Presentation onFUND FLOW STATEMENT

By G.Ravinder

ITM-Business School -warangal

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?

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.

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.

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.

For exampleMachinery 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 .

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

Preparation of Fund Flow StatementThe 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.

ItemItem

(A) Current (A) Current AssetsAssetsCash 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 Incraese / Decrease in Working Capital Capital

TotalTotal

Previous YearPrevious Year Current Current YearYear

Effect onEffect on

Incraese Rs.Incraese Rs.

Working Working captialcaptial

Decrease Rs.Decrease Rs.

Statement or Schedule of Changes in Working Capital.

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”.

This fund flow statement has two parts :1. Sources of fund2. 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.

Fund Flow StatementFund Flow StatementSources 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)

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.

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

Q-Comparative Balance sheet of Z Ltd. As -Comparative Balance sheet of Z Ltd. As on year 2000 and 2001 were as followon year 2000 and 2001 were as follow

Liabilities Liabilities 20020000

20012001 AssetsAssets 20002000 20012001

Account Account payablepayable

Notes payableNotes payable

Loan on Loan on MortgageMortgage

Capital Capital

Sinking fundSinking fund

Retained Retained EarningEarning

Provision for Provision for DDDD

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

You are giving You are giving information:-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.

Schedule of Changes in Working Schedule of Changes in Working CapitalCapitalItemsItems

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

20002000AmountAmount

1120011200

2130021300

3500035000

6750067500

1500015000

1000010000

13501350

2635026350

4115041150

4115041150

20012001AmounAmountt

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

Fund flow statementFund flow statement

Sources of Sources of fundfund

Sale of sinking Sale of sinking fund fund investmentinvestment

Fund from Fund from operation operation

Decrease in Decrease in working capitalworking capital

AmounAmountt

40004000

525525

54755475

1000010000

Application of Application of fundfundRedemption of Redemption of share capitalshare capital

Dividend paidDividend paid

AmounAmount t

50005000

50005000

1000010000

Profit & loss adjustment a\cProfit & loss adjustment a\c

Particular Particular

To Accumulate To Accumulate dep. On furnituredep. On furniture

To Dividend paidTo Dividend paid

To Balance c/dTo Balance c/d

AmounAmount t

200200

50005000

1627516275

2147521475

Particular Particular

By balance b/d By balance b/d

By sinking fundBy sinking fund

By accumulate By accumulate dep. On buildingdep. On building

By fund flow By fund flow operationoperation

AmounAmount t

1395013950

40004000

30003000

525525

2147521475

Accumulative deprecation Accumulative deprecation Building Furniture Building Furniture ParticuParticular lar To P/L a/cTo P/L a/c

To To balance balance c/dc/d

AmoAmo

untunt 30003000

90009000

1200120000

ParticulParticul

arar By By balance balance b/db/d

AmouAmou

ntnt 1200012000

1200012000

ParticulaParticularr

To To furniture furniture a/ca/c

To To balance balance c/dc/d

AmoAmountunt

10001000

24002400

34003400

ParticulParticulararBy By balance balance b/db/d

By P/L By P/L a/ca/c

AmouAmount nt

32003200

200200

34003400

ParticulaParticular r

To To balance balance b/db/d

AmouAmount nt

80008000

80008000

ParticulParticularar

By By deprecatideprecation on

By By balance balance c/dc/d

AmouAmount nt

10001000

70007000

80008000

Furniture a\c