This document provides definitions and explanations of key terms related to preparing a funds flow statement. It defines funds flow as the change in working capital over a period of time. A funds flow statement measures and analyzes the flows of funds, or changes in working capital, between two balance sheet dates. It discusses current assets, current liabilities, and how to calculate the change in net working capital. The document also compares funds flow statements to balance sheets and outlines the general sources and uses of funds.

1. P. Murugan M. Com (CA)., M.Phil., SET., (Ph.D)
Assistant Professor in Commerce (CA)
Vivekananda College
Tiruvedakam West
Madurai - 625234

2. Funds Flow Statement
‘Flow’ means change. ‘Funds’ is interpreted as
‘working capital’ in the context of funds flow statement.
Thus, ‘funds flow’ is ‘change in working capital’. Flow of
funds implies any changes in working capital. These
changes are continuous process, day after day, as and
when transaction takes place. So, the changes in
working capital may be called ‘flow’. It can be ‘Inflow’ or
‘Outflow’ of working capital.
Funds flow statement measures and presents in
an analytical manner the summarized version of the
numerous flows of funds for a specified period.

3. Working Capital
Fund flow statement is based on working
capital concept of funds. However working capital is
also a controversial term. ‘gross working capital’ is
the total current assets. ‘Circulating capital’ is the
amount revolving in the cycle of ‘cash – inventories –
receivables and cash’. ‘Net working capital’ is the
excess of current assets over current liabilities. Funds
flow statement is generally prepared and interpreted
on the basis of ‘Net Working Capital’. Net working
capital can be computed as the difference between
current assets and current liabilities.

4. Current Assets
All those assets which are converted into cash in a
normal course of business within one year or within a
operating cycle are known as ‘current assets’.
The intension in acquiring such assets must to be
converting them into cash. The conversion has to take
place in the normal course of business. The time span for
the conversion should not exceed one year or the operating
cycle of the business.

5. Current Assets
(a) Cash and near cash items: Cash in hand, cash at
bank, govt., bonds, fixed deposits in bank, trade
investments etc..,
(b) Accounts receivable: Trade debtors, non-trade
debtors, bills receivable, etc…
(c) Inventories: Stocks of raw material, work in progress
or semi finished goods and finished goods.
(d) Advances recoverable in cash: Advances and loans to
employees, advances to suppliers, etc..,
(e) Prepaid expenses, etc. like prepaid insurance.

6. Current Liabilities
All those liabilities which are payable in cash
in the normal course of business within a period of one
year or within a operating cycle are called current
liabilities. Here also, the intension of contracting the
liability must be to pay it off in the normal course. The
period of repayment should not exceed one year or the
operating cycle. Thus, the long term loans or
debentures, etc, in the year of repayment also should
not be treated as current liabilities because they were
not intended to be paid off within one year out of
current assets.

7. Current Liabilities
(a) Accounts payable: Bills payable, notes payable, trade
creditors, non-trade creditors.
(b) Borrowing on short term basis: The temporary bank
overdraft, short term bank loans, private borrowing repayable
within one year.
(c) Outstanding expenses: Expenses for which payment
become due.
(d) Income received in advance: Money received in advance for
service to render or goods to be supplied in future.
(e) Tax payable and dividend payable: When tax is assessed, it
becomes a liability. Similarly divided declared is a liability.

8. Provisions against Current Liabilities
and Assets
‘Provision for doubtful debits’, ‘Provision for
discount on creditors’, ‘Provision made against trade
investments’ are also called current items. They
reduced the respective current assets and liability.
Non-current liabilities
All those liabilities which are not included under
‘current liabilities’ may be termed as
‘Non-current liabilities’. Share capital, debentures,
public deposits, reserves, etc.., are included in this
category

9. Non-Current Assets
All assets other than the current assets can be turned
as non-current assets. They include the following:
(a) Fixed assets like land, buildings, missionary,
furniture, loose tools, etc..,
(b) Intangible assets like goodwill, patents, copyright,
etc..,
(c) Long term investments in shares of other
companies, govt. bond, etc..,

10. Funds Flow Statement VS Balance Sheet
Funds Flow Statement Balance Sheet
It shows changes in working capital
between two balance sheet dates.
It shows the position of assets and
liabilities on a specific date.
It shows only those items which
cause changes in working capital.
It shows the real and personal
accounts of a business, reflected in the
assets and liabilities.
It aims at presenting flow of funds
over a period.
It aims at depicting the financial
position of business.
It is the tool for financial analysis,
generally useful to the management
It is the culmination of the
accounting process of the period. It is
meant for general purpose and usage of
various stakeholders.
It is prepared after the financial
accounts are completed.
It is prepared after the income
statement is completed.

11. Preparation of Funds Flow Statement
Funds flow statement reflects the change in
working capital during a period through those
transactions which affects the funds – termed as ‘cross
transactions’. The change is shown as ‘consolidated figure’.
However, it is preferable to prepare the ‘working capital
statement’ which shows the complete details of the
contribution of each item of current items and current
liability towards the overall change in the working capital.

12. Working Capital Statement (or) Schedule
of Changes in Working Capital
The statement of change in working capital is
concerned with the current assets and current liabilities alone,
as they are shown in the balance sheet of the current year and
the previous year. All non-current assets and non-current
liabilities, profits and losses, additional information available
are completely ignored.
Each current asset and current liability in the
period’s balance sheet is compared with those shown in the
previous period’s balance sheet. Increase or decrease on each
of the assets and liabilities is noted. The effect of such increase
and decrease during the period in each item individually on
the working capital is recorded. Finally the overall change in
the working capital is calculated.

13. Working Capital Statement ‘Principle’
Increase in current asset - increases working capital
Decrease in current asset - decreases working capital
Increase in current liability - decreases working
capital
Decrease in current liability - increases working
capital

14. Particulars Year
Rs.
Year
Rs.
Changes in
Working Capital
Increase Rs. Decrease Rs.
Current assets:
Cash xxx xxx xxx ---
Bank balance xxx xxx - xxx
Stock xxx xxx xxx ---
Sundry debtors xxx xxx xxx - --
Bills Receivable xxx xxx --- xxx
Trading investments xxx xxx xxx ---
Prepaid expenses
Total (A)
xxx xxx xxx ---
Schedule of Changes in Working Capital (Or)
Statement of Changes in Working Capital

15. Particulars Year
Rs.
Year
Rs.
Changes in Working Capital
Increase Rs. Decrease Rs.
Current liabilities:
Creditors xxx xxx xxx ---
Bills payable xxx xxx xxx ---
Outstanding expenses xxx xxx `
xxx
---
Short term loans xxx xxx xxx ---
Bank overdraft xxx xxx
xxx
---
Total (B) xxx xxx --- xxx
Working capital (A-B) xxx xxx --- xxx
Net Increase/decrease in Working
Capital xxx --- xxx
TOTAL xxx xxx xxx xxx

16. Funds Flow Statement
Funds flow statement is composed of two
categories of items: Sources of funds and applications
of funds. It is necessary to ascertain them in order to
prepare the funds flow statement.
The ‘transactions analysis’ or ‘identification
of transactions’ which cause flow of funds is the basis
on which different sources and applications of funds
are identified. However, the following are the usual
sources and applications of funds.

17. Sources of funds Applications or uses of funds
 Internal sources  Purchase of fixed assets
 Funds from operations  Purchase of long term investments
 External sources  Redemption of preference shares
 Issues of equity shares  Redemption of debentures
 Issue of preference share  Repayment of long term loans, bank
loans and public deposits
 Issue of debentures  Payment of dividend
 Public deposit accepted  Payment of tax liability
 Long term loans from banks and
other institutions
 Outflow of funds on account of
operations
 Sale of fixed assets
 Sale of long term investments

18. Adjusted Profit And Loss Account
Particulars Rs. Particulars Rs.
To depreciation on fixed
assets
xxx By balance b/d xxx
To loss on sale of fixed assets xxx By profit on sale of fixed
assets
xxx
To loss on sale of investments xxx By profit on sale of
investments
xxx
To goodwill written off xxx By income from investments xxx
To discount on debentures
written off
xxx By income tax refund xxx
To provision for tax xxx By funds from operation
To proposed dividend xxx (Bal. fig) xxx

19. Some points to note for preparation of
Funds Flow Statement
 Treatment of Tax and Dividend
a) It is preferable to treat them as non current items if
nothing is specified
b) If ‘tax payable’ or ‘Dividend payable’ is given on the
balance sheet liabilities side, they are to be taken as
current liabilities
c) Provision for tax and proposed dividend are non
current. Once tax is assessed or divided is declared,
it becomes a liability to be paid off immediately.

20. Tax and Dividend given different ways
a) If provision for tax and dividend are given in the
adjustments alone and nothing is given in the
balance sheets, the given amount is debited to
adjusted profit and loss account. It is also shown as
application in funds flow statement. It is presumed
that provision is made and payment is also made
immediately.
b) If provision for tax and proposed dividend are given
in the balance sheets alone and nothing is
mentioned in the adjustments.
The opening balance of these items can be assumed to
have been paid in cash during the current year. The
opening balance are shown as application of funds.

21. The closing balance are debited to the adjusted profit and
loss account as provisions made in the current year.
 if provision for tax and proposed dividend are given in the
balance sheet as well as in adjustments.
It is necessary to prepare separate ledger accounts for them.
From those accounts the tax paid and dividend paid are
shown as applications of funds. The provisions made are
shown in the debit side of adjusted profit and loss account.
Interim dividend should be treated separately from
proposed dividend.