Sri Sharada Institute Of Indian Management -Research

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FINANCIAL AND MANAGERIAL ACCOUNTING

PROJECT REPORT
ON

FUND FLOW STATEMENT

Submitted To: -

Prof. Venkatraman
(Financial Accounting)
SRI SIIM

Submitted By:-

Anmol Raina
Roll no-109
Amit Singh
Roll no.-105
Anurag Choudhary
Roll no.- 110

Declaration
We hereby declare that the following
project report of
Financial Accounting is an authentic work done by us.
This is to declare that all work indulged in the completion of
this work such as research, analysis of activities of an
organization is a profound and honest work of ours.

Place: New Delhi

Anmol Raina
Amit Singh
Anurag Choudhary
(PGDM 2013-2015)

ACKNOWLEDGEMENT

We would like to express my hearty gratitude to my faculty

guide, Prof Venkatraman for giving us the opportunity to
prepare a project report on Fund Flow Statement and for his
valuable guidance and sincere cooperation, which helped us in
completing this project.

Contents
Funds Flow Statement: Meaning & How to Prepare...................................................3
Difference between Funds Flow Statement & Cash Flow Statement...........................3
Benefits of Funds Flow Statement............................................................................4
Preparation of Fund Flow Statement........................................................................4
Step I: Prepare Statement of Changes in Working Capital......................4
Step II: Prepare Funds from Operations.....................................................5
Step III: Preparation of Funds Flow Statement..........................................6
Sources of Funds.................................................................................................... 6
Application of Funds............................................................................................... 7

Funds Flow Statement: Meaning & How to Prepare

Funds Flow Statement is a statement prepared to analyse the reasons for changes in the
Financial Position of a Company between 2 Balance Sheets. It shows the inflow and outflow
of funds i.e. Sources and Applications of funds for a particular period. In other words, a
Funds Flow Statement is prepared to explain the changes in the Working Capital Position of a
Company. There are 2 types of Inflows of Funds:1. Long Term Funds raised by Issue of Shares, Debentures or Sale of Fixed Assets
2. Funds generated from Operations
If the Long Term Fund requirements of a company are met just out of the Long Term Sources
of Funds, then the whole fund generated from operations will be represented by increase in
Working Capital. However, if the Funds generated from Operations are not sufficient to
bridge a gap of Long Term Fund Requirements, then there will be a decline in Working
Capital.

Difference between Funds Flow Statement & Cash Flow Statement

Both Funds flow statement and Cash Flow Statement are used in analysis of part transactions
of a business firm. However, there are some differences between the two as given below:1. Funds Flow Statement is based on the Accrual System of Accounting. However, in
case of Cash Flow Statement only the transactions effecting Cash or Cash
equivalents are taken into consideration
2. Funds Flow Statement analyses the Sources and Application of Funds of Long Term
nature and the Net Increase or Decrease in Long Term Funds will be reflected on the
Working Capital of the firm. The Cash Flow Statement only considers the Increase or
Decrease in Current Assets or Current Liabilities in calculating the Cash Flow of
Funds from Operations
3. Funds Flow Statement is more useful for Long Term Financial Planning. Cash Flow
Analysis is more useful for identifying and correcting the liquidity problems of the
firm.

4. Funds Flow Statement tallies the funds generated from various sources with various
uses to which they are put. Cash Flow Statement starts with the Opening Balance of
Cash and reaches to the Closing Balance of Cash.

Benefits of Funds Flow Statement

Funds Flow Statement is useful for Long Term Analysis. It is a very useful tool in the hands
of the management for judging the financial and operating performance of the Company. The
Balance Sheet and the Profit and Loss A/c (Income Statement) fail to provide the information
which is provided by the Funds Flow Statement i.e. Changes in Financial Position of an
enterprise. Such an analysis is of great help to the management, shareholders, creditors etc
1. The Funds Flow Statement helps in answering the following questions:

Where have the profits gone?

Why is there an imbalance existing between liquidity position and profitability

position of an enterprise?

Why is the concern financially solid in spite of losses?

2. The Funds Flow Statement analysis helps the management to test whether the working
capital has been effectively used or not and the working capital level is adequate or
inadequate for the requirements of the business. The Working Capital Position helps the
management in taking policy decisions regarding payment of dividend etc.
3. The Funds Flow Statement Analysis helps the investors to decide whether the company has
managed the funds properly. It also indicates the Credit Worthiness of a company which helps
the lenders to decide whether to lend money to the company or not. It helps the management
to take policy decisions and to decide about the financing policies and Capital Expenditure
for the future.
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Preparation of Fund Flow Statement

Step I: Prepare Statement of Changes in Working Capital

For preparing the Funds Flow Statement, the first step is to prepare the Statement of
Changes in Working Capital. There may be several reasons for changes in the Working
Capital Position of a Company, some of which have been discussed below:1. Purchase of Fixed Assets or Long Term Investments without raising Long Term Funds
2. Payments of Dividends in excess of the Profits earned
3. Extension of Credit to the Customers
4. Repayment of a Long Term Liability or Redemption of Preference Shares without
raising Long Term Resources
Eg: From the Balance Sheet of X Ltd for the year ending 2010 and 2011, prepare Statement
of Changes in Working Capital
Particulars

2010

2011

Change in Working Capital

Inventory

1524

1491

-33

Sundry Debtors

126

183

+57

Cash and Bank

134

166

+32

Other Current Assets

+1

Loans and Advances

1176

1474

+298

2968

3323

+355

Current Assets

(Less) Current Liabilities

Liabilities

1776

1483

-293

Provision for Tax

622

745

+123

Proposed Dividend

65

207

+142

2463

2435

-28

505

888

383

Working Capital

Step II: Prepare Funds from Operations

The next Step is to prepare the Funds generated only from the Operating Activities of the
Business and not from the Investing/Financing Activities of the business. The Funds from
Operations shall be prepared as follows:Particulars

Amount

Net Income

Xxx

ADD
1. Depreciation on Fixed Assets

Xxx

2. Amortization of Intangible Assets

Xxx

3. Amortisation of Loss on Sale of Investments

Xxx

4. Amortisation of Loss on sale of Fixed Assets

Xxx

5. Losses from Other Non-Operating Incomes

Xxx

6. Tax Provision (Created out of Current Profits)

Xxx

7. Proposed Dividend

Xxx

8. Transfer to Reserve

Xxx

(LESS)
1. Deferred credit

Xxx

2. Profit on Sale of Investments

Xxx

3. Profit on Sale of Fixed Assets

Xxx

4. Any written back Reserve & Provision

Xxx

Step III: Preparation of Funds Flow Statement

While preparing the Funds Flow Statement, the Sources and Uses of Funds are to be
disclosed clearly so as to highlight the Sources from where the Funds have been generated
the Uses to which these Funds have been applied. This Statement is also sometimes referred
to as the Sources and Applications of Funds Statement or Statement of Changes in Financial
Position.

Sources of Funds
Items to be shown under the head Sources of Funds are as follows:1. Issue of Shares and Debentures for Cash: The total amount received from the Issue
of Shares or Debentures is to shown under this head. But, the Issue of bonus Shares or
Conversion of Debentures into Equity Shares or Shares issued to vendors shall not be
shown here as there is no inflow of Cash
2. Long Term Loans: The Amount received on raising Long Term Loans is shown under
this head. Short Term Loans are not to be shown here as their treatment has already
been done while preparing the Statement of Changes in Working Capital.

3. Sale of Investments and other Fixed Assets: The Total Amount received on the sale of
Investments and other Fixed Assets is to be shown under this head.
4. Funds from Operations: The Funds generated from Operations as computed in Step II
are also required to be shown here.
5. Decrease in Working Capital: This would be the Balancing Figure of the Statement
and will come from change in Working Capital Statement

Application of Funds
Items to be shown under Application of Funds are as follows:1. Purchase of Fixed Assets and Investments: The Cash Payment made for purchase of
Fixed Assets and Investments is an application of Funds. But if the purchase if made
by issue of shares or debentures, such a transaction will not constitute application of
funds. Similarly, if the purchases are on credit, these will not constitute fund
applications.
2. Redemption of Debentures, Preference Shares and Repayment of Loan:- Payment
made including Premium (less: Discount) is to be taken as fund application
3. Payment of Dividend & Tax: Payment of Dividend and Tax are to be taken as
applications of fund if the provisions are excluded from Current Liabilities and
Current Provisions are added back to profit to determine the Funds from Operations
4. Increase in Working Capital: This would be the Balancing Figure of the Statement and
will come from change in Working Capital Statement
As explained above, the Funds Flow Statement summarises for a particular period the
resources made available to finance the activities of an enterprise and the uses to which such
resources have been put.

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REFERENCES

Books:Financial Accounting - S K Singh

Cost and Management Accounting S P Gupta

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www.encyclopedia.com

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