52754835 funds flow analysis

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Funds Flow AnalysisFunds Flow Analysis


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OverviewOverview

DefinitionDefinition Concept of Funds Flow AnalysisConcept of Funds Flow Analysis

Significance of Funds FlowSignificance of Funds Flow Uses of Funds FlowUses of Funds FlowTypes of preparation of Funds FlowTypes of preparation of Funds Flow

statementstatement Accounts to be preparedAccounts to be prepared Difference b/w funds flow and cash flowDifference b/w funds flow and cash flow


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DefinitionDefinition

It is a Statement summarizing theIt is a Statement summarizing the

significant financial changes whichsignificant financial changes which

have occurred between thehave occurred between thebeginning and the end of thebeginning and the end of the

companys accounting period.companys accounting period.


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Concept of Funds FlowConcept of Funds Flow

analysisanalysis Indicates Changes in Financial ConditionIndicates Changes in Financial Condition

Difference from balance sheet and incomeDifference from balance sheet and income

statementstatement Supplementary to the above statements andSupplementary to the above statements and

not a substitutenot a substitute

Summarizes events taking place between twoSummarizes events taking place between two

accounting periodsaccounting periods


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Significance of funds flowSignificance of funds flow

Helps shareholders, creditors and other toHelps shareholders, creditors and other toevaluate the uses of funds by the enterpriseevaluate the uses of funds by the enterprise

Assists in analysis of past trends and thusAssists in analysis of past trends and thusaid future expansion decisionsaid future expansion decisions Helps finance managers in identification ofHelps finance managers in identification of

problems, enabling detailed analysis andproblems, enabling detailed analysis and

immediate actionimmediate action


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Uses of funds FlowUses of funds Flow

Guides the management in deciding abutGuides the management in deciding abut

the dividend and retention policiesthe dividend and retention policies

Planning for long term purposes is enabledPlanning for long term purposes is enabled It facilitates allocation of resources andIt facilitates allocation of resources and

fundsfunds

It also indicates the sources from which theIt also indicates the sources from which the

company has obtained its fundscompany has obtained its funds

Factors resulting in change in workingFactors resulting in change in working

capital may also be ascertainedcapital may also be ascertained


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Types of preparation ofTypes of preparation of

funds flow statementfunds flow statement Cash flow ApproachCash flow Approach

Total resources approachTotal resources approach

Working capital approachWorking capital approach


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Cash Flow ApproachCash Flow Approach According to this method, the word funds isAccording to this method, the word funds is

synonymous with cashsynonymous with cash Through this association, the funds flowThrough this association, the funds flow

statement turns into the receipts and paymentstatement turns into the receipts and payment

accountaccount To prepare funds statement on cash basis, allTo prepare funds statement on cash basis, all

balance sheet changes taken place must bebalance sheet changes taken place must beclassified into either changes that increaseclassified into either changes that increase

cash or changes that decrease cashcash or changes that decrease cash All these changes must be classified from theAll these changes must be classified from the

income statement and surplus statement.income statement and surplus statement.


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Total Resources ApproachTotal Resources Approach Here, funds represents total assets orHere, funds represents total assets or

resources of the enterprise.resources of the enterprise. All changes that result in increase or decreaseAll changes that result in increase or decrease

in assets and liabilities are shownin assets and liabilities are shown

To prepare funds statement on total resourceTo prepare funds statement on total resourcebasis, all balance sheet changes taken placebasis, all balance sheet changes taken placemust be classified into either inflow or outflowmust be classified into either inflow or outflowof fundsof funds

Inflow of funds consists earnings of theInflow of funds consists earnings of the

company, contribution of additional funds,company, contribution of additional funds,increase in liabilities and decrease in assets.increase in liabilities and decrease in assets.

Outflow of funds consists of net losses,Outflow of funds consists of net losses,decrease in liabilities, decrease in capitaldecrease in liabilities, decrease in capitalfunds and increase in assetsfunds and increase in assets


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Working Capital ApproachWorking Capital Approach In his method, funds is equivalent to the netIn his method, funds is equivalent to the net

working capital (current assets minus currentworking capital (current assets minus currentliabilities).liabilities).

The prime objective of this approach is toThe prime objective of this approach is to

show movement of funds through workingshow movement of funds through workingcapital and shed light on the factorscapital and shed light on the factorscontributing to such movementscontributing to such movements

Two statement are prepared in this conceptTwo statement are prepared in this concept The first one is the schedule of workingThe first one is the schedule of working

capital in which changes in net workingcapital in which changes in net workingcapital are recordedcapital are recorded

The second statement is the funds flowThe second statement is the funds flowstatement in which the factors responsible forstatement in which the factors responsible forthese variances in working capital are shownthese variances in working capital are shown


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Accounts to be preparedAccounts to be prepared


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Statement of Sources andStatement of Sources and

Applications of FundsApplications of Funds(Funds Flow Statement)(Funds Flow Statement)


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Dr.

No. S o u r c e s

(1) C a p i t a lI n t r o d u c

(2) I s s u e o f S h a r

D e b e n t u r e s

(3) P r e m i u m R e c

S h a r e s a n dD e b e


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Adjusted Profit & LossAdjusted Profit & Loss

AccountAccount


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Schedule of Changes inSchedule of Changes in

Working CapitalWorking Capital


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Schedule of Ch Particulars

Sundry DebtorsStock

Bills Receivable


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Differences Between FundsDifferences Between Funds

Flow and Cash FlowFlow and Cash Flow


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Funds Flow Cash Flow

1. It is based on the overall1. It is based on the overallconcept of working capitalconcept of working capital

1. It is cash based which is just1. It is cash based which is justone element of working capitalone element of working capital

2. Does not contain any2. Does not contain anyopeningopening

or closing balancesor closing balances

2. Contains opening & closing2. Contains opening & closing

balance of cashbalance of cash

3. Indicates sources and uses of3. Indicates sources and uses of

fundsfunds

3. Indicates only cash inflows3. Indicates only cash inflowsandand

outflowsoutflows

4. Not mandatory in India4. Not mandatory in India 4. Mandatory in India4. Mandatory in India

5. No set format to follow in5. No set format to follow in

preparationpreparation

5. To be presented as per AS-35. To be presented as per AS-3statutory format given by ICAIstatutory format given by ICAI

6. Useful in planning6. Useful in planningintermediateintermediate

6. Used by management for6. Used by management forshortshort


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THE ENDTHE END

52754835 funds flow analysis

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