Fund flow statement

fund flow statement analysis

1. Presentation on
FUND FLOW STATEMENT
By G.Ravinder
ITM-Business School -warangal

2. 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 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?

3. 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.
Fund flow statement will provide us information
about different sources of fund and their
various uses in particular time.

4. 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.

5. 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.

6. 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 .

7. In the above figure the dotted line displays there will be no flow of fund &
the dark line displays the flow of fund.

8. 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’.
Therefore, following two statements under this techniques .
1.Statement or Schedule of Changes in Working Capital.
2.Statement of Sources and Uses of Funds or Funds Flow
Statement.
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.

9. ItemItem
(A) Current (A) Current AssetsAssets
Cash at bank Cash at bank
Cash in handCash in hand
Stock in tradeStock in trade
DebtorsDebtors
Bills receivableBills receivable
Advance paymentAdvance payment
Short term investmentShort term investment
Prepaid expensePrepaid expense
Accrued incomeAccrued income
Total (A) Total (A)
(B) Current Liabilities(B) Current Liabilities
(1) Short term loans(1) Short term loans
(2) Bank overdraft(2) Bank overdraft
(3) Creditors(3) Creditors
(4) Bills payable(4) Bills payable
(5) Outstanding expenses(5) Outstanding expenses
(6) Unclaim dividend(6) Unclaim dividend
Total (B)Total (B)
Net Working Capital (A-B)Net Working Capital (A-B)
Incraese / Decrease in Working Capital Incraese / Decrease in Working Capital
TotalTotal
Previous YearPrevious YearCurrent YearCurrent Year
Effect onEffect on
Incraese Rs.Incraese Rs.

Working captialWorking captial
Decrease Rs.Decrease Rs.
Statement or Schedule of Changes in Working Capital.

10. Meaning of fund flow statement :
This statement reveals resources from which funds were
obtain by the firm hand the specific uses to which such
funds were applied. The effectiveness of financial
management in procuring funds from various sources &
using them effectively for generating income without
sacrificing the financial position of the firm is reflected in
fund flow statement .
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
company’s accounting periods”.

11. This fund flow statement has two parts :
2.Sources of fund
3.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.

12. Fund Flow StatementFund Flow Statement
Sources of Fund Sources of Fund AAmountmount
Fund from operationFund from operation
Issue of shareIssue of share
Issue of debentureIssue of debenture
long term loanslong term loans
Sale of fixed assets /Sale of fixed assets /
InvestmentInvestment
Non trading receiptsNon trading receipts
Decrease in workingDecrease in working
capitalcapital
(if any)(if any)
Uses Of FundsUses Of Funds AmountAmount
Loss from operationLoss from operation
Redemption of Redemption of
preference sharespreference shares
Redemption ofRedemption of
debenturesdebentures
Repayment ofRepayment of
long term loanslong term loans
Purchase of fixed assets Purchase of fixed assets
/ Investments/ Investments
Payment of dividend & taxesPayment of dividend & taxes
Increase in working capitalIncrease in working capital
(if any)(if any)

13. Fund from operations :
The profit made by a firm through normal
operations is a major source of funds.
The amount of sales as shown in the P&L
A/c is a source of funds by way of
increase in cash , debtor and B/R.

14. Profit & loss Adjustment a\cProfit & loss Adjustment a\c
Particular Particular AmountAmount

DepreciationDepreciation
Loss on sale of fixed assetsLoss on sale of fixed assets
Under writing commissionsUnder writing commissions
Discount on issue of shares & Discount on issue of shares &
debenturesdebentures
Preliminary expense written offPreliminary expense written off
Deferred revenue expenses Deferred revenue expenses
Goodwill written off Goodwill written off
Patent or trademarkPatent or trademark
Provision for taxes Provision for taxes
(If treated non current(If treated non current))
Particular Particular AmountAmount
Profit or gain on sale of Profit or gain on sale of
fixed assetfixed asset
Dividend received Dividend received
Interest received ofInterest received of
investmentinvestment
Profit on revaluation Profit on revaluation
of assetof asset
Fund from operationFund from operation

15. Q
-Comparative Balance sheet of Z Ltd. As on year -Comparative Balance sheet of Z Ltd. As on year
2000 and 2001 were as follow2000 and 2001 were as follow
Liabilities Liabilities 2000200020012001AssetsAssets 2000200020012001
Account payableAccount payable
Notes payableNotes payable
Loan on Loan on
MortgageMortgage
Capital Capital
Sinking fundSinking fund
Retained EarningRetained Earning
Provision for DDProvision for DD
Accumulated Accumulated
Depreciation-Depreciation-
BuildingBuilding
furniturefurniture
1500015000
1000010000
4000040000
5000050000
1600016000
1395013950
13501350
1200012000
32003200
161500161500
1800018000
7500075000
4000040000
4500045000
1200012000
1627516275
14251425
90009000
24002400
151600151600
CashCash
Account Account
receivable receivable
StockStock
Sinking fund Sinking fund
investmentinvestment
LandLand
BuildingBuilding
FurnitureFurniture
1120011200
2130021300
3500035000
1600016000
1000010000
6000060000
80008000
161500161500
85008500
2350023500
3060030600
1200012000
1000010000
6000060000
70007000
151600151600

16. You are giving information:-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.

17. Schedule of Changes in Working CapitalSchedule of Changes in Working Capital
ItemsItems
CURRENR ASSETS:-CURRENR ASSETS:-
CashCash
Account receivable Account receivable
StockStock
TOTAL of CA (A)TOTAL of CA (A)
CUURENT CUURENT
LIABILITIES:-LIABILITIES:-
Account payableAccount payable
Note payableNote payable
Provision for D DProvision for D D
TOTAL of CL (B)TOTAL of CL (B)
Difference b/w (A-B)Difference b/w (A-B)
Decrease in W CDecrease in W C
20002000
AmountAmount
1120011200
2130021300
3500035000
6750067500
1500015000
1000010000
13501350
2635026350
4115041150
4115041150
20012001
AmountAmount
85008500
2350023500
3060030600
6260062600
1800018000
75007500
14251425
2692526925
3567535675
54755475
4115041150
Change in Change in
IncreaseIncrease
22002200
25002500
5475 5475
1017510175
Working Working
capitalcapital
DecreaseDecrease
27002700
44004400
30003000
7575
1017510175

18. Fund flow statementFund flow statement
Sources of fundSources of fund
Sale of sinking Sale of sinking
fund investmentfund investment
Fund from Fund from
operation operation
Decrease in Decrease in
working capitalworking capital
AmountAmount
40004000
525525
54755475
1000010000
Application of Application of
fundfund
Redemption of Redemption of
share capitalshare capital
Dividend paidDividend paid
Amount Amount
50005000
50005000
1000010000

19. Profit & loss adjustment a\cProfit & loss adjustment a\c
Particular Particular
To Accumulate dep. To Accumulate dep.
On furnitureOn furniture
To Dividend paidTo Dividend paid
To Balance c/dTo Balance c/d
Amount Amount
200200
50005000
1627516275
2147521475
Particular Particular
By balance b/d By balance b/d
By sinking fundBy sinking fund
By accumulate dep. By accumulate dep.
On buildingOn building
By fund flow By fund flow
operationoperation
Amount Amount
1395013950
40004000
30003000
525525
2147521475

20. Accumulative deprecation Accumulative deprecation
Building Furniture Building Furniture
ParticulParticul
ar ar
To P/L a/cTo P/L a/c
To balance To balance
c/dc/d
AmoAmo
untunt
30003000
90009000
1200012000
ParticulaParticula
rr
By balance By balance
b/db/d
AmounAmoun
tt
1200012000
1200012000
ParticularParticular
To To
furniture a/furniture a/
cc
To balance To balance
c/dc/d
AmouAmou
ntnt
10001000
24002400
34003400
ParticulaParticula
rr
By By
balance b/balance b/
dd
By P/L a/cBy P/L a/c
AmounAmoun
t t
32003200
200200
34003400
Particular Particular
To balance To balance
b/db/d
AmounAmoun
t t
80008000
80008000
ParticularParticular
By By
deprecatiodeprecatio
n n
By balance By balance
c/dc/d
AmounAmoun
t t
10001000
70007000
80008000
Furniture a\c