FUNDS FLOW STATEMENT

FUNDS FLOW STATEMENT

Definition of fund flow statement

Fund flow statement is a statement which shows the inflow and out flow of funds between two dates of balance sheet. So, it is known as the statement of changes in financial position. We all know that balance sheet shows our financial position and inflow and outflow of fund affects it. So, in company level business, it is very necessary to prepare fund flow statement to know what the sources are and what are applications of fund between two dates of balance sheet. Generally, it is prepare after getting two year balance sheet.

According to Prof. Anthony, “The funds flow statement describes the sources from which additional funds were derived and the use of which these funds were put.”

Fund flow statements are known with different names
 

1.      Statement of source and uses of funds

2.      Summary of financial operations

3.       Movement of working capital statement

4.      Fund received and distributed statement

5.      Fund generated and expended statement

6.      A Funds Statement

7.      A statement of sources and application of fund

8.      Where got and where gone statement

9.      Inflow and outflow of fund statement

Objectives of Fund Flow Statement

The main purposes of FFS are:]

·         To help to understand the changes in assets and asset sources which are notreadily evident in the income statement or financial statement.

·         To inform as to how the loans to the business have been used.

·         To point out the financial strengths and weaknesses of the business.

According to Robert Anthony the funds flow statement describes the sources fromwhich additional funds were derived and the uses to which these funds were put.In short, it is a technical device designed to highlight the changes in the financialcondition of a business enterprise between two balance sheets.

·         Format of Fund Flow Statement

Sources	Applications
Fund from operation	Fund lost in operations
Non-trading incomes	Non-operating expenses
Issue of shares	Redemption of redeemable preferenceshare
Issue of debentures	Redemption of debentures
Borrowing of loans	Repayment of loans
Acceptance of deposits	Repayment of deposits
Sale of fixed assets	Purchase of fixed assets
Sale of investments(Long Term)	Purchase of long term investments
Decrease in workingcapital	Increase in working capital

Steps in Preparation of Fund Flow Statement.

1. Preparation of schedule changes in working capital (taking current items only).

2. Preparation of adjusted profit and loss account (to know fund from or fund lost inoperations).

3. Preparation of accounts for non-current items (Ascertain the hidden information).(2 & 3 collectively can be shown as Statement showing the fund from operation)

4. Preparation of the 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

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

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

Current liabilities

             Bills payables
             Sundry creditors
             Bank overdraft
             Short term advances
             Dividends payables
             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

             goodwill
             patents
             trade marks
             preliminary expenses
             discount on issue of shares

3. Appropriation of retained earning such as

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

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

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

5. Dividends including

             Interim dividend
             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

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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

            Profit on sale of land and building
            Profit on sale of plant and machinery
            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 ↓

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A ) 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 )
9. 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 ↓
--------------------------------------------------------------------------------------

Limitations of the funds flow statement:

The funds flow statement suffers from the following limitations

1.      It do1.

1.      It does not include non-fund transactions

2.      It does not add any new item but the financial data appearing in the income statement and the position statement are simply arranged

3.      It is historical in nature as it summarises the sources and uses of working capital already reported by the final accounts but does not estimate the sources and uses of funds for near future.

4.      It does not disclose changes in management policy regarding investment in current assets and short term financing.