S F L O W

F UN D
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 The basic financial statements, i.e., the balance sheet and
profit and loss account or income statement of business, reveal the
net effect of the various transactions on the operational and financial
position of the company.

INTRODUC It does not disclose the causes for changes in the assets and
liabilities between two different points of time. But there are many
transactions that take place in an undertaking and which do not
TION operate through profit and loss account. Thus, another statement has
to be prepared to show the change in the assets and liabilities from
the end of one period of time to the end of another period of time.
The statement is called a Statement changes in Financial Position or
a Funds Flow Statement.
The Funds Flow Statement is a statement which shows the
movement of funds and is a report of the financial operations of the
business undertaking. It indicates various means by which funds
were obtained during a particular period and the ways in which these
funds were employed.
In simple words, it is a statement of Sources and
applications of funds.
MEANING The term funds can be defined in the following ways :

OF FUNDS  IN A NARROW SENSE: It means cash only and a funds flow

statement prepared on this basis is called a cash flow statement. Such a
statement enumerates net effects of the various business transactions on
cash and takes into account receipts and disbursements of cash.

 IN A BROADER SENSE: The term “funds' refers to money values in

whatever form it may exist. Here funds” means all financial resources,
used in business whether in the form of men, material, money, machinery
and others.

 IN A POPULAR SENSE: The term funds, means working capital, i.e.,

the excess of current over current liabilities. The working
capitinnĺť6ýjiùķ concept of funds has emerged due to the fact that total
resources of a business are invested partly in fixed assets in
 The term flow' means movement and includes both ‘inflow' and
'outflow”. The term “flow of funds means transfer of economic values from
Meaning of one asset of equity to another.
Flow of funds is said to have taken place when any transaction makes changes
Flow of Funds in the amount of funds available before happening of the transaction.

If the effect of transaction results in the :

1. Increase of funds, it is called a source of funds and
2. Decrease of funds, it is known as an application of funds. Further,
3. In case the transaction does not change funds, it is said to have not
resulted in the flow of funds.
According to the working capital concept of funds, the term 'flow of
funds' refers to the movement of funds in the working capital. If any
transaction results in the
4. Increase in working capital - Source or inflow of funds and
5. Decrease of working capital, - Application or out-flow of funds.
 The flow of funds occurs when a transaction
changes on the one hand a non-current account and on the
other a current account and vice-versa.
When a change in a non-current account e.g., fixed
assets, long-term liabilities, reserves and surplus, fictitious
RULES assets, etc., is followed by a change in another non-current
account, it does not amount to flow of funds.
This is because of the fact that in such cases neither the
working capital increases nor decreases.

Similarly, when a change in one current account

results in a change in another current account, it does not
affect funds. Funds move from non-current to current
transactions or vice-versa only.
 In a nutshell, funds move when a transaction affects,
(i) a current asset and a fixed asset, or (ii) a fixed and a

RULES current liability, or

(iii) a current asset and a fixed liability, or
(iv) a fixed liability and current liability; and funds do not
move when the transaction affects fixed assets and fixed
liability or current assets and current liabilities.
 • To understand flow of funds, it is essential to classify
various accounts and balance sheet items into current and
non-current categories.
• Current Accounts can either be current assets or current
CURRENT liabilities. Current assets are those assets which in the
ordinary course of business can be or will be converted into
AND NON- cash within a short period of normally one accounting year.
CURRENT
ACCOUNTS • Current liabilities are those liabilities which are intended to
be paid in the ordinary course of business within a short
period of normally one accounting year out of the current
assets or the income of the business. The following is the
list of Current or Working Capital Accounts
LIST OF CURRENT OR WORKING CAPITAL
ACCOUNTS
LIST OF NON-CURRENT ACCOUNT OR
PERMANENT CAPITAL ACCOUNTS
 PROCEDURE FOR KNOWING WHETHER A TRANSACTION RESULTS
IN THE FLOW OF FUNDS OR NOT:

(1)Analyse the transaction and find out the two accounts involved.
(2)Make Journal Entry of the transaction.
(3)Determine whether the accounts involved in the transaction are current or non-
current.
(4)If both the accounts involved are current i.e., either current assets or current
liabilities, it does not result in the flow of funds.
(5)If both the account involved are non-current, i.e., either permanent assets or
permanent liabilities, it still does not result in the flow of funds.
(6)If the accounts involved are such that one is a current account while the other is a
non-current account, i.e., current asset and permanent liability, or current asset and
fixed asset, or current liability and fixed asset, or current liability and permanent
liability then it results in the flow of funds
 Transactions which involve only the current accounts and hence
do not result in the flow of funds :
1. Cash collected from debtors.
2. Bills receivables realised.
3. Cash paid to creditors.
EXAMPLES 4. Payment or discharge of bills payable.
5. Issued bills payable to trade creditors.
6. Received acceptances from customers.
7. Raising of short-term loans.
8. Sale of temporary or marketable investments
9. Goods purchased for cash or credit.
 Transactions which involve only non-current accounts and
hence do not result in the flow of funds:
1. Purchase of one new machine in exchange of two old
machines.
2. Purchase of building or furniture in exchange of land.
3. Conversion of debentures into shares.
EXAMPLES
4. Redemption of preference shares in exchange of debentures.
5. Transfers to general reserves, etc.
6. Payment of bonus in the form of shares.
7. Purchase of fixed assets in exchange of shares, debentures,
bonds or long-term loans.
8. Writing off of ficititious assets.
9. Writing off of accumulated losses or discount on issue of
shares, etc.
 Transactions which involve both current and non-current accounts and
hence result in the flow of funds:
1. Issue of shares for cash.
2. Issue of debentures for cash.
3. Raising of long-term loans.
4. Sale of fixed assets on cash or credit.
EXAMPLES 5. Sale of trade investments.
6. Redemption of Preference shares. 7. Redemption of debentures,
8. Purchase of fixed assets on cash or credit.
9. Purchase of long-term/trade investments.
10. Payment of bonus in cash.
11. Repayment of long-term loans.
12. Issue of shares against purchase of stock-in-trade.
 MEANING AND DEFINITION OF FUNDS FLOW
STATEMENT
Funds Flow Statement is a method by which we study changes in the financial position
of a business enterprise between beginning and ending financial statements dates. It is a
statement showing sources and uses of funds for a period of time,

Foulke defines this statements as :

"A statement of sources and application of funds is a technical device designed to

analyse the changes in the financial condition of a business enterprise between two
dates." In the words of Anthony "The funds flow statement describes the sources from
which additional funds were derived and the use to which these sources were put."
 DEFINITION
"I.C.W.A. in Glossary of Management Accounting terms defines Funds Flow Statement as a
Statement either prospective or retrospective, setting out the sources and applications of the
funds of an enterprise. The purpose of the statement is to indicate clearly the requirement of
funds and how they are proposed to be raised and the efficient utilisation and application of the
same.

"Thus, funds flow statement is a statement which indicates various means by which the funds
have been obtained during a certain period and the ways to which these funds have been used
during that period, The term 'funds used here means working capital, i.e, the excess of current
assets over current liabilities.
Funds flow statement is called by various names such as:

 Sources and Application of Funds,

 Statement of Changes in Financial Position,
 Sources and Uses of Funds;
 Summary of Financial Operations,
 Where came in and Where gone out Statement;
 Where got, Where gone Statement ;
 Movement of Working Capital Statement;
 Funds Statement;
DIFFERENCE BETWEEN FUNDS FLOW STATEMENT AND
INCOME STATEMENT
 PROCEDURE FOR PREPARING A
FUNDS FLOW STATEMENT

Funds Flow statement is a method by which we study changes in the

financial position of a business enterprise between beginning and ending
financial statements 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 as may be needed. Broadly speaking, the
preparation of a funds flow statement consists of two parts:

1. Statement or Schedule of Changes in Working Capital

2. Statement of Sources and Application of Funds.
 1. STATEMENT OR SCHEDULE OF
CHANGES IN WORKING CAPITAL
Working Capital means the excess of current assets over current liabilities. Statement of
changes in working capital is prepared to show the changes in the working capital
between the two balance sheet dates. This statement is prepared with the help of current
assets and current liabilities derived from the two balance sheets.
As, Working Capital = Current Assets - Current Liabilities.

(i) An increase in current assets increases working capital.

(ii) A decrease in current assets decreases, working capital
(iii) An increase in current liabilities decreases working capital ; and
(iv) A decrease in current liabilities increases working capital.
STATEMENT OF SCHEDULE OF CHANGES
IN WORKING CAPITAL
 STATEMENT OF SOURCES OF
APPLICATION OF FUNDS
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 Generally, this statement is prepared in two formats :

(a) Report Form

(b) T Form or An account form or Self Balancing Type.

SPECIMEN OF REPORT FORM OF
FUNDS FLOW STATEMENT
CALCULATION OF FUNDS FROM OPERATIONS
SPECIMEN FOR CALCULATION OF FUNDS FROM OPERATIONS
CALCULATION OF FUNDS FROM OPERATIONS
SPECIMEN FOR CALCULATION OF FUNDS FROM OPERATIONS