The document provides information on preparing a funds flow statement. It defines key terms like funds, flow of funds, and working capital. It explains that a funds flow statement tracks sources and uses of funds, including changes in current assets/liabilities and non-current assets/liabilities. The preparation involves a schedule of changes in working capital and a statement with sources of funds on the left and uses/applications of funds on the right. Important rules and precautions for the preparation are also outlined.

1. FUNDS FLOW STATEMENT

2. LECTURE AT A GLANCE
•Meaning and Definition of Funds Flow Statement;
•Importance of Funds Flow Statement
•Limitations of Funds Flow Statement
•Way of preparing Funds Flow Statement
•Precautions to be taken while preparing Funds
Flow Statement

3. PHILOSOPY OF FUNDS FLOW
STATEMENT
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.

4. FUNDS STATEMENT
• 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 entity’s
economic activities
•The statement was seen as necessary to
summarise investing and financing activities

5. MEANING OF FUND FLOW
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.

6. THE TREM ‘FUND’ IS USED IN THREE
SENSES –
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.

7. 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.

8. 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.

9. 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-

10. Balance –Sheet
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.

11. COMPONENTS OF BALANCE-SHEET
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..

12. 2. CURRENT LIABILITIES –
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…

13. 3. NON-CURRENT ASSETS –
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

14. 4. CURRENT ASSETS –
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
balance-sheet.

15. 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.

16. TRANSACTIONS THAT WILL AFFECT THE
FLOW 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.

17. TRANSACTIONS THAT WILL NOT
AFFECT THE FLOW OF FUNDS
1. Current Assets and Current Liabilities
2. Non-Current Assets and Non-Current Liabilities
3. Non-Current Liabilities or Non-Current Assets.

18. 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.

19. 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 long-
term liabilities or owner’s equity on the other.

20. 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?
OBJECTS OF FUNDS STATEMENT

21. Contd._
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?

22. IMPORTANCE OF FUNDS FLOW
STATEMENT
1. Financial Analysis and Control
2. Financial Planning and Budget preparation
3. Useful to Bankers and Money Lenders
4. Helpful in Comparative Study
5. Knowledge of Managerial Policies
6. Knowledge of Business Problems
7. Dividend Policy

23. LIMITATIONS OF FUNDS FLOW
STATEMENT
1. Non-fund transactions and this is why it is less
popular than Balance-sheet and Profit & Loss
Account;
2. It fails in the disclosure of all changes that
have taken place during the ordinary course of
business;
3. It is not a substitute of Income Statement or
Balance-sheet. It merely provides some
additional information relating to the financial
position of a firm;

24. Contd.—
4. It is historical in nature and analyses past
events only;
5. It gives only a view about the financial
position of business as it does not disclose all
the facts;
6. Changes in cash are more important than
changes in working capital which is not
revealed by fund flow statement.

25. PREPARATION OF FUNDS FLOW
STATEMENT
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
statement is to be prepared.
contd….

26. Preparation of funds flow statement is divided
into two parts.
1. Schedule of Changes in Working Capital;
2. Funds from Operation;
3. Funds Flow Statement

27. STATEMENT OF CHANGES IN
WORKING CAPITAL
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…

28. STATEMENT OF CHANGES IN WORKING CAPITAL
Particulars Previous
Year Fig.
Rs.(2008)
Current
Year Fig.
Rs.(2009)
Changes
in current
assets
and
liabilities
Incr-
ease
Decre
-ase
Current Assets :
Cash
Debtors
Stocks
Bill Receivables
Advance payment
Accrued income
Marketable Securities
or Short-term
Investment

29. Contd..
Previous
Year Fig.
Rs.(2008)
Current
Year Fig.
Rs.(2009)
Change in
current and
liabilities
Particulars
In.(+) Dec.(-)
Current
Liabilities:
Creditors
Bills Payable
Bank Overdraft
Outstanding
Expenses
Short-term
Loan etc.
Increase or
Decrease in
Working Capital

30. The following rules may be applied to current
assets and current liabilities for preparing this
statement:
1. An increase in current assets, increases working
capital
2. A decrease in current assets, decreases working
capital
3. An increase in current liabilities, decreases working
capital
4. A decrease in current liabilities, increases working
capital

31. FUNDS FLOW STATEMENT
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….

32. 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.
Sources of Funds:

33. Uses (or Applications) of funds:
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

34. USES OF FUNDS – Contd…
6. Payment of cash dividends
7. Payment of taxes
8. Drawing in case of proprietary or partnership
business
9. Loss of cash by embezzlement
10. Increase in working capital etc.

35. FUNDS FROM OPERATIONS
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.

36. Profit and Loss Adjustment A/c
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)

37. While preparing funds flow statement, the following
rules must be remembered
1. 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

38. 38
Funds Flow Vs. Income Statement
 Deals with financial
resources required for
running the business.
Explains how funds were
obtained & used.
 Matches funds raised and
funds applied during a
particular period. The
sources and applications of
funds may be capital or
revenue in nature.
 Sources of funds are many,
besides operations such as
share capital, debentures,
sale of fixed assets etc.
 Discloses the result of
business activities i.e how
much has been earned and
how it has been spent..
 Matches incomes of a
period with the expenditure
of that period, both of
which are revenue in
nature.
 An income statement which
discloses the results of
operations cannot even
accurately tell about the
funds from operations
alone because of non-fund
items like depreciation,
being included therein.

39. PRECAUTIONS TO BE TAKEN WHILE
PREPARING FUNDS FLOW STATEMENT
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

40. 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.

41. 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.
Contd….

42. THANK YOU