Definition of 'Fund Flow'

The net of all cash inflows and outflows in and out of various financial assets. Fund flow is usually measured on a monthly or quarterly basis. The performance of an asset or fund is not taken into account, only share redemptions (outflows) and share purchases (inflows). What is fund flow statement? Why, how and when it prepared? Financial statements do not give the complete financial information. These statements give the information of funds on a particular date. The purpose of preparation of fund flow statements is to know about from where funds are coming and where being invested. The funds flow statements is generally prepared from the data identifiable and profit and loss account and balance sheets. Fund flow statement is also called as sources and application of funds. It shows the detail of funds business received from sources and the amount of funds the business used for different purposes in the year. Acc. To FOURLKE, A statement of sources and application of funds, is a technical advice designed to highlight the changes in financial position of business enterprise between two dates. Why fund flow statement is prepared? Financial statements do not give the complete financial information. The purpose of preparation of fund flow statements is to know about from where funds are coming and where being invested. It discloses the funds at the end of one period of time to the end of another period of time. It provides the useful additional information, not covered by financial statements. The funds flow statement is prepared from data generally identifiable and profit and loss account, balance sheet and related notes. Te another important need of fund flow statement is that income statement and balance sheet does not provide full and needed information. Income statement is restricted to the limited transactions regarding goods and services to customers. The balance sheet also gives the detail of assets and liabilities of the business. There are few other reasons to prepare fund flow statement: 1. It explains the financial consequences of business operations: Fund flow statement gives answer to following conflicting situations. a) How the business could have good liquid position in spite of business making loses or acquisition of fixed assets? b) Where have the profits gone? c) How a business can earn more and more profits. 2. It answers intricate queries: a) How much fund is generated from normal business operations? b) What are the sources of repayment of loans? c) How to utilize the funds up to optimum level? 3. It acts as an instrument for allocation of resources. 4. It is a test of effectiveness in use of working capital. How and when to prepare fund flow statements? There are different transactions, which can make change in flow of funds and vice versa. Firstly those transactions which can make a change in flow of funds.

1. Transactions that effect current and fixed assets. A transaction, which changes the balance of current assets and fixed asset, will make a flow of funds. 2. Transactions effecting current assets and non-current liabilities. When a transaction effects a change in current asset and non-current liability, it will result in flow of funds. 3. Transactions effecting current liability and non-current assets. All those transactions, which involve current liabilities and non-current assets, will result in flow of funds. 4. Transactions effecting current liability and non-current liability: when there will be change in current liability and non-current liability will result in flow of funds. Transaction not effecting funds. 1. If transaction effect accounts of current category only: All those transaction which effect the current assets or current liabilities only will never result into flow of funds. 2. If transaction effect non current accounts only. There will be no change in flow of funds, if a transaction affects accounts of non-current category only. Schedule of changes in working capital: When there will be a change in current assets and current liabilities of the firm then that change is covered under schedule of changes in working capital. This is the first step of fund flow statement. So this particulars statement records only change in current assets and current liabilities of the business. By current assets we mean cash and other assets, which are easily converted into cash by normal course of business. By current liabilities we mean which are paid out in short span of time for e.g. creditors, bills payable, bank overdraft etc. the schedule of changes in working capital is prepared by recording current assets and liabilities at the beginning and at the end of the period. If a current asset is more in current year in comparison to previous year then difference is recorded in the increase column and vice versa. If a current liability is more in current year than the previous year the difference is recorded in decrease side. Performa of Schedule of changes in working capital: Particulars 2005 2006

Increase

Decrease

Current assets Stock Debtors Cash and bank Current liabilities Bills payable Creditors Bank overdraft Total liabilities Working capital Increase/Decrease in working capital Preparation of funds flow statement: In order to prepare fund flow statement, it is necessary to find out the sources and application of funds. Sources of funds: a) Internal sources: funds flow from operations is the only internal source of funds. The following adjustments will be required in net profit for calculating true funds from operations. Add. Depreciation on fixed assets Preliminary expenses or goodwill written off. Transfer to general reserve Provision for taxation and proposed dividend. Loss on sale of fixed assets. Less. Profit on sale of fixed assets Profit on revaluation of fixed assets. Dividend received or accrued dividend. b) External sources Funds from long term loan Sale of fixed assets Funds from increase in share capital.

Applications of funds. Purchase of fixed assets Payment of dividend Payment of fixed liabilities Payment of tax liability.

Performa of funds flow statement Sources o funds Amount Issue of shares Issue of debentures Long-term borrowings Sale of fixed assets Operating profit* Decrease in working capital* * Only one figure will be there.

Application of funds Redemption of redeemable preference shares Redemption of debentures Payment of long-term loans Purchase of fixed assets Operating loss* Increase in working capital*

Amount