Funds Flow Analysis

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 Overview

 Definition
 Concept of Funds Flow Analysis
 Significance of Funds Flow
 Uses of Funds Flow
 Types of preparation of Funds Flow
statement
 Accounts to be prepared
 Difference b/w funds flow and cash flow

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 Definition

“It is a Statement summarizing the

significant financial changes which
have occurred between the
beginning and the end of the
company’s accounting period.”

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 Concept of Funds Flow
analysis
 Indicates Changes in Financial Condition
 Difference from balance sheet and income
statement
 Supplementary to the above statements and
not a substitute
 Summarizes events taking place between two
accounting periods

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 Significance of funds flow
 Helps shareholders, creditors and other to
evaluate the uses of funds by the enterprise
 Assists in analysis of past trends and thus
aid future expansion decisions
 Helps finance managers in identification of
problems, enabling detailed analysis and
immediate action

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 Uses of funds Flow
 Guides the management in deciding abut
the dividend and retention policies
 Planning for long term purposes is enabled
 It facilitates allocation of resources and
funds
 It also indicates the sources from which the
company has obtained its funds
 Factors resulting in change in working
capital may also be ascertained
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 Types of preparation of
funds flow statement
 Cash flow Approach

 Total resources approach

 Working capital approach

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 Cash Flow Approach
 According to this method, the word funds is
synonymous with cash
 Through this association, the funds flow
statement turns into the receipts and payment
account
 To prepare funds statement on cash basis, all
balance sheet changes taken place must be
classified into either changes that increase
cash or changes that decrease cash
 All these changes must be classified from the
income statement and surplus statement.

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 Total Resources Approach
 Here, funds represents total assets or
resources of the enterprise.
 All changes that result in increase or decrease
in assets and liabilities are shown
 To prepare funds statement on total resource
basis, all balance sheet changes taken place
must be classified into either inflow or outflow
of funds
 Inflow of funds consists earnings of the
company, contribution of additional funds,
increase in liabilities and decrease in assets.
 Outflow of funds consists of net losses,
decrease in liabilities, decrease in capital
funds and increase in assets
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 Working Capital Approach
 In his method, funds is equivalent to the net
working capital (current assets minus current
liabilities).
 The prime objective of this approach is to
show movement of funds through working
capital and shed light on the factors
contributing to such movements
 Two statement are prepared in this concept
 The first one is the schedule of working
capital in which changes in net working
capital are recorded
 The second statement is the funds flow
statement in which the factors responsible for
these variances in working capital are shown
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Accounts to be prepared

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Statement of Sources and
Applications of Funds
(Funds Flow Statement)

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Dr.
No. S o u r c e s

(1) C a p i t Ia n l t r o d u c

(2) Is s u e o f S h a r
D e b e n t u r e s
(3) P r e m iu m R e c
S h a r e s a Dn ed b e 13
Adjusted Profit & Loss
Account

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Schedule of Changes in
Working Capital

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 Schedule of Cha
Particulars

Sundry Debtors
Stock
Bills Receivable 17
Differences Between Funds
Flow and Cash Flow

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 Funds Flow Cash Flow
1. It is based on the overall 1. It is cash based which is just
concept of working capital one element of working capital

2. Does not contain any 2. Contains opening & closing

opening balance of cash
or closing balances
3. Indicates sources and uses of 3. Indicates only cash inflows
funds and
outflows

4. Not mandatory in India 4. Mandatory in India

5. No set format to follow in 5. To be presented as per AS-3

preparation statutory format given by ICAI

6. Useful in planning 6. Used by management for

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intermediate short
THE END

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