UNIT IV

FUND FLOW STATEMENT

Meaning:

Fund flow statement refers to the inflow and outflow of the funds. The term funds refer to
working capital with regards to fund flow statement.

In broader sense “fund” refers to all resources in the business whether in form of men, material,
money and machinery and method.

In narrow sense “funds” include only cash resources of the business. But for the preparation of
funds flow statement, funds include working capital which is equal to Current Assets – Current
Liabilities.

Therefore fund flow statement refers to the change in working capital because of change in the
value of current asset, current liabilities and non-current assets and liabilities.

Objective of preparing fund flow statement:-

 Helps in understanding the changes in assets and asset sources which are not readily
evident in the income statement of financial statement.
 Information about how the loans to the business are used.
 Point out the financial strength and weakness of the business.

Preparation of Fund Flow Statement

Fund flow statement can be prepared monthly but usually it is prepared for the one, two, three,
four or more years. The preparation of fund flow statement is divided into two parts:-

i. Schedule of changes in working capital

ii. Fund flow statement account

(i) Schedule of Changes in Working Capital

This statement is prepared with the help of current assets and current liabilities. It
generally shows the changes in the working capital with the increase or decrease of the
assets and liabilities in a year.
The following rules may be applied to current assets and liabilities while preparing the
statement:
1. An increase in current assets increases working capital
2. A decrease in current assets decreases working capital
3. An increase in current liabilities decreases working capital
4. A decrease in current liabilities increases working capital
(ii) Fund Flow Statement account
This statement is usually prepared in “T” form. Left hand side is for sources of funds and
right hand side is for application of funds, but some time it is prepared horizontally.

Sources of Funds:-
1. Funds from operation
2. Income from investment
3. Issue of shares and debentures
4. Raising of loan
5. Sale of fixed assets and long term investment

Uses (or application of funds):-

1. Funds lost in operation

2. Repayment of long term loan
3. Redemption of preference shares and debentures
4. Purchase of fixed assets
5. Purchase of long term investment
6. Payment of cash dividend
7. Payment of taxes
 CASH FLOW STATEMENT

Meaning

Cash flow statement is statement which indicates sources of cash inflows and transactions of
cash outflows of a firm during an accounting period. Cash flow statement may also be termed as
“where got where gone statement”

Advantages

The cash flow statement helps to provide answers to some of the important questions related to
company such as:-

1. How much cash can be generated from normal business operating activities/operations of
a company?
2. What have been other prime financing activities of the firm through which cash has been
raised?
3. How much cash has been spent in investment activities say on purchase of new plant and
equipment?
4. How was the redemption of preference share and debentures accomplished?
5. What has been the proportion of debt and equity for cash raised from outside?
6. Is company borrowing to pay cash dividends?
7. Has liquidity position of company is improved?

Limitations

Instead of being very important still cash flow statement has some deficiencies, they are:-

1. Cash flow statement gives the main item of inflow and outflow of cash and does not
correct liquidity position of the company.
2. This statement is not the substitute of income statement which shows both cash and non-
cash items. Therefore, net cash flow does not mean net income of the business.
3. It cannot replace fund flow statement as it can does not show full financial position of the
company.

Definitions Associated with Cash Flow Statement

1. Cash: - it consists of cash in hand and demand deposits in the banks.

2. Cash Equivalent: - these are short-term highly liquid investment that is readily convertible
into known amounts of changes in value. They have short maturity; say of three months or
less from date of acquisition. For example:- treasury bills
3. Cash Flows: - this refers to the inflows (generation of cash ) and outflow (application/uses of
cash) and cash equivalents.
4. Operating Activities: - cash flow from operating activities primarily accrue from the major
revenue producing activities (i.e. sale of goods and rendering of services) of the enterprise.
5. Investing activities: - the investing activities relate to the acquisition and disposal of long
term assets and other investments not included in cash equivalents.
6. Financing activities:-the financing activities report to the changes in the size and composition
of the shares/owner’s capital and debt of the enterprise.

Preparation of cash flow statement

Cash flow statement (cfs ) explains factors which have caused changes in assets, liabilities and
shareholder’s fund between opening and closing dates of the periods. Therefore the cfs can be
prepared by (i) finding the difference in amounts among the various items (say, changes in long
term liabilities, long term assets) then (ii) analyzing the causes of differences.

Cash flow statement is prepared in three stages as given below:-

i. Net profit before taxation and extraordinary items

ii. Cash flow from operating, investing and financing activities
iii. Cash flow statement

Net Profit before Taxation and Extraordinary Items

This will not be equal to net profit in the profit and loss a/c. it is so because of taxation and
certain non-operating items (e.g. loss or profit on sale of fixed assets, dividend received or paid
amount transferred to general reserve , provision for taxation, fictitious assets written off) are
charged to profit and loss a/c.

Following Performa is used to calculate net cash provided or used by operating activities

Rs. Rs.
Net Profit before taxation and extraordinary items xxx
ADD:- Adjustments for Depreciation xxx
Operating Profit before working capital changes xxx
ADD:- (1) Increase in CL xxx
(2) Decrease in CA (except cash in hand or bank) xxx xxx
xxx
LESS:- (1) Decrease in CL xxx
(2) Increase in CA (except cash in hand or bank) xxx xxx
Cash generated from operations xxx
LESS:- Tax Paid xxx
Net cash provided by or used for operating activities xxx
Cash flow from operating activities

Following are the main step in the determination of cash flow from operating activities

(i) Cash receipts from the customers

In order to determine cash received from customer debtor’s a/c is prepared

Rs. Rs.
To balance b/d xxx By cash xxx
To credit sales xxx By bad debts xxx
By discount allowed xxx
By balance c/d xxx

xxx xxx

(ii) Other cash receipts

In order to determine the cash received from other revenue as rent, income,
commission earned etc. adjustments are made for amounts not received or received in
advance both at the end and beginning of the period.

Rs. Rs.
Other revenue received xxx
ADD:- Receivable in the beginning xxx
Received in advance at the end xxx

LESS:- Receivable at the end xxx

Received in advance at the beginning xxx
Cash Received xxx

Cash used for operating activities

(i) Cash Payments to suppliers

In order to determine this creditors or supplier’s a/c is prepared

Rs. Rs.
To Cash balance xxx By balance b/d xxx
To balance c/d xxx By purchases xxx

xxx xxx
(ii) Cash Payments for operating expenses
In order to ascertain cash payments for operating expenses, operating expenses are
adjusted with reference to outstanding expenses both at the beginning and end of the
period.

Rs. Rs.
Operating Expenses xxx
ADD:- Prepaid expenses at the end of the period xxx
Outstanding expenses at the beginning of the xxx
period
xxx
LESS:- Prepaid expenses at the beginning of period xxx
Outstanding expenses at the end xxx xxx
Cash paid for operating expenses xxx

(iii) Cash Payment for income tax

It can be determined by preparing provision for tax.

(iv) Payment of interest

It should be deducted from net income. In case of the other enterprises, cash flow
from interest paid should be classified as financing activities and interest / dividend
received should be reported as cash flow from investing activities.