(i) It will appear in the schedule of changes in working capital like other current liabilities.
(ii) Any payment of tax will not be an application of fund as decrease in cash or bank balance (i.e., Current Assets) is matched by a corresponding decrease in current liability (i.e., provision for Taxation). Hence, while attempting a practical problem on fund flow statement, the item of tax (if any) given outside the trial balance should be ignored under this approach.
(b) As a Non-current Item:
Provision for taxation may be taken as internal reserve created by appropriation of profit. In this case it will be treated like any other non-current account. Thus
(i) It will not be shown in the Schedule of Changes in Working Capital.
(ii) The amount of current provision for taxation made during the year will be shown on the debit side of Adjusted Profit and Loss Account or added to net profit after tax to find out fund from operation.
(iii) Any payment of tax during the year will be shown as an application of fund in fund flow statement.
Like provision for taxation, proposed dividend may be treated either as an item of current liability or an item of appropriation of profit. If, proposed dividend is treated as a current liability, it will appear as one of the item, decreasing working capital in the schedule of changes in working capital. It will not be shown as an application of funds when dividend is paid later on.
On the other hand, if proposed dividend is considered as appropriation of profit, it will not be shown in the schedule of changes in working capital. The amount of dividend proposed during the year will be debited to Adjusted Profit and Loss Account and actual payment of dividend once proposed will be shown as application of fund.
If, in the given problem nothing is mentioned regarding the actual payment of dividend, the proposed dividend of the opening balance sheet has to be supposed to have been paid fully during the current year. This is so because dividend has to be paid compulsorily.
Unclaimed dividend is the dividend which cannot be disbursed due to death or change of address of shareholders without intimation to the company.
Like proposed dividend it can also be treated in two different ways:
(i) As an item of Current Liability:
It will be shown in the schedule of changes in Working Capital. For actual disbursement of such dividend during the year nothing is required to be done.
(ii) As an item of Non-current Liability or Appropriation of Profit:
It will not be shown in the schedule of changes in working capital. A separate Unclaimed Dividend Account will be opened and actual disbursement of such dividend during the year will be shown as an application of fund.
Interim dividend is the dividend which is paid during the middle of the year or in between two annual general meeting of a company. It is a non-operating item. Thus the amount of interim dividend proposed during the year will be debited to Adjusted Profit and Loss Account and actual payment of such dividend will be shown as an application of fund.
Dividend received is a source of fund and is treated in the following ways:
(a) Pre-acquisition dividend may be credited to Investment Account to reduce the cost of investment.
(b) Post-acquisition dividend may be credited to Adjusted Profit and Loss Account.
(c) The whole amount of dividend received on the due date is a source of fund.
Sometimes provision is made for bad debts or loss of any other current assets. It should be treated as a current liability which may be shown separately in schedule of changes in working capital or deducted from gross value of the current assets. No adjustment is required for determining fund from operation.
Alternatively, concerned current assets will be shown at gross value in the schedule of changes in working capital and the new provision credited (i.e., closing balance – opening balance) during the year will be debited to the Adjusted Profit and Loss Account.
Goodwill, preliminary expenses, discount on issue of shares, debentures or any deferred revenue expenditure written-off during the year are to be debited to Adjusted Profit and Loss Account to find out fund from operation.
The amount of depreciation provided during the year will be debited to Adjusted Profit and Loss Account and credited to the Provision for Depreciation Account, if asset is shown at cost. If the asset account is maintained at written-down value i.e., cost less depreciation, it will be credited to the respective asset account.
Generally, an increase in value of fixed assets indicates a purchase i.e., an application of fund and a decrease in value of fixed assets (after charging depreciation) shows a sale of fixed assets. It is to be noted that the whole amount of sale proceeds of a fixed assets is a source of fund, and the gross amount paid for purchase of fixed assets is an application of fund.
For de-terminating the exact amount of source or an application of fund, an account of each type of fixed assets should be prepared.
The Fixed Assets Account may be maintained either at W.D.V. (i.e., cost less depreciation) or at original cost only. In the former case, all entries will be made to the respective asset account. After crediting the respective asset account with the amount of annual depreciation and posting of all items (including profit or loss on sale transaction to Adjusted Profit & Loss A/c), the balancing figure will be considered as purchase or sale—as the case may be.
Again, when asset account is maintained at original cost along with Asset Account, Asset Disposal Account and Provision for Depreciation Account are to be maintained. The balancing figure in Asset Account will be considered as the amount of purchase of fixed assets.
The Asset Disposal Account will be debited with the original cost and credited with total depreciation written-off and realisable value of fixed asset. The profit or loss on sale of fixed assets from this account will be transferred to Adjusted Profit and Loss Account.