SUB: FINANCIAL STATEMENT ANALYSIS

UNIT – II
INTRODUCTION TO FUND FLOW STATEMENT
Learning Objectives:
• Understanding the concept of fund
• Calculation of fund from operation
• Calculation of changes in working capital
• Preparation of statement of Sources & Application of Funds

FUND FLOW STATEMENT

Funds flow statement is a financial statement which shows as to how a business entity has obtained its funds
and how it has applied or employed its funds between the opening and closing balance sheet dates (during the
particular year/period). It can be described as – WHERE GOT-WHERE GONE statement Funds usually refers
to cash resources and funds statement is prepared to show the net effect of various business events on the
current resources of the organization. In this topic fund should be understood as working capital & funds flow
as to mean any change in working capital.

Funds Flow Statement is a statement prepared to analyse the reasons for changes in the financial position of a
company between 2 Balance Sheets. It shows the inflow & outflow of funds i.e. SOURCES and
APPLICATIONS of funds for a particular period. In other words Funds flow statement is prepared to explain
the changes in the working capital position of a company. There are two types of inflows of funds –
a. Long term funds raised by issue of Shares, Debentures or sale of Fixed Assets
b. Funds generated from operations
If the long term fund requirements of a company are met just out of the Long term Sources of funds, then the
whole fund generated from operations will be represented by increase in working capital. However if the funds
generated from operations are not sufficient to bridge a gap of long term fund requirement, then there will be a
decline in working capital.

BENEFITS OF FUND FLOW STATEMENT

Funds flow statement is useful for long term analysis. It is very useful tool in the hands of the management for
judging the financial & operating performance of the company. The Balance Sheet and the Profit & Loss A/c
(Income Statement) fails to provide the information which is provided by the funds flow statement i.e. changes
in Financial Position of an enterprise. Such an analysis is of great help to the management, shareholders,
creditors etc.

Fund Flow Statement answers the following questions

- Where have the profits gone?
- Why is there an imbalance existing between liquidity position and profitability position of an
enterprise?
- Why is the concern financially solid in-spite of losses

Fund flow statement analysis helps the management to test whether the working capital has been effectively
used or not and the working capital level is adequate or inadequate for the requirements of the business. The
working capital position helps the management in taking policy decisions regarding payment of dividend etc.

Fund flow statement analysis helps the investors to decide whether the company has managed the funds
properly. It also indicates the credit worthiness of a company which helps the lenders to decide whether to lend
money to the company or not. It helps the management to take policy decisions and to decide about the
financing policies and capital expenditure for the future.
PROCEDURE OF PREPARATION OF FUND FLOW STATEMENT
Step I - Prepare the statement of changes in working capital
Step II - Analyse the changes in non-current assets and noncurrent liabilities to find out inflow
or outflow of funds
Step III - Find out funds from operation
Step IV - Prepare statement of Sources & Application of Funds (Funds Flow Statement)

Step – I

Step – II - Working Capital Changes

• Increase in Current Assets – Increase in Working Capital- Outflow
• Increase in Current Liabilities – Decrease in Working Capital - Inflow
• Decrease in Current Assets – Decrease in Working Capital - Inflow
• Decrease in Current Liabilities – Increase in Working Capital - Outflow

Step III – Finding Funds from Operations

In this step, we need to calculate the funds generated only from the Operating activities of the business
and not from the Investing / Financing activities of the business. The funds from operations shall be
prepared as follows:
Step – IV – While preparing the fund flow statement, the sources and uses of funds are to be disclosed clearly
so as to highlight the sources from where the funds have been generated and uses to which these funds have
been applied. This statement is also sometimes referred to as the sources and applications of funds statement or
statement of changes in financial position.
Sources of Funds
• Issue of Equity & Preference Shares
• Receipt of Securities Premium
• Issue of Debentures
• Receipt of Long Term Loans from Banks & Other Financial Institutions
• Receipt of Public Deposits & other Unsecured Loans
• Sales of Fixed Assets, Sale of Investments
• Extraordinary receipt awarded in legal suit
• Income from long term investments
• Funds from operations
• Decrease in Working Capital

Application of Funds
• Redemption of Preference share capital, Redemption of Debentures
• Premium paid on redemption of debentures and preference shares
• Repayment of temporary loans, secured & unsecured
• Purchase of Fixed Assets, Purchase of Investment
• Extraordinary payments and non recurring losses like loss by fire & damages paid
• Payment of Dividend & Interim Dividend, Payment of Tax
• Increase in Working Capital

Formats of Fund Flow Statement

There is no prescribed format as such for the preparation of Funds Flow Statement. The only point to
be remembered is that it should be presented in a clear and systematic manner. However, Funds Flow
Statements may be prepared in any of the following formats
• Report Form – Remainder Type
• Report Form – Self Balancing Type
• Report Form – Reconciling Type
Fund Flow Analysis
Flow analysis consists of two different analysis namely
Working Capital Analysis – is the analysis & reporting of working capital. Working capital is the excess of
current assets over current liabilities. This analysis consist of two statements namely
- Statement of changes in working capital
- Statement of Sources & Application of Funds
Cash Flow Analysis – is the analysis of inflows and outflows of cash. Cash flow analysis results in separate
reports viz. Sources and Applications of Cash
Funds flow statement explains as to what caused the changes in the balance sheet items between two balance
sheet dates

Importance of Fund Flow Analysis

Funds flow statement is an important financial tool, which analyze the changes in financial position of a firm
showing the sources and applications of its funds. It provides useful information about the
firm's operating, financing and investing activities during a particular period. The following points highlight the
importance of funds flow statement.
1. Helps in identifying the change in level of current assets investment and current liabilities financing.
2. Helps in analyzing the changes in working capital level of a firm.
3. Shows the relationship of net income to the changes in funds from business operation.
4. Reports about past fund flow as an aid to predict future funds flow.
5. Helps in determining the firms' ability to pay interest and dividend, and pay debt when they become due.
6. Shows the firms' ability to generate long-term financing to satisfy the investment in long-term assets.
7. Helps in identifying the factor responsible for changes in assets, liabilities and owners' equity at two balance
sheet date.
Important Terms
 Fund – It refers to working capital, Flow – It is a movement of fund
 Current Items – It includes current assets and current liabilities
 Non Current Items – It includes share capital, reserves, loans, fixed assets, investments etc
 Fund from Operation – it is the cash profit generated from operations
 Working Capital – Excess of current assets over current liabilities is called as working capital.

Theory Questions
1. Why are funds flow statements important?
2. Explain – funds from operations
3. Explain the concept of fund & how the funds flow?

Practical Questions