Faculty: Ms.

Luvnica Rastogi
Amity International Business School
Imp Website:
www.investorwords.com

Meaning

and Definition of Funds Flow

Statement;
Importance of Funds Flow Statement
Way of preparing Funds Flow Statement
Precautions to be taken while preparing
Funds Flow Statement
Few Numerical Questions

It is continuous process. The study and

control of this funds-flow process (i.e., The
uses and sources of funds) is the main
objective of financial management to assess
the soundness of the solvency of the
enterprise.

The funds statement was also known

as a statement of funds flow or a
statement of sources and applications
of funds
This statement was deemed to be
necessary as the balance sheet and
income statement did not present a
complete picture of an entitys
economic activities
The statement was seen as necessary

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.

CASH In narrow sense, the term fund is used

to mean only the cash and bank
balance.

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.

MEANING OF FLOW IN
FUNDS
Before understanding the meaning
of flow in funds, it is necessary to
classify the balance sheet of a
concern into four parts as shown
below-

1. Non-Current Liability
3. Non-Current Assets
Share Capital
Goodwill
Debentures
Land & Buildings
Other Long-term loans
Plant & Machinery
Reserve & Surplus
Motor Vehicles
Security Premium
Long-term Investments
Capital Redemption reserve
Preliminary Expenses
General Reserve
Discount on shares
Profit & Loss Account
Miscellaneous Expenses

2. Current Liabilities
4. Current Assets
Creditors
Debtors
Bills Payable
Bills Receivable
Short-term loans
Advances
Bank Overdraft
Short-term
investments
Advance Payment Received
Stock in hand
Outstanding Expenses
Cash in hand
Provision for taxation
Cash at Bank
TOTAL
TOTAL
The arrows explain when transaction will constitute flow of funds .

1. NON-CURRENT LIABILITIES
These liabilities are not payable within a
year and out of current assets. These
liabilities are generally payable either in
the long-period or at the close of the
business. For example, see item (1) in
the above balance-sheet.

Contd..

These liabilities are payable within a year

and out of current assets. The values of
these liabilities generally changes within
one year. For example, see item (2) in the
above balance sheet.
Contd

Those assets which are obtained in

business for use over a long period of time
for earning purpose are called non-current
assets. These assets are not purchased for
the purpose of selling and include tangible,
intangible and fictitious.

These assets are equal to cash or

reasonably expected to be realized in cash
or sold or consumed within one year or
during the normal operating cycle of the
business are called current assets. For
example, see item (4) in the above balancesheet.

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.

The following transactions will bring the

change in the working capital
Current Assets and Non-Current Assets
Current Assets and Non-Current Liabilities

Current Liabilities and Non-Current

Liabilities
Current Liabilities and Non-Current Assets
In brief, it can be said that when one aspect
is of non-current category, and the other
current category, there will be flow in funds.

1.
2.
3.

Current Assets and Current Liabilities

Non-Current Assets and Non-Current
Liabilities
Non-Current Liabilities or NonCurrent Assets.

SOURCES
Funds from
business Ops
Other Incomes
Sale of non-current

assets
Long

term

Issue

of additional

borrowings
equity or preference capital.
USES OF WC
Losses from
business ops
Purchase

of non-

current assets
Redemption

debentures/preference shares.
Dividends

shareholders
12/08/15

to

of

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.

TO CONCLUDE
We
shall
include
only
those
transactions in funds flow which affect
current assets or current liabilities, on
one hand, and a fixed asset or longterm liabilities or owners equity on
the other.

Following questions are answered by Funds

Flow
Statement 1. Where the profit is put up?
2. Why net current assets are low even
though there is an increase in net profit? In
other words, why cash balance has not
increased.
3. Why excess dividend was distributed when
there were low profits?
4. How is the amount realized from the sale
of assets used?

5. How were the changes in Working Capital

6. How were the plant and machinery
expanded?
7. How was the amount received from the
issue of shares of debentures used?
8. Why the funds were not available for the
purchase of machinery and plant?

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

Financial Analysis and Control

Financial
Planning
and
Budget
preparation
Useful to Bankers and Money Lenders
Helpful in Comparative Study
Knowledge of Managerial Policies
Knowledge of Business Problems
Dividend Policy

Funds flow statement can be prepared

monthly but usually it is prepared for one,
two, three, four or more years. The data for
the preparation of this statement are
obtained
form
two
balance
sheets
supplemented by such other information from
the accounts as may be needed. It is
customary for accompany to use the figures
of the balance sheet for the latest year and
those on the balance sheet as at the
beginning of the period for which this

Preparation of funds flow statement is

divided into two parts.
1. Schedule of Changes in Working Capital;
2. Funds from Operation;
Funds Flow Statement

This statement is prepared from current

assets and current liabilities in order to
calculate the increase or decrease in
working capital and is prepared in the
Performa given as under.

Contd

STATEMENT OF CHANGES IN WORKING

CAPITAL
Previous Current
Changes
Particulars
Current Assets :

Year Fig. Year Fig. in current

Rs.(2008) Rs.(2009) assets
and
liabilities
Increase

Cash
Debtors
Stocks
Bill Receivables
Advance payment
Accrued income
Marketable Securities or
Short-term Investment

Decre
-ase

Particulars
Current Liabilities:
Creditors

Previous Current Change in

Year Fig. Year Fig. current and
Rs.(2008) Rs.(2009) liabilities
In.
(+)

Bills Payable
Bank Overdraft
Outstanding Expenses
Short-term
Loan etc.
Increase or
Decrease in Working
Capital

Dec.
(-)

1.
2.
3.
4.

An increase in current assets, increases

working capital
A decrease in current assets, decreases
working capital
An increase in current liabilities, decreases
working capital
A decrease in current liabilities, increases
working capital

This statement is usually prepared in T

form. Left-hand side is for sources of funds
and right-hand side for applications of
funds. The items of sources and
applications are given as follows:

Contd.

Sources of Funds:
The following are the sources from which funds
come:
1.Funds from operations
2.Income from investments
3.Issue of shares and debentures
4.Raising a loan
5.Sale of fixed assets and long-term
investments
6.Receipt of interest on non-trade investment,
dividend, refund of tax etc.
7.Decrease in working capital etc.

The following are the various purposes for

which funds can be used:
1.Funds lost in operations
2.Repayment of long-term loans
3.Redemption
of preference shares and
debentures
4.Purchase of fixed assets
5.Purchase of long-term investments

6. Payment of cash dividends

7. Payment of taxes
8. Drawing in case of proprietary
partnership business
9. Loss of cash by embezzlement
10. Increase in working capital etc.

or

It can be calculated in two forms :

Particulars
Net Profit for Current
Year
Add : Non fund items
Depreciation
Goodwill, Patents
Preliminary Expenses
Written
off
LESS : Non-fund Items
and Non-trading
Income ,already
Credited to P & L A/c.
Dividend Recevied
Profit on sale
Funds from
operations

Amount
Rs.

Amount
Rs.

To Depreciation
To Goodwill Written off
To preliminary Expenses
written off
To Transfer to sinking
fund
To Loss on sale of fixed
Assets
To Closing Balance of P&L
Appropriation A/c

By opening Balance
of P&L
Appropriation A/c
By Dividend
Received
By Over provisions
Written Back
By Funds from
operations
(Balancing
Figure)

Prof.(Dr. ACS, CWA) P. K.Aggarwal

An increase in a fixed assets indicates an

application of funds
2. A decrease in a fixed assets indicates a source of
funds
3. An increase in a fixed liability indicates a source of
funds
4. A decrease in fixed liability indicates an application
of funds
5. An increase in share capital indicates a source of
funds
6. A decrease in share capital indicates an application
of funds
1.

Source of Funds
-Fixed Assets
+Fixed
Liabilities
+Share Capital

Application of
Funds
+Fixed Assets
-Fixed Liabilities
-Share Capital

Following points must be kept in mind while preparing funds

flow statement
1.Changes in fixed Accounts
2.Internal Reserves
3.Provision against current Assets
4.Changes in current Assets
5.Interim Dividend
6.Investments
7.Provision for taxation
8.Proposed dividend
9.Profit or Loss on the Sales of Fixed Assets
10.Dividend received
11.Goodwill and Preliminary Expenses written off

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?

Contd.

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.