What is the Funds Flow Statement Analysis?

Fund flow statement analysis is often used to comprehend changes in a company's

financial status. Fund flow statement analysis, like cash flow statement analysis,
analyzes financial data such as the company’s income or its balance sheet. Most
firms examine their finance and operations using a mix of three major financial
statements:

● Balance Sheet: A balance sheet is the summary of all the assets, liabilities, and
capital accounts and their current balances reflecting a certain time.
● Profit and Loss Statement/Income Statement: The profit and loss or
income statement summarise revenue, costs, and profit or loss for a certain period.
● Cash flow statement: The cash flow statement, which is most comparable to a
fund flow statement, evaluates cash intake and outflow for a certain period by
examining cash inflow and cash outflow from operating operations, investment
activities, and financing activities.
While a single balance sheet can provide information on current assets, liabilities,
and equity, it cannot tell you where the funds originated from or how they were
spent. One of the most valuable aspects of fund flow analysis and a fund flow
statement is how it compares two accounting periods, providing precise information
on the changes that occur between the current year and the prior year.

How is a Funds Flow Statement Prepared?

To create a fund flow statement, follow the steps below:

Step 1
Create a Working Capital Changes Schedule: Take into account the change in
current assets and current liabilities. The determination of the net growth or
reduction in working capital is via the difference between net current assets and net
current liabilities.
Work Capital Increase: A rise in working capital occurs when the long-term supply
of cash exceeds the application or use of funds. Because a firm can utilize this
money to meet its working capital requirements. Short-term loans or dividends, for
example, can be paid. As an outcome, a rise in working capital will be shown in the
Fund Flow Statement under 'Application of Funds.'
Work Capital Decrease: A corporation may require additional finances but only
has a limited long-term supply of funds. In such cases, the corporation will use the
available money for working capital. As a result, the amount of money accessible for
working capital is reduced. As a result, a drop in working capital will be shown in the
'Source of Funds' section of the Funds Flow Statement.
Now we'll look at the structure of the "statement of change in working capital."
through the fund flow statement example
 Amount(Rs Amount(Rs Changes in the
Particulars .) .) Working Capital
Statement of changes in 31.03.2020 31.03.2019 Increase Decrease
working capita (in Rs.) (in Rs.) (in Rs.) (in Rs.)

Current Assets:
Cash and Bank balances 16,500.00 15,000.00 1,500.00 0.00
Inventories 25,500.00 23,000.00 2,500.00 0.00
Trade Receivables 22,000.00 27,000.00 0.00 5,000.00
Prepaid Expenses 3,000.00 2,500.00 500.00 0.00
Total Current Assets (A) 67,000.00 67,500.00 4,500.00 5,000.00
Current Liabilities:
Accounts Payable 45,000.00 50,000.00 5,000.00 0.00
Outstanding Expenses 10,000.00 12,000.00 2,000.00 0.00

Step 2
Prepare the Adjusted Profit and Loss Account to determine Funds from Operations.
Following the preparation of the statement of change in working capital, you should
now compile a report of money from operations:
● Take the profit/loss from the profit & loss account in this statement. However,
carefully adjust profit/loss.
● On an accrual basis, you create profit and loss statements. However, non-cash
expenditures like depreciation, bad loans, and any expenditure written off are also
taken into account to determine the real profit or loss.
● Add back or subtract, as appropriate, those non-cash costs to arrive at the cash
profit/loss.
● Estimating a Rs.20,000 profit for the current year in the style below. Then you
discovered non-cash items that were deducted in profit and loss a/c, totalling
Rs.3,230, which has now been added to the current year's earnings. As a result, the
present profit has been lowered by Rs.120 due to a non-operating item added to the
profit and loss account.
● After adding and subtracting non-cash or non-operating elements, you will arrive
at the point when money flows from operations may be calculated, which is
Rs.23,110

Amount (In
Particulars Amount (In Rs.)
Rs.)
Current Year Profit/(Loss) (A) 20,000
Add:
Depreciation 1,000
Expenses Written Off 50
Bad Loans written off 180
 Proposed Dividend 1,500
Provision for Income Tax 500
Total (B) 3,230
Less:
Accrued Interest on fixed
120
Deposits
Total(C') 120
Fund From Operations (A+B-C) 23,110

Step 3
To generate a fund flow statement, you must first identify the sources of funds
(inflows) and the uses of funds (outflows). To produce a money flow statement,
identify the source of funds or the application of funds (growing or decreasing) from
the balance sheet. In addition, net gain or reduction.

Finally, create a fund flow statement.

● This declaration will reveal the sources and uses of funds.

● In the above example, you can observe that working capital increases are
Rs.6,500 (regarded as applications of money), and the capital from an operation is
Rs.23,110. (considered a source of funds).
● Assume that you have issued Rs.5,000 in market share capital (considered a
source of funds). The funds arranged are utilized to increase working capital and
acquire fixed assets.

Statement of Sources and Application of Funds Current Year

Sources of Fund

Fund Generated from Operating Activities 23,110.00

Proceeds from issue of Share Capital 5,000.00

Total Source of Funds 28,110.00

Application of Fund

Purchase of Fixed Assets 21,610.00

Increase in Working Capital 6,500.00

Total Application of Funds 28,110.00

Importance of a Funds Flow Statement

The fund flow statement definition helps in the following:
● Financial Status: A profit and loss report or balance sheet does not illustrate
why a company's financial position has changed. The fund flow statement will
include information on where the funds came from (Source of Monies) and where the
funds were spent (Application of Funds).
● Company Analysis: Profitable businesses are frequently caught in a liquidity
pinch. In such cases, the fund flow statement provides a detailed overview of the
source and utilization of cash.
● Management: They use the fund flow statement to determine its future action
plan and act as a tool for management control.
● Changes in Assets and Liabilities: The fund flow statement explains why
assets and liabilities changed between two balance sheet dates. As a consequence,
you may undertake a thorough examination of the balance sheet.
● Creditworthiness: Lending institutions examine a company's creditworthiness
using this statement. Before authorizing a loan, they evaluate the statement over
time. As a result, the fund flow statement reflects a company's trustworthiness in
fund management.

Uses of funds flow Statement

The fund’s flow statement is important for conducting long-term analysis. It is a
highly valuable instrument in the hands of management for assessing the Company's
financial and operational performance.

The Balance Sheet and Profit and Loss A/c (Income Statement) do not give the
information that the Funds Flow Statement does, namely, changes in an enterprise's
financial position. Such an examination is extremely beneficial to management,
shareholders, creditors, and others.

1. As per the Fund Flow Statement meaning, it can help address the following
questions:
● What happened to the profits?
● Why is there a mismatch between an enterprise's liquidity position and
profitability situation?
● Why is the company financially stable despite losses?
2. The Funds Flow Statement analysis assists management in determining if working
capital has been efficiently utilized and whether the working capital level is
appropriate or insufficient for the business's needs. The Working Capital Status
assists management in making policy decisions such as dividend payments, etc.

3. The Funds Flow Statement Analysis assists investors in determining if the funds
have been correctly managed by the organization. It also reflects a firm's
creditworthiness, which helps lenders determine whether or not to give money to the
company. It assists management in making policy decisions and determining future
funding and capital expenditure programs.

Limitations of Funds Flow Statement

Despite its significance in understanding a firm's financial status, the statement has
two major drawbacks:

● The declaration is solely concerned with transferring funds. It does not take into
account other characteristics from the Balance Sheet and Profit and Loss Account. As
a result, it must be examined alongside the Balance Sheet and Profit and Loss
Account.
● The fund’s flow statement does not show a company's cash situation. As a
result, a different cash flow statement must be prepared to analyze the cash
situation.