ASSIGNMENT ON FUND

FLOW STATEMENT

Submitted to Submitted by

[Link] 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
CURRENT LIABILITIES
CURRENT ASSETS

NON CURRENT LIABILITIES NON CURRENT ASSETS

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

FLOW OF FUNDS

YES
NO

WHEN ONE CURRENT

WHEN BOTH CURRENT
AND
OR
OTHER NON CURRENT
NON CURRENT ACCOUNTS ARE
ACCOUNTS ARE INVOLVED
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.

Working capital = Current asset – Current liabilities

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.
FORMAT FOR SCHEDULE OF CHANGE IN WORKING CAPITAL

Particulars Previou Current Effect on working

s year year capital
Increase decrease
[Link] ASSETS:
Cash in hand XX XX X ---
Cash at bank XX XX X ---
Bills receivable XX XX X
Sundry debtors XX XX --- X
Closing stock XX XX X ---
Prepaid expenses XX XX --- X
XX XX

B. CURRENT LIABILITIES
Sundry creditors XX XX X ---
Bills payable XX XX --- X
Bank overdraft XX XX --- X
o/s expenses XX XX X ---
XX XX X X

C. WORKING CAPITAL (A-B) XX XX

D. NET INCREASE OR X --- --- X
DECREASE
IN WORKING CAPITAL
XX XX X X

ADJUSTED PROFIT AND LOSS ACCOUNT

PARICULARS RS PARTICULARS RS
To depreciation & depletion or XX By opening balance XX
amortization By transfer from excess XX
To appropriation of retained XX provisions
earnings By appreciations XX
To loss on sale of non current XX By dividend received XX
fixed assets By interest on investment XX
To dividends XX By profit on sale of fixed or XX
To proposed dividend XX noncurrent assets
To provision for taxation XX By fund from operations XX
To closing balance XX
To fund lost in operations 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
[Link] of shares XXX [Link] of preference share XXX
[Link] of debenture XXX 2. Redemption of debentures XXX
[Link] term borrowing XXX 3. Repayment of loans XXX
4. Sale of fixed assets XXX 4. Purchase of fixed assets XXX
5. Funds from operation XXX 5. Payment of tax XXX
6. Sale of investments XXX 6. Payment of dividend XXX
7. Income from long- term XXX 7. Purchase of investment XXX
investment XXX 8. Operating losses etc. XXX
Net Decrease in working capital Net Increase in working capital

TOTAL XXX TOTAL XXX

AN ALTERNATIVE FORM

STATEMENT OF SOURCE AND APPLICATION OF FUNDS

A. SOURCES: Rs
 1. Issue of shares XX
2. Issue of debenture XX
3. Long term borrowing XX
4. Sale of fixed assets XX
5. Sale of investments XX
6. Dividend received XX
7. Interest received XX
8. Funds from operations etc. XX
XX
B. APPLICATIONS
1. Redemption of preference shares XX
2. Redemption of debentures XX
3. Repayment of loans XX
4. Purchase of fixed asset XX
5. Payment of tax XX
6. Payment of dividend XX
7. Purchase of investment XX
8. Loss from operation XX
9. Amount withdrawn by the proprietor XX
etc,
XX
C. Net increase or decrease in working capital XX
(A-B)

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 XX
Less: Profit and Loss Account opening balance XX
Current year profit as per profit & Loss Account XX
Add: Depreciation and depletion XX
Amortization of fictitious assets and intangible XX
assets XX
Provision for tax XX
Transfer to reserve XX
Interim dividend paid XX
Dividend proposed XX
Loss on sale of fixed assets XX XX
Any other non-cash expenditure XX
XX
Less: Profit on sale of fixed assets XX
Dividend received XX XX
Appreciation in the values of fixed asset
( if credited in profit and loss account)
Funds from operation 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 2,40,000 3,60,000 Land & building 1,66,200 3,39,600
Share premium 24,000 36,000 Machinery 1,06,800 1,53,900
General reserve 18,000 27,000 Furniture 7,200 4,500
Profit and loss 58,500 62,400 Stock 66,300 78,000
account --- 78,000 Debtors 1,09,500 1,17,300
8% debenture 29,400 32,700 Bank 14,400 12,000
Provision for taxation 1,05,000 1,09,000
Creditors
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 Current year Effect on working

year capital
Increase Decrease
CURRENT ASSET
Stock 66,300 78,000 11,700
 Debtors 1,09,500 1,17,300 7,800
Bank 14,400 12,000 2,400

1,09,000 2,07,300
CURRENT LIABILITIES
Creditors 1,05,000 1,09,200 8,700
Provision for tax 29,400 32,700 3,300

1,29,900 1,41,900
Working Capital 60,300 65,400
Increase in working capital 5100 5100

FURNITURE A/C

Particulars Rs Particulars Rs
To balance b/d 7200 By depreciation 1200
By balance c/d 4500
By sale of furniture 1500
7200 7200

MACHINERY A/C

Particulars Rs Particulars Rs
To balance b/d 1,06,800 By depreciation 38,400
Purchase of machinery 85,500 By balance c/d 1,53,900
1,92,300 1,92,300

ADJUSTED P/L A/C

 PARTICULAR AMT PARTICULAR AMT
To transfer to reserve 9,000 By balance b/d 58,500
To depreciation on 38,400 Fund flow operation 52,500
machinery 1,200
To depreciation on 62,400
furniture
To balance c/d

1,11,000 1,11,000

FUND FLOW STATEMENT

SOURCE RS APPLICATION RS
Issue of share capital 1,20,000 Land and building 1,73,400
Share premium 12,000 Machinery 85,500
Issue of debenture 78,000 Working capital 5,100
Sale of furniture 1500
Fund from operation 52,500
2,64,000 2,64,000

REFERENCE

[Link]

[Link]

[Link]

[Link]

[Link]