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Fund Flow Statement Preparation Guide

This document provides an introduction to fund flow statements. It discusses that a fund flow statement shows sources and uses of funds over a period of time. It outlines the key steps to prepare a fund flow statement, which includes preparing a statement of changes in working capital by comparing current assets and liabilities between two balance sheets. It also involves ascertaining funds from operations. The statement is then prepared by clearly disclosing the sources and uses of funds. The document also provides examples of current assets and liabilities and briefly discusses the difference between a cash flow statement and a fund flow statement.

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SANTHIYA K
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99 views11 pages

Fund Flow Statement Preparation Guide

This document provides an introduction to fund flow statements. It discusses that a fund flow statement shows sources and uses of funds over a period of time. It outlines the key steps to prepare a fund flow statement, which includes preparing a statement of changes in working capital by comparing current assets and liabilities between two balance sheets. It also involves ascertaining funds from operations. The statement is then prepared by clearly disclosing the sources and uses of funds. The document also provides examples of current assets and liabilities and briefly discusses the difference between a cash flow statement and a fund flow statement.

Uploaded by

SANTHIYA K
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

FUND FLOW STATEMENT

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Contents
INTRODUCTION .................................................................................................................................................. 2
STEPS FOR PREPARATION OF FUND FLOW STATEMENT ................................................................................... 3
DIFFERENCE BETWEEN CASH FLOW AND FUND FLOW STATEMENT ................................................................ 6

pg. 1
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INTRODUCTION
Fund in this chapter means working capital.
If current assets of a company are more than its current liabilities, it is called working capital and working capital’s
other name is Fund.

The term “flow of funds” means “Transfer of economic values from one asset to another and one liability
to another.” Flow of fund takes place whenever there is change in working capital. This change may be
either inflow or outflow of funds.
For example,

• Fixed asset changes into current asset or current asset changes into fixed assets.

• Fixed liability changes into current liability or current liability changes into fixed liability.

• Any transaction which attracts one current account and one non-current account then only it is
flow of fund.

Funds flow statement is a method by which we study changes in the financial position of a business
enterprise between beginning and ending financial statement dates. It is a statement showing sources and
uses of funds for a period of time.

Examples of Current Assets are:


• Cash in hand
• Cash at bank
• Bills receivables
• Stock
• Debtors
• Prepaid expenses
• Accrued income
• Marketable securities

Examples of Current Liabilities are:


• Bills payable
• Creditors
• Outstanding expenses
• Advance income

There is a direct relation between current assets and working capital. When current assets increase,
working capital also increases. When current assets decrease, working capital also decreases.

pg. 2
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There is an inverse relation between current liabilities and working capital. When current liabilities
increase, working capital decreases. When current liabilities decrease, working capital increases.

Increase in working capital is application (or use) of fund whereas decrease in working capital is source of
fund.

STEPS FOR PREPARATION OF FUND FLOW STATEMENT


1. To prepare statement of changes in working capital

It is very necessary to make statement of changes of working capital. Because net increase in working
capital is use of fund and net decrease in working capital is source of fund.

We take two balance sheets; one is current year balance sheet and other is previous year balance sheet.
Then we separate current assets and current liabilities.

Statement of changes in working capital

pg. 3
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2. Ascertain the funds from operation

Fund from operation is required for preparation of fund flow statement for source of fund side. It can be
shown on application of fund side when there is negative fund from operation. Operation means business
activity and fund from operation means profit from business activity.

pg. 4
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Alternatively, adjusted profit and loss account can also be prepared.

3. Preparation of fund flow statement

While preparing the funds flow statement, the sources and uses of funds are to be disclosed clearly so as
to highlight the sources from where the funds have been generated and the uses to which these funds
have been applied. This statement is also sometimes referred to as sources and applications of funds
statement.

pg. 5
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DIFFERENCE BETWEEN CASH FLOW AND


FUND FLOW STATEMENT

pg. 6
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pg. 7
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pg. 8
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pg. 9
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pg. 10

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