FUNDS FLOW

ANALYSIS
presented to the students in C.B.I.P.
on
Monday, April 08, 2013
1
By: R.C.Mukherjee
Sr.Faculty Member, PMI

LIMITATION OF BALANCE SHEET

It is static; it only gives position of
assets and liabilities on a certain
date
It does not reflect transactions
during a period
Only comparison of two periods can
give inferences on availability &
utilization of funds

FUNDS FLOW STATEMENT

It shows sources and utilization of
funds by showing movement in items
of balance sheet over two years

FUNDS VERSUS CASH

Cash includes currency and bank
balances only
Funds means the net working
capital, i.e., difference between
current assets and current liabilities

NUMERICAL EXAMPLE
Balance Sheet of XYZ Co. as on 31.03.2013
Liabilities
Share Capital

Rs.

Assets

Rs.

10,00,000 Fixed Assets 10,00,000

Reserves &
Surplus

4,00,000 Less:
2,00,000
Depreciation

8,00,000

Secured Loans
(long-term)

4,00,000 Investments (at cost)

3,00,000

Unsecured Loans
(long-term)

2,00,000

Current Liabilities
Sundry Creditors
for Supplies
Sundry Creditors
for Expenses

Current Assets

7,00,000 Inventories (at cost)

10,00,000

20,000 Book Debts

4,00,000

Cash and Bank Balances

Total

27,20,000

2,20,000

Total 27,20,000

The working capital as on 31.03.2013

= Current Assets Current Liabilities
= Rs.16,20,000 Rs.7,20,000 = Rs.9,00,000
Assume that the following transactions occurred after 31.03.13:
1.

Obtained a further unsecured loan of Rs.1,00,000 in cash.

2.

Sold Rs.2,00,000 worth of inventories (at cost) for a price of

Rs.3,00,000 on credit.

3.

Sold investments costing Rs.1,00,000 for Rs.1,20,000.

4.

Purchased fixed assets for Rs.1,00,000, the amount being

payable after 10 years the loan is secured by the property.

5.

Collected Rs.2,00,000/- from book debts.

The impact of these 5 transactions on the working capital is

shown in tabular form:

Sl.
No.

Transaction

Working Capital affected

Item

Increase
Rs.
100000

1.

Unsecured loan
obtained

Bank

2.

Sale of
inventories

300000
Book
debts
Inventory
-

3.

Sale of
investments

Bank

4.

Purchase of
fixed assets
through loan

Not
affected

Collection of
money from
debtors

Bank
Book
debts

5.

Working Capital not affected

Decrease Item

Rs.

200000

120000

200000

Increase
Rs.

Unsecured 100000
loan

200000

Accumulat 100000
ed
profit
Investment
Capital
20000
profit

Decrease
Rs.

Fixed
Assets
Secured
loans
-

100000

100000

100000

From the previous table it is clear

that:
Some transactions both increase as
well as decrease the working capital
by the same amount, net effect being
zero
Some transactions do not affect the
working capital at all
Some transactions have net effect of
either decreasing or increasing the
working capital
8

Revised Balance Sheet of XYZ Co. after the 5 transactions

Liabilities
Share Capital

Rs.

Assets

Rs.

10,00,000 Fixed Assets 11,00,000

Reserves &
Surplus

5,20,000 Less:
2,00,000
Depreciation

9,00,000

Secured Loans
(long-term)

5,00,000 Investments (at cost)

2,00,000

Unsecured Loans
(long-term)

3,00,000

Current Liabilities
Sundry Creditors
for Supplies
Sundry Creditors
for Expenses

Current Assets

7,00,000 Inventories (at cost)

8,00,000

20,000 Book Debts

5,00,000

Cash and Bank Balances

Total

30,40,000

6,40,000

Total 30,40,000

Funds flow statements essentially study the movements

to and from working capital on an annual basis. The
funds inflows are owing to:
1. Raising of capital
2. Raising of loans
3. Sale of fixed assets
4. Sale of investments
5. Operational inflow, due to profits
The funds outflows are owing to:
1. Repayment of capital buy-back of shares,
redemption of debentures
2. Repayment of loans
3. Purchase of fixed assets
4. Purchase of investments
5. Payment of dividend
10
6. Operational outflow, due to losses

Advantages of Funds Flow Statements:

1. Shows whether funds have been properly
utilized(net surplus) or have been
injudiciously used(net deficit).
2. When prepared for the future financial years
on an estimated basis it forecasts
surplus/deficit thus indicating, in advance, the
need for investing surplus or borrowing for
meeting deficit.
3. When compared with budget it will tell how
much planned expenditure has taken place.
4. Much more reliable and consistent. No scope
for manipulation.
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The Technique of Preparing a Funds Flow

Statement
Funds flow analysis is essentially a financial statement
analysis. The comparison of two years balance sheets
yields the funds flow statement.
To illustrate, let us take a simple example of the first
years balance sheet of a new company:
Liabilities

Rs.

Assets

Rs.

Share Capital

800000 Fixed Assets

Profit and Loss

Account

300000 Sundry debtors

200000

8% debentures

300000 Inventories

200000

Sundry creditors

200000 Cash and bank balances

100000

Bills payable

100000
Total

1700000

1200000

Total 1700000
12

The funds flow statement based on first years balance

sheet will be as follows:
Sources / Inflow

Rs.

Application / Outflow

Rs.

Share Capital

800000 Fixed Assets purchased

8% debentures

300000 Working capital

Funds flow from

profit

300000

Total

1400000

1200000
200000

Total 1400000

Funds Flow Statement when 2

years balance sheets given
From the following Balance Sheets of X Co. Ltd. prepare the Funds
Flow Statement:
Liabilities

31.03.12

31.03.13

Assets

31.03. 12

31.03. 13

Capital

8000000

8500000

Land and
Buildings

5000000

5000000

Profit & Loss

Appropriation A/c

1450000

2450000

Plant &
Machinery

2400000

3400000

Sundry Creditors

900000

500000

Inventory

900000

700000

500000

Sundry Debtors

1650000

1950000

Cash and Bank

balances

400000

900000

Mortgage

Total 10350000

11950000

Total 10350000

11950000

Solution:
First prepare the Schedule of Changes in Working Capital.
Then prepare the Funds Flow Statement, taking the net
increase or decrease in working capital as the balancing
figure
Current Assets
31.03. 12
31.03. 13 Difference

Inventory

900000

700000

(-)200000

Sundry Debtors

1650000

1950000

300000

Cash and Bank balances

400000

900000

500000

Total 2950000

3550000

600000

Current Liabilities

31.03. 12

31.03. 13

Difference

Sundry Creditors

900000

500000

(-)400000

Net increase in working Capital

1000000

The funds flow statement using balancing figure of

Rs.1000000 is as follows:
Sources / Inflow

Rs.

Application / Outflow
Rs.

Raising Share Capital

(Rs.8500000Rs.8000000)

500000 Fixed Assets purchased

(Rs.3400000Rs.2400000)

1000000

Borrowings on
mortgage
(Rs.500000-Nil)

500000 Net increase in working

capital

1000000

Funds flow from

operations
(Rs.2450000Rs.1450000)

1000000

Total 2000000

Total 2000000

Analysis of Inflow of Funds

Operational flow
Start with net profit and adjust for non-fund items like depreciation,
dividend provision, write-offs etc. These items do not result in actual
outflow of funds.
Numerical Example
Excelsior Company limited had the following figures for
2012-13:
1.
Net profit
Rs.640000
2.
Depreciation on assets
Rs.180000
3.
Preliminary expenses written off
Rs.20000
4.
Patents written off
Rs.30000
5.
Provision for taxation
Rs.320000
6.
Proposed dividend
Rs.120000
7.
Provision for doubtful debts
Rs.40000
8.
Profit on sale of fixed assets
Rs.10000
9.
Loss on sale of investments
Rs.5000

In addition, the profit was overstated by Rs.20000 due to

change in the method of inventory valuation. Work out the
funds flow from operations.
Solution:
Net Profit
Rs.640000
Add: Depreciation
Rs.180000
Preliminary expenses
Rs.20000
Patents written off
Rs.30000
Loss on sale of investment
Rs.5000
Proposed dividend
Rs.120000
Provision for taxation
Rs.320000
Rs.675000
Rs.1315000
Less: Profit on sale of fixed assets
Rs.10000
Gain due to change in
Rs.20000
Rs.30000
accounting method
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Funds flow from operations
Rs.1285000

Other items of inflow:

1. Issue of equity or preference shares, either
at premium or discount. Total money
received from allottees. However, the
following are exceptions:
a) Issue of bonus shares from reserves
b) Issue of shares for supply of machinery, technical
know-how etc.
c) Issue of shares in exchange of loan debentures

2.
3.

Secured & unsecured loans, debentures,

bonds for full value received.
Sale proceeds of fixed assets and
investments (long-term)

19

Analysis of Outflow of Funds

1.
Operation outflow all items of revenue
expenditure except depreciation
2.
Repayment of capital
a) Redemption of preference shares
b) Buy back of equity shares
c) Redemption of debentures and bonds
d) Repayment of loans.
3.
Acquisition of fixed assets
4.
Acquisition of investments
5.
Other outflows
a) Payment of dividend
b) Payment of income tax
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