Fund Flow Statement

Profit and Loss Account reveal ? End result

Balance Sheet reveal ? Static view
Provide basic financial information on financial
activities.
This is not much useful for analysis and
interpretation.
You will come to know about the profit or loss and
the financial position either by end of a year or
quarter
There are many transactions that take place in a
business which do not operate through profit and
loss account.
---
Neither P&L nor B/S reveals the nature of
transactions entered into during the period to
finance the business.
P&L will contain many non cash items and
balance sheet will never reveal the acquisitions or
purchases etc
Because of these limitations there is a need for a
statement called--------- Fund Flow Statement
In Narrow Sense Fund Means: Cash
effect of various business transactions on cash

In Broader Sense: Money values in any form men,
material and machinery etc,

In present Popular sense: Working Capital (CA -
CL)

Flow: means Change

Fund means Working Capital

Flow= Movement ------------ inflow and outflow.
Fund Flow= Transfer of economic values from one asset
of equity to another.

When there is a Flow of Fund ?
--------- If there is change in the amount of funds available.
If the transaction results in
--------------- Increase in fund------------- Source of Fund
---------------Decrease in fund------------ Application of Fund
--------------- No Change------------------- No flow

Fund Flow Statement is a statement which shows
the movement of funds and is a report of the
financial operations of the business undertaking.
It shows how the activities of a business
organisation is financed or how the available
financial resources have been used during a
particular period.

Statement of Source and Application of Funds.

Rule:

The flow of funds occurs when a transaction changes on
the one hand a non-current account and on the other a
current account and vice versa.

Funds Move When a transaction affects

i. A current Asset and a Fixed Asset (purchase of FA
for Cash)
ii. A Fixed Asset and a Current Liability( Asset pur on cr
for 3 months)
iii. A Current Asset and a Fixed liability(Redemption of
Pref shares)



Provision for doubt full debts, provision for loss of
stock, provision for discount on debtors etc are
treated as current liabilities as they bring down
the amount of current assets
How to check whether a Transaction has resulted in the Flow
of Funds or Not ?

1. Analyze the transaction and find out the two accounts
involved.
2. Make Journal entry of the transaction
3. Determine Current and Non Current Account
4. Both are current account----------- no flow
5. Bothe are non current------------- no flow
6. One current and one non current----------- flow




















FUNDS FLOW STATEMENT


This statement is prepared in order to reveal clearly the
various sources where from the funds are procured to finance
the activities of business concern during the accounting period
and also bring to highlight the uses to which the funds are put
during the said period.

Different Names of Fund Flow Statement

Source and Application of funds
Statement of Changes in financial position
Where got where gone Statement
Movement of Working capital
Movement of Funds
Funds Received and districuted

Advantages of Fund Flow Statement:
Helps of Analysis of Financial Operations:
P &L ----- operational result
B/s------------ Financial Position
Fund flow helps to analyze the causes of changes in assets and liabilities
between two different point of time

It throws light on many perplexing questions of general interest like-

Why the net current assets were are lesser in spite of higher profits and vice-versa?
Why more dividends could not be declared in spite of available profits?
How was it possible to distribute more dividends than the present earnings?
What happened to the proceeds of the sale of the fixed assets or issue of shares,
debentures etc?
What are the sources of repayment of debt?






It helps is the formulation of dividend policy.

It helps in the proper allocation of resources.

It acts as future guide.

It helps in appraising use of working capital.

it helps knowing the overall credit worthiness of a firm.

Limitations of Funds Flow Statement

It is not a substitute of income statement or B/S
it is just an additional information on changes in
Working capital
It Cannot reveal Continuous Changes
It is not original but rearrangement of data
Projected Fund Flow is not accurate

Changes in Cash is more important than
changes in working Capital
Fund flow means change in the funds or change in the
working capital.
That is current assets and liabilities
TRANSACTIONS AFFECTING WORKING
CAPITAL

A. INCREASE IN THE WORKING CAPITAL / IN FLOW

I. Issue of shares or debentures
II. Sale of Fixed Asset or non current asset
III. Income from different sources( including operations)


B. TRANCASIONS LEADING TO DECREASE IN
WORKING CAPITAL OR OUTFLOW
i. Redemption of preference shares or debentures
ii. Purchase of Fixed Assets or Non- current assets
iii. Payment of Miscellaneous Expenses
iv. Payment of dividends etc.
TRANSACTIONS WHICH DO NOT AFFECT WORKING CAPITAL
OBJECTIVES OF PREPARING FFS\

1. To Know The Imp Items Of Sources And
Application.

2. To Know The Amount Of Funds From Operations

3. To Know The Changes In Working Capital And
Determine The Efficiency In The Working Capital
Management

4. Helps To Prepare Budges For Future



Procedure for preparing a funds flow statement,


1. Adjusted Profit & Loss account.( Funds from Operations)
2. Statement or schedule of changes working capital.
3. Preparation of accounts of non current assets and liabilities.
Statement of sources and application of funds. (FFS)

Adjusted Profit & Loss account.( Funds from
Operations)
Debit Items: Operating but Non Fund Items
Operational but do not affect fund
Amortization on fictitious and intangible assets like
goodwill
Preliminary expenses, discount on issue of shares and
debentures written off
Appropriation of Retained earnings such as Transfer
to Reserves
and Depreciation
Non Operating Items: result in outflow but are not
relating to trading operations
loss on sale of assets
payment of dividend



Methods of Calculating FFO
(b)Adjusted Profit and Loss Account

Particular Amt Particular Amt
To depreciation & depletion or amortization
of fictitious & tangible assets.
Goodwill
Trade marks
Preliminary
Expanses etc.
To appropriation of retained earnings, such
as-
Transfer to general reserve
Dividend
Sinking fund etc.
To loss on sale of any fixed asset
To dividends
( including interim dividend )
To proposed dividend
( if not taken as current liability )
To provision for taxation
( if not taken as current liability )
To closing balance of P&L a/c
To funds lost in operation (Balancing
figure if Cr side is more than Dr side)

To Balance c/d
By opening balance of P&L a/c
By net profit b/d
( current a/c )
By transfer from excess provisions
By appreciation in the value of fixed
assets
By profit on sale of fixed assets
By Profit on revaluation of fixed
assets
By funds from operations
If the debit side is more than credit
side

Sources of Funds:
1 . Issue of Share Capital for cash or any other
current asset only
2. Issue of Debentures and Raising Loans etc.,

3. Sale of Fixed(non current) Assets and Long-term or
Trade Investments

4. Non trading Receipts dividend received, refund of
tax rent received

5. Decrease in Working Capital: means release of
funds from
Working capital
Application or Use of Funds
1. Funds Lost in Operation:
2. Redemption of preference share Capital( net
amount paid is taken)
3. Repayment of Loans and Redemption of
Debentures
4.Purchase of Fixed Asset(non current0.
5.Payment of dividend and Tax : not provisions.
6. Any other non trading payment: eg drawings

Working capital means excess of current
assets over current liabilities.
Working capital=current assets-current
liabilities.
Proposed dividends, provision for taxation items in the below
statement may or may not be current liabilities.

If these are not liabilities will be shown in the funds from operation
statement and not in the statement of changes in the working capital

Statement of changes in the working Capital
Statement of changes in the working Capital
The Change in the current asset or current liability
in the balance sheet as compared to that of previous
balance sheet.

Increase in CA--------------- Increases WC
Increase in CL---------------- Decreases WC
Decrease in CA--------------- Decreases WC
Decrease in CL-------------- Increases WC
Typical form of changes in working capital

Particulars Previous year Current year Effect on working capital.
Increase/decrease
Current assets
Cash in hand
Cash at bank
Bills receivable
Sundry debtors
Temporary investments
Stock/inventories
Prepaid expanses
Accrued incomes
Total current assets
Current liabilities
Bills payable
Sundry creditors
Outstanding expanses
Bank overdraft
Short term advances
Dividend payable
Purposed dividends *
Provision for taxation *
Total current liabilities
Working capital
( CA-CL )
Net increase or decrease in working
capital.
marked items in the below
statement may or may not
be a liability
Preparation of accounts of non current assets and
liabilities.

Like Provision for Depreciation, Provision for
Income tax, Reserve Account etc, Fixed Assets

Fund Flow Statement
Compare the Balance Sheet for any increase or
decrease in the assets and liabilities.(other than
current).
Increase in asset and decrease in liability
indicates the purchase of asset and payment for
liabilities . Therefore it is to shown as application.
If the assets are decreased( other than
depreciation) and liabilities are increased it
indicates the sale of asset/ creation of new
liability and shown as source.
After taking into account the balance of Adjusted
P&L A/c the fund flow statement must tally.


Statement of Sources and Application
Indicates various sources from where the funds(WC)
have been obtained during a certain period and the
application of these funds

Pre pared in two formats

1. Report Form
2. T Form or Account Form
Source and Application of Funds
Source Uses
Funds from operation

Issue of share capital

Issue of debentures and long term
Loans

Sale of Fixed Assets

Non trading receipts *1

Decrease in working capital

Payment of dividend & tax will appear as an
application of funds only where these items are
appropriation of profits and not current
liabilities
Funds lost in operation

Redemption of preference share
capital

Repayment of long term loans and
redemption of debenture

Purchase of fixed assets

Non trading payment *2

Payment of dividend and tax
Increase in working capital
1.Non trading receipts are like dividend received, refund of tax, rent received etc..
2.Non trading payment are like drawings in case of sole trader or partnership firms loss of cash etc.

Sources of Funds :
1
.Funds From Operations: or Trading Profits:
Sales increases Current assets increases and
operating expenses also increases
Net profit shown by P&L A/C does not mean Funds
from operations
There are many non fund or non operating items
which are credited or debited to P&L account needs
to be adjusted.



Sources of Funds:
2 . Issue of Share Capital for cash or any other
current asset only
3. Issue of Debentures and Raising Loans etc.,

4. Sale of Fixed(non current) Assets and Long-term or
Trade Investments

Non trading Receipts dividend received, refund of
tax rent received

Decrease in Working Capital: means release of funds
from
Working capital
Application or Use of Funds
1. Funds Lost in Operation:
2. Redemption of preference share Capital( net
amount paid is taken)
3. Repayment of Loans and Redemption of
Debentures
4.Purchase of Fixed Asset(non current0.
5.Payment of dividend and Tax : not provisions.
6. Any other non trading payment: eg drawings

Liability 1993 1994 Assets 1993 1994
Share capital
P & L A/c
Current liabilities
60,000
34,000
12,000
65,000
26,000
3,000
Goodwill
Plant&Machinary
Current assets
30,000
60,000
16,000
25,000
50,000
19,000
Problem: No1
From the following balance sheet of S M industries prepare Fund flow statement.
Additional information:-
Depreciation of Rs.20,000/- on plant & machinery was charged to P&L A/c

Dividends of Rs.12,000/- were paid during the year.
SOLUTION
Schedule of change in working capital

Particular 1993 1994 Increase Decrease
Current assets
Current liabilities
16,000
12,000
19,000
3.000
3,000
9,000
-
Working capital (CA-CL) 4,000 16,000
Net increase in working capital 12,000 12,000
16,000 16,000 12,000 12,000
Funds from operations:/ Adjusted Profit and Loss
Account
Particular Amt Particular Amt
To depreciation
To goodwill written off
To dividend paid
To balance c/d
20,000
5,000
12,000
26,000
By balance b/d
By funds from operation
34,000
29,000
63,000 63,000
Share Capital Account





Plant and Machinery Account
Particular Amt Particular Amt
To balance C/d 65,000 By balance B/d
By cash (issue)
60,000
5,000
65,000 65,000
Particular Amt Particular Amt
To balance b/d
To cash (purchases)
60,000
10,000
By depreciation
By balance c/d
20,000
50,000
70,000 70,000
Goodwill Account
Particular Amt Particular Amt
To balance b/d 30,000 By balance c/d
By adjusted P&L
25,000
5,000
30,000 30,000
Fund Flow Statement
Particular Amt Particular Amt
Funds from operation
Issue of shares
29,000
5,000
Purchase of plant &
machinery
Payment of dividend
Increase in working
capital

10,000
12,000
12,000
34,000 34,000