Academic need to learn the fund flow statement

1. AS 3 units 1.
Accounting standard 3 units 1 of Institute of Chartered Accountant of India explains
preparation and presentation of statement of changes in financial position or fundflow
statement
2. UGC NET Commerce
If you want to clear UGC NET in commerce subject, you should also learn fund flow
statement. Because it includes in paper 11 and paper 3 A syllabus in the form of fund flow
analysis.
3. Graduate / Post Graduate Classes
Fund flow statement is full subject in B.Com. , B.B.A., B.C.A. and M.Com. , M.B.A.,M.C.A.
and C.A. classes . For succeeding in these classes, you should know the whole system of
fund flow statement.
4. Helpful in Practical business environment
Fund flow statement is very helpful for solving following practical problems ofbusiness
Why are current assets are decreasing, even there are high profit?
1. Why did Company not issue dividend, even company has obtained profit?
2. What happened with net profit, where did it go?
3. What did Company do with the fund received from selling of shares anddebentures?
What are main sources of company to repay his debts?
So, above questions answer can be given after making fund flow statements.
Definition of Fund
Fund means working capital. If current assets of company is more than current liability of
business, it is called working capital and working capitals other name is Fund.
Fund = Working capital = Current assets Current liability
Definition of Flow of Fund
Flow of fund means movement of fund. I take the example of air; we can feel its movement
or flow of air. Same thing is happen with fund, due to the activity of business fund is
transfer from one asset to another assets. If fixed assets are converted into current asset or
fixed liability is converted into current liabilities, these are the flow of fund. But if current
assets are changed with current assets or current assets are changed into current liabilities,
then, there is no flow of fund because there is no change working capital. Suppose, we get
the money fromdebtor, this is not flow of fund because, working capital is not changed.
Both items of current assets and when current assets change into current assets, there will
not be change in working capital.

Flow of Fund = Fixed asset changes into current asset or current asset changes into fixed
assets
Or
Fixed liability changes into current liability or current liability changes into fixed liability.
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
Statement of source and uses of funds
Or summary of financial operations
Movement of working capital statement
Or
Fund received and distributed statement
Or
Fund generated and expended statement.
Steps for making 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
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 statements 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
Loss
Loss
Loss

on
on
on
on

sale
sale
sale
sale

of
of
of
of

land and building

machinery
furniture
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
----------------------------------------------------------------------------------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
------------------------------------------------------------------------------------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