FUND FLOW STATEMENT

Dr. Varsha Rayanade

Meaning of Fund Flow Statement
• Fund Flow Statement attempts to report the flow of funds
between various Assets, Liabilities and Owner’s Capital during
an accounting period
• A Fund Flow Statement is a financial report that shows the
profitability and financial position of a company.

• A fund flow statement is a statement prepared to analyze the

reasons for changes in the financial position of a company
between two balance sheets. It portrays the inflow and
outflow of funds i.e. sources of funds and applications of funds
for a particular period.

Dr. Varsha Rayanade

Meaning of “Funds”
• The term Funds has different meanings like Cash Fund, Capital
Fund, Working Capital Fund, etc.

• In case of Funds Flow Statement, the term “Funds” means

‘Net Working Capital’ that is also known as ‘Net Current
Assets’.

• Fund = Current Assets - Current Liabilities

Dr. Varsha Rayanade

Meaning of “Flow of Fund”
• Flow of Funds arises when the net effect of a transaction is to
increase or decrease the amount of Working Capital (i.e. Fund)

• When a transaction results in Increase of Fund, such a

transaction is said to be a Source of Fund.

• Similarly, if a transaction results in Decrease of Fund, such a

transaction is said to be an Application of Fund.

• A transaction that does not result in either increase or

decrease of fund does not result in flow of funds.

Dr. Varsha Rayanade

Flow of Funds
CURRENT NON CURRENT
FLOW OF FUNDS ASSETS
ASSETS

FUNDS
FLOW NO FLOW OF FUNDS
OF
NO FLOW OF FUNDS
FLOW FUNDS

NON CURRENT
CURRENT FLOW OF FUNDS LIABILITIES
LIABILITIES

Dr. Varsha Rayanade

Definition of Fund Flow Statement
• According to Robert N. Anthony, “A fund flow statement
describes the sources from which additional funds were
derived and the uses to which these sources were applied.”
• Yorston, Smyth, and Brown defined as fund flow statement as
follows: “A fund flow statement is prepared in summary form
to indicate changes (and trends) are prepared regularly.”
• According to Foulke, a fund flow statement is “a statement of
sources and application of funds, designed to analyze the
changes in the financial conditions of a business enterprise
between two dates.”
Dr. Varsha Rayanade
Objectives of Fund Flow Statement
a) Ascertain changes in the financial position - The main aim of
preparing a fund flow statement is to know the reasons for changes in
the liabilities, assets, or equity capital. This is done by comparing the two
balance sheets of different accounting periods.
b) Analyze the operational position - A balance sheet shows the
financial position of a firm, while profit and loss statement shows the
income position. However, neither show the operation position of a
company. A highly profitable company may not be able to pay off its
liabilities due to a shortage of cash. The fund flow statement explains
both – reasons for variations in different assets, liabilities, and capital
accounts and their impact on the company’s liquidity position.

Dr. Varsha Rayanade

Objectives of Fund Flow Statement
c) Assist in proper allocation of resources - Fund flow
statement helps in providing information regarding the allocating of the
resources more efficiently and effectively. It also gives information
regarding external and internal sources of financing.

d) Evaluate the financial Status of the company - The external

and internal users of the financial statement require fund flow statements
to assess the company’s strengths and weaknesses.
e) Act as future guide - Fund flow statement reflects all details
regarding the historical changes that have taken place in the company’s
working capital and net assets in a particular accounting period. This in
turn serves as a guide to make financial decisions to achieve the goals of
the organization. 

Dr. Varsha Rayanade

Preparation of Fund Flow Statement
• Fund flow statement can be prepared in three steps :

o Statement of Changes in Working capital

o Statement showing Funds from Operations
o Fund Flow Statement

Dr. Varsha Rayanade

Preparation of Fund Flow Statement
• STEP I - Preparation of Statement of Changes in Working Capital
o For preparing the Funds Flow Statement, the first step is to prepare the
Statement of Changes in Working Capital.
o Working capital is the net of current assets and current liabilities and it
is calculated by subtracting current liabilities from current assets.
o This statement shows an increase or decrease in working capital.
 Increase in working capital: An increase in the working capital can
indicate an increase in current assets or a decrease in current
liabilities.
 Decrease in working capital: A decrease in the working capital can
be due to a decrease in revenue, or unable to encash accounts
receivable, or even mismanagement of inventory.
Dr. Varsha Rayanade
Preparation of Fund Flow Statement
• STEP I - Preparation of Statement of Changes in Working Capital
o While making Statement of Changes in Working Capital apply following
rules to ascertain increase or decrease in working capital :
 An Increase in Current Assets, increases Working Capital
 An Decrease in Current Assets, decreases Working Capital
 An Increase in Current Liabilities, decreases Working Capital
 An Decrease in Current Liabilities, increases Working Capital
 An Increase/ Decrease in Non Current Assets, has no effect on
Working Capital
 An Increase/ Decrease in Non Current Liabilities, has no effect on
Working Capital

Dr. Varsha Rayanade

Preparation of Fund Flow Statement
• STEP I - Preparation of Statement of Changes in Working Capital
Change in Working Capital
Particulars 2020 2021
Increase (+) Decrease (-)
Current Assets:        
Inventory/ Stock 152400 149100   3300
Sundry Debtors 126000 183000 57000  
Cash & Bank 13400 16600 3200  
Other Current Assets 8000 9000 1000  
Loans & Advances 117600 147400 29800  
Total Current Assets (a) 417400 505100    
         
Less:        
Current Liabilities:        
Sundry Creditors 177600 148300 29300  
Provision for Expenses 26200 37500   11300
Proposed Dividend 65000 105000   40000
Other Liabilities 43500 37000 6500  
Total Current Liabilities (b) 312300 327800    
         
Working Capital (a-b) 105100 177300    
         
Net Increase in Working Capital 72200     72200
      126800 126800
Dr. Varsha Rayanade
Preparation of Fund Flow Statement
• STEP II - Preparation of Statement Showing Funds from Operations
o The next Step is to prepare the Funds generated only from the Operating
Activities of the Business.
o Funds generated from the Investing/Financing Activities of the business
are not be considered.
o Following adjustments need to be made to the Net Profit for the year to
arrive at the actual fund generated from operating activities:
 Add back non-cash expenses like depreciation and amortisation
 Subtract any profit from the sale of investments and fixed assets

Dr. Varsha Rayanade

Preparation of Fund Flow Statement
• STEP II- Adjusted Profit & Loss A/c (Specimen) - Preparation of Statement
Showing Funds from Operations
  Rs   Rs
To Non- Fund Items:   By Net Profit b/d  
- Depreciation   By Non - Operating Incomes:  
- Bad Debts Written Off   - Interest Received  
- Goodwill/ Patents, etc. Written Off   - Dividend Received  
- Loss on Sale of Assets   - Profit on Sale of Assets  
- Loss on Sale of Investments   - Profit on Sale of Investments  
- Premium on Redemption of Shares   - Excess Provision Written Back  
- Discount on issue of Shares Written Off   - Refund of Tax  
Appropriation of Profit      
- General Reserve   By Funds From Operations  
- Debenture Sinking Fundd   ( Balancing Figure)  
- Proposed Dividend      
- Provision for Tax      
To Net Profit c/d      
Dr. Varsha Rayanade
 Preparation of Fund Flow Statement
• STEP II - Preparation of Statement Showing Funds from Operations (Alternative Method)
Particulars Rs Rs
Closing Balance of Profit & Loss A/c or Retained Earnings   xxxx
Add: Non- Fund Items (i.e. items not resulting in outflow of funds)    
Depreciation xx 
Goodwill/ Patents/ Preliminary Expenses Written Off xx 
Premium on Redemption of Shares xx 
Discount on Issue of Shares Written Off xx 
Loss on Sale of Assets xx 
Loss on Sale of Long Term Investments xx 
Transfer to General Reserve/ Debenture Sinking Fund xx 
Provision for Taxation xx 
Proposed/ Interim Dividend xx 
  --------- xxx
    xxxx
Less: Non - Operating Income (i.e. items not resulting in inflow of funds)    
Profit on Sale of Assets xx 
Profit on Sale of Long Term Investments xx 
Dividend Received xx 
Excess Provision written back xx 
Interest Received xx 
Refund of Tax xx 
  --------- xxx
    xxxx
Less: Opening Balance of Profit & Loss A/c or Retained Earnings   xxx
Funds From Operations   XXX

Dr. Varsha Rayanade

Preparation of Fund Flow Statement
• STEP III - Preparation of Fund Flow Statement
o This is the final step that will calculate the flow of funds.
o This statement clearly shows the Sources and Uses of Funds so as to
highlight the Sources from where the Funds have been generated and the
Uses to which these Funds have been applied.
o Fund Flow Statement is also sometimes referred to as the Sources and
Applications of Funds Statement or Statement of Changes in Financial
Position.

Dr. Varsha Rayanade

Preparation of Fund Flow Statement
SOURCES OF FUNDS

Issue of Raising Long Sale of Fixed Non – Trading Profit From

Share Capital Term Loans Assets Receipts Operations

FUNDS

Redemption Payment of
Repayment Loss From
Purchase of of Pref. Dividend,
of Long Term Operations
Fixed Assets Shares & Taxes, etc.
Loans
Debentures
APPLICATION OF FUNDS Dr. Varsha Rayanade
Specimen of Sources And Application of Funds

SOURCES OF FUNDS Amount USES / APPLICATION OF FUNDS Amount

Funds from Operation xx Loss from Operation xx

Issue of Shares xx Redemption of Pref. Shares/ Debentures xx

Long Term Loans xx Repayment of Long Term Loans xx

Sale of Fixed Assets/ Investments xx Purchase of Fixed Assets/ Investments xx

Non Trading Receipts xx Payment of Dividend xx

Decerease in Working Capital (if any) xx Increase in Working Capital xx

     

  xxx   xxx

Dr. Varsha Rayanade