A PROJECT REPORT

For the Subject :

Advanced Accounting

On the Topic :

FUND FLOW STATEMENT

C.R.T-1

Made by:

Nipath Belani

Roll No:

Specialisation:

Finance

FUND FLOW STATEMENT

A fund flow statement is a summary of a firm's
inflow and outflow of funds. It tells us from where
funds have come and where funds have gone.
Fund flows statement can indicate whether
sourcing of funds and their use match in sense
and also reveal the prudence or otherwise of a
firm's financing and investment decisions The
financial statement of the business indicate
assets, liabilities and capital on a particular date
and also the profit or loss during a period. But it
is possible that there is enough profit in the
business and the financial position is also good
and still there may be deficiency of cash or of
working capital in business. If the management
wants to find out as to where the cash is being
utilized, financial statement cannot help.
Therefore, a statement is prepared of the sources
and applications of funds from where Working
Capital comes and where it is utilized. This is
called Fund Flow statement. Funds Flow
Statement is an analytical tool in the hands of
financial manager. The basic purpose of this
statement is to indicate on historical basis the
changes in the working capital i.e., where funds
came from and where they are used during a
given period. The funds flow statement or
statement of changes in financial position is a
statement of flows, it measures the changes that
have taken place during two balance sheet dates.
According to R.N. Anthony, “Fund Flow is a
statement prepared to indicate the increase in
cash resources and the utilization of such
resources of a business during the accounting
period.”

Fund + Flow = Fund Flow

MEANING OF FUND

The term fund has a variety of meaning such as

cash fund, capital fund and working capital fund.
1. Cash fund –In a narrow sense, fund means only
cash. ‘Cash flow statement’ portrays net effect of
the various business transactions on cash into
account receipts & disbursement of cash. This
concept of preparing fund flow statement is not
accepted, as there are many such transactions
which do not affect cash but represent the flow of
fund .for example: purchase of furniture on credit
does not affect cash but there is flow of fund.

2. Capital fund –Here fund means all financial

resources used in the business, whether in the
form of men, money, material, machine & others.
3. Net working capital -Net working capital means
difference between current asset and current
liabilities .funds generally refers to cash or cash
equivalent or to working capital.

MEANING OF FLOW
1. The term ‘flow’ refers to changes or transfer and
therefore the ‘flow of funds’ means transfer of
economic values from one asset to another, from
one liability to another, from one asset to liabilities
or vice-versa or a combination of these. So flow of
fund refers to increase or decrease in net working
capital.

2. The increase or decrease in net working capital will

take place only when one account, out of two
accounts to be affected in a transaction ,is a
current account i.e. current asset or current
liabilities and the other account is non current
account i.e. fixed asset or long term liability or
capital.

3. When a change in non current account is followed

by a change in another non current account, it
does not amount to flow of fund. It is because, in
such case, neither the working capital increase nor
decrease.
In the above figure the dotted line displays
there will be no flow of fund & the dark line
displays the flow of fund.

Benefits of Fund flow Statement

The utility of this statement can be measured
on the basis of its contributions to the financial
management. It generally serves the following
purposes:-

(1) Analysis of Financial Position:The basic

purpose of preparing the statement is to have
a rich into the financial operations of the
concern. It analyses how the funds were
obtained and used in the past. In this sens, it is
a valuable tool for the finance manager for
analyzing the past and future plans of the firm
and their impact on the liquidity. He can
deduce the reasons for the imbalances in uses
of funds in the past an take necessary
corrective actions. In analyzing the financial
position of the firm, the Funds Flow Statement
answers to such questions as-

1. Why were the net current assets of the firm

down, though the net income was up or vice
versa?
2. How was it possible to distribute dividends
in absence of or in excess of current income
for the period ?
3. How was the sale proceeds of plant and
machinery used?
4. How was the sale proceeds of plant and
machinery used?
5. How were the debts retired?
6. What became to the proceeds of share issue
or debenture issue?
7. How was the increase in working capital
financed?
8. Where did the profits go?
Though it is not an easy job to find the definite
answerers to such questions because funds
derived from a particular source re rarely used
for a particular purpose. However, certain
useful assumptions can often be made and
reasonable conclusions are usually not difficult
to arrive at.
(2) Evaluation of the Firm's Financing: One
important use of the statement is that it
evaluates the firm' financing capacity. The
analysis of sources of funds reveals how the
firm's financed its development projects in the
past i.e., from internal sources or from external
sources. It also reveals the rate of growth of
the firm.

(3) An Instrument for Allocation of Resources:

In modern large scale business, available funds
are always short for expansion programmes
and there is always a problem of allocation of
resources. It is, therefore, a need of evolving
an order of priorities for putting through their
expansion programmes which are phased
accordingly, and funds have to be arranged as
different phases of programmes get into their
stride. The amount of funds to be available for
these projects shall be estimated by the
finance with the help of Funds Flow Statement.
This prevents the business from becoming a
helpless victim of unplanned action.

(4) A Tool of Communication to Outside

World: Funds Flow Statement helps in
gathering the financial states of Business.
It gives an insight into the evolution of the
present financial position and gives answer to
the problem 'where have our resources been
moving'? In the present world of credit
financing, it provides a useful information to
bankers, creditors, financial, it provides a
useful informations and government etc.
regarding amount of loan required, its
proposes, the terms of repayment an sources
for repayment of loan etc. the financial
manager gains a confidence born out of a
study of Funds Flow Statement. In fact, it
carries information regarding firm's financial
policies to the outside world.

(5) Future Guide: An analysis of Funds Flow

Statements of several years reveals certain
valuable information for the financial manager
for planning the future financial requirements
of the firm and their nature too i.e. Short term,
long-term or mid term. The management can
formulate its financial policies based on
information gathered from the analysis of such
statements. Financial manager can rearrange
the firm's financing more effectively on the
basis of such information along with the
expected changes in trade p payables and the
various accruals. In this way, it guides the
management in arranging its financing more
effectively.

END OF THE YEAR WORKING CAPITAL CHANGES

CURRENT PREVIOUS INCREASE DECREASE(Rs.)

YEAR (Rs.) YEAR (Rs.) (Rs.)

CURRENT ASSETS

------ ------ ----- ------- ------

------ ------ ----- ------- ------

------ ------ ------ ------- -----

TOTAL(A)

CURRENT
LIABILITIES

------ ----- ----- ----- ------

------ ----- ------ ----- ------

------ ----- ----- ----- ------

TOTAL(B)

WORKING
CAPITAL(A-B)
INCREASE/DECRE TOTAL ------- -------
ASE IN WORKING
CAPITAL

Format of fund flow statement