subject: Preparation of funds flow statement [print this page] 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
Transactions between two current assets. (For ex. conversion of stock into cash)
Transactions between two current liabilities.
Transactions between current assets and current liabilities.
Transactions between two non-current or fixed assets.
Transactions between two long-term liabilities.
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;
Transaction between a long term liability and a current asset.
Transaction between a long term liability and a current liability.
Transaction between a non-current asset and a current asset.
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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---
---
---
---
---
---
---
---
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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.
