FUND FLOW STATEMENT

Meaning of ‘Fund’:

In a popular and generally accepted sense the term ‘fund’ is used to denote the excess of current assets over current liabilities :

Working Capital     =    Current Assets – Current Liabilities

Meaning of ‘Flow’ of Fund:

Flow of funds means transmigration (coming and going) of funds. In other words, Flow of funds means change in Working capital, as in funds flow statement the words ‘funds’ mean net working  capital.

The financial statement of the business indicate assets, liabilities and capital on a  particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. If the management wants to find out as to where the cash is being utilized, financial statement cannot help. Therefore, a statement is prepared of the sources and applications of funds from where Working Capital comes and  where it is utilized. This is called Fund Flow statement.

Meaning of Fund Flow:

Definition:

According to R.N. Anthony, “Fund Flow is a statement prepared to indicate the increase in cash resources and the utilization of such resources of a business during the accounting period.”

According to Smith Brown, “Fund Flow is prepared in summary form to indicate changes occurring in items of financial condition between two different balance sheet dates.”

Coleman rightly states that, “The fund statement is statement summarizing the significant financial change which has occurred between the beginning and the end of a company’s accounting period.”

Funds defined as working capital:

In common usage, the term funds means cash. However, accountants and financial executives think of ‘funds’ in a broader sense. They view the funds available to a business enterprise as its working capital. Working capital is defined as current asset minus current liabilities and thus, is a broader definition of funds than is cash. The basic objective of the statement of changes in financial position, working capital basis, is to explain the changes in the working capital for a specified period of time.

Uses of working capital:

1.Funds flow statement helps in identifying the change in level of current assets investment and current liabilities financing.

2. Funds flow statement helps in analyzing the changes in working capital level of a firm.

3. Funds flow statement shows the relationship of net income to the changes in funds from business operation.

4. Funds flow statement reports about past fund flow as an aid to predict future funds flow.

5. Funds flow statement helps in determining the firms' ability to pay interest and dividend, and pay debt when they become due.

6. Funds flow statement shows the firms' ability to generate long-term financing to satisfy the investment in long-term assets.

7. Funds flow statements helps in identifying the factor responsible for changes in assets, liabilities and owners' equity at two balance sheet date.

Sources of working capital:

The following are the sources of working capital:

1. Funds from operation

2. Sales of non-current assets

3. Long term borrowings

4. Issue of additional equity capital

Preparation of Fund flow Statement:

1. Step-1 preparation of schedule of changes in working capital or statement showing changes in working capital.

[To find out net increase or decrease in working capital]

2. Step-2 preparation of noncurrent liabilities and noncurrent assets ledger account.

[To find out missing items]

[Note 2 is an working note]

3. Step-3 preparation of adjusted profit and loss account

4. Step-4 preparation of fund flow statement.

THANK YOU

Rakshitha V Nayak