FUNDS FLOW

STATEMENT
 LECTURE AT A
GLANCE
•Meaning and Definition of Funds Flow Statement;
•Importance of Funds Flow Statement
•Way of preparing Funds Flow Statement
•Precautions to be taken while preparing Funds Flow
Statement
•Few Numerical Questions
 PHILOSOPY OF FUNDS FLOW
STATEMENT

It is continuous process. The study and

control of this funds-flow process (i.e., The
uses and sources of funds) is the main
objective of financial management to assess
the soundness of the solvency of the
enterprise.
 FUNDS STATEMENT
• The funds statement was also known as a
“statement of funds flow” or a “statement of
sources and applications of funds”
• This statement was deemed to be necessary as
the balance sheet and income statement did not
present a complete picture of an entity’s
economic activities
•The statement was seen as necessary to
summarise investing and financing activities
 MEANING OF FUND
FLOW
The term of ‘Funds Flow’ has made up with the two
words – Funds and Flow of funds. Let us first we
understand these meaning and then we see how
funds flow statement is prepared.
 THE TREM ‘FUND’ IS USED IN THREE
SENSES –

CASH -
In narrow sense, the term ‘fund’ is used to
mean only the cash and bank balance.
Working Capital –
In popular sense, the term ‘Fund’ is used to mean
working capital i.e. the excess of current assets over
current liabilities. Therefore, in this sense, fund flow
statement includes all the transactions affecting
current assets and current liabilities.
 MEANING OF FLOW IN FUNDS

Before understanding the meaning of flow in

funds, it is necessary to classify the balance
sheet of a concern into four parts as shown
below-
 Balance Sheet
1. Non-Current Liability 3. Non-Current Assets
Share Capital Goodwill
Debentures Land & Buildings
Other Long-term loans Plant & Machinery
Reserve & Surplus Motor Vehicles
Security Premium Long-term Investments
Capital Redemption reserve Preliminary Expenses
General Reserve Discount on shares
Profit & Loss Account Miscellaneous Expenses
2. Current Liabilities 4. Current Assets
Creditors Debtors
Bills Payable Bills Receivable
Short-term loans Advances
Bank Overdraft Short-term investments
Advance Payment Received Stock in hand
Outstanding Expenses Cash in hand
Provision for taxation Cash at Bank
TOTAL TOTAL
The arrows explain when transaction will constitute flow of funds .
 COMPONENTS OF
BALANCE-SHEET
1. NON-CURRENT LIABILITIES –
These liabilities are not payable within a year and
out of current assets. These liabilities are generally
payable either in the long-period or at the close of
the business. For example, see item (1) in the
above balance-sheet.

Contd..
2. CURRENT LIABILITIES –
These liabilities are payable within a year and out of
current assets. The values of these liabilities
generally changes within one year. For example, see
item (2) in the above balance sheet.

Contd…
3. NON-CURRENT ASSETS –
Those assets which are obtained in business for use
over a long period of time for earning purpose are
called non-current assets. These assets are not
purchased for the purpose of selling and include
tangible, intangible and fictitious.
4. CURRENT ASSETS –

These assets are equal to cash or reasonably

expected to be realized in cash or sold or consumed
within one year or during the normal operating cycle
of the business are called current assets. For
example, see item (4) in the above balance-sheet.
 MEANING OF FLOW
The term ‘Flow’ means changes – incoming and
outgoing. When this term is used with funds, it
means the changes taking place in funds during a
certain period. Whenever there is change in the
funds, it is presume that flow in funds has taken
place. Transactions that bring working capital into
the firm are sources of funds and on the contrary, if
the working capital decreases, it is an application of
funds.
 TRANSACTIONS THAT WILL
AFFECT THE FLOW OF FUNDS
The following transactions will bring the change in
the working capital –
• Current Assets and Non-Current Assets
• Current Assets and Non-Current Liabilities
• Current Liabilities and Non-Current Liabilities
• Current Liabilities and Non-Current Assets
In brief, it can be said that when one aspect is of
non-current category, and the other current
category, there will be flow in funds.
 TRANSACTIONS THAT WILL
NOT AFFECT THE FLOW OF
FUNDS
1. Current Assets and Current Liabilities
2. Non-Current Assets and Non-Current Liabilities
3. Non-Current Liabilities or Non-Current Assets.
 Sources and Uses Of Working
Capital
SOURCES
⚫Funds from business Ops
⚫Other Incomes
⚫Sale of non-current assets
⚫Long term borrowings
⚫Issue of additional equity or preference capital.
USES OF WC
⚫Losses from business ops
⚫Purchase of non-current assets
⚫Redemption of debentures/preference shares.
⚫Dividends to shareholders

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 MEANING OF FUNDS FLOW
STATEMENT
The Funds flow statement (FFS) 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 dates. It studies – from where the
funds have been received and where the funds have
been used.
TO CONCLUDE –
We shall include only those transactions in funds
flow which affect current assets or current
liabilities, on one hand, and a fixed asset or
long-term liabilities or owner’s equity on the other.
 OBJECTS OF FUNDS STATEMENT
Following questions are answered by Funds Flow
Statement -
1. Where the profit is put up?
2. Why net current assets are low even though there
is an increase in net profit? In other words, why
cash balance has not increased.
3. Why excess dividend was distributed when there
were low profits?
4. How is the amount realized from the sale of assets
used?
 Contd._
5. How were the changes in Working Capital
6. How were the plant and machinery expanded?
7. How was the amount received from the issue of
shares of debentures used?
8. Why the funds were not available for the purchase
of machinery and plant?
 IMPORTANCE OF FUNDS
FLOW STATEMENT
1. Financial Analysis and Control
2. Financial Planning and Budget preparation
3. Useful to Bankers and Money Lenders
4. Helpful in Comparative Study
5. Knowledge of Managerial Policies
6. Knowledge of Business Problems
7. Dividend Policy
 PREPARATION OF FUNDS FLOW
STATEMENT
Funds flow statement can be prepared monthly but
usually it is prepared for one, two, three, four or more
years. The data for the preparation of this statement
are obtained form two balance sheets supplemented
by such other information from the accounts as may
be needed. It is customary for accompany to use the
figures of the balance sheet for the latest year and
those on the balance sheet as at the beginning of the
period for which this statement is to be prepared.

contd….
Preparation of funds flow statement is divided into
two parts.
1. Schedule of Changes in Working Capital;
2. Funds from Operation;
Funds Flow Statement
 STATEMENT OF CHANGES
IN WORKING CAPITAL

This statement is prepared from current assets and

current liabilities in order to calculate the increase or
decrease in working capital and is prepared in the
Performa given as under.

Contd…
STATEMENT OF CHANGES IN WORKING CAPITAL

Particulars Previous Current Changes

Year Fig. Year Fig. in current
Current Assets : Rs.(2008) Rs.(2009) assets
and
liabilities
Incr- Decre
ease -ase

Cash
Debtors
Stocks
Bill Receivables
Advance payment
Accrued income
Marketable Securities or
Short-term Investment
 Contd..
Particulars Previous Current Change in
Year Fig. Year Fig. current and
Current Liabilities: Rs.(2008) Rs.(2009) liabilities
Creditors

In.(+) Dec.(-)

Bills Payable
Bank Overdraft
Outstanding Expenses
Short-term
Loan etc.
Increase or
Decrease in Working
Capital
 The following rules may be applied to current assets
and current liabilities for preparing this statement:
1. An increase in current assets, increases working
capital
2. A decrease in current assets, decreases working
capital
3. An increase in current liabilities, decreases working
capital
4. A decrease in current liabilities, increases working
capital
 FUNDS FLOW STATEMENT

This statement is usually prepared in “T” form.

Left-hand side is for sources of funds and right-hand
side for applications of funds. The items of sources
and applications are given as follows:

Contd….
 Sources of Funds:

The following are the sources from which funds come:

.Funds from operations
.Income from investments
.Issue of shares and debentures
.Raising a loan
.Sale of fixed assets and long-term investments
.Receipt of interest on non-trade investment, dividend,
refund of tax etc.
.Decrease in working capital etc.
 Uses (or Applications) of funds:
The following are the various purposes for which funds
can be used:
1.Funds lost in operations
2.Repayment of long-term loans
3.Redemption of preference shares and debentures
4.Purchase of fixed assets
5.Purchase of long-term investments
 USES OF FUNDS – Contd…
6. Payment of cash dividends
7. Payment of taxes
8. Drawing in case of proprietary or partnership
business
9. Loss of cash by embezzlement
10. Increase in working capital etc.
 FUNDS FROM OPERATIONS
It can be calculated in two forms :
Particulars Amount Amount
Rs. Rs.

Net Profit for Current Year

Add : Non fund items
Depreciation
Goodwill, Patents
Preliminary Expenses
Written off
LESS : Non-fund Items and
Non-trading Income ,already
Credited to P & L A/c.
Dividend Recevied
Profit on sale
Funds from operations
 Profit and Loss
Adjustment A/c
To Depreciation By opening Balance of P&L
Appropriation A/c
To Goodwill Written off
To preliminary Expenses By Dividend Received
written off
To Transfer to sinking fund By Over provisions Written
To Loss on sale of fixed Assets Back
By Funds from operations
To Closing Balance of P&L
Appropriation A/c (Balancing Figure)

Prof.(Dr. ACS, CWA) P. K.Aggarwal

 While preparing funds flow statement, the
following rules must be remembered
1. An increase in a fixed assets indicates an application of funds
2. A decrease in a fixed assets indicates a source of funds
3. An increase in a fixed liability indicates a source of funds
4. A decrease in fixed liability indicates an application of funds
5. An increase in share capital indicates a source of funds
6. A decrease in share capital indicates an application of funds
 The following will
illustrate these rules:

Source of Funds Application of Funds

-Fixed Assets +Fixed Assets
+Fixed Liabilities -Fixed Liabilities
+Share Capital -Share Capital
 PRECAUTIONS TO BE TAKEN WHILE
PREPARING FUNDS FLOW STATEMENT
Following points must be kept in mind while preparing funds flow
statement –
1.Changes in fixed Accounts
2.Internal Reserves
3.Provision against current Assets
4.Changes in current Assets
5.Interim Dividend
6.Investments
7.Provision for taxation
8.Proposed dividend
9.Profit or Loss on the Sales of Fixed Assets
10.Dividend received
11.Goodwill and Preliminary Expenses written off
 IMPORTANT
QUESTIONS
Short answer questions
1.State the meaning of Funds flow statement
2.How is the schedule of changes in working capital
prepared?
3.Discuss the importance of funds flow statement .
4.Explain the terms ‘funds items‘ and ‘non funds
items. Give examples.
5.Write short notes on application of funds.
6.How are the funds from operations calculated?
7.Distinguish between the funds flow statement and
Balance-Sheet.
 Contd….

Long Answer questions

1.Explain the terms ‘Funds’ and ‘Flow in funds ’ in
respect of funds flow statement
2.What is a ‘Funds Flows statement’? How is it
prepared? What are the various sources and uses of
funds ?
3.How is a funds flow statement prepared ?Give a
Performa of schedule of changes in working capital
and funds flow statement.
 Numericals

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THANK YOU