Fund Flow Statement

S Ravi Shankar

Learning Objectives
(i) Understand meaning and objectives of fund flow statement analysis (ii) Analyze methods of preparing fund flow statement (iii) Discuss advantages of preparing fund flow statement

Overview
Various Facets of Fund flow statement are as follows:
Statement of sources and application of funds Statement of changes in financial position Analysis of working capital changes and Movement of funds statement

Fund Flow Statement Analysis

(1) Pinpoints mobilization-Utilization of resources (2) Highlights financing of the expansion of business firms (3) Exemplifies the utilization of debt finance in the structure of financing (4) Portrays the relationship between the financing, investment, liquidity and dividend decision of the firm during the given point of time.

Preparing Fund Flow Statement

Prepare the statement of changes in working capital Preparation of Non- Current A/c items (in order to quantify)
Sources of funds Application of funds

Preparation Adjusted Profit& Loss A/c Preparation of fund flow statement

Schedule of Changes in Working Capital

Changes in Working Capital

Methods of calculation

Net Profit Method (Indirect)

Net Profit Method (Indirect)

Accounting Statement Format

Sales Method (Direct)

Calculate fund from operation

Salaries 10,000 Good will written off 4,000 Rent 6,000 Dividend Received 10,000 Refund of Tax 6,000 Proposed Dividend 12,000 Profit on Sale of Building 10,000 Depreciation on Plant 10,000 Provision for Taxation 8,000 Loss on Sale of plant 4,000 Closing Balance of Profit & Loss A/c 1,20,000 Opening balance on Profit & Loss A/c 50,000 Discount on Issue of Debentures 4,000 Provision for bad debts 2,000 Transfer to general reserve 2,000 Preliminary expenses written off 6,000

Net Profit Method (Indirect)

Closing balance of Profit & Loss A/c Less Opening Balance Balance Forward Add: Non Fund / Non Operating Charges: Depreciation on Plant Provision for Taxation Loss on Sale of Plant Discount on issue of debentures Provision for bad debts Transfer to general reserve Preliminary expenses written off Good will written off Proposed Dividend 1,20,000 50,000 70,000 10,000 8,000 4,000 4,000 2,000 2,000 6,000 4,000 12,000 1,22,000

Net Profit Method (Indirect)

Less Refund of Tax Profit on Sale of Building Dividend Received Fund from operations 6,000 10,000 10,000 96000

Net Profit Method (Indirect)

FORMAT - II

Source & Application of Funds

Financial Structure

Answers the questions

How are outsider's liabilities redeemed? What is the role of the fund generated from operations ? How the funds raised are applied into business? How the decrease in working capital was applied? What is the mode of raising of financial resources for an increase in the working capital?

Working Capital Problem

Working Capital Solution

Prepare the Fund Flow Stmt

Schedule of changes in WC

Non-Current A/Cs

Adjusted PnL & Fund Flow Stmt

Practice Problem

Statement of Changes in WC

Non-Current A/Cs

Non-Current A/C & P&L A/C

Fund Flow Statement

Fund Flow Stmt Problem

Problem (Contd.)
Additional information During the year machine costing Rs.10,000 (accumulated depreciation Rs.3,000) was sold for Rs.5,000 . The provision for depreciation against machinery as on 1-11986 was Rs.25,000 and on 31-12-1986 Rs.40,000 Net profit for the year 1986 amounted to Rs.45,000. You are required to prepare funds flow statement

Statement of Working Capital

Original Cost Calculation

Sale loss/profit calculation

Fixed Asset A/C

Solution (Contd.)

Solution (Contd.)

Solution (Contd.)

Fund Flow Statement

Assignment

Fund vs. Cash Flow Stmt

Cash Flow Stmt

Cash Flow

Cash Flow Stmt (Soln)