FUND FLOW STATEMENT

Definition of Funds flow statement.

“The funds flow statement describes the sources from which additional
funds were derived and the use to which these funds were put.”

It indicates various methods by which funds are obtained during a particular

period and the ways in which these funds are employed. In simple words, it
is a statement of sources and application of funds.

“A statement of sources and application of funds is a technical device

designed to analyse the changes in the financial condition of a business
enterprise between two dates.”

Meaning of important terms

Funds
In funds flow statement funds means working capital i.e. current assets –
current liabilities.

Flow of funds
It means changes in funds or change in working capital

Source of fund
It is any transaction that results in an increase in working capital (inflow of
funds)
Application of funds
It is any transaction that results in a decrease in working capital (outflow of
funds)

Importance Of Funds Flow Statement.

1. Helps in analysis of financial operations.
2. Helps in formulation of realistic dividend policy.
3. Helps in proper allocation of resources.
4. It acts as a future guide.
5. Helps in appraising the use of working capital.
6. It helps knowing the overall creditworthiness of a firm.
7. It throws light on many questions of general interest.
 Why were the net CA lesser in spite of profits.
 Why dividend could not be declared in spite of available profits.
 What are the sources of repayment of debts.
Identification of flow of funds: general rules
1. There will be a flow of funds if a transaction involves a current
account and a non-current account i.e. involves
a. Current assets and fixed assets eg purchase of building for cash
b. Currents asset and capital eg issue of share for cash
c. Current assets and fixed liabilities eg redemption of debentures
in cash or repayment of long term loan in cash
d. Current liabilities and fixed liabilities eg creditors paid off in
debentures
e. Current liabilities and capital eg creditors paid off in shares
f. Current liabilities and fixed assets eg building transferred to
creditors in satisfaction of their claims/
2. There will be NO flow of funds if a transaction involves 2 current
accounts or 2 non-current accounts ie involves:
a. Current assets and current liabilities eg payment of creditors in
cash
b. Fixed assets and fixed liabilities eg building purchased and
payments made in debentures
c. Fixed assets and capital eg. Building purchased and payment
made in shares.
 SOURCES AND APPLICATION OF FUNDS

Sources Applications

Funds from operations Funds lost in operations

Issue of Share Capital Redemption of Preference Share Capital

Redemption of Debentures
Issue of Debentures

Raising of long-term loans Repayment of long-term loans

Sales of non-current (fixed) assets Purchase of non-current (fixed) assets

Sale of long-term Investments Purchase of long-term investments

Non-trading receipts Non-trading payments

Net Decrease in Working Capital Net Increase in Working Capital

FUNDS FLOW STATEMENT
This statement is prepared in two formats:
(a) Vertical form or Report Form
(b) Horizontal form or T Form

Specimen of Vertical Form of Funds Flow Statement

Funds Flow Statement
For the year ended………….
Sources of Funds: Rs.
Funds from Operations
Issue of Share Capital
Raising of long-term loans
Receipts from partly paid shares, called up
Sales of non-current (fixed) assets
Non-trading receipts, such as dividends received
Sale of Investments (long-term)
Total sources (A)
Applications or Uses of Funds:
Funds Lost in Operations
Redemption of Preference Share Capital
Redemption of Debentures
Repayment of Long-term loans
Purchase of non-current (fixed) assets
Purchase of long-term Investments
Non-trading payments
Payments of dividends*
Payment of Tax*
Total Applications (B)
Increase / Decrease in Working Capital (as per schedule of
changes in Working Capital) (A-B)
 T Form An Account Form or Self Balancing Type
Funds Flow Statement
(For the year ended…………. )
Sources Rs. Applications Rs.
Funds from operations Funds lost in Operations
Issue of Share Capital Redemption of Preference
Issue of Debentures Share Capital
Raising of long-term loans Redemption of Debentures
Receipts from partly paid Repayment of long-term
shares, called up loans
Sales of non-current (fixed) Purchase of non-current
assets (fixed) assets
Non-trading receipts such as Purchase of long-term
dividends investments
Sale of long-term Non-trading payments
Investments Payment of Dividends*
Net Decrease in Working Payment of tax*
Capital Net Increase in Working
Capital

Preparation Of Funds Flow Statement

The preparation of funds flow statement consists of the following steps:

1. Preparation of Schedule of changes in working capital
2. Calculation of funds from /(lost in) operations
3. Identification of various sources and application of funds as well as
hidden information affecting the funds (if necessary, through preparation
of ledger a/cs for non-current items)
  An increase in non-current asset over the year is an application of
funds while a decrease is a source of funds
 An increase in non-current liability over the year is a source of
funds while a decrease is an application of funds
4. Preparation of funds flow statement

Preparation of Schedule of changes in working capital

It is prepared to compare the working capital position between two balance
sheet dates so as to determine increase or decrease in working capital. An
increase in working capital is an application of funds while a decrease in
working capital is a source of funds.
WC = CA –CL
  in current assets =  in WC
  in current liabilities =  in WC.
  in current assets =  in WC.
  in current liabilities =  in WC.
 Schedule of changes in working capital for the period ending
Particulars Previous Closing Effect on working capital
year as on year as on Increase (+) Decrease(-)
Current Assets:
Cash
Bank
Debtors
Stock
Prepaid expenses
Total current assets
Current liabilities:
Creditors
Bills payable
Bank overdraft
Outstanding expenses
Total current liabilities
Working capital:(A-B)
Net increase/decrease
in working capital
Example
Prepare a schedule of change in working capital from the following
information:
Liabilities On On Assets On On
31.12.04 31.12.05 31.12.04 31.12.05
Equity share 5,00,000 6,00,000 Fixed assets 5,50,000 7,00,000
capital
Debentures 1,00,000 55,000 Long term 1,05,000 1,05,000
investment
Long term loan 1,00,000 2,00,000 Bills 50,000 50,000
Receivable
Tax payable 55,000 25,000 Sundry debtors 70,000 75,000
Accounts 60,000 70,000 Inventory 50,000 40,000
payable
Outstanding 10,000 5,000 Prepaid 5,000 -
expenses expenses
Bank overdraft 8,000 15,000 Cash and bank 20,000 10,000
balance
Dividend 17,000 10,000
payable
8,50,000 9,80,000 8,50,000 9,80,000
 Calculation of Funds from Operations
This requires the adjustment of non-fund and non-operating items.
Statement showing the calculation of funds from operations for the
period ending…
Particulars Amount Amount
(Rs.) (Rs.)
Closing balance of Profit and Loss A/c XXX
Less opening balance of Profit and Loss A/c XXX
Net profit or net loss for the year XXX
Add: Non-fund and non-operating
Expenses/Losses XXX
Depreciation on fixed assets XXX
Goodwill (or patents) written off XXX
Preliminary expenses written off XXX
Discount on issue of shares/debentures written
off XXX
Loss on sale of fixed assets or long term
investments XXX
Transfer to reserves XXX
Provision for taxation and proposed dividend (if
not taken as a current liability) XXX
XXX
Less: Non Fund and Non operating
Incomes/Gains
Profit on sale of fixed assets/long-term
investments XXX
Interest or dividend received (non-trading
income XXX
XXX
Funds from operations XXX
Example
Following are the extracts from the balance sheet of a company as on 31
December 2006 and 31 December 2007. You are required to calculate funds
from operations.
As on 31.12.06 As on 31.12.07
Profit and Loss Appropriation Account 30,000 40,000
General Reserve 20,000 25,000
Goodwill 10,000 5,000
Preliminary Expenses 6,000 4,000
Provisions for Depreciation on
Machinery 10,000 12,000

Treatment of provision for tax and proposed dividend

There are 2 options for treatment of Provision for tax and proposed dividend
ie they may be treated as
1. A current liability
a. Included in schedule of changes in working capital
b. No further adjustment required
2. An appropriation of profit
a. The provision of tax for the year and/or dividend proposed
during the year is added back to net profit to calculate funds
from operations
b. The amount of tax or dividend paid in current year is shown as
an application of funds