Unit III

MODULE - 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
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 important
management tools for decision making.
The statement is prepared taking into account
revenue statement and position statement of the
organization.
It is a comparative analytical statement between
two consecutive years.
The statement reveals the funds inflow and outflow
during an accounting period.
In order to measure the soundness and solvency of
business, preparation of fund flow is a must.
Dr. Manoj Shah, Principal Investigator, NMEICT, MHRD Delhi.
 Cont
By preparing fund flow statement, management will be
able to know how much funds are available and where
exactly they can be deployed.
It is a statement which portrays the sources from which
funds are obtained and the uses to which they are
being put.

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

 Definitions
"The fund statement is an important device for
bringing to light the underlying financial movements -
the ebb and flow of funds."
- Patton and Patton

"Funds Flow Statement is prepared to indicate in

summary form, changes occurring in items of financial
position between two different balance sheet dates."
- Smith and Brown

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

 What is FUND and FLOW ?
A layman can describe word FUND as cash or cash
equivalents.
In technical terms, the word FUND means Net
Working Capital.
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. owners equity capital plus reserves

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

 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 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.

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

 Movements of Funds

Firm
Inflow of Outflow of
Funds Funds
Business
Transactions
1. Redemption of
1. Issue of shares preference shares and
2. Issue of debentures debentures
3. Bank loan 2. Repaid bank loan
4. Sale of fixed assets 3. Purchase of fixed assets
and investments and investments
5. Operational profits 4. Payment of tax and
6. Decrease in working dividend
capital 5. Increase in working
capital

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

 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)
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)

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

 Block B
Block A
Fixed Assets &
Long term liabilities Investments

Block C
Block D
Current Liabilities &
Current Assets, Loans
Provisions
& Advances

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

 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 period
concerned.
This statement consists of two parts:
Sources of funds
Application of funds

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

 Format Horizontal
FUNDS FLOW STATEMENT
(STATEMENT OF SOURCES AND APPLICATION OF FUNDS)

Sources of Funds Amount Application of Funds Amount

Rs. 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) ----

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

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

 Format Vertical
FUNDS FLOW STATEMENT
(STATEMENT OF SOURCES AND APPLICATION OF FUNDS)
Particular Amount Amount
Rs. 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 ----
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) -------
Dr. Manoj Shah, Principal Investigator, NMEICT, MHRD Delhi.
 Significance of Fund Flow Statement
Analytical Tool
Design Policies
Control Device
Reflect Financial Position
Uses for Working Capital
Help to Lenders
Direction for Business

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

 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.

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

 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 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

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

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

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

 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 reserve
Dividend

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

 Determination of Fund from Operations
Adjusted 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 Dividend received
preference shares
Discount on issue of shares and Refund on taxes
debentures
Write off intangible assets (goodwill, Profit on sale of fixed assets
patent, trade-mark)
Write off fictitious assets (preliminary Change in stock (current assets)
exp., advertisement,)
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)

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

 Distinction
No. Fund Flow Statement Balance Sheet
This statement shows the changes in This statement shows actual position of
1 financial position between two dates. the business on specific date.

It reveals flow of funds during a It reveals assets, liabilities and capital at

2 period of time. a point of time.

It is a management tool for financial It discloses the financial position of a

analysis for decision-making. business and examines the soundness
3 of the firm.

It deals with those accounts which It deals with personnel and real
4 affect working capital. accounts.

This statement is prepared from two This statement is prepared on the basis
consecutive balance sheet and of trail balance and additional
5 additional information. information.

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

 Cont
No. Fund Flow Statements Profit & Loss Account
This statement is not compulsorily This statement is compulsorily
1 prepared as per law. prepared as per law.

Both capital and revenue items are Only revenue items are considered.
2 considered at the time of preparing.

Revenue statement helps for the This statement can not be prepared
3 preparation of Funds Flow statement. from fund flow statement.

It shows financial position, movement It does not reflect the changes in the
of funds and effectiveness in the use financial position of the business.
4 of funds.

This statement is prepared to know This statement is prepared to know

changes of fund in the business profit and loss of the business.
5 during the period.

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

Practical Problems

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

 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 2003 Assets 2002 2003

Rs. Rs. Rs. Rs.
Share capital 3,00,000 4,00,000 Buildings 1,20,000 2,50,000
Debentures 2,00,000 2,50,000 Machinery 3,00,000 2,60,000
Profit & Loss A/c 40,000 60,000 Stock 90,000 80,000
Creditors 70,000 80,000 Debtors 1,40,000 2,40,000
Bank overdraft 25,000 25,000 Prepaid expenses 15,000 25,000
Provision for Taxation 30,000 40,000

6,65,000 8,55,000 6,65,000 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 DECREASE IN
W.C. 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 - -
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 2,60,000
Dr. 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
Dr. Manoj Shah, Principal Investigator, NMEICT, MHRD Delhi.
 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 39,520 41,135 Cash at bank 2,520 4,820
Bills payable 33,780 12,645 Debtors 85,175 72,625
Bank-overdraft 59,510 - Sundry Advances 2,315 735
Provision for taxation 40,000 50,000 Stock 1,11,040 97,370
Reserve 50,000 55,000 Land- building 1,48,500 1,44,250
P & L A/c 39,690 36,220 Plant 1,12,950 1,16,200
Equity shares capital 2,00,000 2,60,000 Goodwill - 19,000
4,62,500 4,55,000 4,62,500 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.

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

 Solution II
STATEMENT OF CHANGIES IN WORKING CAPITAL
PARTICULAR 2010 2011 INCREASE IN DECREASE IN
W.C. W.C.
Current Assets
Stock 1,11,040 97,370
Less: Asset Purchase 21,640
( 2nd effect in Eq. share A/c.)
Correct Stock 1,11,040 75,730 35,310
Cash 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
Dr. Manoj Shah, Principal Investigator, NMEICT, MHRD Delhi.
 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 36,220
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

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

 Cont
Machinery Account
Particular Amount Particular Amount
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
Particular Amount Particular Amount
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

Particular Amount Particular Amount

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