Presentation on FUND FLOW STATEMENT

Presented By:
LOKESH KUMAR PGDM-07003

Why we prepare fund flow statement?

The balance sheet and income statement are the traditional basic financial statement of a business enterprise. A serious limitation of these statements is that they do not provide information regarding changes in the firms financial position during a particular period of time. They fail to answer following question 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?

The balance sheet is merely a static statement.

It is statement of asset and liabilities of the business as on particular date. The fund flow statement overcomes these limitations of basic financial statement. Fund flow statement will provide us information about different sources of fund and their various uses in particular time.

MEANING OF FUND
The term fund has a variety of meaning such as cash fund, capital fund and working capital fund. 1.Cash fund In a narrow sense, fund means only cash. Cash flow statement portrays net effect of the various business transactions on cash into account receipts & disbursement of cash. This concept of preparing fund flow statement is not accepted, as there are many such transactions which do not affect cash but represent the flow of fund . for example: purchase of furniture on credit does not affect cash but there is flow of fund. 2. Capital fund Here fund means all financial resources used in the business, whether in the form of men, money, material, machine & others. 3.Net working capital -Net working capital means difference between current asset and current liabilities .funds generally refers to cash or cash equivalent or to working capital.

The term flow refers to changes or transfer and therefore the flow of funds means transfer of economic values from one asset to another, from one liability to another, from one asset to liabilities or vice-versa or a combination of these. So flow of fund refers to 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 accounts to be affected in a transaction ,is a current account i.e. current asset or current liabilities and the other account is non current account i.e. fixed asset or long term liability or capital. When a change in non current account is followed by a change in another non current account, it does not amount to flow of fund. It is because, in such case, neither the working capital increase nor decrease.

MEANING OF FLOW

For example

Machinery a/c Dr To share capital a/c (Machinery purchase in consideration of share)

In the above transaction both accounts are non current accounts which do not at all affect current asset and current liability. Therefore working capital will remain unaffected i.e. there will be no flow of fund. When changes in one current account results in a changes in other current account ,it also does not affect working capital i.e. there is no flow of funds. For example

Cash a/c Dr To debtor a/c (Cash received from debtor) It represents an increase of cash a current asset account and decrease of debtor again a current asset account .thus there will be no net changes in the amount of working capital, although the composition of working capital will be affected .

In the above figure the dotted line displays there will be no flow of fund & the dark line displays the flow of fund.

The changes which occurred in the current accounts as a result flow of fund are reflected in a statement known as schedule of changes in working capital . The similar changes in non current accounts are shown in Fund Flow Statement. Therefore, following two statements under this techniques . 1. Statement or Schedule of Changes in Working Capital. 2. Statement of Sources and Uses of Funds or Funds Flow Statement. Schedule of Changes in Working Capital It discloses the changes in individual item of current asset & current liabilities between two period & there effect on working capital. Working capital will increase when there is an increase in current asset and decrease in current liabilities, whereas, working capital will decrease when there is a decrease in current asset & increase in current liabilities. Net increase in working capital is treated as use of funds & the net decrease in working capital is treated as source of funds.

Preparation of Fund Flow Statement

Statement or Schedule of Changes in Working Capital.

Previous Year Current Year
Effect on Working captial Decrease Rs.

Item (A) Current Assets Cash at bank Cash in hand Stock in trade Debtors Bills receivable Advance payment Short term investment Prepaid expense Accrued income Total (A) (B) Current Liabilities (1) Short term loans (2) Bank overdraft (3) Creditors (4) Bills payable (5) Outstanding expenses (6) Unclaim dividend Total (B) Net Working Capital (A-B) Incraese / Decrease in Working Capital Total

Incraese Rs.

Meaning of fund flow statement :

This statement reveals resources from which funds
were obtain by the firm hand the specific uses to which such funds were applied. The effectiveness of financial management in procuring funds from various sources & using them effectively for generating income without sacrificing the financial position of the firm is reflected in fund flow statement . Definitions of fund flow statement : In the words of Foulke, R.A., a statement of source and application of fund is a technical device design to analysis the changes in the financial condition of business enterprises between two dates. According to : Almond Coleman, The fund flow statement summarizing the significant financial changes which were occurred between the beginning & the end of a companys accounting periods.

 This fund flow statement has two parts : 1. Sources of fund 2. Application of fund The difference between these two parts that is sources
& uses of funds represents net changes in working capital.

The excess of sources of funds over uses of fund is

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

Fund Flow Statement

Sources of Fund
Fund from operation Issue of share Issue of debenture long term loans Sale of fixed assets / Investment Non trading receipts Decrease in working capital (if any) Amount

Uses Of Funds
Loss from operation Redemption of preference shares Redemption of debentures Repayment of long term loans Purchase of fixed assets / Investments Payment of dividend & taxes Increase in working capital (if any)

Amount

Fund from operations :

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

Profit & loss Adjustment a\c

Particular
Amount

Particular
Profit or gain on sale of fixed asset Dividend received Interest received of investment Profit on revaluation of asset

Amount

Depreciation Loss on sale of fixed assets Under writing commissions Discount on issue of shares & debentures Preliminary expense written off Deferred revenue expenses Goodwill written off Patent or trademark Provision for taxes (If treated non current)

Fund from operation

Q-Comparative Balance sheet of Z Ltd. As

year 2000 and 2001 were as follow Liabilities
Account payable Notes payable Loan on Mortgage Capital Sinking fund Retained Earning Provision for DD Accumulated DepreciationBuilding furniture

on 2001
8500 23500 30600 12000 10000 60000 7000

2000 2001
15000 10000 40000 50000 16000 13950 1350 12000 3200 161500 18000 75000 40000 45000 12000 16275 1425 9000 2400 151600

Assets
Cash Account receivable Stock Sinking fund investment Land Building Furniture

2000
11200 21300 35000 16000 10000 60000 8000

161500

151600

You are giving information: Net profit for the year 2001 amounted
6675. Dividend amounted to Rs.5000 was paid during the year. Prepare a statement of sources and uses of fund.

Schedule of Changes in Working Capital

Items
CURRENR ASSETS:Cash Account receivable Stock TOTAL of CA (A) CUURENT LIABILITIES:Account payable Note payable Provision for D D TOTAL of CL (B) Difference b/w (A-B) Decrease in W C

2000
Amount
11200 21300 35000 67500

2001
Amount
8500 23500 30600 62600

Change in Increase

Working capital Decrease 2700

2200

4400

15000 10000 1350 26350 41150

41150

18000 7500 1425 26925 35675 5475 41150

3000 2500

75

5475 10175

10175

Fund flow statement

Sources of fund Amount Application of fund
Sale of sinking fund investment Fund from operation Decrease in working capital

Amount

4000 525
5475 10000

Redemption of share capital Dividend paid

5000 5000

10000

Profit & loss adjustment a\c

Particular
To Accumulate dep. On furniture To Dividend paid To Balance c/d

Amount Particular
200 5000 16275 By balance b/d By sinking fund By accumulate dep. On building By fund flow operation

Amount
13950 4000 3000 525 21475

21475

Accumulative deprecation Building Furniture

Particul ar
To P/L a/c To balance c/d

Amo unt
3000 9000 12000

Particula r
By balance b/d

Amoun t 12000

Particular
To furniture a/c To balance c/d

Amou nt 1000 2400 3400

Particula Amoun t r
By balance b/d By P/L a/c
3200 200

12000

3400

Furniture a\c
Particular
To balance b/d

Amoun Particular t 8000

By deprecatio n By balance c/d

Amoun t 1000 7000

8000

8000