FUND FLOW STATEMENT

Definition of Funds flow statement.

The funds flow statement describes the

sources from which additional funds were

derived and the use to which these funds

were put.

MEANING OF IMPORTANT TERMS Funds

Working capital i.e. current assets current liabilities.

Flow of funds

Changes in funds or in working capital

Source of fund

Any transaction that increases working capital

Inflow of funds

Application of funds

Any transaction that decreases working capital

Outflow of funds

SOURCES AND APPLICATION OF FUNDS FUNDS FROM OPERATIONS FUNDS LOST IN OPERATIONS

ISSUE OF SHARE CAPITAL

REDEMPTION OF PREFERENCE

SHARE CAPITAL

ISSUE OF DEBENTURES

REDEMPTION OF DEBENTURES

RAISING OF LONG-TERM LOANS REPAYMENT OF LONG-TERM LOANS

SALES OF FIXED ASSETS

PURCHASE OF FIXED ASSETS

SALE OF LONG-TERM

INVESTMENTS

NON-TRADING PAYMENTS eg

DIVIDENDS

NON-TRADING RECEIPTS eg

DIVIDENDS

PURCHASE OF LONG-TERM

INVESTMENTS

NET DECREASE IN WORKING

CAPITAL

NET INCREASE IN WORKING CAPITAL

Importance Of Funds Flow Statement

1. Analysis of financial operations.

2. Formulation of realistic dividend policy.

3. Proper allocation of resources.

4. Future guide.

5. Appraising the use of working capital.

6. Assessing overall creditworthiness of a firm.

7. Throws light on many questions of general interest.

Why were the net CA lesser in spite of profits

Why dividend could not be declared in spite of available profits

What are the sources of repayment of debts

Identification of Flow of Funds: General

Rules

Transaction involves a

CURRENT account and a

NON-CURRENT account

Flow of

funds

Transaction involves 2

CURRENT ACCOUNTS

or 2 NON-CURRENT

ACCOUNTS.

NO flow of funds

FUNDS FLOW STATEMENT

This statement is prepared in two formats:

(a) Vertical form or Report Form vertical

format of FUND FLOW STATEMENT.doc

(b) Horizontal form or T Form horizontal

format of FUND FLOW STATEMENT.doc

Steps in Preparation Of FFS

Preparation of FUNDS FLOW STATEMENT

Preparation of SCHEDULE OF CHANGES IN WORKING CAPITAL

Calculation of FUNDS FROM /(LOST IN) OPERATIONS

Identification of various SOURCES and APPLICATION of

funds

Identification of HIDDEN INFORMATION affecting the

funds (preparation of non-current ledger a/cs)

Schedule of changes in working capital

Compares working capital position between two

balance sheet dates to determine increase or decrease

in working capital.

in current assets = in WC

in current liabilities = in WC.

in current assets = in WC.

in current liabilities = in WC.

Format schedule of changes in working capital.doc

WC = CA CL

Funds from Operations

Adjustment of non-fund and non-operating

items to net profit for the year

Format funds from operations.doc

Provision for Tax and Proposed Dividend

Current liability Schedule of changes in working capital

Appropriation

of profit

Provision of tax for

the year/ proposed dividend

added back to calculate

funds from operations

Tax /dividend paid in

current year - application of

funds