FUNDS FLOW STATEMENT

Parvathy Gopal

A FFS is a valuable aid to financial manager or a creditor in evaluating the uses of funds by a firm in determining how the uses are financed Assessing the growth of the firm Assessing Financial needs. Assessment of best way of financing the needs Planning intermediate and long term financing Analyzing working capital management

The concept of funds

The term fund has a variety of meanings. At one extreme it means cash so that a funds statement is nothing but an enumeration of net effects of various kinds of business events on cash. The other extreme it refers to economic values expressed in money measurements.

The most acceptable view is the one relating to Working Capital. There are two concepts of working capital namely, gross concept and net concept. Gross working capital refers to the firms investments in current assets. Net working capital refers to excess of current assets over current liabilities. This is the actual definition of fund.

Meaning of flow of funds

Any increase or decrease in working capital means funds flow. It can be inflow or outflow of funds. Inflow and outflow happens when there is changes in non current assets and the corresponding current assets/current liabilities are involved. Eg: Machinery purchased for cash

Some transactions increase the working capital position while some others decrease the working capital position. If a transaction results in increase of funds, it will be termed as source of fund. eg: shares issued for cash If a transaction results in decrease of fund it is termed as application of fund. Eg: if land and building purchased for cash. If a transaction does not make any change in WC position then it is termed as a non fund transaction. eg: shares issued for purchase of land

If both aspects belong to current category or non current category then there will be no flow of fund. A flow of fund takesplace when a business transaction brings a change in the working capital. It can be negative (decrease) or positive (increase). The term inflow refers to the sources and outflow refers to the uses of fund.Similarly decrease means outflow and application of fund.

FFS

It is a technical device designed to highlight the changes in the financial position of the business enterprise between two balance sheets It shows the sources and application of fund. It analyses the changes in fianacial condition of a business enterprise between two dates.

Technique of preparing FFS

The FFS involves the preparation of two statements: 1. Schedule of changes in working capital 2. Statement of sources and application of funds.

Schedule of changes in working capital

This is prepared to measure the increase or decrease in the working capital over a period of time, Working capital = CA - CL

Format
Particulars Previous year (Rs) Current Year (Rs) Increase Decrease

A. B. C.

D.

Current Assets Current Liabilities Working Capital (AB) Net Increase or decrease in WC

Sources
1.

FFS

Applications
Redemption of preference shares. 2. Redemption of debentures. 3. Repayment of loans 4. Purchase of FA 5. Payment of tax 6. Payment of dividend 7. Purchase of investments 8. Operating losses etc Net Increase in WC Total
1.

Issue of shares 2. Issue of debentures 3. Long term borrowings 4. Sale of fixed assets 5. Funds from operation 6. Sale of investments 7. Income from long term investments Net decrease in WC Total

Statement showing calculation of fund from operation

Rs. Rs.
Profit and Loss Account Closing balance Less: Profit and Loss Account opening balance Add: 1. Depreciation and depletion 2. Amortization of non fund items 3. Provision for tax 4. Transfer to reserve 5. Interim dividend paid 6. Dividend proposed 7. Loss on sale of FA 8. Any other cash expenditure Less:1. Profit on sale of FA 2. Dividend received 3. Appreciation Funds from operation