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 funds.
#2 – Funds from Operations: If we earn a profit, then it will be a source of funds, and if there is a loss, then it will be an application of funds.
#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.
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- Source of Fund: It is basically used to know where funds have 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 to 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. Then calculate net working capital (After deduction of Current Liabilities from Current Assets) of both the year. After that, compare the 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 make some adjustments in profit/loss.
- We prepare Profit & loss accounts on an accrual basis. In this 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 the current year’s 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.
Conclusion
- With the help of a fund flow statement format, we can prepare the fund flow statement. The company prepares this statement to analyze the changes in working capital between two balance sheets. It is based on historical data. It helps the management in making future decisions, but on the basis of only the fund flow statement, management can’t take the full decision because it considers only fund based items.
- 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.
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