Flow of Funds Statement

A summary of a firms changes in financial position from one period to another; it is also called a sources and uses of funds statement or a statement of changes in financial position.
Has been replaced by the cash flow statement (1989) in U.S. audited annual reports.

Flow of Funds Statement

What are funds ?
All of the firm s investments and claims against those investments. Extends beyond just transactions involving cash. cash.

  

The term Fund refers to all financial resources of the company. Fund has also been understood as Cash" only. The most acceptable meaning of Fund is Working Capital

Flow of funds: the term flow means change and therefore the term funds: flow of funds means changes in funds or changes in working capital . In other words, any increase or decrease in working capital means flow of funds .


Concept of Flow The Flow of funds refers to transfer of economic values from one asset equity to another.

FUNDS FLOW STATEMENT 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 .

Current assets Cash in hand and bank Marketable investments Accounts receivables Stock Prepaid exp.

Fixed assets Goodwill Land and building Plant and machinery Long term investment

Current liabilities Bank overdraft Outstanding expenses Accounts payable

Fixed liabilities Share capital Reserve and surplus Debentures Long term loans

Flow in fund

Not flow in funds

USES OF FUNDS FLOW



    

Why the liquid position of the business becoming more and more unbalanced in spite of company is making more and more profits. profits. Where have the profit gone What will be the sources for dividend if company is not earning sufficient profit What are the sources of repayment of the loan taken How much funds generation through normal business operation. operation. In what way the management has utilized the funds in the past and what are going to be likely uses of funds ?

Sources and Application of Funds

Sources of Funds
       

Funds from operations Issue of share capital Raising of long term loans Receipt from partly paid shares, called up Sales of non current (fixed) assets NonNon-trading receipts, such as dividends received Sales of investment (long term) Decrease in working capital (as per schedule of changes in working capital)

Application or Uses of funds

         

Funds lost in operations Redemption of preference share capital Redemption of debentures Repayment of long-term loans longPurchase of non current (fixed) assets Purchase of investments (long term) NonNon-trading payments Payments of dividends Payments of tax Increase in working capital (as per schedule of changes in working capital)

Funds flow Analysis

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

Changes in Working Capital position Increase in current assets and decrease in current liabilities
The acquisition of current assets and repayment of current liabilities will result in funds outflow. The funds may be applied to finance an increase in stock, debtors etc. or to reduce trade creditors, bank overdraft, bills payable etc.

Decrease in current assets and increase in current liabilities

The reduction in current assets e.g., stock or debtors balances will result in release of funds to be applied elsewhere. Short-term funds raised during the Shortperiod by any increase in the current liabilities like trade creditors, bank overdraft and tax dues, means that these sources have lent more at the end of the year than at the beginning.

Benefits of funds flow analysis



     

To determine financial consequences of operations To fill financial blind spots Working capital utilization To aid in securing new finances Helps in allocation of financial resources Helps in deciding urgency of a problem Helps in evaluation of operational issues

Drawbacks of funds flow analysis

    

Historical nature Structural changes are not disclosed New items are not disclosed Not relevant Not foolproof

Cash Flow Analysis

Cash flow includes cash inflows and outflows cash receipts and cash payments during a period. A cash flow statement is a statement which portrays the changes in cash position between two accounting periods. It helps in taking short term financial decisions and also in the preparation of cash budget for the next year.

Statement of Cash Flows

A summary of a firms payments during a period of time.
This statement reports cash inflows and outflows based on the firm s operating activities, activities, investing activities, and activities, financing activities. activities.

Statement of Cash Flows

Cash Flow from Operating Activities Shows impact of transactions not defined as investing or financing activities.

These cash flows are generally the cash effects of transactions that enter into the determination of net income.

Cash Flow From Operating Activities

Cash Inflows
From sales of goods or services From interest and dividend income

Cash Outflows
To To To To To pay pay pay pay pay suppliers for inventory employees for services lenders (interest) government for taxes other suppliers for other operating expenses

Statement of Cash Flows

Cash Flow from Investing Activities
Shows impact of buying and selling fixed assets and debt or equity securities of other entities.

Cash Flow from Financing Activities

Shows impact of all cash transactions with shareholders and the borrowing and repaying transactions with lenders.

Cash Flow From Investing Activities

Cash Inflows
From sale of fixed assets (property, plant, equipment)
From sale of debt or equity securities (other than common equity) of other entities

Cash Outflows
To acquire fixed assets (property, plant, equipment)
To purchase debt or equity securities (other than common equity) of other entities

Cash Flow From Financing Activities

Cash Inflows
From borrowing From the sale of the firm s own equity securities

Cash Outflows
To repay amounts borrowed To repurchase the firm s own equity securities To pay shareholders dividends

Cash flows from certain special items Cash flow from extraordinary items viz. bad debts recovered, claims from insurance companies, winning of a law suit or lottery etc.

Reporting of cash flows from operating activities

 

 

Calculation of net increase or decrease in cash and cash equivalent accounts Calculation of net cash provided by or used by operating activities Calculation of net cash provided or used by investing and financing activities Preparation of cash flow statement Ensuring that the aggregate of net cash flow from all the three activities is equal to net increase or decrease in cash and cash equivalents

Reporting of cash flows from operating activities

In order to calculate the net cash flows in operating activities, it is necessary to replace revenues and expenses with actual receipts and payments in cash. This is done by eliminating the non-cash nonrevenues and expenses from the earned revenues and incurred expenses. Two methods for conversion of net profit into net cash flows 1) Direct method 2) Indirect method

Direct Method (income statement (income method)

  

Also called the Reports cash receipts and cash disbursements from operating activities. The difference between these two amounts in the net cash flow from operating activates. In other words, the direct method deducts from operating cash receipts the operating cash disbursements. The direct method results in the presentation of a condensed cash receipts and cash disbursements statement.

Indirect Method (reconciliation method) starts with net income and converts it to net cash flow from operating activities. In other words, the Indirect method adjusts net income for items that affected reported net income but didn't affected cash. cash. To compute net cash flows from operating activities, noncash changes in the income statement are added back to net income, and net cash credits are deducted.