TO IDBI Probationary Officers

In this Session
We shall try to get some insight
into
General Utilities of Funds Flow
Funds Flows utilities to Bankers
What is Funds Flow
How to Prepare a Funds Flow
Statement
How to Analyze the Funds Flow

Answered
Why funds flow?

The static data of Balance Sheet

and dynamic data of Profit & Loss
Account fails to provide the
proper
answers
for
various
questions like
a.
Whether
the
Capital
adequate for the company?

is

b. Whether the quality of the

capital
management
of
the

GENERAL UTILITIES
An analysis of Funds Flow
provides the answers for:

Whether
business
generated any funds

has

-How the funds generated

business have been utilised

in

- Position of retained earnings

vis--vis distributed to owners
contd.

GENERAL UTILITIES
Position of Working
CapitalIncrease/Decrease,
source thereof

Reasons for decrease

in NWC despite profit
earnings
Reasons for increase in
NWC despite the firm

Utilities-BANKER
To
what
extent
the
company is relying on the
external sources of Finance
Whether the company has
made
any
major
commitments during the
current year
Whether
company
has
retired the debts that have
been planned

Utilities-BANKER
What is the impact on the
liquidity of concern because of
change in NWC
Whether it indicatesterm
liquidity/long
liquidity

short
term

Whether the funding for Long

Term Assets has come from
long term sources or short
term sources

FLOW
Statement of Sources and
Application of Funds.
Basically
All Liabilities are Sources of
Funds
All assets are Uses of Funds

Funds Flow means

changes
in
Assets
and/or liabilities which
brings changes in Net

ANALYSIS
Principle
Increase
Liabilities
Assets

Sources
uses

Decrease
uses
sources

ANALYSIS
It can be diagrammatically represented as
under:
Current
Liabilities
Y
E
S

Non-Current
Liabilities

NO

YES

No

Current
Assets
Y
E
S

Non-current
assets

Changes in Net Working Capital

2013

2014

2015

Capital

200

200

200

Secured Loan

400

600

500

Long Term Sources

600

800

700

Fixed Assets

500

500

400

Long Term Uses

500

500

400

(Net ) Working
Capital

100

300

300

The increase or decrease in Net working capital takes

place only when one of the accounts affected in the
Transaction is a Current Account (STU or STS) and the
other account is a Capital Account (LTS or LTU). In other
words the change in the STU/STL which results change
in STU/STL do not affect the NWC.
Also change in the LTU/LTL which results change in
LTU/LTL do not affect the NWC.

Changes in NWC
Changes in Net Working Capital due to changes
in CA/CL may happen in the following ways;
Decrease in Current Liabilities= Increase in Net
Working Capital
Increase in Current Liabilities=Decrease in Net
working capital

Conclusion: Changes in the Current

Liabilities is Inversely proportional
to the changes in the Net Working
Capital
Decrease in Current Assets=Decrease Net
Working Capital
Increase in Current Assets=Increase
in Net
working capital

Changes in NWC
Changes in Net Working Capital due to changes in
FA/LTL may happen in the following ways;
Decrease in Long Term Liabilities= Decrease in Long
Term Sources
Increase in Long Term Liabilities= Increase in Long
Term Sources

Conclusion: Changes in the Long Term

Liabilities is Directly proportional to the
changes in the Net Working Capital
Decrease in Fixed Assets= Increase in Long Term
Sources
Increase in Fixed Assets= Decrease in Long Term
Sources

Conclusion: Changes in the Fixed Assets

is Inversely proportional to the changes

of Funds
Long Term Sources of Funds
-

Profit
generated
from
operations
Availment of Long Term
Loans
Issue of Debentures
Issue of Preference Share
Capital
Issue of Equity Share Capital
Sale of Fixed Assets
Realisation of Investments
Short Term Sources of Funds

Increase in Sundry Creditors

Increase in Provisions
Increase in Bills Payable
Increase in Working Capital
Loan
Increase in Any other short
Term loans
Sale of current Assets
Reduction in Sundry Debtors

Long Term Application of Funds

-

Loss from operations

Repayment of
Long Term
Loans
Redemption of Debentures
Redemption
of Preference
Capital
Purchase of Fixed Assets
Purchase of Investments

Short Term Application of Funds

-

Increase in Sundry Debtors

Increase in Inventories
Increase in Bills Payable
Reduction in Working Capital
Loan
Payment of Any other short
Term loans
Reduction
in
Sundry
Creditors

STATEMENT
Sources of Funds

Funds Flow Statement:

Fund from operation
Issue of Shares
Issue of Debenture
Long Term Loans
Sale of Fixed Assets/Investments
Other Trading Receipts
Decrease in Working Capital (if any)
Uses of Funds
Loss from operations
Redemption of Preference Shares/Debentures
Repayment of Long Term Loans
Purchase of Long Term assets/Investments
Payment of Dividend & Taxes
Increase in Working Capital (if any)

In this Session
We have been introduced to
General Utilities of Funds Flow
Funds Flows utilities to Bankers
What is Funds Flow
How to Prepare a Funds Flow
Statement
How to Analyse the Funds Flow
Statement

Any Questions?

Next session we will deal with

Cash Flow Statement

Confirmation

Let us refresh our

learning of Funds
Flow Statement

ANALYSIS
1. The financial information provided by Balance
Sheet is ____________ information
a)
b)
c)
d)

Dynamic
Static
Current
Future

ANALYSIS
2. The financial information provided by Profit & Loss
Account is ____________ information
a)Dynamic
b)Static
c)Current
d)Future

ANALYSIS
3. The financial information provided by Balance Sheet
may not provide satisfactory answer on quality of
a)Working Capital Management
b)Capital Management
c)Liability Management
d) Asset Management

ANALYSIS
4. The change in the position of an item in the Balance
Sheet is known as _________
a)Uses
b)Source
c)Flow
d)FUNDS

ANALYSIS
5. A balance sheet item is also referred to as
a)Uses
b)Source
c)Flow
d)FUNDS

ANALYSIS
6. The statement of changes in financial position is
also known as
a)Change in Working Capital
b)Funds Flow
c)Cash Flow
d)Change in Fixed Capital

ANALYSIS
7. Decrease in Asset Denotes
a)Increase in Capital
b)Sources of Funds
c)Uses of Funds
d)Diversion of Funds
B

ANALYSIS
8. Decrease in Liability Denotes
a)Diversion of Funds
b)Sources of Funds
c)Uses of Funds
d)Depletion of Funds

ANALYSIS
9. Increase in Liability Denotes
a)Diversion of Funds
b)Sources of Funds
c)Uses of Funds
d)Increase in Capital

ANALYSIS
10. Increase in Assets Denotes
a)Diversion of Funds
b)Sources of Funds
c)Uses of Funds
d)Decrease in Capital

ANALYSIS
11. The changes in the Current Asset/Current Liability
which results in the change in Current Asset/Current
Liability.
a)Affects NWC
b)Do not affect NWC
c)Increases NWC
d)Decreases NWC

FUND FLOW ANALYSIS

12. The change in the Current Asset/Current Liability
which results in change in Fixed Asset/Long Term
Liability.
a)Affects NWC
b)Do not affect NWC
c)Affects Funds Flow
d)Do not affect Cash flow

ANALYSIS
13. The profit made by a firm through normal
operations is a major source of
a)Funds
b)Asset
c)Liability
d)Debt
A

ANALYSIS
14. The difference between
Applications denotes the
a)Change in Fixed Capital
b)Change in Fixed Asset
c)Change in Capital
d)Change in Working Capital

the

Sources

and

ANALYSIS
15. Excess of Sources over applications is
a)Net Decrease in Working Capital
b)Net Increase in Working Capital
c)Net Increase in Fixed Capital
d)Net Increase in Fixed Capital

ANALYSIS
16. Excess of Applications over Sources is
a)Net Decrease in Working Capital
b)Net Increase in Working Capital
c)Net Increase in Fixed Capital
d)Net Increase in Fixed Capital

ANALYSIS
17. A Machinery worth Rs. 10 lacs have been
purchased by proceeds of issue of debentures. It will
a)Decrease the Net Working Capital
b)No change in Net Working Capital
c)Increase the Net Term Liability
d)Increase the Net Working Capital

ANALYSIS
18. A sum of Rs. 1 lac was drawn from Cash Credit
account and the proceeds have been utilised for
payment of Term Loan Instalment. This will
a)Decrease the Net Working Capital
b)No change in Net Working Capital
c)Increase the Net Term Liability
d)Increase the Net Working Capital

ANALYSIS
19. A sum of Rs. 5 lacs received on account of sale of
old machinery has been utilised for reduction of
outstanding in Cash Credit Account. This will
a)Decrease the Net Working Capital
b)No change in Net Working Capital
c)Decrease the Net Term Liability
d)Increase the Net Working Capital

ANALYSIS
20. A sum of Rs. 1 lac was drawn from Cash
Credit account and the proceeds have been
utilised for payment of Term Loan Instalment.
On the same day a sum of Rs. 1 lac has been
credited to Cash Credit account on account of
maturity proceeds of Fixed Deposit. This will
a)Decrease the Net Working Capital
b)No change in Net Working Capital
c)Decrease the Net Term Liability
d)Increase the Net Working Capital