2. MEANING:
The Fund flow statement is a report on the movement
of funds or working capital. It explains how working capital
raised and used during an accounting period.
DEFINITION:
“A statement of sources and application of funds is a
technical device designed to analyze the changes in the
financial conditions of a business enterprise between two
dates.” – Foulke.
3. The term fund has a variety of meaning such as cash fund, capital fund
and working capital fund.
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 and 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 cast but there
is flow of fund.
Capital fund- here fund means all financial resources used in the
business, whether in the form of men, money, material, machine and others.
Net working capital- net working capital means difference between
current assets and current liabilities. Funds generally refers to cash or cash
equivalent or to working capital.
MEANING OF FUND
4. 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 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 no current
account ie 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
MEANING OF FLOW
5. 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
account which do not at all affect current asses and current liability.
Therefore working capital will remain unaffected i.e there will be no
flow of fund.
6. When changes in one current account results in a changes in other
current account, it also does not affect working capital there is not 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.
7. FIGURE SHOWING FLOW OF FUND
CURRENT
LIABILITIES
CURRENT
ASSETS
NON
CURRENT
LIABILITIES
NON
CURRENT
ASSETS
------ NO-------
------ NO-------
In the above figure the dotted line displays there will be no flow of
fund and the Dark line displays the flow of fund
8. The balance sheet and income statements 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
firm’s 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?
How much funds have been generated from operations?
Why did the firm not pay dividend in spite of adequate profit?
The balance sheet is merely a static statement. It is statement of
asset and liabilities of the business as on particular date.
WHY WE PREPARE FUND FLOW STATEMENT?
9. To show how the resources have been obtained and used
To indicated the results of current financial management.
To through light upon the most important changes that have
taken place during a specific period.
To show how the general expansion of the business has been financed.
To indicated the relationship between profits from operations,
distribution of dividend and raising of new capital or term loans.
To have an assessment of the working capital position of the concern.
OBJECTIVES OF FUND FLOW STATEMENT:
10. Analysis of Financial Operations
Evaluation of the Firm’s Financing
Answer to Intricate Question
Allocation of Scare Resources
Helps in Working Capital Management
Acts as a Guide to Future
Helps Financial Institutions.
MANAGERIAL USES OF FUNDS FLOW STATEMENT:
11. It provides only some additional information regarding
changes in working capital.
Changes in cash are more important and relevant for financial
management than the working capital.
It is not an original Statement. It is only a rearrangement of data
five in financial Statement.
Fund flow statement is essentially historic in nature. A Projected
funds flow statement, on the basis of it cannot be prepared with
much accuracy.
It cannot reveal continuous changes.
LIMITATIONS OF FUNDS FLOW STATEMENT:
12. SOURCES OF FUNDS:
Issue of shares and debenture
Raising of long term loans
Income from investments
Sales of fixed Assets and long term investments
Funds from operations.
APPLICATION OF FUNDS:
Redemption of preference shares and debenture
Repayment of loans
Purchase of long term Investments
purchase of fixed assets
Payments of taxes and dividends
Drawings(incase of Proprietary or partnership business)
Lose of cash by embezzlement
Funds lost in Operations.
ITEMS COME IN SOURCES AND APPLICATION OF FUNDS:
13. Schedule of Changes in Working Capital.
Opening of Accounts for non-Current Items
Preparation of Adjusted Profit And Loss Account
Preparation of Fund Flow Statement.
PROCEDURE FOR PREPARATION OF FUND FLOW STATEMENT
14. Working capital refers to the capital required for the day-to-day
operations of a business. It is the excess of current assets over current
liabilities. Adequate working capital is necessary for the
successful running of any organization. The management must forecast the
working capital requirements in advance and arrange for financing them. The
requirements of working capital depend
on the following factors.
Nature of the Business
Size of the Business
Time consumed in manufacture
Seasonal Fluctuations
Fluctuations in Supply
Speed of Turnover
Terms of Sales
Terms of Purchase
Labour intensive Vs. Capital Intensive industries
Growth and Expansion of Business.
WORKING CAPITAL:
15. Item Previous
year
Current
Year
Effect on
Increase Rs.
Working Capital
Decrease Rs.
A.CURRENT ASSETS
Cash At Bank
Cash in hand
Stock in Trade
Debtors
Bills receivable
Advance Payment
Short term investment
Prepaid expenses
Accrued income
TOTAL (A)
B.CURRENT LIABILITIES
Short term loans
Bank overdraft
Creditors
Bills Payable
Outstanding expenses
Unclaimed dividend
TOTAL (B)
Net working Capital (A-B)
Increase/Decrease in working capital
TOTAL
STATEMENT OR SCHEDULE OF CHANGES IN WORKING CAPITAL
16. CALCULATION OF FUNDS FROM OPERATION:
Net Profit earned during the year
ADD:
Non-fund and Non operating items which are already debited to P&L a/c:
Depreciation on fixed Assets
Goodwill written off
Discount on issue of shares, written off
Preliminary expenses written off
Patents written off
Transfer to reserves
Loss on sale of fixed assets
LESS:
Non-fund and Non operating items which are already Credited to P&L a/c:
Profit on sale of fixed assets
Profit on revaluation of assets
Rent received
Dividend received
Refund of income tax
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
FUNDS FROM OPERATIONS xxxxxx
SPECIMEN OF FUND FLOW STATEMENT: MODEL I
17. SOURCE OF FUND Amount USES OF FUNDS Amount
FUND FROM OPERATION
Issue of share
Issue of debenture
Long term loans
Sales of fixed assets/Investment
Non trading receipts
Decrease in working capital (if any)
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
LOSS FROM OPERATION
Redemption of preference Shares
Redemption of debentures
Repayment of long term loans
Purchase of fixed assets/Investments
Payment of dividend& taxes
Increase in working capital
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxxxx xxxxxxxx
SPECIMEN OF FUND FLOW STATEMENT: MODEL II
18. PARTICULAR AMOUNT PARTICULAR AMOUNT
Depreciation
Loss on sale of fixed assets
Under writing commissions
Discount o issue of share
&debentures
Preliminary expense written off
Deferred revenue expenses
Goodwill written off
Patient or trademark
Provision for taxes
(It treated non current)
Profit or gain on sale of fixed asset
Dividend received
Interest received of investment
Profit on revaluation of asset
FUND FROM OPERATION
PROFIT AND LOSS ADJUSTMENT ACCOUNT
19. Comparative Balance sheet of Sam & Co. As on
year 2000 and 2001 were as follow
Liabilities 2000 2001 Assets 2000 2001
Account payable
Notes payable
Loan on Mortgage
Capital
Sinking fund
Retained Earning
Provision for DD
Accumulated
Depreciation-
Building
furniture
15000
10000
40000
50000
16000
13950
1350
12000
3200
161500
18000
75000
40000
45000
12000
16275
1425
9000
2400
151600
Cash
Account
receivable
Stock
Sinking fund
investment
Land
Building
Furniture
11200
21300
35000
16000
10000
60000
8000
161500
8500
23500
30600
12000
10000
60000
7000
151600
20. You are giving information:-
Net profit for the year 2001 amounted
6675.
Dividend amounted to Rs.5000 was
paid during the year.
Prepare a statement of sources and
uses of fund.
21. Schedule of Changes in Working Capital
Items
CURRENR ASSETS:-
Cash
Account receivable
Stock
TOTAL of CA (A)
CURRENT LIABILITIES:-
Account payable
Note payable
Provision for D D
TOTAL of CL (B)
Difference b/w (A-B)
Decrease in W C
2000
Amount
11200
21300
35000
67500
15000
10000
1350
26350
41150
41150
2001
Amount
8500
23500
30600
62600
18000
7500
1425
26925
35675
5475
41150
Change in
Increase
2200
2500
5475
10175
Working capital
Decrease
2700
4400
3000
75
10175
22. Fund flow statement
Sources of fund
Sale of sinking fund
investment
Fund from operation
Decrease in working
capital
Amount
4000
525
5475
10000
Application of fund
Redemption of share
capital
Dividend paid
Amount
5000
5000
10000
23. Profit & loss adjustment a/c
Particular
To Accumulate dep.
On furniture
To Dividend paid
To Balance c/d
Amount
200
5000
16275
21475
Particular
By balance b/d
By sinking fund
By accumulate dep.
On building
By fund flow
operation
Amount
13950
4000
3000
525
21475
24. ACCUMULATIVE DEPRECATION ,BUILDING ,FURNITURE
Particular
To P/L a/c
To balance c/d
Amount
3000
9000
12000
Particular
By balance b/d
Amount
12000
12000
Particular
To furniture a/c
To balance c/d
Amount
1000
2400
3400
Particular
By balance b/d
By P/L a/c
Amount
3200
200
3400
Particular
To balance b/d
Amount
8000
8000
Particular
By deprecation
By balance c/d
Amount
1000
7000
8000
