Fund Flow Statement Analysis

Fund Flow Statement :


A fund flow statement is a statement which explains the various sources from which funds were raised and the uses to which these funds were put. A fund flow shows the sources from which the funds are received and the uses (or applications) to which these have been put. In other words, a fund flow statement is used to explain the movement of working capital.

Working capital is defined as the difference between current assets and current liabilities. Working capital determines the liquidity position of the company. As a historical analysis, the statement of changes in working capital reveals to management the way in which working capital has been obtained and used. With this insight, management can prepare the estimates of the working capital flows. A statement reporting the changes in working capital is useful in addition to the financial statement. 


Sources of Fund/ Working capital:
The typical sources of working capital are summarised below:
(i) Funds from operations (adjusted net income)
(ii) Sale of non-current assets:
a. Sale of long-term investments (shares, bonds debentures etc)
b. Sale of tangible fixed assets like land, building, plant, or equipments.
c. Sale of intangible fixed goodwill, patens, or copyrights.
(iii) Long-term financing:
a. Long-term borrowings (institutional loans, debentures, bonds etc.)
b. Issuance of equity and preference shares
(iv) Short-term financing such as bank borrowings.

Uses/Application of Fund/ working capital
The uses of working capital are as follows:
(i) Adjusted net loss operations,

(ii) Purchase of non-current assets:

a. Purchase of long-term investments like shares, bonds /debentures etc.
b. Purchase of tangible fixed assets, like land, building, plant, machinery, equipment etc.
c. Purchase of intangible fixed assets, like goodwill, patents, copyrights etc.

(iii) Repayment of long-term debt (debentures or bonds) and short-term debt (bank borrowing),
(iv) Redemption of redeemable preference shares
(v) Payment of cash dividend.

Funds Flow Statement vs Cash Flow Statement

The cash flow statement is different from the fund flow statement in its approach. The difference between the two can be summarized as follows:
1. The fund flow statement is based on the concept of working capital, whereas the cash flow statement is based on cash which is only one of the elements of working capital.
2. The fund flow statement provides the details of funds movements, whereas cash flow statement provides the details of cash movements.
3. Fund flow statement considers the movement of the funds as defined in terms of net working capital, whereas the cash flow statement considers only the actual movement of funds.
4. In fund flow statement, net increase or decrease in working capital is recorded while in cash flow statement; individual item involving cash is taken into account.
5. Funds flow statement is started with the opening cash balance and closed with the closing cash balance records only cash transactions, whereas cash flow statement is started with the opening cash balance and closed with ht closing cash balance while there a no opening or closing balances in Funds Flow Statement.

Steps for preparing Fund flow statement:

First Step

Making of statement of Changes of Working Capital

For making of fund flow statement. It is very necessary to make statement of changes of working capital. Because net increase in working capital is use of fund and net decrease in working capital is source of fund. So, it is duty of accountant to make statement of changes of working capital. Making of statement of changes working capital is very easy and simple.

We take two balance sheets, one is current year balance sheet and other is previous year balance sheet. Then we separate current assets and current liabilities.

If current assets are more than previous year current assets, it means increase in working capital.
If current assets are less than previous year current assets, it means decrease in working capital. Because, relationship between current assets and working capital is positive and if any changes in current assets, working capital will change in same direction.
If current liabilities are more than previous year current liabilities, it means decrease in working capital.
If current liabilities are less than previous year current liabilities, it means increase in working capital. Relationship between working capital and current liabilities are inverse.

Statement or schedule of changes in working capital

----------------------------------------------------------------------------------------
Particular--------------- ↓ previous year ↓ Current year ↓ Effect on working capital
-----------------------------------------------------------------------------------------
-----------------------------------------------------------↓ Increase ↓ Decrease
----------------------------------------------------------------------------------------
Current Assets

Þ Cash in hand
Þ Bills receivable
Þ Sundry debtors
Þ Temporary investments
Þ Stocks / inventories
Þ Prepaid expenses
Þ Accrued incomes
--------------------------------------------------------------------------------------------
Total current assets----------- ↓xxxx ↓ xxxxx↓
----------------------------------------------------------------------- -----------------

Current liabilities

Þ Bills payables
Þ Sundry creditors
Þ Bank overdraft
Þ Short term advances
Þ Dividends payables
Þ Provision for taxation
---------------------------------------------------------------------------------------
Total current Liabilities ----------↓xxxx ↓xxxx ↓
------------------------------------------------------------------ -------------------
Working capital
CA- CL
---------------------------------------------------------------------------

Net increase or decrease in working capital =

Increase in working capital – Decrease in working capital

2nd Step

Statement showing the fund from operation

Because is the source of fund and will show in fund flow statement’s source side. So before making fund flow statement, we must make statement showing the fund from operation.

Operation means business activity and fund from operation means profit from business activity. So, you will easy understand that profit from business activity between two accounting period must be the source of fund.


Statement of fund from operations
------------------------------------------------------------------------------------------
------------------------------------------------------------------------>↓ Amount ↓
-------------------------------------------------------------------------------------------

Closing balance of profit and loss account or retained earning as
Given in the Balance sheet


Add non –fund and non operating items which have been already Debited to profit and loss account                                                                                                                                 1. depreciation
2. amortization of fictitious and intangible assets

Þ goodwill
Þ patents
Þ trade marks
Þ preliminary expenses
Þ discount on issue of shares

3. Appropriation of retained earning such as

Þ Transfer to general reserve
Þ Dividend equalization fund
Þ Transfer to sinking fund
Þ Contingency reserve etc.

4. Loss on sale of any non current or fixed assets such as

Þ Loss on sale of land and building
Þ Loss on sale of machinery
Þ Loss on sale of furniture
Þ Loss on sale of long term investments

5. Dividends including

Þ Interim dividend
Þ Proposed dividend

(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account

-----------------------------------------------------------------------------------

Total ( A)-------------------------------------------------------> ↓ XXXXX ↓
-------------------------------------------------------------------------------------
Less Non –Fund or non operating items which have already been credited to profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as

Þ Profit on sale of land and building
Þ Profit on sale of plant and machinery
Þ Profit on sale of long term investment etc.

2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the balance sheet
-------------------------------------------------------------------------------------
Total ( B)--------------------------------------------------------------> ↓ XXXXX ↓
----------------------------------------------------------------------------------------
Funds received from operation or business activities = total ( A) – Total ( B)

You can make also above statement in t shape adjusted profit and loss account form .

3rd Step

Fund flow statement

--------------------------------------------------------------------------------------
-------------------------------------------------------------------> ↓ Amount ↓

-------------------------------------------------------------------------------------
Source of funds

1. fund from operation ( balance of second step )
2. issue of shares capital
3. issue of debentures
4. raising of long term loans
5. receipts from partly paid shares , called up
6. amount received from sales of non current or fixed assets
7. non trading receipts such as dividend received
8. sale of investments ( Long term )

decrease in working capital as per schedule of changes in working capital
----------------------------------------------------------------------------------
total -------------------------------------------------------------> ↓ XXXXX ↓
---------------------------------------------------------------------------------
Applications or uses of funds

• 1. Funds lost in operations ( Balance negative in second step )
• 2. redemption of preference share capital
• 3. redemption of debentures
• 4. repayment of long term loans
• 5. purchase of long term loans
• 6. purchase of long term investments
• 7. non trading payments
• 8. payment of tax
• 9. payment of dividends
• 10. increase in working capital ( As per positive balance of ist step )

-------------------------------------------------------------------------------------
total --------------------------------------------------------> ↓ XXXXX ↓--------------------------------------------------------------------------------------

Example of Fun Flow Statement:

Fund Flow Statement

Rs. Lakh
Long term Sources		Long Term Uses
Increase in capital	20	Purchase of fixed assets	125
Profit from operations	104	Investment in associates	56
Increase in long term loan	40	Profit withdrawn	50
Long term deficit	67
Total	231	Total	231
Short Term Sources		Short Term Uses
Increase in CC	15	Incraese in inventory	35
Increase in Trade Creditors	80	Increase in receivables	5
Increase in Other Current Liabilities	5	Short term surplus	67
Decrease in cash	2
Decrease in other current assets	5
Total	107	Total	107

Sources :

svtuition.org , kkhsou.in , .cab.org.in.