Funds flow statement is a financial statement which can indicate the inflow and outflow of fund of an organization during the accounting period.
Funds flow statement shows the position of working capital.
funds flow statement is to prepare or made to know the received sources of funds and used funds during an accounting period.
funds flow statement involves two words.
They are fund and flow.
Fund: In simply we can say, fund means cash.
But it is not the correct meaning. In a broad sense, the fund stands for working capital.
Working capital = Current assets – Current liabilities
The term flow means to change or movement.
Therefore, we can say that fund flow means to increase or decrease in working capital.
If working capital decreases, it is a source of inflow.
If working capital increases, it is a usage or outflow.
Other names of funds flow statement
1) statement of inflow and outflow of funds,
2) statement of funds received and disbursed,
3) statement of funds generate and expand,
4) statement of source and application of funds,
5) statement of source and use of working capital,
6) statement of changes in financial position,
7) movement of funds statement
We prepare a funds flow statement to give satisfactory answers to the following questions:
a) What are the main sources (inflow) and application (outflow) of funds during the accounting period?
b) How much fund has been produced from the business operations?
c) Where did the profit will go?
d) Why the dividend is not larger?
e) How was it possible to distribute the dividend in case of loss in the business?
f) Why the net current assets are down even though there is net profit? Or vice versa.
Objectives or importance of funds flow statement
The main objectives or importance of funds flow statement are as follows:
1) It helps to identify the changing in working capital.
2) It helps to analyse the changing in working capital.
3) It helps to determine the ability of an organization’s or business to pay interest and principal amount.
4) It helps to show the relationship of net profit as a change in a fund from the operation.
4) It helps to predict future fund flow from past fund flow.
5) It helps to identify the factors to change in the assets, liabilities and equity.
Preparation of funds flow statement
We prepare funds flow statement by comparing two years of balance sheets’ figures and additional information. We prepare Funds flow statement to know the changes in the financial position of the business or organization between the beginnings and the ending date.
It contains the following ways:
– Statement/ schedule changes in working capital
– Preparation of ledger accounts
– Profit and loss adjustment account
– Funds flow statement.
Statement schedule changes in working capital:
We prepare it from the current assets and the current liabilities to find out the increasing or decreasing in working capital.
Assets and liabilities are given in the comparative balance sheet. This statement helps to identify the change in working capital. This change may be increase or decrease.
(Working capital= Current assets – Current liabilities)
while preparing this statement, following points are taken into account:
Increase in current assets Increase in working capital
Decrease in current assets. The decrease in working capital
Increase in current liabilities. A decrease in working capital
A decrease in current liabilities. Increase in working capital
Procedures for a schedule change in working capital
step 1: First of all we should find out current assets and current liabilities from the given balance sheet.
step 2: Write down the current assets and current liabilities in the format of schedule change in working capital and then do the sum.
step 3: Compare the current assets of the current year with last year. If increase, write in increase column. If decrease, write in decrease column,
step 4: Compare the current liabilities of the current year with last year. If increase, write in decrease column. If decrease, write in increase column,
step 5: Do the sum of all increase and decrease column,
step 6: Find out the net change in working capital from the difference of current assets and current liabilities,
step 7: At last step, compare whether an increase or decrease in working capital.
Funds from operation
Fund from operation is the second step of funds flow statement. It is found out from the statement of fund from operation ( profit and loss adjustment account). It is prepared after preparing the schedule change in working capital. Net profit or loss of profit and loss account does not indicate the actual funds earns or suffers during an accounting period.
Generally, the non-operating and non-cash expenses are added to net profit.
Non- operating and non- cash incomes are deducted from net profit. Positive value is fund from operation; negative value is loss from operation. There are two methods to find out Fund from operation ( FFO).
They are given below:
1) Add back method
2) Profit and loss adjustment account
ADD BACK METHOD
The income statement shows this method to prepare with the net profit or net loss as it is by the non-operating and non-cash expenses are add with the net profit. But non-operating income deducts from the net profit. The balancing figure of an amount such obtains either fund from operation or loss from the operation.
PROFIT AND LOSS ADJUSTMENT ACCOUNT METHOD
This method is also preparing with the net profit or net loss as it is shown by the income statement or balance sheet. Net profit is shown on the debit side but net loss is shown on the credit side of this account. All the non-operating and non-cash expenses are written on the debit side but non-operating incomes are written on credit side.
If the debit amount become more than credit amount, then we consider it as funds from operation. Similarly, If the credit amount become more than debit amount, then we consider it as loss from operation.
Procedures for profit and loss adjustment account
step 1 : First of all we should find out non operating and non-cash expenses and income,
step 2 : Write down the non-operating and non-cash expenses in the debit side,
step 3: Write down the non-operating incomes in credit side,
step 4: If a transaction is in balance sheet as well as additional information, prepare ledger (working note ) for fixed assets, investments, provision for tax or dividend,
step 5: After transferring all the non-operating and non-cash expenses or income and necessary entry from working note, find out Fund from operation.
Funds flow statement
If we find out increase or decrease in working capital (from schedule change in working capital) and fund from operation (from profit and loss adjustment account), then next step is funds flow statement. It’s main aim or purpose is to get information about the funds obtain and uses by the business firm. Funds flow statement has two sides. In left hand side, there is inflow or sources, and In right hand side there is, outflow, uses or application of funds.
Procedures for funds flow statement
step 1: First of all find out non-current liabilities and assets ( these are long term liabilities and fixed assets),
step 2: All cash inflow (decreases in fix assets or increase in long term liabilities) we write it source side,
step 3: All cash outflow (increase in fixed assets or decrease in long term liabilities) are written in side,
step 4: From schedule change, increase working capital is written in uses side or decrease working capital is written in source side.
step 5: From profit and loss adjustment account, operating profit is written in source side or operating loss is written in uses side,
step 6: At last we should compare sources and uses. If both are equal, solution: is correct