ASSIGNMENT ON FUND FLOW STATEMENT

Submitted to Dr.Karuppasamy

Submitted by Vishnupriya. G

CONTENT 

Introduction  Definition  Meaning of flow of fund  The Concept of funds  Fund flow statement  Objectives or uses of the fund flow statement  Limitation  Modern techniques of preparing fund flow statement  Schedule of changes in working capital  Statement of sources and application of funds  Illustration of fund flow statement

³a statement of source and application of fund is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates. (c) Net working capital. the flow of funds refers to movement of funds involving ³inflow´ and ³outflow´ in the working capital area. In other word any increase or decrease in working capital means ³fund flow´. It is an important tool of working capital analysis also. Such a statement provides an efficient method for the financial manager to access the growth of the firms and its resulting financial needs and to determine the best ways of financing those needs. ³the Fund Flow Statement describes to sources from which additional funds were derived and the uses to which these funds were put. This happens when changes occur in Non current accounts such as fixed assets. According to Robert Anthony. A fund flow statement is a valuable aid to financial manager or a creditor in evaluating the uses of funds by a firm and in determining how these uses are financed.FUND FLOW STATEMENT INTRODUCTION Fund may be interpreted in various ways as (a) cash. Viewed from the angle of working capital concept of funds. For this purpose Fund flow statement is prepared. DEFINITION According to Foulke.´ MEANING OF FLOW OF FUND The term ³flow´ means change and the term ³flow of funds´ means change in funds or change in working capital.´ It is a statement which highlights the underlying financial movement and reflects the changes in the financial position or working capital position in two different dates. (b) Total current assets. share capital. when a transaction results in a change in increase or decrease in the amount of funds. In the nutshell. (d) Net current assets. funds statements are very useful in planning intermediate and long term financing. long . The flow of fund will occur in a business. The term fund means net working capital.

This is known as all financial resources concept of funds. namely. gross concept and net concept.term debts etc. the most acceptable view is the one relating to ³Net working capital´. Where got and where gone statement . At one extreme the word funds is synonymous with cash so that a funds statement is nothing but an enumeration of the net effects of various kinds of business events on the cash. FUND FLOW STATEMENT Fund flow statement is a technical device designed to highlight the changes in the financial position of the business enterprise between two balance sheets. Statement of changes in financial position 3. On the other extreme is the view that funds refer to economic values expressed in money measurements which are subject to firm¶s jurisdiction. It is in the latter sense in which the term µfund¶ is generally used. Both these concepts of funds constitute the extremes. Gross working capital refers to the firm¶s investment in current assets. In between the two extreme views on the concept of funds. Various titles are used for the fund flow statement. They include the following: 1. Statement of sources and uses of fund 4. There are two concepts of working capital. Fund statement depicts the source from where additional funds during the current year as compared to the previous year have been received and to what uses these funds have been applied. Statement of sources and application 2. THE CONCEPT OF FUNDS The term fund has a variety of meanings. while the term net working capital means excess of current assets over current liabilities. and are offset by corresponding changes in current account such as current asset or current liabilities and vice versa.

DIAGRAMS DEPICTING FLOW OF FUNDS FLOW OF FUNDS NO YES WHEN BOTH CURRENT OR NON CURRENT ACCOUNTS ARE INVOLVED WHEN ONE CURRENT AND OTHER NON CURRENT ACCOUNTS ARE INVOLVED .FIGURE SHOWING FLOW OF FUND NO CURRENT LIABILITIES CURRENT ASSETS NON CURRENT LIABILITIES NON CURRENT ASSETS NO In the above figure the dotted line denote there is no flow of fund and the line denotes there is flow of fund.

 It can be compared with the relevant budgets to assess the usage of funds as per plans.OBJECTIVES OR USES OF THE FUND FLOW STATEMENT Fund flow statement is an important tool in the armoury of the finance manager. The following are the benefits or uses of fund flow statement.  It provides a detailed analysis and understanding of changes in the distribution of financial resources between two balance sheet dates. It helps in the planning.  To point out the financial strength and weakness of the business.  The sources from which funds were obtained are useful in computation of cost of capital of the business. This can help in the formulation of sound policy for liquidity and short term solvency of the firm. deployment and controlling of funds year after year.  A detailed analysis of sources of fund in the past acts as a guide for obtaining funds for future requirement. are facilitated by fund flow analysis.  It gives indication of any weakness or strength in the general financial position of a firm  It throws light on the financial consequences of business operations.  Working capital and the causes for changes in working capital are highlighted. etc.  It shows how the funds were obtained and used during a period.  To help to understand the changes in assets and asset sources which are not readily evident in the income statement or financial statement..  To inform as to how the cans to the business have been used.. .

and they are:  It should be remembered that a funds flow statement is not a substitute of an income statement or a balance sheet. MODERN TECHNIQUES OF PREPARING FUND FLOW STATEMENT The document needed for constructing a fund flow statement are the comparatives balance sheets at the beginning and at the end of the period for which it is prepared. The fund flow statement involves the preparation of two statements. This can be obtained from summarized operating statement. however. The effect of conduct of the business is reflected in its balance sheets by increase or decrease in the various assets and liabilities and in the proprietary equity or capital. A condensed statement of retained earnings is necessary to clarify fund effects of ownership transactions. and 2.  Changes in cash are more important and relevant for financial management than the working capital. Material information is also required to highlight correctly the impact of operation upon the funds. Statement of source and application of funds. They are as follows: 1.  It cannot reveal continuous changes. it has certain limitations also.  It is not an original statement but simply are arrangement of data given in the financial statements. .  It is essentially historic in nature and projected fund flow statement cannot be prepared with much accuracy. Schedule of change in working capital. It provides only some additional information as regards changes in working capital.LIMITATIONS OF FUNDS FLOW STATEMENT The funds flow statement has a number of uses.

There is no effect of additional information given in the problem. the effect is an increase in working capital and it is recorded in the increase column. Working capital = Current asset ± Current liabilities So i) An increase in current assets increases working capital ii) A decrease in current assets decrease working capital iii) An increase in current liabilities decrease working capital and iv) A decrease in current liabilities increases working capital The change in the amount of any current asset or current liability in the current balance sheet as compared to that of the previous balance sheet either results in increase or decrease in working capital. It is prepared in order to measure the increase or decrease in the working capital over a period of time.1. SCHEDULE OF CHANGES IN WORKING CAPITAL The first part of the fund flow analysis is the schedule of changes in working capital. . But if the current liability is more than in the previous year. It is necessary to prepare this schedule. The difference is recorded for each individual current asset and current liabilities. This process will be repeated till all accounts relating to all current the schedule of changes in working capital is prepared only from accounts appearing in the balance sheets. This schedule is prepared with the help of only current asset and current liabilities. In case a current asset in the current period is more than in the previous period. The difference is recorded for each individual current asset and current liability. the effect is decrease in working capital and it is recorded in the decrease column or vice versa.

WORKING CAPITAL (A-B) D. NET INCREASE OR DECREASE IN WORKING CAPITAL XX X XX ----X XX XX X X .FORMAT FOR SCHEDULE OF CHANGE IN WORKING CAPITAL Particulars Previou s year Current year Effect on working capital Increase decrease A.CURRENT ASSETS: Cash in hand Cash at bank Bills receivable Sundry debtors Closing stock Prepaid expenses XX XX XX XX XX XX XX XX XX XX XX XX XX XX X X X --X --X --X ----- B. CURRENT LIABILITIES Sundry creditors Bills payable Bank overdraft o/s expenses XX XX XX XX XX XX XX XX XX XX X ----X X --X X --X C.

. This is also applies to share capital. It is also known as fund flow statement. STATEMENT OF SOURCES AND APPLICATION OF FUNDS This is the second but most important part of fund flow analysis. Thus the preparation of fund flow statement involves the ascertainment of increase or decrease in the various items of fixed assets. Increase in fixed asset is an application of funds and decrease in fixed asset on account of sale is a source of fund. Additional information given as per adjustment must also be considered while preparing the fund flow statement. Increase in long term liabilities is a source of fund and decrease in long term liabilities is an application of fund. long term liabilities and share capital. It is prepared on the basis of the change in fixed asset.ADJUSTED PROFIT AND LOSS ACCOUNT PARICULARS To depreciation & depletion or amortization To appropriation of retained earnings To loss on sale of non current fixed assets To dividends To proposed dividend To provision for taxation To closing balance To fund lost in operations XX XX XX XX XX XX XX XX XX RS XX PARTICULARS By opening balance By transfer from excess provisions By appreciations By dividend received By interest on investment By profit on sale of fixed or noncurrent assets By fund from operations RS XX XX XX XX XX XX XX 2. long term liabilities and share capital ascertained on the basis of values of these items shown in the balance sheets.

FUND FLOW STATEMENT SOURCE 1. Net Increase in working capital RS XXX XXX XXX XXX XXX XXX XXX XXX TOTAL XXX TOTAL XXX .Long term borrowing 4. Operating losses etc. Repayment of loans 4.term investment Net Decrease in working capital RS XXX XXX XXX XXX XXX XXX XXX XXX APPLICATIONS 1.Issue of debenture 3. Payment of dividend 7. Sale of investments 7. Payment of tax 6.Issue of shares 2. Purchase of investment 8.Redemption of preference share 2. Purchase of fixed assets 5. Funds from operation 6. Redemption of debentures 3. Sale of fixed assets 5. Income from long.

Sale of fixed assets 5. Funds from operations etc. Net increase or decrease in working capital (A-B) XX XX XX XX XX XX XX XX XX XX . Purchase of investment 8. XX C. SOURCES: 1. APPLICATIONS 1. Repayment of loans 4. Sale of investments 6. Loss from operation 9. Issue of shares 2. Purchase of fixed asset 5. Issue of debenture 3. Dividend received 7.AN ALTERNATIVE FORM STATEMENT OF SOURCE AND APPLICATION OF FUNDS A. Rs XX XX XX XX XX XX XX XX XX B. Interest received 8. Payment of dividend 7. Redemption of debentures 3. Long term borrowing 4. Redemption of preference shares 2. Payment of tax 6. Amount withdrawn by the proprietor etc.

SOURCES OF FUND The transactions that increase working capital are sources of funds. We calculate fund from operations by adding non operating expenses and deducting non operating income from net profit. because we receive funds from it. FUND FROM OPERATIONS Business activities may result in profit. Following items are the source of funds for the business: 1. Fund form operation is a source. STATEMENT SHOWING CALCULATION OF FUND FROM OPERATION Particulars Profit and loss account opening balance Less: Profit and Loss Account opening balance Current year profit as per profit & Loss Account Add: Depreciation and depletion Amortization of fictitious assets and intangible assets Provision for tax Transfer to reserve Interim dividend paid Dividend proposed Loss on sale of fixed assets Any other non-cash expenditure XX Less: Profit on sale of fixed assets Dividend received Appreciation in the values of fixed asset ( if credited in profit and loss account) Funds from operation XX XX XX XX XX XX XX XX XX XX XX XX XX XX Rs XX XX XX Rs .

interim dividend paid. . the amount of depreciation should be added to back to current year¶s profit in order to find out the fund from operation. transfer to reserve. These items are non fund items because they have nothing to do with current assets and current liabilities. (c) PROVISION FOR TAX Provision for tax made from current year¶s profit does not affect the flow of funds.The following items are added with profit: (a) DEPRECIATION AND DEPLETION The treatment of depreciation and depletion of noncurrent assets like plant and machinery and furniture is a different problem. So to delete their effect. etc should also be added back to the current year¶s profit inorder to find out the fund from operation. discount on issue of shares and debentures written off. So it must be added back to the profit. The amortization of non fund items such as preliminary expenses written off. loss on sale of assets. (d) PROPOSED DIVIDEND Dividend proposed out of current year¶s profit does not affect the flow of funds. should be added along with current year¶s profit inorder to find out the fund from operation. (e) OTHER ITEMS Similarly. So it must be added back to the profit. (b) AMORTIZATION OF NON FUND ITEMS This also does not affect the flow of funds. etc. goodwill written off.

3. As it is a non operating item. So here it must be deducted from profit. but shares issued and allotted for consideration other than cash do not generate fund.The following items are deducted from profits: 1. 7. furniture or long term investments are sold then cash is increased without increased current liability and hence results in the generation of funds. it is shown separately as a source of fund. received in cash also increase fund. all result in the increase of funds. SALES OF FIXED ASSETS When any fixed assets like land. PROFIT ON SALE OF FIXED ASSETS Any profit on sale of fixed asset which has been credited to profit and loss account must be eliminated from the amount of profit. 2. ISSUE OF SHARE CAPITAL Increase in share capital increases fund. . must also be deducted from the profit. ISSUE OF DEBENTURE OR LONG TERM LAONS Issue of debenture accepted public deposits and long term loans. 5. DIVIDEND RECEIVED Generally it is credited in profit and loss account. interest etc. building. These are sources of fund. machinery. NON TRADING RECEIPTS Any non trading receipts like dividend. 6. they will not be taken into account. 4. rest. APPRECIATION IN THE VALUE OF FIXED ASSET If any fixed asset has been appreciated during the year and credited to profit and loss account. If debentures have been allotted to somebody for consideration other than cash.

This rule is application in case of provision for tax also. hence loss from operation is supposed to be application of funds. The funds may be applied for redemption of loans. it is an application of und. As the funds are utilized for the payment of dividend and tax. 2. if dividend and tax are paid. . goods or even making payment. Declaration of dividend is not an application of fund. if fund are withdrawn by the proprietor for the personal use. AMOUNT WITHDRAWN BY THE PROPRIETOR Outflow of fund will also take place. it is said to be application of funds. if it is not treated as current liability. tax provision created during the year is not an application. PURCHASE OF FIXED ASSET If any fixed asset is purchased for cash.APPLICATION OF FUNDS Funds received by the business are applied in one way the other. They may also be used for purchasing additional assets. 3. debenture. This application of funds may be in the following forms: 1. PAYMENT OF LOAN OR REDEMPTION OF PREFERENCE SHARES & DEBENTURES Any repayment of loans or redemption of preference shares is also an application of funds. The funds obtained during the year are put to different uses. etc. It is therefore an application of fund. Proposed dividends of the previous year are supposed to be paid during the current year. PAYMENT OF DIVIDEND AND TAX Outflow of fund will also take place. Similarly. Sometimes they are lost in the business operation. 4. Application means outflow or use of funds during the current year.

60.40.000 1. In other words.400 ii) Furniture Rs.000 3.500 --29.70.200 66. if there is a loss or business operation have been unsatisfactory.000 62. loss from operation reduces funds and thus results in outflow of funds.300 and loss 2003 2.000 18.600 1.000 24.66.500 14.300 4.53.400 78.05.400 2004 3.500 78. LIABILITIES Equity share capital Share premium General reserve Profit account 8% debenture Provision for taxation Creditors 4.400 1.700 1. ILLUSTRATION OF FUND FLOW STATEMENT From the following balance sheet of ABC Ltd you are required to prepare the schedule of change in working capital and fund flow statement.06.000 2004 ASSETS 2003 1.09.300 12.300 1.09.900 4.000 Machinery Furniture Stock Debtors Bank ADJUSTMENT: Depreciation written off: i) Machinery Rs 38.05.70.000 Land & building 36.05. LOSS FROM OPERATION The fund received may be lost.400 7.17. 200 .800 7.000 58.1.200 1.000 27.39.5.400 7.000 32.

29.09.300 1.000 29.000 1.05.800 2.300 5100 1.700 7.000 CURRENT LIABILITIES Creditors Provision for tax 1.900 Working Capital Increase in working capital 60.400 2.300 1.300 12.09.700 3.200 32.09.SCHEDULE OF CHANGE IN WORKING CAPITAL Particulars Previous year Current year Effect on working capital Increase CURRENT ASSET Stock Debtors Bank 66.700 8.500 14.000 11.900 65.400 Decrease 1.07.400 5100 FURNITURE A/C Particulars To balance b/d Rs 7200 Particulars By depreciation By balance c/d By sale of furniture Rs 1200 4500 1500 7200 7200 .300 1.41.400 78.17.

11.000 78.92.300 Particulars By depreciation By balance c/d Rs 38.400 1.800 85.000 1.500 1.300 ADJUSTED P/L A/C PARTICULAR To transfer to reserve To depreciation on machinery To depreciation on furniture To balance c/d AMT 9.500 1.MACHINERY A/C Particulars To balance b/d Purchase of machinery Rs 1.500 5.200 62.000 12.53.64.400 85.92.000 APPLICATION Land and building Machinery Working capital RS 1.000 38.500 52.900 1.100 2.400 PARTICULAR By balance b/d Fund flow operation AMT 58.000 FUND FLOW STATEMENT SOURCE Issue of share capital Share premium Issue of debenture Sale of furniture Fund from operation RS 1.06.73.400 1.500 2.000 1500 52.11.64.20.000 .

com www.fundflowstatement.com www.wikepeida.com .com www.authorstream.com www.answers.wiki.encyclopedia.REFERENCE www.

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