M G University first semester MBA question papers 2013

 

 

 

 

 

 

FUND FLOW STATEMENT

MODULE III

FUND FLOW STATEMENT

Balance Sheet does not show the movement of funds. In business concerns, funds flow from different sources and similarly funds are invested in various sources of investment. It is a continuous process. The study and control of this funds flow process is the main objective of financial management to assess the soundness and the solvency of a firm. The traditional statements- Balance Sheet and Profit and Loss Account of a business tell little about its flow of funds, i.e. financing and investing activities over the related period. Hence, the need of another statement to account for periodical increase or decrease of funds of an enterprise. This statement is called Fund Flow Statement.

Meaning of Fund

In a border sense, the term “fund” refers to money value in whatever form it may exist. Here “funds” means all financial resources in the form of men, materials, money, machinery etc. But in a popular sense the term “funds”, mean working capital i.e. the excess of current assets over current liabilities. When the funds move inwards or outwards they cause a flow or rotation of funds. The word ‘fund’ here means net working capital.

Meaning of Flow of Fund

The flow of funds refers to equity or vice versa or a combination of any these. Fund flow statements essentially study the movements to and from Working Capital Area. The flow of funds occurs when a transaction changes on the hand a non current account, and on the other a current account and vice versa. When a change in a non-current account, for examples, fixed assets, long-term liabilities, reserves and surplus, fictitious assets etc. is followed by a change in another non-current account it does not amount to flow of funds. In other words, it can be said that only the following transactions may cause the flow of fund.

Funds Flow Statement

The Fund Flow Statement is a financial statement which reveals the methods by which the business has been financed and how it has used its funds between the opening and closing balance sheet date. Thus, a fund flow statement is a report on movement of funds explaining wherefrom working capital originates and where into the same goes during an accounting period.

Preparation of Fund Flow Statement

Generally speaking, the Fund Flow analysis requires the preparation of two statements.  

(a)    Statement of Changes in Working Capital and  (b) Fund Flow Statement

(a) Statement of Changes in Working Capital

A Statement of working capital is prepared to depict the changes in working cagM tal. Working capital represents the excess of Current Assets over Current Liabilities. Since, several items i.e. all current assets and current liabilities are the component of working capital, it is necessary to measure the increase or decrease therein, by preparing a Statement or Schedule of changes in Working Capital. This Statement is prepared with current assets and current liabilities as appearing in the Balance Sheets under
consideration. A form of the Statement is given below

STATEMENT OR SCHEDULE OF CHANGES IN WORKING CAPITAL

Particulars	Amount of Previous year	Amount of current year	Effect on	Working Capital
			Increase		Decrease
			(Dr.)		(Cr.)
	Rs.	Rs.	Rs.		Rs.
Current Assets :
Cash in hand
Cash at Bank
Bills Receivable
Sundry Debtors
Temporary Investments
Stocks/Inventories
Prepaid Expenses
Accrued Incomes etc.
TOTAL CURRENT
ASSETS or (A)

Current Liabilities : Bills Payable Sundry Creditors Outstanding Expenses Bank Overdraft Short-term Advances Dividends Payable etc. TOTAL CURRENT LIABILITIES Or  (B) working capital (A-B) NET INCREASE/ DECREASE IN WO RKING CAPITAL
TOTAL

(b) Fund flow statement

This is second but most important part of Fund Flow Statement. After preparing the Statement of working Capital, the Statement of Sources and Application of Fund is prepared. This statement is prepared with the help of remaining items in the Balance Sheet of the two periods –all non-current assets and non-current liabilities and other information given in the problem. That is, it is prepared on the basis of the changes in Fixed Assets, Long-tern Liabilities and Share Capital ascertained on the basis of values of these items shown in the Balance Sheets. Of course, additional information, if given, must also be considered.

FUND FOW STATEMENT

For the year ended…..

SOURCES OF FUNDS  (inflow)	Rs.	APPLICATION OF FUNDS (Outflow)	Rs.
Trading Profit Issue of Share Capital Issue of Debentures Long term Borrowings Sale of Fixed Assets Non-Trading Incomes Decrease in Working Capital Total	- - - - - - - ------------------------	Trading Loss Redemption of Redeemable Preference Shares Redemption of Debentures Repayment of Other Long Term Loans Purchase of Fixed Assets Non-Trading Expenditure Increase in Working Capital Total	- - - - - - - ----------------------

Calculation of Funds from Operation - STATEMENT FORM :

CALCULATION OF FUNDS FROM OPERATION

Net Profit for the current year ADD: Non-Fund and Non-Trading Charges already debited to P & L A/c : Depreciation and Depletion Amortization of Fictitious and intangible assets, i.e. Preliminary Expenses written off Discount on Shares written Premium on Redemption written off Goodwill or Patents written off Appropriation of Retained Earnings, i.e.                                Transfer to General Reserve,                                Sinking Fund etc.                                Proposed Dividend                                Loss on sale of fixed asset written off                                              Total: Less : Non-Fund Items and Non-Trading Incomes            Already credited to P & L A/c :                         Dividend Received/Receivable                         Excess Provision written back                         Profit on sale of Fixed Asset                         Profit on reevaluation of Fixed Assets   TRADING PROFIT OR FUND FROM OPERATIONS

Rs. - - - - - - - - - - - - -

Rs. - -   - - -

Importance of Fund Flow Statement (Objectives)

Funds Flow Statement is a useful tool in the financial manager’s analytical kit. The basic purpose of this statement is to indicate where funds came from and where it was used during the certain period. Following are the use of this which show its importance (Advantages):

1.      Fund Flow Statement determines the financial consequences of business operations. It shows how the funds were obtained and used in the past. Financial manager can take corrective actions.

2.      The management can formulate its financial policies-dividend, reserve etc. on the basis of the statement.

3.      It serves as a control device, when comparing with budgeted figures. The financial manager can take remedial steps, if there is any deviation.

4.      It points out the sound and weak financial position of the enterprise.

5.      It points out the causes for changes in working capital.

6.      It enables the Bankers, Creditors or financial institutions in assessing the degree of risk involved in granting credit to the business.

7.      The management can rearrange the firm’s financing more effectively on the basis of the Statement.

8.      Various uses of funds can be know and after comparing them with the uses of previous years, improvement or downfall in the firm can be assessed.

9.      The statement compared with the budget concerned will show to what extent the resources of the firm were used according to plan and what extent the utilization was unplanned.

10.  It tells whether sources of funds are increasing or decreasing or constant.

Limitations of Fund Flow Statement

1.      The Statement lacks originality because it is only rearrangement of data appearing in accounts books.

2.      It indicates only the past position and not future.

3.      It indicates Fund Flow in a summary form and it does not show various changes which take place continuously.

4.      When both the aspects of a transaction are current, they are not considered.

5.      When both the aspects of a transaction are non-current, even then they are not included in this statement.

6.      It is not an ideal tool for financial analysis.

7.      It is not an original statement but simply a rearrangement of data in the finance statements.