UNIT - V

ACCOUNTING FOR FUNDS FLOW

I. CONCEPT:

(1)Meaning and Concept of Funds : The term ‘funds’ has been defined in a number of
ways as follows:
(a) In a narrow sense, it means cash only and a fund flow statement prepared on this basis
is called a Cash Flow statement. Such a statement enumerates net effects of the
various business transactions on cash and takes into account receipts and
disbursements of cash.
(b) In a broader sense, the term ‘funds’ refers to money values in whatever form it may exist.
Here, ‘funds’ means all financial resources.
(c) In a popular sense, the term ‘funds’ means working capital, i.e. the excess of Current
Assets over Current Liabilities.

(2)Meaning and Concept of ‘Flow’ of Funds : The term ‘flow’ means movement and
includes both ‘Inflow’ and ‘Outflow’. The term ‘flow of funds’ means transfer of economic
values from one asset of equity to another. Flow of funds is said to have taken place when
any transaction makes changes in the amount of funds available before happening of the
transaction. If the effect of transaction results in the increase of funds, it is called a Source
of Funds and if it results in the decrease of funds, it is known as an Application of Funds.
The flow of funds occurs when a transaction changes on the one hand a Non-Current account
and on the other a Current account and vice-versa. In simple language funds move when a
transaction affects-
(i) A Current Asset and a Fixed Asset
(ii) A Current Liability and a Fixed Liability
(iii)A Current Asset and a Fixed Liability
(iv) A Fixed Asset and a Current Liability.
Funds do not move when the transaction affects fixed assets and fixed liability or current
assets and current liabilities.

(3) Funds Flow Statement : The Funds Flow Statement is a statement which shows the
movement of funds and is a report of the financial operations of the business undertaking. It
indicates the various means by which funds were obtained during a particular period and the
ways to which these funds were employed. In simple words, it is a statement of sources and
application of funds.
(4) Cash Flow Statement : A statement of changes in the financial position of firm on
cash basis is called a Cash flow Statement.
 II Uses/Significance/Importance of Funds Flow Statement :

A fund flow statement is an essential tool for the financial analysis and is of primary importance
to the financial management. The significance or importance of a fund flow statement can be
well followed from its various uses given below :

(1) It helps in the analysis of financial operations. The fund flow statement gives a clear
answer to such a situation explaining what has happened to the profits of the firm. It
explains the causes for changes in the assets and liabilities between two different points of
time.
(2) It throws light on many perplexing questions of general interest which otherwise may be
difficult to be answered, such as :
(a) Why were the net currents lesser in spite of higher profit and vice-versa?
(b) Why more dividends could not be declared in spite of available profits ?
(c) How was it possible to distribute more dividends than the present earnings?
(d) What happened to the net profits? Where did they go ?
(e) What happened to the proceeds of sale of fixed assets or issue of shares, debentures,
etc. ?
(f) What are the sources of the repayment of debt ?
(g) How was the increase in working capital financed and how will it be financed in
future ?
(3) It helps in the formation of a realistic dividend policy. Sometimes firm has sufficient profits
available for distribution as dividend but yet it may not be advisable to distribute dividend
for lack of liquid or cash resources. In such cases, a funds flow statement helps in the
formation of a realistic dividend policy.
(4) It helps in the proper allocation of resources. A projected funds flow statement constructed
for the future helps in making management decisions. The firm can plan the deployment of
its resources and allocate them among the various applications.
(5) It acts as a future guide. A projected funds flow statement also acts as a guide for future to
the management. The management can come to know the various problems it is going to
face in near future for want of funds. The firm’s future needs of funds can be projected well
in advance and also the timing of these needs. The firm can arrange to finance these needs
more effectively and avoid future problems.
(6) It helps in appraising the use of working capital. A funds flow statement helps in explaining
how efficiently the management has used its working capital and also suggests ways to
improve working capital position of the firm.
(7) It helps knowing the overall creditworthiness of a firm. The financial Institutions and banks
always ask for funds flow statement constructed for a number of years before granting loans
to know the creditworthiness and paying capacity of the firm. Hence, a firm seeking financial
assistance from these institutions has no alternative but to prepare funds flow statements.

***Limitations of Funds Flow Statement :

(1) It should be remembered that a funds flow statement is not a substitute of an income
statement or a balance sheet. It provides only some additional information as regards
changes in working capital.
(2) It cannot reveal continuous changes.
(3) It is not an original statement but simply a re-arrangement of data given in the
financial statement.
(4) It is essential historic in nature and projected funds flow statement cannot be prepared
with much accuracy.
(5) Changes in cash are more important and relevant for financial management than the
working capital.

III Preparation of Funds Flow Statement : Broadly speaking, the preparation of a

funds flow statement consists of two parts :
(1) Statement or Schedule of Changes in Working capital :
Working Capital = Current Assets – Current Liabilities.
(i) An increase in current assets increases Working Capital
(ii) A decrease in current assets decreases Working Capital
(iii) An increase in current liabilities decreases Working capital
(iv) A decrease in current liabilities increases Working Capital.

STATEMENT OR SCHEDULE OF CHANGES IN WORKING CAPITAL

Effect on Working Capital
Particulars Previous Year Current Year Increase Decrease
Current Assets :
Cash in hand
Cash at bank
Bills Receivables
Sundry Debtors
Temporary Investments
Stocks
Prepaid Expense
Accrued Income _______ _________ _______ _______
Total Current Assets
======= ========= ====== =======
Current Liabilities :
Bills Payables
Sundry Creditors
Outstanding Expenses
Bank Overdraft
Short-term Advances
Dividends Payable
Proposed Dividend**
Provision for Taxation** ________ _________ ________ ________
Total Current Liabilities
======= ======== ======= =======
Working Capital = CA – CL
Net Increase or Decrease in
Working Capital. ________ _________ ________ ______
======= ======== ======= =======
** May or may not be a Current Liability.
(2) Statement of Sources and Application of Funds : Statement of Sources and
application of funds can be prepared in two forms :
(a) T Form or An Account Form or Self Balancing Type
(b) Report Form.

(a) T Form or An Account Form or Self Balancing Type

FUNDS FLOW STATEMENT

( For the year ended …..)
____________________________________________________________________
Sources Rs Applications Rs.
Funds from Operation Funds lost in Operation
Issue of Share Capital Redemption of Pref. Share Capital
Issue of Debentures Redemption of Debentures
Raising of Long-term Loans Repayment of Long-term Loans
Receipts from partly paid Shares Purchase of Non-Current Assets (Fixed)
Called up Purchase of Long-term Investments
Non-Trading receipts- Dividends Non-Trading Payments
Sale of Long-term Investments Payment of Dividends
Net Decrease in Working Capital Payment of Tax
Net Increase in Working Capital
_____
_____
XXX
XXX
====
====
***LIST OF CURRENT OR WORKING CAPITAL ACCOUNTS

Current Liabilities Current Assets

1) Bills Payable 1) Cash in hand
2) S/ Creditors/Accounts Payables 2) Cash at bank
3) Accrued or Outstanding Expenses 3) Bills Receivables
4) Dividends Payable 4) Sundry Debtors or Account
Receivables
5) Bank Overdraft 5) Short-term Loans & Advances
6) S/Term Loans, Advance, Deposits 6) Temporary Investments
7) Provision against Current Assets 7) Inventories or Stock such as
8) Provision for Taxation, if it does (a) Raw Materials
Not amount to Appropriation (b) Work-in-Process
Of funds (c) Stores & Spares
9) Proposed Dividend ( May be a (d) Finished Goods
Current or a Non-Current 8) Prepaid expenses
Liabilities 9) Accrued Income.
 _____________________________________________________________

***LIST OF NON-CURRENT OR PERMANENT CAPITAL ACCOUNTS

Non-Current or Permanent Liabilities Non-Current or Permanent Assets

1) EquityShare Capital 1) Goodwill
2) Preference Share Capital 2) Land
3) Redeemable Pref. Share Capital 3) Building
4) Debentures 4) Plant & Machinery
5) Long-term Loans 5) Furniture & Fittings
6) Share Premium Account 6) Trade Marks
7) Share Forfeited Account 7) Patent Rights
8) Profit & Loss Account ( Credit ) 8) Long-term Investment
9) Capital Reserves 9) Profit & Loss Account ( Debit )
10) Capital Redemption Reserves 10) Discount on Issue of Shares
11) Provision for Depn. On Fixed Assets 11) Discount on Issue of Debentures
12) Appropriation of Profits : 12) Preliminary Expenses
(a) General Reserve 13) Other Deferred Expenses.
(b) Dividend Equalisation Fund
(c) Insurance Fund
(d) Compensation Fund
(e) Sinking Fund
(f) Investment Fluctuation Fund
(g) Provision for Taxation
(h) Proposed Dividend.
________________________________________________________________________

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 UNIT - V
1. True or False :
(a) ‘Fund’ is the difference between fixed assets and current assets ( F )
(b) A fund flow statement is a good substitute for income statement ( F )
(c) Flow of funds mean increase or decrease of working capital ( T )
(d) Any transaction that increases working capital is a source of funds ( T )
(e) Depreciation is a source of funds ( T )
(f) Increase in current assets means increase in working capital ( T )
(g) There will be a flow of funds when both a transactions are non- current ( F )
(h) Net losses mean drain on working capital ( T )
2. Choose the correct answer :
(a) Current assets include :
(i) Trade investment
(ii) Machinery
(iii) Sundry Debtors
(iv) None of these ( iii )
(b) Which of the following is non-current asset ?
(i) Goodwill
(ii) Cash balance
(iii) Bills receivables
(iv) None of these ( i )
(c) Non-current liability is :
(i) Mortgage loan
(ii) Bank balance
(iii) Outstanding salary
(iv) None of these ( i )
(d) Depreciation of machinery is :
(i) Source of funds
(ii) Application of funds
(iii) No flow of funds
(iv) None of these ( i )
(e) Stock in the beginning results in :
(i) Application of funds
(ii) Source of funds
(iii) No flow of funds
(iv) None of these ( i )
3. Questions :
1) What is a fund flow statement ? Examine its use and significance for management.
2) Explain the meaning, importance and objectives of fund flow statement
3) Write a notes on
(a) Concept of funds
(b) Application of funds
(c) Causes for changes in Working Capital.
(d) Limitations of funds flow Statement
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