FUNDS FLOW ANALYSIS

Learning objectives:
Concept of funds flow statement
Preparation on total resource basis
Preparation on cash basis
FFS on working capital basis
Significance of FFS and its interpretation.

Introduction and concept of FFS

Over a period of time, every item of B/S
undergoes change. While a business may
show considerable profits, there may not be
adequate cash to meet business needs.
Or, in spite of borrowings, funds may not be
available to support inventory. Statement of
changes in financial position (SCFP)
answers all these questions.

Funds Flow Statement

Funds Flow Statement (FFS) is also known as:
Cash flow statement (presentation is different)
Statement of sources and uses / applications of
funds
Statement of money provided and its disposition
Summary of financial operations
Financial expansion and replacement
Statement of changes of financial position(SCFP)

FFS the concept

FFS captures movement of funds, whereas
B/S indicates static picture of sources and
uses of funds. FFS shows how did the
business meet its expenses, liabilities and
create assets during the year, how did it pay
taxes and dividends and the sources of those
funds. FFS is complementary to B/S, and
PL statement.

Preparation of FFS on total

resource basis
Take difference of corresponding values in B/S of 2
years.
Positive differences on assets side and negative
differences on liability side should be grouped.
Negative differences on assets side and positive
differences on liability side should be grouped.
When added up all items in each group, both totals
will tally, indicating arithmetical accuracy.
Thus FFS is prepared and presented as required by
management.

FFS on cash basis

Classify net B/S changes between 2 points
in time into changes that increase or
decrease cash.
Classify from PL A/c. factors that increase
or decrease cash.
Reclassify this information into a source of
funds and uses (or application) of funds.

Sources of funds that increase

cash
1. Net decrease in any asset other than cash
and fixed assets
2. Decrease in gross block or gross fixed
assets
3. Net increase in any liability
4. Proceeds from sale of any equity or pref.
shares
5. Funds from operations

Uses of funds that decrease cash

Net increase in any asset other than cash
and fixed assets
Gross increase in fixed assets
Net decrease in any liability
Retirement / redemption of shares or bonds
or purchase of shares
Dividend pay out

FFS on working capital basis

Increase in CA results in increase in WC

Decrease in CA results in decrease in WC
Increase in CL results in decrease in WC
Decrease in CL results in increase in WC
This statement is frequently used by bankers to
determine whether minimum WC requirement is
maintained by borrowers and to monitor
borrowers cash credit a/c. or WC loan A/c.

Significance of FFS
Detection of imbalances in cash flows and
appropriate action
Divisional performance appraisal
Evaluation of firms financing
Planning for future financing

Advantages-Funds Flow
Statement
1. It gives the figure of flow of funds from
operations. This is more relevant than the
net profit revealed by PL A/c. Depn and
amortization is charged at the discretion of
management and hence, profit, which is after
deducting above two charges, may not be
representative of cash generated. In FFS,
depn and non-cash charges are added back.

Advantages - FFS
2. Comparison of the figures of working
capital budget with the figures of sources
and applications of funds in the FFS enables
management to ascertain how far the budget
has been implemented. It also helps in
preparation of budget for the subsequent
period.

Limitations of Funds Flow

Statement
FFS shows flow of net working capital,
which includes Stock of goods, Prepaid
expenses, which do not contribute to the
short term ability of the enterprise to pay its
debts or liabilities. Because of these
limitations, AS 3 (Revised) has done away
with it and has recommended preparation of
Cash Flow Statement.

Distinction- FFS & CFS.

1. FFS deals with changes in working
capital position while CFS deals with
changes in cash position between two
points of time.
2. FFS does not contain opening and
closing balances of cash and cash
equivalents, but CFS gives both.

Distinction between FFS & CFS

3. FFS records sources of funds and
application of funds, resulting in increase in
working capital (WC) or decrease in WC.
In case of CFS, difference is reflected in
opening and closing cash and cash
equivalents. 4. Statement showing WC
changes is prepared along with FFS, but no
such statement is prepared in case of CFS.

Distinction between FFS & CFS

5. FFS can be prepared if CFS by indirect
method is made available. But one cannot
prepare CFS from FFS. For CFS, statement
showing changes in WC is required. To
prepare CFS by direct method, cash
received from Debtors and paid to Creditors
and to employees, etc. are required.

Distinction between FFS & CFS

6. FFS is relevant in estimating firms
ability to meet its long term liabilities. CFS
is more relevant in estimating firms
capacity to meet its liabilities over a short
term. 7. FFS is not required by Companies
Act or SEBIs regulations. CFS must be
prepared and circulated to shareholders of
company, as per Co. Act and SEBI rules.

Distinction between FFS &

Income Statement or PL A/c.
1. FFS matches funds raised during a period
and funds applied or used. PL A/c. matches
income and expenditure over a period.
2. FFS tells increase or decrease in NWC
during a period , whereas PL A/c. reveals net
profit or loss during the period.
3. FFS deals with revenue and capital items,
whereas PL deals with only revenue items.

Distinction - FFS & PL A/c.

4. For preparing FFS, Income statement or
PL is required. Income statement can be
prepared without reference to FFS.
5. Preparation of FFS, though optional, is
advantageous. Income statement is must.
6. No prescribed format for FFS. But for
PLA/c. prescribed format must be followed
by banks, ins.co. and electricity companies.

Dist-Statement Showing Changes

in Working Capital & FFS
1. SSCWC notes the effect of changes in
each one of the current assets and current
liabilities on WC. FFS notes the effect of
items other than current assets and current
liabilities on WC.
2. Items appearing in SSCWC are
constituents of WC, but items appearing in
FFS are not constituents of WC.

Distinction - SSCWC and FFS

3. Only BS is required to prepare SSCWS,
whereas to prepare FFS, PLA/c. and BS are
required.
4. SSCWC is not presented in T form, but
FFS can be presented in T form.

Why FFS is important

Remember these words:
In business,
CASH IS KING
Cash Flow Statement will be taken up in
next session.

Assignment
Prepare FFS or statement of sources and uses or
application of funds from the Balance Sheet and Profit
and Loss A/c. of any company. Comment on your
findings.
Prepare cash flow statement showing:
Funds generated from operations,
Funds generated from investing activities, and
Funds generated from financing activities
Compare with cash flows of earlier year and
comment on observations.

Summary
We have studied:
the concept of cash flow & funds flow
how to prepare and FFS?
what are the methods of presentation of FFS?
what is Cash Flow statement under Clause 32
of Listing Agreement with stock exchange?
what is the utility of FFS and interpretation?
what is the significance of FFS?

Case study Reliance Industries

Preparation and Study of
Funds Flow Statement of
Reliance Industries Limited
for the year 2007-08.
Source:
Annual Report of Reliance Industries Limited
for Financial Year 2007-08

Funds Flow Analysis

-Reliance Industries Limited

Year ended 31st March, 2008

SOURCES OF FUNDS Rs. Crores
Profit After Tax (PAT)
19506
Add: Depreciation
4692
Equity share warrants
1682
Unsecured Loans
11623
Increase in Current Liab.&Prov 5460
Increase in Deferred Tax
890
Total Sources
43853

Funds Flow AnalysisReliance Industries Ltd.:Uses

Acquisition of Fixed Assets 20174

Investments
5812
Inventory
2111
Sundry Debtors
2495
Cash and Bank Balances
2445

(continued on next slide)

Funds Flow AnalysisReliance Industries Ltd.:Uses

Loans and Advances

Other Current Assets
Secured Loans repaid
Sub-total
Increase in Reserves
Others

Total Applications

5852
73
2969
41931
1781
141
43853

Funds Flow AnalysisReliance Industries Limited

Long term Sources: Rs. Crores
43853 minus 5460 (CL+)-890(Def.tax)
=37503
Long term applications:
27104(FA)+5812(Inv)+2969(loans)=35885
(continued on next slide)

Funds Flow AnalysisReliance Industries Limited

Short term sources = 5460+890=6350 crores
Short term uses = 12976 crores(CA)
Unsecured loans + share warrants=13305 crores
plus part of profits have been used for acquiring
fixed assets of 21704 crores

Funds flow analysisReliance Industries Limited

CA increase 7051 crores as against CL
increased by 5280 crores.
Note: Statement of changes in working
capital is not prepared as a separate
statement, but changes ae included in
Sources and Uses of funds.

Next Quiz
11th December, 2010. Date will be confirmed
and time, and venue will be announced by
Exam and Academics dept.
Syllabus All what has been taken up in
class till 5th December, 2010.
Mis Sem Exam or one more quiz will be
conducted even earlier or this date may be
advanced or pre-poned.