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Fund Flow Statement – Conceptual Framework
Paper 3B: Financial Management Chapter 3 Unit II
CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT
Learning Objectives
1. Concept of Funds Flow statement
2. Format of Funds Flow Statement
3. Preparation and Presentation of Funds Flow Statement
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Introduction to Fund Flow Statement •Introduction •Background •Change in Working Capital
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Fund Flow - Introduction
1. Fund means Working capital – difference between current assets and current liabilities
2. Funds flow statement analyses the reasons for change in financial position between two balance sheets
3. Funds flow statement shows the inflows and outflows of funds – Sources and Application of funds during a particular period
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Fund Flow - Background
1. Funds flow statement reveals the sources and applications of funds
2. It ascertains the changes in financial position between two accounting periods.
3. It analyses the reasons for change in financial position between two balance sheets
4. It helps to test whether working capital has been effectively used or not
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Change in Working Capital – Profit situation
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• Even when a firm is earning adequate profit, it may be short of fund for day - to - day working – Reasons • Purchase of Fixed assets
using short term funds • Extension of credit to
Customers • Holding larger stock
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Change in Working Capital – Loss situation
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• Even in years of loss, working capital may not diminish as much as the amount of loss less depreciation – • Better realization from
Customers • Sale of long term assets and
releasing cash • Liquidation of stock
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Elements of Funds Flow Statement
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•Introduction •Sources of Funds •Applications of Funds
Elements of Funds Flow - Introduction
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• It is important to understand the numerous movements in funds in an accounting year • This is possible by preparing a
statement known as Funds Flow Statement.
• Funds Flow Statement also known as • Sources and Applications of
Funds Statement or • Statement of Changes in
Financial Position
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Elements of Funds Flow – Introduction …Continued
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• There is no prescribed format for this statement • It is customary to draw in
a manner as would disclose • the main sources of
funds and • their uses
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Sources of Funds
Issue of shares for cash
Issue of Debentures for cash
Raising long term loans
Sale of Fixed Assets
Sale of Investments
Funds from Operations
Decrease in Working Capital
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Funds from Operation 12
Net Income Add: • Depreciation • Amortization of Intangibles and deferred charges • Amortization of loss on sale of investments or fixed assets • Losses from other non-operating items • Current year tax provision • Transfer to reserve • Proposed dividend Less: • Profit on sale of investment or fixed assets • Any subsidy credited to P & L A/c • Any written back reserve and provision
Applications of Funds
Purchase of Fixed Assets
Purchase of Investments
Redemption of preference shares
Redemption of debentures
Repayment of loan
Payment of dividend and tax
Increase in Working Capital
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Funds Flow Statement - Benefits
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Funds Flow Statement - Benefits
Benefits to Management
Benefits to Investors
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Funds Flow Statement – Benefits to Management
* Projected funds flow statement can be used for implementing the budgetary and capital expenditure controls * Helps in deciding financing policies
Helps the management to identify whether Working capital is – * Effectively used or not * Adequate or not?
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Funds Flow Statement – Benefits to Investors
Helps in answering – * Where the profits have gone? * How the firm is financially sound in spite of losses?
Helps the Investors – * To decide whether company has managed funds properly? * Indication of credit worthiness
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Funds Flow Statement Vs. Cash Flow Statement
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Differences between Funds Flow and Cash Flow Statements
Basis
Nature of analysis
Usage
Presentation
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Basis
Funds flow statement is based on accrual accounting system
In Cash flow statement, transactions effecting cash or cash equivalents are considered
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Nature of Analysis
Funds flow statement analyses the sources and applications of funds of long term nature and the net increase or decrease will be reflected in Working capital
In Cash flow statement, only increase or decrease in current assets and current liabilities are considered in calculating cash flow of funds from operations
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Usage
Funds flow analysis is more useful in long range financial planning
In Cash flow analysis is more useful in identifying and correcting the current liquidity problems
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Presentation
Funds flow statement matches funds generated from various sources with various uses of funds
Cash flow statement start with opening balance of cash and reach to closing balance of cash by proceeding through sources and uses
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Lesson Summary 24
We have learnt the meaning of funds and funds flow statement
We have also learnt various elements of funds flow statement - Sources of funds and Application of funds
We have reviewed the benefits of funds flow statement
We have also seen the differences between funds flow statement and cash flow statement
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Please follow session on – Funds Flow Statement – Practical
Paper 3B: Financial Management Chapter 3 Unit II
Thank You
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