Fund flow statement Meaning The fund flow statement

Fund flow statement Meaning: The fund flow statement is a report on the movement of funds or working capital. It explains how working capital raised and used during an accounting period. Definitions: A statement of sources and applications of funds is a technical device designed to analyse the changes in the financial condition of a business enterprise between two dates. Objectives: Ø To show the resources have been obtained and used. Ø To indicate the results of current financial management. Ø To throw light upon the most important changes that have taken place during a specific period. Ø To show the general expansion of the business has been financed Ø To have an assessment of the working capital position of the concern

Advantages of Fund Flow Statement Analysis of Financial operations Evaluation of the firms Financing Answer to Intricate Questions Allocation of Scare Resources Helps in working capital management Acts as a guide to future helps financial institutions

Limitations of fund flow statement Ø It is not a substitute for an income statement or balance sheet. It provides only some additional information regarding changes in working capital. changes in cash are more important and relevant for financial management than the working capital. It cannot reveal continuous changes.

Sources of fund and Applications of funds Sources of funds Applications of funds Issue of shares and debentures Redemption of preference shares and debentures Raising of long term loans Repayment of loans Income from investments Purchase of long term investments Sale of fixed assets and long term investments Purchase of fixed assets Funds from operation Payment of taxes and dividends Drawings (in case of proprietory or partnership business) Loss of cash by embezzlement Funds lost in operations

Cash flow Statement A statement prepared from the historical data( income statement and balance sheet) showing sources and uses of cash is called cash flow statement. It reveals the inflow and outflow of cash during the particular period. Cash flow statement can be prepared for a year, half year, quarter or for any other duration. The term cash is used to refer bank balance also. Objectives of cash flow statement 1. to show the causes of changes in cash balance between two balance sheet dates. 2. to indicate the factors contributing to the reduction of cash balance inspiteof increase in profits and vice versa. Significance and uses of cash flow statement v Explains the reasons for low cash balance inspite of huge profits or large cash balance inspite of low profits. v Helps in short term financial decisions relating to liquidity. v Shows the major sources and uses of cash v Helps the management in planning the repayment of loans, replacements of assets, credit arrangements. v Basis of past year cash flow statements projections can be made for the future. v A comparison of actual cash flow statement with the projected cash flow statement helps in understanding the variations and control of cash expenditure.

Difference between cash flow and fund flow statement S. no Cash Flow Statement Fund Flow Statement 1. Only cash receipts and payments are recorded Increase or decrease in working capital is recorded 2. Indicates the causes for changes in cash positions Indicates the causes for changes in working capital 3. Appropriate for short range planning Appropriate for long range planning 4. Inflow of cash It does not mean inflow of cash 5. Starts with opening cash balance and closes with closing cash balance. There are no opening and closing balances in fund flow statement.

Specimen for cash flow statement ( As per Accounting Standard 3 ) Particulars Rs Rs Particulars A. Cash flow from operating activities B. Cash flow from investing activities Net profit before tax and extraordinary items. Purchase of fixed assets, Sale of fixed assets , purchase of investment, sale of investment, interest received dividend received Net cash from/ used in investing activities Adjustment for: C. Cash flow from financing activities Depreciation Gain / loss on sale of fixed assets Foreign exchange, Investment income, interest , dividend Proceeds from issue of share capital Proceeds from long term borrowings/ banks Payment of long term borrowings Dividend paid Adjustments for: Trade and other receivables inventories', trade payables Net cash from /used in financing activities Net increase / decrease in cash and cash equivalents (A+B+C) Cash generated from operations: Interest paid, direct taxes paid, cash flow before extraordinary items net cash from operating activities Cash and cash equivalents as at (opening balance) Cash and cash equivalents as at Closing balance) Rs Rs