Definition: Fund Flow Statement summarises the movements of funds in the business between the two accounting periods. It provides analytical data about the procurement and utilization of funds.
It is a technique that studies, control and monitors the number of changes in the funds during a period. One can judge whether the funds are efficiently utilized in the business or not.
The fund flow statement depicts sources by which the firm has been financed. And the areas where these funds are applied or utilized.
We can refer it by a variety of names as follows:
- Statement of Sources and Utilization of Funds
- Where-Got Where-Gone Statements
- Funds Statements
- Inflow-Outflow of Funds Statements
- Statement of Sources and Application of Funds
These statements are an essential tool for financial statement analysis. It helps manage the financial health and solvency of the business.
The flow of funds refers to the inwards and outwards flow of cash and cash equivalents inside the firm. Thus, the flow of funds impacts a firm’s working capital.
The fund’s statements depict the cause of changes in working capital. So, we record only those financial transactions that affect the working capital.
Three statements are prepared during the fund flow analysis:
- Statement of Changes in Working Capital
- Funds from Operations or Adjusted Profit and Loss Account
- Fund flow Statement
Content: Fund Flow Statement
Objectives of Fund Flow Statement
Primarily the Fund Flow Statement is used to assess the cause of funds inflow and outflow. The objectives of the Fund Flow Statement is to:
- Estimate the working capital of the undertaking.
- Find out the changes and causes of changes in working capital.
- Perform a comparative study of the business’s financial position.
- Know the sources of the inflow of funds.
- Learn where the funds are being used.
- Formulate the policies for the financial soundness of the firm.
- Attain financial control over the business.
- Track and control the key resource of the company.
How to prepare Funds Flow Statements?
We need to collect data from the following sources for Fund Flow Statements:
- The balance sheet of the current year and previous year.
- Profit and Loss Statement of the current year.
- All the relevant information affecting firms funds flow.
After that, we need to prepare three statements as stated earlier.
Firstly, we analyze the changes in working capital. The statement shows an increase/decrease in current assets and liabilities between the two years.
Accounting Treatment in Fund Flow Statement:
- The net increase in working capital under the application of funds.
- A decrease in working capital under the sources of funds.
Format of Changes in Working Capital
Secondly, we calculate the funds from operations. It depicts an increase or decrease in working capital due to operating activities.
We can calculate it by preparing:-
- Statement of Funds Flow from Operations, or
- Adjusted Profit and Loss Account
Accounting Treatment in Fund Flow Statement:
- Funds from operations appear under sources of funds.
- Funds lost in operations appear under the application of funds.
Format of Funds from Operations
Format of Adjusted Profit and Loss Account
The third or final step in the process is making the fund flow statement. The fund’s statement has two separate sections, that is:
- Sources of Funds: It depicts the items responsible for the inflow of funds into the business.
- Application of Funds: This section shows the outflow of funds from the business.
We can prepare it in the form of an account or statement.
Format of Fund flow Statements in the form of an account
Format of Fund flow Statements in the form of a Statement
Points to Remember
One must consider the following points while preparing funds flow statements:
- Always prepare the changes in working capital first.
- The funds flow statement and operations funds must be prepared simultaneously.
- Provide necessary working notes for the adjustments.
Importance of the fund flow statements
The fund flow statements are helpful to the firm’s stakeholders. As it conveys vital information about the business. The importance or uses of fund flow statements are as follows:
Fund Flow Statements helps managements in the following ways:
- It helps management to determine the plan of action for the future.
- The fund flow analysis enables optimum resource allocation.
- After analyzing the application of funds, management can formulate its dividend policy.
- The management can analyze and improve its working capital positions.
- It depicts the firm’s financial position, which helps get loans easily.
Investors can get some vital information about the firm like:-
- Abilities of the firms to pay them dividend
- Firms capabilities to pay their obligations
- Effective sourcing and usage of the funds
Fund flow statements provide the actual financial position of the business. The creditors can find out the companies’ capabilities of repaying their debts. It includes the short and long term liabilities of the business.
The government uses these statements to know the firm’s capital budgeting sources. The government forms industrial policies based on the data given in this statement.
Fund flow statements also help the government in capital control.
The financial institutions seek information about the firm’s liquidity and profitability. They get this information by way of Fund flow statements.
Limitations of Fund Flow Statements
- Only provides additional information about funds. Therefore it cannot be the substitute of the financial statements.
- It uses historical data, so it is not prepared with much accuracy.
- These statements only cover changes in working capital, not the cash. However, analyzing changes in cash is a must.
- Important non-fund transactions are not included in these statements.
Example of Fund Flow Statement
The Balance sheet of MRF Ltd. for 2011 and 2012 is given below. From the shared data prepare:
- Statement of Working Capital Changes
- Fund Flow Statement
- Dividend paid Rs.400/-, Taxes Rs.250/-.
- Issue of Bonus Shares Rs.800/-.
- MRF Ltd. purchased land for Rs.1500/-.
- Sale of Furniture costing Rs.1000/- for Rs.800/- (accumulated depreciation Rs.600/-).
We will record the increase in working capital Rs.4880/- under the application of funds.
Opening balance of Land Rs.7000/-
Add: Land Purchased Rs.1500/-
Less: Closing balance Rs.5000/-
The Funds statement helps analyze the changes in the financial soundness of business over a while. The analysis is done by monitoring the firm’s inflow and outflow of funds.
It considers business transactions that are financial in nature. Also, the impact of these transactions on the working capital.