Funds from Business Operations
The profit/loss figure, as shown in the profit and loss account of the firm, per se does not indicate the quantum of working capital provided by business operations as the revenues and expenses shown do not run parallel to the flow of the working capital. The profit and loss account contains a variety of write-offs and other adjustments which do not involve any corresponding movement of funds, Therefore, appropriate adjustments are to he made in respect of these items shown in the profit and loss account to arrive at the funds from business operations, For this purpose: (i) all such expenses which have been deducted from revenue but do not reduce working capital are to he added back, depreciation on fixed assets (ii) such items as have been added to revenue but have not contributed to the working capital are to be subtracted, like appreciation of land and buildings and (iii) all such revenues which are not directly caused business operations (e.g. dividends/interest received) should also be deducted and shown separately in the statement. The items requiring adjustment are listed in Exhibit 6.1.