fund flow statement
DESCRIPTION
fund flow statement analysisTRANSCRIPT
Presentation onFUND FLOW STATEMENT
By G.Ravinder
ITM-Business School -warangal
Why we prepare fund flow statement?
The balance sheet and income statement are the traditional basic financial statement of a business enterprise. A serious limitation of these statements is that they do not provide information regarding changes in the firm’s financial position during a particular period of time. They fail to answer following question
What funds were available during the accounting period and for what purpose these funds were utilized?
Have long term sources been adequate to finance fixed asset purchase?
Does the firm possess adequate working capital? How much funds have been generated from
operations? Why did the firm not pay dividend in spite of
adequate profit?
The balance sheet is merely a static statement. It is statement of asset and liabilities of the business as on particular date.
The fund flow statement overcomes these limitations of basic financial statement. Fund flow statement will provide us information about different sources of fund and their various uses in particular time.
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 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.
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.
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.
For exampleMachinery a/c Dr To share capital a/c(Machinery purchase in consideration of share) In the above transaction both accounts are non
current accounts which do not at all affect current asset and current liability. Therefore working capital will remain unaffected i.e. there will be no flow of fund.
When changes in one current account results in a changes in other current account ,it also does not affect working capital i.e. there is no flow of funds.
For example Cash a/c Dr To debtor a/c (Cash received from debtor) It represents an increase of cash –a current asset account and
decrease of debtor again a current asset account .thus there will be no net changes in the amount of working capital, although the composition of working capital will be affected .
In the above figure the dotted line displays there will be no flow of fund & the dark line displays the flow of fund.
Preparation of Fund Flow StatementThe changes which occurred in the current accounts as a result
flow of fund are reflected in a statement known as ‘schedule of changes in working capital’ .
The similar changes in non current accounts are shown in ‘Fund Flow Statement’.
Therefore, following two statements under this techniques .1. Statement or Schedule of Changes in Working Capital.2. Statement of Sources and Uses of Funds or Funds Flow Statement.
Schedule of Changes in Working Capital It discloses the changes in individual item of current asset &
current liabilities between two period & there effect on working capital. Working capital will increase when there is an increase in current asset and decrease in current liabilities, whereas, working capital will decrease when there is a decrease in current asset & increase in current liabilities.
Net increase in working capital is treated as use of funds & the net decrease in working capital is treated as source of funds.
ItemItem
(A) Current (A) Current AssetsAssetsCash at bank Cash at bank
Cash in handCash in hand
Stock in tradeStock in trade
DebtorsDebtors
Bills receivableBills receivable
Advance paymentAdvance payment
Short term investmentShort term investment
Prepaid expensePrepaid expense
Accrued incomeAccrued income
Total (A) Total (A)
(B) Current Liabilities(B) Current Liabilities
(1) Short term loans(1) Short term loans
(2) Bank overdraft(2) Bank overdraft
(3) Creditors(3) Creditors
(4) Bills payable(4) Bills payable
(5) Outstanding expenses(5) Outstanding expenses
(6) Unclaim dividend(6) Unclaim dividend
Total (B)Total (B)
Net Working Capital (A-B)Net Working Capital (A-B)
Incraese / Decrease in Working Incraese / Decrease in Working Capital Capital
TotalTotal
Previous YearPrevious Year Current Current YearYear
Effect onEffect on
Incraese Rs.Incraese Rs.
Working Working captialcaptial
Decrease Rs.Decrease Rs.
Statement or Schedule of Changes in Working Capital.
Meaning of fund flow statement : This statement reveals resources from which funds
were obtain by the firm hand the specific uses to which such funds were applied. The effectiveness of financial management in procuring funds from various sources & using them effectively for generating income without sacrificing the financial position of the firm is reflected in fund flow statement .
Definitions of fund flow statement : In the words of Foulke, R.A., “a statement of
source and application of fund is a technical device design to analysis the changes in the financial condition of business enterprises between two dates”.
According to : Almond Coleman, “ The fund flow statement summarizing the significant financial changes which were occurred between the beginning & the end of a company’s accounting periods”.
This fund flow statement has two parts :1. Sources of fund2. Application of fund
The difference between these two parts that is sources & uses of funds represents net changes in working capital.
The excess of sources of funds over uses of fund is the net increase in working capital & excess of uses over sources of fund is net decrease in working capital.
The amount of net increase or decrease as shown in fund flow statement should be equal to the amount shown by schedule of working capital changes.
Fund Flow StatementFund Flow StatementSources of Fund Sources of Fund
AAmountmount
Fund from operationFund from operation
Issue of shareIssue of share
Issue of debentureIssue of debenture
long term loanslong term loans
Sale of fixed assets /Sale of fixed assets /
InvestmentInvestment
Non trading receiptsNon trading receipts
Decrease in workingDecrease in working
capitalcapital
(if any)(if any)
Uses Of FundsUses Of Funds AmountAmount
Loss from operationLoss from operation
Redemption of Redemption of
preference sharespreference shares
Redemption ofRedemption of
debenturesdebentures
Repayment ofRepayment of
long term loanslong term loans
Purchase of fixed assets Purchase of fixed assets
/ Investments/ Investments
Payment of dividend & taxesPayment of dividend & taxes
Increase in working capitalIncrease in working capital
(if any)(if any)
Fund from operations :The profit made by a firm through
normal operations is a major source of funds. The amount of
sales as shown in the P&L A/c is a source of funds by way of
increase in cash , debtor and B/R.
Profit & loss Adjustment a\cProfit & loss Adjustment a\c
Particular Particular AmountAmount
DepreciationDepreciation
Loss on sale of fixed assetsLoss on sale of fixed assets
Under writing commissionsUnder writing commissions
Discount on issue of shares & Discount on issue of shares &
debenturesdebentures
Preliminary expense written offPreliminary expense written off
Deferred revenue expenses Deferred revenue expenses
Goodwill written off Goodwill written off
Patent or trademarkPatent or trademark
Provision for taxes Provision for taxes
(If treated non current(If treated non current))
Particular Particular AmountAmount
Profit or gain on sale of Profit or gain on sale of
fixed assetfixed asset
Dividend received Dividend received
Interest received ofInterest received of
investmentinvestment
Profit on revaluation Profit on revaluation
of assetof asset
Fund from operationFund from operation
Q-Comparative Balance sheet of Z Ltd. As -Comparative Balance sheet of Z Ltd. As on year 2000 and 2001 were as followon year 2000 and 2001 were as follow
Liabilities Liabilities 20020000
20012001 AssetsAssets 20002000 20012001
Account Account payablepayable
Notes payableNotes payable
Loan on Loan on MortgageMortgage
Capital Capital
Sinking fundSinking fund
Retained Retained EarningEarning
Provision for Provision for DDDD
Accumulated Accumulated Depreciation-Depreciation-
BuildingBuilding
furniturefurniture
1500015000
1000010000
4000040000
5000050000
1600016000
1395013950
13501350
1200012000
32003200
161500161500
1800018000
7500075000
4000040000
4500045000
1200012000
1627516275
14251425
90009000
24002400
151600151600
CashCash
Account Account receivable receivable
StockStock
Sinking fund Sinking fund investmentinvestment
LandLand
BuildingBuilding
FurnitureFurniture
1120011200
2130021300
3500035000
1600016000
1000010000
6000060000
80008000
161500161500
85008500
2350023500
3060030600
1200012000
1000010000
6000060000
70007000
151600151600
You are giving You are giving information:-information:-Net profit for the year 2001
amounted 6675.Dividend amounted to Rs.5000
was paid during the year.Prepare a statement of sources
and uses of fund.
Schedule of Changes in Working Schedule of Changes in Working CapitalCapitalItemsItems
CURRENR ASSETS:-CURRENR ASSETS:-
CashCash
Account receivable Account receivable
StockStock
TOTAL of CA (A)TOTAL of CA (A)
CUURENT CUURENT LIABILITIES:-LIABILITIES:-
Account payableAccount payable
Note payableNote payable
Provision for D DProvision for D D
TOTAL of CL (B)TOTAL of CL (B)
Difference b/w (A-B)Difference b/w (A-B)
Decrease in W CDecrease in W C
20002000AmountAmount
1120011200
2130021300
3500035000
6750067500
1500015000
1000010000
13501350
2635026350
4115041150
4115041150
20012001AmounAmountt
85008500
2350023500
3060030600
6260062600
1800018000
75007500
14251425
2692526925
3567535675
54755475
4115041150
Change in Change in
IncreaseIncrease
22002200
25002500
5475 5475 1017510175
Working Working capitalcapital
DecreaseDecrease
27002700
44004400
30003000
7575
1017510175
Fund flow statementFund flow statement
Sources of Sources of fundfund
Sale of sinking Sale of sinking fund fund investmentinvestment
Fund from Fund from operation operation
Decrease in Decrease in working capitalworking capital
AmounAmountt
40004000
525525
54755475
1000010000
Application of Application of fundfundRedemption of Redemption of share capitalshare capital
Dividend paidDividend paid
AmounAmount t
50005000
50005000
1000010000
Profit & loss adjustment a\cProfit & loss adjustment a\c
Particular Particular
To Accumulate To Accumulate dep. On furnituredep. On furniture
To Dividend paidTo Dividend paid
To Balance c/dTo Balance c/d
AmounAmount t
200200
50005000
1627516275
2147521475
Particular Particular
By balance b/d By balance b/d
By sinking fundBy sinking fund
By accumulate By accumulate dep. On buildingdep. On building
By fund flow By fund flow operationoperation
AmounAmount t
1395013950
40004000
30003000
525525
2147521475
Accumulative deprecation Accumulative deprecation Building Furniture Building Furniture ParticuParticular lar To P/L a/cTo P/L a/c
To To balance balance c/dc/d
AmoAmo
untunt 30003000
90009000
1200120000
ParticulParticul
arar By By balance balance b/db/d
AmouAmou
ntnt 1200012000
1200012000
ParticulaParticularr
To To furniture furniture a/ca/c
To To balance balance c/dc/d
AmoAmountunt
10001000
24002400
34003400
ParticulParticulararBy By balance balance b/db/d
By P/L By P/L a/ca/c
AmouAmount nt
32003200
200200
34003400
ParticulaParticular r
To To balance balance b/db/d
AmouAmount nt
80008000
80008000
ParticulParticularar
By By deprecatideprecation on
By By balance balance c/dc/d
AmouAmount nt
10001000
70007000
80008000
Furniture a\c