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Funds Flow Analysis
Funds Flow Analysis
1
Overview
Definition
Concept of Funds Flow Analysis
Significance of Funds Flow
Uses of Funds Flow
Types of preparation of Funds Flow
statement
Accounts to be prepared
Difference b/w funds flow and cash flow
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Definition
3
Concept of Funds Flow
analysis
Indicates Changes in Financial Condition
Difference from balance sheet and income
statement
Supplementary to the above statements and
not a substitute
Summarizes events taking place between two
accounting periods
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Significance of funds flow
Helps shareholders, creditors and other to
evaluate the uses of funds by the enterprise
Assists in analysis of past trends and thus
aid future expansion decisions
Helps finance managers in identification of
problems, enabling detailed analysis and
immediate action
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Uses of funds Flow
Guides the management in deciding abut
the dividend and retention policies
Planning for long term purposes is enabled
It facilitates allocation of resources and
funds
It also indicates the sources from which the
company has obtained its funds
Factors resulting in change in working
capital may also be ascertained
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Types of preparation of
funds flow statement
Cash flow Approach
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Cash Flow Approach
According to this method, the word funds is
synonymous with cash
Through this association, the funds flow
statement turns into the receipts and payment
account
To prepare funds statement on cash basis, all
balance sheet changes taken place must be
classified into either changes that increase
cash or changes that decrease cash
All these changes must be classified from the
income statement and surplus statement.
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Total Resources Approach
Here, funds represents total assets or
resources of the enterprise.
All changes that result in increase or decrease
in assets and liabilities are shown
To prepare funds statement on total resource
basis, all balance sheet changes taken place
must be classified into either inflow or outflow
of funds
Inflow of funds consists earnings of the
company, contribution of additional funds,
increase in liabilities and decrease in assets.
Outflow of funds consists of net losses,
decrease in liabilities, decrease in capital
funds and increase in assets
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Working Capital Approach
In his method, funds is equivalent to the net
working capital (current assets minus current
liabilities).
The prime objective of this approach is to
show movement of funds through working
capital and shed light on the factors
contributing to such movements
Two statement are prepared in this concept
The first one is the schedule of working
capital in which changes in net working
capital are recorded
The second statement is the funds flow
statement in which the factors responsible for
these variances in working capital are shown
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Accounts to be prepared
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Statement of Sources and
Applications of Funds
(Funds Flow Statement)
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Dr.
No. S o u r c e s
(1) C a p i t Ia n l t r o d u c
(2) Is s u e o f S h a r
D e b e n t u r e s
(3) P r e m iu m R e c
S h a r e s a Dn ed b e 13
Adjusted Profit & Loss
Account
14
15
Schedule of Changes in
Working Capital
16
Schedule of Cha
Particulars
Sundry Debtors
Stock
Bills Receivable 17
Differences Between Funds
Flow and Cash Flow
18
Funds Flow Cash Flow
1. It is based on the overall 1. It is cash based which is just
concept of working capital one element of working capital
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