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A fund flow statement is a statement which explains the various sources from which
funds were raised and the uses to which these funds were put. A fund flow shows the
sources from which the funds are received and the uses (or applications) to which these
have been put. In other words, a fund flow statement is used to explain the movement
of working capital.
Working capital is defined as the difference between current assets and current
liabilities. Working capital determines the liquidity position of the company. As a
historical analysis, the statement of changes in working capital reveals to management
the way in which working capital has been obtained and used. With this insight,
management can prepare the estimates of the working capital flows. A statement
reporting the changes in working capital is useful in addition to the financial statement.
Sources of Fund/ Working capital:
The typical sources of working capital are summarised below:
(i) Funds from operations (adjusted net income)
(ii) Sale of non-current assets:
a. Sale of long-term investments (shares, bonds debentures etc)
b. Sale of tangible fixed assets like land, building, plant, or equipments.
c. Sale of intangible fixed goodwill, patens, or copyrights.
(iii) Long-term financing:
a. Long-term borrowings (institutional loans, debentures, bonds etc.)
b. Issuance of equity and preference shares
(iv) Short-term financing such as bank borrowings.
Uses/Application of Fund/ working capital
The uses of working capital are as follows:
(i) Adjusted net loss operations,
(ii) Purchase of non-current assets:
a. Purchase of long-term investments like shares, bonds /debentures etc.
b. Purchase of tangible fixed assets, like land, building, plant, machinery, equipment etc.
c. Purchase of intangible fixed assets, like goodwill, patents, copyrights etc.
(iii) Repayment of long-term debt (debentures or bonds) and short-term debt (bank
borrowing),
(iv) Redemption of redeemable preference shares
(v) Payment of cash dividend.
The cash flow statement is different from the fund flow statement
The difference between the two can be summarized as follows:
1. The fund flow statement is based on the concept of working capital, whereas the
cash flow statement is based on cash which is only one of the elements of working
capital.
2. The fund flow statement provides the details of funds movements, whereas cash flow
statement provides the details of cash movements.
3. Fund flow statement considers the movement of the funds as defined in terms of net
working capital, whereas the cash flow statement considers only the actual movement
of funds.
4. In fund flow statement, net increase or decrease in working capital is recorded while
in cash flow statement; individual item involving cash is taken into account.
Amount
------------------------------------------------------------------------------------------Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non fund and non operating items which have been already Debited to
profit and loss account
1. Depreciation
2. Amortization of fictitious and intangible assets
Goodwill
Patents
trade marks
preliminary expenses
discount on issue of shares
3. Appropriation of retained earning such as
Transfer to general reserve
Dividend equalization fund
Transfer to sinking fund
Contingency reserve etc.
4. Loss on sale of any non current or fixed assets such as
Loss on sale of land and building
Loss on sale of machinery
Loss on sale of furniture
Loss on sale of long term investment
5. Dividends (including Interim dividend /Proposed dividend
(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account
----------------------------------------------------------------------------------Total ( A)-------------------------------------------------------> XXXXX
------------------------------------------------------------------------------------Less Non Fund or non operating items which have already been credited to
profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as
Profit on sale of land and building
Profit on sale of plant and machinery
Profit on sale of long term investment etc.
2. Appreciation in the value of fixed assets such as increase in the value of land if it has
been credited to profit and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the
balance sheet
---------------------------------------------------------------------------------------Total ( B)
XXXXX
---------------------------------------------------------------------------------------Funds received from operation or business activities = total ( A) Total ( B)
You can make also above statement in T shape adjusted profit and loss account form .
3rd Step
Fund flow statement
----------------------------------------------------------------------------------------- Amount
------------------------------------------------------------------------------------Source of funds
1.
2.
3.
issue of debentures
4.
5.
6.
7.
8.