Fund Flow Statement:

Fund Flow Statement

(Meaning)

• Fund flow statement is a statement showing sources and Application of funds for a period of time.
• Fund flow statement is one of the valuable tool in the hand of Management to evaluate the uses of funds by the organization and in determining as to how these uses are financed
•  Fund flow statement is statement which discloses the analytical Information about the different sources of fund and the application of the same in the specific accounting cycle.

Important Definitions of Fund Flow Statements :

 (a)”The Fund Flow Statement describes the sources from which

additional funds were derived and the uses to which these funds

were put”.

 (b)”The Fund Flow Statement is a statement of sources and

application of funds is a technical device designed to analyze the

changes in the financial condition of a business enterprise

between two dates.

 Uses/Advantages of Fund Flow Statement (FFS)

1. Fund flow statement is helpful in estimating the budgets or the

amount of funds required in future for modernization and

expansion programs.

 

2. Fund flow statement provides the information how the funds have

been obtained from different sources, i.e. External, Internal etc.

and how they have been spent.

3. Fund flow statement helps to know where did the profits go.

4. Fund flow statement leads to improvement in the rate of profit on

assets by directing the flow of funds to those activities with higher

margins.

5. Fund flow statement helps the management for declaration of

dividends, planning of a dividend policy, or issue of bonus shares.

6. Fund flow statement helps in avoiding the situation of running out

of funds by obtaining additional working capital, when required

7. Fund flow statement helps in planning the temporary investment of

idle funds and planning the repayment schedules of long-term

debt.

8. Fund flow statement helps in planning for retirement of long-term

debts.

9. Fund flow statement helps in assessing the relative points of

strength and weakness of the organization.

 Limitations / Disadvantages of Fund Flow Statement (FFS)

1. Non-fund transactions are ignored and hence it cannot provide full

financial analysis unless supported by ratio analysis etc.

2. It is criticized for just re-arranging the financial information

obtained from the financial statements.

3. It is historic statement and it does not indicate any price level

changes.

4. It does not show any changes in working capital for which a

separate statement has to be prepared.

Preparation of Fund Flow Statement

(a)  Funds from Operations

(b) The concept of funds from operations is extremely important.

•  Fund from operations is the working capital flow arising out of

operating activities.

• In calculating funds from operations, non-business expenses like

dividend paid as well as non-cash expenses like depreciation etc.

are added to the net profits shown by the Profit and Loss A/c.

•  Similarly , non – cash as well as non – business income is

deducted from net profits

The method of finding out funds from operations is as follows :

 

Particulars		Particulars
To Non-cash Items :  1. Depreciation on fixed assets  2. Preliminary expenses written-off 3. Goodwill written-off 4. Discount on issue of shares and debentures written-off 5. Transfer to reserve  6. Proposed dividend 7. Loss on sale of assets  8. Provision for taxation To Dividend Paid To Income Tax Paid To Balance c/d (Closing Balance)		By Balance b/d (Opening Balance) By Non-operating Income : 1. Interest received  2. Profit on sale of fixed assets 3. Dividend received 4. Refund of taxation 5. Other items By Funds from Operations (Balancing Figure)
Total		Total

 

·        The funds from operations can also be calculated by preparing a

statement.

·        The items shown on the debit side of the adjusted Profit and Loss

A/c. are added in the net profits while the items on the credit side

are deducted from net profits.

 

(c)   Statement of Changes in Working Capital

·        It shows net increase or decrease in working capital.

·        In the funds flow statement, net increase in working capital is

shown on the application side, while net decrease in working

capital is shown on the sources side.

·        In order to find out this figure, the following statement is prepared.

Statement showing Changes in Working Capital

 

Particulars	Previous year	Current year	Increase/Decrease in working capital
1. Current Assets  Cash  Debtors  Bills Receivable  Stock  Prepaid expenses  Income outstanding Short-term investments
II. Current Liabilities: Creditors Bills payable Bank overdraft Expenses outstanding Short-term loans
Total

                                               

(d)Funds Flow Statement

1. Funds flow statement is a financial statement drawn to know the

changes in financial position over the year.

Performa of Fund Flow Statement:

Funds Flow Statement for the year ended on 31st March, 20XX

Sources		Application
1.     Funds     from        business operations	–	1. Loss of funds due to operations	–
2. Issue of additional capital	–	2.   Redemption  of      preference shares	–
3. Issue of debentures	–	3. Redemption of debentures	–
4. Sale of investments	–	4. Purchase of investments	–
5. Sale of Assets	–	5. Purchase of assets	–
6. Loans raised	–	6. Payment of loans	–
7. Non-trading receipts	–	7. Tax paid	–
8. Decrease in working capital	–	8. Dividend paid	–
		9. Non-trading payments	–
		10. Increase in working capital	–
Total	_	Total	–

 

Question 1 :

Prepare a Fund Flow Statement from the following balance sheets of ABC Company :

Particulars	January 1, 2018 IQD	December 31, 2018 IQD
Cash	40,000	44,400
Accounts Receivable	10,000	20,700
inventories	15,000	15,000
Land	4,000	4,000
Buildings	20,000	16,000
Equipment	15,000	17,000
Accumulated Depreciation	(5,000)	(2,800)
Patents	1,000	900
Total Assets	100,000	115,200
Current Liabilities	30,000	32,000
Bills Payable	22,000	22,000
Bills Payable Discount	(2,000)	(1,800)
Capital Stock	35,000	43,500
Retained Earnings	15,000	19.500
Total Liabilities	100,000	115,200

 

Additional Information

1. Income for the period was IQD 10,000.
2. A building that cost IQD 4,000 and which had a book value of IQD 1,000 was sold for IQD 1,400.
3. The depreciation charge for the period was IQD 800.
4. There was an issue of IQD 5,000 of common stock.
5. Cash dividends of IQD 2,000 and stock dividends of IQD 3,500 were declared.

Solution :

 

1) Computation of Profit on Sale of Building :

Particulars	IQD
Acquisition Cost	4,000
Less : Depreciation to the date of sale (4,000 – 1,000) (Acquisition Cost –	3,000
Undepreciated Book Value)
Undepreciated Book Value of Building Sold	1,000
Sales Price	1,400
Profit on Sale of Building	400

 

This IQD 400 has been credited to P & L A/c and IQD 10,000 profit for the year has been arrived at after credited profit of IQD 400. Since this profit is not an item of trading profit, it should be deducted from the profit figure to arrive at funds from operations. IQD 1,400 sales price of the building should be considered at an item of source of funds in the funds flow statement.

(2)   Calculation of Funds from Operations :

Particulars		IQD
Income for the Period (Given)		10,000
Add : Depreciation	IQD 800
Add : Amortization of Patents	IQD 100
Add : Amortization of Discount Bonds	IQD 200	1,100
		11,100
Less : Profit on Sale of Building (W. N. -1)		400
Funds from Operations		10,700

• Schedule of Changes in Working Capital:

Particulars	1-1-2018   (IQD)	31-12-2018   (IQD)	Changes in Working Capital
			Increase (IQD)	Decrease (IQD)
(A) Current Assets (CA):
Cash	40,000	44,400	4,400	–
Accounts Receivable	10,000	20,700	10,700	–
Inventories	15,000	15,000	–	–
	65,000	80,100
Less : (B) Current Liabilities
(CL)
Current Liabilities	30,000	32,000	–	2,000
	35,000	48,100	15,100	2,000
Net   Increase    in         Working
Capital				13,100

• Equipment A/c Cr.

Particulars	IQD	Particulars	IQD
To Balance b/d To Bank (Purchase) (Balancing Fig.)	15,000   2,000	By Balance c/d	17,000
	17,000		17,000

 

ABC Company

Funds Flow Statement (As on 31-12-2013)

Sources	IQD	Application	IQD
Funds from Operations	10,700	Purchase of Equipment	2,000
Sale of Building.	1,400	Equity Dividend (Cash)	2,000
Issue of Equity Shares	5,000	Increase in Working Capital	13,100
	17,100		17,100

Question 2

From the following Balance Sheets of ‘Sammal Ltd.’ Prepare : (a)Statement showing changes in Working Capital, (b)Funds Flow Statement.

Liabilities	2017 IQD	2018 IQD	Assets	2017 IQD	2018 IQD
Equity Share Capital General Reserve	20,000 2,500	27,500 4,000	Machinery Stock	9,000 10,000	22,500 11,500

 

Profit and Loss A/c	3,000	2,500	Land & Building	7,500	10,000
6% Debentures	5,000	10,000	Debtors	4,000	3,500
Creditors	4,500	7,250	Bills Receivable	3,250	4,200
Bills Payable	1,700	2,500	Goodwill	3,500	2,500
Unclaimed Dividend	300	250	Bank	2,250	2,800
Tax Provision	2,500	3,500	Discount on Issue	—	500
			of Debentures
	39,500	57,500		39,500	57,500

 

 

Other Information :

1. Depreciation on Machinery and Building for 2018 amounted to IQD 2,500 and IQD 1,500 respectively.
2. The above company acquired the assets of Small Co. for IQD 10,000 and paid the purchase consideration by issuing fully paid shares amounting to IQD 7,500 and by paying the balance in cash. The assets consists of Plant and Machinery IQD 5,500, Stock IQD 2,500, and Goodwill IQD 2,000.
3. Income tax paid during 2018 amounted to IQD 3,500.
4. Interim dividend paid during 2018 was IQD 5,000.
5. Debentures were issued at a discount of IQD 1,000.
6. Decided to value stock at cost, whereas previously the practice was to value stock at cost, less 20%. The stock according to the books was IQD 10,000 on 2017.

The stock on 2018 was IQD 11,500 and it was correctly valued at cost.

Solution :

• Statement showing Changes in Working Capital of ‘Vimal Ltd.’:

Particulars	2017 IQD	2018 IQD
Current Assets (CA): (Stock + Debtors + B/R + Bank)
Less ; Current Liabilities (Creditors + B/P + Unclaimed	22,000	22,000
Dividend)	6,500	10,000
Working Capital	15,500	12,000

 

Decrease in Working Capital = 15,500 – 12,000 = 3,500 (Source) Now, Revalued Opening Stock (2017) = 10,000 x = 12,500 This is clarified below : Let the Cost Price be IQD 100

Reduced Price = 100 – 20 = 80

 

 

Reduced Price	Cost Price
IQD	IQD
80	100
10,000	IQD
× 10,000 = 12,500

(b)  Funds Flow Statement of Sammal Ltd. for the year 2018 :

Sources	IQD	Application	IQD
Operational Profit	18,500	Purchase of Land and Building	4,000
Issue of Debentures	4,000	Purchase of Machinery	10,500
Decrease in Working Capital	3,500	Payment of Tax	6,500
		Interim Dividend	5,000
	26,000		26,000

 

Working Notes :

• Land and Building A/c                              Cr.

Particulars	IQD	Particulars	IQD
To Balance b/d To Bank – (Purchase) (Bal. Figure)	7,500 4,000	By Depreciation By Balance c/d	1,500 10,000
	11,500		11,500

 

• Plant and Machinery A/c                             Cr.

Particulars	IQD	Particulars	IQD
To Balance b/d	9,000	By Depreciation	2,500
To Bank – (Purchase)	5,500	By Balance c/d .	22,500
To  Bank  –   (Purchase)       (Bal.
Figure)	10,500
	25,000		25,000

 

• 6% Debenture A/c                             Cr.

Particulars	IQD	Particulars	IQD
To Balance c/d	10,000	By Balance b/d	5,000
		By Bank	4,000
		By Discount on Issue	1,000
	10,000		10,000

 

 

• Goodwill A/c                                     Cr.

Particulars	IQD	Particulars	IQD
To Balance b/d To Bank – (Purchase)	3,500 2,000	By Profit and Loss A/c By Balance c/d	3,000 2,500
	5,500		5,500

 

Dr.                             Adjusted Profit and Loss A/c                        Cr.

Particulars	IQD	Particulars	IQD
To Interim Dividend	5,000	By Balance b/d	3,000
To General Reserve	1,500	By Stock (Increase in Value)	2,500
To Tax Provision	4,500	By Operational Profit	15,500
To Depreciation	4,000	(Balancing figure)
To Discount on Debenture	500
7o Goodwill	3,000
To Balance c/d	2,500
	21,000		21,000

 

Question 3

         The financial position of ABC Ltd. on 1st Jan., 2018 and 31th December, 2018 was as follows :

Particulars	1st January	31st December
Assets :
Cash	8,000	7,200
Debtors	70,000	76,800
Stock	50,000	44,000
Land	40,000	60,000
Building	100,000	110,000
Machinery	160,000	172,000
Total Assets	428,000	470,000
Liabilities:
Current Liabilities	72,000	82,000
Loan from Bank	60,000	50,000
Loan from Associated Co.	–	40,000
Capital and Reserve	296,000	298,000
Total Liabilities	428,000	470,000

During the year IQD 52,000/- were paid as Dividends. The provision for depreciation against machinery as on 1st Jan. 2018 was IQD 54,000/- and as on 31st Dec. 2018 IQD 72,000/-.

prepare the Fund Flow Statement.

Solution :

Statement Showing Changes in Working Capital:

Particulars	1-1-2018 IQD	31-12-2018 IQD	Increase in Working Capital IQD	Decreased in Working Capital IQD
(A) Current Assets (CA):
•  Cash	8,000	7,200	–	800
•  Debtors	70,000	76,800	6,800	–
•  Stock	50,000	44,000	_	6,000
	128,000	128,000
(B) Current Liabilities (CL):
•  Current Liabilities	72,000	82,000	–	10,000
	72,000	82,000	6,800	16,800

Net Decrease in Working Capital: IQD 10,000 (16,800 – 6,800)

 

Dr.                                             Building A/c                          Cr.

Particulars	IQD	Particulars	IQD
To Balance b/d To Bank A/c (Balancing Figure)	100,000 10,000	By Balance c/d	110,000
	110,000		110,000

 

Dr.                                             Machinery A/c                      Cr.

Particulars	IQD	Particulars	IQD
To Balance b/d	214,000
(Opening Bal (+) Provision)
To Bank A/c (Additions) (Bal. Fig.)	30,000	By Balance c/d	244,000
	244,000		244,000

                                                  

 

 

 

Dr.                                   Provision for Depreciation A/c               Cr.

Particulars	IQD	Particulars	IQD
To Balance c/d	72,000	By Balance b/d By P & L A/c (Balancing Figure)	54,000 18,000
	72,000		72,000

 

Dr.                                     Funds from Operations                        Cr.

Particulars	IQD	Particulars	IQD
To Depreciation Provision To Dividend Paid To Balance c/d	18,000 52,000 2,000	By Funds from Operations (Balancing Figure)	72,000
	72,000		72,000

 

Funds Flow Statement of ABC Ltd. (As on 31-12-2018)

Sources	IQD	Applications	IQD
Loan from Associate Company	40,000	Purchase of Land	20,000
Funds from Operations	72,000	Purchase of Building	10,000
Net Decreases in Working Capital	10,000	Purchase of Machinery	30,000
		Repayment of Bank Loan	10,000
		Dividend Paid	52,000
	122,000		122,000

     Question 4

Following are the summarized Balance Sheet of NDA Ltd. As on 31st March, 2017 and 2018. You are required to prepare a Funds Flow statement for the year ended 31st March, 2018.

 

Balance Sheet

Liabilities	Amount IQD	Amount IQD	Assets	Amount IQD	Amount IQD
Share Capital	200,000	250,000	Goodwill		5,000
General Reserve	50,000	60,000	Land and Building	200,000	190,000
Profit & Loss Ale	30,500	30,600	Plant and Machinery	150,000	169,000
Bank Loan	70,000	135,200	Stock	100,000	74,000
Creditors	150,000		Debtors	80,000	64,200
Provision for Tax	30,000	35,000	Cash in Hand	500	8,600
Total IQD	530,500	510,800	Total IQD	530,500	510,800

Additional information :

1. Depreciation written-off on Plant and Machinery IQD 14,000 and on Land and Building IQD 10,000.
2. Provision for tax was made during the year IQD 33,000.
3. Dividend of IQD 23,000 was paid.

Ans.:

• Working Notes :

Statement Showing changes in Working Capital

Particulars	31-3-2017 IQD	31-3-2018 IQD	increase in Working Capital IQD	Decrease in Working Capita! IQD
(A) Current Assets:
Stock	100,000	74,000	–	26,000
Debtors	80,000	64,200	–	15,800
Cash	500	8,600	8,100	–
Total	180,500	146,800
(B) Current Liabilities : Creditors	150,000	–	150,000	–
Total	150,000		158,100	41,800

–    Net Increase in Working Capital

= IQD 158,100 (-) IQD 41,800 = IQD 116,300

 

(2)  Dr.                              Plant and Machinery A/c                              Cr.

Particulars	IQD	Particulars	IQD
To Bal. b/d To Bank A/c (Machinery Purchased)	150,000 33,000	By Adj. P & L A/c. (Dep.n) By Bal. c/d	14,000 169,000
	183,000		183,000

 

• Land and Building A/c                                 Cr.

Particulars	IQD	Particulars	IQD
To Bal. b/d	200,000	By Adj. P&L A/c (Dep.n) By Bal. c/d	10,000 190,000
	200,000		200,000

 

                                    Provision for Taxation A/c                       

        Dr.                                                                                                            Cr.

Particulars	IQD	Particulars	IQD
To Bank A/c	33,000	By Bal. b/d	30,000
To Bal. c/d	35,000	By Adj. P& L A/c	38,000
	68,000		68,000

 

• Funds From Operations / Adjusted P & L A/c             Cr.

Particulars	IQD	Particulars	IQD
To Dep.n on P & M	14,000	By Bal. b/d	30,500
To Dep.n on L & B	10,000	By Operational Profit	90,100
To Dividend Paid	23,000	(Balancing Figure)
To Provision for Tax	33,000
To General Reserve	10,000
To Bal. c/d	30,600
	120,600		120,600

 

Funds Flow Statement

(As on 31-3-2014)

Sources	IQD	Application	IQD
Issue of Share Capital	50,000	Purchase of Machinery	33,000
Bank Loan	65,200	Dividend Paid	23,000
Operational Profit	90,100	Tax	33,000
		Increase in Working Capital	116,300
	205,300		205,300

       Important QuestiExplain the concept of Fund.

 

2. What is Fund Flow Statement ?

 

3. State the various Uses of Fund Flow Statement.

 

4. State the Advantages of Fund Flow Statement.

 

5. Write Short Notes about of the Utility of Funds Flow Statement.

 

6. State the Limitations of Fund Flow Statement.

 

7. Explain : Preparation of Fund Flow Statement.