What is Fund Flow Statement Format?
The fund flow statement is a summary of the source of funds and the application of funds that compares the balance sheets of two different dates and analyse from where company has earned money and where the company has spent money. With the help of fund flow statement format, it becomes a condensed version to analyze the sources and application of fund.
Three Parts of Fund Flow Statement Format
#1 – Statement of Changes in Working Capital: Working capital means the difference between the current assets and current liabilities, If there is an increase in working capital then it will be an application of funds and if there is a decrease in working capital then it will be a source of fund.
#2 – Funds from Operations: If we earn profit then it will be a source of fund and if there is a loss then it will be an application of fund.
#3 – Fund Flow Statement: After preparing the above two requirements we will prepare the fund flow statement which will comprise all outflow and inflow of funds.
- Source of Fund: It is basically used to know, where the fund has been arranged to invest in the business. The Source of the fund can be in the form of the issue of shares, debentures, profit from operations, dividend received on investments, and proceeds from borrowings, etc.
- Application of Fund: It is basically used to know, where the arranged fund has been invested. Application of funds can be in the form of the purchase of fixed assets, an increase in working capital, purchase of investments, the dividend paid, repayment of borrowings, interest paid, etc.
How to Prepare a Fund Flow Statement? (Examples)
#1 – Statement of Change in Working Capital
Now we will see the format of “statement of change in working capital”.
- In this format there are two parts first is current assets and current liabilities. We will take current assets and current liabilities from the balance sheet as on 31st March’19 and 31st March’18 and calculate net working capital (After deduction of Current Liabilities from Current Assets) of both the year thereafter compare net working capital of both the year and find out changes in working capital.
- In the below example net working capital as on 31st Mar’19 and 31st Mar’18 is $ 12000 and $ 5500 respectively therefore for the current year i.e. Mar’19 increase in working capital is $ 6,500.
#2 – Prepare a Statement of Fund From Operations
After preparing the statement of change in working capital, now we need to prepare a statement of fund from operations:
- In this statement we will take the profit/loss from the profit & loss a/c then we need to do some adjustment in profit/loss.
- Profit & loss accounts are prepared on an accrual basis in which non-cash expenses like depreciation, bad debt, any expenses are written off are also considered for getting the actual profit or loss.
- We will add back or less, as the case may be, those non- cash expenses and we will get the cash profit/loss.
- In the below format we have assumed current year profit is $ 20000 then we have identified non-cash items which have been deducted in profit & loss a/c which is $ 3230 which is now add back in current year profit and non-operating item which has been added in profit & loss account of $ 120 has been reduced from current year profit.
- After adding and deducting non-cash items or non-operating items, we will reach the position in which fund flow from operations can be derived i.e. $ 23110.
#3 – Prepare the Fund Flow Statement
Last, we will prepare the fund flow statement
- In this statement, we will find out the sources of fund and their applications.
- In the above example, we have seen that increases in working capital are $ 6,500 (considered as Applications of the fund) and the fund from an operation is $ 23,110 (considered as Source of Fund).
- Suppose we have issued share capital in the market amounting to $ 5000 (considered as Source of Fund). Arranged Source of the fund is used for enhancement in working capital and purchase of fixed assets.
- With the help of fund flow statement format, we can prepare fund flow statement which is basically a statement which is prepared to analyze the changes in working capital between two balance sheet, It is based on historical data. It helps to the management for making future decisions, but on the basis of only the fund flow statement, management can’t take own full decision because it considers only fund based item.
- Last, management should prepare this statement because it considers all sources i.e. from where the funds are coming and all applications i.e. where the funds are going and this summarised statement helps management to move further.
This has been a guide to What is Fund Flow Statement Format & its Definition. Here we discuss the three-parts of the fund flow statement and how to prepare this. You can learn more about from the following articles –