Question

Closing stock is

• A. Source of fund
• B. Application of fund
• C. No flow of fund
• D. None of these

Hint:

This is a common point of confusion. Remember: in the calculation of Funds from Operations, a higher Closing Stock reduces COGS, increases Profit, and thus is treated as a Source of Fund.

Answer 1

The Correct Option is A

Step 1: Understanding the Question:
The question asks about the treatment of 'Closing Stock' in the context of a Fund Flow Statement. This is a nuanced concept and can be interpreted in different ways.
Step 2: Key Concept:
We need to analyze how closing stock affects the calculation of 'Funds from Operations', which is a major source of funds in the Fund Flow Statement.
The formula for Funds from Operations starts with Net Profit and adjusts for non-fund and non-operating items. The net profit itself is derived from the Trading and Profit & Loss Account.
Step 3: Detailed Explanation:
The calculation of Cost of Goods Sold (COGS) is: \[ \text{COGS} = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock} \] Gross Profit is then calculated as: \[ \text{Gross Profit} = \text{Sales} - \text{COGS} \] Substituting the COGS formula: \[ \text{Gross Profit} = \text{Sales} - (\text{Opening Stock} + \text{Purchases} - \text{Closing Stock}) \] From this equation, we can see that if the Closing Stock value increases (all else being equal), the COGS decreases. A lower COGS results in a higher Gross Profit, and consequently, a higher Net Profit.
Since 'Funds from Operations' is calculated starting with Net Profit, a higher closing stock leads to a higher value for 'Funds from Operations'. In this indirect manner, closing stock acts as if it is a source of funds because it increases the reported profit, which is the primary source of operational funds.
Step 4: Final Answer:
Based on its effect of increasing the calculated 'Funds from Operations', Closing Stock is treated as a Source of Fund. Therefore, option (A) is correct as per standard accounting conventions for this type of question.