Wednesday, 7 January 2015

Fund Flow Statements & How to prepare a Fund Flow Statement

What is Fund Flow Statement?
Fund Flow Statement is a financial document which depicts and explains the changes in the working capital and financial position of a company during a period as compared with another period.

Why it is prepared?
Fund Flow Statements are prepared to study and explain the changes in working capital and finances of the company during any period. It gives the reasons for increase or decrease of working capital and the finances of the company by revealing the various changes in different account heads for a better understanding and management of funds.

How to prepare Fund Flow Statement?
Fund flow statements are prepared by deriving the amounts of increase or decrease in figures of balance sheets comparing two accounting periods and putting those figures in a statement.

Fund flow statement contains two parts - Sources of Funds and Application of Funds. You can prepare it in a single columnar statement or in a double columnar one.

In a single column format, you will first mention all sources of funds and then mention the applications.

In a double columnar format, the left side will show sources of funds whereas application of funds are shown on the right side. Both totals will match as you will be describing the whole utilisation of resources.

Sources of Funds
Under this head, you will be showing the following figures.
  • Shares and debentures issued for cash (including bank cheques, drafts, money transfers,etc.) 
  • Amount received through long term loans. Short term loans are not taken as they are part of working capital.
  • Amount received through sale of fixed assets and investments, etc.
  • Gross Profit or funds generated from business operations during the year. This amount is calculated in a different way through indirect method by taking the net loss during the year and back calculating the gross funds in a format described below separately in worksheet
  • Decrease, if any, in the working capital. This figure is also calculated by deriving the changes between working capital of two years as per explanation given below separately in a worksheet.
Application of Funds 
Coming to application of funds, the following figures generally appear in a funds flow statement.

  • Purchase of Fixed Assets and Investments made during the year on actual payment basis.
  • Payments made against redemption of debentures, shares and loan repayments. 
  • Tax and dividend payments made during the year. (No provisions for dividend or tax should have been made in current liabilities in this case)
  • Increase in working capital, if any. (If there is decrease in working capital, it is taken as Source of Fund and increase in working capital is taken as Application of Fund).
So, the format for Fund Flow Statement will be something like this:


Fund Flow Statement of XYZ Company
Sources of Funds
Amount
Application of Funds
Amount
Issue of shares/debentures

Purchase of Fixed assets and Investments

Long term loan receipts during the year

Redemption of Debentures, Shares

Sale of fixed assets/investments

Repayment of Loans

Fund generated from business operations
 as per    worksheet
Tax and Dividend payments

Decrease in working capital  (* as per below  worksheet)

Increase in working capital   (* as per below work  sheet)





TOTAL

TOTAL


Now, coming to the Annexures of above statement, two work sheets are to be prepared for Funds generated from Business Operations and for Decrease or Increase in Working Capital. They are prepared as per below given worksheets. All other figures are taken direct from Balance Sheet in above columns

Work Sheet for funds generated from business operations (for above marked@)
You will proceed from Net Profit of the year and back calculate as follows:

Net Profit/ Income                                                
Add (Items shown as expense)
Depreciation
Loss on sale of Fixed assets
Loss on sale/ encashment of investments
Deferred Revenue Expenditure
Provision for Tax
Provision for Dividend
Other losses written off

TOTAL
Less: (Items shown as Income)
Profit on sale of assets
Profit on Investments
Reserves & Provisions written back, if any
Other fictitious income shown, if any


 Actual Fund generated from operations
50000


10000
  2000
  1000
  2500
  1500
  3000
    500
20500
70500

  5000
  3000
  5000
    500
13500

57000



Worksheet for Increase/ Decrease in Working Capital (marked * in fund flow)
Particulars
Previous Year (2012-13)
Current Year
(2013-14)
Increase / Decrease
A. Current Assets



      Inventories
1200
1500
(+) 300
      Sundry Debtors
  500
  650
(+) 150
      Cash & Bank Balances
    50
    75
(+)   25
      Loans & Advances
  300
  405
(+) 105
      Other Current Assets
    30
    20
(-)   10
TOTAL (A)
2080
2650
(+) 570




B. Current Liabilities



     Liabilities (for expenses, creditors & customer advances)
1050
1200
(+) 150
     Provision for Tax
  350
  450
(+) 100
     Provision for Dividend
  300
  360
(+)   60
     Others
  100
    90
(-)    10
TOTAL (B)
1800
2100
(+) 300
Net Working Capital (A – B)
  280
  550
(+) 270

Note: If net working capital increases, it is to be treated as application of funds as funds are utilized to add to the stocks. On the other hand, when there is decrease of working capital, it is a source of fund because you are saving money by spending less. 

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