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Fund flow statement
The document provides information on fund flow statements, including their meaning, definition, purpose, and preparation. It defines a fund flow statement as a report on the movement of funds or working capital during an accounting period. It explains how working capital is raised and used. The summary then outlines some key points on the meaning of funds, items that constitute sources and uses of funds, and the objectives and limitations of fund flow statements.
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Fund flow statement
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- 2. MEANING: The Fund flowstatement is a report on the movement of funds or working capital. It explains how working capital raised and used during an accounting period. DEFINITION: “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial conditions of a business enterprise between two dates.” – Foulke.
- 3. The term fundhas a variety of meaning such as cash fund, capital fund and working capital fund. Cash fund- in a narrow sense fund means only cash. Cash flow statement portrays net effect of the various business transactions on cash into account receipts and disbursement of cash. This concept of preparing fund flow statement is not accepted as there are many such transactions which do not affect cash but represent the flow of fund. For example: purchase of furniture on credit does not affect cast but there is flow of fund. Capital fund- here fund means all financial resources used in the business, whether in the form of men, money, material, machine and others. Net working capital- net working capital means difference between current assets and current liabilities. Funds generally refers to cash or cash equivalent or to working capital. MEANING OF FUND
- 4. The term ‘flow’refers to changes or transfer and therefore the ‘flow of funds’ means transfer of economic values from one asset to another, from one liability to another, from one asset to another, from one liability to another, from one asset to liabilities or vice-versa or a combination of these. So flow of fund refers to increase or decrease in net working capital. The increase or decrease in net working capital will take place only when one account, out of two accounts to be affected in a transaction, is a current account i.e current asset or current liabilities and the other account is no current account ie fixed asset or long term liability or capital. When a change in non current account is followed by a change in another non current account, it does not amount to flow of fund. It is because, in such case neither the working capital increase nor decrease MEANING OF FLOW
- 5. When a changein non current account is followed by a change in another non current account, it does not amount to flow of fund. It is because, in such case neither the working capital increase nor decrease. For example Machinery a/c Dr To share capital a/c (machinery purchase in consideration of share) In the above transaction both accounts are non current account which do not at all affect current asses and current liability. Therefore working capital will remain unaffected i.e there will be no flow of fund.
- 6. When changes inone current account results in a changes in other current account, it also does not affect working capital there is not flow of funds. For example Cash a/c Dr. To debtor a/c (cash received from debtor) It represents an increase of cash a current asset account and decrease of debtor again a current asset account. Thus there will be no net changes in the amount of working capital, although the composition of working capital will be affected.
- 7. FIGURE SHOWING FLOWOF FUND CURRENT LIABILITIES CURRENT ASSETS NON CURRENT LIABILITIES NON CURRENT ASSETS ------ NO------- ------ NO------- In the above figure the dotted line displays there will be no flow of fund and the Dark line displays the flow of fund
- 8. The balance sheetand income statements are the traditional basic financial statement of a business enterprise. A serious limitation of these statements is that they do not provide information regarding changes in the firm’s financial position during a particular period of time. They fail to answer following question What funds were available during the accounting period and for what purpose these funds were utilized? Have long term sources been adequate to finance fixed asset purchase? Does the firm possess adequate working capital? How much funds have been generated from operations? Why did the firm not pay dividend in spite of adequate profit? The balance sheet is merely a static statement. It is statement of asset and liabilities of the business as on particular date. WHY WE PREPARE FUND FLOW STATEMENT?
- 9. To show howthe resources have been obtained and used To indicated the results of current financial management. To through light upon the most important changes that have taken place during a specific period. To show how the general expansion of the business has been financed. To indicated the relationship between profits from operations, distribution of dividend and raising of new capital or term loans. To have an assessment of the working capital position of the concern. OBJECTIVES OF FUND FLOW STATEMENT:
- 10. Analysis of FinancialOperations Evaluation of the Firm’s Financing Answer to Intricate Question Allocation of Scare Resources Helps in Working Capital Management Acts as a Guide to Future Helps Financial Institutions. MANAGERIAL USES OF FUNDS FLOW STATEMENT:
- 11. It provides onlysome additional information regarding changes in working capital. Changes in cash are more important and relevant for financial management than the working capital. It is not an original Statement. It is only a rearrangement of data five in financial Statement. Fund flow statement is essentially historic in nature. A Projected funds flow statement, on the basis of it cannot be prepared with much accuracy. It cannot reveal continuous changes. LIMITATIONS OF FUNDS FLOW STATEMENT:
- 12. SOURCES OF FUNDS: Issueof shares and debenture Raising of long term loans Income from investments Sales of fixed Assets and long term investments Funds from operations. APPLICATION OF FUNDS: Redemption of preference shares and debenture Repayment of loans Purchase of long term Investments purchase of fixed assets Payments of taxes and dividends Drawings(incase of Proprietary or partnership business) Lose of cash by embezzlement Funds lost in Operations. ITEMS COME IN SOURCES AND APPLICATION OF FUNDS:
- 13. Schedule of Changesin Working Capital. Opening of Accounts for non-Current Items Preparation of Adjusted Profit And Loss Account Preparation of Fund Flow Statement. PROCEDURE FOR PREPARATION OF FUND FLOW STATEMENT
- 14. Working capital refersto the capital required for the day-to-day operations of a business. It is the excess of current assets over current liabilities. Adequate working capital is necessary for the successful running of any organization. The management must forecast the working capital requirements in advance and arrange for financing them. The requirements of working capital depend on the following factors. Nature of the Business Size of the Business Time consumed in manufacture Seasonal Fluctuations Fluctuations in Supply Speed of Turnover Terms of Sales Terms of Purchase Labour intensive Vs. Capital Intensive industries Growth and Expansion of Business. WORKING CAPITAL:
- 15. Item Previous year Current Year Effect on IncreaseRs. Working Capital Decrease Rs. A.CURRENT ASSETS Cash At Bank Cash in hand Stock in Trade Debtors Bills receivable Advance Payment Short term investment Prepaid expenses Accrued income TOTAL (A) B.CURRENT LIABILITIES Short term loans Bank overdraft Creditors Bills Payable Outstanding expenses Unclaimed dividend TOTAL (B) Net working Capital (A-B) Increase/Decrease in working capital TOTAL STATEMENT OR SCHEDULE OF CHANGES IN WORKING CAPITAL
- 16. CALCULATION OF FUNDSFROM OPERATION: Net Profit earned during the year ADD: Non-fund and Non operating items which are already debited to P&L a/c: Depreciation on fixed Assets Goodwill written off Discount on issue of shares, written off Preliminary expenses written off Patents written off Transfer to reserves Loss on sale of fixed assets LESS: Non-fund and Non operating items which are already Credited to P&L a/c: Profit on sale of fixed assets Profit on revaluation of assets Rent received Dividend received Refund of income tax xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx FUNDS FROM OPERATIONS xxxxxx SPECIMEN OF FUND FLOW STATEMENT: MODEL I
- 17. SOURCE OF FUNDAmount USES OF FUNDS Amount FUND FROM OPERATION Issue of share Issue of debenture Long term loans Sales of fixed assets/Investment Non trading receipts Decrease in working capital (if any) xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx LOSS FROM OPERATION Redemption of preference Shares Redemption of debentures Repayment of long term loans Purchase of fixed assets/Investments Payment of dividend& taxes Increase in working capital xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxxxx xxxxxxxx SPECIMEN OF FUND FLOW STATEMENT: MODEL II
- 18. PARTICULAR AMOUNT PARTICULARAMOUNT Depreciation Loss on sale of fixed assets Under writing commissions Discount o issue of share &debentures Preliminary expense written off Deferred revenue expenses Goodwill written off Patient or trademark Provision for taxes (It treated non current) Profit or gain on sale of fixed asset Dividend received Interest received of investment Profit on revaluation of asset FUND FROM OPERATION PROFIT AND LOSS ADJUSTMENT ACCOUNT
- 19. Comparative Balance sheetof Sam & Co. As on year 2000 and 2001 were as follow Liabilities 2000 2001 Assets 2000 2001 Account payable Notes payable Loan on Mortgage Capital Sinking fund Retained Earning Provision for DD Accumulated Depreciation- Building furniture 15000 10000 40000 50000 16000 13950 1350 12000 3200 161500 18000 75000 40000 45000 12000 16275 1425 9000 2400 151600 Cash Account receivable Stock Sinking fund investment Land Building Furniture 11200 21300 35000 16000 10000 60000 8000 161500 8500 23500 30600 12000 10000 60000 7000 151600
- 20. You are givinginformation:- Net profit for the year 2001 amounted 6675. Dividend amounted to Rs.5000 was paid during the year. Prepare a statement of sources and uses of fund.
- 21. Schedule of Changesin Working Capital Items CURRENR ASSETS:- Cash Account receivable Stock TOTAL of CA (A) CURRENT LIABILITIES:- Account payable Note payable Provision for D D TOTAL of CL (B) Difference b/w (A-B) Decrease in W C 2000 Amount 11200 21300 35000 67500 15000 10000 1350 26350 41150 41150 2001 Amount 8500 23500 30600 62600 18000 7500 1425 26925 35675 5475 41150 Change in Increase 2200 2500 5475 10175 Working capital Decrease 2700 4400 3000 75 10175
- 22. Fund flow statement Sourcesof fund Sale of sinking fund investment Fund from operation Decrease in working capital Amount 4000 525 5475 10000 Application of fund Redemption of share capital Dividend paid Amount 5000 5000 10000
- 23. Profit & lossadjustment a/c Particular To Accumulate dep. On furniture To Dividend paid To Balance c/d Amount 200 5000 16275 21475 Particular By balance b/d By sinking fund By accumulate dep. On building By fund flow operation Amount 13950 4000 3000 525 21475
- 24. ACCUMULATIVE DEPRECATION ,BUILDING,FURNITURE Particular To P/L a/c To balance c/d Amount 3000 9000 12000 Particular By balance b/d Amount 12000 12000 Particular To furniture a/c To balance c/d Amount 1000 2400 3400 Particular By balance b/d By P/L a/c Amount 3200 200 3400 Particular To balance b/d Amount 8000 8000 Particular By deprecation By balance c/d Amount 1000 7000 8000
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- 26. THANK YOU DESIGNED BY: D.SAMUEL MANIRAJ., MBA., M.Com., M.Phil., MA., PGDCA., ADCHN., CHENNAI, TAMIL NADU, INDIA.