Why we prepare fund flow

statement?

The balance sheet and income statement

are the traditional basic financial statement of a
business enterprise. A serious limitation of these
statements is that they do not provide
information regarding changes in the firms
financial position during a particular period of
time. They fail to answer following question
Does the firm possess adequate working capital?
How much funds have been generated from
operations?
Why did the firm not pay dividend in spite of
adequate profit?

MEANING OF FUND
The term fund has a variety of meaning such as cash
fund, capital fund and working capital fund.
1.Cash fund :
In a narrow sense, fund means only cash. Cash flow
statement portrays net effect of the various business
transactions on cash into account receipts & disbursement of
cash.
This concept of preparing fund flow statement is not
accepted, as there are many such transactions which
do not affect cash but represent the flow of fund .
for example: purchase of furniture on credit does not affect
cash but there is flow of fund.
2. Capital fund:
Here fund means all financial resources used in the
business, whether in the form of men, money, material,
machine & others.
3.Net working capital :
Net working capital means difference between
current asset and current liabilities .funds generally refers to
cash or cash equivalent or to working capital.

In

the above figure the dotted line displays there will be no flow of fund &
the dark line displays the flow of fund.

Preparation of Fund Flow Statement

The changes which occurred in the current accounts
as a result flow of fund are reflected in a statement known as
schedule of changes in working capital .
The similar changes in non current accounts are shown
in Fund Flow Statement.
Therefore, following two statements under this
techniques .
1. Statement or Schedule of Changes in Working Capital.
2. Statement of Sources and Uses of Funds or Funds Flow
Statement.
Schedule of Changes in Working Capital: It discloses the changes in individual item of current asset &
current liabilities between two period & there effect on
working capital. Working capital will increase when there is an
increase in current asset and decrease in current liabilities,
whereas, working capital will decrease when there is a
decrease in current asset & increase in current liabilities.
Net increase in working capital is treated as use of funds &
the net decrease in working capital is treated as source of
funds.

Statement or Schedule of Changes in Working Capital.

Item

Previous Year

Current Year

Effect

on

Increase Rs.
(A) Current Assets
Cash at bank
Cash in hand
Stock in trade
Debtors
Bills receivable
Advance payment
Short term investment
Prepaid expense
Accrued income
Total (A)
(B) Current Liabilities
(1) Short term loans
(2) Bank overdraft
(3) Creditors
(4) Bills payable
(5) Outstanding expenses
(6) Unclaim dividend
Total (B)
Net Working Capital (A-B)
Incraese / Decrease in Working
Capital
Total

Working
capital
Decrease Rs.

Sources of Fund
Amount
Fund from operation
Issue of share
Issue of debenture
long term loans
Sale of fixed assets /
Investment
Non trading receipts
Decrease in working
capital
(if any)

Uses Of Funds
Amount
Loss from operation
Redemption of
preference shares
Redemption of
debentures
Repayment of
long term loans
Purchase of fixed assets
/ Investments
Payment of dividend & taxes
Increase in working capital
(if any)

Particular

Amount

Depreciation
Loss on sale of fixed assets
Under writing commissions
Discount on issue of shares &
debentures
Preliminary expense written off
Deferred revenue expenses
Goodwill written off
Patent or trademark
Provision for taxes
(If treated non current)

Particular
Amount
Profit or gain on sale of
fixed asset
Dividend received
Interest received of
investment
Profit on revaluation
of asset

Fund from operation