Meaning (Fund flow statement) It is a statement which shows the movement of funds into or out of business. In other words , it is a sources and application of funds. The term ‘funds’ here refer to ‘Net working capital’ which is ascertained by taking out the difference between current asset and current liabilities. FFS is also known as “Statement of Sources and Application of Funds”. ACC TO ANTHONY: FFS describe the sources from which additional funds were derived and the use to which these funds were put.

IMPORTANCE OF FFS : 1.Helps in analysis of financial statements 2.Throws light on perplexing questions 3.Helps in the formulation of dividend policy 4.Helps in the proper allocation of resources 5.Acts as a future guide 6.Helps appraising the use of working capital 7.Helps knowing the credit worthiness

NON-CURRENT LIABILITIES FLOW OF FUNDS CURRENT ASSETS CURRENT LIABILITIES NO FLOW OF FUNDS FLOW OF FUNDS FLOW OF FUNDS FLOW OF FUNDS NO FLOW OF FUNDS NON-CURRENT ASSETS NON-CURRENT LIABILITIES

WHEN FLOW OF FUNDS TAKE PLACE ? Flow of funds take place whenever any transaction brings the change in working capital. If the transaction results in the increase of amount of working capital it is known as “Source of funds” and if the transaction results in the decrease of amount of working capital it is known as “Application of funds”. To determine as to whether a particular transaction has resulted in the flow of funds or not , the following steps should be followed: STEP 1: Pass journal entry for the concerned transaction . STEP 2: Classify the accounts involved into current and non-current. STEP 3: Determine whether there is a flow of funds or not as follows:

STEPS INVOLVED IN PREPRATION OF FFS If all the accounts involved in the transaction are current (there is no flow of funds) If all the accounts involved in the transaction are non current (there is no flow of funds) If one of accounts involved is current and another non current (there is flow of funds) STEPS INVOLVED IN PREPRATION OF FFS STEP 1: Collect balance sheet of two periods: e.g. if want to prepare fund flow statement for the last year ended 31st March,07 , we need balance sheet of two periods i.e. (i)balance sheet as on 31.3.06 and (ii)balance sheet as on 31.3.07 . STEP 2: "Prepare “schedule of changes in working capital”: With the help of current assets and current liabilities as follows:

Particulars Previous Year Current year Effect on working capital (increase) Effect on working capital (decrease) Current assets:- ---- Cash/Bank _ _ _ _ Stock Debtors Bill receivable Prepaid Expenses Accured Income Short –term /marketable investment ect Total (A) ****** Current Liabilities:- Creditors Bills payable Outstanding Expenses Bank Overdraft Income Received in advance etc. Total (B) Working capital [(A)-(B)] Net increase or decrease in working capital

STEP 3: Prepare “Fund Flow Statement”: The last step is to prepare fund flow statement with the help of non-current assets and non-current liabilities as follows: Sources Rs. Applications Funds from operations ****** Funds Lost in operations Sales of fixed Assets Purchase of fixed assets Sale of investments Purchase of Investments Issue of shares Redemption of preference shares Issue of Debentures Redemption of debentures Raising of long term loans Repayment of long term loans Non- operating incomes Payment of Dividend/Tax Net decrease in working Capital Net Increase in Working Capital

Difference Between Fund Flow Statement and Balance sheet Basis Funds Flow Statement Balance sheet 1. Meaning It is the statement which shows the movement of funds into and out of business. It is the statement which shows the financial position of business on a particular data. 2. Objectives To find out the reasons for change in working capital. To show the financial position of business on a particular date. 3. Nature Dynamic Static 4. Format No specific format prescribed by companies Act. Specific format Prescribed by companies Act,1956. 5. Sources Prepared from the balance sheet of two dates Prepared from the trail balance. 6. Users Internal party i.e. Management External parties i.e. investors, creditors , income tax department. 7. Legal obligations No legal obligations Every company is legally bound to prepare its balance sheet at the end of every financial year.

Treatment of Proposed Dividend There are two different ways of treating this item. 1. When Proposed Dividend is treated as Current Liability:- In this case. Proposed dividend will appear only in the ‘Schedule of working capital’. 2. When Proposed Dividend is treated as Non Current Liability :- In this case , Proposed dividend for current year will appear on the debit side of ‘Adjusted Profit & Loss A/c’ and proposed dividend for the previous year will be shown on the applications side of ‘Funds Flow Statement’.

Treatment of Provision For Taxation There are two ways of treating this item:- 1. When Provision for Taxation is treated as Current Liability :- In this case , Provision for taxation will appear only in the ‘Schedule of change in the working capital’. 2. When Provision for taxation is treated as Non Current Liability:- In such a case, Firstly ‘provision for Taxation Account ‘ is prepared as follows to find out the missing information. Provision For Taxation Account Rs. To Bank A/c By Balance b/d ******* (Tax paid during the year) ****** By Adjusted Profit & Loss A/c To Balance c/d (Provision made during the year)