CHAPTER - IV

FUND FLOW ANALYSIS

INTRODUCTION
The financial statement analysis plays a significant role in measuring trading
performance, operational efficiency, profitability and financial position of a concern as
revealed by its Trading, Profit and Loss Account and Balance Sheet. These financial
statements are prepared to find out the Gross Profit or Gross Loss, Net Profit or Net Loss and
financial soundness of a firm as a whole for a particular period of time. From the
management point of view, the useful information provided by these income statements
functions effectively and efficiently by taking important management decisions. In the true
sense, they do not disclose the nature of all transactions. In fact, the Management, Creditors
and Investors etc. want to determine or evaluate the sources and application of funds
employed by the firm for the future course of action to be taken by them. Based on these
backgrounds, it is essential to analyse the movement of assets, liabilities, funds from
operations and capital between the components of two year financial statements. Thus, the
analysis of financial statements helps the management by providing additional information in
a meaningful manner for making suitable financial decisions.

MEANING OF FUND
The term "Fund" refers to Cash, or Cash Equivalents or Working Capital and in
general to all financial resources which are used in a business. These total resources of a
concern are in the form of men, materials, money, plant and equipments and so on.
In a broader term the word "Fund" refers to Working Capital. The Working Capital
indicates the difference between current assets and current liabilities. The term working
capital may be :
(a) Gross Working Capital and
(b) Net Working Capital.

"Gross Working Capital" represents total of all Current Assets.

"Net Working Capital" refers to the excess of Current Assets over Current Liabilities.
In a narrow sense, the word "Fund" denotes cash or cash equivalents.

MEANING OF FLOW OF FUNDS

The term "Flow of Funds" refers to changes or movement of funds or changes in
working capital in the normal course of business transactions. The changes in working capital
may be in the form of inflow of working capital or outflow of working capital. In other words,
any increase or decrease in working capital when transactions take place is called as "Flow of
Funds." If the components of working capital results in any increase of the fund, it is known
as Inflow of Fund or Sources of Fund. Similarly, if the components of working capital results
in decreasing the financial position, it is treated as Outflow of Fund. For example, the funds
raised by way of issue of shares will be taken as a source of fund or inflow of fund. This
transaction results in an increase of the financial position. On the other hand, the funds used
for the purchase of machinery will be taken as application or use of funds or outflow of funds,
since it has the effect of reducing the fund position.

NO FLOW OF FUNDS
Some transactions may not make any movement or changes in the fund position.
Usually such transactions take place within the business concern itself. For instance, the
transaction which involves both, between current assets and current liabilities or between
non-current assets and non-current liabilities does not result in the flow of funds. For example,

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conversion of shares in to debenture. Such a transaction takes place between non-current
accounts only and this activity does not result in any increase or decrease of the working
capital position.
STATEMENT OF CHANGES IN FINANCIAL POSITION
It is a statement prepared on the basis of all financial resources, i.e., assets, liabilities
and capital. This statement attempts to measure changes in both current and non-current
accounts. Generally, the changes in financial position may occur in dealing with the
following transactions:
a) Involving between current assets and non-current assets (fixed assets or
permanent assets).
b) Involving between current liabilities and non-current assets.
c) Involving between current assets and non-current liabilities (long-term
liabilities and capital).
d) Involving between current liabilities and non-current liabilities.

COMPONENTS OF FLOW OF FUNDS

In order to analyse the sources and application of funds, it is essential to know the
meaning and components of flow of funds which are given below :
(l) Current Assets
(2) Non-Current Assets (Fixed or Permanent Assets)
(3) Current Liabilities
(4) Non-Current Liabilities (Capital & Long-Term Liabilities)
(5) Provision for Tax
(6) Proposed Dividend
(1) Current Assets:
The term "Current Assets" refers to the assets of a business of a transitory nature
which are intended for resale or conversion into different form during the course of business
operations. For example, raw materials are purchased and the amount unused at the end of the
trading period forms a part of the current asset as stock on hand. Materials· in process at the
end of the trading period and the labour incurred in processing them also form a part of
current assets.

(2) Non-Current Assets (Permanent Assets):

Non-Current Assets also refer to as Permanent Assets or Fixed Assets. This class of
assets include those of tangible and intangible nature having a specific value and which are
not consumed during the course of business or trade but provide the means for producing
saleable goods or providing services. Land and Building, Plant and Machinery, Goodwill and
Patents etc. are the few examples of Non-Current” assets

(3) Current Liabilities:

The term Current Liabilities refer to any amount owing by the business which are
currently due for payment. They consist of amount owing to creditors, bank loans due for
repayment, proposed dividend and proposed tax for payment and outstanding expenses.

(4) Non-Current Liabilities:

The term Non-Current Liabilities refer to Capital and Long-Term Debts. It is also
called as Permanent Liabilities. Any amount owing by the business which are payable over a
longer period time, i.e., after a year are referred to as Non-Current Liabilities. Debentures,
long-term loans and loans on mortgage etc., are the few examples of non-current liabilities.

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(5) Provision for Taxation:
Provision for taxation may be treated as a current liability or an appropriation of profit.
When it is made during the year, it is not used for adjusting the net profit, it is advisable to
treat the same as current liability. Any amount of tax paid during the year is to be treated as
application of funds or non-current liability. Because it is used for adjusting the net profit
made during the year.

(6) Proposed Dividend:

Like provision for taxation, it is also treated both as a current liability and noncurrent
liability, when dividend might be considered as being declared. And thus, it will not be used
for adjusting the net profit made during the year. It is treated as an appropriation, i.e., an non-
current liability when the dividend is paid during the year.

(7) Provisions Against Current Assets and Current Liabilities:

When provision for bad and doubtful debts, provision for loss on inventories,
provision for discount on creditors and provision made against investments etc. are made
during the year, they may be treated separately as current assets or current liabilities as the
case may be or the same may be reduced from the respective gross value of the assets or
liabilities.

For easy understanding, the list of Current Accounts and Non-Current Accounts are
given below:
Current Accounts
Current Liabilities Current Assets
1) Bills Payable (1) Cash in Hand
(2) Sundry Creditors (2) Cash at Bank
(3) Outstanding Expenses (3) Bills Receivable
(4) Dividends Payable (4) Sundry Debtors
(5) Bank Overdraft (5) Short-Term Investments
(6) Short-Term Loans (6) Marketable Securities
(7) Provisions against Current Assets (7) Stock of Raw Materials, Work
(8) Provision for Taxation (8) in Progress & Finished Goods
(9) Proposed Dividend (9) Prepaid Expenses
(10) Accrued Incomes
Non Current Accounts
Non-current Liabilities Non-current Assets
(1) Equity Share Capital (1) Good will
(2) Preference Share Capital (2) Land
(3) Debentures (3) Building
(4) Long-Term Loans (4) Plant and Machinery
(5) Share Premium (5) Furniture and Fittings
(6) Share forfeited (6) Trade Marks
(7) Profit and Loss Account (7) Patent Right
(8) Capital Reserve (8) Long-Term Investments
(9) Capital Redemption Reserve (9) Discount on Issue of
Shares
and Debentures
(10) Preliminary Expenses
(11) Other Deferred Expenses

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Fund Flow Statement
It is a statement summarizing the significant financial changes that have taken place
in items of financial statement which have occurred between two different balance sheet
dates. This statement is prepared on the basis of "Working Capital" concept of funds. Fund
flow Statement helps to measure the different sources of funds and application of funds from
transactions involved during the course of business. The fund flow statements also termed as
Statement of Sources and Application of Fund, Where Got and Where Gone Out Statement,
Inflow of Fund or Outflow of Fund Statement.

Importance or Uses of Fund Flow Statement

Fund Flow Statements are prepared for financial analysis in order to meet the
following purposes:
(1) It highlights the different sources and applications or uses of funds between the two
accounting periods.
(2) It brings to light the financial strengths and weaknesses of a concern.
(3) It acts as an effective tool to measure the causes of changes in working capital.
(4) It helps the management to take corrective actions when deviations between two balance
sheet figures are noticed.
(5) It is used by the investors for making effective decisions at the time of considering their
investment proposals.
(6) It also presents a detailed information about profitability, operational efficiency and
financial affairs of a concern.
(7) It serves as a guide to the management to formulate its dividend policy, retention policy
and investment policy etc.
(8) It helps to evaluate the financial consequences of business transactions involved in
operational finance and investments.
(9) It gives a detailed explanation about movement of funds from different sources or uses of
funds during a particular accounting period based upon which important financial
decisions can be taken.

Differences between Fund Flow Statement and Income Statement

The following are the differences between fund flow statement and income statement.
Fund Flow Statement Income Statement
(1) It explains the different sources and uses (1) It reveals the net profit or net loss during
of funds during a particular period. a particular period of time.

(2) No standard format is required for the (2) As per the double entry book keeping,
preparation of fund flow statement. aprescribed format is used for the preparation
of income statement.

(3) Fund Flow Statement considers both (3) It considers only revenue nature of
capital and revenue nature of income and incomes and expenditures.
expenditures.

(4) It discloses the exact flow of funds from (4) It is not prepared for fund flow statement.
operations. Thus, it is complementary to
income statement.

LIMITATIONS OF FUND FLOW STATEMENT

A Fund Flow Statement suffers from the following limitations :-

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1. It is prepared on the basis of information related to historical in nature. It completely
ignores to project future operations.
2. This statement does not focus on transactions involving in non-fund items.
3. It also ignores transactions that are involved between current accounts or non-current
accounts.
4. It does not provide any additional information to the management because financial
statements are simply rearranged and presented.

ACCOUNTING TREATMENT

PREPARATION OF FUND FLOW STATEMENT

Fund flow analysis involves the preparation of the following important three
statements viz.:
I. Fund From Operations
II. Statement of Changes in Working Capital
III. Fund Flow Statement.

I. FUND FROM OPERATIONS

Fund from Operations is to be determined on the basis of Profit and Loss Account.
The operating profit revealed by the Profit and Loss Account represents the excess of sales
revenue over the cost of goods sold. In the true sense, it does not reflect the exact flow of
funds caused by business operations. Because the revenue earned and expenses incurred are
not in conformity with the flow of funds. For example, depreciation charges on fixed assets,
writing up of fixed assets or fictitious assets, any appropriations etc. do not cause an actual
flow of funds. Because, they have already been charged to such profits. Hence, fund from
operation is prepared to find out the exact inflow or outflow of funds from the regular
operations on the basis of items which have been readjusted to the current profit or loss. The
balancing amount of adjusted profit and loss account is treated as fund from operations.

CALCULATION OF FUND FROM OPERATIONS

Fund from operations is calculated with the help of the following adjustments. The
adjustments may be shown in the specimen proforma of profit and loss account as given
below :
SPECIMEN PROFORMA OF PROFIT AND LOSS ACCOUNT
Particulars Amount Amount
(Rs) (Rs)
Net Profit or Retained Earnings xxx
(Closing balance of P&L A/c as given in the Balance Sheet)
Add : Non-Fund and Non-operating items which have
already been debited to P & L A/c
(1) Depreciation and Depletion xxx
(2) Amortization of fictious and intangible assets, etc.
(a) Goodwill, patents written off xxx
(b) Discount on issue of shares written off xxx
(c) Preliminary expenses written off xxx
(d) Premium on redemption of debentures xxx
(3) Appropriation of Retained Earnings :
Profit transfer to General Reserve xxx
Profit transfer to Sinking fund xxx
Profit transfer to Contingency xxx

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 Provision for taxation (not taken as current liability) xxx
Provision for proposed dividend xxx
(not taken as current liability) xxx
Loss on sale of fixed assets xxx
Total (A) xxx
Less : Non-fund and non-operating items which have already xxx
been credited to P & L A/c
(1) Profit on sale of fixed assets xxx
(2) Appreciation or revaluation of fixed assets xxx
(3) Dividend received on investment xxx
(4) Profit on redemption of shares and debentures xxx
(5) Excess provisions written back xxx
(6) Any other non-trading items already credited to xxx
P&L A/c
(7) Net profit or Retained earnings (opening balance of xxx
P&L A/c)
Total (B) xxx
Funds from Operations (A – B) xxx

Alternative Specimen Format

The funds from operations can also be calculated through another method by
preparing adjusted Profit and Loss A/c:
Specimen of Adjusted Profit and Loss Account
Particulars Amount Particulars Amount
(Rs) (Rs)
To depreciation on fixed assets xxx By Opening balance of P&L A/c xxx
To loss on sale of fixed assets xxx By profit on sale of fixed assets xxx
To loss on sale of investments xxx By excess provision written back xxx
To goodwill written off xxx By dividend received on xxx
To discount on shares written off xxx investment
To transfer to reserve xxx By revaluation of fixed assets xxx
To preliminary expenses written xxx By fund from operation (Balance) xxx
off
To provision for tax xxx
To proposed dividend xxx
To closing balance of P& L A/c xxx
xxx xxx

Illustration : 1
From the following profit and loss a/c, calculate funds from operations
Profit and Loss A/c
Particulars Amount Particulars Amount
(Rs) (Rs)
To rent 6,000 By Gross Profit b/d 50,000
To Salaries 14,000 By Transfers to General Reserve 7,000
To advertisement 3,000 By Preliminary expenses 1,000
To office expenses 2,000 By profit on sale of investment 2,000
To depreciation on plant 5,000
To Goodwill written off 3,000
To loss on sale of plant 2,000

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To provision for tax 4,000
To interim dividend 3,000
To Net profit 18,000
60,000 60,000

Solution :
Calculation of Fund from Operations
Particulars Amount Amount
(Rs) (Rs)
Net Profit or Retained Earnings 18,000
(Closing balance of P&L A/c as given in the Balance Sheet)
Add : Non-Fund and Non-operating items which have
already been debited to P & L A/c
Depreciation on plant 5,000
Goodwill written off 3,000
Loss on sale of plant 2,000
Provision for taxation 4,000
Interim dividend 3,000
Preliminary expenses 1,000
Transfer to General Reserve 7,000 25,000
43,000
Less : Non-fund and non-operating items which have already
been credited to P & L A/c
Profit on sale of investments 2,000 2,000
Funds from Operations 41,000
Alternatively,
Adjusted Profit and Loss Account
Particulars Amount Particulars Amount
(Rs) (Rs)
To Depreciation on plant 5,000 By profit on sale of investments 2,000
To Goodwill written off 3,000 By Funds from Operations 41,000
To Loss on sale of plant 2,000 (Balance)
To Provision for taxation 4,000
To Interim dividend 3,000
To Preliminary expenses 1,000
To Transfer to General Reserve 7,000
To Net profit (Closing balance of 18,000
P & L A/c)
43,000 43,000

II. STATEMENT OF CHANGES IN WORKING CAPITAL

It is also termed as Statement of Changes in Working Capital. Before the preparation
of a fund flow statement, it is essential to prepare first the schedule of changes in working
capital and fund from operations. Statement of changes in working capital is prepared on the
basis of changes between the items of current assets and current liabilities of two balance
sheets. This statement helps to measure the movement or changes of working capital during a
particular period. The term working capital refers to the excess of current assets over current
liabilities. The working capital may be "Increase in working capital" or "Decrease in working
capital." An increase in the amount of an item of current assets in the current year as
compared to the previous year represents an increase in working capital. Similarly, a decrease

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in the amount of an item of current assets in the current year as compared to the previous year
would represent decrease in working capital. In the same way, over all changes in working
capital is calculated and presented in the schedule of changes in working capital. The final
result of Net Decrease in Working Capital refers to Source of Funds or Inflow of Funds.
Similiarly, Net Increase in Working Capital represents Application of Fund or Uses of Funds.

Principle or Rules for the preparation of Working Capital Statement

The following rules may be kept in mind while preparing working capital statement:
(1) Increase in Current Asset Increases Working Capital
(2) Decrease in Current Asset Decreases Working Capital
(3) Increase in Current Liability Decreases Working Capital
(4) Decrease in Current Liability Increases Working Capital

Specimen Form of Schedule of Changes in Working Capital :

The following is the specimen showing the schedule of changes in working capital.
Statement (or) Schedule of Changes in Working Capital

Particulars Previous Current Effect on Working

year year Capital
(Rs.) (Rs.) Increase Decrease
Current Assets :
Cash in hand xxx xxx
Cash at bank xxx xxx
Sundry Debtors xxx xxx
Bills Receivable xxx xxx
Short-term investments xxx xxx
Stock xxx xxx
Prepaid expenses xxx xxx
Outstanding incomes xxx xxx
Total Current Assets (A) xxx xxx
Current Liabilities :
Sundry Creditors xxx xxx
Bills Payable xxx xxx
Bank overdraft xxx xxx
Outstanding expenses xxx xxx
Short-term loans xxx xxx
Total Current Liabilities (B) xxx xxx
Working Capital (A-B) xxx xxx
Net Increase / Decrease in
working capital xxx --- --- xxx
Total xxx xxx xxx xxx

Illustration : 2
From the following Balance Sheet of Gupta, prepare Schedule of Changes in Working
Capital.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Creditors 55,000 83,000 Cash in hand 15,000 10,000
Bills Payable 20,000 16,000 Cash at bank 10,000 8,000
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Capital 1,00,000 1,50,000 Debtors 1,60,000 2,00,000
General Reserve 7,000 8,000 Stock 77,000 1,09,000
Debenture 1,00,00 1,00,000 Bills Receivable 20,000 30,000
2,82,000 3,57,000 2,82,000 3,57,000

Solution :
Statement (or) Schedule of Changes in Working Capital

Particulars 2016 2017 Effect on Working

(Rs.) (Rs.) Capital
Increase Decrease
Current Assets :
Cash in hand 15,000 10,000 -- 5,000
Cash at bank 10,000 8,000 -- 2,000
Stock 1,60,000 2,00,000 40,000 --
Debtors 77,000 1,09,000 32,000 --
Bills Receivable 20,000 30,000 10,000 --
Total Current Assets (A) 2,82,000 3,57,000
Current Liabilities :
Creditors 55,000 83,000 -- 28,000
Bills Payable 20,000 16,000 4,000
Total Current Liabilities (B) 75,000 99,000
Working Capital (A-B) 2,07,000 2,58,000
Net Increase / Decrease in working
capital 51,000 --- --- 51,000
Total 2,58,000 2,58,000 86,000 86,000

III. FUND FLOW STATEMENT

In the analysis and interpretation of financial statements, fund flow statement is one of
the important techniques. The statement of changes in working capital is prepared with the
help of current assets and current liabilities. Similarly, funds from operation is prepared on
the basis of profit and loss account to find out the exact movement of funds in different
operations. After preparing schedule of changes in working capital and fund from operations,
at the last stage a comprehensive fund flow statement can be prepared on the basis of
component of non-current assets, non-current liabilities of balance sheet and relevant
information. In other words, this statement is prepared with the help of the changes in non-
current assets and non-current liabilities appearing in the balance sheet.

Components of Sources and Application of Funds

The following are the components of different sources and applications of funds:

Components of Sources of Funds

(1) Fresh Issue of Equity Share Capital.
(2) Fresh Issue of Preference Share Capital.
(3) Issue of Debentures and Bonds.
(4) Long-Term Loans raised from bank, financial institutions and public.
(5) Long-Term Loans on Mortgage.
(6) Sale of Fixed Assets.
(7) Sale of Long-Term Investments.

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 (8) Non-Trading Incomes.
(9) Fund From Operations.
(10) Net Decrease in Working Capital (as per schedule of changes in working capital).

Components of Applications of Funds

Generated funds from various sources may be utilized in the following ways for
meeting the future productive programmes of the business:
(1) Redemption of shares and debentures.
(2) Repayment of loans raised from bank, financial institutions and public.
(3) Purchase of Fixed Assets.
(4) Purchase of Long-Term Investments.
(5) Non-Trading Expenditure.
 Payment of Tax;
 Payment of Dividend.
(6) Fund Lost in Operations.
(7) Net Increase in Working Capital (as per schedule of changing in working capital).

Specimen Form of Fund Flow Statement

The following are the two usual formats used for the preparation of Sources and
Application of Fund:
(1) Statement Form.
(2) Account Form.
(1) Statement Form
SPECIMEN OF STATEMENT FORM
FUNDS FLOW STATEMENT
Particulars Amount Amount (Rs)
(Rs)
Sources of Funds :
Funds from operations xxx
Issue of Share Capital xxx
Issue of debentures xxx
Long-term loans xxx
Sale of fixed assets xxx
Sale of Investments xxx
Non-Trading Incomes xxx
Decrease in Working Capital xxx
(as per schedule of changes in working capital) xxx
Total Sources (or) Total Inflows (A) xxx
Application or Uses of Funds:
Fund Lost in Operations xxx
Redemption of Shares xxx
Redemption of Debentures xxx
Purchase of Fixed Assets xxx
Repayment of Long-Term Investments xxx
Non-Trading Expenditure xxx
Payment of Tax xxx
Payment of dividend xxx
Increase in Working Capital xxx
(as per schedule of changes in working capital) xxx

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 Total Application or Total Outflows (B) xxx

(2) Account Form

SPECIMEN OF ACCOUNT FORM
FUNDS FLOW STATEMENT
Sources of Funds Amount Applications of Funds Amount
(Rs.) (Rs.)
Funds from operations xxx Fund Lost in Operations xxx
Issue of Share Capital xxx Redemption of Shares xxx
Issue of debentures xxx Redemption of Debentures xxx
Long-term loans xxx Purchase of Fixed Assets xxx
Sale of fixed assets xxx Repayment of Long-Term xxx
Sale of Investments xxx Investments
Non-Trading Incomes xxx Non-Trading Expenditure xxx
Decrease in Working Capital xxx Payment of Tax xxx
(as per schedule of changes in Payment of dividend xxx
working capital) Increase in Working Capital xxx
(as per schedule of changes in
working capital)
Total Inflow xxx Total Outflow xxx

Illustration : 3
From the following Balance sheet of William, you are required to prepare a Schedule
of Changes in Working Capital and Statement of Sources and Application of Funds.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Capital 80,000 85,000 Cash in hand 4,000 9,000
Net Profit 14,500 24,500 Sundry Debtors 16,500 19,500
Sundry Creditors 9,000 5,000 Stock 9,000 7,000
Long-term loans --- 5,000 Machinery 24,000 34,000
Building 50,000 50,000
1,03,500 1,19,500 1,03,500 1,19,500

Solution :
Statement (or) Schedule of Changes in Working Capital
Particulars 2016 2017 Effect on Working Capital
(Rs.) (Rs.) Increase Decrease
Current Assets :
Cash in hand 4,000 9,000 5,000 --
Sundry Debtors 16,500 19,500 3,000 --
Stock 9,000 7,000 -- 2,000
Total Current Assets (A) 29,500 35,500
Current Liabilities :
Creditors 9,000 5,000 4,000 --
Total Current Liabilities (B) 9,000 5,000
Working Capital (A-B) 20,500 30,500
Net Increase / Decrease in working capital 10,000 --- --- 51,000
Total 30,500 30,500 12,000 12,000

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 FUNDS FLOW STATEMENT
Sources of Funds Amount (Rs.) Applications of Funds Amount
(Rs.)
Additional Capital 5,000 Purchase of Machinery (24,000 – 10,000
(80,000 – 85,000) 5,000 34,000)
Long-term loans 10,000 Net increase in Working Capital 10,000
Funds from operations
(14,500 – 24,500)
Total Inflow 20,000 Total Outflow 20,000

Illustration : 4
From the following Balance sheet of M/s Raja & Co., Ltd., you are required to
prepare (a) Schedule of Changes in Working Capital (b) Fund Flow Statement and (c) Fund
From Operations.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Capital 1,00,000 1,00,000 Goodwill 6,000 6,000
General Reserve 14,000 18,000 Patents 6,000 6,000
Net Profit 16,000 13,000 Building 50,000 46,000
Bank overdraft 3,000 2,000 Machinery 27,000 26,000
Sundry Creditors 5,000 3,400 Investments 10,000 11,000
Bills Payable 1,200 800 Stock 20,000 13,400
Provision for taxation 10,000 11,000 Bills Receivable 12,000 13,200
Proposed dividend 6,000 7,000 Debtors 18,000 19,000
Provision for doubtful 400 600 Cash at bank 6,600 15,200

1,55,600 1,55,800 1,55,600 1,55,800

Additional Information
(1) Depreciation Charged on Machinery Rs. 4,000 and on Building Rs. 4,000.
(2) Provision for Taxation of Rs. 19,000 was made during the year 2017.
(3) Interim dividend of Rs. 8,000 was paid during the year 2017.

Solution:
Calculation of Fund from Operations
Particulars Amount (Rs) Amount (Rs)
Net Profit 13,000
Add : Non-Fund and Non-operating items which have
already been debited to P & L A/c
Depreciation on machinery 4,000
Depreciation on building 4,000
Interim dividend 8,000
Transfer to general reserve 4,000
Provision for tax (Note 2) 19,000
Proposed dividend 1,000 40,000
53,000
Less : Non-fund and non-operating items which have
already been credited to P & L A/c
Net profit 16,000 16,000
Funds from Operations 37,000
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 Statement (or) Schedule of Changes in Working Capital
Particulars 2016 2017 Effect on Working Capital
(Rs.) (Rs.) Increase Decrease
Current Assets :
Cash at bank 6,600 15,200 8,600 --
Debtors 18,000 19,000 1,000 --
Stock 20,000 13,400 -- 6,600
Bills Receivables 12,000 13,200 1,200 --
Total Current Assets (A) 56,600 60,800
Current Liabilities :
Bank overdraft 3,000 2,000 1,000 --
Sundry Creditors 5,000 3,400 1,600 --
Provision for Doubtful Debts 400 600 -- 200
Bills Payable 1,200 800 400 --
Total Current Liabilities (B) 9,600 6,800
Working Capital (A-B) 47,000 54,000
Net Increase / Decrease in working capital 7,000 --- --- 51,000
Total 54,000 54,000 13,800 13,800

FUNDS FLOW STATEMENT

Sources of Funds Amount (Rs.) Applications of Funds Amount
(Rs.)
Funds from operation 37,000 Purchase of Machinery (Note 1 3,000
Tax paid (Note 2) 18,000
Investment purchased 1,000
(10,000 – 11,000)
Interim dividend paid 8,000
Net increase in Working Capital
Capital 7,000
Total Inflow 37,000 Total Outflow 37,000

Working Notes: 1
Dr. Machinery A/c Cr.
Particulars Amount (Rs.) Particulars Amount
(Rs.)
To balance b/d 27,000 By Depreciation 4,000
To bank (Purchase)- 3,000 By Balance c/d 26,000
(Balance)
30,000 30,000
2.
Dr. Provision for Taxation A/c Cr.
Particulars Amount (Rs.) Particulars Amount
(Rs.)
To bank (balance) 18,000 By Balance b/d 10,000
To balance c/d 11,000 By Provision for Taxation 19,000
29,000 29,000

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Illustration : 5
From the following are the comparative Balance Sheet of Gupta & Co., you are
required to prepare (a) Schedule of Changes in Working Capital (b) Fund Flow Statement and
(c) Fund From Operations.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Share Capital 90,000 1,00,000 Goodwill 12,000 10,000
General Reserve 14,000 18,000 Buildings 40,000 36,000
Profit & Loss A/c 19,500 12,000 Machinery 37,000 36,000
Provision for Taxation 16,000 17,000 Stock 30,000 25,400
Sundry Creditors 8,000 5,400 Sundry Debtors 20,000 22,200
Bills payable 6,200 1,300 Cash at bank 6,600 15,200
Provision for doubtful debts 1,900 2,100 Investments 10,000 11,000
1,55,600 1,55,800 1,55,600 1,55,800
Additional Information
(1) Depreciation charged on Machinery was Rs. 4000 and on building Rs. 4000.
(2) Interim Dividend paid during 2017 was Rs. 7500.
(3) Provision of Rs. 5000 was made for taxation during the 2017.

Solution :
Calculation of Fund from Operations
Particulars Amount Amount
(Rs) (Rs)
Net Profit 12,000
Add : Non-Fund and Non-operating items which have
already been debited to P & L A/c
Goodwill written off 2,000
Depreciation on machinery 4,000
Depreciation on building 4,000
Provision for taxation 5,000
Interim dividend paid 7,500
Transfer to General Reserve 4,000 26,500
38,500
Less : Non-fund and non-operating items which have already
been credited to P & L A/c
Net profit 19,500 19,500
Funds from Operations 19,000

Statement (or) Schedule of Changes in Working Capital

Particulars 2016 2017 Effect on Working
(Rs.) (Rs.) Capital
Increase Decrease
Current Assets :
Stock 30,000 25,400 -- 4,600
Sundry Debtors (Less: Provision for Doubtful 18,100 20,100 2,000 --
debts)
Cash balances 6,600 15,200 8,600 --
Total Current Assets (A) 54,700 60,700
Current Liabilities :
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Sundry Creditors 8,000 5,400 2,600 --
Bills Payable 6,200 1,300 4,900 --
Total Current Liabilities (B) 14,200 6,700
Working Capital (A-B) 40,500 54,000
Net Increase / Decrease in working capital 13,500 --- --- 13,500
Total 54,000 54,000 18,100 18,100

FUNDS FLOW STATEMENT

Sources of Funds Amount (Rs.) Applications of Funds Amount
(Rs.)
Issue of Share Capital 10,000 Purchase of Machinery (Note 1) 3,000
(90,000 – 1,00,000) Tax paid (Note 2) 4,000
Funds from operation 19,000 Purchase of investments 1,000
Interim dividend paid 7,500
Net increase in Working Capital 13,500
Capital
Total Inflow 29,000 Total Outflow 29,000
Working Notes:
1. Dr. Machinery A/c Cr.
Particulars Amount (Rs.) Particulars Amount
(Rs.)
To balance b/d 37,000 By Depreciation 4,000
To bank (Purchase)- 3,000 By Balance c/d 36,000
(Balance)
40,000 40,000
2.
Dr. Provision for Taxation A/c Cr.
Particulars Amount (Rs.) Particulars Amount
(Rs.)
To bank (balance) 4,000 By Balance b/d 16,000
To balance c/d 17,000 By Provision for Taxation 5,000
21,000 21,000

Illustration : 6

From the following Balance sheet of X Y Z Ltd., on 31st Dec. 2016 and 2017, you are
required to prepare (a) Fund From Operations (b) Schedule of Changes in Working Capital
and (c) Fund Flow Statement.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Bills Payable 20,000 22,000 Cash Balances 10,000 7,000
Creditors 20,000 22,000 Debtors 20,000 20,000
Ramesh’ loan 25,000 -- Bills Payable 10,000 30,000
Loan from Kannan 40,000 50,000 Stock 35,000 25,000
Equity Share Capital 1,00,000 1,00,000 Machinery 80,000 55,000
Preference Share Capital 25,000 53,000 Land 40,000 50,000
Building 35,000 60,000
2,30,000 2,47,000 2,30,000 2,47,000

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Additional Information :
(1) During the year machine costing Rs. 10,000 (accumulated depreciation Rs. 3,000) was
sold for Rs. 5,000.
(2) The provision for depreciation against machinery on 1st Jan. 2017 was Rs. 25,000 and on
31st December was Rs. 40,000.
(3) Net profit for the year 2017 amounted to Rs. 45,000.
Solution :
Calculation of Fund from Operations
Particulars Amount Amount
(Rs) (Rs)
Net Profit 45,000
Add : Non-Fund and Non-operating items which have
already been debited to P & L A/c
Loss on sale of machinery 2,000
Depreciation on machinery (Note 2) 18,000 20,000
65,000
Less : Non-fund and non-operating items which have already
been credited to P & L A/c : Net profit -- --
Funds from Operations 65,000

Statement (or) Schedule of Changes in Working Capital

Particulars 2016 2017 Effect on Working Capital
(Rs.) (Rs.) Increase Decrease
Current Assets :
Cash balances 10,000 7,000 -- 3,000
Bills Payable 10,000 30,000 20,000 --
Stock 35,000 25,000 -- 10,000
Total Current Assets (A) 55,000 62,000
Current Liabilities :
Bills Payable 20,000 22,000 -- 2,000
Creditors 20,000 22,000 -- 2,000
Total Current Liabilities (B) 40,000 44,000
Working Capital (A-B) 15,000 18,000
Net Increase / Decrease in working capital 3,000 --- --- 3,000
Total 18,000 18,000 20,000 20,000

FUNDS FLOW STATEMENT

Sources of Funds Amount (Rs.) Applications of Funds Amount
(Rs.)
Fund from operation 65,000 Ramesh loan repaid 25,000
Loan from Kannan 10,000 Drawings (Note 3) 17,000
Sale of machinery 5,000 Purchase of land 10,000
Purchase of building 25,000
Net increase in working capital 3,000
Total Inflow 80,000 Total Outflow 80,000
Working Notes: 1
Dr. Machinery A/c Cr.

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 Particulars Amount (Rs.) Particulars Amount
(Rs.)
To Balance b/d 1,05,000 By Provision for depreciation 3,000
By Bank 5,000
By loss on sale of machinery (Note 1) 2,000
By Balance c/d 95,000
1,05,000 1,05,000
2.
Dr. Provision for Depreciation on Machinery A/c Cr.
Particulars Amount (Rs.) Particulars Amount
(Rs.)
To Machinery A/c 3,000 By Balance b/d 25,000
To Balance c/d 40,000 By Profit & Loss (depreciation 18,000
provided during the year –
balance)
43,000 43,000
3. Capital Account :
Rs.
Opening balance of Equity Share Capital 1,00,000
Opening balance of preference Share Capital 25,000
Net Profit during the year 2017 45,000
1,70,000
Less: Closing balance of Equity and Preference Share Capital
(Rs. 1,00,000 to Rs. 53,000) 1,53,000
Drawing 17,000
TEST YOUR KNOWLEDGE
I. OBJECTIVE TYPE QUESTIONS
1. An increase in the share premium account is
(a) an application of fund (b) A source of fund
(c) No flow of fund

2. Building sold on credit is

(a) an application of fund (b) A source of fund
(c) No flow of fund

3. Debenture is a
(a) Current liability (b) Current Asset
(c) Non-current liability

4. Fund flow from operation is

(a) an application of fund (b) An external source of fund
(c) an internal source of fund

5. Current assets include

(a) plant and machinery (b) Sundry debtors
(c) buildings

Answer : 1.(b); 2. (b); 3. (c); 4. (c); 5. (b)

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II. Fill in the Blanks
1. A decrease in current liability increases ________ capital
2. Tax paid is an __________ of fund.
3. Increase in current assets results in ________ of working capital
4. Short term investment is a ________ asset.
5. Purchase of furniture will _________ working capital.
6. Flow of fund means increase or decrease of _________.
7. Issue of debenture for cash is a ________ of fund.

Answer : 1.working; 2. Application; 3. Increase; 4. Current; 5. Decrease; 6. Working capital;

7. Source

III. State True or False

1. Cash collected from debtors will not affect the fund flow.
2. Depreciation is sometimes treated as a source of fund.
3. Dividend received is an external source of fund.
4. Purchase of machinery by issue of debenture will affect fund flow.
5. A ‘source of fund’ always increases cash position.
6. Income tax paid is an application of fund.
7. Sale of fixed asset is an application of fund.

Answer : 1. True; 2. True; 3. True; 4. False; 5. False; 6. True; 7. False.

IV. Short Answer Questions

1. What do you mean by Fund ?
2. What is meant by Fund flow ?
3. Distinguish between fund flow statement and income statement.
4. What are the components of fund flow ?
5. What do you understand by Fund flow statement ?
6. What is meant by statement of changes in working capital ?

V. Long Answer Questions

1. Explain the merits and limitations of fund flow statement.
2. What are the steps involved in the preparation of fund flow statement ?
3. List out the various sources and applications of fund.
4. Describe the uses of fund flow statement.

Exercise Problems
1. Calculate fund from operation from the following particulars :
(a) Net profit for the year ended 31.03.2016 Rs.6,50,000
(b) Profit on sale of building Rs.40,000
(c) Goodwill written-off Rs.10,000
(d) Old machinery worth Rs.8,000 has been sold for Rs.6,500
(e) Depreciation has been provided on plant at 20% per year
(f) The value of plant is Rs.5,00,000
(Ans. Fund from operation : Rs.7,21,500)
2. From the following particulars calculate fund from operations :
Particulars Rs.
Salaries 40,000
Depreciation 20,000

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 Interest on investment 10,000
Profit on sale of fixed assets 5,000
Provision for taxation 30,000
Interim dividend paid 20,000
Proposed dividend 30,000
Administrative and selling expenses 25,000
Goodwill written off 10,000
Preliminary expenses written off 5,000
Loss on sale of old machinery 5,000
Opening balance of P&L A/c on 1.1.2016 70,000
Closing balance of P&L A/c on 31.12.2016 1,20,000
(Answer : Fund from Operation : Rs.1,55,000)
3. From the following Profit & Loss A/c calculate fund from operations.
Profit and Loss A/c for the year ended 31.03.2017
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To operating expenses 1,00,000 By Gross profit 2,00,000
To depreciation 40,000 By Profit on sale of land 20,000
To loss on sale of building 10,000
To goodwill written off 12,000
To discount on issue of shares 5,500
written off
To discount allowed to 500
customers
To Net profit 52,000
2,20,000 2,20,000
(Answer : Fund from operation Rs. 99,500)
4. Calculate fund from operations from the following Profit and Loss A/c
Profit and Loss A/c for the year ended 31.03.2017
Particulars Amount (Rs.) Particulars Amount
(Rs.)
To expenses 3,00,000 By Gross profit 4,50,000
To depreciation 70,000 By gain on sale of land 60,000
To loss on sale of machinery 4,000
To discount 200
To goodwill 20,000
To net profit 1,15,800
5,10,000 5,10,000
(Answer : Fund from operation : Rs.1,49,800)
5. Prepare a schedule of changes in working capital.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Share capital 80,000 90,000 Land & Buildings 50,000 50,000
P & L A/c 14,500 24,500 Machinery 24,000 34,000
Creditors 6,000 3,000 Stock 9,000 7,000
Provision for taxation 3,000 2,000 Debtors 10,500 20,000
Cash 10,000 8,500
1,03,500 1,19,500 1,03,500 1,19,500
(Answer : Increase in working capital Rs.9,000)
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6. From the following Balance sheet of a company, prepare a schedule of changes in working
capital and funds flow statement.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Share capital 63,000 1,00,000 Cash 15,000 20,000
Long-term borrowings 50,000 60,000 Debtors 30,000 28,000
Trade creditors 42,000 39,000 Stock 55,000 72,000
Bank overdraft 35,000 25,000 Land and Buildings 80,000 1,00,000
Outstanding expenses 5,000 6,000 Furniture 15,000 10,000

1,95,000 2,30,000 1,95,000 2,30,000

(Answer : Increase in working capital : Rs.32,000; Sources : Rs.52,000; Applications :
Rs.22,000)
7. The Balance Sheet of M/s. Vimal and Ravi as on 01.01.2017 and 31.12.2017 were as
follows :
Balance Sheet
Liabilities 1.1.2017 31.12.2017 Assets 1.1.2017 31.12.2017
Rs. Rs. Rs. Rs.
Capital 1,25,000 1,53,000 Cash 10,000 7,000
Creditors 40,000 44,000 Debtors 30,000 50,000
Mrs. Ravi’s loan 25,000 -- Stock 35,000 25,000
Loan from Canara 40,000 50,000 Machinery 80,000 55,000
Bank Land 40,000 50,000
Building 35,000 60,000
2,30,000 2,47,000 2,30,000 2,47,000
The provision for depreciation against machinery as on 1.1.2017 was Rs.25,000 and on
31.12.2017 was Rs.40,000. Net profit for the year 2017 amounted to Rs.45,000. During the
year, a machine costing Rs.10,000 (accumulated depreciation Rs.3,000) was sold for
Rs.5,000. Prepare the fund flow statement.
(Answer : Increase in working capital : Rs.3,000; Sources : Rs.80,000; Applications :
Rs.77,000; Fund from operation : Rs.65,000; Drawings Rs.17,000; Depreciation on
machinery Rs.18,000)

8. From the following balance sheets of B Ltd., prepare a sources and uses of fund for the
year 2017.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Accounts payable 50,000 45,000 Cash 35,000 75,000
Notes payable (short- 20,000 35,000 Accounts receivable 98,000 90,000
term) -- 20,000 Inventory 87,000 1,20,000
Notes payable 1,25,000 1,50,000 Long-term 15,000 10,000
(due in December 2018) investments
Capital Land 20,000 30,000
Retained earnings 60,000 75,000
2,55,000 3,25,000 2,55,000 3,25,000

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9. Following are the comparative Balance Sheet of Mancy & Co. Ltd., you are required to
prepare Fund flow statement.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Share capital 70,000 74,000 Cash 9,000 7,800
Debentures 12,000 6,000 Trade debtors 14,900 17,700
Trade Creditors 10,360 11,840 Stock-in-trade 49,200 42,700
P & L A/c 10,740 11,360 Goodwill 10,000 5,000
Land 20,000 30,000
1,03,100 1,03,200 1,03,100 1,03,200
Additional Information :
1. Dividends were paid totaling Rs.4,000.
2. Land was purchased for Rs.15,000
(Answer : Decrease in working capital Rs.6,380; Fund from operation : Rs.9,620; Total
sources Rs. 18,620; Total applications : Rs.25,000; sale of land Rs.5,000)

10. From the Balance Sheet of X,Y and Z Ltd. as on 31.12.2016 and 31.12.2017, you are
required to prepare Schedule of Changes in working capital and fund flow statement for the
year ended 31st December, 2017.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Equity Capital 2,64,000 3,96,000 Building 1,66,200 3,39,000
General Reserve 18,000 27,000 Machinery 1,06,800 1,53,900
P & L A/c 58,500 62,400 Furniture 7,200 4,500
8% Debentures -- 70,000 Stock 6,300 78,000
Bills Payable 29,400 32,700 Debtors 1,09,500 1,17,300
Creditors 1,00,500 1,09,200 Cash 14,400 12,000
4,70,400 7,05,300 4,70,400 7,05,300
Depreciation written off during the year 2017 was under :
On machinery Rs. 38,400
On furniture Rs.1,200
You are required to prepare fund flow statement.
(Answer : Increase in working capital Rs.5,100; Fund from operation Rs.52,500; Total of
fund flow statement Rs.2,64,000)
11. Following are the summarized balance sheet of A Ltd. as on 31st December, 2016 and
2017.
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Share capital 2,00,000 2,50,000 Land & Buildings 2,00,000 1,90,000
General reserve 50,000 60,000 Plant & Machinery 1,50,000 1,74,000
P & L A/c 30,500 30,600 Stock 1,00,000 74,000
Bank loan 70,000 -- Debtors 80,000 64,200
Creditors 1,50,000 1,35,200 Cash 500 600
Provision for taxation 30,000 35,000 Bank -- 8,000
5,30,500 5,10,800 5,30,500 5,10,800
Additional information :
1. Depreciation was written off on plant is Rs.14,000 in 2017.

21
2. Dividend of Rs.20,000 was paid during the year 2017.
3. Income tax provision for the year Rs.25,000
4. A piece of land has been sold during the year at cost.
You are required to prepare a statement showing sources and applications of fund for
the year 2017 and schedule of changes in the working capital.
(Hint : Provision for taxation, Bank loan are taken as non-current items)
(Answer : Decrease in working capital Rs. 18,000; Fund from operation Rs.69,100; Total
sources Rs. 1,29,100 and applications Rs.1,48,000; Purchases of plant Rs.38,000; Tax paid
Rs.20,000)
12. From the following balance sheet of X Ltd. as on 31st December, 2016 and 31st
December, 2017, you are required to prepare fund flow statement :
Balance Sheet
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Share Capital 4,00,000 5,00,000 Land & Building 4,00,000 4,80,000
General Reserve 80,000 1,40,000 Machinery 3,60,000 2,60,000
P & L A/c 64,000 78,000 Stock 2,00,000 2,52,000
Bank Loan (long term) 3,20,000 80,000 Debtors 1,60,000 1,28,000
Creditors 3,00,000 2,60,000 Cash at bank 1,04,000 18,000
Provision for taxation 60,000 80,000
12,24,000 11,38,000 12,24,000 11,38,000
Additional information :
1. During the year ended 31st December, 2017, dividend of Rs.84,000 was paid.
2. Assets of another company were purchased for a consideration of Rs.1,00,000 payable by
the issue of shares. The assets included land and building of Rs.50,000 and stock of
Rs.50,000.
3. Depreciation written off on machinery is Rs.24,000 and on land & building is Rs.45,000.
4. Income tax paid during the year was Rs.70,000
5. Addition to buildings was Rs. 75,000.
(Answer : Decrease in working capital Rs.26,000; Fund from operation Rs.3,17,000; Total of
fund flow statement Rs.4,69,000)

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