4,800
 TOTAL                                                           264,800

CREDITORS PARTIALLY SECURED
NOTES PAYABLE        40,000                      40,000
LESS MARKETABLE SECURITIES            38,400                          1,600
                                                                      ________

UNSECURED CREDITORS
ACCTS PAYABLE       130,000                                                       130,000
NOTE PAYABLE          170,000                                                       170,000
ACCTS RECE. CREDIT BALANCE                                                 10,000
 UNRECORDED AUDIT FEE                                                            10,000
EST. LIABILITY -SUIT                                                                    100,000

+=======================================================

TOTAL...........................................................................................    421,600
========================================================

EXPLANATIONS

FLOW OF NET WORKING CAPITAL

THIS TOPIC WILL TALK ABOUT  THE SOURCES AND USES OF NET WORKING CAPITAL AND THE CASH FLOW STATEMENT .

The discussion will not deal too much on the theoretical concept of this subject matter but would deal largely on the accounting technique of  this subject matter.

Basically, these reports shall all come from the balance sheet data.  The profit and loss data does anyway goes to the balance sheet in the form of the net income or net loss forming part  of the retained earnings.  As you may be aware, accounting transaction is simply the inter play of  the balance sheet accounts to each other.  though the profit and loss accounts are also having interplay with the balance sheet accounts .

WHAT COMPOSES THE WORKING CAPITAL.

Simply , working capital is compose of THE CURRENT ASSETS ONLY  AND THE CURRENT LIABILITIES ONLY.   However,  when it is affected by the movement of the NON CURRENT  ASSETS, NON CURRENT LIABILITIES,  THE CAPITAL, THE NOMINAL OR THE PROFIT AND LOSS ACCOUNTS , THAT IS WHEN THE NET WORKING CAPITAL WILL CHANGE.

WHAT IS NET WORKING CAPITAL.

Since the  CURRENT ASSETS IS one of  the  CONTRA ACCOUNTS OF LIABILITIES, therefore  THE NET WORKING CAPITAL WOULD MEAN , CURRENT ASSETS LESS THE CURRENT LIABILITIES the resulting answer is the net working capital of either  EXCESS OF THE CURRENT ASSETS OVER THE CURRENT LIABILITIES or vice versa.
EXAMPLE:

              CURRENT ASSETS                               100      current assets                         59
               CURRENT LIABILITIES                        30       current liab.                           79
                 net working capital                                  70        net work cap  negative         20

THAT MEANS WHEN THE CURRENT ASSETS IS MORE THAN THE CURRENT LIABILITIES ,  there is an excess of  current assets over the current liabilities, ON THE CONTRARY WHEN THE CURRENT ASSETS IS LESS THAN THE CURRENT LIAB. , THEN the net working capital is on the negative.

.
When we talk of  the increase or the decrease of  NET WORKING CAPITAL  , we are dealing with the NET WORKING CAPITAL (CURRENT ASSETS AND THE CURRENT LIABILITIES) OF LAST YEAR AS AGAINST THE NET WORKING CAPITAL THIS YEAR,  THAT MEANS IT IS A COMPARATIVE  APPROACH ,  THAT IS why  IT IS SAID THAT THERE IS AN INCREASE OR DECREASE OF NET WORKING CAPITAL. LAST YEAR VS. THIS YEAR.

BEFORE YOU CAN COMPUTE THIS WORKING CAPITAL , YOU MUST KNOW HOW TO DIFFERENTIATE CURRENT ASSETS AGAINST NON CURRENT ASSETS AND THE CURRENT LIABILITIES AS AGAINST THE NON CURRENT LIABILITIES.  YOU MUST ALSO KNOW WHAT ARE THE ACCOUNTS COMPOSING THE CURRENT ASSETS AND THE CURRENT LIABILITIES AND EVEN THE NON CURRENT ASSETS AND THE NON CURRENT LIABILITIES.

IN THIS TOPIC,  YOU MUST ASSUME THAT THE CURRENT ASSETS IS JUST A ONE ACCOUNT AND THE CURRENT LIABILITIES IS JUST A ONE ACCOUNT, BECAUSE IT DEAL WITH CURRENT ACCOUNTS AS ONE GROUP ONLY.

THE CURRENT ASSETS AND THE CURRENT LIABILITIES  WILL CHANGE OR INCREASE OR DECREASE  against last year   IF AND WHEN

1.    THERE IS A TRANSACTIONS INVOLVING  CURRENT ASSETS AGAINST THE NON CURRENT ASSETS.

      EXAMPLE:

         1. PURCHASE OF FIXED ASSETS,  ( decrease cash OR increase accounts payable ,  and  increase non current assets,in the form of FIXED ASSETS>
         2. PUTTING CURRENT  ASSETS TO LONG TERM INVESTMENTS ( decrease cash increase,  and increase  non current assets. or increase in notes payable which is considered long term .
         3.  SELLING OF THIS LONG TERM INVESTMENTS (  increase cash or notes receivable and decrease in non current assets  .

2.      OR CURRENT ASSETS  AGAINST THE NON CURRENT LIABILITIES.

           EXAMPLE

          1.  OBTAIN LONG TERM LOAN.  increase cash  , increase in non current liabilities.
           2.  PURCHASE/ ISSUE  OF BONDS . increase cash and increase in non current liab.
           3.  TERMINATION OF THIS BONDS PAYABLE . decrease non current , increase cash.

3.      OR CURRENT ASSETS have CHANGED because of increase or decrease in CAPITAL STRUCTURE

                  1.  ADDITIONAL INVESTMENTS TO INCREASE CAPITAL (increase in cash or increase in subscription receivable  and increase in capital.
                  2. CASH DIVIDENDS ( decrease cash but decrease retained earnings.

4.   CURRENT ASSETS OR CURRENT LIABILITIES HAVE CHANGE DUE TO THE TRANSACTIONS INVOLVING THE PROFIT AND LOSS ACCOUNTS .



EXAMPLE

1.   A SALES WAS MADE,  SO  CASH  OR ACCTS RECEIVABLE  HAS  INCREASE O CHANGE , THE INCOME ACCOUNTS IN THE FORM OF GROSS PROFIT   ALSO HAVE INCREASED, THEN THE CURRENT ASSETS HAS INCREASE DUE TO CASH OR ACCTS. REC. INCREASE. THAT MEANS BECAUSE OF THE GROSS PROFIT DUE TO SALES OF INVENTORIES ARE MADE , THE INCOME ACCOUNTS HAS CAUSED THE accts receivable TO INCREASE. 

2.  WHEN AN EXPENSES WERE INCURRED , EITHER THE CASH HAS DECREASE OR OTHER CURRENT ASSETS such as prepaid exp,  cash advances etc, etc,  HAS DECREASE  OR  THE ACCTS PAYABLE,  accrued expenses payable  HAS INCREASED,..

 3.  WHEN AN OTHER  INCOME IS INCURRED, THE CASH HAS INCREASE SO THE CURRENT ASSETS INCREASES.

       "   in short, the net income during the year is one of the reason why the current assets, current liabilites  will increase or decrease compared to last year , that will increase the net working capital if it is profit. THAT IS WHY THE NET INCOME DURING THE PERIOD IS AUTOMATICALLY  PART OF THE AMOUNT TO ATTRIBUTE TO THE INCREASE OR DECREASE OF NET WORKING CAPITAL.    BUT TAKE NOTE THAT  YOU MUST NOT  INCLUDE IN THIS NET INCOME ( as a reason of the increase in net working capital) THE FOLLOWING PROFIT AND LOSS STATEMENT TRANSACTIONS:

             1. the depreciation expense should be excluded,  because , when the entry was made a depreciation expense was used which reduces NET INCOME  and it is credited to a ACCUMULATED DEPN.  ACCOUNT  which is  a NON CURRENT ASSETS ,but because the entry is  depreciation expense  and credit  accumulated depn which are both non current within their category , the depreciation expense should not be part of the item that would  change the working capital and the same with  the accumulated depreciation being a non current assets  therefore the transactions is between a NOMINAL ACCOUNTS OR PROFIT AND LOSS ACCOUNTS  AND NON CURRENT ACCOUNTS which will not change the net working capital., hence the depreciation expense which as part of the net income should be added back to the net income amount/

  EXAMPLE:

        assuming networking capital last year is    100.
        this year there are only three transactions:

          a.   interest income only                                200
          b.   the selling of assets , net book value         50
                sold at                                                     75
        c. depreciation exp.                                           5
 this year the net working capital is 375  arrived at  100 plus  200  plus 75  ( no current liabl movement )
  the INCREASE IN NET WORKING CAPITAL IS  275  as ff:
        LAST YEAR                                                          100
        THIS YEAR                                                          ( 375)
         INCREASE IN NET WORKING CAPITAL         275

        the net income recorded would be:
                 interest income                                200
                less: depreciation                                  5
                add  gain on sale                                25
         NET INCOME                                      220

NOW IF YOU WILL PREPARE THE SOURCES AND USES OF WORKING CAPITAL , IT WILL APPEAR LIKE THIS.

           net income for the period                                          220
             add   depreciation                                                  (  5)
             less : gain on sale                                                 +  25
               NET INCOME AS ADJUSTED                          200

        add:   sources of working capital
                    1.      proceeds from sale                                   75      
                        
      INCREASE IN NET WORKING CAPITAL              275

THE EXAMPLE PROVES THAT THE DEPRECIATION SHOULD BE ADDED BACK AND THE GAIN ON FIXED ASSETS SALE OR ANY OTHER NONCURRENT ASSET  HAS TO BE DEDUCTED FROM THE RECORDED NET INCOME.
              2. the gain on sales of non current assets like fixed assets, should be excluded in the net income in computing the net increase or decrease in the net working capital,  BECAUSE CURRENT ASSETS SAY SPECIFICALLY THE CASH   HAS INCREASE  BECAUSE OF THE PROCEEDS , BUT THE AFFECTED  NON CURRENT ASSETS (FIXED ASSETS)  WAS NOT THE SAME AMOUNT OF THE  PROCEEDS BECAUSE THERE IS GAIN ON THAT SALE, .
  EXAMPLE:
       THE ENTRY IS:
                 CASH ( proceeds of sales                        100
                                 fixed assets                                         20
                                 gain    on sale                                      80
                 sales of fixed assets.

       explanation :   as you have learned any transaction between  current assets ( cash ) and non current asset (fixed assets) is automatically will increase the current assets IN THE SAME AMOUNT  . in this example the current asset CASH,    INCREASE BY 100, BUT THE NON CURRENT ASSETS ( FIXED ASSET)  DECREASE  ONLY BY 20,  SO IT IS NOT EQUAL , THAT WOULD LEAD YOU TO HAVE AN UNACCOUNTED DIFFERENCE OF INCREASE OR DECREASE IN NET WORKING CAPITAL , AND BECAUSE  IN MAKING THE SOURCES AND USES OF WORKING CAPITAL , YOU START ON THE NET INCOME as one of the reason for the increase in net working capital and since that net income includes the 80 , you have no choice but to deduct that 80 on the net income .

there is no problem if only the NET INCOME YOU WILL CONSIDER IN THE MAKING OF SOURCES AND USES OF WORKING CAPITAL IS  WITHOUT THIS GAIN ON SALE THEN IT IS ALRIGHT .     

if there is no gain recorded , no problem because the cash received is equal to the fixed assets sold.            
  
      
TAKE NOTE THAT  TRANSACTIONS THAT INVOLVES THE CURRENT ASSETS VS THE CURRENT LIABILITIES,    THE  WORKING CAPITAL WILL NOT CHANGE /AFFECTED BECAUSE THEY ARE BOTH ON THE SAME CATEGORY 

 THEREFORE  AFTER ALL HAS BEEN SAID,  THE NET WORKING CAPITAL WILL ONLY CHANGE IF IT HAS A TRANSACTION WITH  THE  NON CURRENT ASSETS, NON CURRENT LIABILITES , CAPITAL , AND THE INCOME STATEMENT

    THAT MEANS , ANY TRANSACTION BETWEEN THE NON CURRENT ASSETS AGAINST NON CURRENT LIABILITIES OR AGAINST CAPITAL OR AGAINST THE NOMINAL ACCOUNTS, SHOULD NOT BE CONSIDERED IN THE MAKING OF THE BREAKDOWN OF THE INCREASE IN NET WORKING CAPITAL .

+++++++++++============================================================

THIS  NET WORKING CAPITAL FLOWS WOULD INDICATE or SHOW  :

1.  THAT THE WORKING CAPITAL HAS INCREASE  BECAUSE OF  BY HUGE LOANS PAYABLE AND NOT BECAUSE OF THE ABILITY TO GENERATE INCOME.
2.  THAT THE WORKING CAPITAL HAS INCREASED ONLY BECAUSE OF CAPITAL INVESTMENT AND NOT CAUSED BY  THE ABILITY TO GENERATE INCOME
3.  THAT IT INCREASES ONLY BECAUSE OF THE SELLING OF  FIXED ASSETS.

ON THE OTHER HAND IT INDICATES:

1.  THAT THE WORKING CAPITAL HAS DECREASE BECAUSE OF THE HEAVY ACQUISITIONS OF FIXED ASSETS
2.  THE TOO MUCH  BORROWING OF FUNDS.
3.  THE  DIVIDENDS DECLARATION
4.  OR WORST IS THE RECURRING OF LOSSES.

IN SHORT THIS REPORT  CAN BE  USED BY MANAGEMENT IN DECISION MAKING PROCESS FOR THE FUTURE PLANS AND ACTIONS.  THAT MANAGEMENT HAS BEEN AWARE AS WHERE THE WORKING CAPITAL WAS PUT TO USE , FAVORABLY OR UNFAVORABLY . OR AS FROM SOURCES DOES THE INCREASE OR THE SOURCES OF  THE WORKING CAPITAL  CAME FROM  AS  EXPLAINED JUST ABOVE. .  

ALLOW ME TO SHOW YOU THIS COMPARATIVE BALANCE SHEET .

CURRENT ASSETS                                         2012               2011      INC       DEC
CASH                                                               22,100          18,300  
MARKETABLE SECURITIES                         14,000           15,000
ACCTS. RECEIVABLE                                     43.200          44.900
INVENTORIES                                                 76,200          67,100
    TOTAL                                                         155,500        145,300

NON CURRENT ASSETS
INVESTMENT IN STOCKS                            26,000                           26,000
FIXED ASSETS                                                96,000            76,000    20,000
ACCUMULATED DEPN                                (14,000)           12,000)

  TOTAL ASSETS                                            263,500       209,300

CURRENT LIAB.
ACCTS PAYABLE                                           10,300              11,500
WAGES PAYABLE                                             8,500               8,100
INCOME TAX PAYABLE                                56,100              52,400
DIVIDENDS PAYABLE                                     6,000                5,000
TOTAL...........................................................80,900                77,000

NON CURRENT LIAB.
 LONG TERM NOTES                                      25,000             15,000       10,000                     
BONDS PAYABLE                                                                     35,000                         35,000

CAPITAL                                                            60,000           15,000        45,000
RETAINED EARNINGS                                     97,600           67,300

TOTAL LIAB. CAPITAL                                   263,500         209,300

 NET WORKING CAPITAL                           74,600              68,300          6,300

                                INCOME STATEMENT \\

SALES                                                            326.400
COST OF SALES                                           149,800
 GROSS PROFIT                                             176,600

OPERATING EXPENSES                                 50,800
DEPN                                                                   7000
INTEREST EXP                                                   4,000
INCOME TAX                                                   56,100

GAIN ON SALE OF FIXED ASSETS                3200
net income for the year                                          61,900


Before you can start  making the SOURCES AND USES OF WORKING CAPITAL , YOU HAVE TO MAKE  A BREAKDOWN ON THE CHANGES OF  THE NON CURRENT ASSETS, THE NON CURRENT LIABILITIES AND THE CAPITAL AND RETAINED EARNINGS,  ALSO SOME CHANGES IN THE PROFIT AND LOSS MORE PARTICULARLY ON THE DEPRECIATION AND THE GAIN ON SALE OF ANY NON CURRENT ASSETS AND OF ANY GAIN IN THE DISPOSITION OF THE NON CURRENT LIABILITIES AND ANY LOSS INCURRED ON THIS ACCOUNT THEREOF   AS IT AFFECTS THE CURRENT ASSETS AND LIABILITIES..  

IN THE ABOVE EXAMPLE ,  CHECKING  THE LEDGER ACCOUNTS OF NON CURRENT ASSETS AND LIABILITIES AND EVEN CAPITAL ,IT WOULD REVEAL THE FF:

1.  THE INCREASE IN THE INVESTMENT IN STOCKS( NON current assets)  IS PROBABLY A CASH PURCHASE OF THIS stocks at  26,000.

             THE  CURRENT ASSETS  WAS USED TO FINANCE THE PURCHASE OF A STOCKS. OF 26,000
2.  THE BOOK VALUE OF THE FIXED ASSETS INCREASED BY 20,000.  CHECKING THE LEDGER INDICATES THAT THERE IS  A CREDIT OF 12,000 FOR THE BOOK VALUE OF AN ASSET SOLD. THEREFORE  THE FIXED ASSETS ACTUALLY INCREASE BY 32,000.

                          BEG FIXED ASSETS    76,000
                          PLUS ACQUISTION     32,000   USING CASH
                          LESS ; SELLING            12,000
                           END BALANCE            96,000

               THE DETAILS OF THE  ACCUMULATED DEPN.
                        BEG                                                    12,000   GIVEN
                       THIS YEARS DEPN                             7,000   GIVEN
                    DEPN OF FIXED ASSETS SOLD       (   5,000)   BALANCING FIGURE
                     ENDING BALANCE                            14,000   GIVEN

             IF THIS IS THE CASE ,  THE GAIN ON SALE OF FIXED ASSETS IS:

                     PROCEEDS                   10,200            BALANCING FIGURE
                     ACCUMULATED           5,000       DERIVED ABOVE
                                      BOOK VALUE               12,000  GIVEN
                                       GAIN                               3,200   GIVEN

          THEREFORE ONE ITEM THAT THE  CURRENT ASSETS OR WORKING CAPITAL INCREASES AS SOURCES OF FUND IS DUE TO THE  PROCEEDS OF 1O,200  OUT THE FIXED ASSETS SOLD.
TAKE NOTE THAT A TRANSACTION BETWEEN CURRENT ASSETS (CASH ) AND FIXED ASSETS HAD TRANSPIRED.

3.  LOOKING THE LEDGER OF LONG TERM NOTES PAYABLE , ON THE CREDIT SIDE , A 10,000 BORROWED FUNDS IS INDICATED AS EXPLAIN ON THE JOURNAL VOUCHER.
         BEG BALANCE       15,000
        LOANS                     10,000
             END BALANCE  25,000

               THAT MEANS THERE IS TRANSACTION INVOLVING CASH AGAINST A NON CURRENT LIABILITIES  THEREFORE THIS IS A SOURCES OF WORKING CAPITAL .

4.   RETAINED EARNINGS LEDGER SHOWED THAT :
              BEGINNING BALANCE                                                                                67,300
            A  CREDIT   FOR THE NET INCOME DURING THE YEAR                         61,900
            A DEBIT FOR THE CASH DIVIDENDS PAID                                            (     21,600
            A DEBIT OF THE STOCK DIVIDEND                                                        (    10,000)
                  END BALANCE                                                                                            97,600

  THE NET INCOME OF 67,300 IS A TRANSACTION BETWEEN  A NOMINAL ACCOUNTS AGAINST THE CURRENT ASSETS OR CURRENT LIABILITIES , THEREFORE THIS NET INCOME IS ONE OF THE REASON FOR THE INCREASE IN NET WORKING CAPITAL CATEGORIZED AS sources of net working capital.


IF YOU ARE GOING TO PREPARE THE SOURCES AND USES OF NET WORKING CAPITAL
IT WILL APPEAR LIKE THIS


SOURCES OF NET WORKING CAPITAL

FROM NET INCOME                                                                   61,900
  ADD: DEPRECIATION                                                                  7,000
   LESS: GAIN ON SALE OF FIXED ASSETS                             (  3,200)
1.   NET INCOME ACTUALLY CONTRIBUTED TO SOURCES  65,700
2. THE PROCEEDS OF FIXED ASSETS SOLD                             10,200
3. THE PROCEEDS OF LONG TERM NOTES  PAY                     10,000
---------------------------------------------------------------------------------------
      TOTAL  SOURCES..................................................................85,900

USES OF THE NET WORKKING CAPITAL

 1.  PURCHASE OF STOCKS                                                              26,000
2. PURCHASE OF FIXED ASSETS                                                     32,000
3. DIVIDENDS PAID                                                                            21,600
     TOTAL  USES                                                                                79,600
---------------------------------------------------------------------------------------
EQUALS THE NET INCREASE IN NET WORKING CAPITAL       6,300
--------------------------------------------------------------------------------------
+++++++++++========================================================

LET ME GO NOW TO ANOTHER TYPE OF  ANALYSIS OF THE WORKING CAPITAL AND THIS IS ABOUT CASH FLOW STATEMENT.

IN THE PREVIOUS DISCUSSION ON  NET WORKING CAPITAL , WE LARGELY DEAL WITH THE CURRENT ASSETS AND CURRENT LIABILITIES AS A WHOLE  OR AS GROUP OF ACCOUNTS., IRRESPECTIVE OF THE INDIVIDUAL ACCOUNTS.

IN THIS CASH FLOW STATEMENT WE WILL TALK ABOUT ALL BALANCE SHEET ACCOUNTS AND THAT OF THE PROFIT AND LOSS AS IT AFFECTS THE  CASH ACCOUNT.
UNLIKE IN NET WORKING CAPITAL ANALYSIS , ONLY THE GROUP OF CURRENT ACCOUNTS ARE BEING COUNTERCHECK AGAINST THE NON CURRENT ACCOUNTS , THE CAPITAL AND THE INCOME STATEMENT

THAT MEANS  WE WILL CHECK THE TRANSACTIONS OR THE DEBIT AND CREDIT  OF EACH EVERY ACCOUNT IN THE BALANCE SHEET AS IT AFFECTS THE CASH ACCOUNT OR IF ITS AFFECT THE CASH ITSELF..

AS YOU MAY BE AWARE,  ALL ACCOUNTS IN THE ACCOUNTING SYSTEM ARE JUST MOVING FROM ONE ACCOUNT TO THE OTHER , THEREFORE  WHEN A ACCOUNTS DO MOVE ,  A CORRESPONDING ACCOUNTS SHALL LIKEWISE MOVED , EITHER DEBIT OR CREDIT., INCREASE OR DECREASE UNTIL SUCH TIME THE CASH WILL BE AFFECTED

THERE TWO TYPES OF CASH FLOW:

  FIRST IS THE ACCOUNTING AS TO WHY THE CASH DECREASE OR INCREASE COMPARED TO THE LAST PERIOD.

 THAT MEANS , THIS IS A COMPARISON OF THE PREVIOUS BALANCE SHEET ACCOUNTS BALANCES AS AGAINST THE BALANCE SHEET THIS PERIOD.

I WILL SHOW YOU A VERY SIMPLE EXAMPLE OF CASH FLOW ANALYSIS

                                                       LAST YEAR           THIS YEAR    INCREASE   DECREASE

CASH                                                100                             300             200
ACCTS RECEIVABLE                      200                             150                                        50
INVENTORIES                                 300                             500             200

FIXED ASSETS                                 100                             100
ACCU. DEPN                                      20                               22               2
------------------------------------------------------------------------------------------------------
 TOTAL                                              680                           1,028           398                      50
----=================================================================
ACCTS PAYABLE                              30                                 40             10

CAPITAL                                           400                             400
RETAINED EARNINGS                    250                             250           
PROFIT THIS YEAR.                                                           338            338
===================================================================
TOTAL                                               680                            1,028          348
===================================================================

IF YOU WILL TAKE A LOOK OF A BALANCE SHEET  SHOWING THE INCREASE AND DECREASE OF EACH ITEM COMPARED WITH THE LAST PERIOD, YOU WILL NOTICE THAT THERE DIFFERENCE IN AMOUNT IS ALSO BALANCE,      IN THE ABOVE ,  ASSETS DIFFERENCE OF 348 IS THE SAME WITH THE LIAB. AND STOCKHOLDERS EQUITY DIFFERENCE OF 348.

IT ONLY MEANS , THAT IF YOU WILL SUMMARIZE THE DIFFERENCE OF ALL THE ACCOUNTS EXCEPT CASH,   THE RESULT IS  THE  INCREASE IN CASH OF 200 AS SHOWN BELOW.

WITHOUT MAKING EXCEPTION,  THE FOLLOWING IS THE DETAILS OF THE INCREASE IN CASH OF 200 .

          INCREASE DUE TO :
                     .  NET INCOME                                                   338
                       ADD: DEPRECIATION                                           2
                       ADD: INCREASE IN PAYABLE                           10
                       ADD :DECREASE IN ACCTS. RECEIVABLE     50

            
          DECREASE DUE TO:
                    INCREASE IN INVENTORIES                            200

             NET INCREASE IN  CASH                                         200

LET ME FIRST  EXPLAIN WHY FOR EVERY ITEM IN THE BALANCE SHEET, IT AFFECTS CASH BALANCE.

    1.   WHEN THE ACCTS. RECEIVABLE HAS INCREASE COMPARED TO LAST YEAR IT MEANS THAT THE CREDIT ON THIS ACCOUNT  SAY COLLECTION IS SMALLER THAT IT DID NOT BRING DOWN THE RECEIVABLE TO A SMALLER AMOUNT THAN THE LAST PERIOD . SO THE CASH COLLECTION IS LOWER  , SO YOU PRESUME AND PUT IT ON THE "DECREASE OF CASH  DUE TO "      ACCTS. RECEIVABLE BEING BIGGER VS. LAST YEAR.
       
                     OR THE  SALES DURING THE PERIOD DEBITED TO ACCTS RECEIVABLE IS BIGGER THAN THE COLLECTION OF RECEIVABLE , HENCE CASH DECREASE AS A RESULT.

         IN THE EVENT THAT THE RECEIVABLE BECOMES SMALLER VS. LAST YEAR THAT MEANS , A BIG COLLECTION OR CREDIT  WAS MADE  , THEREFORE THE CASH BECOMES BIGGER, SO YOU INCLUDE THAT ON THE     "   increase of cash due to"

2.  WHEN THE INVENTORY AMOUNT IS BIGGER THAN LAST YEAR , THAT MEANS PURCHASES IS BIGGER THAN WHAT WAS SOLD, SO CASH DECREASES BECAUSE OF HEAVY PURCHASES,  HENCE ,   THAT INCREASE OF AMOUNT   IS PLACED  TO     " decrease of cash due to:" , because you purchases is bigger leading to the increase of inventory.

  OR THE PURCHASES THIS PERIOD IS BIGGER THAN WHAT WAS SOLD 

        IN THE EVENT THAT THE INVENTORY IS SMALLER THAN LAST YEAR , IT MEANS THAT A BIG SALES OF THIS INVENTORY WAS MADE , THEREFORE  THE CASH INCREASE , so it is place to    "   increase in cash due to "   decrease in inventory due to big sales.

      OR THE SOLD AMOUNT OF INVENTORY IS BIGGER THAN THE PURCHASES , HENCE CASH INCREASES

3.    WHEN THE FIXED ASSETS  HAS INCREASE THAT MEANS ,  THERE IS A PURCHASES OF FIXED ASSETS, SO THE CASH DECREASES   " put that to  '" decrease of cash due to "  INCREASE IN FIXED ASSET.

        IF THIS FIXED ASSETS DECREASES, THAT MEANS A SALE OF FIXED ASSETS WAS MADE, SO A CASH HAS BEEN RECEIVED,  SO THE CASH INCREASES  ""  increase in cash due to"
4. the same is true with the rest of the non current assets.

5.   IF THE ACCOUNTS PAYABLE HAS INCREASED THAT MEANS NO MUCH  PAYMENT WAS MADE TO THIS ACCOUNTS PAYABLE , THEREFORE THE CASH INCREASE , " increase in cash due to "   increase in acct. payable.

      CONVERSELY, IF THIS PAYABLE HAS DECREASED  A BIG PAYMENT IS MADE ,than purchase , so the CASH HAS DECREASED  ,  "  decrease due to "   decrease in accts. payable.

6.  IF THERE IS AN INCREASE IN  LOANS PAYABLE , IT MEANS THERE IS A CASH BORROWING MADE , SO CASH INCREASE ,,  "  increase due to "  bigger credit to loans payable than payment .

7.   IF CAPITAL INCREASE , THAT MEANS A  AN ADDITIONAL CASH INVESTMENT WAS MADE  so,   " increase in cash due to"

     IF THIS CAPITAL DECREASE, THAT MEANS  A CASH DIVIDEND WAS PAID, HENCE CASH DECREASE,  "  decrease in cash due to "

8.   NOW , OF COURSE ,  THE PROFIT DURING THE PERIOD IS AUTOMATICALLY BIGGER THAN LAST YEAR BECAUSE PROFIT LAST YEAR  IS MERGED WITH THE RETAINED EARNINGS ON THAT YEAR..

             THIS PROFIT THIS PERIOD IS AUTOMATICALLY PRESUMED TO HAVE INCREASE THE CASH  BECAUSE  THE INCOME , SALES  AND THE EXPENSE IS PRESUMED TO HAVE COURSED THRU THE CASH AND THIS PROFIT  PRESUMED TO HAVE INCREASED THE CASH AND THE NET LOSS MAKES THE  CASH BECOMES SMALLER. SO IF IT IS A NET LOSS , ACTUALLY THIS IS PRESENTED AS A NEGATIVE AMOUNT.

              THOUGH IT IS NOT  A PRACTICED,  THE SALES SHOULD BE PRESENTED AS " increase cash due to sales"  and  COST OF SALES is presented as " decrease cash  due to cost of sales" , and the expenses is presented as " decrease in cash  ".due to expenses.    .
======================================================================
                   
THERE IS ANOTHER TYPE OF CASH FLOW , CALLED STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS.

WHAT IS THIS REPORT:

THIS REPORT IS THE ACCOUNTING OF THE  CASH INFLOW AND OUTFLOW DURING THE PERIOD TO ARRIVE AT THE ENDING BALANCE OF THE CASH , SO IT BEGINS WITH THE BEGINNING BALANCE OF CASH.AND END UP TO THE ENDING CASH .

  THIS IS DIFFERENT WITH SOURCES AND USES OF WORKING CAPITAL WHEREIN IN SOURCES AND USES OF WORKING CAPITAL ,   THE INCREASE OF CASH OF  THE PRESENT PERIOD AS  AGAINST THE LAST PERIOD IS THE ONE THAT IS BEING ACCOUNTED

.  WHAT IS INVOLVE  HERE IN THIS CASH RECEIPTS AND DISBURSEMENT REPORT IS THE  ACCOUNTING OF INFLOW AND OUTFLOW OF CASH DURING THE YEAR AND ADDED AND DEDUCTED  IT TO THE BEGINNING BALANCE TO ARRIVE AT ENDING BALANCE


WHAT ARE THE ADDITIONS TO BEG CASH BALANCE.

A.   THE NET INCOME
    1.  OF COURSE ONE REASON WHY THE ENDING CASH HAD INCREASE  IS THE  NET INCOME GENERATED DURING THE PERIOD,  THE 61,900 INDICATED  ABOVE.
   2.   ANY DEPRECIATION EXPENSE SHOULD BE ADDED TO THE NET INCOME..     THE GAIN ON ANY SALE OF  NON CURRENT ASSETS  SHOULD BE DEDUCTED ON THE NET INCOME.

B.   THOSE CURRENT ASSETS AND CURRENT LIABILITIES
    3  ALSO THE CASH INCREASE AS A RESULT OF DECREASE OF CURRENT ASSETS COMPARED TO LAST PERIOD
    4   ALSO THE CASH INCREASE AS A RESULT OF THE INCREASE IN CURRENT LIABILITIES COMPARED TO LAST PERIOD.

C.  THE MOVEMENT OF NON CURRENT ASSETS AND NON CURRENT LIABILITIES REPRESENTING INFLOW OF CASH.
          1.   PROCEEDS OF SALE OF FIXED ASSETS
          2.   PROCEEDS OF SALE OF OTHER NON CURRENT ASSETS
          3.   PROCEEDS OF BANK LOANS , BONDS SALES  , LONG TERM LOANS ETC
         4.    ADDITIONAL CAPITAL INFUSION..

D.  THE MOVEMENT OF NON  CURRENT ASSETS AND NON CURRENT LIABILITIES REPRESENTING OUTFLOW OF CASH

           1.   PURCHASE OF FIXED ASSETS
            2.  PAYMENT OF LOANS PAYABLE , BONDS PAYABLE, LONG TERM LIAB.
           3.   PAYMENT OF CASH DIVIDENDS
            4. AN ALL OTHERS PAYMENTS OF NON CURRENT LIAB. AND CAPITAL

NOW USING THE ABOVE BALANCE SHEET AND PROFIT AND LOSS  , THIS IS  THE REPORT ON STATEMENT OF CASH RECEIPTS AN DISBURSEMENTS.

CASH BALANCE BEGINNING                                                        18,300
ADD  NET INCOME                       61,900
ADD DEPN                                        7,000
LESS  GAIN ON SALE                   ( 3,200 )               65,700
------------------------------------------------- 
ADD: DECREASE IN ACCTS. RECE.        1700
          INCREASE IN WAGES PAY               400
          INCREASE INCOME TAX PAY       3,700
------------------------------------------------        ------5800
LESS:  INCREASE IN INVENTORY         9,100
           DECREASE IN ACCTS.PAY          1,200
 ---------------------------------------------------         10.300
NET   INFLOW OF  CASH CAUSED
BY WORKING CAPITAL                                       ___                      61,200

ADD/DEDUCT THOSE CASH TRANSACTIONS AFFECTING NON CURRENT
         PROCEEDS OF SALE OF SECURITIES            1,000
         PROCEEDS OF SALE OF FIXED ASSETS      10,200
        PROCEEDS OF LONG TERM LOANS             10,000             21,200

LESS:
     PAYMENT OF DIVIDENDS                                 20,600
     PAYMENT OF INVESTMENTS                           26,000
     PAYMENT OF PURCHASE OF FIXED ASSETS 32,000            ( 78,600)   

ENDING CASH BALANCE ..............................................................22,100


HOWEVER, YOU MAY ASK , WHY NOT JUST ANALIZE THE CONTENTS OF THE CASH LEDGER AND DETERMINE THE CLASS OF TRANSACTIONS THAT ARE IN ITS DEBIT AND IN ITS CREDITS.

THE FACT IS WE CAN DO THAT, THE ONLY PROBLEM IS THE SEGREGATION OF  DEBITS AND CREDITS TO CASH ACCOUNT  WHICH IF THIS IS A BIG COMPANIES A LOT OF TRANSACTION IS BEING ENTERED TO THIS ACCOUNT ,HENCE IT IS IMPRACTICAL.

TO GIVE YOU AN IDEA ON HOW TO DO IT.

1.  SEGREGATE THE DEBITS TO CASH NOT REPRESENTING NON CURRENT ASSETS OR NON CURRENT LIABILITIES OR RETAINED EARNING OR CAPITAL, THAT MEANS SEGREGATE DEBITS AGAINST CURRENT ASSETS OR CURRENT LIABLITIES.
2.  SEGREGATE ALSO FROM THIS CASH DEBITS , THOSE NON CURRENT ASSET, NON CURRENT LIAB. CAPITAL RET. EARNINGS.
3.  ON CREDIT, SIDE,  SEGREGATE THOSE REPRESENTING TRANSACTIONS AFFECTING CURRENT ASSETS, CURRENT LIABILIITES.
4.  SEGREGATE THOSE CREDIT REPRESENTING NON CURRENT ASSETS AND LIABILITIES AND CAPITAL OR RETAINED EARNINGS.

THE 1,  AND 3, IF YOU WILL GET THE NET AMOUNT WOULD REPRESENT THE  WORKING CAPITAL FROM OPERATION..