FUNDS FLOW

STATEMENT
 Why we prepare fund flow statement?

The balance sheet and income statement are

the traditional basic financial statement of a
business enterprise. A serious limitation of these
statements is that they do not provide information
regarding changes in the firms financial position
during a particular period of time. They fail to
answer following question
What funds were available during the accounting
period and for what purpose these funds were
utilized?
Have long term sources been adequate to finance
fixed asset purchase?
Does the firm possess adequate working capital?
 The balance sheet is merely a static
statement. It is statement of asset and
liabilities of the business as on particular
date.
The fund flow statement overcomes
these limitations of basic financial
statement.
MEANING OF FUND

The term fund has a variety of meaning such as cash fund,

capital fund and working capital fund.
1.Cash fund In a narrow sense, fund means only cash. Cash
flow statement portrays net effect of the various business
transactions on cash into account receipts &
disbursement of cash.
This concept of preparing fund flow statement is not
accepted, as there are many such transactions
which do not affect cash but represent the flow of
fund .
for example: purchase of furniture on credit does not affect
cash but there is flow of fund.
2. Capital fund Here fund means all financial resources used
in the business, whether in the form of men, money,
material, machine & others.
3.Net working capital -Net working capital means difference
between current asset and current liabilities .funds
generally refers to cash or cash equivalent or to working
capital.
 Funds Flow Statement uses the working
capital aspect of funds
 MEANING OF FLOW
The term flow refers to changes or transfer and
therefore the flow of funds means transfer of
economic values from one asset to another, from
one liability to another, from one asset to liabilities
or vice-versa or a combination of these. So flow of
fund refers to increase or decrease in net working
capital.

The increase or decrease in net working capital

will take place only when one account, out of two
accounts to be affected in a transaction ,is a current
account i.e. current asset or current liabilities and
the other account is non current account i.e. fixed
asset or long term liability or capital.
 When a change in non current account is
followed by a change in another non
current account, it does not amount to
flow of fund. It is because, in such case,
neither the working capital increase nor
decrease.
For example
Machinery a/c Dr
To share capital a/c
(Machinery purchase in consideration of share)
In the above transaction both accounts are non
current accounts which do not at all affect current
asset and current liability. Therefore working
capital will remain unaffected i.e. there will be no
flow of fund.
When changes in one current account results in
a changes in other current account ,it also does not
affect working capital i.e. there is no flow of funds .
For example
Cash a/c Dr
To debtor a/c
(Cash received from debtor)
It represents an increase of cash a current asset account and
decrease of debtor again a current asset account .thus there will be
no net changes in the amount of working capital, although the
composition of working capital will be affected .
In the above figure the dotted line displays there will be no flow of fund &
the dark line displays the flow of fund.
 Preparation of Fund Flow Statement

The changes which occurred in the current accounts as a

result flow of fund are reflected in a statement known as
schedule of changes in working capital .
The similar changes in non current accounts are shown in
Fund Flow Statement.

Funds Flow statement is three stage process:

Schedule of Changes in working capital

Calculation of Funds From operations

Statement of Funds Flow.

.
Schedule of Changes in Working Capital

It discloses the changes in individual item of

current asset & current liabilities between
two period & there effect on working capital.
Working capital will increase when there is an
increase in current asset and decrease in
current liabilities, whereas, working capital
will decrease when there is a decrease in
current asset & increase in current liabilities.
Net increase in working capital is treated as
use of funds & the net decrease in working
capital is treated as source of funds.
 Statement or Schedule of Changes in Working Capital.

Previous Current Effect on Working

Item captial
Year Year
Incraese Rs. Decrease
Rs.
(A) Current Assets
Cash at bank
Cash in hand
Stock in trade
Debtors
Bills receivable
Advance payment
Short term investment
Prepaid expense
Accrued income
Total (A)
(B) Current Liabilities
(1) Short term loans
(2) Bank overdraft
(3) Creditors
(4) Bills payable
(5) Outstanding expenses
(6) Unclaim dividend
Total (B)
Net Working Capital (A-B)
Incraese / Decrease in Working
Capital
Total
 Fund from operations :
Fund From Operation is to be determined on the basis of Profit and Loss
Account. The operating profit revealed by Profit and Loss Account
represents the excess of sales revenue over cost of goods sold. In the
true sense, it does not reflect the exact flow of funds caused by business
operations. Because the revenue earned and expenses incurred are not
in conformity with the flow of funds. For example, depreciation charges on
fixed assets, write up of fixed assets or fictious assets, any appropriations
etc. do not cause actual flow of funds. Because they have already been
charged to such profits.
Hence, fund from operation is prepared to find out exact inflow or outflow
of funds from the regular operations on the basis of items which have
readjusted to the current profit or loss. The balancing amount of adjusted
profit and loss account is described as fund from operations.
Calculation of Funds from operations
 Meaning of fund flow statement :
Fund flow statement provides us information
about different sources of fund and their various
uses in particular time. This statement reveals
resources from which funds were obtain by the
firm hand the specific uses to which such funds
were applied. The funds statement is also known
as a statement of funds flow or a statement
of sources and applications of funds.
Definitions of fund flow statement :
In the words of Foulke, R.A., a statement of
source and application of fund is a technical
device design to analysis the changes in the
financial condition of business enterprises
between two dates.
According to : Almond Coleman, The fund
flow statement summarizing the significant
financial changes which were occurred between
the beginning & the end of a companys
accounting periods.
 This fund flow statement has two parts :
1. Sources of fund
2. Application of fund
The difference between these two parts that is
sources & uses of funds represents net changes
in working capital.
The excess of sources of funds over uses of
fund is the net increase in working capital &
excess of uses over sources of fund is net
decrease in working capital.
The amount of net increase or decrease as
shown in fund flow statement should be equal to
the amount shown by schedule of working
capital changes.
 Fund Flow Statement

Sources of Fund Uses Of Funds

Amount
Amount

Fund from operation

Loss from operation
Issue of share
Redemption of
Issue of debenture
preference shares
long term loans
Redemption of
Sale of fixed assets /
debentures
Investment
Repayment of
Non trading receipts
long term loans
Decrease in working
Purchase of fixed assets
capital
/ Investments
(if any)
Payment of dividend & taxes
Increase in working capital
(if any)
Q -Comparative Balance sheet of Z Ltd.
As on year 2011 and 2012 were as
follow
Liabiliti 201 201 Assets 201 201
es 1 2 1 2
Account 15000 18000 Cash 11200 8500
payable 10000 75000 Account
Notes receivable 21300 23500
payable Stock
40000 40000 35000 30600
Loan on Sinking fund
50000 45000
Mortgage investment
16000 12000 16000 12000
Capital Land
13950 16275 10000 10000
Sinking fund Building 60000 60000
Retained Furniture
Earning 1350 1425 8000 7000
Provision for
DD 12000 9000
Accumulated 3200 2400
Depreciation 16150 151600 161500 151600
Profit & loss Adjustment
a\c
Particular Particular
Amount Amount

Funds lost in operations Opening P&L A/c

Depreciation Profit or gain on sale of
Loss on sale of fixed assets fixed asset
Under writing commissions Dividend received
Discount on issue of shares & Interest received of
debentures investment
Preliminary expense written Profit on revaluation
off
Deferred revenue expenses of asset
Fund from operation
Goodwill written off
Patent or trademark
Provision for taxes
You are given information:-
Net profit for the year 2012 amounted
6675.
Dividend amounted to Rs.5000 was paid
during the year.
Prepare a statement of sources and uses of
fund.
Schedule of Changes in
Working Capital
Items 2011 2012 Change in Working
capital
Amoun Amou Decreas
CURRENR t nt Increase e
ASSETS:-
2700
Cash 11200 8500
2200
Account 21300 23500 4400
receivable 35000 30600
Stock 67500 62600
TOTAL of CA (A)
CUURENT
LIABILITIES:- 15000 3000
18000
Account payable 10000 2500
7500
Note payable 1350 75
1425
Provision for D D 26350 26925
TOTAL of CL (B) 41150 35675
Difference b/w (A- 5475
B) 5475 10175
Fund flow statement

Sources of Amou Application Amou

fund nt of fund nt
Redemption of
Sale of share capital
sinking fund Dividend paid 5000
4000
investment 5000
525
Fund from
operation
Decrease in 5475
working
capital
10000 10000
Profit & loss adjustment
a\c
Particular Amou Particular Amou
nt nt
To Accumulate By balance b/d
dep. On By sinking fund
furniture 200 13950
By accumulate 4000
To Dividend paid 5000 dep. On building
To Balance c/d 16275 By fund flow
operation 3000

525

21475 21475
Accumulative deprecation
Building Furniture
Particul Amo Partic Amou
Part Amou Particul Am
ar unt nt
oun ular
icul nt ar
By
t
ar 3000 By
120
To 1000 balance 3200
9000 balance furniture b/d
To P/L 00
b/d a/c 2400 By P/L
a/c 200
To 12000 To a/c
balanc balance 3400
120 c/d 3400
e c/d
00
Furniture a\c
Particul Amo Particu Amou
ar unt lar nt

To 8000 By 1000
balance depreca
b/d tion
By 7000
balance
8000 c/d 8000