FUND FLOW STATEMENT

Introduction
Profit & Loss Account / Income or Revenue
Statement and Balance Sheet are the two basic
financial statements of a business enterprise. The
profit & loss account reflects the results of the
business operations by summarizing revenues and
expenses during a period of time while the balance
sheet discloses a summary of the firm’s resources
(assets) and obligations (external liabilities and
owners’ equity) at a point of time.
 Fund Flow Statement
Fund flow statement is a statement which
attempts to explain the changes that have
taken place in the financial position of a
business firm between two balance sheet
dates. In other words, it is a systematic and
analytical statement designed to analyse the
sources from which funds have been procured
/ derived and the uses to which they have
been put into.
 Sources of Fund
Trading Profit or Fund Generated from Operations

It is one of the major sources of fund. The amount of fund generated from
operations is not the net profit shown in the profit & loss account. Generally,
there are two ways of ascertaining the amount of fund from operations – Direct
Approach and Indirect Approach. Under direct approach, a statement showing
computation of fund from operations is prepared. This statement is to start with
the profit / net loss shown in the profit & loss account, which is then adjusted for
the non-fund items. Under indirect approach, alternatively an account namely,
`Adjusted Profit & Loss Account’, may be prepared for determining the amount of
fund from operations. In this account, non-fund expenses are debited and non-
fund gains are credited. The balancing figure of this account, if on the credit side,
will be fund from operations and that, if on the debit side, will represent loss
from operations or use of fund from operations. The illustration that follow will
facilitate understanding of the above procedures.
 On the basis of the following information disclosed in the financial statement
of KC Ltd. for the year 2009 you are required to ascertain trading profit & loss
for the year ended 31.12.2009 using direct method :

Particulars ₹ Particulars ₹
Sales revenue 50,00,000 Repairs to machinery 30,000
Raw materials consumed 17,00,000 Depreciation on machinery 70,000
Power & fuel 3,00,000
Wages, salaries & bonus 7,00,000
Rent, rates & taxes 50,000
Research & development costs 10,000
Directors’ fees 2,50,000
Preliminary expenses written off 1,30,000
Sales tax 2,50,000
Dividend from shares in AB Ltd. 5,000
Profit on sale of investments 3,000
Solution:
Statement showing computation of Trading Profit & Loss
for the year ended 31.12.2009
Particulars (₹) (₹)
Sales revenue 50,00,000
Less:
Raw materials consumed 17,00,000

Power & fuel 300,000

Wages, salaries & bonus 700,000
Rent, rates & taxes 50,000
Repairs to machinery 30,000
Research & development costs 10,000
Directors’ fees 250,000
Sales tax 250,000
32,90,000
Trading Profit 17,10,000
Note: Preliminary expenses written off, dividend
from shares and profit on sale of investments
are non-trading items and depreciation is not
an external transaction involving any outflow
of fund. Thus, these items have not been
included in the above statement.
Illustration 5.2
Kaushik Technologies Ltd. had balance of ₹300,000 and ₹750,000 in its profit & loss account as on 1 st January and 31st December 2009 respectively. During the year 2009, the following adjustments were made at the time of calculating net profit of the
company :

₹
Depreciation on fixed assets 200,000
Patents written off 20,000
Preliminary expenses written off 15,000
Goodwill written off 15,000
Provision for taxation 300,000
Proposed dividend 150,000
Profit on sale of investments 15,000
Loss on sale of fixed assets 8,000
Transfer to general reserve 250,000

In addition, the profit was overstated by ₹25,000 due to change in the

valuation method of closing stock. Ascertain trading profit or loss for the
year ended 31st December, 2009.
Solution
Kaushik Technologies Ltd.
Adjusted Profit & Loss Account for the year ended 31st December, 2009
Dr Cr
Particulars (₹) Particulars (₹)
To Depreciation 200,000 By Balance b / d 300,000
To Preliminary expenses 15,000 By Profit on sale of investments 15,000
written off
To Goodwill written off 15,000 By Profit due to change in 25,000
valuation method of closing
stock
To Patent written off 20,000 By Trading profit (Balancing 3,68,000
figure)
To Provision for taxation 300,000
To Proposed dividend 150,000
To Loss on sale of fixed 8,000
assets
To Transfer to general 250,000
reserve
To Balance c / d 750,000
17,08,000 17,08,000
Sources of Funds – Contd.
Investment by Owners

Issue of Long-term Debt

Sale of Fixed Assets

Sale of Long-term Investments

 Uses of Fund
The major uses of fund are discussed below :

1. Purchase of fixed assets, long-term investments, etc.: One of the most significant uses of
fund is the purchase of fixed assets, long-term investments, etc.
2. Repayment of long-term debt: Another common use of fund is the repayment of
debentures, bonds and other long-term loans. When debentures are redeemed at a
premium, such premium is an application of fund.
3. Redemption of preference share capital: It is also a use of fund. Here again, premium on
redemption of preference shares is treated as an application of fund.
4. Payment of dividends, taxes, etc.: Another major use of fund is the payment of dividends
and taxes. If proposed dividend, provision for taxation, etc., are treated as non-current
liabilities, the actual amount of dividends, taxes etc., will be included in the fund flow
statement as applications of funds.
5. Loss from operations: If the expenses of operations, excluding mere write-offs, exceed
the total revenue, a cash loss will be experienced. Thus, it will be treated as an
application of fund.
Steps in Preparing Fund Flow Statement

The following steps are adopted while preparing a Fund Flow Statement :

1.Preparation of a statement showing changes in working capital : Before preparing a fund flow statement, a
statement / schedule of changes in working capital is prepared to ascertain the amount of net increase or
decrease in working capital over the period by showing the differences in various items of current assets and
current liabilities on the basis of opening and closing balance sheets. A net increase in working capital is shown
as an application of fund while a net decrease is included as a source of fund in the fund flow statement.
2.Computation of fund from operation : Fund from operation is ascertained by applying either direct approach or
indirect approach. Both the approaches have already been discussed earlier. Fund from operation is a major
source of fund while its negative balance (i.e. Loss from operations) is shown in the application side of the fund
flow statement.
3.Digging out hidden information : Sometimes, some data which are required to present in the fund flow
statement may not be directly available. In this situation, relevant accounts are prepared to obtain the missing
information.
4.Preparing fund flow statement : After following the above three steps, fund flow statement is prepared either
in `T-form’ or in `Vertical form’.

Let us demonstrate the applicable of the above procedure with the help of a few illustrations.
Illustration 5.3
On the basis of the following summarized
financial statements of JS Ltd. as at 31.03.09
and 31.03.10, you are required to prepare :
1. A statement showing changes in working
capital for the year ended 31.03.10 and
2. A statement showing sources and
applications of funds during the same period.
 Balance Sheet of JS Ltd.
Liabilities 31.03.09 31.03.10 Assets 31.03.09 31.03.10
(₹) (₹) (₹) (₹)

Share Capital 2,00,000 2,40,000 Fixed Assets 3,60,000 4,10,000

General Reserve 1,00,000 1,20,000 Investment 40,000 50,000
Profit & Loss A/c 20,000 30,000 Stock-in-Trade 1,00,000 1,40,000
16% Debenture 1,00,000 90,000 Debtors 80,000 98,000
Sundry Creditors 1,80,000 2,20,000 Cash 3,000 2,000
Proposed Dividend 20,000 30,000 Preliminary 37,000 30,000
Expenses
6,20,000 7,30,000 6,20,000 7,30,000

During the year ended 31.03.10, depreciation charges on fixed

assets amounted to ₹50,000. The final dividend for the year ended
31.03.09 amounting to ₹20,000 was paid on 21.12.09.
 Solution:
Statement Showing Changes in
Working Capital
Particulars 31.03.09 31.03.10 Effect on Working Capital
(₹) (₹)
Increase (+) Decrease (-)
(₹) (₹)
A. Current Assets
Stock-in-Trade 1,00,000 1,40,000 40,000
Debtors 80,000 98,000 18,000
Cash 3,000 2,000 1,000
1,83,000 2,40,000
B. Current Liabilities:
Sundry Creditors 1,80,000 2,20,000 40,000
C. Working Capital (A-B) 3,000 20,000
D. Increase in Working Capital 17,000 17,000
58,000 58,000
 JS Ltd.
Fund Flow Statement for the year ended
31.03.10
Sources Amount (₹) Applications Amount (₹)
Fund from Operations 1,17,000 Redemption of Debentures 10,000
Issue of Share Capital 40,000 Payment of Dividend 20,000
Purchase of Investment 10,000
Purchase of Fixed Assets 1,00,000
Increase in Working Capital 17,000
157,000 157,000

Working Notes :
(1) Fixed Assets Account
Dr Cr
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 3,60,000 By Depreciation 50,000
To Bank (Bal.Fig.) 1,00,000 By Balance c / d 4,10,000
4,60,000 4,60,000
(2) Investment Account
Dr Cr
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 40,000
To Bank (Bal.Fig.) 10,000 By Balance c / d 50,000
50,000 50,000
(3) Preliminary Expenses Account
Dr Cr
Particulars Amount (₹) Particulars Amount (₹)
To Balance b/d 37,000 By Adjusted Profit & 7,000
Loss A/c (Bal.Fig.)
By Balance c / d 30,000
37,000 37,000
(4) General Reserve Account

Dr Cr
Particulars Amount (₹) Particulars Amount (₹)
To Balance c /d 120,000 By Balance b / d 1,00,000
By Adjusted Profit & 20,000
Loss A/c (Bal.Fig.)
120,000 120,000
(5) Proposed Dividend Account
Dr Cr
Particulars Amount (₹) Particulars Amount (₹)
To Bank 20,000 By Balance b / d 20,000
To Balance c /d 30,000 By Adjusted Profit & 30,000
Loss A/c (Bal.Fig.)
50,000 50,000
(6) Adjusted Profit & Loss Account
Dr Cr
Particulars Amount (₹) Particulars Amount (₹)
To Depreciation 50,000 By Balance b / d 20,000
To Preliminary 7,000 By Fund from Operation / 1,17,000
Expenses Trading Profit (Bal.Fig.)
To Proposed Dividend 30,000
To General Reserve 20,000
To Balance c / d 30,000
1,37,000 1,37,000