Fund Flow Statement

FUND FLOW STATEMENT

The term of ‘Funds Flow’ has made up with the two words – Funds and Flow of funds. Let us first we understand these meaning and then we see how funds flow statement is prepared.

Meaning of Funds:

The term ‘fund’ has different meanings:

CASH -

In narrow sense, the term ‘fund’ is used to mean only the cash and bank balance. Therefore, in this sense, funds flow statement is a statement reflecting the changes in cash and bank balances only. This concept is better for the preparing of ‘Cash Flow Statement’ Therefore, this term is not used in this sense.

TOTAL RESOURCES -

In broader sense it includes all resources used in the business whether in the form of men, material, machinery, money and methods etc.

Working Capital –

In popular sense, the term ‘Fund’ is used to mean working capital i.e. the excess of current assets over current liabilities. Therefore, in this sense, fund flow statement includes all the transactions affecting current assets and current liabilities.

q  Hence, Fund means Working Capital.

Working Capital = Current Assets - Current Liabilities.

MEANING OF FLOW 

The term ‘Flow’ means changes – incoming and outgoing. When this term is used with funds, it means the changes taking place in funds during a certain period. Whenever there is change in the funds, it is presume that flow in funds has taken place. Transactions that bring working capital into the firm are sources of funds and on the contrary, if the working capital decreases, it is an application of funds.

THEREFORE THE TERM FLOW OF FUNDS MEANS “CHANGES IN FUNDS” OR “CHANGES IN WORKING CAPITAL”. IN OTHER WORDS, ANY INCREASE OR DECREASE IN WORKING CAPITAL MEANS “FLOW OF FUNDS”.

MEANING OF FUNDS FLOW STATEMENT

The Funds flow statement (FFS) is a financial statement which reveals the methods by which the business has been financed and how it has used its funds between the opening and closing Balance-Sheet dates. It studies – from where the funds have been received and where the funds have been used.

Fund flow statement is the statement prepared for the purpose of studying the changes in the funds of an organization between the two balance sheet dates.

“A statement of sources and application of fund is a technical device designed to analyse the changes in the financial condition of a business enterprise between two dates.”      -Foulke

“Fund flow statement is a statement prepared to indicate the increase in the cash resources and the utilization of such resources of business during the accounting period.”    - Robert N. Anthony

A fund flow statement is:

ü   a statement shows the changes in funds

ü   b/w two balance sheet of two different dates.

Other Cognate Names of Fund Flow statement:

Fund flow statement bears the following names as well:

(1)   Application of Funds statement;

(2)   Statement of Sources & Application of Funds;

(3)   Statement of sources and uses of funds;

(4)   Statement of Funds Supplied and applied.

 Flow of Funds Chart

Transaction Involves between

 No Flow of Funds Chart

Uses / advantages of Fund Flow Statement :

1. Fund flow statement helps the management in the assessment of long range forecasts of a cash requirements and availability of liquid resources. The manager can judge the quality of management decisions.

 2. With the help of Fund Flow Statement, the investors are able to measure as to how the company has utilized the funds supplied by them and its financial strength. Also, the investors can judge the company’s capacity to generate funds from operations.

 3. It serves as effective tools to the Management for economic analysis as it supplies additional information which cannot be provided by financial statement based on historical data.

 4. Fund flow statement explains the relationship between changes in working capital and net profits. 

5. Fund flow statement helps the management in making planning process of a company. It is also useful in assessing the resources available and the manner of utilization of the resources. 6. It explains the financial consequences of business activities. It also provides explicit and clean answer to questions regarding liquid and solvency position of the company.

6. Fund Flow Statement provides clues to the creditors and financial institutions as to the ability of a company to use funds effectively in the best interest of the investors, creditors and owners of the company.

Limitations of Fund Flow Statements

 1. It should not be overlooked that Fund Statements ignore non-cash transactions, therefore it is considered as cruder device than the financial statement.

 2. Fund Flow Statements merely rearrange a part of the information contained in financial statements. They do not serve as original evidence of financial status.

 3. Though changes in cash resources are more significant, they are not highlighted by Fund Statements except being shown by them as a part of working capital.

 4. As Fund Flow Statements are prepared from information provided by financial statements, they are essentially historical in nature.

Preparation of Fund Flow Statement

Example:- The Balance Sheet of ABC Ltd. at the end of 2006 and 2007 are as follows:

	31 March 2006	31 March 2007
Liabilities:
Accounts Payable	15,000	20,000
Notes Payable	25,000	10,000
Other Current Liabilities	10,000	15,000
6 % Bonds	------	20,000
Retained Earning	80,000	1,10,000
Mortgage	------	10,000
Shares	50,000	50,000
TOTAL	1,80,000	2,35,000
Assets:
Cash	10,000	5,000
Marketable Security	10,000	-------
Inventory	70,000	1,05,000
Receivables	30,000	40,000
Fixed Assets	1,00,000	1,40,000
Accumulated Depreciation	(-)40,000	(-)55,000
TOTAL	1,80,000	2,35,000

You are required to prepare a Statement of Changes in Working Capital and Fund Flow Statement.

Solution: 

Statement of Changes in Working Capital

Particular	2006	2007	Effect on Working Capital
			Increase	Decrease
Current Assets:	Rs.	Rs.	Rs.	Rs.
Cash	10,000	5,000	-----	5,000
Marketable Security	10,000	-----	-----	10,000
Inventory	70,000	1,05,000	35,000	-----
Receivable	30,000	40,000	10,000	-----
	1,20,000	1,50,000
Current Liabilities:
Accounts Payable	15,000	20,000	-----	5,000
Notes Payable	25,000	10,000	15,000	-----
Other Current Liabilities	10,000	15,000	-----	5,000
	50,000	45,000
Net Increase in Working Capital(Balance)			-----	35,000
TOTAL			60,000	60,000

Adjusted Profit & Loss Account

Particular	Amount	Particular	Amount
To Depreciation  (55,000 – 40,000)	15,000	By Opening Balance of P & L A/c	80,000
To Closing Balance of P & L A/c	1,10,000	By Fund from Operation (Balance)	45,000
	1,25,000		1,25,000

Fund Flow Statement
( As on 31 march 2007)

Sources	Amount	Application	Amount
Mortgage	10,000	Purchase of Fixed Assets	40,000
6 % Bonds	20,000	Net Increase in Working Capital	35,000
Funds from Operation	45,000
	75,000		75,000

IMPORTANT QUESTIONS

Short answer questions

1. State the meaning of Funds flow statement
2. How  is the  schedule of changes in working capital prepared?
3. Discuss the importance  of funds flow statement .
4. Explain the  terms ‘funds items‘ and ‘non funds items. Give examples.
5. Write short notes on application of funds.
6. How are the funds from operations calculated?
7. Distinguish between the funds flow statement and Balance-Sheet.

Long Answer questions 

1. Explain the terms ‘Funds’ and ‘Flow in funds ’ in respect of funds flow statement
2. What is a ‘Funds Flows statement’? How is it prepared? What are the various sources and uses of funds ?
3. How is a funds flow statement prepared ?Give a Performa of schedule of changes in working capital and funds flow statement. 

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