Fund Flow Analysis

Fund Flow Analysis



Need and Importance



Provides information relates to overall investment and financial activities of the company. company. Serve the dual role of an accounting report and an analytical tool. tool. Evaluating the employment of funds by a firm and in determining the sources for such funds. funds.

Fund Flow Analysis

Meaning: Fund may be interpreted in various ways as (a) Cash (b) Total Current Assets (c) Net working capital (d) Net Current Assets For the purpose of FFS the term fund means Net working capital.

Fund Flow Analysis

Definition: Definition: According Robert Anthony The FFS describes the sources from which additional funds were derived and the uses to which these funds were put .

Fund Flow Analysis

Meaning: FFS is a statement in summary form that indicates the changes in items of financial position between two different balance sheet dates showing clearly the sources and application of funds. funds.

Fund Flow Analysis



Uses


Limitations


Explain the financial consequences of business operations. operations. Helps to ascertain the information relates to Debt capital Instrument for allocation of the company s scarce resources Evaluating the effective use of working capital

It ignores non-fund nonitems It does not reveal shifts among the items making up the CA and CL.

Preparation of Fund Flow Analysis



Mainly two comparative Balance Sheet at the beginning and end of a period are used for preparing a FFS. FFS. The FF analysis involves the preparation of two statements, viz. viz.
(a)

(b)

Statement or schedule of changes working capital; and capital; Sources and uses of funds statement

in

(a) Statement of Changes in Working Capital

Previous Year Current Year Effect of Change on Working capital
Increase Decrease

Current Assets Cash Bank B/R Debtors Stock Prepaid Exps. Total (a)

Statement of Changes in Working Capital

Previous Year Current Year Effect of Change on Working capital
Increase Current Liabilities: Outstanding Exps. B/P Creditors Decrease

Total (b)
Working Capital (a-b) (aNet increase/decrease in working capital

Rules for Preparing the Changes in Working Capital



Increase in current asset, results in increase (+) in Working Capital . Decrease in current asset, results in decrease (-) in Working Capital . Increase in current liability, results in decrease (-) in Working Capital . Decrease in current liability, results in increase (+) in Working Capital .

(b) Statement of Sources and Application of Funds Sources

Issue of shares Issue of Debentures Long term loans Sale of Investment Sale of fixed assets Trading profits (or) Funds from operations Non trading income Net decrease in WC as per schedule of changes in WC Total Total

Rs.

Applications
Redemption of shares Redemption of debentures Repayment of loans Purchase of investment Purchase of fixed assets Payment of dividends Fund lost from operations Non Trading payments Net increase in WC as per schedule of changes in WC

Rs.

Cash Flow Analysis



Need and Importance To show the cause of changes in cash balance between the balance sheet dates. dates.  To show the factors contributing to the reduction of cash balance inspite of increasing of profit or decreasing profit. profit.


Cash Flow Statement



Meaning:
CFS reveals that inflow and outflow of cash during a particular period. It is prepared on period. the basis of historical data showing the inflow and outflow of cash. cash.

Cash Flow Analysis



Uses
It explaining the reason for low cash balance.  It shows the major sources and uses of cash.  It helps in short term financial decisions relating to liquidity. liquidity.  It helps the management in planning the repayment of loans, credit arrangement etc. etc.


Steps in preparing CFS



 

Opening of accounts for non-current items non( to find out the hidden information) Preparation of adjusted P&L A/C (to find out the cash from operations and cash lost in operations) Comparison of current items Preparation of CFS

Cash from operations can be prepared by this formula: formula:

Decrease in CA Net Profit + Increase in CL Decrease in CL Increase in CA

Cash Flow Statement

In flow of Cash
Opening Cash Balance Cash from operation Sale of Assets Issue of Shares Issue of Debentures Raising of Loans
Collection from Debentures

Rs.

Out flow of Cash

Redemption of Pref. Shares Redemption of Debentures Repayment of Loans Payment of Dividends Payment of Tax Cash Lost in operations

Rs.

Refund of Tax

Difference between CFS & FFS



CFS takes into consideration only the changes in cash position between two balance sheets Cash from operation is calculated only by actual receipt and payment of income and expenses. expenses. It is more useful to management as a tool of financial analysis Wherever there is inflow of cash there will be definitely be inflow of funds. funds.

FFS is concerned with changes in working capital position between two balance sheet dates. dates. Fund from operation is calculated by adjusted P&L account. account. It is not more useful than CFS. CFS. Sound fund position does not necessarily mean sound cash position. position.

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