Fund Flow Statement – Conceptual Framework

Paper 3B: Financial Management Chapter 3 Unit II

CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT

Learning Objectives

1. Concept of Funds Flow statement

2. Format of Funds Flow Statement

3. Preparation and Presentation of Funds Flow Statement

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Introduction to Fund Flow Statement •Introduction •Background •Change in Working Capital

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Fund Flow - Introduction

1. Fund means Working capital – difference between current assets and current liabilities

2. Funds flow statement analyses the reasons for change in financial position between two balance sheets

3. Funds flow statement shows the inflows and outflows of funds – Sources and Application of funds during a particular period

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Fund Flow - Background

1. Funds flow statement reveals the sources and applications of funds

2. It ascertains the changes in financial position between two accounting periods.

3. It analyses the reasons for change in financial position between two balance sheets

4. It helps to test whether working capital has been effectively used or not

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Change in Working Capital – Profit situation

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• Even when a firm is earning adequate profit, it may be short of fund for day - to - day working – Reasons • Purchase of Fixed assets

using short term funds • Extension of credit to

Customers • Holding larger stock

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Change in Working Capital – Loss situation

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• Even in years of loss, working capital may not diminish as much as the amount of loss less depreciation – • Better realization from

Customers • Sale of long term assets and

releasing cash • Liquidation of stock

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Elements of Funds Flow Statement

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•Introduction •Sources of Funds •Applications of Funds

Elements of Funds Flow - Introduction

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• It is important to understand the numerous movements in funds in an accounting year • This is possible by preparing a

statement known as Funds Flow Statement.

• Funds Flow Statement also known as • Sources and Applications of

Funds Statement or • Statement of Changes in

Financial Position

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Elements of Funds Flow – Introduction …Continued

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• There is no prescribed format for this statement • It is customary to draw in

a manner as would disclose • the main sources of

funds and • their uses

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Sources of Funds

Issue of shares for cash

Issue of Debentures for cash

Raising long term loans

Sale of Fixed Assets

Sale of Investments

Funds from Operations

Decrease in Working Capital

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Funds from Operation 12

Net Income Add: • Depreciation • Amortization of Intangibles and deferred charges • Amortization of loss on sale of investments or fixed assets • Losses from other non-operating items • Current year tax provision • Transfer to reserve • Proposed dividend Less: • Profit on sale of investment or fixed assets • Any subsidy credited to P & L A/c • Any written back reserve and provision

Applications of Funds

Purchase of Fixed Assets

Purchase of Investments

Redemption of preference shares

Redemption of debentures

Repayment of loan

Payment of dividend and tax

Increase in Working Capital

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Funds Flow Statement - Benefits

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Funds Flow Statement - Benefits

Benefits to Management

Benefits to Investors

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Funds Flow Statement – Benefits to Management

* Projected funds flow statement can be used for implementing the budgetary and capital expenditure controls * Helps in deciding financing policies

Helps the management to identify whether Working capital is – * Effectively used or not * Adequate or not?

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Funds Flow Statement – Benefits to Investors

Helps in answering – * Where the profits have gone? * How the firm is financially sound in spite of losses?

Helps the Investors – * To decide whether company has managed funds properly? * Indication of credit worthiness

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Funds Flow Statement Vs. Cash Flow Statement

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Differences between Funds Flow and Cash Flow Statements

Basis

Nature of analysis

Usage

Presentation

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Basis

Funds flow statement is based on accrual accounting system

In Cash flow statement, transactions effecting cash or cash equivalents are considered

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Nature of Analysis

Funds flow statement analyses the sources and applications of funds of long term nature and the net increase or decrease will be reflected in Working capital

In Cash flow statement, only increase or decrease in current assets and current liabilities are considered in calculating cash flow of funds from operations

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Usage

Funds flow analysis is more useful in long range financial planning

In Cash flow analysis is more useful in identifying and correcting the current liquidity problems

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Presentation

Funds flow statement matches funds generated from various sources with various uses of funds

Cash flow statement start with opening balance of cash and reach to closing balance of cash by proceeding through sources and uses

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Lesson Summary 24

We have learnt the meaning of funds and funds flow statement

We have also learnt various elements of funds flow statement - Sources of funds and Application of funds

We have reviewed the benefits of funds flow statement

We have also seen the differences between funds flow statement and cash flow statement

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Please follow session on – Funds Flow Statement – Practical

Paper 3B: Financial Management Chapter 3 Unit II

Thank You

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