What is a Fund Flow Statement?
A fund flow statement reveals the periodic increase or decrease of funds of a business enterprise. This statement is able to reveal the efficiency of the staff of financial management in generating funds from various sources and applying them efficiently for generating income without sacrificing the financial health of the business enterprise.
What is meant by fund flow?
The flow of funds refers to transfer of economic value from one asset to another, from one equity to another, from one asset to equity or from one equity to other assets or a combination of any of these. The term ‘flow’ indicates change, and hence, funds flow means change in fund or change in working capital.
The inflows of funds into working capital from the ‘sources of funds’ and include trading profits, issue of shares or/and debentures, borrowings, sale of fixed assets, repayment of borrowings, payment of tax, dividends and increase in working capital. Hence, the difference between the sources and application of funds shows the net change in the working capital during the year/period. It is only those items which affect the net working capital of the business enterprise that find a place in this statement.
Thus, a fund flow statement is a financial statement that reveals the methods by which the business activities have been financed and how the enterprise has used its funds between the opening and closing balance sheet dates. This is only a supplementary statement to ‘time honoured statements’, i.e., income statement and position statement (balance sheet). This statement describes the sources from which additional funds were generated and the areas or items to which these funds are used or applied. In a nutshell, it can be stated that the transactions which increase working capital are sources of funds, whereas the transactions which decrease working capital are the application of funds. From the viewpoint of users of information, this statement helps in understanding how efficiently the funds are procured and how effectively the funds are employed.
In general, the financial statement is Balance Sheet and profit and loss account, popularly known as income statement speak about the net effect of various transactions on the operational and financial position of the company.
Thus, the Balance sheet is a statement of Assets and liabilities of an organization between two periods of time. The Balance sheet assets side shows the development of resources of an undertaking. Whereas the liabilities side indicates its payments to outsiders.
The Profit and loss account shows the income and expenditure of an accounting year, generally a year. Thus, these two statements show the financial highlights of the company. A third statement is prepared o show changes in assets and liabilities from the end of one period of time to the end of another period of time. This statement is known as financial position or fund flow statement.
Fund flow statement is a statement which shows the movement of funds and report of the financial operations of the enterprise. It shows various means by which funds are obtained and where the same are used.
Different definitions of fund flow statement
The following are the definitions of fund flow statement:
1. Rober N. Anthony—The fund flow statement describes the sources from which additional funds were derived and the use to which these sources were put to use.
2. ICWA. It is a statement either prospective or retrospective, setting out the sources and application of the funds of the enterprise. The purpose of the statement is to indicate how funds are raised and how the same have been utilized.
3. Yorston , Smyth and Brown. “A fund flow statement is prepared in summary form to indicate change ( and trends) are prepared regularly. ”
4. Foulke. “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial conditions of a business enterprise between two dates. ”
It is a statement that indicates various means by which the funds have been obtained during a specific period and the ways to which these funds have been used during that period.
Fund flow statement is a statement of cash inflows and cash outflows. There are persons who feel that the funds are cash or working capital which represent the excess of current assets over current liabilities.
The term flow means movement and includes both inflows and outflows of resources. The fund flow and statement means a change in working capital. It is also known as the statement of sources and uses of funds.
Preparation of Fund Flow Statement
To prepare a fund flow statement, we write down the receipts from various assets and liabilities on the source side and the payment for assets and liabilities on the application side. To do this, we need a balance sheet at the beginning and at the end of the accounting period for which a fund flow statement is prepared. The two alternative ways of presenting funds flow statement are given as under.
T-Format of Presenting Funds Flow Statement
Note: Either (A) or (B) will appear in the T form.
The vertical format of Presenting Funds Flow Statement
Note: Either (A) or (B) will appear in the statement.
Objectives and uses of fund flow statement
The main objectives and uses of the fund flow statement are as below.
1. Knowledge of Financial Position. The fund flow statement indicates the addition in profits which is a boon to the shareholders. The division of profit can be planned.
2. Knowledge of addition in share capital. The fund flow statement can highlight the changes in share capital. What is the need of increase in share capital and where the same have been used?
3. Knowledge of Addition or Reduction in Share Premium. The fund flow statement clearly shows the fluctuation in share premium. It is increased when shares are issued at premium when preferential shares or debentures are reduced, the premium it will reduce both position can be seen from this statement.
4. Knowledge of profit or loss of operation. The fund flow statement can easily show whether the organization is earning profit or going into loss.
5. Knowledge of addition in long term Borrowings. This statement can show the additional amount borrowed by issuing debentures. Why is the issue of debentures desirable?
6. Knowledge of decrease in working capital. This statement shows the reduction in working capital. It will be when current assets are less than current liabilities. It speaks about more revenues to the organization.
7. Fund flow statement acts as a guide. It also works as guide to the management. The management can know various future problems of the company. The future needs of the company can be predicted. The management can manage to raise funds effectively and can avoid financial problems of the organization.
8. Helpful in sound dividend policy. There are cases where a company having sufficient profit yet it is advisable not to distribute dividend for lack of cash or liquid. The statement of fund is useful in forming sound dividend policy.
9. Helpful in long term borrowings. The various financial institutions before advancing long term loans ask for many years fund flow statement to know the worthiness of credit of the firm.
10. Useful information to the investors. Before investing funds some investors like to study its fund flow statement to know how the funds are raised, and how these are applied. Whether funds are adequate or not for the payment of interest and principal sum.
11. Other uses of fund now statement.
(i) It highlights whether or not sufficient funds are available for shareholders’ dividends.
(ii) The ability of the organization to thrust the organization for getting additional working capital.
(iii) Justification for long term borrowings.
(iv) Knowledge of sources of funds for the purchase of fixed assets.
Limitations of fund flow statement
The main limitations against fund flow statement are as under:
1. Fund flow statement is not a substitute for income statement or Balance Sheet. The only limiting factor about the fund flow statement is that it is not a substitute for income statement and Balance sheet. It provides some other additional information regarding changes in working capital.
2. It cannot state the reason why capital is raised or redeemed?
3. It is a by-product of financial statement. As a matter of fact, It is a re-arranged statement of financial data.
4. Based on historical data. Fund flow statement is historical in nature as it is the outcome of old financial data which are simply a window dressing.
5. Misleading. FFS is, sometimes misleading if an analyst does not know the reality and soundness of the figures from which they are computed.
Distinction between Balance Sheet and Fund Flow Satatement
|S.No.||Balance Sheet||Funds Flow Statement|
|1||It shows assets and liabilities of an enterprise at the end of the accounting period||It shows the changes in amount of assets and the liabilities of an enterprise during an accounting period.|
|2||It is prepared on a particular date at the end of the accounting period.||It is prepared for a particular accounting period.|
|3||It is prepared with the help of trial balance and additional information provided.||It is prepared to with the help of balance sheets of two years and additional information.|
|4||The purpose of balance sheet is to reveal financial position of a business on a particular date.||It is prepared to make a decision on investing activities.|
|5||It is static in nature as it shows assets and liabilities position on a particular date.||It is dynamic in nature as it reveals the change in the amount of assets and liabilities and the reasons for the same.|
|6||There is a statutory obligation to the business enterprises to prepare balance sheet.||Preparation of fund flow statement is optional. It facilitates decision making.|
|7||Profit and loss account is prepared before the preparation of a balance sheet.||Schedule of changes of working capital is prepared before preparing the fund flow statement.|
|8||It is not much use fo making decisions.||It is a tool used by management for making financial analysis and decisions.|
Distinction between schedule of changes in working capital and fund flow statement
|S.No.||Schedule of Changes in Working Capital||Funds Flow Statement|
|1||It is prepared with current assets and current liabilities only.||It is prepared with both current and non-current assets and liabilities.|
|2||It is prepared as a part of funds flow statement.||It is prepared not as a part of statement of changes in working capital.|
|3||It depicts changes in current assets and current liabilities individually.||It depicts the sources and application of funds of an enterprise as a whole.|
|4||It is prepared with the help of balance sheets of two consecutive accounting periods.||It is prepared with profit and loss account and balance sheet of an enterprise for two consecutive accounting periods.|
|5||It is prepared to know the movement of working capital.||It is prepared to know the overall operational efficiency of an enterprise.|
From the following balance sheets of Kites Ltd. prepare Statement of Changes in Working Capital and Fund Flow Statement.
Statement of Changes in Working Capital
Note: Net decrease in the working capital is entered in the increase column to balance the statement.
Fund Flow Statement
Statement Showing Sources and Application of Funds