Fund Flow Analysis

• It reflects details of financial resources availed and

the way in which such resources are used during the
particular accounting period.
• It is shown in a form of statement which is called Fund Flow
Statement.
•The Fund Flow can explain the reasons for liquidity, problem
of the firm even though it is earning profits.It helps the
efficiency working capital management.
• While preparation of the Fund Flow Statement, non-fund
transactions are ignored..
• A Fund Flow Statement is based on the accrual
accounting system.
• Fund Flow is a broader concept than the Cash
Flow where the cash transactions are recorded.
• The statement discloses the amount raised from
various resources of finance during the period and
then explains how the finance has been used in a business.
• A Fund Flow Statement analysis the changes which have taken
place in the assets and liabilities during the certain period.
 The Fund Flow Statements
are used for:-

• Helps users in understanding the

Managerial decision
• Indicates quantum of working capital
• Helps in judging the paying capacity of the concern
• Enables management for planning regarding fund
management.
• Helps in future planning and budgeting
• Providing the knowledge regarding the funds from operation
• Some more informative process of preparing the fund flow
statement.
 Working Capital
Fund refers to cash, or equalent to cash or to working
Capital. The excess of a current assets over current
liabilities is called Working Capital.
The term fund refers to all the financial resources of the company.
According to accounting standard, the terms funds generally
refers to cash, cash equivalent or two Working Capital.
Working Capital

Gross Working Capital Net Working Capital

The investment in current assets Current assets less current liabilities
 Current Assets:
The current assets are normally converted into cash within an accounting
period. This accounting period is generally not more than one year.
It can consist of:
Cash and bank balance
Advance payment of tax
Income tax paid under dispute
Loans and advances
Non-trade marketable securities or readily saleable securities or short-term
investment or investment in treasury bills etc.
Prepaid expenses
Accounts receivable (bills receivable + debtors)
Inventories (raw materials+work-in-progress+finished goods)
 Current Liabilities:

The current liabilities are those liabilities which are

paid within an accounting year out of current assets
or by creating new current liabilities. It can consist of:
Accounts Payable (bill payable+creditors)
Bank overdraft
Outstanding expenses
Unclaimed dividend
Proposed dividend
Provision for taxation
 Transactions which do not
effect working capital

Fixed assets and fixed liabilities:- When both

aspects of a transaction are fixed, there is no flow

of funds: e.g., when a company procures fixed assets and

issues shares to make the payment

Current assets and current liabilities: When both transactions are

current in nature it does not affect flow of funds example when a company

receives payment from its debtors.

 Transactions where funds inflow
is equal to funds outflow

This is the point where working capital neither increases

nor decreases. It can be described as follows:

Redemption of debentures by converting them into new debentures.

Payment of long-term debt or debentures by creating new long-term

debts.

Exchange of one fixed asset by another fixed asset/fixed investment.

ssuing shares or debentures for purchasing the fixed assets.

Bank overdraft taken to repay the creditors.

Current Assets
Cash in Hand Fixed Assets
Cash at Bank Building
Debtors Land
Bills Receivable Plant and Machinery
Advances Furniture
Accrued Income Investments
Goodwill

Current Liabilities
Fixed Liabilities and
Bills Payable
Capital
Creditors
Share Capital
Bank Overdraft
Debentures
Outstanding exp.
Long-term Loans
Doubtful Debts
Profits
Provision for bad debts
Reserve
 Funds Flow Statement and
Income Statement

The funds flow statement and income statement have

different functions and their main differences are summarized
below:-

Funds Flow Statement Income Statement

1. Its main objective is to ascertain 1 It s main objective is to ascertain
the funds generated from . the net profit earned or loss
operations. It reveals the incurred by the company out of
sources of funds and their business operations at the end of
applications. particular period.

2. It is prepared based on the 2 It is prepared on the basis of

financial statements of two . nominal accounts of particular
consecutive years. accounting period.
3 It takes into account not only the 3 It uses only income
. funds available from trading . and expenditure transactions
operations but also funds relating to trading operations of
available from other sources like a particular period.
issue of share
capital/debentures, sale of fixed
assets etc.
4 Preparation of funds flow 4 Preparation of profit and loss
. statement is not a statutory . account is a statutory obligation
obligations and is left to the and should be prepared in
discretion of management. accordance with the legal
requirements.
5 Income statement is one of 5 An income statement can be
. the source documents in . prepared without the help of a
preparation of funds flow funds flow statement.
statement.
6 It may be prepared much 6 It is static in as much as it
. before business operations . gives information on what
and act as an instrument of has happened during the
planning and control. period covered by it.
7. It can be prepared as and 7 It is prepared only at the end of
when management want it. . accounting period for the
period covered by it.

8. It provides a complete 8 It is prepared on accrual basis of

record of transactions . accounting and fails to present
involving cash. the factual history of firm’s cash
transactions.

9. It cannot be easily 9 The determination of periodic

manipulated by . income is necessarily based on
management. number of estimates, judgment
and allocations and is subject of
manipulations of management.
Funds Flow Statement and Balance Sheet
The distinction between a Funds flow statement and a
Balance sheet are as follows:-
Funds Flow Statement Balance Sheet
1 It is prepared to know the total 1 It is prepared to know the
. sources and their uses in a . financial position of a
year. company on a particular
date.
2 It is prepared with the help of 2 It is prepared on the basis of
. balance sheets of two . different accounts in the
consecutive years. ledger.

3 It is dynamic as it reveals the 3 It shows the assets and

. changes in the value of . liabilities as on a particular
fixed assets and their effect date, as such it is a static
on flow of funds. statement.
4 It is useful for internal 4 It is useful not only for the
. financial management. . management but also to the
shareholders, creditors,
outsiders and government
agencies etc.

5 In funds flow statement, 5 In balance sheet, current

. current assets and current . assets and current liabilities
liabilities are used to find out are shown item-wise.
increase or decrease in
working capital

6 Its preparation is at the 6 Its preparation is a statutory

. discretion of the management. . obligation and as per the
format prescribed under legal
provisions.
 Benefits of Funds Flow Analysis

•To determine financial consequences of operations-

•Funds flow analysis determines the financial consequences

of business operations.
•In the following cases, funds flow analysis helps the management to

understand the movement of funds and in effective funds management.

Drawbacks of Funds Flow Analysis

Historical nature – The funds flow statement is historical in nature

like any other financial statement. It does not estimate the sources and
applications of funds for the near future.
 Identification of Flow of Funds

Sources and Application of Funds (Rs.)

Sources of Funds xxx
Fund from operations xxx
Issue of share capital xxx
Raising of long-term loans xxx
Receipts from partly paid shares, called up xxx
Sales of non current (fixed) assets xxx
Non-trading receipts, such as dividends received xxx
Sale of investments (long-term) xxx
Decrease in working capital (as per schedule of changes in
working capital)
xxx
 Applications or Uses for Funds xxx
Funds lost in operations xxx
Redemption of preference share capital xxx
Redemption of debentures xxx
Repayment of long-term loans xxx
Purchase of non-current (fixed) assets xxx
Purchase of long-term investments xxx
Non-trading payments xxx
Payments of dividends* xxx
Payment of tax* xxx
Increase in working capital (as per schedule of changes x x x
in working capital)

Note – Payment of dividend and tax will appear as an application of funds

only when these items are appropriations of profits and not current
liabilities.
 Changes in Working Capital Position
Particulars Beginnin End of the Working capital
g of year Increase
the Decrease
year
Current Assets xxx xxx xxx -
Cash in hand xxx xxx xxx -
Cash at bank xxx xxx - xxx
Bills receivable xxx xxx - xxx
Sundry debtors xxx xxx xxx -
Closing stock xxx xxx xxx -
Short-term investments xxx xxx xxx -
Prepaid expenses xxx xxx - xxx
Other current assets
(a) xxx xxx
Current Liabilities xxxx xxxx xxxx -
Bills payable xxxx xxxx - xxxx
Sundry creditors xxxx xxxx - xxxx
Outstanding expenses xxxx xxxx - xxxx
Bank overdraft xxxx xxxx xxxx -
Short-term loans taken xxxx xxxx xxxx -
Proposed dividend xxxx xxxx - xxxx
Provisions for tax xxxx xxxx xxxx -
Other current liabilities
(b) xxxx xxxx
Working Capital xxxx xxxx - -
(a)-(b) xxxx xxxx xxxx xxxx
Net increase or decrease in xxxx xxxx xxxx xxxx
working capital