Presented By:Md.Ashadulla

PGDM.T-6195

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

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?

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.

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 Statement The 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.

Sources 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)

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