Fund Flow Statement and Cash Flow Statement

Meaning of fund flow statement:

➢ This statement reveals resources from which funds were obtained by the firm and 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:

➢ According to Robert Anthony, “The Fund Flow Statement describes sources from
which additional funds were derived and the uses to which these funds were put.”
➢ 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”.

Advantages
1. Funds flow statement reveals the net result of operations done by the company during the year.
2. In addition to the balance sheet, it serves as an additional reference for many interested parties
like creditors, suppliers, government etc… to look into financial position of the company.
3. It shows how the funds were raised from various sources and also how those funds were put to
use in the business.
4. It reveals the causes for the changes in liabilities and assets between the two balance sheet
dates therefore providing a detailed analysis of the balance sheet of the company.
5. Funds flow statement shows from where funds were raised and also how those funds got
utilized into the business.
4. Fund flow statement helps the management in deciding its future course of plans and also it
acts as a control tool for the management.

Disadvantages:
Funds flow statement has many advantages; however it has some disadvantages or limitations
also. Let’s look at some of the limitations of funds flow statement –
1. Funds flow statement has to be used along with balance sheet and profit and loss account, it
cannot be used alone.
2. It does not reveal the cash position of the company, and that is why company has to prepare
cash flow statement in addition to funds flow statement.
3. Funds flow statement merely rearranges the data which is there in the books of account and
therefore it lacks originality. In simple words it presents the data in the financial statements in
systematic way and therefore many companies tend to avoid preparing funds flow statements.
4. Funds flow statement is basically historic in nature that is it indicates what happened in the
past and it does not communicate anything about the future, only estimates can be made based on
the past data and therefore it cannot be used by the management for taking decision related to
future.
 Preparation of Fund Flow Statement

The changes which occurred in the current accounts as a result of flow of fund are reflected in a
statement known as ‘schedule of changes in working capital’ .
The funds generated from operating activities are calculated in statement of ‘Fund From
Operations’.
The similar changes in non-current accounts are shown in ‘Fund Flow Statement’.
Therefore, following three statements are prepared in FFS:.
1. Statement of Schedule of Changes in Working Capital.
2. Calculation of Fund from Operation / Loss from operation.
3. Statement of Sources and Uses of Funds or Funds Flow Statement.

Statement of 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.
Previous Current Effect on
Item Year Year working Capital
Increase Decrease
Rs. Rs.
(A) Current Assets
(1) Cash at bank
(2) Cash in hand
(3) Stock in trade
(4) Debtors
(5) Bills receivable
(6) Advance payment
(7) Short term investment
(8) Prepaid expense
(9) Accrued income
Total (A)
(B) Current Liabilities
(1) Short term loans
(2) Bank overdraft
(3) Creditors
(4) Bills payable
(5) Outstanding expenses
(6) Advance Income
(7) Unclaimed dividend
Total (B)
Net Working Capital (A-B)
Increase / Decrease in Working
Capital
Total

Fund from operations

The profit made by a firm through normal operations is a major source of funds. The fund from
operation is calculated in following way:
Net Profit/Loss (Excess of current year profit over previous year)
Add: Profit Appropriations
•Provision for taxes (Current year)
•Proposed dividend (Current Year)
•Amount transferred to any reserve (Increase in Reserve)
Add: Non operating expenses & non cash items
• Depreciation
•Loss on sale of asset
•Discount on issue of shares/ Debentures
•Premium on redemption of shares/Debentures
•Goodwill/Patent/Copyrights written off (Decrease in Value)
•Preliminary expenses/Issue expenses written off
Less: Non operating income
• Profit on sale of asset
• Refund of taxes
• Receipts of dividend
• Interest received on investment
• Rent Received
• Profit on revaluation of asset
• Increase in the value of goodwill
• Decrease in general reserve
Fund From Operation (if positive) / Loss From Operation (if
negative)

Fund flow statement

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.
Sources of Fund Amount Uses Of Funds Amount
Fund from operation Loss from operation
Issue of share (Increased Amount) Redemption of shares (Decreased
Amount)
Issue of debenture(Increased Redemption of
Amount) debentures(Decreased Amount)
long term loans(Increased Amount) Repayment of long term loans
(Decreased Amount)
Sale of fixed assets /Investment Purchase of fixed assets /
Investments
Non trading receipts Payment of dividend & taxes
Decrease in working capital (if any) Increase in working capital(if any)
Total Total

Cash Flow Statement

Cash Flow Statement deals with flow of cash which includes cash equivalents as well as cash.
This statement is an additional information to the users of Financial Statements. The statement
shows the incoming and outgoing of cash. The statement assesses the capability of the enterprise
to generate cash and utilize it.
Thus a Cash-Flow statement may be defined as a summary of receipts and disbursements of cash
for a particular period of time. It also explains reasons for the changes in cash position of the
firm.
Cash flows are cash inflows and outflows. Transactions which increase the cash position of the
entity are called as inflows of cash and those which decrease the cash position are called as
outflows of cash. Cash flow Statement traces the various sources which bring in cash such as
cash from operating activities, sale of current and fixed assets, issue of share capital and
debentures etc. and applications which cause outflow of cash such as loss from operations,
purchase of current and fixed assets, redemption of debentures, preference shares and other long-
term debt for cash. In short, a cash flow statement shows the cash receipts and disbursements
during a certain period.
The statement of cash flow serves a number of objectives which are as follows :
❖ Cash flow statement aims at highlighting the cash generated from operating activities.
❖ Cash flow statement helps in planning the repayment of loan schedule and replacement of
fixed assets, etc.
❖ Cash is the center of all financial decisions. It is used as the basis for the projection of
future investing and financing plans of the enterprise.
❖ Cash flow statement helps to ascertain the liquid position of the firm in a better manner.
Banks and financial institutions mostly prefer cash flow statement to analyze liquidity of
the borrowing firm.
❖ Cash flow Statement helps in efficient and effective management of cash. The
management generally looks into cash flow statements to understand the internally
generated cash which is best utilized for payment of dividends.
❖ Cash Flow Statement presents separately cash generated and used in operating, investing
and financing activities.
❖ It is very useful in the evaluation of cash position of a firm.
 Cash flow statement is a statement which shows how the operations of the company affects
the cash position of the company during a financial year and therefore companies usually
make both cash and funds flow statement. Given below are some of the advantages and
disadvantages of cash flow statement –

Advantages
❖ It shows the actual cash position available with the company between the two balance
sheet dates which funds flow and profit and loss account are unable to show and therefore
it is important to make a cash flow report if you want to know about the liquidity position
of the company.
❖ It helps the company in making accurate projections regarding the future liquidity
position of the company and hence arrange for any shortfall in money by making
arrangements in advance and if there is excess than it can help the company in earning
extra return out of idle funds.
❖ It acts like a filter and is used by many analyst and investors to judge whether company
has prepared the financial statements properly or not because if there is any discrepancy
in the cash position as shown by balance sheet with cash flow statement than it means
that statements are incorrect.

❖ Disadvantages
❖ Since it shows only cash position, it is not possible to arrive at actual profit and loss of
the company by just looking at this statement alone.
❖ In isolation this is of no use and it requires other financial statements like balance sheet,
profit and loss etc…, and therefore limiting its use

Cash and relevant terms as per Accounting Standard

1. (a) Cash fund :
Cash Fund includes (i) Cash in hand
(ii) Demand deposits with banks, and
(iii) cash equivalents.
(b) Cash equivalents are short-term, highly liquid investments, readily convertible into cash and
which are subject to insignificant risk of changes in values.
2. Cash Flows are inflows and outflows of cash and cash equivalents.
The statement of cash flow shows three main categories of cash inflows and cash outflows,
namely : operating, investing and financing activities.
(a) Operating activities are the principal revenue generating activities of the enterprise.
(b) Investing activities include the acquisition and disposal of long term assets and other
investments not included in cash equivalents.
(c) Financing activities are activities that result in change in the size and composition of the
owner’s capital (including Preference share capital in the case of a company) and borrowings of
the enterprise.
 Format of Cash Flow Statement (Indirect Method)
Particulars
A 1 Cash From Operating Activities
Net profit as per Profit and Loss account (C.Y-P.Y.)
2 Add: Profit Appropriation during the year
a. Transfer to Reserves
b. Interim dividend paid during the year
c. Proposed dividend for the current year
d. Provision for tax made during the year
e. Extra ordinary items debited to profit and loss account (if
any)
3 Less:
a. Tax refund
b. Extraordinary items credited to profit and loss account (if
any)(Ex. Insurance proceeds from earthquake disaster
settlement)

4 Net Cash Before Tax and Extraordinary Items (1+2-3)

5 Add: Adjustment for non-cash and non-operating expenses

a. Depreciation
b. Goodwill, patents, trademarks etc written off
c. Discount on issue of shares, debentures or loss on issue of
debentures written off
d. Preliminary expenses written off
e. Interest on debentures or other borrowings
f. Loss on sale of fixed assets
6 Less: Adjustment for non-operating income
a. Dividend earned during the year
b. Interest earned during the year
c. Rent earned during the year
d. Profit on sale of Fixed Assets

7 Operating Profit before working Capital Changes(4+5-6)

8 Add: Decrease in Current Assets and Increase In Current Liabilities

9 Less: Increase in Current Assets and Decrease in Current Liabilities

10 Cash Generated from Operations (7+8-9)

11 Less: Income Tax paid (Less refund if any)
12 Cash Flow Before Extraordinary Items(10-11)
13 Add/Less: Extraordinary Items
 14 Net Cash from/used in Operating activities (A)(12+/-13)

B Cash Flow From Investing Activities

1
a. Proceeds from sale of Fixed Assets
b. Proceeds from sale of long term investments
c. Proceeds from sale of Goodwill/Patents/Trademarks etc
d. Rent received
e. Interest/Dividend received (in case of non-
financial companies)
2 Less:
a. Purchase of Fixed Assets
b. Purchase of Long Term Investments
c. Purchase of Goodwill/Patents/Trademarks etc

3 Net Cash from/used in Investing activities (1-2)

C Cash Flow from Financing Activities

1
a. Proceeds from Issue of Shares and Debentures
b. Proceeds from Long term loans and other borrowings
2 Less:
a. Repayment of Long term Loans and Borrowing
b. Redemption of Debentures/Preference Shares
c. Interest On Debentures and Loans Paid
d. Final Dividend Paid
e. Interim Dividend Paid

3 Net Cash from/used in Financing Activities (1-2)

D Net Increase/Decrease in Cash and Cash Equivalents(A+B+C)

E Add: Cash and cash equivalents in the beginning of the year

-Cash in hand/at bank
-Marketable Investments
-Short term deposits

F Cash and Cash Equivalents at the end of the Year(D+E)

 Statement of Cash Flows (Direct Method)
For the Years Ending ……………….

Amount
1 Cash Flows from Operating Activities
Collections
Payments to Suppliers
Payments to Employees
Insurance Payments
Interest Payments
Other Source/(Uses) of Cash
Net Cash from Operating Activities
2 Cash Flows from Investing Activities
3 Cash Flows from Financing Activities
4 NET INCREASE/(DECREASE) IN CASH
5 CASH, BEGINNING OF YEAR
6 CASH, END OF YEAR
 Practice Problems:
1. From the following Balance-Sheet of the company for the year ending 31st March 2012,
prepare schedule of changes in working capital and a statement showing sources and application
of fund.

Liabilities 2011 2012 Assets 2011 2012

Share Capital 300000 400000 Plant & Machinery 50000 60000
Furniture &
Creditors 100000 70000 Fixtures 10000 15000
P&L a/c 15000 30000 Stock in trade 85000 105000
Debtors 160000 150000
Cash 110000 170000
Total 415000 500000 Total 415000 500000

2. From the following information prepare Fund-Flow statement:

Liabilities 2011 2012 Assets 2011 2012

Share Capital 500 540 Machinery 300 310
Reserve & Surplus 300 400 Furniture 70 90
Borrowings 600 620 Building 600 700
Creditors 100 110 Stock in trade 390 400
Bills Payable 80 90 Debtors 190 200
Cash 30 60
Total 1580 1760 Total 1580 1760

3. From the following Balance Sheet prepare FFS.

Liabilities 2011 2012 Assets 2011 2012

Equity share capital 300000 400000 Goodwill 115000 90000
Preference share capital 150000 100000 Land & Building 200000 170000
General Reserve 40000 70000 Plant & 80000 200000
Machinery
Profit and Loss A/c 30000 48000 Debtors 160000 200000
Proposed dividend 42000 50000 Stock 77000 109000
Creditors 55000 83000 Bills Receivable 20000 30000
Bills Payable 20000 16000 Cash 15000 10000
Provision for Tax 40000 50000 Bank 10000 8000
677000 817000 677000 817000
Additional Information:
(1) Depreciation on Plant & Machinery Rs.10000 and Land and Building Rs.20000.
(2) Interim Dividend of Rs.20000 has been paid during the year.
(3) Tax Paid during the year Rs.35000.
4. The following are the Balance-Sheets of ABC Ltd., as on 31st March 2017 and 2018:

Liabilities Mar-17 Mar-18 Assets Mar-17 Mar-18

Share Capital (Rs. 10 3,50,000 3,70,000 Land 1,00,000 1,50,000
Each)
Profit and Loss Account 50,400 52,800 Stocks 2,46,000 2,13,500
9% Debentures 60,000 30,000 Goodwill 50,000 25,000
Creditors 51,600 59,200 Cash and Bank 42,000 35,000
Short-Term 3,000 4,000
Investment
Debtors 71,000 84,500
5,12,000 5,12,000 5,12,000 5,12,000

Other information provided to you are:

a. Dividends declared and paid during the year Rs. 17,500.
b. Land was revalued during the year at Rs. 1,50,000 and the profit on revaluation is
transferred to P& L account.
c. Debentures redeemed at the end of March 2018.
You are required to prepare a cash-flow statement ended 31-3-2018.
5. From the following Balance-Sheets of Akshay Ltd., as on 31st March 2017 and 2018, you are
required to prepare cash-Flow Statement for the year ended 31-3-2018:

Liabilities Mar-17 Mar-18 Assets Mar-17 Mar-18

Share Capital 1,00,000 1,00,000 Goodwill 12,000 12,000
General Reserve 14,000 18,000 Building 40,000 36,000
Profit and Loss Account 16,000 13,000 Plant 37,000 36,000
Sundry Creditors 8,000 5,400 Investments 10,000 11,000
Bills Payable 1,200 800 Stock 30,000 23,400
Provision for Taxation 16,000 18,000 Bills Receivable 2,000 3,200
Provision for Doubtful 400 600 Debtors 18,000 19,000
Debts
Cash at bank 6,600 15,200
1,55,600 1,55,800 1,55,600 1,55,800

Additional Information:
a. Depreciation charged to Plant Rs. 4,000.
b. Provision for taxation of Rs. 19,000 was made during the year 2017-18.