Unit – IV

Funds Flow Statement

Funds – Meaning:- The term funds has been defined in number of ways:
a) In a narrow sense: Funds means Cash only.
b) In a Broader Sense: The term fund refers to money values in whatever form it may exist
i.e. Men, Material, Money, Machinery and others.
c) In a Popular Sense: The term fund means Working Capital i.e. the excess of Current
Assets over Current Liabilities.
Flow – Meaning:- The term flow means movement and includes both inflow and outflow.
Funds Flow Statement - Meaning:- The funds flow statement is a statement which shows the
movement of funds and is a report of the financial operation of the business understanding. It indicates
various means by which these funds were obtained during a particular period and the ways in which
these funds were employed. In other words it is a statement of sources and applications of funds.
When fund means Working Capital, flow of funds refers to the movement of funds which cause
a change in working capital of the organisation. To identify a flow of funds, we have to understand the
difference between current account and non current account.
Current Accounts:- Any account which is either a current Asset or a current liability is called as a current
account. Example:
Current Assets Current Liabilities
1. Cash in Hand 1. Bills Payable
2. Cash at Bank 2. Sundry Creditors
3. Sundry Debtors 3. Bank Overdraft
4. Bills Receivables 4. Outstanding Expenses
5. Short term loans & advances 5. Income Received in advance
6. Outstanding Incomes 6. Proposed Dividend
7. Temporary investments(Short term) 7. Provision for Taxation
8. Prepaid Expenses 8. Unclaimed Dividend
9.Closing Stock: Raw Materials 9. Short term loans & Borrowings
Work-in-progress
Finished goods
10. Other Current Assets

Non- current Accounts:- An account which is neither a current assets nor a current liability is called as
non current accounts.
Non-Current Assets Non-Current Liabilities
1.Fixed Assets: Tangible Assets: 1. Long Term Borrowings:
Land & Buildings Debentures
Plant & Machinery Long Term Loans
Furniture & Fixtures 2. Shareholders Fund:
Premises Share Capital
Freehold Properties Equity Share Capital
Motor Vehicles Preference Share Capital
Others Reserves & Surplus:
Intangible Assets: General Reserve
Goodwill, Patents Capital Reserve
Copy rights & Trade Marks Sinking fund
2. Long Term Investments Share Premium
3. Miscellaneous Expenses: Profit & Loss a/c
Preliminary Expenses Other Reserves
Discount on issue of Shares Provision on Fixed Assets
Discount on issue of Debentures
Underwriting Commission
Working Capital:- The excesses of current assets over current liabilities is called as working capital. In
other words that part of capital which is used for day-to-day operating activities is called as working
capital. Thus,
Working Capital = Current Assets – Current Liabilities
Identification of Flow of Funds:- A flow of funds takes place only if a current account is involved. To
identify a flow, journalise the transactions, identify the two accounts involved as current account and
non-current account and apply the following general rule.
General Rule:-
1. A transaction which involves only current accounts (between current assets & current
Liabilities), do not result in a flow of funds.
2. A transaction which involve only Non-current accounts (Fixed Assets & Long term Liabilities and
Capital), do not result in a flow of funds.
3. A transaction, which involves one current account (current asset or current liability) and one
non-current account (fixed assets or long term liability or shareholders fund), results in a flow
of funds.
USES, SIGNIFICANCE AND IMPORTANCE OF FUNDS FLOW STATEMENT
A funds flow statement is an essential tool for the financial analysis and is of primary importance
to the financial management. Now –a – days, it is being widely used by the financial analysts, credit
granting institutions and financial managers. The basic purpose of a funds flow statement is to reveal
the changes in the working capital on the two balance sheet dates. It also describes the sources from
which additional working capital has been financed and the uses to which working has been applied.
Such a statement is particularly useful is assessing the growth of the firm, is resulting financial needs and
in determining the best way of financing these needs. By making use of projected funds flow statement,
the management can come to know the adequacy or inadequacy of working capital even in advance.
One can plan the intermediate and long-term financing of the firm, repayment long-term debts,
expansion of the business, allocation of resources, etc.
The significance or importance of funds flow statement can be we followed from its various uses given
below:
1. It helps in the analysis of financial operations.
The financial statements reveal the net effect of various transactions on the operational and
financial positions of a concern. The balance sheet gives a static view of the resources of a business and
the uses to which these resources have been put at a certain point of time. But it does not disclose the
causes for changes in the assets and liabilities between two different changes on the liquidity position of
the company. Sometimes a concern may operate profitably and yet its cash position may become more
and worse. The funds flow statement gives a clear answer to such a situation explaining what has
happened to the profits of the firm.
2. It throws light on many perplexing questions of general interest which otherwise may be
difficult to be answered, such as:
a. Why were the net current assets lesser in spite of higher profits and vice- versa?
b. Why more dividends could not be declared in spite of available profits?
c. How was it possible to distribute more dividends than the present earnings?
d. What happened to the net profit? Where did they go?
e. what happened to the proceeds of sale of fixed assets or issue of shares, debentures, etc.
f. what are the sources of the repayment of debts?
g. How was the increase in working capital financed and how will it be financed in future?
3. It helps in the formation of a realistic dividends policy.
Sometimes a firm has sufficient profits available for distribution as dividend but yet it may not be
advisable to distribute dividend for lack of liquid or cash resources. In such cases, a funds flow statement
helps in the formation of a realistic dividend policy.
4. It helps in the proper allocation of resources.
The resources of a concern are always limited and it wants to make the best use of these
resources. A projected funds flow statement constructed for the future helps in making managerial
decisions. The firm can plan the deployment of its resources and allocate them among various
applications.
5. It acts as a future guide.
A projected funds flow statement also acts as guide for future to the management. The
management can come to know the various problems it is going to face in near future for want of funds.
The firm’s future needs of funds can be projected well in advance and also the timing of these needs.
The firm can arrange to finance these needs more effectively and avoid future problems.
6. It helps knowing the overall credit worthiness of a firm.
A fund flow statement helps in explaining how efficiently the management has used its working
capital and also suggest ways to improve working capital position of the firm.
7. It helps knowing the overall credit worthiness of a firm.
The financial institutions and banks such as state financial institutions, Industrial Development
Corporation, Finance Corporation of India, industrial development bank of India, etc. all ask for funds
flow statement constructed for a number o year before granting loans to know the creditworthiness and
paying capacity of the firm. Hence, a firm seeking financial assistance from these institutions has no
alternative but to prepare funds flow statements.
LIMITATIONS OF FUNDS FLOW STATEMENT
The funds flow statement has a number of uses; however, it has certain limitations also, which are
listed below.
1. It should be remembered that a funds flow statement is not a substitute of an income
statement or a balance sheet. it provides only some additional information as regards changes
in working capital.
2. It cannot reveal continuous changes.
3. It is not original statement but simply are-arrangement of data given in the financial statements.
4. It is essentially historic in nature and projected founds flow statements cannot be prepared with
much accuracy
5. Changes in cash are more important and relevant for financial management then the working
capital
Procedure for preparing a Funds Flow Statement:- Funds Flow Statement is a method by which we
study the changes in the financial position of a business enterprise between beginning and ending
financial statement dates. Hence the funds flow statement is prepared by comparing two balance sheets
and with the help of such other information derived from the accounts has may be needed. The
preparation of a funds flow statement consists of two parts:
1. Statement / Schedule of Changes in Working Capital.
2. Statement of Sources and Application of Funds
1. Statement / Schedule of Changes in Working Capital:- This statement is concerned with the Current
Assets and Current Liabilities as they are shown in the balance sheet. Statement of changes in working
capital is prepared to show the changes in the working capital between the two balance sheet dates.
Each current asset and current liability in the balance sheet is compared with those shown in the
previous period’s balance sheet. Increase or decrease in each of the current asset and current liability is
noted. The effect of such increase or decrease during the period on all the items is the overall change in
the working capital. It is prepared as follows:
Statement of Changes in Working Capital
Particulars Previous Current Effect on Working Capital
Year Rs. Year Rs. Increase Decrease
Current Assets:- Cash in Hand
Cash at Bank
Sundry Debtors
Bills Receivables
Short term loans & advances
Outstanding Incomes
Temporary investments
(Short term)
Prepaid Expenses
Closing Stock: Raw Materials
Work-in-progress
Finished goods
Other Current Assets
Total - (A)
Current Liabilities:-
Bills Payable
Sundry Creditors
Bank Overdraft
Outstanding Expenses
Income Received in advance
* Proposed Dividend
* Provision for Taxation
Unclaimed Dividend
Short term loans & Borrowings
Provision for Doubtful Debts
Total – (B)

Working Capital : - ( A - B )
Net Increase / Decrease in Working Capital

Working Capital = Current Assets – Current Liabilities So,

1. If Current Asset Increases, Working Capital is also Increases.
2. If Current Asset Decreases, Working Capital is also Decreases.
3. If Current Liability Increases, Working Capital is Decreases.
4. If Current Liability Decreases, Working Capital is Increases.
Note:- * Provision for Taxation & Proposed Dividend may or may not be taken as Current Liability.
Generally it is to be assumed as on appreciation of profits.
1. Prepare a Statement of Changes in Working Capital from the following balance sheet of Amaravathi Company Ltd.
Balance Sheet of Amaravathi Company Limited as 31st March
Particulars 2016 Rs. 2015 Rs.
I Equity & Liabilities:
a. Shareholders Fund: i. Share Capital 500,000 500,000
Reserves & Surplus 50,000 70,000
b. Non-Current Liabilities: 8% Debentures 400,000 300,000
c. Current Liabilities: Accounts Payables 192,000 96,000
Tax Payables 43,000 77,000
Interest Payable 45,000 37,000
Dividends Payable 35,000 50,000
Total 1265,000 1130,000
II Assets:
a. Non-Current Assets: i. Fixed Assets 700,000 600,000
ii. Long Term Investments 100,000 200,000
b. Current Assets: Stock in trade 225,000 150,000
Accounts Receivables 140,000 70,000
Work-in-progress 90,000 80,000
Cash 10,000 30,000
1265,000 1130,000
Total

2. Statement of Sources and Application of Funds (funds flow statement):- Funds Flow Statement is a
statement which indicates various sources from which funds (working capital) have been obtained
during a certain period and the uses or applications to which these funds have been put during that
period. In this statement sources of funds (Inflows) are recorded on the left hand side and applications
of funds (Outflows) are recorded on the right hand side. Generally this statement is prepared in two
forms i.e. in report form or an account form.
Funds Flow Statement of ……………… as on ………………..
Particulars Amount Rs.
Funds from Operations
Issue of Shares Capital
Issue of Debentures
Raising of Long term Loans
Sale of Fixed Assets
Sale of Investments
Receipts from partly paid up shares Non-trading Receipts
(Rent, Interest, Dividends etc.) Net Decrease in Working Capital
Total
Applications/ Outflow of Funds
Redemption of Preference Shares
Redemption of Debentures
Re-payment of Long term Loans
Purchase of Fixed Assets
Purchase of Investments
Non-Trading Expenses
Payment of Divided
Payment of Tax
Funds lost in Operation
Net increase in Working Capital
Total

OR
 Funds Flow Statement of ……………… as on ………………..
Sources / Inflow of Funds Amount Applications/ Outflow of Funds Amount
Funds form Operations Redemption of Preference Shares
Issue of Shares Capital Redemption of Debentures
Issue of Debentures Re-payment of Long term Loans
Raising of Long term Loans Purchase of Fixed Assets
Sale of Fixed Assets Purchase of Investments
Sale of Investments Non-Trading Expenses
Receipts from partly paid up shares Payment of Divided
Non-trading Receipts Payment of Tax
(Rent, Interest, Dividends etc.) Funds lost in Operation
Net Decrease in Working Capital Net increase in Working Capital

Funds from Operations / Funds Lost in Operations:-

Funds from operations means the increase in funds on account of the operations carried on by the
organisation in the given time. It is the most important and major source of funds of the business. Ex.
Sales are the main source of inflow of funds in to the business as they increase current assets i.e. cash,
Debtors, or Bills Receivables, but at the same time funds flow out from the business for expenses and
cost of goods sold. Thus the net effect of operations will be a source of funds, if inflow from sales
exceeds the outflow for expenses and cost of goods sold i.e. profits vice-versa. In other words If the total
inflow of funds from operations is greater than the total outflow of operations, the difference is a source
of funds and it is called as “Funds from Operations”. Alternatively, if the outflow of funds is greater than
the total inflow, the difference is called “Funds Lost in Operations”.
It must be remembered that funds from operations do not necessarily mean the profit as shown
by the profit and loss account of a firm, because there are non -fund items or non-operating items which
may have been either debited or credited to profit and loss account.
The examples of such items on the debit side of profit and loss account are:
1. Depreciation on Fixed Assets
2. Loss on sale of Fixed Assets
3. Payment of Divided
4. Transfer to Reserves
5. Goodwill Written off
6. Preliminary Expenses written off
7. Discount on issue of Shares and Debentures written off etc.
The Examples of such items on the credit side of profit and loss account are:
1. Profit on sale of Fixed Assets
2. Profit on sale of Investments
3. Interest & Dividends received
4. Other non-operating items
Funds from Operations are to be calculated in two formats i.e. Report Form or Account Form. The
general account form of funds from operations can be calculated by preparing adjusted profit & loss
account.
Dr. Adjusted Profit & Loss Account Cr.
Particulars Amount Particulars Amount
To Depreciation a/c XXX By Balance B / d
To Dividends Paid a/c XXX (Opening balance of P&L a/c) XXX
To Loss on sale of fixed assets a/c XXX BY Interest received a/c XXX
To Proposed Dividends a/c XXX BY Rent Received a/c XXX
To Provision for Taxation a/c XXX By Dividends received a/c XXX
To Goodwill written off XXX By Profit on sale of fixed assets XXX
To Preliminary expenses written off XX By Profit on sale of investments XXX
To Discount on issue of shares By Funds from Operations
written off XXX (difference) XXX
To Discount on issue of debentures
written off XX
To Transfer to reserves XX
To Balance C / d
(closing balance of P&L a/c) XXX
To Funds Lost In
Operations(difference if any) XX
XXXX XXXX
OR
Funds form Operations
Particulars Amount Rs.
Net Profit / Closing balance of P & L a/c XXXX
Add: Interest received a/c
Rent Received a/c
Dividends received a/c
Profit on sale of fixed assets
Profit on sale of investments
XXXX
Less: Depreciation a/c
Dividends Paid a/c
Loss on sale of fixed assets a/c
Proposed Dividends a/c
Provision for Taxation a/c
Goodwill written off
Preliminary expenses written off
Discount on issue of shares written off
Discount on issue of debentures written off
Transfer to reserves
Opening Balance of P & L a/c xxx
Funds from Operations / Funds Lost in Operations XXXX / xxx
1. Calculate Funds from Operations from the following income statement.
Dr. Profit & Loss Account Cr.
Particulars Amount Rs. Particulars Amount Rs.
To Rent paid 25,000 By Gross Profit 5,00,000
To Salaries paid 1,00,000 By Profit on sale of Vehicle 3,000
To Provision for Depreciation 50,000 By Refund of Tax 2,000
To Commission paid 5,000 By Dividend Received 10,000
To Provision for taxation 1,50,000
To Loss on sale of Investment 10,000
To Provision for legal damages 5,000
To Discount on issue of shares written off 2,000
To Transfer to General Reserve 3,000
To Net Profit 1,65,000
5,15,000 5,15,000

2. (JULY - 2020) Find out funds from operations from the following.
Particulars Amount Rs.
Balance in Profit & Loss account on 1-4-2007 1,70,000
Balance in Profit & Loss account on 31-3-2008 3,10,000
Total amounts debited to profit and loss account in the current year:
Goodwill written off during the year 50,000
Depreciation made during the year 20,000
Transfer to General reserve 15,000
Expenses Payable 10,000
Prepaid insurance 5,000
Funds Flow Statement – Problems:
1. (Sole Trade) The following is the Balance Sheet of Mr. Kumar. Prepare Funds flow Statement.
Liabilities 2016 2017 Assets 2016 2017
Current Liabilities 35,000 40,000 Cash 5,000 4,000
Loan from Mrs. Sudhakar - 25,000 Debtors 40,000 45,000
Bank Loan 40,000 30,000 Stock 30,000 25,000
Capital 150,000 154,000 Land 30,000 40,000
Buildings 50,000 55,000
Machinery 70,000 80,000
225,000 249,000 225,000 249,000
a. During the Year Mr. Kumar brought an additional capital of Rs. 10,000 and his drawings during the year were Rs. 31,000.
b. Provision for depreciation on machinery opening balance Rs. 30,000 and closing balance Rs. 40,000. No depreciation need to be provided for
other assets.
2. From the following balance sheet of Mr. A prepare a schedule of changes in working capital and a funds flow statement.
Liabilities 2013 2014 Assets 2013 2014
Capital 63,000 100,000 Cash 15,000 20,000
Long Term Borrowings 50,000 60,000 Debtors 30,000 28,000
Trade Creditors 42,000 39,000 Stock in Trade 55,000 72,000
Bank Overdraft 35,000 25,000 Land & Buildings 80,000 100,000
Outstanding Expenses 5,000 6,000 Furniture 15,000 10,000
195,000 230,000 195,000 230,000
3. Following are the balance sheets of Textiles Ltd. as on 31st Dec. 2017 and 2018.
Liabilities 2017 Rs. 2018 Rs. Assets 2017 Rs. 2018 Rs.
Share Capital 1,20,000 1,50,000 Goodwill 10,000 6,000
General Reserve 25,000 28,000 Plant & Machinery 1,00,000 1,20,000
Profit & Loss Account 18,000 32,000 Investments 49,000 62,000
Debentures 80,000 60,000 Stock 40,000 38,000
Creditors 40,000 46,000 Debtors 86,000 82,000
Bills Payables 27,000 20,000 Bills Receivables 14,000 20,000
Provision for Tax 25,000 34,000 Cash 26,000 34,000
Preliminary Expenses 10,000 8,000
3,35,000 3,70,000 3,35,000 3,70,000
Additional Information: a) Depreciation provided on machinery during the year Rs. 25,000.
b) This year paid interim dividend Rs. 15,000.
Prepare a schedule of changes in working capital and funds flow statement.
4. The following are the summarised balance sheets of EssKay Ltd. as at 31-03-2021 and 2020.
Liabilities 2021 Rs. 2020 Rs. Assets 2021 Rs. 2020 Rs.
Share Capital: Plant & Machinery 2,30,000 2,00,000
10% Preference share capital 1,10,000 1,00,000 Buildings 1,76,000 1,50,000
Equity share capital 2,50,000 2,20,000 Land 18,000 18,000
Securities Premium 26,000 20,000 Stock 98,000 84,000
Profit & Loss Account balance 1,34,000 104,000 Debtors 38,000 38,000
12% Debentures 64,000 70,000 Bills Receivables 62,000 42,000
Creditors 46,000 38,000 Cash & Bank 32,000 42,000
Bills Payables 4,000 5,000
Provision for Tax 12,000 10,000
Dividends Payable 8,000 7,000
6,54,000 5,74,000 6,54,000 5,74,000
You are required to prepare a statement of changes in working capital and statement of sources and applications of funds.
 May be taken as current liability (or) non-current liability.
5. From the following balance sheets of Cuttack Ltd. as at 31st March, prepare a schedule of changes in working capital and a funds flow
statement.
Liabilities 2021 Rs. 2020 Rs. Assets 2021 Rs. 2020 Rs.
Share Capital: Equity share capital 4,00,000 3,00,000 Plant & Machinery 2,00,000 80,000
General Reserve 70,000 40,000 Buildings 1,20,000 1,60,000
Profit & Loss Account 48,000 30,000 Goodwill 40,000 72,000
12% Debentures 1,00,000 150,000 Stock 30,000 20,000
Creditors 80,000 60,000 Debtors 2,85,000 2,20,000
Bills Payables 19,000 15,000 Bills Receivables 24,000 18,000
Cash & Bank 18,000 15,000
7,17,000 5,95,000 7,17,000 5,95,000
Depreciation charged on Plant & Machinery was Rs. 20,000 and on Buildings was Rs. 40,000.
6. Following are the summarised balance sheets of Preaveen Ltd. as at 31-12-2016 and 31-12-2017.
Liabilities 2020 Rs. 2021 Rs. Assets 2020 Rs. 2021 Rs.
Share Capital 2,00,000 2,50,000 Plant & Machinery 1,50,000 1,74,000
General Reserve 50,000 60,000 Land &Buildings 2,00,000 1,90,000
Profit & Loss Account 30,500 30,600 Stock 1,00,000 74,000
Bank Loan (Short Term) 70,000 - Debtors 80,000 64,200
Creditors 1,50,000 1,35,200 Cash 500 600
Provision for Tax 30,000 35,000 Bank - 8,000
5,30,500 5,10,800 5,30,500 5,10,800
Additional Information:
a. Depreciation was written off on plant Rs. 14,000 in 2021.
b. Dividend of Rs. 20,000 was paid during the year 2021.
c. Income tax provision made during the year was Rs. 25,000.
d. A piece of land has been sold during the year at cost.
You are required to prepare funds flow statement

7. Given below are the Comparative balance sheet of a company as on 31-12-2016 and 31-12-2017
Liabilities 2016 Rs. 2017 Rs. Assets 2016 Rs. 2017 Rs.
Share Capital: Shares of Re. 1 each 50,000 50,000 Plant at Cost 20,000 25,000
General Reserve - 3,000 Less: Depreciation 8,000 12,000
Profit & Loss Account 15,000 35,000 12,000 13,000
6% Debentures - 50,000 Freehold Property - 1,00,000
Bank Loan - 20,000 Investments 15,000 -
Trade Creditors 18,000 22,000 Stock 30,000 44,000
Provision for Tax 3,000 - Debtors 20,000 30,000
Proposed Dividend 6,000 8,000 Cash in hand 15,000 1,000
92,000 1,88,000 92,000 1,88,000
You are required to prepare funds flow statement after taking the following facts into consideration.
a. Total Bank loan raised during the year was Rs. 28,000.
b. 8% dividend was declared during the year 2017
c. Plant sold during the year for 3,500 was originally bought for Rs. 5,000 on which Rs. 1,800 depreciation had accumulated.
8. The following are the summarised balance sheets of X Ltd. as on 31-03-2020 and 31-03-2021.
Liabilities 2020 Rs. 2021 Rs. Assets 2020 Rs. 2021 Rs.
Share Capital 6,00,000 8,00,000 Plant & Machinery at cost 4,00,000 6,45,000
Profit & Loss Account 1,25,000 2,50,000 Land &Buildings at cost 3,00,000 4,00,000
Debentures 2,00,000 3,00,000 Stock 3,00,000 3,50,000
Creditors 1,15,000 90,000 Debtors 69,000 61,000
Provision for Bad & Doubtful debts 6,000 3,000 Cash & Bank 20,000 40,000
Provision for Depreciation: Preliminary Expenses 7,000 6,000
On Land & Buildings 20,000 24,000
On Plant & Machinery 30,000 35,000
10,96,000 15,02,000 10,96,000 15,02,000
Additional Information:
a. During the year a part of machinery costing Rs. 70,000 (accumulated depreciation there on Rs. 2,000) was sold for Rs. 6,000.
b. Dividends of Rs. 50,000 were paid during the year.
9. The following balance sheets of a machinery manufacturing company ltd. shows as at the end of the year 31-03-2020 and 2021.
Liabilities 2020 Rs. 2021 Rs. Assets 2020 Rs. 2021 Rs.
Share Capital 2,30,000 2,30,000 Plant & Machinery 52,000 70,000
Reserves for Contingencies 60,000 60,000 Land &Buildings 1,50,000 1,50,000
Profit & Loss Account 16,000 23,000 Stock in Trade 82,000 1,06,000
Depreciation fund 40,000 44,000 Temporary Investments 1,10,000 74,000
8% Debentures 90,000 70,000 Debtors 67,000 43,000
Outstanding Expenses 13,000 12,000 Cash & Bank 90,000 90,000
Creditors 1,03,000 96,000 Prepaid Expenses 1,000 2,000
5,52,000 5,35,000 5,52,000 5,35,000
The following information is available.
a. 10% dividend was paid in cash.
b. A new machinery for Rs. 30,000 was purchased but old machinery costing Rs. 12,000 was sold for Rs. 4,000, accumulated
depreciation there on was Rs. 6,000.
c. Rs. 20,000, 8% Debentures were redeemed by purchase from the open market at the rate of 96 for a debenture of Rs. 100.
d. Rs. 36,000 Investments were sold at bank value.
You are required to prepare schedule of changes in working capital and statement of sources of application of funds.
10.