Preparation of Fund Flow Statement and it’s analysis

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 Preparation of Fund Flow Statement and Its Analysis

Overview: A Fund Flow Statement provides a detailed analysis of changes in the financial position of a business between two balance sheet dates. It highlights the movement of funds (working capital) within the business, showing sources and applications of funds.

Key Concepts:

  • Fund: Generally refers to working capital, defined as the excess of current assets over current liabilities.
  • Flow of Funds: Movement of funds that results in a change in working capital, involving transactions between current and non-current accounts.

Identification of Flow of Funds

Flow of Funds Occurs When:

  • Current and Non-Current Accounts are Involved: Transactions that involve one current account and one non-current account.
  • Current Accounts Only: No flow if only current accounts are involved.
  • Non-Current Accounts Only: No flow if only non-current accounts are involved.

Sources of Funds

  • Funds Generated from Operations: Difference between revenue from sales and payment of costs.
  • External Sources: Issuance of shares, long-term loans, sale of non-current assets.

Steps for Preparing a Fund Flow Statement

  • Determine Change in Working Capital: Calculate the net increase or decrease in working capital between two periods.
  • Adjust Net Income: Adjust net income for non-cash items (like depreciation).
  • Analyze Non-Current Accounts: Establish increases or decreases in non-current assets and liabilities to identify sources and uses of funds.
  • Verify Totals: Ensure total sources of funds match the total uses of funds, reconciling with the change in working capital.

General Rules for Preparing Fund Flow Statement

  • Increase in Current Asset: Increase in working capital.
  • Decrease in Current Asset: Decrease in working capital.
  • Increase in Current Liability: Decrease in working capital.
  • Decrease in Current Liability: Increase in working capital.
  • Simultaneous Changes: Increase in current assets and liabilities, or decrease in both, does not affect working capital.
  • Changes in Non-Current Assets/Liabilities: Affect working capital.

Format of Fund Flow Statement

Statement Form:

Sources of Funds:

  • Funds from Operations
  • Issuance of Share Capital
  • Long-term Loans
  • Sale of Non-Current Assets

Applications of Funds:

  • Purchase of Non-Current Assets
  • Repayment of Loans
  • Payment of Dividends
  • Increase in Working Capital

Example

Balance Sheet Data (Simplified):

Schedule of Changes in Working Capital:

Fund Flow Statement:

Sources of Funds:

Applications of Funds:

Calculation:

  • Funds from Operations: 42,000−35,000=7,00042,000 - 35,000 = 7,00042,000−35,000=7,000 (based on Profit and Loss account).
  • Increase in Working Capital: 82,000−48,000=34,00082,000 - 48,000 = 34,00082,000−48,000=34,000.

Analysis of Fund Flow Statement

  • Assess Financial Health: Helps in understanding the financial stability by analyzing sources and uses of funds.
  • Decision Making: Aids management in making informed financing and investment decisions.
  • Identifying Trends: Reveals trends in working capital changes, which can indicate efficiency in managing current assets and liabilities.
  • Investment and Financing: Provides insight into how well the company is financing its operations and investments.

Important Points:

  • Unlike cash flow statements, fund flow statements are prepared on an accrual basis.
  • It is crucial for assessing long-term financial strategies and ensuring that short-term liquidity is not compromised by long-term investments.

This detailed explanation and example help in understanding the preparation and analysis of the fund flow statement, emphasizing its importance in financial management.