Вы находитесь на странице: 1из 9

c c

A fund flow statement is a summary of a firm's inflow and outflow of funds. It tells us
from where funds have come and where funds have gone. Fund flows statement can
indicate whether sourcing of funds and their use match in sense and also reveal the
prudence or otherwise of a firm's financing and investment decisions The financial
statement of the business indicate assets, liabilities and capital on a particular date
and also the profit or loss during a period. But it is possible that there is enough profit
in the business and the financial position is also good and still there may be deficiency
of cash or of working capital in business. If the management wants to find out as to
where the cash is being utilized, financial statement cannot help. Therefore, a
statement is prepared of the sources and applications of funds from where Working
Capital comes and where it is utilized. This is called Fund Flow statement. Funds
Flow Statement is an analytical tool in the hands of financial manager. The basic
purpose of this statement is to indicate on historical basis the changes in the working
capital i.e., where funds came from and where they are used during a given period.
The funds flow statement or statement of changes in financial position is a statement
of flows, it measures the changes that have taken place during two balance sheet


It indicates various methods by which funds are obtained during a particular period
and the ways in which these funds are employed. In simple words, it is a statement of
sources and application of funds.

³A statement of sources and application of funds is a technical device designed to

analyses the changes in the financial condition of a business enterprise between two

"  #    $, ³Fund Flow is a statement prepared to indicate the

increase in cash resources and the utilization of such resources of a business during
the accounting period.´


The term fund has a variety of meaning such as cash fund, capital fund and working
capital fund.

1. Cash fund ±In a narrow sense, fund means only cash. µCash flow statement¶
portrays net effect of the various business transactions on cash into account receipts &
disbursement of cash. This concept of preparing fund flow statement is not accepted,
as there are many such transactions which do not affect cash but represent the flow of
fund .for example: purchase of furniture on credit does not affect cash but there is
flow of fund.

2. Capital fund ±Here fund means all financial resources used in the business, whether
in the form of men, money, material, machine & others.

3. Net working capital -Net working capital means difference between current asset
and current liabilities .funds generally refers to cash or cash equivalent or to working

1. The term µflow¶ refers to changes or transfer and therefore the µflow of funds¶
means transfer of economic values from one asset to another, from one liability
to another, from one asset to liabilities or vice-versa or a combination of these.
So flow of fund refers to increase or decrease in net working capital.

2. The increase or decrease in net working capital will take place only when one
account, out of two accounts to be affected in a transaction ,is a current account
i.e. current asset or current liabilities and the other account is non current
account i.e. fixed asset or long term liability or capital.

When a change in non current account is followed by a change in another non current
account, it does not amount to flow of fund. It is because, in such case, neither the
working capital increase nor decrease.

" )

)It is any transaction that results in an increase in working capital
(Inflow of funds).

 ) It is any transaction that results in a decrease in working

capital (outflow of funds).


The Funds Flow Statement is widely used by the financial analysis and credit
granting institutions and financial managers in performance of their jobs.
It has become a useful tool in their analytical kit. This is because the
financial statements, i.e., ³Income Statement´ and the ³Balance Sheet´ have
a limited role to perform.
Income Statement measures flow restricted to transitions that pertain to
rendering of goods and services to customers. The Balance Sheet is merely a
static statement. It is a statement of assets and liabilities as on a particular


1. Helps in analysis of financial operations.
2. Helps in formulation of realistic dividend policy.
3. Helps in proper allocation of resources.
4. It acts as a future guide.
5. Helps in appraising the use of working capital.
6. It helps knowing the overall creditworthiness of a firm.
7. It throws light on many questions of general interest.

Why was the net CA lesser in spite of profits?

Why dividend could not be declared in spite of available profits?

What are the sources of repayment of debts?
The utility of this statement can be measured on the basis of its contributions to
the financial management. It generally serves the following purposes:-

+,- $c.)
The basic purpose of preparing the statement is to have a rich into the financial
operations of the concern. It analyses how the funds were obtained and used in the
past. In this sense, it is a valuable tool for the finance manager for analyzing the
past and future plans of the firm and their impact on the liquidity. He can deduce
the reasons for the imbalances in uses of funds in the past an take necessary
corrective actions. In analyzing the financial position of the firm, the Funds Flow
Statement answers to such questions as-

1. Why were the net current assets of the firm down, though the net income was
up or vice versa?
2. How was it possible to distribute dividends in absence of or in excess of current
income for the period?
3. How was the sale proceeds of plant and machinery used?
4. How was the sale proceeds of plant and machinery used?
5. How were the debts retired?
6. What became to the proceeds of share issue or debenture issue?
7. How was the increase in working capital financed?
8. Where did the profits go?

Though it is not an easy job to find the definite answerers to such questions
because funds derived from a particular source re rarely used for a particular
purpose. However, certain useful assumptions can often be made and reasonable
conclusions are usually not difficult to arrive at.

 c0c") One important use of the
statement is that it evaluates the firm' financing capacity. The analysis of sources
of funds reveals how the firm's financed its development projects in the past i.e.,
from internal sources or from external sources. It also reveals the rate of growth of
the firm.
+1- ' #)
In modern large scale business, available funds are always short for expansion
programmes and there is always a problem of allocation of resources. It is,
therefore, a need of evolving an order of priorities for putting through their
expansion programmes which are phased accordingly, and funds have to be
arranged as different phases of programmes get into their stride. The amount of
funds to be available for these projects shall be estimated by the finance with the
help of Funds Flow Statement. This prevents the business from becoming a
helpless victim of unplanned action.

+2- 3)
Funds Flow Statement helps in gathering the financial states of Business.

It gives an insight into the evolution of the present financial position and gives
answer to the problem 'where have our resources been moving'? In the present
world of credit financing, it provides a useful information to bankers, creditors,
financial, it provides a useful informations and government etc. regarding amount
of loan required, its proposes, the terms of repayment an sources for repayment of
loan etc. the financial manager gains a confidence born out of a study of Funds
Flow Statement. In fact, it carries information regarding firm's financial policies to
the outside world.

An analysis of Funds Flow Statements of several years reveals certain valuable
information for the financial manager for planning the future financial
requirements of the firm and their nature too i.e. Short term, long-term or mid
term. The management can formulate its financial policies based on information
gathered from the analysis of such statements. Financial manager can rearrange
the firm's financing more effectively on the basis of such information along with
the expected changes in trade p payables and the various accruals. In this way, it
guides the management in arranging its financing more effectively.


1. There will be a flow of funds if a transaction involves a current account and a non-
current account i.e. involves
a) Current assets and fixed assets e.g. purchase of building for cash. Currents asset
and capital e.g. issue of share for cash.
b) Current assets and fixed liabilities e.g. redemption of debentures in cash or
repayment of long term loan in cash.
c) Current liabilities and fixed liabilities e.g. creditors paid off in debentures.
d) Current liabilities and capital e.g. creditors paid off in shares.
e) Current liabilities and fixed assets e.g. building transferred to creditors in
satisfaction of their claims.
2. There will be  flow of funds if a transaction involves 2 current accounts or 2
non-current accounts.
a) Current assets and current liabilities e.g. payment of creditors in cash.
b) Fixed assets and fixed liabilities e.g. building purchased and payments made in
c) Fixed assets and capital e.g. Building purchased and payment made in shares.

The preparation of funds flow statement consists of the following steps:

1. reparation of Schedule of changes in working capital.

2. Calculation of funds from (lost in) operations.
3. Identification of various sources and application of funds as well as hidden
information affecting the funds (if necessary, through preparation of ledger a/c
for non-current items).
a) An increase in non-current asset over the year is an application of funds
while a decrease is a source of funds.
b) An increase in non-current liability over the year is a source of funds while
a decrease is an application of funds.
4. reparation of funds flow statement.
.  "5")

It is prepared to compare the working capital position between two balance sheet
dates so as to determine increase or decrease in working capital. An increase in
working capital is an application of funds while a decrease in working capital is a
source of funds.

3&3 63

Increase in current assets = Increase in WC
Increase in current liabilities = Decrease in WC
Decrease in current assets = Decrease in WC
Decrease in current liabilities = Increase in WC

In the above figure the dotted line displays there will be no flow of fund & the dark
line displays the flow of fund.
c#8'(3 .' :
. . 3 3 "5"
* * 3
#  # 
#  # 

3 ##

3 :95
+ -  

9 3 ##
' 9'''




+ <9-  
c c 
c #
' #
;: #$
' "
" . ;
5" :'
+$- '5"