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Flow of Funds Statement
A summary of a firm¶s changes in financial position from one period to another; it is also called a sources and uses of funds statement or a statement of changes in financial position.
Has been replaced by the cash flow statement (1989) in U.S. audited annual reports.

.Flow of Funds Statement What are funds ? All of the firm s investments and claims against those investments. cash. Extends beyond just transactions involving cash.

Fund has also been understood as Cash" only.  Concept of Flow The Flow of funds refers to transfer of economic values from one asset equity to another.   The term Fund refers to all financial resources of the company. . The most acceptable meaning of Fund is Working Capital Flow of funds: the term flow means change and therefore the term funds: flow of funds means changes in funds or changes in working capital . In other words. any increase or decrease in working capital means flow of funds .

It explains changes in funds or changes in working capital . Meaning :. preparation of funds from operation statement in which we find out operating profit.FUNDS FLOW STATEMENT Funds flow statements is dealt by Accounting Standard 7 . 2.It is the difference between current assets and current liabilities. Preparation of working capital statement that explains increase or decrease in working capital. . Steps in preparation of funds flow statement:1. Preparation of funds flow statement that shows various sources and application of fund . 3. Working capital:. . It explains the working capital position of the company which gives an idea to the top management about the liquidity position of the company.

Current assets Cash in hand and bank Marketable investments Accounts receivables Stock Prepaid exp. Fixed assets Goodwill Land and building Plant and machinery Long term investment Current liabilities Bank overdraft Outstanding expenses Accounts payable Fixed liabilities Share capital Reserve and surplus Debentures Long term loans Flow in fund Not flow in funds .

Where have the profit gone What will be the sources for dividend if company is not earning sufficient profit What are the sources of repayment of the loan taken How much funds generation through normal business operation. In what way the management has utilized the funds in the past and what are going to be likely uses of funds ? . operation. profits.USES OF FUNDS FLOW       Why the liquid position of the business becoming more and more unbalanced in spite of company is making more and more profits.

Sources and Application of Funds .

such as dividends received Sales of investment (long term) Decrease in working capital (as per schedule of changes in working capital) . called up Sales of non current (fixed) assets NonNon-trading receipts.Sources of Funds         Funds from operations Issue of share capital Raising of long term loans Receipt from partly paid shares.

Application or Uses of funds           Funds lost in operations Redemption of preference share capital Redemption of debentures Repayment of long-term loans longPurchase of non current (fixed) assets Purchase of investments (long term) NonNon-trading payments Payments of dividends Payments of tax Increase in working capital (as per schedule of changes in working capital) .

It measures the inflows and outflows of working capital resulting from different transactions. Funds flow statement measures and presents in an analytical manner the summarized version of the numerous flows of funds for a specific period. Funds Flow is the change in Working Capital .Funds flow Analysis This statement is based on the working Capital concept of funds.

or to reduce trade creditors. . The funds may be applied to finance an increase in stock. bills payable etc. bank overdraft. debtors etc.Changes in Working Capital position Increase in current assets and decrease in current liabilities The acquisition of current assets and repayment of current liabilities will result in funds outflow.

Decrease in current assets and increase in current liabilities The reduction in current assets e.. Short-term funds raised during the Shortperiod by any increase in the current liabilities like trade creditors. stock or debtors balances will result in release of funds to be applied elsewhere. . means that these sources have lent more at the end of the year than at the beginning. bank overdraft and tax dues.g.

Benefits of funds flow analysis        To determine financial consequences of operations To fill financial blind spots Working capital utilization To aid in securing new finances Helps in allocation of financial resources Helps in deciding urgency of a problem Helps in evaluation of operational issues .

Drawbacks of funds flow analysis      Historical nature Structural changes are not disclosed New items are not disclosed Not relevant Not foolproof .


. It helps in taking short term financial decisions and also in the preparation of cash budget for the next year. A cash flow statement is a statement which portrays the changes in cash position between two accounting periods.Cash Flow Analysis Cash flow includes cash inflows and outflows cash receipts and cash payments during a period.

and activities. activities.Statement of Cash Flows A summary of a firm¶s payments during a period of time. financing activities. . activities. This statement reports cash inflows and outflows based on the firm s operating activities. investing activities.

.Statement of Cash Flows Cash Flow from Operating Activities Shows impact of transactions not defined as investing or financing activities.  These cash flows are generally the cash effects of transactions that enter into the determination of net income.

Cash Flow From Operating Activities Cash Inflows From sales of goods or services From interest and dividend income Cash Outflows To To To To To pay pay pay pay pay suppliers for inventory employees for services lenders (interest) government for taxes other suppliers for other operating expenses .

.Statement of Cash Flows Cash Flow from Investing Activities Shows impact of buying and selling fixed assets and debt or equity securities of other entities. Cash Flow from Financing Activities Shows impact of all cash transactions with shareholders and the borrowing and repaying transactions with lenders.

plant. equipment) To purchase debt or equity securities (other than common equity) of other entities . plant. equipment) From sale of debt or equity securities (other than common equity) of other entities Cash Outflows To acquire fixed assets (property.Cash Flow From Investing Activities Cash Inflows From sale of fixed assets (property.

Cash Flow From Financing Activities Cash Inflows From borrowing From the sale of the firm s own equity securities Cash Outflows To repay amounts borrowed To repurchase the firm s own equity securities To pay shareholders dividends .

bad debts recovered.Cash flows from certain special items Cash flow from extraordinary items viz. claims from insurance companies. . winning of a law suit or lottery etc.

Reporting of cash flows from operating activities      Calculation of net increase or decrease in cash and cash equivalent accounts Calculation of net cash provided by or used by operating activities Calculation of net cash provided or used by investing and financing activities Preparation of cash flow statement Ensuring that the aggregate of net cash flow from all the three activities is equal to net increase or decrease in cash and cash equivalents .

This is done by eliminating the non-cash nonrevenues and expenses from the earned revenues and incurred expenses.Reporting of cash flows from operating activities In order to calculate the net cash flows in operating activities. Two methods for conversion of net profit into net cash flows 1) Direct method 2) Indirect method . it is necessary to replace revenues and expenses with actual receipts and payments in cash.

. The direct method results in the presentation of a condensed cash receipts and cash disbursements statement. In other words. The difference between these two amounts in the net cash flow from operating activates. the direct method deducts from operating cash receipts the operating cash disbursements.Direct Method (income statement (income method)     Also called the Reports cash receipts and cash disbursements from operating activities.

noncash changes in the income statement are added back to net income. To compute net cash flows from operating activities. the Indirect method adjusts net income for items that affected reported net income but didn't affected cash. and net cash credits are deducted. .Indirect Method (reconciliation method) starts with net income and converts it to net cash flow from operating activities. cash. In other words.