FUNDS FLOW ANALYSIS

Two Types of Funds

1. Involves the long-term funds cycle, which includes fixed assets, other long-term
assets and permanent fund sources like long-term debt and equity.
2. Involves the short-term or operating funds cycle, which consists of movements in
current assets and current liabilities.

LONG TERM FUNDS CYCLE

Sale of Investments
NET FIXED OTHER LONG
ASSETS TERM ASSETS
Sale of Assets

Purchase of Assets
Investments
NET WORKING
CAPITAL
Payments of Cash
Dividends
] Payment of Loan

Loan CAPITAL
LONG-TERM
STOCK
DEBT
Issuance of
stocks

Inflows > Outflows – company not reinvesting its earnings in productive capacity, is not
declaring dividends, the results is a build –up of working capital.

Working Capital - refers to the currents assets used in the operations of a firm
(sometimes called gross working capital)

Net Working Capital – current assets minus current liabilities.

IEFIMAN: Funds Flow Analysis Page 1 of 7

 OPERATING FUNDS CYCLE

Credit
A/R Sales INVENTORIES OTHER CURRENT
ASSETS

Cash Sales
Cash
Purchase Collection of
Payments for Acquisition advances,loans
Accruals
CASH

Payment of
Payments Payment
Loan
Deferred for Loans
Purchases Credit
ACCRUED WAGES, Allowed
SHORT-TERM
TAXES, & OTHER
TRADE PAYABLES DEBTS
EXPENSES

Funds flow statement – requires the balance sheet at two points in time and an income
statement covering the two balance sheet dates.

Statement of Funds as Working Capital – covers only non-current financial account

and is quite limited.
Statement of Funds as Cash- covers both current and non-current accounts.

Preparation of the Funds Flow Statement

1. Comparing balance sheet accounts and determining whether there have been
increases or decreases over time. Other information like dividends and sale of fixed
assets are also gathered.
2. Classifying the changes as either sources or uses of working capital or cash.
3. Classifying from the income statement the factors which increase or decrease
working capital or cash.

IEFIMAN: Funds Flow Analysis Page 2 of 7

Funds Flow Can be Categorized Into 3 Classes:
1. Operating Activities
- includes net income, depreciation and changes in current assets and current
liabilities other than cash or short-term debt.
2. Investing Activities
- includes investment in or sales of fixed assets
3. Financing Activities
- includes funds raised during the year by issuing short-term debt, long-term debt,
or stock. Funds used to buy back outstanding stock, bonds, pay debts and
dividends are also included here.

Statement of Funds as Working Capital

Sources of Funds Which Increase Working Capital

1. Funds provided by operations (net income).

2. A decrease in fixed assets (asset sale or disposition).
3. An increase in long-term debt (new borrowing).
4. Proceeds from sale of common or preferred stock.

Note: To determne any decrease( or increase ) in fixed assets during the period, the
depreciation should be added back to the current balance of the fixed asset account
before making the comparison against the previous fixed asset balance.

Uses of Funds Which Decrease Working Capital

1. An increase in fixed assets.

2. Repayment of long-term debt.
3. Purchase of own stock ( treasury stock).
4. Cash dividends.
5. Funds used in operation ( excess of net loss over depreciation and other non-cash
charges).

Statement of Funds as Cash

Sources of Funds Which Increase Cash

1. Changes which were previously classified as sources of funds which increase

working capital.
2. A net increase in any current liability ( new borrowings).
3. A net decrease in any current asset other than cash (liquidation of assets).

IEFIMAN: Funds Flow Analysis Page 3 of 7

Uses of Funds Which Decrease Cash

1. Changes which were previously classified as uses of funds which decrease working
capital.
2. A net increase in any current asset ( working capital build up).
3. A net decrease in any current liability ( repayment of debt).

Limitations of Funds Flow Statement

1. Funds depict net rather than gross changes of financial statement accounts over
point in time. We could determine the net asset increases or decreases from one
year-end to another but we could not describe how assets changed during the year.
2. Inability to trace very specific financing sources to particular fund uses.

IEFIMAN: Funds Flow Analysis Page 4 of 7

Sample: Funds Flow Statement (Statement of Funds as Cash)

Allied Food Products: Statement of Cash Flows for 2000

(in Millions of Dollars)

Operating Activities
Net Income $117.50

Additions (Sources of Cash)

Depreciation and Amortization $100.0
Increase in Accounts Payable $ 30.0
Increase in Accruals $ 10.0

Subtractions (Uses of Cash)

Increase in Accounts Receivable ($ 60.0)
Increase in Inventories ($200.0)

Net Cash Provided by Operating Activities ($ 2.5)

Investing Activities
Cash Used to Acquire Fixed Assets ($230.0)

Financing Activities

Additions (Sources of Cash

Increase in Notes Payable $ 50.0
Increase in Bonds $174.0

Subtractions (Uses of Cash)

Payment of Common and Preferred Div. ($61.5)

Net Cash Provided by Financing Activities $162.5

Net Decrease in Cash ($70.0)

IEFIMAN: Funds Flow Analysis Page 5 of 7

Exercises:

1. Serap-Jones, Inc. had the following financial statements for 19x1 and 19x2. Prepare
a source and use of funds statement on a cash basis.

19x1 19x2
Assets
Cash and Cash Equivalents $140,000 $ 31,000
Accounts Receivable $346,000 $ 528,000
Inventories $432,000 $683,000
Current Assets $918,000 $1,242,000
Net Fixed Assets $1,113,000 $1,398,000
Total $2,031,000 $2,640,000

Liabilities and Equity

Accounts Payable $413,000 $627,000
Accruals $226,000 $314,000
Bank Borrowings $100,000 $235,000
Current Liabilities $739,000 $1,176,000
Common Stock $100,000 $100,000
Retained Earnings $1,192,000 $1,364,000
Total $2,301,000 $2,640,000
Note: Depreciation was $189,000 for 19x2 and no dividends were paid.

2. Kohn Corporation comparative balance sheets at December 31 (in millions):

Assets 19x1 19x2 Liabilities and Equity 19x1 19x2

Cash $5 $3 Notes Payable $20 $0
Accounts Receivable $15 $22 Accounts Payable $5 $8
Inventories $12 $15 Accrued Wages $2 $2
Fixed Assets, net $50 $55 Accrued Taxes $3 $5
Other Assets $8 $5 Long-Term Debt $0 $15
Common Stock $20 $26
Retained Earnings $40 $44
Total Assets $90 $100 Total Liabilities and $90 $100
Equity

IEFIMAN: Funds Flow Analysis Page 6 of 7

Kohn Corporation statement of income and retained earnings year ended December 31,
19x2:
Net Sales $48,000,000
Expenses
Cost of Goods Sold $25,000,000
Selling, General and Administrative $5,000,000
Depreciation $5,000,000
Interest $2,000,000 $37,000,000
Net Income Before Taxes $11,000,000
Less: Taxes $4,000,000
Net Income $7,000,000
Add: Retained Earnings at 12/31/x1 $40,000,000
Subtotal $47,000,000
Less: Dividends $3,000,000
Retained Earnings at 12/31/x2 $44,000,000

a. Prepare a source and use of funds statement on cash basis for 19x2.
b. Prepare a source and use of working capital statement for 19x2.

3. Financial statements for the Sennet Corporation follows:

Sennet Corporation Balance Sheet, December 31 (in millions)
Assets 19x1 19x2 Liabilities and Equity 19x1 19x2
Cash $4 $5 Notes Payable $5 $5
Accounts Receivable $7 $10 Accounts Payable $8 $10
Inventories $12 $15 Accrued Wages $2 $3
Current Assets $23 $30 Accrued Taxes $3 $2
Net Plant $40 $40 Current Liabilities $18 $20
Long-Term Debt $20 $20
Common Stock $10 $10
Retained Earnings $15 $20
Total Assets $63 $70 Total Liabilities and $63 $70
Equity

Sennet Corporation Income Statement, 19x2 (in millions)

Net Sales $95
Expenses
Cost of Goods Sold $50
Selling, General and Administrative $15
Depreciation $3
Interest $2 $70
Net Income Before Taxes $25
Less: Taxes $10
Net Income $15
a. Prepare a source and use of funds statement for Sennet (cash basis).
b. Prepare a source and use of funds statement for Sennet (working capital basis).

IEFIMAN: Funds Flow Analysis Page 7 of 7

IEFIMAN: Funds Flow Analysis Page 8 of 7