What is/How to make a Funds Flow Statement? Sources/Inflow Applications/Outflow of Funds

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Balance Sheet- Information relating to Funds

 
 
The Fund area of the balance sheet provides us the information relating to Funds. By Funds we mean items (Assets and Liabilities) which have a life span of over a year.

• A Single Balance Sheet

A single balance sheet provides the information relating to a specific date, generally the last day of the accounting period. Where the balance sheet has been prepared by grouping information as in the case of "Balance Sheet in a form suitable for financial analysis", we would be able to derive the information relating to Liquid Assets, Current Assets, Current Liabilities/Provisions, Fixed Assets, Other Assets, Long Term Liabilities and Share Capital from the balance sheet itself.

This enables us to have an understanding of the funds within that Balance Sheet.

Balance Sheet of M/s ___ as on 31st March 2007
Liabilities Amount Amount Assets Amount Amount

EQUITY SHARE CAPITAL

PREFERENCE SHARE CAPITAL

RESERVES

a) P/L Appropriation a/c
b) Share Premium
e) General Reserve

LONG TERM LIABILITIES

(1) Loans from Banks
(2) Debentures

CURRENT LIABILITIES/PROVISIONS

(1) Sundry Creditors
(2) Bills Payable
(3) Bank Overdraft
(4) Outstanding Expenses
(7) Provision for Taxation
(8) Provision for Dividends

8,00,000
6,00,000
9,00,000

8,00,000
8,00,000

11,00,000
4,00,000
2,50,000
1,00,000
3,00,000
2,50,000

15,00,000

9,00,000

23,00,000

16,00,000

24,00,000

FIXED ASSETS
(1) Goodwill at Cost
(2) Land and Buildings
(3) Plant and Machinery
(4) Furniture and Fittings
(7) Investments

CURRENT ASSETS

A. LIQUID ASSETS
(1) Cash Balance
(2) Bills Receivable
(3) Sundry debtors
Less: Bad Debt Reserve

B. OTHER CURRENT ASSETS

(1) Stocks/Inventories
(2) Prepaid Expenses

ACCUMULATED LOSSES

1) Miscellaneous Expenses

8,00,000
13,00,000
14,00,000
6,00,000
4,00,000

78,000
8,25,000
12,25,000
(12,000)

12,00,000
2,84,000

45,00,000

36,00,000

6,00,000

  87,00,000   87,00,000

We may not be able to derive the extracted information such as Working Capital, Net Assets, Total Capital Employed, Share Holders Net Worth, Equity Share Holders Net Worth, Non-Assets (Asset side items not to be considered as fixed assets) straight away from the balance sheet.

If we need them, we may have to derive them using the figures available in the Balance Sheet.

• Balance Sheet with previous period figures

A balance sheet with the figures pertaining to the previous period enables us to have an understanding on the position of the business as on the date of preparation of the balance sheet as well as the date of the previous balance sheet.

Balance Sheet of M/s ___ as on 31st March 2007
LIABILITIES ASSETS
Amount
(Previous)
Particulars Amount Amount
(Current)
Amount
(Previous)
Particulars Amount Amount
(Current)
12,00,000

7,00,000

20,00,000

15,00,000

18,00,000

EQUITY SHARE CAPITAL

PREFERENCE SHARE CAPITAL

RESERVES

a) P/L Appropriation a/c
b) Share Premium
e) General Reserve

LONG TERM LIABILITIES

(1) Loans from Banks
(2) Debentures

CURRENT LIABILITIES/PROVISIONS

(1) Sundry Creditors
(2) Bills Payable
(3) Bank Overdraft
(4) Outstanding Expenses
(7) Provision for Taxation
(8) Provision for Dividends

8,00,000
6,00,000
9,00,000

8,00,000
8,00,000

11,00,000
4,00,000
2,50,000
1,00,000
3,00,000
2,50,000

15,00,000

9,00,000

23,00,000

16,00,000

24,00,000

37,00,000

28,00,000

7,00,000

FIXED ASSETS
(1) Goodwill at Cost
(2) Land and Buildings
(3) Plant and Machinery
(4) Furniture and Fittings
(7) Investments

CURRENT ASSETS

A. LIQUID ASSETS
(1) Cash Balance
(2) Bills Receivable
(3) Sundry debtors
Less: Bad Debt Reserve

B. OTHER CURRENT ASSETS

(1) Stocks/Inventories
(2) Prepaid Expenses

ACCUMULATED LOSSES

1) Miscellaneous Expenses

8,00,000
13,00,000
14,00,000
6,00,000
4,00,000

78,000
8,25,000
12,25,000
(12,000)

12,00,000
2,84,000

45,00,000

36,00,000

6,00,000

72,00,000   87,00,000 72,00,000   87,00,000

In addition to providing all the information pertaining to the current period, this would also enable us to compare the current period figures to the previous period figures and have a comparative evaluation with respect to all the information that we can derive from the Balance Sheet.

This also gives rise to a possibility to compare the extracted information such as Working Capital, Net Assets, Total Capital Employed, Share Holders Net Worth, Equity Share Holders Net Worth, Non-Assets (Asset side items not to be considered as fixed assets) pertaining to the two periods.

• Limitation - Absence of information relating to Flow

The data relating to two different balance sheets, enables us to assess the quantum (amount) of change over the two periods (as shown in the following statement).

Item Nature Amount
Previous Period
Amount
Current Period
Change Nature
Equity Share Capital
Preference Share Capital
Reserves
Long Term Liabilities
Fixed Assets
Accumulated Losses
Liability
Liability
Liability
Liability
Assets
Assets
12,00,000
7,00,000
20,00,000
15,00,000
37,00,000
7,00,000
15,00,000
9,00,000
23,00,000
16,00,000
45,00,000
6,00,000
3,00,000
2,00,000
3,00,000
1,00,000
8,00,000
1,00,000
Increase
Increase
Increase
Increase
Increase
Decrease

The above information on its own is useful to a limited extent. It helps in understanding what changes have occurred over the two balance sheets and to what quantum.

There is one another important information that can be derived from this information and that is relating to Flow of Funds.

What is Funds Flow?

 
 

• Flow

Meaning
  1. To move or run smoothly with unbroken continuity like in the case of a fluid.
  2. Something that resembles a flowing stream in moving continuously

Synonyms = Stream, Gush, Course

• Funds Flow

By Funds flow (in accounting and financial management) we mean the flow in relation to the various items that form part of the Fund Area in a Balance Sheet. The Funds Flow explains how the values changed from the initial figure to the final figure between the two balance sheet dates. Flow is between two points and the two points in a Funds Flow Analysis are the beginning and the ending dates as indicated by the two balance sheets.

The flow (changes) is interpreted in two directions/ways. Funds flowing in and flowing out of the organisation

» Inflow (Or) Source of Fund

Where the change in the value of a Fund Account (Asset or Liability) results in the availability of additional funds we say there is an inflow of fund and the change forms the source of fund. The source of fund is an explanation for how we are getting the funds.

Thus, the following would result in an inflow of funds

  • An Increase in the value of a Fund Liability
    • Equity Share Capital
    • Debentures
    • Preference Share Capital
    • Long Term Loans
    • Reserves
    • Accumulated Profits
  • A Decrease in the value of a Fund Asset
    • Fixed Assets
    • Accumulated Losses

» Outflow (Or) Application of Fund

Where the change in the value of a Fund Account (Asset or Liability) results in the reduction of available funds, we say there is an outflow of fund and the change forms the application of fund. The application of fund is an explanation for how we are utilising the funds.

Thus, the following would result in an inflow of funds

  • An Increase in the value of a Fund Asset
    • Fixed Assets
    • Accumulated Losses
  • A Decrease in the value of a Fund Liability
    • Equity Share Capital
    • Debentures
    • Preference Share Capital
    • Long Term Loans
    • Reserves
    • Accumulated Profits

The changes as revealed by the balance sheets of the two periods would be

Item Amount
Previous Period
Amount
Current Period
Change Nature Result
Equity Share Capital
Preference Share Capital
Reserves
Long Term Liabilities
Fixed Assets
Accumulated Losses
12,00,000
7,00,000
20,00,000
15,00,000
37,00,000
7,00,000
15,00,000
9,00,000
23,00,000
16,00,000
45,00,000
6,00,000
3,00,000
2,00,000
3,00,000
1,00,000
8,00,000
1,00,000
Liability - Increase
Liability - Increase
Liability - Increase
Liability - Increase
Asset - Increase
Asset - Decrease
Inflow
Inflow
Inflow
Inflow
Outflow
Inflow

• Decrease in Accumulated Losses - Inflow !!

Consider this explanation based on the logic that a decrease in fund assets would result in an inflow of funds. This results in an inflow of funds which are a part of Funds From Operations about which we will learn in the subsequent notes.

Funds Flow Statement

 
 
A statement presenting the information relating to the inflow and outflow of funds or the sources and applications of funds is what is called a Funds Flow Statement.

The Funds flow statement is presented in two different forms (a) As a Statement and (b) in 'T' form.

• As a Statement

Funds Flow Statement for the period from __ to __
Particulars Amount Amount
SOURCES (INFLOW) of FUNDS :
1) Equity Share Capital
2) Preference Share Capital
3) Reserves
4) Long Term Liabilities
5) Accumulated Losses

3,00,000
2,00,000
3,00,000
1,00,000
1,00,000





10,00,000
Less: APPLICATIONS (OUTFLOW) of FUNDS
1) Fixed Assets

8,00,000

8,00,000
Change in Working Capital + 2,00,000

Since the Change is positive, there is a Net increase in Working Capital

• In a T Form

Statement of Sources and Applications of Funds for the period from __ to __
Sources of Funds
(Inflow)
Amount Applications of Funds
(Outflow)
Amount
Equity Share Capital
Preference Share Capital
Reserves
Long Term Liabilities
Accumulated Losses
3,00,000
2,00,000
3,00,000
1,00,000
1,00,000
Fixed Assets 8,00,000
10,00,000 8,00,000
Change in Working Capital 2,00,000

Since the Sources/Inflows are more, there is a Net increase in Working Capital

This statement is identified using different titles as

  • Funds Flow Statement
  • Statement of Sources and Applications of Funds

Note

Sources/Inflow − Applications/Outflow = Change in Working Capital - How?. Please read the following page.
Author Credit : The Edifier ... Continued Page 5

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