Faculty: Ms. Luvnica Rastogi Amity International Business School Imp Website:

Meaning and Definition of Funds Flow Statement; Importance of Funds Flow Statement Way of preparing Funds Flow Statement Precautions to be taken while preparing Funds Flow Statement Few Numerical Questions

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.

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

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.

CASH - In narrow sense, the term ‘fund’ is used to mean only the cash and bank balance.

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.

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-

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.

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..

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…

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.

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.

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.

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.

1. Current Assets and Current Liabilities 2. Non-Current Assets and Non-Current Liabilities 3. Non-Current Liabilities or Non-Current Assets.

SOURCES Funds from business Ops Other Incomes Sale of non-current assets Long term borrowings Issue of additional equity or preference capital. USES OF WC Losses from business ops Purchase of non-current assets Redemption of debentures/preference shares. Dividends to shareholders 9/8/2015

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.

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.

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?

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?

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

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….

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

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…

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

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

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

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….

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:

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

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.

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.

Prof.(Dr. ACS, CWA) P. K.Aggarwal 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)

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

Source of Funds -Fixed Assets +Fixed Liabilities +Share Capital Application of Funds +Fixed Assets -Fixed Liabilities -Share Capital

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

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.

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….