FUND FLOW STATEMENT

Definition of Funds flow statement.

“The funds flow statement describes the sources from which additional

funds were derived and the use to which these funds were put.”

It indicates various methods by which funds are obtained during a particular

period and the ways in which these funds are employed. In simple words, it

is a statement of sources and application of funds.

“A statement of sources and application of funds is a technical device

designed to analyse the changes in the financial condition of a business

enterprise between two dates.”

Meaning of important terms Funds In funds flow statement funds means working capital i.e. current assets – current liabilities. Flow of funds It means changes in funds or change in working capital Source of fund It is any transaction that results in an increase in working capital (inflow of funds) Application of funds It is any transaction that results in a decrease in working capital (outflow of funds) Importance Of Funds Flow Statement.

1. Helps in analysis of financial operations.

2. Helps in formulation of realistic dividend policy.

3. Helps in proper allocation of resources.

4. It acts as a future guide.

5. Helps in appraising the use of working capital.

6. It helps knowing the overall creditworthiness of a firm.

7. It throws light on many questions of general interest.

Why were the net CA lesser in spite of profits.

Why dividend could not be declared in spite of available profits.

What are the sources of repayment of debts.

Identification of flow of funds: general rules 1. There will be a flow of funds if a transaction involves a current

account and a non-current account i.e. involves

a. Current assets and fixed assets eg purchase of building for cash

b. Currents asset and capital eg issue of share for cash

c. Current assets and fixed liabilities eg redemption of debentures

in cash or repayment of long term loan in cash

d. Current liabilities and fixed liabilities eg creditors paid off in

debentures

e. Current liabilities and capital eg creditors paid off in shares

f. Current liabilities and fixed assets eg building transferred to

creditors in satisfaction of their claims/

2. There will be NO flow of funds if a transaction involves 2 current

accounts or 2 non-current accounts ie involves:

a. Current assets and current liabilities eg payment of creditors in

cash

b. Fixed assets and fixed liabilities eg building purchased and

payments made in debentures

c. Fixed assets and capital eg. Building purchased and payment

made in shares.

SOURCES AND APPLICATION OF FUNDS

Sources Applications

Funds from operations Funds lost in operations

Issue of Share Capital Redemption of Preference Share Capital

Issue of Debentures Redemption of Debentures

Raising of long-term loans Repayment of long-term loans

Sales of non-current (fixed) assets Purchase of non-current (fixed) assets

Sale of long-term Investments

Non-trading payments Non-trading receipts

Purchase of long-term investments

Net Decrease in Working Capital Net Increase in Working Capital

FUNDS FLOW STATEMENT This statement is prepared in two formats:

(a) Vertical form or Report Form

(b) Horizontal form or T Form

Specimen of Vertical Form of Funds Flow Statement

Funds Flow Statement For the year ended………….

Sources of Funds: Funds from Operations Issue of Share Capital Raising of long-term loans Receipts from partly paid shares, called up Sales of non-current (fixed) assets Non-trading receipts, such as dividends received Sale of Investments (long-term) Total sources (A) Applications or Uses of Funds: Funds Lost in Operations Redemption of Preference Share Capital Redemption of Debentures Repayment of Long-term loans Purchase of non-current (fixed) assets Purchase of long-term Investments Non-trading payments Payments of dividends* Payment of Tax* Total Applications (B) Increase / Decrease in Working Capital (as per schedule of changes in Working Capital) (A-B)

Rs.

T Form An Account Form or Self Balancing Type Funds Flow Statement

(For the year ended…………. ) Sources Rs. Applications Rs.

Funds from operations Issue of Share Capital Issue of Debentures Raising of long-term loans Receipts from partly paid shares, called up Sales of non-current (fixed) assets Non-trading receipts such as dividends Sale of long-term Investments Net Decrease in Working Capital

Funds lost in Operations Redemption of Preference Share Capital Redemption of Debentures Repayment of long-term loans Purchase of non-current (fixed) assets Purchase of long-term investments Non-trading payments Payment of Dividends* Payment of tax* Net Increase in Working Capital

Preparation Of Funds Flow Statement

The preparation of funds flow statement consists of the following steps:

1. Preparation of Schedule of changes in working capital

2. Calculation of funds from /(lost in) operations

3. Identification of various sources and application of funds as well as

hidden information affecting the funds (if necessary, through preparation

of ledger a/cs for non-current items)

An increase in non-current asset over the year is an application of

funds while a decrease is a source of funds

An increase in non-current liability over the year is a source of

funds while a decrease is an application of funds

4. Preparation of funds flow statement

Preparation of Schedule of changes in working capital

It is prepared to compare the working capital position between two balance

sheet dates so as to determine increase or decrease in working capital. An

increase in working capital is an application of funds while a decrease in

working capital is a source of funds.

WC = CA –CL

in current assets = in WC

in current liabilities = in WC.

in current assets = in WC.

in current liabilities = in WC.

Schedule of changes in working capital for the period ending

Effect on working capital Particulars Previous year as on

Closing year as on Increase (+) Decrease(-)

Current Assets: Cash Bank Debtors Stock Prepaid expenses Total current assets Current liabilities: Creditors Bills payable Bank overdraft Outstanding expenses Total current liabilities Working capital:(A-B) Net increase/decrease in working capital

Example Prepare a schedule of change in working capital from the following information:

Liabilities On 31.12.04

On 31.12.05

Assets On 31.12.04

On 31.12.05

Equity share capital

5,00,000 6,00,000 Fixed assets 5,50,000 7,00,000

Debentures 1,00,000 55,000 Long term investment

1,05,000 1,05,000

Long term loan 1,00,000 2,00,000 Bills Receivable

50,000 50,000

Tax payable 55,000 25,000 Sundry debtors 70,000 75,000 Accounts payable

60,000 70,000 Inventory 50,000 40,000

Outstanding expenses

10,000 5,000 Prepaid expenses

5,000 -

Bank overdraft 8,000 15,000 Cash and bank balance

20,000 10,000

Dividend payable

17,000 10,000

8,50,000 9,80,000 8,50,000 9,80,000

Calculation of Funds from Operations This requires the adjustment of non-fund and non-operating items.

Statement showing the calculation of funds from operations for the period ending…

Particulars Amount (Rs.)

Amount (Rs.)

Closing balance of Profit and Loss A/c Less opening balance of Profit and Loss A/c Net profit or net loss for the year Add: Non-fund and non-operating Expenses/Losses Depreciation on fixed assets Goodwill (or patents) written off Preliminary expenses written off Discount on issue of shares/debentures written off Loss on sale of fixed assets or long term investments Transfer to reserves Provision for taxation and proposed dividend (if not taken as a current liability) Less: Non Fund and Non operating Incomes/Gains Profit on sale of fixed assets/long-term investments Interest or dividend received (non-trading income

XXX XXX

XXX XXX XXX XXX

XXX

XXX XXX

XXX

XXX

XXX

XXX

XXX

XXX Funds from operations XXX

Example Following are the extracts from the balance sheet of a company as on 31 December 2006 and 31 December 2007. You are required to calculate funds from operations. As on 31.12.06 As on 31.12.07 Profit and Loss Appropriation Account General Reserve Goodwill Preliminary Expenses Provisions for Depreciation on Machinery

30,000 20,000 10,000 6,000

10,000

40,000 25,000 5,000 4,000

12,000

Treatment of provision for tax and proposed dividend

There are 2 options for treatment of Provision for tax and proposed dividend ie they may be treated as

1. A current liability a. Included in schedule of changes in working capital b. No further adjustment required

2. An appropriation of profit a. The provision of tax for the year and/or dividend proposed

during the year is added back to net profit to calculate funds from operations

b. The amount of tax or dividend paid in current year is shown as an application of funds