Funds flow AnalysisFunds flow AnalysisThis statement is based on the ‘working This statement is based on the ‘working Capital’ concept of funds.Capital’ concept of funds.

It measures the inflows and outflows of It measures the inflows and outflows of working capital resulting from different working capital resulting from different transactions.transactions.

Funds flow statement measures and presents Funds flow statement measures and presents in an analytical manner the summarized in an analytical manner the summarized version of the numerous flows of funds for a version of the numerous flows of funds for a specific period.specific period.

‘‘Funds Flow’ is the change in ‘Working Funds Flow’ is the change in ‘Working Capital’Capital’

FUNDS FLOW STATEMENT

Funds flow statements is dealt by Accounting Standard 7 . . Meaning :- It explains changes in funds or changes in working capital . It explains the working capital position of the company which gives an idea to the top management about the liquidity position of the company. Working capital:- It is the difference between current assets and current liabilities. Steps in preparation of funds flow statement:-

1. Preparation of working capital statement that explains increase or decrease in working capital.

2. preparation of funds from operation statement in which we find out operating profit.

3. Preparation of funds flow statement that shows various sources and application of fund .

FUNDS FUNDS : WORKING CAPITAL : WORKING CAPITAL

FLOW OF FUNDSFLOW OF FUNDS: THE TERM FLOW MEANS : THE TERM FLOW MEANS

CHANGE AND THEREFORE THE TERM FLOW OF CHANGE AND THEREFORE THE TERM FLOW OF

FUNDS MEANS “CHANGES IN FUNDS” OR FUNDS MEANS “CHANGES IN FUNDS” OR

“CHANGES IN WORKING CAPITAL”. IN OTHER “CHANGES IN WORKING CAPITAL”. IN OTHER

WORDS, ANY INCREASE OR DECREASE IN WORDS, ANY INCREASE OR DECREASE IN

WORKING CAPITAL MEANS “FLOW OF FUNDS”.WORKING CAPITAL MEANS “FLOW OF FUNDS”.

USES OF FUND FLOW STATEMENT:

What funds were available during the accounting period and for what purpose these funds were utilized?

Have long term sources been adequate to finance fixed asset purchase?

Does the firm possess adequate working capital?

How much funds have been generated from operations?

Why did the firm not pay dividend in spite of adequate profit?

Why we prepare fund flow statement?Why we prepare fund flow statement?

The balance sheet and income The balance sheet and income statement are the traditional basic statement are the traditional basic financial statement of a business financial statement of a business enterprise.enterprise.

A serious limitation of these statements A serious limitation of these statements is that they do not provide information is that they do not provide information regarding changes in the firm’s financial regarding changes in the firm’s financial position during a particular period of position during a particular period of time.time.

They fail to answer following question :They fail to answer following question :

The balance sheet is merely a static The balance sheet is merely a static statement. It is statement of asset and statement. It is statement of asset and liabilities of the business as on liabilities of the business as on particular date.particular date.

The fund flow statement The fund flow statement overcomes these limitations of basic overcomes these limitations of basic financial statement. Fund flow financial statement. Fund flow statement will provide us information statement will provide us information about different sources of fund and about different sources of fund and their various uses in particular time.their various uses in particular time.

Meaning of fund flow statement Meaning of fund flow statement

This statement reveals resources from which This statement reveals resources from which funds were obtain by the firm and the specific funds were obtain by the firm and the specific uses to which such funds were applied. uses to which such funds were applied.

The effectiveness of financial management in The effectiveness of financial management in procuring funds from various sources & using procuring funds from various sources & using them effectively for generating income them effectively for generating income without sacrificing the financial position of the without sacrificing the financial position of the firm is reflected in fund flow statement .firm is reflected in fund flow statement .

MEANING OF FUNDMEANING OF FUND The term fund has a variety of meaning such as cash The term fund has a variety of meaning such as cash

fund, capital fund and working capital fund.fund, capital fund and working capital fund.1.Cash fund1.Cash fund –In a narrow sense, fund means only cash. –In a narrow sense, fund means only cash.

‘Cash flow statement’ portrays net effect of the various ‘Cash flow statement’ portrays net effect of the various business transactions on cash into account receipts & business transactions on cash into account receipts & disbursement of cash.disbursement of cash.

This concept of preparing fund flow statement is This concept of preparing fund flow statement is not accepted, as there are many such not accepted, as there are many such transactions which do not affect cash but transactions which do not affect cash but represent the flow of fundrepresent the flow of fund . .

for examplefor example: purchase of furniture on credit does not : purchase of furniture on credit does not affect cash but there is flow of fund.affect cash but there is flow of fund.

2. 2. Capital fundCapital fund –Here fund means all financial resources –Here fund means all financial resources used in the business, whether in the form of men, used in the business, whether in the form of men, money, material, machine & others.money, material, machine & others.

3.3.NetNet working capitalworking capital -Net working capital means -Net working capital means difference between current asset and current difference between current asset and current liabilities .funds generally refers to cash or cash liabilities .funds generally refers to cash or cash equivalent or to working capital.equivalent or to working capital.

MEANING OF FLOWMEANING OF FLOW The term ‘flow’ refers to changes or transfer and The term ‘flow’ refers to changes or transfer and

therefore the ‘flow of funds’ means transfer of therefore the ‘flow of funds’ means transfer of economic values from one asset to another, from economic values from one asset to another, from one liability to another, from one asset to liabilities one liability to another, from one asset to liabilities or vice-versa or a combination of these. So flow of or vice-versa or a combination of these. So flow of fund refers to increase or decrease in net working fund refers to increase or decrease in net working capital.capital.

The increase or decrease in net working capital The increase or decrease in net working capital will take place only when one account, out of two will take place only when one account, out of two accounts to be affected in a transaction ,is a current accounts to be affected in a transaction ,is a current account i.e. current asset or current liabilities and account i.e. current asset or current liabilities and the other account is non current account i.e. fixed the other account is non current account i.e. fixed asset or long term liability or capital.asset or long term liability or capital.

When a change in non current account is followed When a change in non current account is followed by a change in another non current account, it does by a change in another non current account, it does not amount to flow of fund. It is because, in such not amount to flow of fund. It is because, in such case, neither the working capital increase nor case, neither the working capital increase nor decrease.decrease.

Definitions of fund flow statement Definitions of fund flow statement

In the words of In the words of Foulke, R.A.Foulke, R.A., “a statement of , “a statement of source and application of fund is a technical source and application of fund is a technical device design to analysis the changes in the device design to analysis the changes in the financial condition of business enterprises financial condition of business enterprises between two dates”.between two dates”.

According to According to Almond Coleman,Almond Coleman, “ The fund flow “ The fund flow statement summarizing the significant financial statement summarizing the significant financial changes which were occurred between the changes which were occurred between the beginning & the end of a company’s accounting beginning & the end of a company’s accounting periods”.periods”.

For exampleFor example

Machinery a/c DrMachinery a/c Dr To share capital a/cTo share capital a/c(Machinery purchase in consideration (Machinery purchase in consideration

of share)of share)

In the above transaction both accounts In the above transaction both accounts are non current accounts which do not at are non current accounts which do not at all affect current asset and current liability. all affect current asset and current liability. Therefore working capital will remain Therefore working capital will remain unaffected i.e. there will be no flow of unaffected i.e. there will be no flow of fund.fund.

When changes in one current account results When changes in one current account results in a changes in other current account ,it also in a changes in other current account ,it also does not affect working capital i.e. there is no does not affect working capital i.e. there is no flow of funds.flow of funds.For exampleFor example Cash a/c Dr Cash a/c Dr To debtor a/c To debtor a/c (Cash received from debtor)(Cash received from debtor) It represents an increase of cash –a current It represents an increase of cash –a current asset account and decrease of debtor again a asset account and decrease of debtor again a current asset account .thus there will be no net current asset account .thus there will be no net changes in the amount of working capital, changes in the amount of working capital, although the composition of working capital will although the composition of working capital will be affected .be affected .

Preparation of Fund Flow StatementPreparation of Fund Flow Statement

The changes which occurred in the current The changes which occurred in the current accounts as a result flow of fund are reflected in a accounts as a result flow of fund are reflected in a statement known as ‘statement known as ‘schedule of changes in schedule of changes in working capital’ working capital’ ..

The similar changes in non current accounts are The similar changes in non current accounts are shown in shown in ‘Fund Flow Statement’. ‘Fund Flow Statement’.

Statements to be Prepared are:Statements to be Prepared are:1.1. Statement or Schedule of Changes in Statement or Schedule of Changes in

Working Capital.Working Capital.

2.2. Statement of Sources and Uses of Statement of Sources and Uses of Funds or Funds Flow Statement.Funds or Funds Flow Statement.

Current assets

Cash in hand and bankDebtors

Marketable investmentsAccounts/ Bills receivables

StockPrepaid exp.

Fixed assets

Land and buildingFurniture & FixturesPlant and machineryLong term investment

Current liabilities

CreditorsBank overdraft

Outstanding expensesAccounts/ Bills payable

Fixed liabilities

Share capitalReserve and surplus

DebenturesLong term loans

Flow in fund Not flow in funds

Schedule of Changes in Working Capital:Schedule of Changes in Working Capital:

It discloses the changes in individual item of It discloses the changes in individual item of current asset & current liabilities between two current asset & current liabilities between two period & there effect on working capital.period & there effect on working capital.

Working capital will increase when there is an Working capital will increase when there is an increase in current asset and decrease in increase in current asset and decrease in current liabilities, current liabilities,

whereas, working capital will decrease when whereas, working capital will decrease when there is a decrease in current asset & increase there is a decrease in current asset & increase in current liabilities.in current liabilities.

Net increase in working capital is treated as Net increase in working capital is treated as use of funds & the net decrease in working use of funds & the net decrease in working capital is treated as source of funds. capital is treated as source of funds.

ItemItem

(A) Current (A) Current AssetsAssetsCash at bank Cash at bank

Cash in handCash in hand

Stock in tradeStock in trade

DebtorsDebtors

Bills receivableBills receivable

Advance paymentAdvance payment

Short term investmentShort term investment

Prepaid expensePrepaid expense

Accrued incomeAccrued income

Total (A) Total (A)

(B) Current Liabilities(B) Current Liabilities

(1) Short term loans(1) Short term loans

(2) Bank overdraft(2) Bank overdraft

(3) Creditors(3) Creditors

(4) Bills payable(4) Bills payable

(5) Outstanding (5) Outstanding expensesexpenses

(6) Unclaimed dividend(6) Unclaimed dividend

Total (B)Total (B)

Net Working Capital (A-B)Net Working Capital (A-B)

Increase / Decrease in Increase / Decrease in Working Capital Working Capital

TotalTotal

Previous Previous YearYear

Current Current YearYear

Effect onEffect on

Increase Rs.Increase Rs.

Working Working capitalcapital

Decrease Decrease Rs.Rs.

Statement or Schedule of Changes in Working Capital.

This fund flow statement has two parts :This fund flow statement has two parts :1.1. Sources of fundSources of fund2.2. Application of fundApplication of fund The difference between these two parts that The difference between these two parts that

is sources & uses of funds represents net is sources & uses of funds represents net changes in working capital.changes in working capital.

The The excess of sourcesexcess of sources of funds over uses of funds over uses of fund is the net increase in working capital of fund is the net increase in working capital & & excess of usesexcess of uses over sources of fund is over sources of fund is net decrease in working capital. net decrease in working capital.

The amount of net increase or The amount of net increase or decrease as shown in fund flow statement decrease as shown in fund flow statement should be equal to the amount shown by should be equal to the amount shown by schedule of working capital changes.schedule of working capital changes.

Fund Flow StatementFund Flow Statement

Sources of Fund Sources of Fund AAmountmount

Fund from operationFund from operation

Issue of shareIssue of share

Issue of debentureIssue of debenture

long term loanslong term loans

Sale of fixed assets /Sale of fixed assets /

InvestmentInvestment

Non trading receiptsNon trading receipts

Decrease in working capitalDecrease in working capital

(if any)(if any)

Uses Of FundsUses Of Funds AmountAmount

Loss from operationLoss from operation

Redemption of Pref. sharesRedemption of Pref. shares

Redemption of debenturesRedemption of debentures

Repayment of long term loansRepayment of long term loans

Purchase of fixed assets Purchase of fixed assets

/ Investments/ Investments

Payment of dividend & taxesPayment of dividend & taxes

Increase in working capitalIncrease in working capital

(if any)(if any)

Fund from operations Fund from operations

The profit made by a firm through normal The profit made by a firm through normal operations is a major source of funds. operations is a major source of funds. The amount of sales as shown in the P&L The amount of sales as shown in the P&L A/c is a source of funds by way of A/c is a source of funds by way of increase in cash , debtor and B/R. increase in cash , debtor and B/R.

Funds generated from the regular Funds generated from the regular operations of an enterprise or applied to operations of an enterprise or applied to such operation are known as such operation are known as funds from funds from operationoperation. It can be calculated by adding . It can be calculated by adding non-operating expenses and deducting non-operating expenses and deducting non-operating income from the net profit.non-operating income from the net profit.

If the net amount is ‘positive’ it is called If the net amount is ‘positive’ it is called ‘funds from operations (source) and if it is ‘funds from operations (source) and if it is ‘Negative’ it is called ‘Negative’ it is called ‘funds lost from ‘funds lost from operations (application)operations (application)’’

Specimen statement of funds from operationSpecimen statement of funds from operation

ParticularsParticulars Rs. Rs. Rs. Rs.Net profit for the Current yearNet profit for the Current year

xxxxxxxxAdd:Add:1.1. Depreciation written offDepreciation written off2.2. Goodwill written off Goodwill written off 3.3. Preliminary expenses written offPreliminary expenses written off4.4. Provision for taxationProvision for taxation5.5. Transfer to reserveTransfer to reserve6.6. Dividend/interim/proposed dividend paidDividend/interim/proposed dividend paid7.7. Loss on sale of fixed assetLoss on sale of fixed asset8.8. Discount on issue of shares and debentures written offDiscount on issue of shares and debentures written off9.9. Patents written offPatents written offLess:Less:1.1. Dividend received Dividend received 2.2. Profit on sale of fixed assetsProfit on sale of fixed assets3.3. Appreciation in the value of fixed assetAppreciation in the value of fixed asset4.4. Rent received Rent received 5.5. Refund of taxRefund of tax

Funds from operation: XXXX Funds from operation: XXXX

Note:Note:

If the P&L A/c shows a net loss, If the P&L A/c shows a net loss, the above procedure will be the above procedure will be reversed.reversed.

Net profit = closing balance of Net profit = closing balance of P&L A/c – opening balance of P&L A/c – opening balance of P&L A/cP&L A/c

1.Calculate funds from operation from the following:1.Calculate funds from operation from the following:

P&L A/cP&L A/c

Particulars Particulars Rs.Rs. ParticularsParticulars Rs.Rs.

To Expenses Paid 3,00,000 To Expenses Paid 3,00,000 By Gross Profit By Gross Profit 4,50,0004,50,000

To DepreciationTo Depreciation 70,00070,000 By gain on saleBy gain on sale

To loss on sale ofTo loss on sale of of landof land 60,000 60,000

MachineMachine 4,000 4,000

To DiscountTo Discount 200 200

To Goodwill To Goodwill 20,00020,000

To Net ProfitTo Net Profit 1,15,800 1,15,800

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

5,10,0005,10,000 5,10,000 5,10,000

Solution:Solution:

Calculation of Funds from operation:Calculation of Funds from operation:

ParticularsParticulars Rs.Rs. Rs.Rs.

Net ProfitNet Profit 1,15,8001,15,800

Add: Non-profit expensesAdd: Non-profit expenses

DepreciationDepreciation 70,00070,000

Loss on sale of machineryLoss on sale of machinery 4,000 4,000

Discount Discount 200 200

GoodwillGoodwill 20,00020,000 94,200 94,200

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

2,10,0002,10,000

Less: Non operating incomeLess: Non operating income

Gain on sale of landGain on sale of land 60,000 60,000

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

Funds from operationsFunds from operations 1,50,000 1,50,000

Illustration 2Illustration 2

Calculate funds from operation from the following:Calculate funds from operation from the following:

P&L AccountP&L Account

Particulars Particulars Rs.Rs. Particulars Particulars Rs.Rs.

To Expenses paid and To Expenses paid and

OutstandingOutstanding 1,50,000 1,50,000 By Gross Profit By Gross Profit 2,25,0002,25,000

To DepreciationTo Depreciation 35,000 35,000 By Gain on saleBy Gain on sale

To Loss on sale of Machine 2,000To Loss on sale of Machine 2,000 of Land of Land 30,00030,000

To DiscountTo Discount 100100

To GoodwillTo Goodwill 10,000 10,000

To Net ProfitTo Net Profit 57,900 57,900

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

2,55,0002,55,000 2,55,000 2,55,000

Profit & loss Adjustment a\cProfit & loss Adjustment a\c

Particular Particular AmountAmount

DepreciationDepreciation

Loss on sale of fixed assetsLoss on sale of fixed assets

Under writing commissionsUnder writing commissions

Discount on issue of shares & Discount on issue of shares &

debenturesdebentures

Preliminary expense written offPreliminary expense written off

Deferred revenue expenses Deferred revenue expenses

Goodwill written off Goodwill written off

Patent or trademarkPatent or trademark

Provision for taxes Provision for taxes

(If treated non current(If treated non current))

Particular Particular AmountAmount

Profit or gain on sale of Profit or gain on sale of

fixed assetfixed asset

Dividend received Dividend received

Interest received ofInterest received of

investmentinvestment

Profit on revaluation Profit on revaluation

of assetof asset

Fund from operationFund from operation

Q-Comparative Balance sheet of Z -Comparative Balance sheet of Z Ltd. As on year 2000 and 2001 were Ltd. As on year 2000 and 2001 were

as followas followLiabilitieLiabilities s

20020000

20012001 AssetsAssets 20002000 20012001

Account Account payablepayable

Notes payableNotes payable

Loan on Loan on MortgageMortgage

Capital Capital

Sinking fundSinking fund

Retained Retained EarningEarning

Provision for Provision for DDDD

Accumulated Accumulated Depreciation-Depreciation-

BuildingBuilding

furniturefurniture

1500015000

1000010000

4000040000

5000050000

1600016000

1395013950

13501350

1200012000

32003200

161500161500

1800018000

7500075000

4000040000

4500045000

1200012000

1627516275

14251425

90009000

24002400

151600151600

CashCash

Account Account receivable receivable

StockStock

Sinking fund Sinking fund investmentinvestment

LandLand

BuildingBuilding

FurnitureFurniture

1120011200

2130021300

3500035000

1600016000

1000010000

6000060000

80008000

161500161500

85008500

2350023500

3060030600

1200012000

1000010000

6000060000

70007000

151600151600

You are given the following You are given the following information:-information:-

Net profit for the year 2001 Net profit for the year 2001 amounted 6675.amounted 6675.

Dividend amounted to Rs.5000 was Dividend amounted to Rs.5000 was paid during the year.paid during the year.

Prepare a statement of sources and Prepare a statement of sources and uses of fund.uses of fund.

Items 2000 2001 Change in Working capital

  Amount Amount Increase Decrease

CURRENR ASSETS:-        

Cash 11200 8500   2700

Account receivable 21300 23500 2200  

Stock 35000 30600   4400

TOTAL of CA (A) 67500 62600    

CUURENT LIABILITIES:-        

Account payable 15000 18000   3000

Note payable 10000 7500 2500  

Provision for D D 1350 1425   75

TOTAL of CL (B) 26350 26925    

Difference b/w (A-B) 41150 35675 5475  

Decrease in W C   5475    

  41150 41150 10175 10175

Fund flow statementFund flow statementSources of Sources of fundfund

Sale of sinking Sale of sinking fund fund investmentinvestment

Fund from Fund from operation operation

Decrease in Decrease in working capitalworking capital

AmounAmountt

40004000

525525

54755475

1000010000

Application of Application of fundfund

Redemption of Redemption of share capitalshare capital

Dividend paidDividend paid

Amount Amount

50005000

50005000

1000010000

Profit & loss adjustment a\cProfit & loss adjustment a\cParticular Particular

To Accumulate To Accumulate dep. On furnituredep. On furniture

To Dividend paidTo Dividend paid

To Balance c/dTo Balance c/d

AmounAmount t

200200

50005000

1627516275

2147521475

Particular Particular

By balance b/d By balance b/d

By sinking fundBy sinking fund

By accumulate By accumulate dep. On buildingdep. On building

By fund flow By fund flow operationoperation

Amount Amount

1395013950

40004000

30003000

525525

2147521475

Accumulative deprecation BuildingAccumulative deprecation Building && Furniture Furniture

ParticulaParticular r To P/L a/cTo P/L a/c

To balance To balance c/dc/d

Amt Amt 30003000

90009000

1200120000

ParticulParticular ar By By balance balance b/db/d

AmounAmoun

tt 1200012000

1200012000

ParticularParticular

To To furniture furniture a/ca/c

To To balance balance c/dc/d

AmtAmttt

10010000

24024000

34034000

ParticulParticulararBy By balance balance b/db/d

By P/L a/cBy P/L a/c

AmounAmount t

32003200

200200

34003400

Particular Particular

To balance b/dTo balance b/d

AmounAmount t

80008000

80008000

ParticularParticular

By By deprecatideprecation on

By By balance balance c/dc/d

Amount Amount

10001000

70007000

80008000

Furniture a\c

Schedule of changes in Working Capital

DetailDetail 20042004 20052005 Increase Increase DecreaseDecrease

Current AssetsCurrent AssetsDebtorsDebtorsClosing stockClosing stockBank BalanceBank BalanceCash in handCash in hand

1,10,0001,10,0003,30,0003,30,00050,00050,00010,00010,000

1,15,0001,15,0003,80,0003,80,0001,35,0001,35,00020,00020,000

5,0005,00050,00050,00085,00085,00010,00010,000

Total current Total current assetsassets

5,00,0005,00,000 6,50,0006,50,000 1,50,0001,50,000

Current LiabilitiesCurrent Liabilities RBDRBDCreditorsCreditorsBills PayableBills PayableShort –Term LoansShort –Term Loans

10,00010,0002,00,0002,00,0001,50,0001,50,00050,00050,000

15,00015,0002,15,0002,15,0001,50,0001,50,00070,00070,000

5,0005,00015,00015,000----20,00020,000

Total current Total current liabilitiesliabilities

4,10,0004,10,000 4,50,0004,50,000 40,00040,000

Net Increase in Net Increase in Working Capital Working Capital (CA – CL)(CA – CL)

1,10,0001,10,000

ADJ. PROFIT & LOSS A/c

ParticularsParticulars AmountAmount ParticularsParticulars AmountAmount

To Preliminary Exp.To Preliminary Exp.To ReservesTo ReservesTo Preliminary Exp To Preliminary Exp

W/offW/offTo dividends To dividends To Dividend on To Dividend on

equity shares equity shares

10,00010,0002,55,0002,55,000

500050001200012000

1000010000 By fund flow By fund flow operationoperation 2,92,0002,92,000

2,92,0002,92,000 2,92,0002,92,000

FUND FLOW STATEMENT

SourcesSources AmountAmount ApplicationsApplications AmountAmount

Issue of Equity Issue of Equity share Capitalshare Capital

Issue of Issue of DebenturesDebentures

Fund flow Fund flow operationoperation

1,00,0001,00,000

50,00050,000

2,92,0002,92,000

PreliminaryPreliminaryPreference Share Preference Share

capitalcapitalPurchase of fix Purchase of fix

assetsassetsGovt. securities Govt. securities Increase in Increase in

Working Capital Working Capital Dividend paidDividend paid

10,00010,000

1,00,0001,00,000

15000015000050,00050,000

1,10,0001,10,0002200022000

4,42,0004,42,000 4,42,0004,42,000