A PROJECT REPORT

For the Subject :

Advanced Accounting

On the Topic :

FUND FLOW STATEMENT

C.R.T-1

Made by:

Nipath Belani

Roll No:

6

Specialisation:

Finance

FUND FLOW STATEMENT

A fund flow statement is a summary of a firm's inflow and outflow of funds. It tells us from where funds have come and where funds have gone. Fund flows statement can indicate whether sourcing of funds and their use match in sense and also reveal the prudence or otherwise of a firm's financing and investment decisions The financial statement of the business indicate assets, liabilities and capital on a  particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. If the management wants to find out as to where the cash is being utilized, financial statement cannot help. Therefore, a statement is prepared of the sources and applications of funds from where Working Capital comes and  where it is utilized. This is called Fund Flow statement. Funds Flow Statement is an analytical tool in the hands of financial manager. The basic purpose of this statement is to indicate on historical basis the changes in the working capital i.e., where funds came from and where they are used during a

given period. The funds flow statement or statement of changes in financial position is a statement of flows, it measures the changes that have taken place during two balance sheet dates.

According to R.N. Anthony, “Fund Flow is a statement prepared to indicate the increase in cash resources and the utilization of such resources of a business during the accounting period.”

Fund + Flow = Fund Flow

MEANING OF FUND

The term fund has a variety of meaning such as cash fund, capital fund and working capital fund.

1. Cash fund –In a narrow sense, fund means only cash. ‘Cash flow statement’ portrays net effect of the various business transactions on cash into account receipts & disbursement of cash. This concept of preparing fund flow statement is not accepted, as there are many such transactions which do not affect cash but represent the flow of fund .for example: purchase of furniture on credit does not affect cash but there is flow of fund.

2. Capital fund –Here fund means all financial resources used in the business, whether in the form of men, money, material, machine & others.

3. Net working capital -Net working capital means difference between current asset and current liabilities .funds generally refers to cash or cash equivalent or to working capital.

MEANING OF FLOW

1. The term ‘flow’ refers to changes or transfer and therefore the ‘flow of funds’ means transfer of economic values from one asset to another, from one liability to another, from one asset to liabilities or vice-versa or a combination of these. So flow of fund refers to increase or decrease in net working capital.

2. The increase or decrease in net working capital will take place only when one account, out of two accounts to be affected in a transaction ,is a current account i.e. current asset or current liabilities and the other account is non current account i.e. fixed asset or long term liability or capital.

3. When a change in non current account is followed by a change in another non current account, it does not amount to flow of fund. It is because, in such case, neither the working capital increase nor decrease.

In the above figure the dotted line displays there will be no flow of fund & the dark line displays the flow of fund.

Benefits of Fund flow Statement

The utility of this statement can be measured on the basis of its contributions to the financial management. It generally serves the following purposes:-

(1) Analysis of Financial Position:The basic purpose of preparing the statement is to have a rich into the financial operations of the

concern. It analyses how the funds were obtained and used in the past. In this sens, it is a valuable tool for the finance manager for analyzing the past and future plans of the firm and their impact on the liquidity. He can deduce the reasons for the imbalances in uses of funds in the past an take necessary corrective actions. In analyzing the financial position of the firm, the Funds Flow Statement answers to such questions as-

1. Why were the net current assets of the firm down, though the net income was up or vice versa?2. How was it possible to distribute dividends in absence of or in excess of current income for the period ? 3. How was the sale proceeds of plant and machinery used?4. How was the sale proceeds of plant and machinery used?5. How were the debts retired?6. What became to the proceeds of share issue or debenture issue?7. How was the increase in working capital financed?8. Where did the profits go?Though it is not an easy job to find the definite answerers to such questions because funds

derived from a particular source re rarely used for a particular purpose. However, certain useful assumptions can often be made and reasonable conclusions are usually not difficult to arrive at.

(2) Evaluation of the Firm's Financing: One important use of the statement is that it evaluates the firm' financing capacity. The analysis of sources of funds reveals how the firm's financed its development projects in the past i.e., from internal sources or from external sources. It also reveals the rate of growth of the firm.

(3) An Instrument for Allocation of Resources: In modern large scale business, available funds are always short for expansion programmes and there is always a problem of allocation of resources. It is, therefore, a need of evolving an order of priorities for putting through their expansion programmes which are phased accordingly, and funds have to be arranged as different phases of programmes get into their stride. The amount of funds to be available for these projects shall be estimated by the finance with the help of Funds Flow Statement. This prevents the business from becoming a helpless victim of unplanned action. 

(4) A Tool of Communication to Outside World: Funds Flow Statement helps in gathering the financial states of Business.

It gives an insight into the evolution of the present financial position and gives answer to the problem 'where have our resources been moving'? In the present world of credit financing, it provides a useful information to bankers, creditors, financial, it provides a useful informations and government etc. regarding amount of loan required, its proposes, the terms of repayment an sources for repayment of loan etc. the financial manager gains a confidence born out of a study of Funds Flow Statement. In fact, it carries information regarding firm's financial policies to the outside world. 

(5) Future Guide: An analysis of Funds Flow Statements of several years reveals certain valuable information for the financial manager for planning the future financial requirements of the firm and their nature too i.e. Short term, long-term or mid term. The management can formulate its financial policies based on information gathered from the analysis of such statements. Financial manager can rearrange

the firm's financing more effectively on the basis of such information along with the expected changes in trade p payables and the various accruals. In this way, it guides the management in arranging its financing more effectively.

END OF THE YEAR WORKING CAPITAL CHANGES

CURRENT YEAR (Rs.)

PREVIOUS YEAR (Rs.)

INCREASE (Rs.)

DECREASE(Rs.)

CURRENT ASSETS

------ ------ ----- ------- ------

------ ------ ----- ------- ------

------ ------ ------ ------- -----

TOTAL(A)

CURRENT LIABILITIES

------ ----- ----- ----- ------

------ ----- ------ ----- ------

------ ----- ----- ----- ------

TOTAL(B)

WORKING CAPITAL(A-B)

INCREASE/DECREASE IN WORKING CAPITAL

TOTAL ------- -------

Format of fund flow statement