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Fund Flow Analysis

The document discusses the meaning, flow, and preparation of fund flow statements. It defines fund as cash and other financial resources used in business. The flow of funds refers to changes in working capital from business transactions, which can be inflows or outflows. A fund flow statement summarizes significant financial changes between balance sheet dates based on working capital changes and sources and uses of funds. It highlights financial strengths, weaknesses, and how management uses funds.

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hardika jadav
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81 views

Fund Flow Analysis

The document discusses the meaning, flow, and preparation of fund flow statements. It defines fund as cash and other financial resources used in business. The flow of funds refers to changes in working capital from business transactions, which can be inflows or outflows. A fund flow statement summarizes significant financial changes between balance sheet dates based on working capital changes and sources and uses of funds. It highlights financial strengths, weaknesses, and how management uses funds.

Uploaded by

hardika jadav
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Hardika Jadav

Meaning of fund
 The term "Fund" refers to Cash, to Cash Equivalents or to
Working Capital and all financial resources which are used in
business.
 These total resources of a concern are in the form of men,
materials, money, plant and equipments and others.
 In a broader meaning the word "Fund" refers to Working
Capital. The Working Capital indicates the difference between
current assets and current liabilities.
Flow of funds
 The term "Flow of Funds" refers to changes or movement of
funds or changes in working capital in the normal course of
business transactions.
 The changes in working capital may be in the form of inflow of
working capital or outflow of working capital. In other words,
any increase or decrease in working capital
 when the transactions takes place is called as "Flow of Funds."
 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.
Examples of "Flow of Funds"
Examples Transactions Involve Flow of Funds From
Between
(1) Purchase of Machinery for Current Asset and Non- Current to Non-Current
Cash Current Asset Account
(2) Issue of Share for Cash Current Asset and Capital Current to Capital Account
Current Asset.

(3) Redemption of Current Asset. and Non- Current to Long-Term


Debenture in Cash Current Liabilities Liabilities Account

(4) Creditors Paid off in Current Liabilities and Non- Non-Current Liabilities to
Debenture Current Liabilities Current Liabilities

(5) Land Transferred to Current Liability and Non- Non-Current Assets to


Creditors for } Current Assets Current Liability
their Statement
Examples of ''No Flow of Funds"
Examples Transactions Involve Flow of Funds From
Between
(1) Payment made to Current Asset and No Flow of Funds
Creditors Current Liabilities
made in Debenture

(2) Machinery Purchased Non-Current Assets and No Flow of Funds


and Payment No-Current Liabilities

(3) Machinery Purchased Non-Current Asset and No Flow of Funds


and Payment made in Capital
Shares
Fund Flow Statement
 It is a statement summarizing the significant financial changes in items of
financial position which have occurred between the two different balance
sheet dates.
 This statement is prepared on the basis of "Working Capital" concept of
funds.
 Fund flow Statement helps to measure the different sources of funds and
application of funds from transactions involved during the course of
business.
 The fund flow statement also termed as Statement of Sources and
Application of Fund, Where Got and Where Gone Out Statement, Inflow of
Fund or Outflow of Fund Statement.
Importance or Uses of Fund Flow Statement
 It highlights the different sources and applications or uses of funds between
the two accounting period.
 It brings into light about financial strength and weakness of a concern.
 effective tool
 helps the management to take corrective actions
 detailed information about profitability, operational efficiency and financial
affairs of a concern.
 guide to the management to formulate its dividend policy, retention policy
and investment policy etc.
 detailed explanation about movement of funds from different sources or
uses of funds during a particular accounting period.
Limitations of Fund Flow Statement
 Fund Flow Statement has suffered with the following limitations :

 It is prepared on the basis of information related to historical in nature. It


ignores to project future operations.

 This statement does not focus on transactions involved in non-fund items.

 It also ignores when transactions involved between current accounts or non-


current accounts.

 It does not provide any additional information to the management because


financial statements are simply rearranged and presented.
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 firm’s 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?
Preparation of Fund Flow Statement
 Fund flow analysis involves the following important
three statements such as :
 I. Fund From Operations
 II. Statement of Changes in Working Capital
 III. Fund Flow Statement.
Funds from operations
 Fund From Operation is to be determined on the basis of Profit and Loss
Account.

 The operating profit revealed by Profit and Loss Account represents the
excess of sales revenue over cost of goods sold.

 In the true sense, it does not reflect the exact flow of funds caused by
business operations.
STATEMENT OF CHANGES IN WORKING CAPITAL
 Before preparation of fund flow statement, it is essential to prepare first the
schedule of changes in working capital and fund from operations.

 Statement of changes in working capital is prepared on the basis of items in


current assets and current liabilities of between two balance sheets.

 This statement helps to measure the movement or changes of working


capital during a particular period.
 Principle or Rules for Preparation of Working Capital Statement

 The following rules may be kept in mind while preparing working


capital statement:

 (1) Increase in Current Asset Increases Working Capital


 (2) Decrease in Current Asset Decreases Working Capital
 (3) Increase in Current Liability Decreases Working Capital
 (4) Decrease in Current Liability Increases Working Capital
Fund flow statement
 After preparing schedule of changes in working capital and fund from
operations, at the last stage a comprehensive fund flow statement can be
prepared on the basis of component of non-current assets, non-current
liabilities of balance sheet and relevant information.

 In other words, this statement is prepared with the help of the changes in
non-current assets and non-current liabilities of balance sheet.
Components of Sources of Funds

 (1) Fresh Issue of Equity Share Capital.


 (2) Fresh Issue of Preference Share Capital.
 (3) Issue of Debentures and Bonds.
 (4) Long-Term Loans raised from bank, financial institutions and
public.
 (5) Long-Term Loans on Mortgage.
 (6) Sale of Fixed Assets.
 (7) Sale of Long-Term Investments.
 (8) Non-Trading Incomes.
 (9) Fund From Operations.
 (10) Net Decrease in Working Capital (as per schedule of changes in
working capital).
Components of Applications of Funds

 Generated funds from various sources may be utilized in the following


ways for meeting the future
 productive programs of the business:
 ( 1 ) Redemption of shares and debentures.
 (2) Repayment of loans raised from bank, financial institutions and
public.
 (3) Purchase of Fixed Assets.
 (4) Purchase of Long-Term Investments.
 (5) Non-Trading Expenditure.
 Payment of Tax;
 Payment of Dividend.
 (6) Fund Lost in Operations.
 (7) Net Increase in Working Capital (as per schedule of changing in
working capital).

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