Funds flow statement

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By :Kanika Sharma

Asst. Prof. in Commerce

Introduction

The basic financial statements, I.e., the balance sheet and profit and loss account or income statements of business, revels the net effect of various transactions on the operational and financial position of the company. Likewise, another statement has to be prepared to show the changes in the assets and liabilities from the end of one period to the end of another period of time. This statement is known as,

statement of change in financial position or a fund flow statement.

Meaning and concept of funds

The funds has been defined in a number of ways:-

1. In a narrow sense:- it means cash only and a fund flow statement prepared on this basis is known as a cash flow statement.
2. in a broader sense:- here, funds refers to money values in whatever form it may exist. It can be Men, Material, Money, Machinery and others.
3. in a popular sense:- here, funds mean working capital concept, I.e., the excess of current over current liabilities.

Meaning And definition of fund flow statement

Meaning :- The fund flow statement is a statement which shows the movement of funds and is a report of the financial operations of the business undertaking. It indicates various means by which funds were obtained and the ways in which these funds were employed. In simple words, it is a statement of sources and application of funds.

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Definition:-

In the words of Robert N. Anthony:- “ A fund flow statement describes the sources from which additional funds were derived and the uses to which these sources were put.”

According to Accounting Standard Board of ICAI, “A statement which summaries for the period covered

by it, the changes in financial position including the sources from which the funds were obtained by the

enterprised and the specific use to which the fund were applied.

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Conditions of Funds Flow�

• The flow of funds takes place when transactions between the following items occur:
• Fixed and Current Assets (Assets purchased in Cash)
• Current Assets and Capital (Redemption or Issue in Cash)
• Fixed Assets and Current Liabilities ( Assets purchased in Credit)
• Current Liabilities and Capital ( Debentures issued to Creditors)

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Uses of fund flow statement

Fund flow statement is widely used by financial analyst, credit granting institutions and financial managers. The various uses are as given below:-

1. Revels the changes between two balance sheet dates.
2. Describe the sources of funds and it’s application
3. Assess the growth of firm.
4. Check adequacy and inadequacy of working capital.
5. Plan the intermediate and Long term financing of the firm.

Significance or importance

The significance or importance of fund flow statement can be well followed from it’s various uses given below:-

1. It helps in analysis of financial position.
2. Throws light on perplexing questions
3. Helps in formulation of dividend policies.
4. Helps in proper allocation of resources.
5. Act as a future guide.
6. Helps appraising the uses of working capital.
7. Helps in knowing the credit worthiness

Procedure for preparing a fund flow statement

Preparation of fund flow statement consists two parts:-

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Fund flow statement preparation

1. Statement of changes

In working capital

2. Statement of sources and

Application of funds.

1. Statement of changes in working capital

2. Statement of sources and application of funds.

These are prepared in. Two formats:-

● Report form,

● T form

Specimen of Report form of fund flow statement :-

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Specimen of T-form statement of resources and application of funds

Sources of funds

1. Funds from operation or trading profit
2. Issue of share capital
3. Issue of debentures and raising of loans
4. Sale of fixed assets and long term investment
5. Non – trading receipts

Application of funds

1. Funds lost in operation
2. Redemption of preference share capital
3. Repayment of loan
4. Purchase of non-current or fixed assets
5. Payments of dividends and tax
6. Any other non- trading payments

Calculating funds from operations

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Calculating funds from operations

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Limitations of fund flow statement

Limitations of fund flow statement is given below:-

1. Not a substitute of profit and loss account
2. Cannot reveal continuous changes
3. Not an original statement
4. Not provide information about changes in cash
5. Historic in nature
6. Accuracy is depending on financial statements

Difference between fund flow and cash flow statement

FUND FLOW STATEMENT

1. Basis of concept:- it is a wider concept of funds, working capital.
2. Basis of accounting:- it is based on accrual Basis of accounting.
3. Schedule of changes in working capital:- Schedule of changes in working capital is prepared to show the changes in current assets and current liabilities.
4. Methods of preparing:- it is prepared on the basis of sources and application of funds.
5. Basis of usefulness:- it is useful in planning intermediate and long term financing.
6. Basis of improvement:- improvement in funds doesn’t necessary lead to Improvement in cash position.
7. Cash and cash equivalent:- The opening and closing balance of cash are included in the Schedule of changes in working capital.

CASH FLOW STATEMENT

1. It is based on a narrower concept of funds, cash.
2. It is based on cash basis of accounting.
3. No such schedule of changes in working capital is prepared.

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• It is prepared by classifying all cash inflow and outflow in terms of operating, investing and financing activities.
• It is more useful for short term analysis and cash planning of the business.
• Improvement in cash position results in Improvement of funds position of the firm.
• The balance of cash and cash equivalent at the beginning and at the end of the period are shown in the cash flow statement.

Example of Fund Flow Statement

The Balance sheet of MRF Ltd. for 2011 and 2012 is given below. From the shared data prepare:

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• Statement of Working Capital Changes

Fund Flow Statement

Additional Information:

Dividend paid Rs.400/-, Taxes Rs.250/-.

Issue of Bonus Shares Rs.800/-.

MRF Ltd. purchased land for Rs.1500/-.

Sale of Furniture costing Rs.1000/- for Rs.800/- (accumulated depreciation Rs.600/-)

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Opening balance of Land Rs.7000/-�Add: Land Purchased Rs.1500/-�Less: Closing balance Rs.5000/-�Hence, the Sale of Land is equal to Rs.3500/-