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Unit – III

MODULE - IVMODULE - IV

Fund Flow Statement

Dr. Manoj Shah, Principal Investigator, NMEICT, MHRD Delhi.

Topics to be enlightened…

• Introduction

• Meaning & Definition

• Meaning of 'Fund' and 'Flow'

• Classification of Fund Flow

• Preparation of Fund Flow Statement

• Essential Sources and Application of Funds

• Significance of Fund Flow Statement• Significance of Fund Flow Statement

• Limitation of Fund Flow Statement

• Effects of Funds Flow on Working Capital

• Statement of Changes in Working Capital

• Adjustments effects Funds Flow Statement – Depreciation

– Profit or Loss on Sale on Asset

– Provision for Taxation

– Provision against Current Assets

– Dividend (Proposed dividend & Interim Dividend)

• Determination of Fund from Operations (Adj. Profit & Loss Account)

• Distinction between Funds Flow Statement and Financial Statement

• Practical Problems Dr. Manoj Shah, Principal Investigator, NMEICT, MHRD Delhi.

Introduction and Meaning

• Fund flow statement is one of the importantmanagement tools for decision making.

• The statement is prepared taking into accountrevenue statement and position statement of theorganization.organization.

• It is a comparative analytical statement betweentwo consecutive years.

• The statement reveals the funds inflow and outflowduring an accounting period.

• In order to measure the soundness and solvency ofbusiness, preparation of fund flow is a must.


Cont…

• By preparing fund flow statement, management will beable to know how much funds are available and whereexactly they can be deployed.

• It is a statement which portrays the sources from whichfunds are obtained and the uses to which they arebeing put.funds are obtained and the uses to which they arebeing put.


Definitions

• "The fund statement is an important device forbringing to light the underlying financial movements -the ebb and flow of funds."

- Patton and Patton

• "Funds Flow Statement is prepared to indicate insummary form, changes occurring in items of financialposition between two different balance sheet dates."

- Smith and Brown


What is ‘FUND’ and ‘FLOW’ ?

• A layman can describe word FUND as cash or cashequivalents.

• In technical terms, the word FUND means ‘NetWorking Capital’.

• Funds may mean:• Funds may mean:

� Cash only

� Net working capital, i.e. current assets less current liabilities

� Total resources or total funds

� Internal resources only

� Net worth, i.e. owner’s equity capital plus reserves


Cont…

• The term flow refers to change or transfer.

• The term ‘Fund flow’ or ‘Flow of funds’ may thus mean

transport of:

� One asset to another� One asset to another

� One liability to another

� Assets to liabilities or vice versa

� And mixture of these…

• The changes in working capital is also an inflow or outflow

of funds, and thus it is called fund flow.


Movements of Funds

Firm

Inflow of Outflow of

Business

Transactions

Inflow of

Funds

Outflow of

Funds

1. Issue of shares

2. Issue of debentures

3. Bank loan

4. Sale of fixed assets

and investments

5. Operational profits

6. Decrease in working

capital

1. Redemption of

preference shares and

debentures

2. Repaid bank loan

3. Purchase of fixed assets

and investments

4. Payment of tax and

dividend

5. Increase in working

capital


Cont…

“When liabilities increase, it is a Source of Funds;

When assets increase, it is an Application of Funds”.

• Transactions happen among current assets and non-current assets (fixed

assets or permanent assets)assets or permanent assets)

• Transactions involving current assets and non-current liabilities (long term

borrowings and capital)

• Transactions involving current liabilities and non-current assets (fixed

assets or permanent assets)

• Transactions involving current liabilities and non-current liabilities (long

term borrowings and capital)


Block A

Long term liabilities

Block B

Fixed Assets &

Investments

Block C

Current Liabilities &

Provisions

Block D

Current Assets, Loans

& Advances


Preparation of Fund Flow Statement

• A funds flow statement is prepared on the basis

of information contained in the consecutive two

years Balance Sheet and that is based on the

Profit and Loss Account for the periodProfit and Loss Account for the period

concerned.

• This statement consists of two parts:

– Sources of funds

– Application of funds


Format – Horizontal FUNDS FLOW STATEMENT

(STATEMENT OF SOURCES AND APPLICATION OF FUNDS)

Sources of Funds Amount

Rs.

Application of Funds Amount

Rs.

Issue of Equity Shares ---- Purchase of Fixed Assets ----

Issue of Preference shares ---- Purchase of Investments ----

Issue of Debentures ---- Redemption of shares ----

Loan borrowed ---- Redemption of debenture ----

Sale of Fixed Assets ---- Payment of loan ----

Sale of Investments ---- Payment of Tax ----

Non-trading incomes ---- Payment of Dividend ----

Fund from Operation (profit) ---- Non-trading losses ----

Decrease of working capital ---- Increase of working capital ----

Fund from operation (loss) ----

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


Format – VerticalFUNDS FLOW STATEMENT

(STATEMENT OF SOURCES AND APPLICATION OF FUNDS)Particular Amount

Rs.

Amount

Rs.

Sources of Funds:

Issue of Equity Shares ----

Issue of Preference shares ----

Issue of Debentures ----

Loan borrowed ----

Sale of Fixed Assets ----

Sale of Investments ----

Non-trading incomes ----Non-trading incomes ----

Fund from Operation (profit) ----

Decrease of working capital ----

Total Sources of Funds (A) -------

Application of Funds:

Purchase of Fixed Assets ----

Purchase of Investments ----

Redemption of shares ----

Redemption of debenture ----

Payment of loan ----

Payment of Tax ----

Payment of Dividend ----

Non-trading losses ----

Increase of working capital ----

Fund from operation (loss) ----

Total Application of Funds (B) -------


Significance of Fund Flow Statement

• Analytical Tool

• Design Policies

• Control Device

• Reflect Financial Position• Reflect Financial Position

• Uses for Working Capital

• Help to Lenders

• Direction for Business


Limitations of Fund Flow Statement

• It ignores non-fund items.

• It ignores to project future operations.

• It also ignores transactions when they occur between

current accounts and non-current accounts.

• This is not ideal tool for financial analysis.

• It does not provide any additional information to the

management because financial statements are simply

rearranged and presented.


Effects of Fund Flow on Working

Capital

• Increase in the current year current assets than previous

year - Increase in Working Capital

• Decrease in the current year current assets than previous

year - Decrease in Working Capitalyear - Decrease in Working Capital

• Increase in the current year current liabilities than previous

year - Decrease in Working Capital

• Decrease in the current year current liabilities than

previous year - Increase in Working Capital


Pro-forma – Working Capital Statement

Particulars Previous Year Current Year Effect on Working Capital

Increase Decrease

Current Assets:Cash on Hand ------- -------

Cash at Bank ------- -------

Sundry Debtors ------- -------

Bills Receivable ------- -------

Stock/ Inventory ------- -------

Prepaid Expenses ------- -------

Short-term Investments ------- -------

Outstanding Incomes ------- -------Outstanding Incomes ------- -------

Total Current Assets (A) ------- -------

Current Liabilities:

Sundry Creditors ------- -------

Bills Payable ------- -------

Bank Overdraft ------- -------

Outstanding Expenses ------- -------

Short-term Loan ------- -------

Prepaid Incomes ------- -------

Provision of Taxation * ------- -------

Total Current Liabilities (B) ------- -------

Net Working Capital (A - B) ------- -------

Net Increase / Decrease in Working Cap. ------- -------

TOTAL ------- -------


Adjustment effects on P & L A/c

• Depreciation

• Amortization of fictitious & intangible assets

• Profit or Loss on sale of assets and investments

• Provision for taxation• Provision for taxation

• Provision for reserve

• Dividend


Determination of Fund from OperationsAdjusted Profit and Loss Account

Particulars Amount Particulars Amount

To Non-Fund items (non-cash) By Balance b/d (opening balance)

Depreciation / Depletion By Non-Fund items (non-cash)

Loss on sale of fixed assets Interest received

Premium on redemption debentures and

preference shares

Dividend received

Discount on issue of shares and

debentures

Refund on taxes

Write off intangible assets (goodwill, Profit on sale of fixed assets Write off intangible assets (goodwill,

patent, trade-mark)

Profit on sale of fixed assets

Write off fictitious assets (preliminary

exp., advertisement,)

Change in stock (current assets)

To Appropriation / Provision

General reserve By Adjusted Profit

(funds from operations)

Debenture sinking fund

Proposed dividend (equity and Preference

shares)

Interim dividend

Taxation provision

To balance C/f (Closing Balance)


Distinction

No. Fund Flow Statement Balance Sheet

1

This statement shows the changes in

financial position between two dates.

This statement shows actual position of

the business on specific date.

2

It reveals flow of funds during a

period of time.

It reveals assets, liabilities and capital at

a point of time.

3

It is a management tool for financial

analysis for decision-making.

It discloses the financial position of a

business and examines the soundness

of the firm.

4

It deals with those accounts which

affect working capital.

It deals with personnel and real

accounts.

5

This statement is prepared from two

consecutive balance sheet and

additional information.

This statement is prepared on the basis

of trail balance and additional

information.


Cont…

No. Fund Flow Statements Profit & Loss Account

1

This statement is not compulsorily

prepared as per law.

This statement is compulsorily

prepared as per law.

2

Both capital and revenue items are

considered at the time of preparing.

Only revenue items are considered.

Revenue statement helps for the This statement can not be prepared

3

Revenue statement helps for the

preparation of Funds Flow statement.

This statement can not be prepared

from fund flow statement.

4

It shows financial position, movement

of funds and effectiveness in the use

of funds.

It does not reflect the changes in the

financial position of the business.

5

This statement is prepared to know

changes of fund in the business

during the period.

This statement is prepared to know

profit and loss of the business.


Practical Problems


Problem – I

The following are the summaries of the balance sheets of the Bharat Vijay Ltd. as on 31-12-09 and 31-12-10.

Liabilities 2002

Rs.

2003

Rs.

Assets 2002

Rs.

2003

Rs.

Share capital

Debentures

Profit & Loss A/c

Creditors

Bank overdraft

3,00,000

2,00,000

40,000

70,000

25,000

4,00,000

2,50,000

60,000

80,000

25,000

Buildings

Machinery

Stock

Debtors

Prepaid expenses

1,20,000

3,00,000

90,000

1,40,000

15,000

2,50,000

2,60,000

80,000

2,40,000

25,000Bank overdraft

Provision for Taxation

25,000

30,000

6,65,000

25,000

40,000

8,55,000

Prepaid expenses 15,000

6,65,000

25,000

8,55,000

The following additional information is obtained:

1. The net profit for the year was Rs. 40,000 after charging depreciation.

2. During the year depreciation charged was Rs. 30,000 on building and Rs. 40,000 on machinery.

3. The company purchased during the year buildings worth Rs. 1, 60,000.

4. Dividend paid during the year amounted to Rs. 20,000.

From the above information, prepare a statement of sources and application of funds for the year

2003.Dr. Manoj Shah, Principal Investigator, NMEICT, MHRD Delhi.

Solution – I

STATEMENT OF CHANGIES IN WORKING CAPITAL

PARTICULAR 2009 2010 INCCREASE IN

W.C.

DECREASE IN

W.C.

Current Assets:

Stock 90,000 80,000 - 10,000

Debtors 1,40,000 2,40,000 1,00,000 -

Prepaid Expenses. 15,000 25,000 10,000 -

Total (A) 2,45,000 3,45,000

Current Liabilities:

Creditors 70,000 80,000 10,000

B.O.D. 25,000 25,000 - -B.O.D. 25,000 25,000 - -

Provision for Taxation 30,000 40,000 - 10,000

Total (B) 1,25,000 1,45,000

Working Capital (A-B) 1,20,000 2,00,000

Increase in Working Capital 80,000

1,10,000 1,10,000

Fund Flow Statement

Sources of Funds Amount

₹

Application of Funds Amount

₹

Equity share capital 1,00,000 Purchase building 1,60,000

Debenture 50,000 Dividend Paid 20,000

Profit 1,10,000 Increase in working capital 80,000

2,60,000 2,60,000Dr. Manoj Shah, Principal Investigator, NMEICT, MHRD Delhi.

Cont…

LEDGER ACCOUNTS

Building Account

Particular Amount

₹

Particular Amount

₹

Opening Bal 1,20,000 By Depreciation 30,000

To bank A/C- Purchase 1,60,000 By closing balance 2,50,000

2,80,000 2,80,000

Machinery Account

Particular Amount

₹

Particular Amount

₹

To opening bal 3,00,000 By Deprication 40,000

By closing bal. 2,60,000

3,00,000 3,00,000

Adjusted Profit and Loss Account

Particular Amount

₹

Particular Amount

₹

To Depreciation By opening bal 40,000

Building 30,000

Machinery 40,000 70,000

To Dividend Paid 20,000

To closing bal. 60,000 By Adjusted Profit & Loss 1,10,000

1,50,000 1,50,000


Problem – II From the following balance sheets of Bhairav Ltd. prepare:

(a) A statement showing changes in working capital

(b) A statement of source and application of funds.

Liabilities Rs. Rs. Assets Rs. Rs.

Creditors

Bills payable

Bank-overdraft

Provision for taxation

Reserve

39,520

33,780

59,510

40,000

50,000

41,135

12,645

-

50,000

55,000

Cash at bank

Debtors

Sundry Advances

Stock

Land- building

2,520

85,175

2,315

1,11,040

1,48,500

4,820

72,625

735

97,370

1,44,250Reserve

P & L A/c

Equity shares capital

50,000

39,690

2,00,000

4,62,500

55,000

36,220

2,60,000

4,55,000

Land- building

Plant

Goodwill

1,48,500

1,12,950

-

4,62,500

1,44,250

1,16,200

19,000

4,55,000

Additional information:

1. During the year taxes and interim dividend paid were Rs. 35,000 and Rs. 39,000

respectively.

2. The assets of another company were purchased for Rs. 60,000 payable in fully paid

equity shares of the company. The assets consisted of stock Rs. 21,640, plant Rs.

18,360 and remaining amount was for goodwill.

3. During the year the purchase price is Rs. 5,650 for a plant.


Solution – II STATEMENT OF CHANGIES IN WORKING CAPITAL

PARTICULAR 2010 2011 INCREASE IN

W.C.

DECREASE IN

W.C.

Current Assets

Stock 1,11,040 97,370

Less: Asset Purchase

( 2nd effect in Eq. share A/c.)

21,640

Correct Stock 1,11,040 75,730 35,310

Cash at bank 2,520 4,820 2,300Cash at bank 2,520 4,820 2,300

Sundry Advances 2,315 735 1,580

Debtors 85,175 72,625 12,550

Total(A) 201,050 1,53,910

Current Liabilities

Bills Payable 33,780 12,645 21,135 -

Creditors 39,520 41,135 1,615

B.O.D. 59,510 - 59,510 -

Total(B) 1,32,810 53,780

Working Capital(A-B) 68,240 1,00,130

Increase in Working Capital 31,890

82945 82945


Cont…

Adjusted Profit &Loss Account

Particular Amount Particular Amount

To Provision for reverse 5,000 By bal b/d. 39,690

To goodwill written off 1,000

To provision for taxation 45,000 By Adjusted profit 1,11,540

TO interim Dividend 39,000

To dep. On land- building 4,250

To dep. On machinery 20,760

To bal c/f 36,220To bal c/f 36,220

1,51,230 1,51,230

Fund Flow Statement

Sources of Funds Amount Application of Funds Amount

Purchase of machinery 5,650

Tax paid 35,000

Interim Dividend 39,000

Adjusted Profit 1,11,540 Increase in working capital 31,890

1,11,540 1,11,540


Cont…Machinery Account


To opening bal. 1,12,950 By profit &loss (Dep.) 20,760

To Machinery(business) 18,360

To bank (purchase) 5,650

By closing bal. 1,16,200

1,36,960 1,36,960

Provision for Taxation Account


To tax paid 35,000 By Bal b/d 40,000

To bal c/f 50,000 By profit &loss (provision) 45,000

85,000 85,000

Equity share Capital Account


By bal b/d. 2,00,000

By machinery 18,300

By Stock 21,640

By bal c/d 2,60,000 By G/W A/c. 20,060

2,60,000 2,60,000


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