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Fund Flow Statement

Meaning of Funds, Fund Flow Statement, Flow of Funds, Working Capital, Causes of changes in working Capital,

Proforma of Sources and Application of Funds, Proforma of Adjusted Profit and Loss Account

Meaning - Fund means cash or working capital or a financial resource of the company. Flow of fund is like circulation

blood in the body. Like blood circulates in the body, fund should also come into business and go from business. The floof fund is called as changes in working capital. The movement of funds happens with increase or decrease in net workin

capital. The increase or decrease in net working capital takes place when two accounts to be affected in a transaction arecurrent account and non current account. Like current asset or current liabilities one account should be current account

other non current. The flow highlights efficiency in funds management. The effectiveness of financial management inprocuring funds from various sources & using them effectively for generating income without sacrificing the financial

position of the firm.

Funds Flow Statement - reveals resources from which funds can be obtained by the firm and the specific uses to which

such funds can be applied to. A few definitions of fund flow statement are:Foulke, R.A., a statement of source and application of fund is a technical device designs to analysis the changes in the

financial condition of business enterprises between two dates.

The fund flow statement has two parts: (a)Sources of fund & (b) Application of fund.

The difference between these two parts represents net changes in working capital. The excess of sources of funds overuses of fund is the net increase in working capital & excess of uses over sources of fund is net decrease in working capit

The amount of net increase or decrease as shown in fund flow statement should be equal to the amount shown by schedof working capital changes.

Proforma of Sources and Application of Funds

Sources Applications

Funds from business operations

Other incomes

Sale of non-current assetsLong-term borrowings

Issue of additional equity capital or preference sharecapital

Net decrease in working capital

Losses from business operations

Purchase of non-current assets

Redemption of debentures and/or preference sharesDividends to share holders

Net increase in working capital

Source of Fund (From where funds are obtained) :

A decrease in asset or increase in liability results in source of fund.

Application of Fund (How these funds are employed):

An increase in asset or decrease in liability results in an application of fund.

Application of Funds Flow Statement: It generally serves the following purposes:-

[a] Analysis of Financial Position: It analyses how the funds were obtained and used in the past. It is a valuable tool fo

the finance manager to understand and study the past and future plans of the firm and their impact on the liquidity. He csearch reasons for the imbalances in uses of funds to take corrective actions.

[b]Analysis of financial operations : Financial statements does not disclose the causes for changes in assets & liabilitibetween two different points of time. The fund flow statement explains causes for such changes& also the effect of thes

changes on liquidity position of the firm.[c] Computation of working capital - The funds flow statement helps the management in assessing the activity ofworking capital and whether the working capital has been effectively used to the maximum.

[d] Calculation of Financing capacity: One important use of the statement is that it evaluates the firm' financing

capacity. The analysis of sources of funds reveals how the firm's financed its development projects in the past i.e., from

internal sources or from external sources. It also reveals the rate of growth of the firm.[e] Allocation of Resources: The amount of funds to be available for the projects is estimated with the help of Funds

Flow Statement. This prevents the business from becoming a helpless victim of unplanned action.

[f] Insight of Outside World: It gives an insight into the evolution of the present financial position and and answers the

problem 'Movement of our resources'? It provides useful information regarding amount of loan required, its proposes, thterms of repayment an sources for repayment of loan etc. It carries information regarding firm's financial policies to the

outside world.

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[g] Planning for Future : It reveals certain valuable information for the financial manager for planning the future

financial requirements of the firm. The management can formulate its financial policies based on information gathered

from the analysis of such statements. Financial manager can rearrange the firm's financing more effectively on the basissuch information along with the expected changes in debtors and various accruals.

Objectives of Fund Flow Statement:

1. To ascertain the funds generated from operations. It reveals the sources of funds and their applications.

2. It acts as an instrument of planning and control.

3. It is prepared based on the financial statements of two consecutive years.

4. It takes into account funds available not only from trading operations but also from other sources like issue ofshare etc.

5. Preparation of the statement is not a statutory obligation.

6. It can be prepared as and when management wants it.

Drawbacks of Funds Flow Analysis:

The funds flow statement is historical in nature like any other financial statement. It does not estimate the sources and

application of funds for the near future. The funds flow statement does not disclose the structural changes in financialrelationship in a firm nor it discloses the major policy changes with regard to investment in current assets and short-term

financing. The funds flow statement does not disclose any new or original items which affect the financial position of thbusiness. The funds flow statement simply rearranges the data given in conventional financial statements and schedules

A study of changes in cash is more relevant than a study of changes in funds for the purpose of managerial decisionmaking. The funds flow statement is prepared from the data provided in the balance sheet and profit and loss account.

Hence, the defects in financial statements will be carried over to funds flow statement also

Procedure for preparing fund flow statement

Step 1: Prerequisites for preparation are - Balance sheets at the beginning and at the end of the accounting period.( 2 yrs Balance sheets)

The profit and loss account of the current periodStep 2 : Preparing schedule or statement of changes in working capital

Step 3 : Preparation of statement for funds from operation (adjusted profit and loss account)Step 5 : Prepare ledger accounts for additional information and calculate hidden information.

Step 6 : Fund flow statement

Working Capital - The working capital (WC) of a firm is the amount by which its current assets (CA) exceed its curren

liabilities (CL). WC = CA CL

The size of working capital is a measure of the safety margin that exists for the protection of short-term creditors. Workcapital may also be viewed as funds available for acquisition of non-current assets as well as to repay non-current

liabilities.

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Causes of changes in working Capital- The excess of funds generated over funds outgo from non-current assets andnon-current liabilities will lead to increase or decrease in working capital and it is presented in a statement form.

Any transaction that results in an increase in working capital is a source of WC.

An increase in CA causes an increase in WC

E.g.: Issue of equity shares causes an increase in cash (CA) and increase in non-current liability (NCL)

A decrease in CL causes an increase in WCE.g.: Bank overdraft paid by issue of debentures causes a decrease in bank overdraft (CL) and an increase in NCL

Any transaction that causes a net decrease in WC is an application of WCA decrease in CA causes a decrease in WC.

E.g.: Purchase of non-current assets (NCA) causes decrease in cash (CA) and increase in (NCA)An increase in CL causes a decrease in WC.

E.g.: Bank overdraft to repay long-term loans causes an increase in CL and decrease in NCL

Some transactions merely change the form of working capital, without altering the amount of working capital as such.

Clearly, such items neither constitute a source nor the use of working capital.A simultaneous increase in CA and CL does not affect WC.

E.g.: Purchase of inventories on credit causes an increase in inventory (CA) and an increase in creditors (CL)

A simultaneous decrease in CA and CL does not affect

E.g.: Payment of creditors causes a decrease in cash (CA) and a decrease in creditors (CL).

In short transaction which gives rise to a source or use of working capital should affect both the current account (CA orCL), and the non-current account (NCA or NCL) simultaneously. However, if a transaction occurs where only current

accounts are affected, working capital is not changed. Likewise, if a transaction occurs where only non-current accoun

are affected; it does not bring about any change in the working capital. E.g.: a conversion of debentures into equity

increases one component of NCL (equity) and decreases another component of NCL (debentures).

Funds from Business OperationsThe profit/loss figure, as shown in the profit and loss account of the firm, does not indicate the quantum of working cap

provided by business operations because the revenues and expenses shown do not run parallel to the flow of the workincapital. The profit and loss account contains a variety of write-offs and other adjustments which do not involve any

corresponding movement of funds. Therefore, appropriate adjustments are to be made to the profit disclosed by the prof

and loss account to arrive at the funds from business operations.For this purpose: all such expenses which have been deducted from revenue but do not reduce working capital are to beadded back, such items as have been added to revenue but have not contributed to the working capital are to be subtrac

and all such revenues which are not directly caused by business operations should also be deducted and shown separatein the statement.

Calculation of Funds from Operations

A

B

C

(A+B-C) =

Net income (or loss) as shown by the profit or loss account

Add: Depreciation expenses

Amortization of goodwill, patents and other intangible assets;

Amortization of discount on debentures or share issue expensesAmortization of extraordinary losses occurred in previous years

Loss on sale of non-current assetsLess: Amortization of premium received on debentures;

Profit on sale of equipmentProfit on revaluation of non-current assets

Dividends and interest

Funds from business operations.

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OR

Proforma of Adjusted Profit and Loss Account

Particulars Rs Particulars Rs

To Depreciation & Depletion charges By Bal b/d (Opening Bal of P& L)

To Amortization of:

(a) Intangible assets: Good will

Patent rights, etc.

(b) Fictitious assets: preliminary expenses

deferred expenditure

By Dividend received

By Profit on sale of fixed assets

By Profit on sale of long-term

investments

By Funds from operations (Bal fig)

Appropriation of retained earnings:

Transfer to:- General Reserve

- Dividend equalisation fund- Sinking fund

- Compensation fund etc,

To Dividends paid

To Provision for taxation

To Interim dividend

To Proposed dividendTo Loss on sale of fixed assets

To Funds lost in operations (Bal. Fig.)

To Bal c/d (Closing Bal of P & L A/c )

Total Total

Note: Proposed dividend and provision for taxation may or may not be a current liability. In case if they are treated as

current liabilities, they should be shown in a schedule of changes in working capital only. However, if they are treated anon-current liabilities, then they should be considered as internal appropriation of profits made during the year and shou

be added back to current years profit while calculating funds from operations. But tax paid during the year should beconsidered as Application of Fund.

Funds Flow Statement (Vertical)

I. Sources of Funds

Funds from operationsIssue of Share Capital

Issue of DebenturesLong Term Borrowings

Sale of Assets or InvestmentNon operating Income

Any other sourceTotal Sources (A)

II. Applications of FundsLoss from operations

Redemption of share capital

Redemption of Debentures

Repayment of loansPurchase of Assets or Investments

Dividend paymentAny other use

Total Applications (B)

Increase or Decrease in working capital [A-B]

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Q.1 From the following information prepare

i) A Schedule of Changes in Working Capital

ii) A Funds Flow Statement

Balance Sheetof M/s ______ as on

Liabilities31stMarch

Assets31stMarch

2006 2007 2006 2007

Capital

Profit/LossAppropriation

Bank Loan

Bills PayableSundry Creditors

Reserve for Taxation

18,50,000

14,78,00012,00,000

4,00,000

14,00,0002,00,000

21,00,000

17,64,0009,00,0000

6,80,000

12,20,0001,80,000

Goodwill (at Cost)

Land and BuildingsPlant and Machinery

Furniture and

FittingsStock/Inventories

Sundry Debtors

Bills ReceivableBank

Cash

6,00,000

18,50,0004,74,000

1,94,000

8,26,000

12,00,000

8,00,0005,00,000

84,000

6,00,000

22,00,0005,24,000

1,94,000

7,24,000

12,80,000

7,21,0004,83,000

1,18,000

65,28,000 68,44,000 65,28,000 68,44,000

Schedule/Statement of Changes in Working Capital for the period from __ to __

Particulars/AccountPrevious

Period

Current

Period

Working Capital

Change

Increase Decrease

A. CURRENT ASSETS

1) Stock/Inventories2) Sundry Debtors

3) Bills Receivable

4) Bank5) Cash

8,26,00012,00,000

8,00,000

5,00,00084,000

7,24,00012,80,000

7,21,000

4,83,0001,18,000

80,000

34,000

1,02,000

79,000

17,000

34,10,000 33,26,000 1,14,000 1,98,000

B. CURRENT

LIABILITIES/PROVISIONS

1) Bills Payable2) Sundry Creditors

3) Provision for Taxation

4,00,000

14,00,0002,00,000

6,80,000

12,20,0001,80,000

1,80,00020,000

2,80,000

20,00,000 20,80,000 3,14,000 4,78,000

Working Capital (A B) 14,10,000 12,46,000

Change in Working Capital(12,46,000 14,10,000)

(Or) (3,14,000 4,78,000)1,64,000

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Working - Funds Flow Statement

Item

Amount

Previous

Period

Amount

Current

Period

Change Nature Result

Capital

Profit/Loss

AppropriationBank Loan

Land and Building

Plant and Machinery

18,50,000

14,78,000

12,00,00018,50,000

3,70,000

21,00,000

17,64,000

9,00,00022,00,000

4,74,000

2,50,000

2,86,000

3,00,0003,50,000

50,000

Liability -

Increase

Liability -Increase

Liability -

IncreaseLiability -

IncreaseAsset-Increase

Inflow

Inflow

InflowInflow

Outflow

Funds Flow Statement for the period from __ to __

Particulars Amount Amount

SOURCES (INFLOW) of FUNDS :1) Capital

2) Profit/Loss Appropriation

2,50,000

2,86,000 5,36,000

Less: APPLICATIONS (OUTFLOW) of FUNDS

1) Land and Buildings2) Plant and Machinery

3) Bank Loan

3,50,00050,000

3,00,000 7,00,000

Change in Working Capital 1,64,000

There is a decrease inNet Working Capitalto the extent of Rs. 1,64,000

T Form

Statement of Sources and Applications of Funds for the period from __ to __

Sources (Inflow)

of FundsAmount

Applications (Outflow)

of FundsAmount

1) Capital

2) Profit/Loss Appropriation

2,50,000

2,86,000

1) Land and Buildings

2) Plant and Machinery3) Bank Loan

3,50,000

50,0003,00,000

5,36,000 7,00,000

Change in Working Capital 1,64,000

(Sources/Inflow of Funds) < (Applications/Outflow of Funds)

There is a decrease in Net Working Capital to the extent of Rs. 1,64,000

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