3. Meaning of ‘Fund’:
In a popular and generally accepted sense the term „fund‟ is used to
denote the excess of current assets over current liabilities :
Working Capital = Current Assets – Current Liabilities
Meaning of ‘Flow’ of Fund:
Flow of funds means transmigration (coming and going) of funds. In other
words, Flow of funds means change in Working capital, as in funds flow
statement the words „funds‟ mean net working capital.
4. Meaning of Fund Flow:
The financial statement of the business indicate
assets, liabilities and capital on a particular date and also the
profit or loss during a period. But it is possible that there is
enough profit in the business and the financial position is also
good and still there may be deficiency of cash or of working
capital in business. If the management wants to find out as to
where the cash is being utilized, financial statement cannot help.
Therefore, a statement is prepared of the sources and
applications of funds from where Working Capital comes
and where it is utilized. This is called Fund Flow statement.
5. Definition:
According to R.N. Anthony, “Fund Flow is a statement prepared to indicate the
increase in cash resources and the utilization of such resources of a business
during the accounting period.”
According to Smith Brown, “Fund Flow is prepared in summary form to indicate
changes occurring in items of financial condition between two different balance
sheet dates.”
Coleman rightly states that, “The fund statement is statement summarizing the
significant financial change which has occurred between the beginning and the
end of a company‟s accounting period.”
6. Funds defined as working capital:
In common usage, the term funds means cash.
However, accountants and financial executives think of „funds‟
in a broader sense. They view the funds available to a business
enterprise as its working capital. Working capital is defined as
current asset minus current liabilities and thus, is a broader
definition of funds than is cash. The basic objective of the
statement of changes in financial position, working capital
basis, is to explain the changes in the working capital for a
specified period of time.
7. Uses of working capital:
1.Funds flow statement helps in identifying the change in level of
current assets investment and current liabilities financing.
2. Funds flow statement helps in analyzing the changes in working
capital level of a firm.
3. Funds flow statement shows the relationship of net income to the
changes in funds from business operation.
4. Funds flow statement reports about past fund flow as an aid to
predict future funds flow.
5. Funds flow statement helps in determining the firms' ability to
pay interest and dividend, and pay debt when they become due.
6. Funds flow statement shows the firms' ability to generate long-
term financing to satisfy the investment in long-term assets.
7. Funds flow statements helps in identifying the factor responsible
for changes in assets, liabilities and owners' equity at two balance
sheet date.
8. Sources of working capital:
The following are the sources of working capital:
1. Funds from operation
2. Sales of non-current assets
3. Long term borrowings
4. Issue of additional equity capital
9. Preparation of Fund flow Statement:
1. Step-1 preparation of schedule of changes in working
capital or statement showing changes in working capital.
[To find out net increase or decrease in working capital]
2. Step-2 preparation of noncurrent liabilities and noncurrent
assets ledger account.
[To find out missing items]
[Note 2 is an working note]
3. Step-3 preparation of adjusted profit and loss account
4. Step-4 preparation of fund flow statement.
