Presentation on

FUND FLOW STATEMENT

Presented By:
LOKESH KUMAR
PGDM-07003
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 example
Machinery 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 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.
 Statement or Schedule of Changes in Working Capital.

Previous Year Current Year Effect on Working captial

Item Decrease Rs.
Incraese Rs.
(A) Current Assets
Cash at bank
Cash in hand
Stock in trade
Debtors
Bills receivable
Advance payment
Short term investment
Prepaid expense
Accrued income
Total (A)
(B) Current Liabilities
(1) Short term loans
(2) Bank overdraft
(3) Creditors
(4) Bills payable
(5) Outstanding expenses
(6) Unclaim dividend
Total (B)
Net Working Capital (A-B)
Incraese / Decrease in Working Capital
Total
 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 fund
2. 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 Statement
Sources of Fund Amount Uses Of Funds Amount

Fund from operation

Loss from operation
Issue of share
Redemption of
Issue of debenture
preference shares
long term loans
Redemption of
Sale of fixed assets /
debentures
Investment
Repayment of
Non trading receipts
long term loans
Decrease in working
Purchase of fixed assets
capital
/ Investments
(if any)
Payment of dividend & taxes
Increase in working capital
(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\c
Particular Amount Particular Amount

Depreciation Profit or gain on sale of

Loss on sale of fixed assets fixed asset
Under writing commissions Dividend received
Discount on issue of shares & Interest received of
debentures investment
Preliminary expense written off Profit on revaluation
Deferred revenue expenses
of asset
Goodwill written off
Patent or trademark Fund from operation
Provision for taxes
(If treated non current)
Q-Comparative Balance sheet of Z Ltd. As on
year 2000 and 2001 were as follow
Liabilities 2000 2001 Assets 2000 2001
Account payable 15000 18000 Cash 11200 8500
Notes payable 10000 75000 Account
Loan on receivable 21300 23500
Mortgage 40000 40000 Stock 35000 30600
Capital 50000 45000 Sinking fund
Sinking fund investment
16000 12000 16000 12000
Retained Earning Land
13950 16275 10000 10000
Provision for DD Building 60000 60000
Accumulated 1350 1425 Furniture 8000 7000
Depreciation-
Building
12000 9000
furniture
3200 2400
161500 151600 161500 151600
You are giving 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 Capital
Items 2000 2001 Change in Working
capital
Amount Amount Increase Decrease
CURRENR ASSETS:-
11200 2700
Cash 8500
Account receivable 21300 23500 2200
4400
Stock 35000 30600
TOTAL of CA (A) 67500 62600
CUURENT
LIABILITIES:-
Account payable 15000 18000 3000
Note payable 10000 7500 2500
Provision for D D 1350 1425 75
TOTAL of CL (B) 26350 26925
Difference b/w (A-B) 41150 35675
Decrease in W C 5475
5475
10175
41150 41150
Fund flow statement
Sources of fund Amount Application of Amount
fund
Sale of sinking Redemption of
fund investment share capital 5000
4000
Fund from Dividend paid 5000
525
operation
Decrease in
working capital 5475

10000 10000
Profit & loss adjustment a\c
Particular Amount Particular Amount

To Accumulate dep. By balance b/d 13950

200
On furniture By sinking fund
5000 4000
To Dividend paid By accumulate dep.
16275
To Balance c/d On building
3000
By fund flow
operation
525

21475 21475
 Accumulative deprecation
Building Furniture
Particul Amo Particula Amoun Particular Amou Particula Amoun
nt t
r
ar unt r t
To By
To P/L a/c 3000 By balance 12000 1000
furniture balance 3200
To balance 9000 b/d a/c b/d
c/d To balance 2400 By P/L a/c 200
12000 12000 c/d
3400 3400
Furniture a\c

Particular Amoun Particular Amoun

t t
To balance By
b/d 8000 deprecatio 1000
n
By balance
c/d 7000

8000 8000