FUND FLOW STATEMENTS

Introduction
The funds statement aims to supplement the two conventional statements. It shows
information that can only be obtained through analysis and interpretation of income
statements and opening and closing balance sheets. This information relates to the overall
investment and financial activities of the company, showing the principle sources and
application of funds.

Need for fund flow analysis

The traditional package of financial statements has as such limited role to play in financial
analysis. The balance sheet is a statement of assets and liabilities on a particular date and
portrays the financial position as on that particular date. Similarly the income statement will
show in more detail only the profit or loss arising out of the productive and commercial
activities of the enterprise during that period. However, they fail to throw light on those
major financial transactions, which are behind the balance sheet changes. In order to
ascertain such major financial transactions, or movement of financial resources or funds, a
separate statement is prepared by comparing the balance sheets of two periods. This
statement is variously known as funds flow statement or statement of sources and uses of
funds.
By recording these changes in the financial structure that have resulted from the companies
trading activities, and at the same time indicating the reasons for those changes, the funds
statement serves the dual role of an accounting reports and an analytical tool. This is so
because the funds statement can be used as part of budgetary process in forecasting the
company’s financial requirement for the future.

Meaning of fund
Funds flow statement is a widely used tool in the hands of financial executives for analyzing
the financial performance of a concern. Funds keep on moving in a business which itself is
based on a going concern concept. In a narrow sense, it means cash only and a funds flow
statement prepared on this basis is called as 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. In a broader sense, the term fund refers to money values

-1-
in whatever form it may exist. Here funds means all financial resources in the form of men,
material, money, machinery etc. but in a popular sense the term funds mean working capital
i.e. the excess of current assets over current liabilities. When the funds move inwards or
outwards, they cause a flow or rotation of funds. The work fund here means net working
capital
Working capital is ordinarily understood as excess of current assets over current liabilities.
Some persons call total current assets as gross working capital and current assets minus
current liabilities as net working capital or net current assets. In other words, the term fund
stands for net working capital or net current assets or free current assets.
The important components of current assets are
Cash in hand
Cash at bank
Bills receivable
Stocks
Debtors
Income earned but not received
Prepaid expenses etc
Similarly the important components of current liabilities are
Creditors
Bills payable
Debts due within a year
Provision for bad debts etc

Meaning of fund flow statement

Funds flow statement is a statement in summary form that indicates the changes in items of
financial position between tow different balance sheet dates showing clearly the sources and
application of funds. The major purpose of the funds statement is to provide a detailed
presentation for the results of financial management, as distinguished from operating
management. It summarizes the financing and investing activities of the enterprise. The
statement shows directly the information that the readers of financial reports could otherwise
obtain only by making an analysis and interpretation of published balance sheets and
statements of income and retained earnings.

-2-
Funds flow statement
The fund flow statement is a financial statement which reveals the methods by which the
business has been financed and how it has used its funds between the opening and closing
balance sheet date. Thus a fund flow statement is a report on movement of funds explaining
wherefrom working capital originates and where into the same goes during an accounting
period. This statement consists of two parts – 1. Sources of funds and 2. Application of
funds. The difference between the two shows the net change in the working capital during the
period. It is to be remembered that only those transactions can find place in this statement
which affect the net working capital of the firm. The fund flow statement is a supplement to
the two principal financial statements. While supplementing the position statement, it
describes the sources from which additional funds were derived and uses to which these
funds were put. The transactions which increase working capital are sources of funds and the
transactions which decrease working capital are application of funds.

Importance of fund flow statement

Funds flow statement is a useful tool in the financial manager’s analytical kit. The basic
purpose of this statement is to indicate where funds came from and where it was used during
the certain period. Following are the uses of this which show its importance
1. Funds flow statement determines the financial consequences of business operations. It
shows how the funds were obtained and used in the past. Financial manager can take
corrective actions
2. The management can formulate its financial policies – dividend, reserve etc. On the
basis of the statement
3. It serves as a control device, when comparing with budgeted figures. The financial
manager can take remedial steps, if there is any deviation
4. It points out the sound and weak financial position of the enterprises
5. It points out the causes for changes in working capital
6. It enables the bankers, creditors or financial institutions in assessing the degree of risk
involved in granting credit to the business
7. The management can rearrange the firms financing more effectively on the basis of
the statement
8. Various uses of funds can be known and after comparing them with the uses of
previous years, improvement or downfall in the firm can be assessed.

-3-
 9. The statement compared with the budget concerned will show to what extent the
resources of the firm were used according to plan and what extend the utilization was
unplanned
10. It tells whether sources of funds are increasing or decreasing or constant.

Limitations of fund flow statement

1. The statement lacks originality because it is only rearrangement of data appearing in
accounts books
2. It indicates only the past position and not future
3. It indicates fund flow in a summary form and it does not show various changes which
take place continuously
4. When both the aspects of a transaction are current, they are not considered
5. When both the aspects of a transaction are non current, even then they are not
included in this statement
6. It is not an ideal tool for financial analysis
7. It is not an original statement but simply a rearrangement of data in the financial
statements

-4-
 PREPARATION OF FUND FLOW STATEMENT
Introduction
Mainly two comparative balance sheets at the beginning and end of a period are used
for preparing a funds flow statement. In addition, a summarized income statement and
retained earning statement or at least material information from these statements is required
in order to obtain information relating to funds from operation and ownership transactions.
These are the basic minima and not maxima. Additional information, if available, will
sharpen the firms financial profile as reveled by the statement
The funds flow analysis involves the preparation of two statements viz
1. statement or schedule of changes in working capital and
2. sources and uses of funds statement

Statement of changes in working capital

Since a funds flow statement depicts changes in working capital. It will be better to prepare
first the schedule of changes in working capital before preparing a funds flow statement. The
statement of changes in working capital or simply called working capital statement is
prepared with the help of current assets and current liabilities. There is not effect of
additional information given separately, and such information will affect only the funds flow
statement. While preparing the statement of changes in working capital, the current assets
may be shown either at their gross values, showing provisions as current liabilities, or at their
net values after deducting such provisions. The usual items are provision for doubtful debts,
provision for loss of stock, provision for discount on debtors etc. the purpose of this
statement to find out the net change in working capital

The format of the statement is as follows

Statement of changes in working capital
Previous Current Effect of change in working
year year capital
Rs. Rs. Increase Rs. Decrease Rs.
Current assets
Cash
Bank

-5-
B/R
Debtors
Stock
Prepaid expenses
Total (a)
Current liabilities
Outstanding expenses
B/P
Creditors
Total (b)
Working capital (a-b)
Net increase/decrease in
working capital

Rules for preparing the statement of changes in working capital

1. Increase in a current asset, results in increase (+) in working capital
2. Decrease in a current asset, result in decreases (-) in working capital
3. Increase in current liabilities, results in decrease (-) in working capital
4. Decrease in current liabilities, results in increase (+) in working capital

Funds flow statement

The total difference between the total sources and application will be shown as either
increase or decrease in working capital or funds and this could be verified with the net
increase/decrease in working capital as derived from the above statement. The change in
working capital may also be verified by calculating working capital separately.
While preparing a funds flow statement current asset and current liabilities are to be ignored.
Attention is to be given to changes in fixed assets and fixed liabilities.

Proforma of a funds flow statement

Statement of sources and applications of funds
sources Rs.
1 Issue of shares at par/discount/premium

-6-
2 Issue of debentures at par/discount/premium
3 Long and medium term borrowing
4 Sales of investments
5 Sales of fixed assets
6 Funds from operation
7 Non trading income
Total sources
application Rs.
1 Redemption of shares at par/discount/premium
2 Redemption of debentures at par/discount/premium
3 Repayment of loans
4 Purchase of investment
5 Purchase of fixed assets
6 Funds lost from operations
7 Non trading payments – dividends paid
Total uses
Net increase/decrease in working capital
Total source – Total uses

Alternatively it may be prepared as follows.

Statement of sources and application of funds
sources Rs. Applications Rs.
Issue of shares Redemption of shares
Issue of debentures Redemption of debentures
Long term and medium term loans Repayment of loans
Purchase of investment
Sales of investments Purchase of fixed assets
Sales of fixed assets Payment of dividends
Trading profits Funds lost from operations
Non trading income Non trading payments
Net decrease in working capital as per Net increase in working capital as per
schedule of changes in working capital schedule of changes in working capital

-7-
Total Total

Illustration 1
From the following information, calculate funds from operation
Profit and loss account
Rs. Rs.
To expenses: By Gross profit b/d 200000
Operation 100000 By Gain on sale of buildings 20000
Depreciation 40000 By Other income 2000
To Loss on Sale of Machinery 10000
To Advertisement Suspense A/C 5000
To Discount of Debtors 500
To Discount on Issue of Shares 500
To Goodwill W/Off 12000
To Preliminary Expenses W/Off 2000
To Net Profit 52000
222000 222000

Solution
Calculation of funds from operation
Rs. Rs.
Reported current profit 52000
Add : items not affecting funds:
Depreciation 40000
loss on sale of machinery 10000
advertisement suspense a/c 5000
discount on issue of shares 500
goodwill w/off 12000
preliminary expenses w/off 2000 69500
121500
Less : non operating income :
Gain on sale of buildings 20000

-8-
Other income 2000 22000
Funds from operations 99500

Note: other income Rs.2000 should be shown as a separate source in the funds flow
statement.

Illustration: 2
Calculate the funds from operations from the following
Profit and loss account
Rs. Rs.
To Salaries 15000 By Gross Profit 20000
To Rent 15000 By Profit on Sale of Land 5000
To Depreciation 10000 By Net Loss 35000
To Printing Expenses 5000
To Goodwill W/Off 3000
To Provision for Tax 4000
To Loss on Sale of Plant 2000
To Proposed Dividends 6000
60000 60000

Solution
Calculation of funds from operations
Rs. Rs.
Reported net loss (-) 35000
Add: items not affecting funds
Depreciation 10000
Goodwill written off 3000
Provision for taxation 4000
Loss on sale of plant 2000
Proposed dividends 6000 25000
(-)10000

-9-
Less: non operating income
Profit on sale of land (-)5000
Funds lost from operation (-)15000

Illustration 3:
From the following particulars prepare a funds flow statement for the year ended 31st
December 2007

Rs.
1. Net profit before writing off goodwill 21500
2. Depreciation written off on fixed assets 3500
3. Good will written off from profits 5000
4. Dividends paid 7000
5. Shares issued fro cash 10000
6. Purchase of machinery 20000
7. Increase in working capital 8000

Solution:
Working notes:
Computation of funds from operations
Net profit before writing off goodwill Rs.21500
Add: Depreciation 3500
Funds from operations 25000

Goodwill need not be adjusted as it is not written off from profits

Funds flow statement

Sources Rs. Applications Rs.
Issue of shares 10000 Machinery purchased 20000
Funds from operations 25000 Dividends paid 7000
Increase in working capital 8000
35000 35000

- 10 -
Illustration 4:
The opening and closing balances of plant and machinery at cost amounted to Rs.200000
and Rs.300000 respectively. Accumulated depreciation at the beginning and the end
amounted to Rs.50000 and Rs.80000 respectively. A machine costing Rs.10000 (WDV
Rs.6000) was sold for Rs.5000 during the year. Prepare necessary accounts to show the
sources and application of fund during the year relating to plant and machinery

Solution
Plant and machinery A/c
Rs. Rs.
To Balance b/d 200000 By Machine sold 10000
To Cash (purchased) (Bal. fig) 110000 By Balance h/d 300000
310000 310000

Accumulated depreciation a/c

Rs. Rs.
To Machine sold (depreciation ) 4000 By Balance b/d 50000
To Balance c/d 80000 By Adjusted P&L a/c (depreciation 34000
)(Bal. fig)
84000 84000

Machine sold account

Rs. Rs.
To plant and machinery a/c 10000 By accumulated depreciation 4000
By cash (sales) 5000
By adjusted P&L a/c loss (bala. Fig) 1000
10000 10000

Plant and machinery purchased Rs.110000 should be shown as application of funds

Depreciation Rs. 34000 and loss on sale Rs.1000 should be debited to adjusted P & L a/c
in order to add back this amount, to find out funds from operations
- 11 -
 Machine sold for Rs.5000 will be shown as a source of funds

Funds flow statement

source Rs, Application Rs.
Sale of machinery 5000 Purchase of machinery 110000

Illustration 5
Following are the comparative balance sheets of accompany for the year 2006 and 2007
Balance sheet
liabilities 2006 2007 assets 2006 2007
Rs. Rs. Rs. Rs.
Share capital 70000 74000 Cash 9000 7800
Debentures 12000 6000 Debtors 14900 17700
Creditors 10360 11840 Stock 49200 42700
Profit & loss a/c 10740 11360 Goodwill 10000 5000
land 20000 30000
103100 103200 103100 103200

Additional information
Dividend were paid totaling Rs, 4000
Land was purchased for Rs.15000
You are required to prepare a statement showing changes in working capital and a funds flow
statement

Solution
Statement showing changes in working capital
2006 2007 Effect on working capital
Rs. Rs. Increase Rs. Decrease Rs.
Current assets
Cash 9000 7800 1200
Debtors 14900 17700 2800

- 12 -
Stock 49200 42700 6500
73100 68200
Current liabilities 1480
Creditors 10360 11840
Working capital 62740 56360
Net decrease in working capital 6380 6380
62740 62740 9180 9180
Funds flow statement for the year ended 31.12.2007
source Rs, Application Rs.
Issue of shares 4000 Purchase of land 15000
Funds from operations 14620 Redemption of debentures 6000
18620 Dividends paid 4000
Net decrease in working capital 6380
25000 25000

Workings
Adjusted P & L a/c
Rs. Rs.
To goodwill written off 5000 By opening balance 10740
To dividend paid 4000 By funds from operations 14620
To depreciation on land 5000 (bal. fig)
To closing balance 11360
25360 25360

Land a/c
Rs. Rs.
To opening balance 20000 By depreciation (bal. fig) 5000
To cash (purchase) 15000 By closing balance 30000
35000 35000

Illustration 6:

- 13 -
From the following balance sheets of XYZ for the year ended on 31st December 2006 and
2007. Prepare a statement showing sources and application of funds and schedule of changes
in working capital

liabilities 2006 2007 assets 2006 2007

Rs. Rs. Rs. Rs.
Share capital 400000 575000 Cash 143000 270000
Creditors 106000 70000 Debtors 181000 170000
Profit & loss a/c 14000 31000 Stock 121000 136000
Plant 75000 100000
520000 676000 520000 676000

Solution:
STATEMENT OF SOURCES AND APPLICATION OF FUNDS
For the year ended 31st December 2007
source Rs, Application Rs.
Issue of shares 175000 Plant purchased 25000
(Rs.575000 – Rs.400000) (Rs.100000 – Rs.75000)
Funds from operations 17000 Increase in working capital 167000
192000 192000

SCHEDULE OF CHANGES IN WORKING CAPITAL

2006 2007 Changes in working capital
Increase Decrease
Rs. Rs. Rs. Rs.
Current assets :
Cash 143000 270000 127000 -
Debtors 181000 170000 - 11000
Stock 121000 136000 15000 -
445000 576000
Current liabilities
Creditors 106000 70000 36000

- 14 -
 106000 70000
Working capital 339000 506000

Net increase in working capital 167000 167000

total 506000 506000 178000 178000

Rs. Rs.
To balance c/d 31000 By balance b/d 14000
By funds from operation 17000
31000 31000

Illustration 7
The following are the summarized balance sheets of XYZ ltd as on 31st December 2006 and
2007
Capitals & liabilities 2006 2007 assets 2006 2007
Rs. Rs. Rs. Rs.
Capitals Fixed assets
10% preference shares 100000 110000
Equity shares 220000 250000 Machinery 200000 230000
Share premium 20000 26000 Buildings 150000 176000
Profit & loss 104000 134000 Land 18000 18000
12% debentures 70000 64000 Current assets
Current liabilities Cash 42000 32000
Creditors 38000 46000 Debtors 38000 38000
Bills payable 5000 4000 Bills receivable 42000 62000
Provision for tax 10000 12000 Stock 84000 98000
Dividends payable le 7000 8000
574000 654000 574000 654000

Prepare a statement of sources and applications of finds

Solution
FUND FLOW STATEMENT

- 15 -
For the year ended 31st December 2006

source Rs, Application Rs.

Funds from operations 30000 Purchase of machinery 30000
(Rs.134000 – Rs.104000) (Rs.230000 – Rs.200000)
Issue of 10% preference shares 10000 Purchase of buildings 26000
(Rs.110000 – Rs.100000) (Rs.176000 – Rs.150000)
Issue of equity shares 30000 Redemption of debentures 6000
(Rs.250000 – Rs.220000) (Rs.70000 – R.64000)
Share premium 6000 Increase in working capital 14000
(Rs.26000 – Rs.20000)
76000 76000

STATEMENT OF CHANGES IN WORKING CAPITAL

2006 2007 Changes in working capital
Increase Decrease
Rs. Rs. Rs. Rs.
Current assets
Cash 42000 32000 10000
Debtors 38000 38000
Bills receivables 42000 62000 20000
Stock 84000 98000 14000
Total (A) 206000 230000
Current liabilities
Creditors 38000 46000 8000
Bills payable 5000 4000 1000
Provision for tax 10000 12000 2000
Dividend payable 7000 8000 1000
Total (B) 60000 70000

Working capital (A) : (B) 146000 160000

- 16 -
Net increase in working capital 14000 14000
total 160000 160000 35000 35000

- 17 -