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Unit-3 Fund Flow Statement

The document explains the concepts of cash flow and fund flow statements, detailing their definitions, components, and importance in financial analysis. It categorizes cash flows into operating, investing, and financing activities, while also outlining the significance of fund flow statements in understanding a company's financial position and creditworthiness. Additionally, it highlights the limitations of fund flow statements and provides steps for their preparation.

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Bharat mahan Rai
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23 views47 pages

Unit-3 Fund Flow Statement

The document explains the concepts of cash flow and fund flow statements, detailing their definitions, components, and importance in financial analysis. It categorizes cash flows into operating, investing, and financing activities, while also outlining the significance of fund flow statements in understanding a company's financial position and creditworthiness. Additionally, it highlights the limitations of fund flow statements and provides steps for their preparation.

Uploaded by

Bharat mahan Rai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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UNIT-3 FUND FLOW

STATEMENT
Meaning of Cash Flow
◦Cash flow refers to the outflow and inflow of cash or cash equivalents in an
organization in a specific period. Cash flow is recorded in the cash flow statement,
which is one of the most important financial statements in accounting.

There are many sources of cash flow in an organisation which may be categorized as:
1.Cash Flows from Operating activities: It represents the movement of cash from the
core operations of a business.
2.Cash Flows from Investment Activities: It represents the flow of cash due to
purchase or sale of an asset or any other investment activities for the business.
3.Cash flow from financing activities: It involves changes in the flow of cash
involving selling or paying off financial instruments such as the issuance of debt,
issuing shares and debentures or repayment of debt.
Meaning of Fund Flow
◦Fund flow refers to the working capital of the company, and a fund flow statement is
prepared to visualize the changes in working capital of the company over a period of
time. Investors use the fund flow information to determine where capital needs to be
invested.
There are two types of inflow of funds in a business-
1.Funds generated by the business operations.
2.Long term funds raised by issuing shares or sale of fixed assets.
1. Cash from Operating Activities
Cash flows from operating activities are primarily derived from the main activities of the enterprise. They
generally result from the transactions and other events that enter into the determination of net profit or loss.
Examples of cash flows from operating activities are:
Cash Inflows from operating activities
cash receipts from sale of goods and the rendering of services.
 cash receipts from royalties, fees, commissions and other revenues.
Cash Outflows from operating activities
Cash payments to suppliers for goods and services.
Cash payments to and on behalf of the employees.
Cash payments to an insurance enterprise for premiums and claims, annuities, and other policy benefits.
Cash payments of income taxes unless they can be specifically identified with financing and investing
activities.
2. Cash from Investing Activities
As per AS-3, investing activities are the acquisition and disposal of long-term assets and other investments not included in
cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery,
furniture, land and building, etc. Transactions related to long-term investment are also investing activities.
Cash Outflows from investing activities
Cash payments to acquire fixed assets including intangibles and capitalised research and development.
Cash payments to acquire shares, warrants or debt instruments of other enterprises other than the instruments those held for
trading purposes.
Cash advances and loans made to third party (other than advances and loans made by a financial enterprise where it is
operating activities).
Cash Inflows from Investing Activities
Cash receipt from disposal of fixed assets including intangibles.
Cash receipt from the repayment of advances or loans made to third parties (except in case of financial enterprise).
Cash receipt from disposal of shares, warrants or debt instruments of other enterprises except those held for trading
purposes.
Interest received in cash from loans and advances.
Dividend received from investments in other enterprises.
3. Cash from Financing Activities
As the name suggests, financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from
issue of equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc. As per AS-3, financing
activities are activities that result in changes in the size and composition of the owners’ capital (including preference share
capital in case of a company) and borrowings of the enterprise.

Cash Inflows from financing activities

 Cash proceeds from issuing shares (equity or/and preference).

 Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.

Cash Outflows from financing activities

 Cash repayments of amounts borrowed.

 Interest paid on debentures and long-term loans and advances.

Dividends paid on equity and preference capital.


Problem 3

ABC Ltd., made a profit of Rs 1,00,000 after charging depreciation of Rs 20,000


on assets and a transfer to general reserve of Rs 30,000. The goodwill amortised
was Rs 7,000 and gain on sale of machinery was Rs 3,000. Other information
available to you ( changes in the value of current assets and current liabilities) are
trade receivables showed an increase of Rs 3,000; trade payables an increase of Rs
6,000; prepaid expenses an increase of Rs 200; and outstanding expenses a
decrease of Rs 2,000. Ascertain cash flow from operating activities.
Problem 4. The net income reported in the Income Statement for the year was Rs.
110,000 and depreciation of fixed assets for the year was Rs. 44000. The balances of the
current assets and current liabilities at the beginning and end of the year are as follows.
Calculate cash from operating activities.
FUND FLOW STATEMENT
A funds flow statement is a statement that comprises the inflows and outflows
of funds. It includes the sources of funds and application of funds for the
particular period. Therefore, you can analyze the reasons behind the change in
a company’s financial position. This article explains the funds flow statement,
its components, importance and limitations.
Importance of a Funds Flow Statement
Financial Position: A profit and loss statement or balance sheet does not explain the reasons for the
change in a company’s financial position. The statement will give information about where the funds
have come (Source of Funds) and where the funds have been used (Application of Funds).
Company Analysis: Often, companies that are making profits end up in cash crunch scenarios. In
such scenarios, the funds flow statement offers a clear picture of the source and usage of funds.
Management: The funds flow statement assists management in determining its future course of
action and also serves as a management control tool.
Changes in Assets and Liabilities: The statement shows the reason behind the change in assets and
liabilities between two balance sheet dates. As a result, you can conduct an in-depth analysis of the
balance sheet.
Creditworthiness: Lending institutions use the this statement of a company to analyse the
creditworthiness. They compare the statement over the years before approving a loan. Therefore, the
statement depicts a company’s credibility in terms of fund management.
Limitations of Funds Flow Statement

Despite its importance in analyzing the financial position of a firm, the


statement has the following limitations:
The statement focuses only on the movement of funds. It doesn’t consider
other parameters that are part of the Balance Sheet and Profit and Loss
Account. Therefore, it has to be analyzed alongside the Balance Sheet and
Profit and Loss Account.
The funds flow statement doesn’t depict the cash position of a company.
Hence, a separate cash flow statement has to be made for analyzing the cash
position.
How to prepare Fund Flow Statement?
Step 1
Prepare a Schedule of Changes in Working Capital. Consider the increase or decrease in the current
assets and current liabilities. The difference between the net current assets and net current liabilities gives
the net increase or decrease in working capital.
Increase in Working Capital: When the long-term source of funds is more than the application or use
of funds, it is referred to as an increase in working capital. Since a company can use these funds for
their working capital needs. For instance, payment of short-term loans or dividends can be paid. As a
result, an increase in working capital will become part of the ‘Application of Funds’ in the Funds Flow
Statement.
Decrease in Working Capital: A company may require more funds but has only a limited long term
source of funds. In such scenarios, the company will use the funds available for working capital. As a
result, funds available for working capital are reduced. Thus, a decrease in working capital will become
part of the ‘Source of Funds’ in the Funds Flow Statement.
Step 2
Prepare the Adjusted P&L Account to find out Funds from Operations.
Step 3
To create the fund flow statement; you need to identify the Sources of Funds
(Inflows) and Application of Funds (Outflows). Identify the source of funds or
application of funds (increasing or decreasing) from the balance sheet to create a
fund flow statement. And also net increase or decrease in working capital and
funds from operations to complete the statement.
FUND FLOW STATEMENT

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