ASSIGNMENT ON FUND

FLOW STATEMENT

Submitted to Submitted by

Dr.Karuppasamy Vishnupriya. G

CONTENT

Introduction

Definition

Meaning of flow of fund

The Concept of funds

Fund flow statement

Objectives or uses of the fund flow statement

Limitation

Modern techniques of preparing fund flow statement

Schedule of changes in working capital

Statement of sources and application of funds

Illustration of fund flow statement

FUND FLOW STATEMENT

INTRODUCTION

Fund may be interpreted in various ways as (a) cash, (b) Total current assets, (c) Net

working capital, (d) Net current assets. For this purpose Fund flow statement is prepared. The

term fund means net working capital. The flow of fund will occur in a business, when a

transaction results in a change in increase or decrease in the amount of funds.

A fund flow statement is a valuable aid to financial manager or a creditor in evaluating

the uses of funds by a firm and in determining how these uses are financed. Such a statement

provides an efficient method for the financial manager to access the growth of the firms and its

resulting financial needs and to determine the best ways of financing those needs. In the nutshell,

funds statements are very useful in planning intermediate and long term financing. It is an

important tool of working capital analysis also.

DEFINITION

According to Foulke, “a statement of source and application of fund is a technical device

designed to analyze the changes in the financial condition of a business enterprise between two

dates.” It is a statement which highlights the underlying financial movement and reflects the

changes in the financial position or working capital position in two different dates.

According to Robert Anthony, “the Fund Flow Statement describes to sources from

which additional funds were derived and the uses to which these funds were put.”

MEANING OF FLOW OF FUND

The term “flow” means change and the term “flow of funds” means change in funds or

change in working capital. In other word any increase or decrease in working capital means

“fund flow”. Viewed from the angle of working capital concept of funds, the flow of funds refers

to movement of funds involving “inflow” and “outflow” in the working capital area. This

happens when changes occur in Non current accounts such as fixed assets, share capital, long

term debts etc. and are offset by corresponding changes in current account such as current asset

or current liabilities and vice versa.

THE CONCEPT OF FUNDS

The term fund has a variety of meanings. At one extreme the word funds is

synonymous with cash so that a funds statement is nothing but an enumeration of the net effects

of various kinds of business events on the cash. On the other extreme is the view that funds refer

to economic values expressed in money measurements which are subject to firm’s jurisdiction.

This is known as all financial resources concept of funds. Both these concepts of funds constitute

the extremes.

In between the two extreme views on the concept of funds, the most acceptable view is

the one relating to “Net working capital”. There are two concepts of working capital, namely,

gross concept and net concept. Gross working capital refers to the firm’s investment in current

assets, while the term net working capital means excess of current assets over current liabilities.

It is in the latter sense in which the term ‘fund’ is generally used.

FUND FLOW STATEMENT

Fund flow statement is a technical device designed to highlight the changes in the

financial position of the business enterprise between two balance sheets. Fund statement depicts

the source from where additional funds during the current year as compared to the previous year

have been received and to what uses these funds have been applied.

Various titles are used for the fund flow statement. They include the following:

1. Statement of sources and application

2. Statement of changes in financial position

3. Statement of sources and uses of fund

4. Where got and where gone statement

FIGURE SHOWING FLOW OF FUND

NO

NO

In the above figure the dotted line denote there is no flow of fund and the line

denotes there is flow of fund.

DIAGRAMS DEPICTING FLOW OF FUNDS

CURRENT LIABILITIES CURRENT ASSETS

NON CURRENT LIABILITIES NON CURRENT ASSETS

FLOW OF FUNDS

NO YES

WHEN BOTH CURRENT

OR

NON CURRENT ACCOUNTS ARE INVOLVED

WHEN ONE CURRENT

AND

OTHER NON CURRENT ACCOUNTS ARE INVOLVED

OBJECTIVES OR USES OF THE FUND FLOW STATEMENT

Fund flow statement is an important tool in the armoury of the finance manager. It helps

in the planning, deployment and controlling of funds year after year. The following are the

benefits or uses of fund flow statement.

To help to understand the changes in assets and asset sources which are not readily

evident in the income statement or financial statement.

To inform as to how the cans to the business have been used.

To point out the financial strength and weakness of the business.

It provides a detailed analysis and understanding of changes in the distribution of

financial resources between two balance sheet dates.

It shows how the funds were obtained and used during a period.

The sources from which funds were obtained are useful in computation of cost of capital

of the business.

A detailed analysis of sources of fund in the past acts as a guide for obtaining funds for

future requirement.

It gives indication of any weakness or strength in the general financial position of a firm

It throws light on the financial consequences of business operations.

It can be compared with the relevant budgets to assess the usage of funds as per plans.

etc.., are facilitated by fund flow analysis.

Working capital and the causes for changes in working capital are highlighted. This can

help in the formulation of sound policy for liquidity and short term solvency of the firm.

LIMITATIONS OF FUNDS FLOW STATEMENT

The funds flow statement has a number of uses, however, it has certain limitations also,

and they are:

It should be remembered that a funds flow statement is not a substitute of an income

statement or a balance sheet. It provides only some additional information as regards

changes in working capital.

It cannot reveal continuous changes.

It is not an original statement but simply are arrangement of data given in the financial

statements.

It is essentially historic in nature and projected fund flow statement cannot be prepared

with much accuracy.

Changes in cash are more important and relevant for financial management than the

working capital.

MODERN TECHNIQUES OF PREPARING FUND FLOW STATEMENT

The document needed for constructing a fund flow statement are the comparatives

balance sheets at the beginning and at the end of the period for which it is prepared. The effect of

conduct of the business is reflected in its balance sheets by increase or decrease in the various

assets and liabilities and in the proprietary equity or capital. Material information is also required

to highlight correctly the impact of operation upon the funds. This can be obtained from

summarized operating statement. A condensed statement of retained earnings is necessary to

clarify fund effects of ownership transactions.

The fund flow statement involves the preparation of two statements. They are as

follows:

1. Schedule of change in working capital, and

2. Statement of source and application of funds.

1. SCHEDULE OF CHANGES IN WORKING CAPITAL

The first part of the fund flow analysis is the schedule of changes in working

capital. It is prepared in order to measure the increase or decrease in the working capital over a

period of time. It is necessary to prepare this schedule. This schedule is prepared with the help of

only current asset and current liabilities. The difference is recorded for each individual current

asset and current liability. This process will be repeated till all accounts relating to all current the

schedule of changes in working capital is prepared only from accounts appearing in the balance

sheets. There is no effect of additional information given in the problem.

So i) An increase in current assets increases working capital

ii) A decrease in current assets decrease working capital

iii) An increase in current liabilities decrease working capital and

iv) A decrease in current liabilities increases working capital

The change in the amount of any current asset or current liability in the current balance

sheet as compared to that of the previous balance sheet either results in increase or decrease in

working capital. The difference is recorded for each individual current asset and current

liabilities. In case a current asset in the current period is more than in the previous period, the

effect is an increase in working capital and it is recorded in the increase column. But if the

current liability is more than in the previous year, the effect is decrease in working capital and it

is recorded in the decrease column or vice versa.

Working capital = Current asset – Current liabilities

FORMAT FOR SCHEDULE OF CHANGE IN WORKING CAPITAL

ADJUSTED PROFIT AND LOSS ACCOUNT

Particulars Previou

s year

Current

year

Effect on working

capital

Increase decrease

A.CURRENT ASSETS:

Cash in hand

Cash at bank

Bills receivable

Sundry debtors

Closing stock

Prepaid expenses

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

X ---

X ---

X

--- X

X ---

--- X

XX XX

B. CURRENT LIABILITIES

Sundry creditors

Bills payable

Bank overdraft

o/s expenses

XX

XX

XX

XX

XX

XX

XX

XX

X ---

--- X

--- X

X ---

XX XX X X

C. WORKING CAPITAL (A-B)

D. NET INCREASE OR

DECREASE

IN WORKING CAPITAL

XX

X

XX

--- --- X

XX XX X X

PARICULARS RS PARTICULARS RSTo depreciation & depletion or

amortization

To appropriation of retained

earnings

To loss on sale of non current

fixed assets

To dividends

To proposed dividend

To provision for taxation

To closing balance

To fund lost in operations

XX

XX

XX

XX

XX

XX

XX

XX

By opening balance

By transfer from excess

provisions

By appreciations

By dividend received

By interest on investment

By profit on sale of fixed or

noncurrent assets

By fund from operations

XX

XX

XX

XX

XX

XX

XX

XX XX

2. STATEMENT OF SOURCES AND APPLICATION OF FUNDS

This is the second but most important part of fund flow analysis. It is also known as

fund flow statement. It is prepared on the basis of the change in fixed asset, long term liabilities

and share capital ascertained on the basis of values of these items shown in the balance sheets.

Additional information given as per adjustment must also be considered while preparing the fund

flow statement. Increase in fixed asset is an application of funds and decrease in fixed asset on

account of sale is a source of fund. Increase in long term liabilities is a source of fund and

decrease in long term liabilities is an application of fund. This is also applies to share capital.

Thus the preparation of fund flow statement involves the ascertainment of increase or decrease in

the various items of fixed assets, long term liabilities and share capital.

FUND FLOW STATEMENT

SOURCE RS APPLICATIONS RS

1.Issue of shares

2.Issue of debenture

3.Long term borrowing

4. Sale of fixed assets

5. Funds from operation

6. Sale of investments

7. Income from long- term

investment

Net Decrease in working capital

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

1.Redemption of preference share

2. Redemption of debentures

3. Repayment of loans

4. Purchase of fixed assets

5. Payment of tax

6. Payment of dividend

7. Purchase of investment

8. Operating losses etc.

Net Increase in working capital

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

TOTAL XXX TOTAL XXX

AN ALTERNATIVE FORM

STATEMENT OF SOURCE AND APPLICATION OF FUNDS

A. SOURCES:

1. Issue of shares

2. Issue of debenture

3. Long term borrowing

4. Sale of fixed assets

5. Sale of investments

6. Dividend received

7. Interest received

8. Funds from operations etc.

Rs

XX

XX

XX

XX

XX

XX

XX

XX

XX

B. APPLICATIONS

1. Redemption of preference shares

2. Redemption of debentures

3. Repayment of loans

4. Purchase of fixed asset

5. Payment of tax

6. Payment of dividend

7. Purchase of investment

8. Loss from operation

9. Amount withdrawn by the proprietor

etc,

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

C. Net increase or decrease in working capital

(A-B)

XX

SOURCES OF FUND

The transactions that increase working capital are sources of funds. Following items

are the source of funds for the business:

1. FUND FROM OPERATIONS

Business activities may result in profit. We calculate fund from operations by

adding non operating expenses and deducting non operating income from net profit. Fund form

operation is a source, because we receive funds from it.

STATEMENT SHOWING CALCULATION OF FUND FROM OPERATION

Particulars Rs Rs

Profit and loss account opening balance

Less: Profit and Loss Account opening balance

Current year profit as per profit & Loss Account

Add: Depreciation and depletion

Amortization of fictitious assets and intangible

assets

Provision for tax

Transfer to reserve

Interim dividend paid

Dividend proposed

Loss on sale of fixed assets

Any other non-cash expenditure

Less: Profit on sale of fixed assets

Dividend received

Appreciation in the values of fixed asset

( if credited in profit and loss account)

Funds from operation

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

The following items are added with profit:

(a)DEPRECIATION AND DEPLETION

The treatment of depreciation and depletion of noncurrent assets like plant and

machinery and furniture is a different problem. These items are non fund items because

they have nothing to do with current assets and current liabilities. So to delete their

effect, the amount of depreciation should be added to back to current year’s profit in

order to find out the fund from operation.

(b)AMORTIZATION OF NON FUND ITEMS This also does not affect the flow of funds. The amortization of non fund items

such as preliminary expenses written off, goodwill written off, discount on issue of

shares and debentures written off, etc. should be added along with current year’s profit

inorder to find out the fund from operation.

(c) PROVISION FOR TAX Provision for tax made from current year’s profit does not affect the flow of

funds. So it must be added back to the profit.

(d)PROPOSED DIVIDEND Dividend proposed out of current year’s profit does not affect the flow of

funds. So it must be added back to the profit.

(e) OTHER ITEMS Similarly, interim dividend paid, transfer to reserve, loss on sale of assets, etc

should also be added back to the current year’s profit inorder to find out the fund from

operation.

The following items are deducted from profits:

1. DIVIDEND RECEIVED

Generally it is credited in profit and loss account. As it is a non operating item, it

is shown separately as a source of fund. So here it must be deducted from profit.

2. PROFIT ON SALE OF FIXED ASSETS Any profit on sale of fixed asset which has been credited to profit and loss

account must be eliminated from the amount of profit.

3. APPRECIATION IN THE VALUE OF FIXED ASSET If any fixed asset has been appreciated during the year and credited to profit

and loss account, must also be deducted from the profit.

4. ISSUE OF SHARE CAPITAL Increase in share capital increases fund; but shares issued and allotted for

consideration other than cash do not generate fund.

5. ISSUE OF DEBENTURE OR LONG TERM LAONS Issue of debenture accepted public deposits and long term loans, all result in the

increase of funds. These are sources of fund. If debentures have been allotted to

somebody for consideration other than cash, they will not be taken into account.

6. SALES OF FIXED ASSETS When any fixed assets like land, building, machinery, furniture or long term

investments are sold then cash is increased without increased current liability and

hence results in the generation of funds.

7. NON TRADING RECEIPTS Any non trading receipts like dividend, rest, interest etc. received in cash also

increase fund.

APPLICATION OF FUNDS

Funds received by the business are applied in one way the other. The funds may

be applied for redemption of loans, debenture, etc. They may also be used for purchasing

additional assets, goods or even making payment. Sometimes they are lost in the business

operation, hence loss from operation is supposed to be application of funds. Application means

outflow or use of funds during the current year. The funds obtained during the year are put to

different uses. This application of funds may be in the following forms:

1. PURCHASE OF FIXED ASSET If any fixed asset is purchased for cash, it is an application of und.

2. PAYMENT OF LOAN OR REDEMPTION OF PREFERENCE

SHARES & DEBENTURES Any repayment of loans or redemption of preference shares is also an application

of funds.

3. PAYMENT OF DIVIDEND AND TAX Outflow of fund will also take place, if dividend and tax are paid. As the funds

are utilized for the payment of dividend and tax, it is said to be application of funds.

Declaration of dividend is not an application of fund. Similarly, tax provision created

during the year is not an application. Proposed dividends of the previous year are

supposed to be paid during the current year, if it is not treated as current liability. This

rule is application in case of provision for tax also.

4. AMOUNT WITHDRAWN BY THE PROPRIETOR Outflow of fund will also take place, if fund are withdrawn by the proprietor

for the personal use. It is therefore an application of fund.

5. LOSS FROM OPERATION

The fund received may be lost, if there is a loss or business operation have

been unsatisfactory. In other words, loss from operation reduces funds and thus results in

outflow of funds.

ILLUSTRATION OF FUND FLOW STATEMENT

From the following balance sheet of ABC Ltd you are required to prepare the schedule of

change in working capital and fund flow statement.

LIABILITIES 2003 2004 ASSETS 2003 2004

Equity share capital

Share premium

General reserve

Profit and loss

account

8% debenture

Provision for taxation

Creditors

2,40,000

24,000

18,000

58,500

---

29,400

1,05,000

3,60,000

36,000

27,000

62,400

78,000

32,700

1,09,000

Land & building

Machinery

Furniture

Stock

Debtors

Bank

1,66,200

1,06,800

7,200

66,300

1,09,500

14,400

3,39,600

1,53,900

4,500

78,000

1,17,300

12,000

4,70,400 7,05,300 4,70,400 7,05,300

ADJUSTMENT:

Depreciation written off:

i) Machinery Rs 38,400 ii) Furniture Rs.1, 200

SCHEDULE OF CHANGE IN WORKING CAPITAL

Particulars Previous

year

Current year Effect on working

capital

Increase Decrease

CURRENT ASSET

Stock

Debtors

Bank

66,300

1,09,500

14,400

78,000

1,17,300

12,000

11,700

7,800

2,400

1,09,000 2,07,300

CURRENT LIABILITIES

Creditors

Provision for tax

1,05,000

29,400

1,09,200

32,700

8,700

3,300

1,29,900 1,41,900

Working Capital

Increase in working capital

60,300

5100

65,400

5100

FURNITURE A/C

Particulars Rs Particulars RsTo balance b/d 7200 By depreciation

By balance c/d

By sale of furniture

1200

4500

1500

7200 7200

MACHINERY A/C

Particulars Rs Particulars RsTo balance b/d

Purchase of machinery

1,06,800

85,500

By depreciation

By balance c/d

38,400

1,53,900

1,92,300 1,92,300

ADJUSTED P/L A/C

PARTICULAR AMT PARTICULAR AMTTo transfer to reserve

To depreciation on

machinery

To depreciation on

furniture

To balance c/d

9,000

38,400

1,200

62,400

By balance b/d

Fund flow operation

58,500

52,500

1,11,000 1,11,000

FUND FLOW STATEMENT

SOURCE RS APPLICATION RS

Issue of share capital

Share premium

Issue of debenture

Sale of furniture

Fund from operation

1,20,000

12,000

78,000

1500

52,500

Land and building

Machinery

Working capital

1,73,400

85,500

5,100

2,64,000 2,64,000

REFERENCE

www. fundflowstatement .com

www.wiki.answers.com

www.authorstream.com

www.encyclopedia.com

www.wikepeida.com