Preparation of Fund Flow Statement and Its Analysis ***
Overview
A Fund Flow Statement tracks the movement of funds (i.e., working capital) in a business between two balance sheet dates. It reveals sources and applications of funds, highlighting how financial resources were generated and used during a specific period.
Key Concepts
Term
Meaning
Fund
Generally refers to Working Capital (Current Assets – Current Liabilities)
Flow of Funds
Any transaction that changes working capital
Identification of Flow of Funds
Transaction Type
Fund Flow Occurs?
Current + Non-Current Account Involved
✅ Yes
Only Current Accounts Involved
❌ No
Only Non-Current Accounts Involved
❌ No
Sources of Funds
Funds from operations (operating profits)
Issue of share capital
Long-term borrowings
Sale of fixed/non-current assets
Applications of Funds
Purchase of fixed/non-current assets
Repayment of loans
Payment of dividends
Increase in working capital
Steps to Prepare Fund Flow Statement
Determine Change in Working Capital → Use the Schedule of Changes in Working Capital to find the net increase or decrease.
Calculate Funds from Operations → Adjust net profit with non-cash/non-operating items (depreciation, profit/loss on asset sales, etc.)
Analyze Non-Current Accounts → Look at increases/decreases in fixed assets, long-term liabilities, and capital.
Prepare the Statement → List sources and uses, and ensure both totals match.
General Rules for Working Capital Impact
Change Type
Effect on Working Capital
Increase in Current Asset
Increases Working Capital
Decrease in Current Asset
Decreases Working Capital
Increase in Current Liability
Decreases Working Capital
Decrease in Current Liability
Increases Working Capital
Change in Non-Current Accounts
Affects flow of funds
Same-direction change in Current A/L
No change in Working Capital
Format of Fund Flow Statement
Fund Flow Statement for the Year Ended June 20, 2024
Sources of Funds
Funds from Operations ……………………………… ₹xx,xxx
Issue of Share Capital …………………………….. ₹xx,xxx
Long-Term Borrowings ………………………………. ₹xx,xxx
Sale of Non-Current Assets …………………………. ₹xx,xxx Total ………………………………………….. ₹xxx,xxx
Applications of Funds
Purchase of Fixed Assets ……………………………. ₹xx,xxx
Repayment of Loans …………………………………. ₹xx,xxx
Dividends Paid …………………………………….. ₹xx,xxx
Increase in Working Capital ……………………… ₹34,000 Total …………………………………………… ₹xxx,xxx
💡 Note: Totals of Sources and Applications must always match.
Example Calculations
Funds from Operations: → Profit after adjustments = ₹42,000 − ₹35,000 = ₹7,000
Increase in Working Capital: → Working Capital (2024) = ₹82,000 → Working Capital (2023) = ₹48,000 → Change = ₹34,000 Increase
Analysis of Fund Flow Statement
Why It Matters
Use Case
Explanation
Assess Financial Health
Shows how well a company is managing its resources
Strategic Decision-Making
Informs investment and financing decisions
Identifying Operational Trends
Highlights inefficiencies or improvements in working capital
Long-Term Planning
Reflects ability to fund long-term commitments without liquidity issues
Important Notes
Fund flow statements are based on accrual accounting, not cash.
Different from cash flow statements, which track actual inflows/outflows.
Critical for evaluating long-term financing and investment efficiency.
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