what is fund flow statement, current and noncurrent assets and liabilities, objectives, characteristics, and limitations of fund flow statement, how to make fund flow, format of fund flow, sources of fund flow
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SOURCES AND APPLICATION OF FUNDS
1.
2. A statement of sources and application of funds is a
technical device designed to analyses the changes in the
financial condition of a business enterprise between two
dates.
- Foulke
3. Meaning of fund
The term fund is used to convey a variety of meanings in financial
management. However, in the context of funds flow analysis of term “Fund” is
used to describe ‘Net working capital’ and net working capital refers to the
access of current assets over current liabilities.
Fund=Net working capital=Total current assets-Total current liabilities
Meaning of Flow
The term ‘Flow’ means movement and in this sense it includes both ‘inflow’
and ‘outflow’. On this basis the term ‘fund flow’ means change in funds or
‘change in working capital’. If the effect of any transaction results in increase
of working capital, it is called a sources of funds and if it results in decrease
of working capital, it is known as application of fund.
4. Current assets:
It is expected to be realized in, or is intended for sale or
consumption in, the company’s normal operating cycle.
It is expected to be realized within 12 months after the
reporting date.
Non-current assets: non-current assets mean those assets
which are held for more than one year.
Fixed assets –tangible assets like land, building, plant, furniture,
leasehold property etc.
Non-current investment
Long term loans & advances.
5. Contd……..
Current liabilities: a liability shall be classified as current when it satisfies
any of the following criteria:
It is expected to be settled in the company’s normal operating cycle.
It is held primarily for the purpose of being traded.
It is due to be settled within 12 months after the reporting date.
Non-current liabilities: these liabilities include long term borrowings(bonds,
debentures), deffered tax liabilities, long-term provisions and trade payables
outstanding for more than 12 months.
6. To find out the position of working capital on two dates of
balance sheet.
To know the changes in working capital during this period.
To know the causes of changes in working capital.
To know the inflow of funds according to their sources.
to understand the main features of financial operation and policies
7. Not a substitute of annual accounts: a funds flow statement is not a substitute
of an income statement or a balance sheet.
Historic in nature: it is basically historic in nature. Though projected funds flow
statement may give an idea about the future but it cannot be prepared with
much accuracy.
Less important than changes in cash: changes in cash are more important for
financial management than the working capital which are not reflected in this
statement.
Not an original financial statement: it is not an original financial statement but
simple a re-arrangement of data given in balance sheet and profit & loss
a/c.
8. Characteristics of fund flow statement
Statements of factors affecting working capital: it is a statement of assets
and liabilities affecting working capital during an accounting period.
Dynamic nature: fund flow statement is of dynamic nature.
Basis of information: funds flow statement is prepared on the basis of
information's of profit & loss statement and two consecutive balance
sheets.
Managerial technique: fund flow statement is a managerial technique,
which provide knowledge of liquidity and solvency of a firm on the
basis of funds flow.
9. Preparation of fund flow statement
For preparing the fund flow statement the first step is to prepare the
statement of change in working capital position of a company some of
which have been discuss below:
1. Purchas of fixed assets or long term investment without rising long
term funds
2. Payment of fixed assets or long term investment without rising long
term funds.
3. Extension of credit to customer
4. Repayment of credit to customer redemption of preference shares
without rising long term resource.
10. Statement or schedule of working capital change
This statement depicts the amount of working capital at the beginning as well as at
the end of the year and changes in working capital during the year.
11.
12. Sources of Funds Flow
1. Funds from Operations or Trading Profits:
Trading profits or the profits from operations of the business are the most
important and major source of funds. Sales are the main source of inflow of funds
into the business as they increase current assets (cash, debtors or bills
receivable) but at the same time funds flow out of business for expenses and cost
of goods sold.
2. Issue of Share Capital:
If during the year there is any increase in the share capital, whether preference or
equity, it means capital has been raised during the year. Issue of shares is a
source offunds as it constitutes inflow of funds. Even the calls received from partly
paid shares constitute an inflow offunds.
3. Issue of Debentures and Raising of Loans, etc.:
Issue of debentures or raising of loans (long- term), whether secured or
unsecured results in the flow of fundsinto the business. The inflow of funds is the
actual proceeds from the issue of such debentures or raising of loans, i.e.,
including the amount of premium or excluding discount, if any.
13. 4. Sale of Fixed (non-current) Assets and Long-term or Trade investments:
When any fixed or non-current assets like land, building, plant and machinery, furniture,
long-term investments, etc. are sold it generates funds and becomes a source offunds.
However, it must be remembered that if one fixed asset is exchanged for another fixed
asset, it does not constitute an inflow of funds because no current assets are involved.
5. Non-Trading Receipts:
Any non-trading receipt like dividend received, refund of tax, rent received, etc. also
increases funds and is treated as a sources of funds because such an income is not
included in the funds from operations.