Fund flow statement intro

the slide will help to understand base of fund flow statement preparation

1. FUNDS FLOW STATEMENT FUND FLOW STATEMENT 1 Mr. LIBEESH P C Assistant Professor in Commerce B Com, Bed, M Com, UGC NET

2. I ntroduction There is no comparison of profit with another year in the profit and loss account. Balance sheet explain a static information about assets and liabilities for a particular period of time. The improvement of profit and the financial position may not be known through the P&L account and Balance sheet. Not possible to measure the change of fund invested. FUND FLOW STATEMENT 2

3. Introduction (Cont.) The statement prepared to show changes in assets, liabilities and owners equity of a business are called statement of changes in financial position . These include Funds flow statement and cash flow statement. Statement of changes in financial position prepared on working capital basis is called funds flow statement and O n cash basis is called cash flow statement. FUND FLOW STATEMENT 3

4. Meaning of fund Investments in long term assets as well as the receipts concerned with long period of time. According to IAS, fund refers to cash or cash equivalents; or to working capital (excess of current assets over current liabilities) So the fund can be defined in two concepts Cash concept (narrow sense of funds) Working capital concept (broad sense of fund) FUND FLOW STATEMENT 4

5. Cash concept (narrow sense of funds) Fund means only cash. It is concerned with inflow and outflow of cash only. Movement of fund means movement of cash only. So the statement prepared according to this concept, to measure the movement of fund is called statement of cash flow FUND FLOW STATEMENT 5

6. Working capital concept (broad sense of fund) Fund means cash and cash equivalents. Cash equivalents are stock, debtors, bills receivables, outstanding income and expenses paid in advance. This concept state that fund means working capital. Working capital may be gross working capital and net working capital GWC means investments of funds in current assets. NWC is the difference between current assets and current liabilities. FUND FLOW STATEMENT 6

7. Meaning of Fund Flow Movement of fund from one period to another. The term flow means movement and includes both inflow and outflow of fund. T ransaction results in increase of funds are called inflow of funds and T ransaction which decreases funds are called outflow of funds. A transaction which increases the working capital is called inflow of funds and which decreases working capital is called outflow of funds. FUND FLOW STATEMENT 7

8. Examples of inflow and outflow Inflow of fund Sale of fixed assets Raising of fixed capital Outflow of fund Purchase of fixed assets. Decreasing of fixed capital (redemption) FUND FLOW STATEMENT 8

9. The flow of fund occurs when a transaction changes on the one hand a non current account and on the other hand a current account and vice versa. A change in non current account followed by a change in another N on current account or a change in a current account followed by a change in another current account will not result in the flow of fund. FUND FLOW STATEMENT 9

10. Change in flow of fund Transaction between Current assets and fixed assets. Transaction between current liabilities and fixed liabilities. Transaction between current assets and fixed liabilities. Transaction between current liabilities and fixed assets. FUND FLOW STATEMENT 10

11. Flow of fund Current Assets Fixed liabilities Current Liabilities Fixed Assets Flow of funds Flow funds Flow of funds Flow of funds No Flow of funds No Flow of funds FUND FLOW STATEMENT 11

12. Transaction which result in movement of fund Transaction between Current assets and fixed assets Sale of machinery Purchase of furniture Transaction between current assets and fixed liabilities Issue of equity share capital Borrowing loans from bank Redemption of debentures Repayment of loans. FUND FLOW STATEMENT 12

13. Transaction which won’t result in movement of fund Transaction between Current assets and current liabilities Receipt from sundry creditors Honoring of bills payable. Transaction between Fixed assets and fixed liabilities Purchase of machinery by paying equity. Redemption of debentures through a machinery. Transaction within current items and with in fixed items Receipt from debtors Bills accepted for sundry creditors. Exchange of a machine with furniture for other company. Redemption of debentures through equity shares. FUND FLOW STATEMENT 13

14. Difference between funds flow statement & balance sheet Fund flow statement Balance sheet A statement of changes in Financial position and hence is dynamic in nature. A statement of financial position on a particular date and is static in nature. Shows the sources and uses of funds in a particular period of time. Depicts the assets and liabilities at a particular point of time. A tool of management for financial analysis and helps in decision making. No much help to management in making decisions. Schedule of changes in working capital has to be prepared before preparing FFS. No schedule of changes in working capital is required. Rather profit and loss account is prepared. FUND FLOW STATEMENT 14

15. Difference between funds flow statement and income statement Fund flow statement Income statement Highlights the changes in financial position means inflow and outflow of funds It does not reveal the flow of fund but depicts the items of expenses and income. It is a complementary income statement. Income statement helps in the preparation of FFS Income statement is not prepared from the FFS Both capital and revenue items are considered Only revenue items are considered. There is no prescribed format for the preparation of FFS Prepared in a prescribed format. FUND FLOW STATEMENT 15

16. 1. ………………. is a statement which lists all the sources of funds and applications of funds taken place in a business during a particular period (a ) Fund flow statement ( b ) Cash flow statement (c ) any of these ( d) none of these Ans : Fund flow statement FUND FLOW STATEMENT 16

17. 2. The overall net increase or decrease in working capital is found out by preparing………………… (a ) Fund flow statement (b ) Cash flow statement (c ) Statement showing changes in working capital (d) None of these Ans : Statement showing changes in working capital FUND FLOW STATEMENT 17

18. 3 . Which one of the following is a source of fund ? (a ) Issue of shares in consideration of machinery purchased (b) Issue of bonus shares (c) Issue of right shares (d) Issue of shares for cash Ans : Issue of shares for cash FUND FLOW STATEMENT 18

19. 4 . Which among the following is a sources of fund ? (a ) Sale proceeds of fixed assets (b ) Sale proceeds of long term investments (c) Non operating incomes (d) All of these Ans : All of these FUND FLOW STATEMENT 19

20. 5 . Which among the following is an application of fund ? (a ) Purchase of long term investments (b) Redemption of preference shares (c ) Redemption of debentures (d ) All of these Ans : All of these THE END FUND FLOW STATEMENT 20 Mr. LIBEESH P C Assistant Professor in Commerce B Com, Bed, M Com, UGC NET