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Objectives of Fund Flow Statement
Fund Flow Statement
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 Helps in proper allocating of the resources
 Fund flow statement helps in providing information regarding the
allocating of the resources more efficiently and effectively.
 It also gives information regarding external and internal sources of
financing.
 To evaluate the financial withstanding of the company
 The external and internal users of the financial statement require fund
flow statements to assess the company’s strengths and weaknesses.
Format for Fund Flow Statement
 The fund flow statement can be prepared in the vertical format as well
as horizontal format. Given below is the horizontal format of the fund
flow statement
 Helps in knowing the changes in the company’s financial position
 The main aim of preparing a fund flow statement is to cite the reasons
for changes in the liabilities, assets, or equity capital.
 It is done by comparing the two balance sheets for different accounting
periods.
 Analysing the operational position of the company
 The balance sheet gives a static view of the company’s financial
position. It is only an overview of the current position of the company at
any particular date so a thorough review of the movement of funds is
essential for better financial planning.
 Fund flow statement acts as a future guide
 Fund flow statement reflects all details regarding the historical changes
that have taken place in the company’s working capital and net assets in
a particular accounting period.
 This in turn serves as a guide to make financial decisions to achieve the
goals of the organization.
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Understanding Fund Flow Statement
 Let us have a look at the following example to better understand fund
flow statement:
 BALANCE SHEET AS ON 31ST MARCH 2021
 Let us consider the following two balance sheets, revealing the position
of an organisation in the previous year and the current year:
 Reserves and Surplus
 Next comes the Reserves and Surplus also having an increase of 125
between the two balance sheet dates.
 This reflects the retained profits of the organisation which is another
source of funds and will appear on the sources side of the Funds-Flow
Statement.
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 This balance sheet above gives the precise position of the entity as on
the balance sheet date. However, it fails to provide any details of its
particulars. For instance, it says the fixed assets of the organisation are
to the tune of 850, but it does not provide any information if the said
assets are newly purchased or have been in the organisation for long.
 This is where a Funds-Flow Statement comes into picture. A balance
sheet reflects the position of an organisation as on a day (be it the last
day of the financial year or an interim period). A fund flow statement on
the other hand is over a period of time. It shows the inflow and outflow
of the funds over a period of time which is essentially between 2
balance sheets.
Uses of Fund Flow Statement
 Share Capital
 The very first item on the liabilities side indicates an increase in the
owner’s funds, i.e., the Share Capital.
 An increase in the Share Capital can only be in the case of a fresh issue
of shares which here is to the tune of 200.
 This is a source of the funds for the organisation hence will appear on
the sources side of the Funds-Flow Statement.
 Long Term Loans
 Moving on, the third item on the Balance Sheet is the Long Term Loans.
It shows a decrease in the amount by 100 which can be on account of
repayment.
 This indicates a use of the available funds and hence will be reflected on
the uses side of the Statement.
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 Current Assets and Current Liabilities

 Fixed Assets
 The remaining items on the Balance sheet namely the Current Assets
 The first item on the Assets side of the Balance Sheet shows an increase
and the Current Liabilities have to be looked at together to get a clear
in the value of the fixed assets.
picture regarding the working capital of the organisation.
 This indicates a fresh purchase of an asset in the current year and thus
 The changes in the working capital also indicate an allocation of the
will be reflected in the uses side of the Funds-Flow Statement.
funds available and therefore, a typical Funds-Flow Statement also
includes a Statement Showing Change in Working Capital.

 STATEMENT SHOWING CHANGE IN WORKING CAPITAL

 The increase in the working capital by 75 shows that the organisation
has allocated more money in the working capital and hence this will
reflect on the uses side of the Funds-Flow Statement.

 Let us now prepare a Funds-Flow Statement for this organisation based

on the information derived from the above two Balance Sheets.

FUNDS-FLOW STATEMENT

 The above statement indicates that while the closing balances of the
two years may be 1075 and 1350, the actual flow of funds during the
period is to the tune of 325.

 The said inflow of 325 is on account of a fresh issue of shares and

through retained earnings. However, the same is not reflected as a
direct increase in the cash or bank balance of the entity. The uses side of
the Statement indicates the areas of allocation of the said funds raised.

 This enables the management to track all the funds that have come in
and gone out of the organisation.

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 Another key feature of a financial statement of any organisation is the
Cash Flow Statement. It focuses on the actual inflow and outflow of cash
from the organisation. It is mainly used to determine the liquidity
position of the organisation and thus identify any liquidity problems, if
any.
 A Funds-Flow Statement on the other hand deals with the long-term
nature of the funds, its application as well as the position of the working
capital and its impact on the organisation. This further determines the
financial situation of the entity and enables a correct allocation of its
funds. It is a crucial factor leading to healthy financial planning.
FAQs on Fund Flow Statement
1. What is the difference between cash flow and fund flow statements?
 Cash flow statement is prepared to analyse the movement of purely
cash and cash equivalents of the organization while fund flow statement
is used to prepare the overall movement of all the funds of the entity.
2. How do most businesses prepare a fund flow statement today?
 Nowadays, most businesses are making use of SERP software or online
accounting software for preparing fund flow statements along with
other forms of financial statements. It makes it easier for business
owners to get accurate financial information for analysis and making
smart business decisions.
4. Is it advisable to use short term financing for getting a capital asset?
 No. Capital assets are also known as capital investments which are for
meeting the long term goals of the organization. Hence, they have to be
financed with a long term loans to avoid falling into a vicious cycle of
getting more loans to pay off existing debts.
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 How do fund flow analysis help investors?
 The fund flow analysis is a great help for potential investors in deciding
whether the company can manage the funds properly or not. Investors
will be able to estimate the creditworthiness of the company as well as
decide how safe it is to invest in that particular company. The
management of the organization is also benefited through the fund flow
statements as it will help in an efficient decision-making process to
optimize the resources of the company to ultimately maximize the
profits.
3. What are the basic reasons for changes in working capital of any
organization?
 The basic reasons for changes in working capital of any organization are,
 Issue or redemption of shares and debentures
 Purchase or sale of current assets or fixed assets
 Income from different sources
 Payment of Miscellaneous expenses
 Extension of credit period to the debtors or creditors
 Payments of Dividends