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Asset liability confusion

Cost Accountant (Student) (92 Points)

24 November 2013

Hello, Please help me out with this Question....

Which of the following is correct?

(a) All increase in liabilities and increase in assets represent sources of funds

(b) All decrease in liabilities and decrease in assets represent sources of funds

(d) All increase in liabilities and increase in assets represent uses of funds.

Please explain the above mentioned points and the correct option.

Regards and Thanks

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9 Replies

Joey Tribbiani (fdg) (2010 Points)
Replied 24 November 2013

C.All increase in liabilities and decrease in assets represent sources of funds

This is regarding cash flows from operations. Let me put it this way,when your liabilities increase(E.g. loans,goods on credit,etc) you receive money or money's worth which can be further utilised in business. On the other hand you get money when your assets decrease,case in point can be sale of assets or payment by debtors. Hence they become source of your funds,hope you get the point.

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Cost Accountant (Student) (92 Points)
Replied 24 November 2013

Hello Mr. Siddque,

Thank You Very much for your kind reply.

But I still don't get the second part. As you say "you get money when your assets decrease,case in point can be sale of assets or payment by debtors. Hence they become source of your funds". Even cash in hands or bank is an asset, when my cash (an asset) decreases, then how can it be a source of fund?

Thanks again and Regards.

NOUFAL (ACCOUNTANT) (762 Points)
Replied 24 November 2013

me to have this question, will pls explain, how it is?

Joey Tribbiani (fdg) (2010 Points)
Replied 25 November 2013

This principle is used when we calculate cash flows, hence we see it from the point of view of Cash that can be readily used in business. You are seeing this from balance sheet perspective which is not done in this case.

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Cost Accountant (Student) (92 Points)
Replied 25 November 2013

Pardon me Mr.Siddque, but I still don't get which principle are you referring. Cash is an Asset, no matter it is a CashFlow or Balance Sheet point of view - accounting rules remain same. And when your Cash Decreases, that means your Asset is Decreasing, so how can a decrease in asset represents sources of funds. On the contrary, our sources of funds are going away since our Cash is decreasing.

Thanks again and Regards.

Cost Accountant (Student) (92 Points)
Replied 26 November 2013

Look at option (d). increase in liabilities and increase in assets represent uses of funds.

Supose Ram takes a loan of Rs.10k from bank. So his Liability Increases. With this amount, he purchases a new machine for work. Thus, his Assets also Increases. This simply means that Ram's liability has increased and he is using the funds (Rs.10k) to purchase the machine, hence his asset also increased. So the option (d) fits, that increase in the liability (ie Rs. 10k from bank) and increase in assets (machine purchased from Rs.10k), represents uses of funds (Rs.10k has been used to buy the machine).

Joey Tribbiani (fdg) (2010 Points)
Replied 27 November 2013

Are you a student of foundation or inter?

Cost Accountant (Student) (92 Points)
Replied 27 November 2013

I am Foundation student of ICMAI.....not to mention that I studied from SCIENCE background till class 12th..also pursuing B.comm. 2nd year from Univ. Of Delhi

CA PRIYUL SHAH (JOB) (901 Points)
Replied 29 November 2013

Mr. Siddque said is correct. If you want to calculate source of fund than you required to seprate your asset in two parts in is cash & second is other assets. You just analyse effect of changes in other assets on cash. As we are calculating changes in cas than how can we add cash with other assets ?

So consider assets excluding cash

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