What is Fund Flow Statement Format?
The fund flow statement summarizes the source of funds and the application of funds that compares the balance sheets of two different dates and analyzes from where the company has earned money and where the company has spent money.
Three Parts of Fund Flow Statement Format
- Statement of Changes in Working Capital: Working capital means the difference between the current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more and current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more. 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, it will be a source of funds.
- Funds from Operations: If the company earns a profit, it will be a source of funds, and if there is a loss, it will be an application of funds.
- Fund Flow Statement: After ensuring the above two requirements, the firm will prepare the fund flow statement, which will comprise all outflow and inflow of funds.
- Source of Fund: It is used to know where funds have been arranged for investment. The source of the fund can be in the form of the issue of sharesIssue Of SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more, debentures, profit from operations, dividends received on investments, and proceeds from borrowings, etc.
- Application of Fund: It is used to know where the arranged funds have been invested. Application of funds can be in the purchase of fixed assets, increased working capital, purchase of investments, the dividend paid, repayment of borrowings, interest paid, etc.
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Source: Fund Flow Statement Format (wallstreetmojo.com)
How to Prepare a Fund Flow Statement? (Examples)
#1 – Statement of Change in Working Capital
Now we will see the format of the “statement of change in working capital.”
- In this format, there are two parts – current assets and current liabilities. We will take existing assets and current liabilities from the balance sheet as on March 31, 2019, and March 31, 2018. Then calculate net working capitalCalculate Net Working CapitalThe Net Working Capital (NWC) is the difference between the total current assets and total current liabilities. A positive net working capital indicates that a company has a large number of assets, while a negative one indicates that the company has a large number of liabilities.read more (after deduction of current liabilities from current assets) of both years. After that, compare the networking capital of both years and find out changes in working capital.
- In the below example, net working capital as on March 31, 2019, and March 31, 2018, is $12,000 and $5,500 respectively. Therefore for the current year, i.e., March 2019, 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 report of funds from operations:
- In this statement, we will take the profit/loss from the profit & loss a/c. But then, we need to adjust profit/loss.
- We prepare profit & loss accounts on an accrual basis. However, in this non-cash expensesNon-cash ExpensesNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation.read more like depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more, bad debtBad DebtBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.read more, and any expenses written offWritten OffWrite off is the reduction in the value of the assets that were present in the books of accounts of the company on a particular period of time and are recorded as the accounting expense against the payment not received or the losses on the assets.read more 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 $20,000. Then we have identified non-cash items which have been deducted in profit & loss a/c, which is $3,230, which is now added back in the current year profit. As a result, a non-operating item added in the profit & loss account of $120 has been reduced from the current profit.
- After adding and deducting non-cash or non-operating items, we will reach the position in which fund flow from operations can be derived, i.e., $23,110.
#3 – Prepare the Fund Flow Statement
Last, we will prepare the fund flow statement
- This statement will find out the sources and applications of funds.
- In the above example, we have seen that increases in working capital is $6,500 (considered as applications of funds), and the fund from an operation is $23,110 (considered as source of funds).
- Suppose we have issued share capitalIssued Share CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more in the market amounting to $5,000 (considered as source of funds). Arranged source of the funds is used to enhance working capital and purchase fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more.
| Statement of Sources and Application of Funds | Current Year |
|---|---|
| Sources of Fund | |
| Fund Generated from Operating Activities | 23,110.00 |
| Proceeds from issue of Share Capital | 5,000.00 |
| Total Source of Funds | 28,110.00 |
| Application of Fund | |
| Purchase of Fixed Assets | 21,610.00 |
| Increase in Working Capital | 6,500.00 |
| Total Application of Funds | 28,110.00 |
Conclusion
- With the help of a fund flow statement format, we can prepare the fund flow statementFund Flow StatementFund flow statement is a statement that compares the two balance sheets by analyzing the sources of funds (debt and equity capital) and the application of funds (assets) and its reasons for any differences. It helps the company see through where their money has been spent and from where they have received the money (long-term funds raised by issues of shares, debentures, and sale of non-current assets).read more. 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 make future decisions, but management cannot take the entire decision based on only the fund flow statement 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. This summarized statement helps management to move further.
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