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Funds flow Analysis


statement is based on the working Capital concept of funds. measures the inflows and outflows of working capital resulting from different transactions. flow statement measures and presents in an analytical manner the summarized version of the numerous flows of funds for a specific period. Flow is the change in Working Capital





Funds flow statements is dealt by Accounting Standard 7 . . Meaning :- It explains changes in funds or changes in working capital . It explains the working capital position of the company which gives an idea to the top management about the liquidity position of the company. Working capital:- It is the difference between current assets and current liabilities.

Steps in preparation of funds flow statement:1. Preparation of working capital statement that explains increase or decrease in working capital. 2. preparation of funds from operation statement in which we find out operating profit. 3. Preparation of funds flow statement that shows various sources and application of fund .





USES OF FUND FLOW STATEMENT:  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?


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 :

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 flow statement

This statement reveals resources from which funds were obtain by the firm and 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 .

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 example: 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 3.Net 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 vicecombination 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.

Definitions of fund flow statement

In the words of Foulke, R.A., a statement of Foulke, R.A., 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 companys accounting periods.

For example Machinery 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 .

Preparation of Fund Flow Statement The 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 . Statements to be Prepared are: 1. Statement or Schedule of Changes in Working Capital. 2. Statement of Sources and Uses of Funds or Funds Flow Statement.

Current assets Cash in hand and bank Debtors Marketable investments Accounts/ Bills receivables Stock Prepaid exp. Fixed assets Land and building Furniture & Fixtures Plant and machinery Long term investment

Current liabilities Creditors Bank overdraft Outstanding expenses Accounts/ Bills payable

Fixed liabilities Share capital Reserve and surplus Debentures Long term loans

Flow in fund

Not flow in funds

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.

Statement or Schedule of Changes in Working Capital.

Item (A) Current Assets Cash at bank Cash in hand Stock in trade Debtors Bills receivable Advance payment Short term investment Prepaid expense Accrued income Total (A) (B) Current Liabilities (1) Short term loans (2) Bank overdraft (3) Creditors (4) Bills payable (5) Outstanding expenses (6) Unclaimed dividend Total (B) Net Working Capital (A-B) (AIncrease / Decrease in Working Capital Total

Previous Year

Current Year



Increase Rs.

Working capital Decrease Rs.

 1. 2. 

This fund flow statement has two parts : Sources of fund 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 Statement

Sources of Fund
Fund from operation Issue of share Issue of debenture long term loans Sale of fixed assets / Investment Non trading receipts Decrease in working capital (if any) Amount

Uses Of Funds
Loss from operation Redemption of Pref. shares Redemption of debentures Repayment of long term loans Purchase of fixed assets / Investments Payment of dividend & taxes Increase in working capital (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.

Funds generated from the regular operations of an enterprise or applied to such operation are known as funds from operation. It can be operation. calculated by adding non-operating expenses and nondeducting non-operating income from the net nonprofit. If the net amount is positive it is called funds from operations (source) and if it is Negative it is called funds lost from operations (application)

Specimen statement of funds from operation Particulars Rs. Net profit for the Current year Add: 1. Depreciation written off 2. Goodwill written off 3. Preliminary expenses written off 4. Provision for taxation 5. Transfer to reserve 6. Dividend/interim/proposed dividend paid 7. Loss on sale of fixed asset 8. Discount on issue of shares and debentures written off 9. Patents written off Less: 1. Dividend received 2. Profit on sale of fixed assets 3. Appreciation in the value of fixed asset 4. Rent received 5. Refund of tax Funds from operation: Rs. xxxx


Note: Note: If the P&L A/c shows a net loss, the above procedure will be reversed. Net profit = closing balance of P&L A/c opening balance of P&L A/c

1.Calculate funds from operation P&L A/c Particulars Rs. To Expenses Paid 3,00,000 To Depreciation 70,000 To loss on sale of Machine 4,000 To Discount 200 To Goodwill 20,000 To Net Profit 1,15,800 ---------5,10,000

from the following: Particulars Rs. By Gross Profit 4,50,000 By gain on sale of land 60,000


Solution: Calculation of Funds from operation: Particulars Rs. Net Profit Add: Non-profit expenses NonDepreciation 70,000 Loss on sale of machinery 4,000 Discount 200 Goodwill 20,000 --------Less: Non operating income Gain on sale of land Funds from operations

Rs. 1,15,800

94,200 -----------2,10,000 60,000 ------------1,50,000

Illustration 2 Calculate funds from operation from the following: P&L Account Particulars By Gross Profit By Gain on sale of Land

Particulars Rs. To Expenses paid and Outstanding 1,50,000 To Depreciation 35,000 To Loss on sale of Machine 2,000 To Discount To Goodwill To Net Profit

Rs. 2,25,000 30,000

100 10,000 57,900 --------------2,55,000


Profit & loss Adjustment a\c a\

Amount Particular
Profit or gain on sale of fixed asset Dividend received Interest received of investment Profit on revaluation of asset


Depreciation Loss on sale of fixed assets Under writing commissions Discount on issue of shares & debentures Preliminary expense written off Deferred revenue expenses Goodwill written off Patent or trademark Provision for taxes (If treated non current)

Fund from operation

Q-Comparative Balance sheet of Z Ltd. As

on year 2000 and 2001 were as follow
Account payable Notes payable Loan on Mortgage Capital Sinking fund Retained Earning Provision for DD Accumulated DepreciationDepreciationBuilding furniture

2000 2001 Assets

15000 10000 40000 50000 16000 13950 1350 12000 3200 161500 18000 75000 40000 45000 12000 16275 1425 9000 2400 151600 Cash Account receivable Stock Sinking fund investment Land Building Furniture

2000 2001
11200 21300 35000 16000 10000 60000 8000 8500 23500 30600 12000 10000 60000 7000



You are given the following 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.


2000 Amount

2001 Amount

Change in Working capital Increase Decrease

CURRENR ASSETS:Cash Account receivable Stock TOTAL of CA (A) CUURENT LIABILITIES:Account payable Note payable Provision for D D TOTAL of CL (B) Difference b/w (A-B) Decrease in W C 41150 15000 10000 1350 26350 41150 18000 7500 1425 26925 35675 5475 41150 10175 10175 5475 2500 75 3000 11200 21300 35000 67500 8500 23500 30600 62600 2200 4400 2700

Fund flow statement

Sources of fund Amount Application of fund
Sale of sinking fund investment Fund from operation Decrease in working capital 4000 525 5475 10000 10000 Redemption of share capital Dividend paid Amount

5000 5000

Profit & loss adjustment a\c a\

Particular Amount Particular
By balance b/d By sinking fund By accumulate dep. On building By fund flow operation

13950 4000 3000 525 21475

To Accumulate dep. 200 On furniture 5000 To Dividend paid 16275 To Balance c/d


Accumulative deprecation Building

To P/L a/c To balance c/d



3000 9000 12000

By balance b/d

Amount 12000 To furniture a/c To balance c/d


Particular Amount
By balance b/d By P/L a/c 3200 200

1000 2400 3400


Furniture a\c Particular

To balance b/d


Amount 8000

Particular By deprecatio n By balance c/d

Amount 1000 7000 8000


Schedule of changes in Working Capital

Detail Current Assets Debtors Closing stock Bank Balance Cash in hand 2004 2005 Increase

1,10,000 3,30,000 50,000 10,000

1,15,000 3,80,000 1,35,000 20,000

5,000 50,000 85,000 10,000

Total current assets 5,00,000 6,50,000 1,50,000 Current Liabilities RBD Creditors Bills Payable Short Term Loans Total current liabilities Net Increase in Working Capital (CA CL)

10,000 2,00,000 1,50,000 50,000

15,000 2,15,000 1,50,000 70,000

5,000 15,000 -20,000 40,000

4,10,000 4,50,000



Particulars To Preliminary Exp. To Reserves To Preliminary Exp W/off To dividends To Dividend on equity shares

Amount 10,000 2,55,000 5000 12000 10000 2,92,000



By fund flow operation 2,92,000 2,92,000


Sources Issue of Equity share Capital Issue of Debentures Fund flow operation


Applications Preliminary Preference Share capital Purchase of fix assets Govt. securities Increase in Working Capital Dividend paid

Amount 10,000 1,00,000 150000 50,000 1,10,000 22000

1,00,000 50,000 2,92,000