Updated July 10, 2023
Definition of Fund Flow Statement
A fund flow statement is a statement that shows the difference of position between two balance sheets to compare the financial position and effects of funds between two periods by showing the sources of the funds as well as the application of the funds. It analyzes whether the financial position is strengthened or weakened, thereby taking measures to improve it.
Explanation
The fund flow statement facilitates the analysis of the change in financial position between two balance sheet dates or periods, enabling a clear understanding of the reasons behind the financial position’s fluctuations. First, it broadly gives the idea of sources of funds and the application of funds between two periods. Second, it analyzes whether a favorable position has arisen or results in an unfavorable position. Third, it gives analyses about whether the organization is applying the funds to achieve the best results or application of funds is unfavorable as per the market conditions and returns. Finally, it shows where the company has funds and its source.
Objectives of Fund Flow Statement
- First, to get a clear position of the source and application of funds.
- To know that funds are being utilized for the company’s objectives or beyond them.
- To know how much funds are collected from selling assets, issuing shares, borrowing loans, and utilizing them.
- The organization prepares the fund flow to formulate policies and budgets for future operations and enhance its financial position.
How to Prepare Fund Flow Statement?
- Step 1: Prepare Statement of Changes in Working Capital: For the Preparation of the fund flow statement, the statement of changes in the working capital statement is necessary to determine the working capital position between two periods, which may be due to several reasons and which gives the idea that whether the operations of the organization are working effectively.
- Step 2: Prepare Statement of Funds from Operations: The next step is to prepare the funds generated from operating activities, as the operations are considered the organization’s core. The fund statement of funds from operations gives an idea about the business position for the current period.
- Step 3: Preparation of the Fund flow statement: The last step is to prepare the fund flow statement by showing the source and application of funds. The source of funds from operating activities is determined in steps one and step 2. So that is to be incorporated in the fund flow statement. The source and application of funds from financing, investing, and other activities will also be incorporated by comparing the financial position of two different balance sheets.
Examples of Fund Flow Statement
The balance sheet position for the year 2018-19 and 2019-20 is shown as under:
Solution:
| 2018-19 | 2019-20 | |
| Particulars | Amount ($) | Amount ($) |
| Sources of Fund | ||
| Equity Capital | 100,000.00 | 150,000.00 |
| Reserves and Surplus | 20,000.00 | 15,000.00 |
| Non-Current Liabilities | ||
| Loan from Bank | 100,000.00 | 150,000.00 |
| Current Liabilities: | ||
| Creditors | 10,000.00 | 5,000.00 |
| Outstanding expenses | 5,000.00 | 7,000.00 |
| Total | 235,000.00 | 327,000.00 |
| Application of Funds: | ||
| Non-current Assets | 170,000.00 | 207,000.00 |
| Current Assets | ||
| Debtors | 25,000.00 | 30,000.00 |
| Cash and Bank | 40,000.00 | 90,000.00 |
| Total | 235,000.00 | 327,000.00 |
Statement of Changes in Working Capital
| 2018-19 | 2019-20 | |
| Particulars | Amount ($) | Amount ($) |
| Current Assets | ||
| Debtors | 25,000.00 | 30,000.00 |
| Cash and Bank | 40,000.00 | 90,000.00 |
| Total (A) | 65,000.00 | 120,000.00 |
| Current Liabilities | ||
| Creditors | 10,000.00 | 5,000.00 |
| Outstanding expenses | 5,000.00 | 7,000.00 |
| Total (B) | 15,000.00 | 12,000.00 |
| Working Capital (A – B) | 50,000.00 | 108,000.00 |
Changes in working capital = 108,000 – 50,000
= 58,000 increased from last year
i.e. 58,000 applied in operations
As there is nothing mentioned about the non-operating activities. Hence the statement of funds from operations is not to be prepared.
Preparation of Fund Flow Statement
| Particulars | Amount ($) |
| Source of Funds | |
| Cash From the issue of shares (150,000-100,000) | 50,000.00 |
| the outflow of accumulated profit (20,000- 15,000) | (5,000.00) |
| Long term Borrowings (150,000-100,000) | 50,000.00 |
| Total | 95,000.00 |
| Application of Funds | |
| Purchase of Assets (207,000 – 170,000) | 37,000.00 |
| Cash applications in operations | 58,000.00 |
| Total | 95,000.00 |
Fund Flow Statement Format
| Particulars | Amount ($) |
| Source of Funds | |
| Cash inflow from the issue of Shares | – |
| Long term borrowings | – |
| Sale of Assets | – |
| Total | – |
| Application of Funds | |
| Purchase of Assets | – |
| Amount Invested in Purchasing Investments | – |
| Cash applied in operations. | – |
| Funds utilized for paying dividends, taxes, etc. | – |
| Total | – |
Components of Fund Flow Statement
- Owners’ Equity: Owners’ equity shows whether the capital is increased or repaid/ decreased between two periods. It also includes whether the accumulations, i.e., reserves, are increased. Accumulation is the position of accumulated profits deducted by the set-off of losses.
- Non-Current Liabilities: Non-current liabilities are also termed long-term liabilities, which normally include borrowings. It reflects whether the borrowings are increased between two periods or decreased.
- Net Changes in Working Capital: Net changes in working capital are the net funds from operating activities calculated as changes in current assets and fewer changes in current liabilities. The favorable position is to be shown on the sources of funds side. In contrast, the unfavorable position, i.e., excess of liabilities over assets, is to be shown as the application of funds as it resulted in an outflow of funds.
- Non-Current Assets: Non-current assets normally reflect fixed assets. The non-current assets in the fund flow statement reflect how many and of what amount the new assets are purchased from the additional fund sources between two periods.
- Provision of Tax: Provision of Tax is determined based on the organization’s profits. Suppose the net profit is positive after reducing all expenses and setting off losses. In that case, the provision of taxation is to be done at the prevailing tax rate, and the actual figure of the tax provision is to be reflected in the fund flow statement.
Uses and Importance
- The different sources and applications of funds can be easily determined with the help of a fund flow statement.
- With its help, the organization’s strengths and weaknesses can be determined, which helps to improve the position and future planning.
- It shows the organization’s operational profitability and efficiency, which can be used for expansion and improvement.
- It acts as a guide to management, analyst, and the various users of the financial statements.
Benefits
Some of the benefits are provided and discussed below-
- The statement helps investors in investment decisions.
- The operational efficiency can be increased with proper planning with the help of a fund flow statement.
- It shows the proper positions of source and application of funds; hence, the deficiencies can be easily pointed out.
Limitations
Some of the Limitations are provided and discussed below-
- The non-fund transactions are not included in the fund flow statement; hence the true position cannot be determined.
- It cannot determine additional information about future investments, planning, liability, etc.
- The statement only considers the historic data and does not give future transactions’ effects.
Conclusion
It is the type of statement that shows the sources and application of funds between two periods from two balance sheets. With the help of the fund flow statement, proper planning and efficiency are to be achieved, but at the same time, the statement does not consider the non-fund transactions; hence it cannot be said that the position is true and correct. It also helps the management and investors in their respective decisions.
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