fund flow statement - March 6th, 2010 Objectives (or Importance) of Funds Flow Statement Funds Flow Statement

is an 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 were there are used during a given period.

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

(1) Analysis of Financial Position. 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 sens, 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.

(2) Evaluation of the Firm's Financing. 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.

(3) An Instrument for Allocation of Resources. 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.

(4) A Tool of Communication to Outside World. 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.

(5) Future Guide. 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.

Fund Flow Statement: Meaning of Fund Flow 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. Meaning of Fund In a popular and generally accepted sense the term fund is used to denote the excess of current assts over current liabilities : Working Capital = Current Assets Current Liabilities

Meaning of Flow of Fund Flow of funds means transmigration (coming and going) of funds. In other words, Flow of funds means change in Working capital, as in funds flow statement the words funds mean net working capital. Definition: According to R.N. Anthony, Fund 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. According to Smith Brown, Fund Flow is prepared in summary form to indicate changes occurring in items of financial condition between two different balance sheet dates. Coleman rightly states that, The fund statement is statement summarizing the significant financial change which have occurred between the beginning and the end of a companys accounting period. FUNDS FLOW STATEMENT Introduction Many changes take place in the assets, equities, revenues and expenses in the course of business operations. These changes in an asset or an equity account or in revenue or an expenses account over a period of time can be examined and presented in the form of a flow statement. The flow statement may, therefore be defined as a statement which explains increases or decreases in different related accounts for a specified period of time. These flow statements can be classified

into four categories; 1. Income Statement 2. Funds Flow Statement 3. Statement of Changes in Financial Position 4. Cash Flow Statement MEANING OF FUNDS FLOW STATEMENT According to the Standard, the term fund generally refers to cash and cash equivalents, or to working capital. The meaning of two terms current assets and current liabilities are 1. Current Assets: The term Current Assets includes assets which are acquired with the intention of converting them into cash during the normal business operations of the company. 2. Current Liabilities: The term Current Liabilities is used principally to designate such obligations whose liquidation is reasonably expected to require the use of assets classified as current assets in the same balance sheet or the creation of other current liabilities or those expected to be satisfied within a relatively short period of time usually one year. The term current liabilities also includes amounts set apart or provided for any known liability of which the amount cannot be determined with substantial accuracy e.g., provision for taxation, pension etc., Meaning of Flow of Funds: The term Flow of Funds means Change in Funds or Change in working Capital. In other words, any increase or decrease in working capital means Flow of

Funds. The following are the general rules: 1. There will be Flow of Funds if a transaction involves a. Current assets and fixed assets, e.g. Purchase of building for cash. b. Current and Capital, e.g. Issue of shares for cash c. Current and fixed liabilities e.g., Redemption of debentures in cash. d. Current liabilities and fixed liabilities e.g., creditors paid of in debentures. e. Current liabilities and capital e.g., creditors paid of in shares. f. Current liabilities and fixed assets e.g., building transfer to creditors in satisfaction of their claims. 2. There will be no flow of funds if transaction involves a. Current assets and current liabilities e.g., payment made to creditors. b. Fixes assets and fixed liabilities e.g., Building purchased and payment made in debentures. c. Fixed assets and capital e.g., Building purchased and payment made in shares.

NEED FOR FUNDS FLOW STATEMENT 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., Income Statement and the

Balance 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 date. USES OF FUNDS FLOW STATEMENT Funds flow statement helps the financial analyst in having a more detailed analysis and understanding of changes in the distribution of resources between two balance sheet dates. In case such study is required regarding the future working capital position of the company, a projected funds flow statement can be prepared. The uses of a funds flow statement can be put as follows: i. It explains the financial consequences of business operations: Funds flow statement provides a ready answer to so many conflicting situations, such as: a. Why the liquid position of the business is becoming more and more unbalanced in spite of business making more and more profits? b. How was it possible to distribute dividends in excess of current earnings or in the presence of a net loss for the period? c. How the business could have good liquid position in spite of business making losses or acquisition of fixed assets? d. Where have the profits gone?

ii. It answers intricate queries: The financial analyst can find out answers to a number of intricate questions: a. What is the overall creditworthiness of the enterprises? b. What are the sources of repayments of the loans taken? c. How much funds are generated through normal business operations? d. In what way the management has utilized the funds in the past and what are going to be likely uses of funds? iii. It acts as an instrument for allocation of resources: A projected funds flow statement will help the analyst in finding out how the management is going to allocate the scarce resources for meeting the productive requirements of the business. The uses of funds should be phased in such an order that the available resources are put to the best use of the enterprise. The funds should be managed in such away that the business is in a position to make payment of interest and loan installments as per the agreed schedule.

iv. It is a test as to effective or otherwise use of working capital: Funds flow statement is a test of effective use of working capital by the management during a particular period. The adequacy or inadequacy of working capital will tell the financial analyst about the possible steps that the management should take for effective use of surprise working capital or make arrangement in case of inadequacy of working capital.

Advantages of Funds Flow Statement The chief advantages of the Funds Flow Statement are the following:1. Since it gives the figures of cash inflow from operations, it gives much more reliable picture of the results of operations than the usual profit and loss account. Changing the amount of depreciation can easily change the figure of profit. Higher depreciation will mean lower profit and vice versa. 2. Since cash (or funds) is the basis for carrying on operation, the funds flow statement, prepared on an estimated basis for the next period will enable a firm, to plan its financial operations properly. The firm will know how much funds it requires, how much it should make arrangements from outside. This is a process of budgeting. 3. The statement for the previous year compared with the budget prepared before the year commenced will show to what extent the resources for the company or the firm were used according to plan to what extent the utilization was unplanned or not proper. The funds Flow Statement cannot take the place of the final statements of account-the Balance Sheet or the Profit and Loss Account-but it is most useful supplementary statement.