FUNDS FLOW STATEMENT

AND CASH FLOW STATEMENT

AFTERSCHO☺OL
– DEVELOPING CHANGE MAKERS
CENTRE FOR SOCIAL ENTREPRENEURSHIP
PGPSE PROGRAMME –
World’ Most Comprehensive programme in social
entrepreneurship & spiritual entrepreneurship
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AFTERSCHOOOL MATERIAL 1
FOR PGPSE PARTICIPANTS
1
 FUNDS FLOW STATEMENT
AND CASH FLOW STATEMENT
Dr. T.K. Jain.
AFTERSCHO☺OL
Centre for social entrepreneurship
Bikaner M: 9414430763
tkjainbkn@yahoo.co.in
www.afterschool.tk, www.afterschoool.tk
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AFTERSCHOOOL MATERIAL 2
FOR PGPSE PARTICIPANTS
2
 WHAT IS FUND?
• It denotes working capital

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 What is working capital ?
• Current assets
• Total of gross current assets is called
gross working capital
• Net working capital = current assets –
current liabilities

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 What is current assets?
• All those assets which will be converted
into cash in the next one year are called
current assets
• Examples of current assets :
• Cash, inventory, debtors, bills receivables,
prepaid expenditure, etc.

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 What is current liabilities?
• All those dues, which we have to pay in
the next year are called current liabilities :
• Example :
• Overdraft, short term loan, creditors, bills
payable, outstanding expenditure

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 What is a flow of fund?
• When there is change in fund (working
capital), it is called flow of fund.
• Example: you purchase furniture, there is
increase in fixed assets (furniture) and
decrease in current assets (cash). Thus
there is flow of funds

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Which of these have flow of funds?
• Purchase of raw material :
• No – as there is no change in working capital,
raw material is current asset and cash is also
current asset.
• Payment of creditors :
• No – as there is no change in working capital.
Creditors are current liabilities and cash is
current asset thus net working capital remains
the same.

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 Are these flow of funds?
• Purchase of building against shares:
• No – as there is no change in working capital
(fund). Building is long term asset and shares are
long term liabilities, there is no impact on current
asset or current liabilities.
• Sale of Plant against long term investment :
• No – as there is no change in working capital
(fund). Plant is long term asset (fixed assets) and
long term investments are also fixed assets.
there is no impact on current asset or current
liabilities.

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When do you have a flow of funds?
• Flow of funds is possible when one of the item is
from working capital and other item is from fixed
asset / liability.
• Example: Purchase of furniture against cash. : it
involves furniture and cash. Furniture is fixed
assets, but cash is current assets, thus there is
change in working capital and therefore there is
flow of funds. When you buy furniture, you are
reducing your working capital or you are
reduciing your funds.
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 How do you prepare funds flow
statement:?
• You have to prepare three statements :
• 1. statement of changes in working capital
• 2. statement of sources of funds
• 3. Statement of applications of funds.

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 What are sources of funds?
• Whenever there is increase in fund
(working capital), it is called source of fund
• Whenever there is decrease in fund, it is
called application of fund.
• Example : issue of fresh equity shares /
debenture / bonds/ rights issue /
preference issue are all example of
incrrease in funds.
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What are applications of funds?
• When working capital gets reduced, it is
called application of funds.
• Example :
• Purchase of fixed assets
• Payment of long term liability
• Payment of debenturers / bonds /
preference shares etc.

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 What are the key issues in
preparation of cash flow
statement?
• Cash flow statement is similar to funds flow
statement, but here we are looking at flow of
cash – not on working capital.
• Thus when there is change in working capital, it
will be flow of fund, but it will be flow of cash
only if it involves cash transaction.
• Thus non-cash transactions will not affect flow of
cash.

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What are the issues,, which require
adjustments:
• There are some issues which require
adjustments in profits.
• Example : depreciation: it is one such
mattere, which doesn’t affect working
capital or cash, therefore it is adjusted in
the profit.

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 What are the statements that you
prepare in cash flow statements?
• Cash flow from operations
• Cash flow from financing activities
• Cash flow from investing activities

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 What is cash from operations:
• Cash from operations denotes cash profits.
Therefore you have to adjust profits. All non-
cash items are adjusted in profits. Thus it is
called cash from operations. Following items are
added to profits – as they are non-cash
expenditures :
• Depreciation, amortisation, non-cash
expenditure,
Similarly, we will adjust all non-cash revenues. All
non-cash revenues will be deducted from profit.

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 What is cash from investing ?
• Investing refers to dealing in fixed assets.
When you buy a fixed assets, there is cash
outflow. When you sell a fixed assets, there
is cash inflow. Thus cash from investing is
positive, when we are selling some fixed
assets.
• When we are buying fixed assets, there is
cash outflow.

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 What is cash from financing ?
• It refers to transactions relating to shares /
debentures / bonds / loans etc.
• When we issue shares, there is cash
inflow. When we pay back (redeem) our
debentures / preference shares / bonds,
there is cash outflow.

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 Why is it interesting to prepare
funds flow and cash flow
statement?
• First, you come to know about real conditions of an
enterprise. It may be possible that the firm may be
earning profit, but it may be in negative cash flows and
in deep financial problems and it may also be possible
that the firm may be in losses but actually have huge
positive cash inflows so having good financial position.
• Cash flow statement and funds flow statement always
match therefore it is always interesting to prepare
these statements.

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 Some typical situations:
• Increased share capital from 1000 crores to
1200 crores:
• There is increase in cash from financing of 200
Crores (Cash flow) and there is source of
working capital (funds flow statement).
• Debt of 200 cr. Paid: (it is cash outflow in cash
from financing in cash flow statement and
application of funds in funds flow statement.

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