FUND FLOW STATEMENT

Meaning and Concept of Fund

The fund has defined in number of ways.
a) In Narrow sense: It means cash only and a fund flow statement prepared on this basis is cash flow statement
b) In a broader sense: the term fund refers to money values in whatever form of men material, money, machinery & others.
c) In a popular sense: The term fund means working capital, i.e. the excess of current asset over current liabilities

Meaning and Concept of flow of Fund

The term flow means movement and included both inflow & outflow. The term flow of funds means transfer of economic values
from one asset of equity to another. If the effect of transaction result in increase in fund (Working capital) it is called a source of
fund and if it result in decrease of fund (Working capital) it is known as application of funds.
“The flow of fund occurs when a transaction changes on the one hand a non-current account and on the other a current account”

Procedure for Knowing Whether A Transaction Result In the Flow of Fund or Not
a) Analyse the transaction and find out the two Accounts involved
b) Make journal Entry for the transaction
c) Determine whether the accounts involved in the transaction are current or non-Current
d) If both the account involved in the transaction are Current (i.e., Current asset or Current Liability) it does not result in the
flow of fund
e) If both the account involved in the transaction are non-Current (i.e., Fixed Assets or Long-term Liability) it does not result
in the flow of fund
f) If account involved are, one is a current account while the other is a non-current account then it results in the flow of funds

Meaning of Fund Flow Statement

The fund flow statement consists of 2 terms Fund & Flow. Fund may be interpreted as Working capital. Flow means change.
Therefore, the fund flow statement means statement of changes in working capital. It shows,
a) The specific sources from which working capital was generated by an enterprise
b) The specific uses for which working capital was used by an enterprise
c) Net change in working capital indicating the difference between total sources and total uses
This statement is also known as Sources and application of fund, Statement of changes in financial position, Sources and uses of
fund, Summary of financial operation, where came in where gone statement, Movement of working capital statement, Movement of
fund statement, Fund received & Disbursed statement, Fund generated & expended statement, Sources of increase and application
of decrease, Fund statement

Difference between Fund Flow Statement & Balance Sheet

Balance sheet
It is a statement of Asset & Liabilities
It is prepared to ascertain financial position
Compulsory preparation under Schedule VI of Company’s Act
Prepared in a prescribed form
Headings are Assets & Liabilities
Fund Flow statement
It is a statement of Changes in Assets & Liabilities
It is prepared to ascertain how financial position changed
No Legal obligation to prepare
No Prescribed form
Headings are Sources & Applications

Difference between Fund flow Statement & Income Statement

Income Statement
It summarizes the result of operating Activities
It is prepared to ascertain how profit was earned
Compulsory preparation under Schedule VI of Company’s Act
Prepared with the help of Nominal accounts & additional information
Excess of income over expense is Net profit/loss
Only revenue items are considered
Fund Flow statement
It is a statement of Changes in Assets & Liabilities
It is prepared to ascertain how profits has been utilized
No Legal obligation to prepare
Prepared with the help of 2 Consecutive Balance sheet
Excess of source over application is change in Working Capital
Both capital & revenue items are considered

Sources of Funds
Any transaction which increases the amount of working capital is a source of fund. The working capital increases if a transaction
increases current assets or decreases Current liability. The major sources of working capital are summarised as follows.
a) Issue of shares for cash
b) Raising of long-term Debt (Issue of debenture for cash)
c) Sale of Fixed Assets for cash
d) Fund from Operations
Applications of Fund
Any transaction which decreases the amount of working capital is an application of fund. The working capital decreases if a
transaction decreases current assets or increases the current liability. The major uses of working capital are summarised as
follows.
a) Redemption of Shares for cash
b) Repayment of Long-term Debt
c) Purchase of Fixed Assets
d) Fund used in operations
e) Payment of Preliminary Expense, underwriting Commission (Non-Operating Expense).

Limitations of Fund flow Statement

a) It is not a substitute for Income statement or Balance sheet
b) It cannot reveal continuous changes
c) Secondary data-based statement
d) Ignores non-fund transactions

Schedule of Changes in Working Capital

Working capital means the excess of current asset over current Liability. Statement of changes in working capital is prepared to
show the changes in the working capital between the two Balance sheet dates. This statement is prepared with the help of current
assets and current liabilities derived from the two Balance Sheets.
a) An increase in Current Assets increases working capital (Inflow)
b) A decrease in Current assets decreases Working capital (Outflow)
c) An increase in Current Liability decreases working capital (Outflow)
d) A decrease in Current Liability increases working capital (Inflow)
The Working capital in the Current balance sheet is compared to that of previous year Balance sheet to find whether there is Net
Increase /Decrease in working capital. If the resultant figure is Net Increase in Working capital (It should be shown on
Application side of Fund Flow statement) and if the resultant figure is Net Decrease in Working capital (It should be shown on
Source side of Fund Flow statement)
a) If Source > Application = Difference is Net Increase in Working Capital (Balance transferred to Working capital)
b) If Application > Source = Difference is Net Decrease in Working Capital (Balance taken from Working capital)

Treatment of Special Items

a) Investments: The treatment of investments while preparing fund flow statement depends upon their nature, whether they
are current Assets or Fixed assets. If the investments represent surplus funds temporarily invested in marketable or short-
term securities they are to be treated as current assets. But if investments are long term, permanent or trade investments
they should be treated as fixed assets.
If the investments are of non-current nature (Fixed) then these should not be shown in
schedule of changes in working capital. However, an investment account should be prepared to find out cost of
investments purchased or sold and the profit or loss on sale of such investments is transferred to Adjusted P/L Account.
If it is a Loss then it should be Debited and if it is Profit then it should be credited to Adjusted P/L Account. The
purchase of Investment is an application of funds while the proceeds realised from the sale of such investments are a
source of funds.

b) Provision for Taxation: There are two ways of dealing with provision with taxation,
 As a Current Liability
 As an Appropriation of Profit (Non-Current Liability)
As a Current Liability: Provision for taxation may be treated as a current Liability as it generally represents an
immediate obligation of the company to pay tax to the government .When it is treated as a current Liability, provision for
taxation will appear in the schedule of changes in the working capital like all other current Liabilities and no further
treatment is required while preparing the fund flow statement and the payment of Tax made during the year shall not be
shown as application of funds because in this case both the accounts involved for the Payment of tax shall be current
Accounts.
Entry: Provision for Taxation A/c ……. Dr (Already taken as Current liability)
To Cash A/c (Current Asset)
It is clear from the above entry that only the current Accounts are involved hence there is no movement of funds
(Working Capital)
As an appropriation of profits: When the provision for taxation is treated as an appropriation of profits and not as a
current Liability, then it shall not appear in the schedule of changes in working capital instead of that Provision for
taxation A/c is prepared. Provision for taxation made during the year shall be the appropriation of profits made during the
year and same should be debited to Adjusted P/L A/c. Moreover, Tax paid during the year shall be an application of
funds.
 Entry: P/L A/c…………. Dr Provision for Taxation A/c…………Dr
To Provision for Taxation (For Tax Provided) To Cash (For Tax Paid)

Provision for Taxation

Particulars Amount Particulars Amount
To Cash xxxxxx By Balance b/d xxxxxx
To Balance c/d xxxxxx By P/L A/c xxxxxx
  xxxxxx   xxxxxx

c) Proposed Dividends: There are two ways of dealing with provision with taxation,
 As a Current Liability
 As an Appropriation of Profit (Non-Current Liability)
As a Current Liability: When proposed Dividend is treated as a current Liability it represents an obligation of the
company which is payable in a short period. Hence it is shown in the schedule of changes in working capital as a current
Liability and it required no further treatment in the fund flow statement.
As an appropriation of profits: When the proposed dividend is treated as an appropriation of profits and not as a current
Liability, then it shall not appear in the schedule of changes in working capital instead of that proposed dividend A/c is
prepared. Proposed dividend made during the year shall be the appropriation of profits made during the year and same
should be debited to Adjusted P/L A/c. Moreover, Dividend paid during the year shall be an application of funds.
Entry: P/L A/c…………. Dr Proposed dividend A/c…………Dr
To Proposed dividend (For Dividend Provided) To Cash (For Dividend Paid)
Proposed Dividend
Particulars Amount Particulars Amount
To Cash xxxxxx By Balance b/d xxxxxx
To Balance c/d xxxxxx By P/L A/c xxxxxx
  xxxxxx   xxxxxx

d) Interim Dividend: The expression interim dividend denotes a dividend paid to the members of the company during a
financial year, before the finalisation of annual accounts. The dividend paid or declared in between the two Annual
general meetings. Interim dividend should be debited to Adjusted P/L A/c, it is also an application of fund and has to
appear on the application side of fund flow statement.
Entry: P/L A/c…………..Dr
To Cash

DEPRECIATION AS A SOURCE OF FUNDS

Depreciation means decrease in the value of an asset due to wear and tear, lapse of time, obsolescence, Exhaustion and accident.
Depreciation is taken as an operating Expense while calculating fund from operations. The accounting entries are:
Depreciation A/c…………. Dr P/L A/c …………………Dr
To Fixed assets To Depreciation
Thus effectively the Profit & Loss A/c is debited while the Fixed assets account is credited with the amount of depreciation .Since
both Profit & Loss A/c and Fixed assets account are non-Current accounts ,depreciation is a non-fund item .It is neither a source
nor an application of fund .It is debited to adjusted P/L A/c to find out fund from operation since it has already been charged to
profit but it does not decrease Fund from operation .Depreciation should therefore not taken as source of fund .If Depreciation
were really a source of fund by itself ,any enterprise could have improved its fund position by merely increasing the periodical
depreciation Charge.
However, depreciation can be taken as an indirect source of funds in a limited sense because of the following reasons,
 Depreciation does not generate funds but it definitely saves funds. For E.g.: If the business has taken the fixed assets on
hire, it would have been required to pay rent for them. Since it owns fixed assets, it saves outflow of funds which would
have otherwise gone out in the form of rent.
 Depreciation reduces Taxable income and therefore, income tax liability for the period is reduced.
 CASH FLOW STATEMENT

It is a statement that shows flow (Inflow or outflow) of cash and cash equivalents during a given period of
time. As per Accounting Standard-3 (Revised) the changes resulting in the flow of cash & cash equivalent
arises on account of three types of activities i.e.
(1) Cash flow from Operating Activities.
(2) Cash flow from Investing Activities.
(3) Cash flow from Financing Activities

Cash: Cash comprises cash in hand and demand deposits with bank.

Cash equivalents: Cash equivalents are short-term, highly liquid investment that are readily convertible into
known amount of cash and which are subject to an insignificant risk of change in the value e.g. short-term
investment. Generally these investments have a maturity
Period of less than three months.

Some examples of cash equivalent: Short-term deposits, marketable securities. Treasury bills, commercial
papers, money market funds, money market funds, investment in preference shares if redeemable within
three months provided that there is no risk of the failure of the company.
PREPARATION OF CASH FLOW STATEMENT (SIMPLE FORMAT)

Computation of Cash flows from different activities

(1) Cash flow from operating activities:
Operating activities are the main revenue generating activities of the enterprises. It also includes all those
transactions which are not included in investing and financing activities

2. Cash Flow from Investing Activities

Investing activities are those activities which related to the acquisition (busying) and disposal (selling) of
fixed assets and investment (other than cash equivalents). It also includes income from fixed assets and
investment like rent received, interest received on investment, dividend received on investment in shares and
mutual funds
3. Cash Flow from financing Activities
Financing activities are those activities that result in the changes in size and composition of the share capital
(equality and preference) and borrowed fund of the business enterprises. Generally cost related to these
funds also included in financing activities like interest paid on loans and debentures and dividend paid on
equity and preference capital

Objectives of Cash Flow Statement

1. To ascertain how much cash or cash equivalents have been generated or used in different activities i.e.,
operating/investing/financing activity.
2. To ascertain the net changes in cash and cash equivalents.
3. To assess the causes of difference between actual cash & cash equivalent and related net earnings/income.
4. To help in formulation of financial policies such as dividend policy, fixed assets policy, capital structure
related policy.
5. To help in short-term financial planning.
6. To ascertain the liquidity of enterprises.

Limitations of Cash Flow Statement

1. Non cash transaction are not taken into consideration like shares or debentures issued to vendors,
depreciating charged during the year.
2. It is a statement related with past data.
3. It is not used for judging the profitability of enterprise.
4. Accrual accounting concept is ignored in this statement e.g. credit sales, credit purchases, outstanding
expenses, accrued income are not included