FUND FLOW STATEMENT Presented By: SHREEKANT VYAS LECTURER IN MARUDHAR ENGINNERING COLLEGE
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Why we prepare fund flow statement?
The balance sheet and income statementare the traditional basic financial statement of abusiness enterprise. A serious limitation of these statements is that they do not provideinformation regarding changes in the firm’sfinancial position during a particular period of time. They fail to answer following question
What funds were available during theaccounting period and for what purpose thesefunds were utilized?
Have long term sources been adequate tofinance fixed asset purchase?
Does the firm possess adequate workingcapital?
How much funds have been generated fromoperations?
Why did the firm not pay dividend in spite of adequate profit?
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The balance sheet is merely a staticstatement. It is statement of asset andliabilities of the business as on
particular date. The fund flow statementovercomes these limitations of basicfinancial statement. Fund flow
statement will provide us informationabout different sources of fund andtheir various uses in particular time.
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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. ‘Cashflow statement’ portrays net effect of the various businesstransactions on cash into account receipts & disbursementof cash.
This concept of preparing fund flow statement is notaccepted, 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 affectcash but there is flow of fund.
2. Capital fund –Here fund means all financial resources usedin 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 .fundsgenerally refers to cash or cash equivalent or to workingcapital.
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MEANING OF FLOW 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 oneliability to another, from one asset to liabilities orvice-versa or a combination of these. So flow of fundrefers to increase or decrease in net working capital.
The increase or decrease in net working capitalwill take place only when one account, out of twoaccounts to be affected in a transaction ,is a currentaccount i.e. current asset or current liabilities and theother account is non current account i.e. fixed assetor long term liability or capital.
When a change in non current account is followedby a change in another non current account, it doesnot amount to flow of fund. It is because, in suchcase, neither the working capital increase nordecrease.
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For exampleMachinery a/c Dr
To share capital a/c
(Machinery purchase in consideration of share)
In the above transaction both accounts are noncurrent accounts which do not at all affect currentasset and current liability. Therefore working capitalwill 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 notaffect 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 nonet changes in the amount of working capital, although the compositionof working capital will be affected .
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In the above figure the dotted line displays there will be no flow of fund &the dark line displays the flow of fund.
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Preparation of Fund Flow Statement The changes which occurred in the current accounts as a result
flow of fund are reflected in a statement known as ‘scheduleof changes in working capital’ .
The similar changes in non current accounts are shown in ‘FundFlow 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 workingcapital. Working capital will increase when there is an increasein current asset and decrease in current liabilities, whereas,
working capital will decrease when there is a decrease incurrent 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.
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ItemItem
(A) Current(A) Current AssetsAssetsCash at bankCash at bank
Cash in handCash in hand
Stock in tradeStock in trade
DebtorsDebtors
Bills receivableBills receivable
Advance paymentAdvance payment
Short term investmentShort term investmentPrepaid expensePrepaid expense
Accrued incomeAccrued income
Total (A) Total (A)
(B) Current Liabilities(B) Current Liabilities
(1) Short term loans(1) Short term loans
(2) Bank overdraft(2) Bank overdraft
(3) Creditors(3) Creditors
(4) Bills payable(4) Bills payable
(5) Outstanding expenses(5) Outstanding expenses
(6) Unclaim dividend(6) Unclaim dividend
Total (B) Total (B)
Net Working Capital (A-B)Net Working Capital (A-B)
Incraese / Decrease in WorkingIncraese / Decrease in WorkingCapitalCapital
Total Total
Previous YearPrevious Year Current YearCurrent Year Effect onEffect on
Incraese Rs.Incraese Rs.
Working captialWorking captial
Decrease Rs.Decrease Rs.
Statement or Schedule of Changes in Working Capital.
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Meaning of fund flow statement : This statement reveals resources from which
funds were obtain by the firm hand the specificuses to which such funds were applied. The
effectiveness of financial management inprocuring funds from various sources & usingthem effectively for generating income withoutsacrificing the financial position of the firm isreflected 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 technicaldevice design to analysis the changes in thefinancial condition of business enterprises
between two dates”. According to : Almond Coleman, “ The fundflow statement summarizing the significantfinancial changes which were occurred betweenthe beginning & the end of a company’saccounting periods”.
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This fund flow statement has two parts :1. Sources of fund2. Application of fund
The difference between these two parts that issources & uses of funds represents net changesin 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 netdecrease in working capital.
The amount of net increase or decrease asshown in fund flow statement should be equal tothe amount shown by schedule of workingcapital changes.
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FUND FLOW STATEMENT
Sources of FundSources of FundAAmountmount
Fund from operationFund from operation
Issue of shareIssue of share
Issue of debentureIssue of debenture
long term loanslong term loans
Sale of fixed assets /Sale of fixed assets /
InvestmentInvestment
Non trading receiptsNon trading receipts
Decrease in workingDecrease in working
capitalcapital
(if any)(if any)
Uses Of FundsUses Of Funds AmountAmount
Loss from operationLoss from operation
Redemption of Redemption of preference sharespreference shares
Redemption of Redemption of
debenturesdebentures
Repayment of Repayment of
long term loanslong term loansPurchase of fixed assetsPurchase of fixed assets
/ Investments/ Investments
Payment of dividend & taxesPayment of dividend & taxes
Increase in working capitalIncrease in working capital
(if any)(if any)
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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 asource of funds by way of increase in cash ,
debtor and B/R.
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PROFIT & LOSS ADJUSTMENT A\C ParticularParticularAmountAmount
DepreciationDepreciation
Loss on sale of fixed assetsLoss on sale of fixed assets
Under writing commissionsUnder writing commissions
Discount on issue of shares &Discount on issue of shares &
debenturesdebentures
Preliminary expense written off Preliminary expense written off
Deferred revenue expensesDeferred revenue expenses
Goodwill written off Goodwill written off
Patent or trademarkPatent or trademark
Provision for taxesProvision for taxes
(If treated non current(If treated non current))
Balance c/dBalance c/d
ParticularParticular AmountAmount
Balance b/dBalance b/d
Profit or gain on sale of Profit or gain on sale of
fixed assetfixed asset
Dividend receivedDividend received
Interest received of Interest received of
investmentinvestment
Profit on revaluationProfit on revaluation
of assetof asset
Fund from operationFund from operation (b/f)(b/f)
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Q-COMPARATIVE BALANCE SHEET OF ZLTD. AS ON YEAR 2000 AND 2001 WERE AS
FOLLOWLiabilitiesLiabilities 20002000 20012001 AssetsAssets 20002000 20012001
AccountAccountpayablepayable
Notes payableNotes payableLoan onLoan onMortgageMortgage
CapitalCapital
Sinking fundSinking fund
RetainedRetainedEarningEarning
Provision for DDProvision for DD
AccumulatedAccumulatedDepreciation-Depreciation-
BuildingBuilding
furniturefurniture
1500015000
1000010000
4000040000
5000050000
1600016000
1395013950
13501350
1200012000
32003200
161500161500
1800018000
7500075000
4000040000
4500045000
1200012000
1627516275
14251425
90009000
24002400
151600151600
CashCash
AccountAccount
receivablereceivableStockStock
Sinking fundSinking fundinvestmentinvestment
LandLand
BuildingBuildingFurnitureFurniture
1120011200
21300213003500035000
1600016000
1000010000
600006000080008000
161500161500
85008500
23500235003060030600
1200012000
1000010000
600006000070007000
151600151600
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YOU ARE GIVING INFORMATION:-
Net profit for the year 2001 amounted 6675.
Dividend amounted to Rs.5000 was paidduring the year.
Prepare a statement of sources and uses of fund.
CAPITAL
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CAPITAL
ItemsItems
CURRENR ASSETS:-CURRENR ASSETS:-
CashCash
Account receivableAccount receivable
StockStock
TOTAL of CA (A) TOTAL of CA (A)CUURENTCUURENTLIABILITIES:-LIABILITIES:-
Account payableAccount payable
Note payableNote payable
Provision for D DProvision for D D
TOTAL of CL (B) TOTAL of CL (B)
Difference b/w (A-B)Difference b/w (A-B)
Decrease in W CDecrease in W C
20002000
AmountAmount
1120011200
2130021300
3500035000
6750067500
1500015000
1000010000
13501350
2635026350
4115041150
4115041150
20012001
AmountAmount
85008500
2350023500
3060030600
6260062600
1800018000
75007500
14251425
2692526925
3567535675
54755475
4115041150
Change inChange in
IncreaseIncrease
22002200
25002500
54755475
1017510175
WorkingWorkingcapitalcapital
DecreaseDecrease
27002700
44004400
30003000
7575
1017510175
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FUND FLOW STATEMENT
Sources of Sources of fundfund
Sale of sinkingSale of sinkingfund investmentfund investment
Fund fromFund fromoperationoperation
Decrease inDecrease inworking capitalworking capital
AmountAmount
40004000
525525
54755475
1000010000
Application of Application of fundfund
Redemption of Redemption of
share capitalshare capital
Dividend paidDividend paid
AmountAmount
50005000
50005000
1000010000
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PROFIT & LOSS ADJUSTMENT A\C
ParticularParticular
To Accumulate dep. To Accumulate dep.
On furnitureOn furniture To Dividend paid To Dividend paid
To Balance c/d To Balance c/d
AmountAmount
200200
50005000
1627516275
2147521475
ParticularParticular
By balance b/dBy balance b/d
By sinking fundBy sinking fundBy accumulate dep.By accumulate dep.On buildingOn building
By fund flowBy fund flowoperationoperation
AmountAmount
1395013950
40004000
30003000
525525
2147521475
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ACCUMULATIVE DEPRECATIONBUILDING FURNITURE
ParticulParticularar
To P/L a/c To P/L a/c
To balance To balancec/dc/d
AmouAmountnt 30003000
90009000
1200012000
ParticulaParticularr By balanceBy balanceb/db/d
AmountAmount 1200012000
1200012000
ParticularParticular
To furniture To furniturea/ca/c
To balance To balancec/dc/d
AmounAmountt
10001000
24002400
34003400
ParticulaParticularrBy balanceBy balanceb/db/d
By P/L a/cBy P/L a/c
AmountAmount
32003200
200200
34003400
ParticularParticular
To balance To balanceb/db/d
AmountAmount
80008000
80008000
ParticularParticular
ByBydeprecatiodeprecationn
By balanceBy balancec/dc/d
AmountAmount
10001000
70007000
80008000
Furniture a\c