Fund Flow Statements Meaning of Fund Fund Flow Statement is widely used tool in the hands of financial executives

for analyzing the financial performance of a concern. Funds keep on moving in a business which itself is based on a going concern concept. In broader sense, the term fund refers to money values in whatever form it may exits.

Meaning of Flow of Fund The term Flow means change. Thus flow of fund means change in fund or change in working capital. Flow of fund is said to have taken place when a business transaction makes a change in the amount of fund which existed just before the happening of the transaction.

Current and Non-Current Accounts Current accounts can be either be current assets or current liabilities. Current assets are those assets which in the ordinary course of business can be or will be converted into cash within a short period of normally one accounting year. Current liabilities are intended to be paid in the ordinary course of business within a short period normally one accounting year out of the current assets or the income of the business. Following is the list of current and non-current accounts: Current liabilities Bills Payable Sundry Creditors Expenses Outstanding Dividend Payable Bank Overdraft Short-term loans Provision against current assets Current Assets Cash in hand Cash at Bank Bills Receivable Sundry Debtors Short-term loans and Advances Marketable Investments Inventories such as Raw Material, Workin-Progress, Finished goods 8. Prepaid Expenses 9. Accrued Income 1. 2. 3. 4. 5. 6. 7.

1. 2. 3. 4. 5. 6. 7.

8. Provision for Taxation etc

1. 2. 3. 4. 5. 6. 7. 8. 9.

Non-Current or Permanent Liabilities Equity Share Capital Preference Share Capital Debentures Long-term Loans Share Premium Share Forfeited Profit and Loss (Balance of Profit) Capital Reserve Capital Redemption Reserve etc.

Non-Current or Permanent Assets Goodwill Land Building Plant and Machinery Furniture and Fittings Trade Mark Patent Right Long Term Investment Discounts on Issue of Shares and Debentures 10. Other Deferred Expenses etc. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Fund Flow Statement The Fund Flow Statement is a financial statement which reveals the methods by which the business has been financed and how it has used its fund between the opening and closing balance sheet dates. Thus, a fund flow statement is a report on movement of funds explaining wherefrom works capital originates and where into the same goes during an accounting period. This statement consist of two parts (1) Sources of Funds and (2) Application of Funds. The difference between two shows the net change in working capital during the period. It is to be remembered that only those transactions can find place in this statement which affect the net working capital of the firm. The Fund Flow Statement is a supplement to the two principal financial statements. While supplementing the position statement, it describes the sources from which additional funds were derived and the use to which these funds were put. The transactions which increase working capital are sources of funds and the transactions which decrease working capital are application of funds The basic object of this statement is to find out increase or decrease in working capital during a period by showing sources and uses of working capital.

Importance of Fund Flow Statement Fund Flow Statement is a useful tool in the financial managers analytical kit. The basic purpose of this statement is to indicate where funds came from and where it was used during the certain period. Following are the uses of this which shows its importance: 1. Fund Flow Statement determines the financial consequences of business operations. It shows how the funds were obtained and used in the past. Financial manager can take corrective actions. 2. The management can formulate its financial policies dividend, reserves etc. on the basis of the statement. 3. It serves as a control device, when comparing with budgeted figures. The financial manager can take remedial steps, if there is any deviation 4. It points out the sound and weak position of the enterprise. 5. It points out the causes for changes in working capital. 6. It enables the Bankers, Creditors or financial institutions in assessing the degree of risk involved in granting credit to the business. 7. The management can rearrange the firms financing more effectively on the basis of the statement. 8. Various uses of funds can be known and after comparing them with the uses of previous year, improvement or downfall in the firm can be assessed. 9. The statement compared with the budget concerned will show to what extent the resources of the firm were used according to plan and what extent the utilization was unplanned. 10. It tells whether sources of funds are increasing or decreasing or constant.

Limitations of Fund Flow Statement 1. The statement lacks originality because it is only rearrangement of data appearing in accounts books. 2. It indicate only the past position and not future. 3. It indicates Fund Flow in summary form it does not show various changes which take place continuously. 4. When both aspects of a transaction are current, they are not considered. 5. When both the aspect of transaction are non-current, even then they are not included in this statement. 6. It is not ideal tool for financial analysis. 7. It is not an original statement but simply a rearrangement of data in financial statements.

Preparation of Fund Flow Statement The Fund Flow analysis requires (a) Statement of changes in working capital and (b) Fund Flow Statement. the preparation of two statements.