Preparation of funds flow statement

Preparation of Funds Flow Statement

Meaning

Generally a fund is interpreted as working capital. Thus, funds flow is change in working capital. Hence, the changes in working capital is called as flow, the flow may be inflow or outflow. The term working capital has two concepts, gross working capital and net working capital. Gross working capital is the total of all current assets, whereas net working capital is the excess of current assets over current liabilities. Fund flow statement is prepared and interpreted on the basis of net working capital concept. Funds flow statement measures and presents in an analytical manner the summarized version of the numerous flows of funds for a specified period.

Fund Transactions

There is a plenty of business transactions which results in flow of funds or which cause changes in working capital. For this purpose, all the business transactions classified into (a) those transactions which increase funds i.e. sources of funds (b) those transactions which decrease funds i.e. application of funds. Identification of transactions causing for increase or decrease in funds is essential for funds flow statement analysis. The following transactions do not affect the flow of funds. These are

1. Transactions between two current assets. (For ex. conversion of stock into cash)
2. Transactions between two current liabilities.
3. Transactions between current assets and current liabilities.
4. Transactions between two non-current or fixed assets.
5. Transactions between two long-term liabilities.
6. Transactions between non-current assets and long-term liabilities.

It is clear from above, transactions between a current account (non-current account) and another current account (non-current account) does not affect flow of funds. The first three is connected with current account; the last three belongs to non-current account. As against this concept, any transaction between a current account and a non-current account affect funds. These are;

1. Transaction between a long term liability and a current asset.
2. Transaction between a long term liability and a current liability.
3. Transaction between a non-current asset and a current asset.
4. Transaction between a non-current asset and a current liability.

Steps in preparation of FFS

            Usually preparation of fund flow statement involves three steps. These are:

Step - 1: Preparation of Schedule of Changes in Working Capital

It reveals the difference between the current assets and liabilities. Increase in current assets and decrease in current liability will increase the working capital amount. At the same time decrease in current assets and increase in current liability will decrease the working capital amount. It can be explained as under:

Particulars

(1)

Previous year

(2)

Current year

(3)

Changes in Working Capital [(2) – (3)]

Increase

Decrease

Current Assets:

           Cash in hand

           Bank balance

           Stock

           Sundry Debtors

           Trading investment (Short-term)

           Prepaid Expenses

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

---

---

---

---

---

---

---

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Total (A)

xxx

xxx

Xxx

xxx

Current Liabilities

          Creditors

          Outstanding Expenses

          Bills Payable

          Shot-term Loans

          Bank Overdraft

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

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Total (B)

xxx

xxx

Xxx

xxx

Working Capital (A – B)

xxx

xxx

Net increase/ decrease in working capital

xxx

xxx

xxx

Xxx

xxx

Step – 2: Preparation of Adjusted P&L Account – to find fund from operations

Adjusted Profit & Loss Account

Particulars

Amt.

Particulars

Amt.

To Depreciation on fixed assets

To Loss on sale of fixed assets

To Loss on sale of investments

To Goodwill written off

To Discount on Debentures

To Provision for tax

To Proposed dividend

To Balance c/d

xx

xx

xx

xx

xx

xx

xx

xx

By Balance b/d

By Profit on sale of fixed assets

By Profit on sale of investments

By Income from investments

By Income tax Refund

By Funds From Operations (b/f)

xx

xx

xx

xx

xx

xx

xxx

xxx

Step – 3: Funds Flow Statement

Funds Flow Statement for the year ending……….

Sources

Amt.

Applications

Amt.

Fund from operations

Issue of shares / debentures

Sale of fixed assets

Borrowing loans from bank

Investment sold

Non-trading income

Decrease in working capital

xx

xx

xx

xx

xx

xx

xx

xx

Fund lost in operation

Repayment of loans

Redemption of preference shares

Redemption of debentures

Purchase of investments

Tax paid

Dividend paid

Increase in working capital

xx

xx

xx

xx

xx

xx

xx

xx

xxx

xxx

Importance of funds flow statement

Funds flow statement is an important tool, ut helps in the planning, deployment and controlling of funds year after year. The following are the benefits of funds flow statement.

      It provides a detailed analysis and understanding of changes between two balance sheet dates.

      It shows the fund mobilization and canalization

      It helps to take fund projections for the future.

      It is a useful technique to measure the quantum funds needs for efficient operation of a firm.