Finincial Povilion- | (lumds Flow Statement)

5.11
Rleption of deheniures:

Dehentunes A/c Dr. (Non-Current Liability

lo Bank A/ (Current-Asset)
fixed assets oil cash or credit
Punhase of
Fied Assets A/c .
.Dr. (Non-Current Asset)
To Cash/Creditors A/e
(Current-Asset/Liability)
nveStments or trade investment
Purchaseof long-term
Long-termn Investment A/c ..Dr. (Non-Current Asset)
To Cash A/c (Current Asset)

Pavmenl
ol bonus in cash:
0
il Profit and Loss (App.) A/c ..Dr.
To Bonus to Shareholders A/c
Bonus to Shareholders A/c ..Dr.
(i7)

To Cash/Bank Alc

(in) Or say, Profit

& Loss (App.) A/c ..Dr. (Non-Current Liability)
To Cash/Bank A/c (Current Asset)

11.Repayment of Long-term Loans:

Loans A/c ...Dr. (Non-Current Liability)
To Cash A/wc (Current Assets)

12, Issue of shares against purchase of stock-in-trade:

Stock-in-trade A/c ..Dr. (Current Asset)
To Share Capital A/c (Non-Current Liability)
STATEMENT
MEANING AND DEFINITION OF FUNDS FLOW
in the financial
Funds Flow Statements is a method by which we study changes
financial statements
pOsition of a business enterprise between beginning and ending
ales. It is a statement showing sources and uses of funds
for a period of time.
Foulke defines this statements as
of funds is a technical device designed
A Statement of sources and application of a business enterprise between two
analyse the changes in the financial condition
dates."
In the words of Anthony, The funds flow statement
describes the sourees from
wrch additional funds were derived and the use to which these sources were put.
terms defines Funds Flow
. W.A. in Glossary of Management Accounting
or retrospective, seting
out the sources
C
and
l as "a Statement cither prospective of the statement is to
the funds of an enterprise. The purpose
plicationstheofrequirement
ndicate of funds and how they are proposed to bc raised and

theeflicient utilisation and application of the same.

indicates various means by
funds flow statement is a statement which
hichnus,
the funds have been obtained during a certain period and the ways to which

have been used during that period. Thc term 'funds'

used here means
Worl:s
ing capital, i.e., the excess of current assets over current liabilities.
 of ChungeeS in Puancial
5.12
Satenent
Position- I
(Fnds Flow in
in
Finand Position- I (Funds Flow Statement)
5.13
Flow Stouem
nges

C
statement is called by various uf
tween Funds Flow Statement and Balance Sheet
Funds flo mes
such mn
wmnt p i f f e r e n c e B e l w e e nF u n d s i

Ayliition
j E u n d s ; Sritement C°
ofChanges in
Operations:
Financial
W/ere Positon; Sou
Soure
as

fFun.is: Sunnary
Srteen: Wher* o7.
fFmancial
Where gone statement; Moveme Sources dWh Fimds PloW S I a l e m e i Balance Sheet
i n financ cial (1) ltisa statement
onement f unds Statenent; Funds Re Rc e i vWor cnanges
of financial position
ved" o k i ,
ol on
ated and
Funis Gcnenatcd Expended Sta
and Expended Statement : and Disbursea
stlcnenl

is dynamic
in natu, a
particular date and hence is
Satemen:
7Decrcase ; tuds Statenent, erc Sources. of Increase un s

uition nd
hence
nature.
staiic in

Aryiain
y L OW STATEMENT, INCOME
STATEMENT sources
and uses of fun (2) It depicts the assets and liabilities at a
the

SHEET
hows
period of time. particular point of time.
Funds flow stalement subsutute ofan income.
is
not a parlicukar for financial
(3) Itis not of much help to
and a balance sheet. The Profit and Loss statement,
a
it management
management
i.e.
toolof

Jnd loss a c o u n t . Acco a in making

decisions. in making decisions.
the cxtent of success achieved by a businc un is aPo his and helps

earning docomen
w hich indicate in unalysis of Changes in (4) No such schedule of
renarts the results of business activities and indicates the reasor Usually, Schedule
Changes in
and Loss Account does not hiok or theo has to be prepared
Working Capital is required. Rather
lack thereof. The Profit Capilal
or
inancial a business. lt does not reveal the intlow
position of
profitaby
ne chanoi
Working
preparing
Funds
rlow ent.
Statemen Profit and Loss Account is
prepared.
belore
in husiness during particular period.
a

A balance sheet is a statement of financial position or stan hund, \

given date. It is prepared
at the end of accouning period, The
arious resources of an undertaking and the deployment of thesebalar
resources
Sheet
in do
van
business on ISES, SIGNFICANCEANDIMP
SESS
OFFUNDSFLOWSTATEMENT

asseis on a particular date. As it indicates the financial conditio A

funds flow statement is an essenial tool tor the financial analysis and is of
artancetothe financial management. Now-a-days, it is being widely used
undspartstatementel,
icular dac,
itis static in nature:while funds tlow Statement is a dynamic one. Fund pninary importanc

which a balance sheet cannot tell. nancial analysts,

credit granting institutions and financial managers. The basic
many financial facts
us
Balance
nse of funds flow statementis to reveal the changes in the working capital
on the
disclose the causes for changes in the assets and liabilities between t eet
of time. Again. while balance sheet is the end result of all accountine nPoins
does t a
No balance sheet dates. It also describes the sources from which additional working

aperiod otf time. funds flow statement is essentially a post alhas been financed and the uses to which working capital has been applied. Such
balance sheet ever captal
atement is particularly usetul in assessing the growth of the firm.
is prepared (Funds Statements) to show various sources from which its resulting
eI
the fune
into business and various applications where they have been used. in delermining the best way ot financing these needs. By making
defnancial needs and
Hence, Funds flow statement i1S not INe of projected
funds flow statements, the management can come to know the
competitive but complementary tofinanril
statements. The funds statement provides additional information as repard k deauacy or inadequacy of working capital Even in advance. One can plan the
n working capita, derived irom financial statements at two points of time, licaitemediateand long-term financing atihe firm, repayment ot long-term_debts,
of management for financial analysis and helps in making decisions. epansionofthe business, allocationofresources,etc. The significance orimportance
Difference Between Funds Flow Statement and Income Statement offunds flow statementcan be wellfollowed from its various uses given belo:
Funds Flow Statement Income Statemeni 1. It helps in the analysis of financial operations. The financial statements
reveal the net effect of various transactions on the operational and financial position
It highlights the changes in the financial ()It does not reveal the inflows and ofa concern. The balance sheet gives a static view of the resources of a business and
posilion of a business and indicates the outflows of funds but depictstheiens the uses to which these resources have been put at a certain point of time. But it does
various means by which funds were of expenses and income amive a the|
oblained during a particular period and figure of profit or loss. nodisclosethecausesfor changes in the assets and liabilities betueentwe different
the ways to which these funds were misof fime. The funds flow statement explains causes for such changes and also
De ellect of these changes on the liquidity position of the company. Sometimes a
employed.
(2) It is
complementary to income
CE may operate profitably and yet its cash position
may become more and more
2) Income statement is not prepared ino SThe funds flow statement gives a clear answer to sucha situation explaining
statement. Income statement whal has
helps the
Funds Flow Statement. happened to the profits of the firm.
preparation of Funds Flow Statement.
3) While preparing Funds Flow
Statement
throws light on many perplexing
uherwise may
questions of general interest which
both capilal and
be difficult to be answered, such as
revenue items are (3) Only revenue items are consiu
Considered. wny were the net curent assets
Versa?
lesser in spite of higher profits and vice-
(4) There is
prescribed format for
no
Why more dividends could not be declared in spite of available profits ?
preparing a Funds Flow Statement. (4) lt is prepared in a prescribea lo
 Natement of C hanges n Fmancal Povition
I (Funds Flow Statement)
-I (Funds cial Position
-

5.15
was it possibleo distibute more dividend. nof India, Industrial Developmen
cHow n the presem Litgun,ldus. al Finance Bank
proll? Where dis
What happened to the net y go ?
funds llow statement constructed for a number of years before
What happened to the procceds of sale of fixed Mhnudi,c : ask
w the creditworthir hincss and paying capacity of the firm. Hence,
icbentus, clc. ? 1O
kno
ance from these institutions has no alternative but to
auns

hat an the sources ot the repayment of deht ? yatitng

i u d s flow statements.

How was the inerease in workingcqpital timanced TATIONS

ayme
OFFUND
u n d s
FUNDS FLOW STATEMENT

in tuture
dhow will statement has a nt nber of uses, however, it hás
certain
ithen below:
3. lu helps in the formation ofa realistie dividend poli
available for distribution as
iwmncd h

atso,
which
are listed

emhcred that a funds Ilow statement i_ not asubstitute ofan

remembered

has sutieiont protius

adisabletodistribute
dividendfor lack
divic
ofliquid or cash r
but yet i mehnes a I.
ouldbe balance sheet. It provides only some dditional
ora a
balanc
as information
funds flow statement helhps in the formation of a realistic
may an
ces. In sueh
nt or
StalcCnt

orking capital.
e HIC work
dividend poliey n

nls I
changes
in
cannot reveal
continuous changes.
4.l helps in the proper allocation ofresources. The riginal statcment but simply are-arrangement of data given in
are always imited and it wanis to make the best use ofthese resource
original
an
is not
these resources. 3.
for thetfuture helps in
h ef i n a n c i a ls t a l c m e n t s .

tlow stalement constructed

funis
plan the deployment of its
makingmanamagerial Kjent
resources
:sentially
historic in natur and projected funds flow statement cannot
The firm can and
locate decisi them with much accuracy.
aplications. amongyVanny enparcd
otepared
in cash are more importan and revelant for financial management
5. Changes
5. It acts as a future guide. A
projected funds flow statenmaas capital.
also a asa the working
guide for future to the management. The management «can haun FOR PREPARING A FUNDS FLOw STATEMENT
come to knowt
The firm's he varws
PROCEDUR

it
problems goingis to face in near fuure for want of funds. statement is a method by which we study changes in the financial
futu FundsFlow
of funds can be projected well in advance and also the timing of these necede business
een
enterprise between beginning and ending financial statements
Cds. The Gesition ofa
can arrange to finance these needs more effectively and avoid future r
The fin Hence, the funds
flow statement is prepared by comparing two balance sheets
oblems. uth the help of such other infornmation derived from the accounts as may be
statement consists of flow two
speaking. the preparation afunds
wded. Broadly of
1. Statement or Schedule of Changes in Working Capital.
Heips n

2. Statement of Sources and Application of Funds.

analsis of
linanci:

Heps alemenls Throws light L. Statement or Schedule of Changes in Working Capital

Crear
peplexing
quesuons/
Working Capital means the excess of current assets over current liabilities.
wortiness
Satcment of changes in working capital is prepared to show the changes in the
USES OF
working capital between the two balance sheet dates. This statement is prepared with
FUNDS FLOow Helps in e
Hep lonnulaliun ol he help ofcurrent assets and current liabilities derived from the two balance sheets.
appraisung th dividend policy

capia
STATEMENT As, Working Capital Current Assets -Current Liabilities.
=

S0, (1) An increase in current assets increases working capital.

Helps in the
proper () A decrease in current assets decreases,
Aclsas allocation ol working capital.
a lulure esources (ui) An increase in current liabilities decreases working capital; and
guioe
() A decrease in current liabilities
increases working capital.
nc
change in the amount of any current asset or current
liability in the curent
.1t
helps in appraising the use of working capital. A funds i O r tas compared to that of the previous balance sheet either results in
deciease in working capital. The difference is recorded for each individual
HElps n
explaining how efficiently the management has used its working CUrTent and current
ai'so
suggests ways to thanSel
in the liability. In case acurrent asset in the current period is more
7. It
improve working capital position o e firm. Orded in thepreviousasefperiod, the effect is an increase in working capital and it is
helps knowing the overall editworthiness of firm. The han in the inerease
column. But if a current liability in the current riod is more
nstitutions and banks such
as State
Financial Institutions.
dustrial Developna
a
previous period, the effect is decrease in working capital and it is recorded
 Statement of Chuanges m Finamcial Poxitie
sition- 1 (Fnds
5.
Te rersa. The
tOtal Flow S Financial
Posilion- I (Funds Flow Stat
5.17
n the
deeneise vofinin
or
increasTCse n ndi the t alt nen in
itlennce shows the
net
companed and the Sencouc ol changes in w ein
iU g Capti
It is wonth noting
and c i l I T v n t habilitics
and the ot
urreni assets
A pical torm of
ormati OF CHANGES IN WORKING CAPITAL
sltement
schesnotn
1his atement. ilhutim
TEMENT

panng STA

is 1s
lollows Effect on
wAing .ipilal
OF
HANGES IN WORKkIN Working Capital
STATEMENTORSCHEDULE
1994 1995 Increase Decrease
Particulars
Rs. Rs. Rs. Rs.
Effect on
PreviuN
Year
Current
Year
Working Capial
10,000
nerease Deccue ( i nm s s e i

Aavmals K e c e i v a b l e
s
30,000
70.000 1,40,000 70,000
20,000

1,50.000 2,25,000 75,000

C i s h

Cish in hand
Cash at hank S km - r a d e

80,000 90,000 10,000

Bills ReceiNable Honk-1n-progress

Sundry Dbiors 3,30,0004,65,000

Temporary Investnments

Stoks In\entories

repaid E\penses
C i u n e nL
t iabilities:
77.000 43,000 34,000
Accrued lncomes Tat P a y a b l e
96,000 1,92,000 96,000
AccountsP a y a b l e

Total Curent Assets 37,000 45,000 8,000

nterestPayable
50,000 35,000 15,000
Dvidend Payable

2,60,000 3,15,0000
Bills Payable
Sundry Creditors
Working Capital (CA-CL)
70,000 1,50,000
Outstanding Expenses 80,000 80,000
in Working Capital
5ank Overdratt Net increase 2,04,000
Short-term advances 1,50,000 1,50,000 2,04,000
Dividends Payable
Proposed dividends*
Provision tor taxation*
From the following balance sheets of Bharat Company prepare
Total Current Liabilities Illustratión 2.
astatemept'showing changes in Working Capital.
Working Capital (CA-CL 31st Dec. 1994 31st Dec. 1993
Aet Increase or Decrease in
Rs. Rs.
Working Capital
Assets
Goodwill 5,000 10,000
May orpáy not be a current liability. sihadde 25,000
Illustratiön 1. Prepare a Statement of changes in working Capital from te
Cash 70,000
Debtors 90,000 98,000
following Barance Sheets of Manjit and Company Limiled.
Closing Stock 1,20,000 87,000
BALANCE SHEETs 15,000
Long-term Investments 10.000
as atDecember 31 Land
b e h e u

27,000 15,000
Liabilities 1994 1995 Assets 1994 1995 Preliminary Expenses 3,000 5,000
Rs Rs. Rs 3,25,000 2.55,000
Equity Capital 5,00,000 5,00,000 Fixed ASsets 6,00,000 7,00
Debentures
3,70,000 4,50,000 Long-term Liabilities
Tax Payable 2,00,000 1,0000
AcCounts Payable
77,0 43,000 Investments Trade Creditors 45,000 50,000
80,000
nterestPayable 96,0001,92,000 Work-in-Progress I,50,000 2.23.0
Bills Payable 35,000 20,000
Dividend Payable 37,000 45,000Stock-in-trade
S0,000 35,000AccountsReceivable
70,000 1,40 Loans (Payable during 1995) 20,000
Cash
30,000 Share Capital 1,50,000 1,25.000
Profit & Loss Account 75,000 60,000
11,30,000| 12,65,000
1 1 , 3 0 , 0 0 0 | 1 2 , 6 5 0

3,25,000 2,55,000
 Siatement of Changes in Finacial
PasitionI (Funds Flow Statement) 5.19
Position- I (F
in
in
Financial
Fin

5.8 nds Flow Statemens of

C
1anges

of Funds
C M m e n t

and plication
Solution
Sources
Sources

f
STATEMENT SHOWING CHANGES IN WORL of statement which indic:
various sources from which
KING CAPTTAL, is a
Statement
statement

) w
have been obtained during a certain period
and the uses or
al)
h ave been put during that period. Generally, this
ymds
( w o r k i n gc a p i t a l )

Ellect on these funds

Particulars
1903 1994
Working Capital c a l i o n sl o w h i c

staltemeni sprepared
which
in twoformats:

Inerease (a) Report Form

Rs. s.
Rs. Decreme TForm
or
Account Form or SelflBalancing Type.
An A

sh
25.000 70.000 Rs. RT FORM OF FUNDS FLOW STATEMENT
98.000 45,000 CIMEN OF REPORI

90,000
$7.000 Rs.
Closing S k 1.20,000 33,000
2.10,000 2.80.000 oureesofFunds
Funds f r o m O p e r a i o n s

CTCnt Liubiliik s
Capital
Trade Creditors 50.000 45,000 Issue ofShare loans
20.000
5,000 Raising
of
long-term

Bills Pay able 35,000 from partly paid

shares, uD called

Loans (Pay abie during 1995) Receipts

20,000 I5.0 c u r r e n t (fixed)
assets

Sales of
non

20,000 such as dividends received

70,000 1,00.000 Non-trading receipts,
Investments (long-term)
1.40.000 Sale of
Working Capitai (CA-CL) 1,80,000D Capital (as per schedule
of
Decrease in Working
Net incre ase in Capital)
40.000 changes in Working
Working Capital
40,000 Total
1.80.000 1.80,000 83,000 83,0 Uses of Funds
Applications or
Funds Lost in Operations
Note. Lodns (payahle during 1995) is current liability. Redemption of Preference Share Capital
a

Redemption of Debentures
Try youp[eif 1. Repayment of long-term loans
fom the
following iwo Balance Sheets as on 31st Dec. 1994 and 1995, Purchase of non-curreni (fixed) assets
regeired to prepare a schedule of changes in Working Capital for 1995: you ae Purchase of long-term Investments

Dec. 31, Non-trading payments

Dec.3 Payments of dividends*
1994 1995
Payment of tax*
Rs. Rs.
ASsets: Inerease in Working Capital (as per schedule of
Cash changes in Working Capital)
60,000 94,000
Debtors 2.30,000
2,40,000 Total
Stock-in-trade
Land 1,60,000 I,80,000
I,32,00
1,00,000
6,36,00 T Form An Account Form or Self Balancing 'Type
5,60,000
Capital and Liabiliies: FUNDS FLOW STATEMENT
Share Capial 5,00,00 (For the yeur ended..
Trade Creditors 4,00,000 90,000 Sources Rs.
Retained Earnings 1,40,000 Rs.Applications
46,00
Funds from Operations
20,000 bsue of Share Funds lost in Operations

5,60,000
6,36,00

Capital
sue of Debentures Redemption of Prefecrence

Ans. Net Inerease in Working Asing of long-term loans Share Capital

Redemption of Debentures
Capital Rs. 94,000