Fund Flow Statement Meaning of Funds, Fund Flow Statement, Flow of Funds, Working Capital, Causes of changes in working

Capital, Proforma of Sources and Application of Funds, Proforma of Adjusted Profit and Loss Account Meaning - Fund means cash or working capital or a financial resource of the company. Flow of fund is like circulation of blood in the body. Like blood circulates in the body, fund should also come into business and go from business. The flow of fund is called as changes in working capital. The movement of funds happens with increase or decrease in net working capital. The increase or decrease in net working capital takes place when two accounts to be affected in a transaction are current account and non current account. Like current asset or current liabilities one account should be current account and other non current. The flow highlights efficiency in funds management. The effectiveness of financial management in procuring funds from various sources & using them effectively for generating income without sacrificing the financial position of the firm. Funds Flow Statement - reveals resources from which funds can be obtained by the firm and the specific uses to which such funds can be applied to. A few definitions of fund flow statement are: Foulke, R.A., a statement of source and application of fund is a technical device designs to analysis the changes in the financial condition of business enterprises between two dates. The fund flow statement has two parts: (a)Sources of fund & (b) Application of fund. The difference between these two parts represents net changes in working capital. The excess of sources of funds over uses of fund is the net increase in working capital & excess of uses over sources of fund is net decrease in working capital. The amount of net increase or decrease as shown in fund flow statement should be equal to the amount shown by schedule of working capital changes. Proforma of Sources and Application of Funds Sources Applications Funds from business operations Losses from business operations Other incomes Purchase of non-current assets Sale of non-current assets Redemption of debentures and/or preference shares Long-term borrowings Dividends to share holders Issue of additional equity capital or preference share Net increase in working capital capital Net decrease in working capital Source of Fund (From where funds are obtained) : A decrease in asset or increase in liability results in source of fund. Application of Fund (How these funds are employed): An increase in asset or decrease in liability results in an application of fund. Application of Funds Flow Statement: It generally serves the following purposes:[a] Analysis of Financial Position: It analyses how the funds were obtained and used in the past. It is a valuable tool for the finance manager to understand and study the past and future plans of the firm and their impact on the liquidity. He can search reasons for the imbalances in uses of funds to take corrective actions. [b]Analysis of financial operations : Financial statements does not disclose the causes for changes in assets & liabilities between two different points of time. The fund flow statement explains causes for such changes& also the effect of these changes on liquidity position of the firm. [c] Computation of working capital - The funds flow statement helps the management in assessing the activity of working capital and whether the working capital has been effectively used to the maximum. [d] Calculation of Financing capacity: One important use of the statement is that it evaluates the firm' financing capacity. The analysis of sources of funds reveals how the firm's financed its development projects in the past i.e., from internal sources or from external sources. It also reveals the rate of growth of the firm. [e] Allocation of Resources: The amount of funds to be available for the projects is estimated with the help of Funds Flow Statement. This prevents the business from becoming a helpless victim of unplanned action. [f] Insight of Outside World: It gives an insight into the evolution of the present financial position and and answers the problem 'Movement of our resources'? It provides useful information regarding amount of loan required, its proposes, the terms of repayment an sources for repayment of loan etc. It carries information regarding firm's financial policies to the outside world.

[g] Planning for Future : It reveals certain valuable information for the financial manager for planning the future financial requirements of the firm. The management can formulate its financial policies based on information gathered from the analysis of such statements. Financial manager can rearrange the firm's financing more effectively on the basis of such information along with the expected changes in debtors and various accruals. Objectives of Fund Flow Statement: 1. To ascertain the funds generated from operations. It reveals the sources of funds and their applications. 2. It acts as an instrument of planning and control. 3. It is prepared based on the financial statements of two consecutive years. 4. It takes into account funds available not only from trading operations but also from other sources like issue of share etc. 5. Preparation of the statement is not a statutory obligation. 6. It can be prepared as and when management wants it. Drawbacks of Funds Flow Analysis: The funds flow statement is historical in nature like any other financial statement. It does not estimate the sources and application of funds for the near future. The funds flow statement does not disclose the structural changes in financial relationship in a firm nor it discloses the major policy changes with regard to investment in current assets and short-term financing. The funds flow statement does not disclose any new or original items which affect the financial position of the business. The funds flow statement simply rearranges the data given in conventional financial statements and schedules. A study of changes in cash is more relevant than a study of changes in funds for the purpose of managerial decision making. The funds flow statement is prepared from the data provided in the balance sheet and profit and loss account. Hence, the defects in financial statements will be carried over to funds flow statement also Procedure for preparing fund flow statement

Step 1: Prerequisites for preparation are Balance sheets at the beginning and at the end of the accounting period.( 2 yrs Balance sheets) The profit and loss account of the current period Step 2 : Preparing schedule or statement of changes in working capital Step 3 : Preparation of statement for funds from operation (adjusted profit and loss account) Step 5 : Prepare ledger accounts for additional information and calculate hidden information. Step 6 : Fund flow statement
Working Capital - The working capital (WC) of a firm is the amount by which its current assets (CA) exceed its current liabilities (CL). WC = CA CL The size of working capital is a measure of the safety margin that exists for the protection of short-term creditors. Working capital may also be viewed as funds available for acquisition of non-current assets as well as to repay non-current liabilities.

Causes of changes in working Capital - The excess of funds generated over funds outgo from non-current assets and non-current liabilities will lead to increase or decrease in working capital and it is presented in a statement form. Any transaction that results in an increase in working capital is a source of WC. An increase in CA causes an increase in WC E.g.: Issue of equity shares causes an increase in cash (CA) and increase in non-current liability (NCL) A decrease in CL causes an increase in WC E.g.: Bank overdraft paid by issue of debentures causes a decrease in bank overdraft (CL) and an increase in NCL Any transaction that causes a net decrease in WC is an application of WC A decrease in CA causes a decrease in WC. E.g.: Purchase of non-current assets (NCA) causes decrease in cash (CA) and increase in (NCA) An increase in CL causes a decrease in WC. E.g.: Bank overdraft to repay long-term loans causes an increase in CL and decrease in NCL Some transactions merely change the form of working capital, without altering the amount of working capital as such. Clearly, such items neither constitute a source nor the use of working capital. A simultaneous increase in CA and CL does not affect WC. E.g.: Purchase of inventories on credit causes an increase in inventory (CA) and an increase in creditors (CL) A simultaneous decrease in CA and CL does not affect E.g.: Payment of creditors causes a decrease in cash (CA) and a decrease in creditors (CL). In short transaction which gives rise to a source or use of working capital should affect both the current account (CA or CL), and the non-current account (NCA or NCL) simultaneously. However, if a transaction occurs where only current accounts are affected, working capital is not changed. Likewise, if a transaction occurs where only non-current accounts are affected; it does not bring about any change in the working capital. E.g.: a conversion of debentures into equity increases one component of NCL (equity) and decreases another component of NCL (debentures). Funds from Business Operations The profit/loss figure, as shown in the profit and loss account of the firm, does not indicate the quantum of working capital provided by business operations because the revenues and expenses shown do not run parallel to the flow of the working capital. The profit and loss account contains a variety of write-offs and other adjustments which do not involve any corresponding movement of funds. Therefore, appropriate adjustments are to be made to the profit disclosed by the profit and loss account to arrive at the funds from business operations. For this purpose: all such expenses which have been deducted from revenue but do not reduce working capital are to be added back, such items as have been added to revenue but have not contributed to the working capital are to be subtracted and all such revenues which are not directly caused by business operations should also be deducted and shown separately in the statement. Calculation of Funds from Operations A Net income (or loss) as shown by the profit or loss account B Add: Depreciation expenses Amortization of goodwill, patents and other intangible assets; Amortization of discount on debentures or share issue expenses Amortization of extraordinary losses occurred in previous years Loss on sale of non-current assets C Less: Amortization of premium received on debentures; Profit on sale of equipment Profit on revaluation of non-current assets Dividends and interest (A+B-C) = Funds from business operations.

OR Proforma of Adjusted Profit and Loss Account Particulars Rs Particulars To Depreciation & Depletion charges By Bal b/d (Opening Bal of P& L) To Amortization of: By Dividend received (a) Intangible assets: Good will By Profit on sale of fixed assets Patent rights, etc. By Profit on sale of long-term (b) Fictitious assets: preliminary expenses investments deferred expenditure By Funds from operations (Bal fig) Appropriation of retained earnings: Transfer to: - General Reserve - Dividend equalisation fund - Sinking fund - Compensation fund etc, To Dividends paid To Provision for taxation To Interim dividend To Proposed dividend To Loss on sale of fixed assets To Funds lost in operations (Bal. Fig.) To Bal c/d (Closing Bal of P & L A/c ) Total

Rs

Total

Note: Proposed dividend and provision for taxation may or may not be a current liability. In case if they are treated as current liabilities, they should be shown in a schedule of changes in working capital only. However, if they are treated as non-current liabilities, then they should be considered as internal appropriation of profits made during the year and should be added back to current years profit while calculating funds from operations. But tax paid during the year should be considered as Application of Fund. Funds Flow Statement (Vertical) I. Sources of Funds Funds from operations Issue of Share Capital Issue of Debentures Long Term Borrowings Sale of Assets or Investment Non operating Income Any other source Total Sources (A) II. Applications of Funds Loss from operations Redemption of share capital Redemption of Debentures Repayment of loans Purchase of Assets or Investments Dividend payment Any other use Total Applications (B) Increase or Decrease in working capital [A-B]

Q.1 From the following information prepare i) A Schedule of Changes in Working Capital ii) A Funds Flow Statement Balance Sheet of M/s ______ as on Liabilities Capital Profit/Loss Appropriation Bank Loan Bills Payable Sundry Creditors Reserve for Taxation 31stMarch 2006 18,50,000 14,78,000 12,00,000 4,00,000 14,00,000 2,00,000 2007 21,00,000 17,64,000 9,00,0000 6,80,000 12,20,000 1,80,000 Assets Goodwill (at Cost) Land and Buildings Plant and Machinery Furniture and Fittings Stock/Inventories Sundry Debtors Bills Receivable Bank Cash 31stMarch 2006 6,00,000 18,50,000 4,74,000 1,94,000 8,26,000 12,00,000 8,00,000 5,00,000 84,000 2007 6,00,000 22,00,000 5,24,000 1,94,000 7,24,000 12,80,000 7,21,000 4,83,000 1,18,000

65,28,000 68,44,000

65,28,000 68,44,000

Schedule/Statement of Changes in Working Capital for the period from __ to __ Particulars/Account A. CURRENT ASSETS 1) Stock/Inventories 2) Sundry Debtors 3) Bills Receivable 4) Bank 5) Cash Previous Period Current Period Working Capital Change Increase Decrease 1,02,000 80,000 79,000 17,000 34,000 1,14,000 1,98,000 2,80,000 1,80,000 20,000 3,14,000 4,78,000

8,26,000 12,00,000 8,00,000 5,00,000 84,000 34,10,000

7,24,000 12,80,000 7,21,000 4,83,000 1,18,000 33,26,000 6,80,000 12,20,000 1,80,000 20,80,000 12,46,000

B. CURRENT LIABILITIES/PROVISIONS 1) Bills Payable 2) Sundry Creditors 3) Provision for Taxation

4,00,000 14,00,000 2,00,000 20,00,000

Working Capital (A B) Change in Working Capital

14,10,000

(12,46,000 14,10,000) (Or) (3,14,000 4,78,000)

1,64,000

Working Amount Previous Period 18,50,000 14,78,000 12,00,000 18,50,000 3,70,000

Funds Flow Statement Amount Current Period 21,00,000 17,64,000 9,00,000 22,00,000 4,74,000

Item Capital Profit/Loss Appropriation Bank Loan Land and Building Plant and Machinery

Change 2,50,000 2,86,000 3,00,000 3,50,000 50,000

Nature Liability Increase Liability Increase Liability Increase Liability Increase Asset Increase

Result Inflow Inflow Inflow Inflow Outflow

Funds Flow Statement for the period from __ to __ Particulars SOURCES (INFLOW) of FUNDS : 1) Capital 2) Profit/Loss Appropriation Less: APPLICATIONS (OUTFLOW) of FUNDS 1) Land and Buildings 2) Plant and Machinery 3) Bank Loan Change in Working Capital Amount 2,50,000 2,86,000 3,50,000 50,000 3,00,000 Amount

5,36,000

7,00,000 1,64,000

There is a decrease in Net Working Capital to the extent of Rs. 1,64,000

T Form
Statement of Sources and Applications of Funds for the period from __ to __ Sources (Inflow) of Funds Amount Applications (Outflow) of Funds 1) Land and Buildings 2) Plant and Machinery 3) Bank Loan Amount 3,50,000 50,000 3,00,000 7,00,000 Change in Working Capital 1,64,000 (Sources/Inflow of Funds) < (Applications/Outflow of Funds) There is a decrease in Net Working Capital to the extent of Rs. 1,64,000

1) Capital 2,50,000 2) Profit/Loss Appropriation 2,86,000 5,36,000