Funds Flow Analysis

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
It is a Statement summarizing the significant financial changes which have occurred between the beginning and the end of the companys accounting period.

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 Total resources approach Working capital approach

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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D r.
N o. S o u r c e s A m o u n No. t R s . A p p lic a t i o n s A m R

C r.
o u n t s .

(1 ) (1 ) (1 )

a p i t Ia n l t r o d u c e d

X X a n X dX

(1 ) (1 ) (1 )

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a p it aX lX

Is s u e o f S h a r e s D e b e n t u r e s

R e d e m p t io n o f XX S h a r e s a Dn ed b e n t u r e s P r e m i u m P a i d o n R e d e m p t i o Sn h o a f r e s a n d D e b e n t u r e s R e p a y m e n t T e r m o La n s P u r c h a s e C u r r e n t A o f XX

P r e m iu m R e c e i v e d Xo n X S h a r e s a Dn ed b e n t u r e s L o n g T e r m T a k e n S a le o f A s s e t s L o a n s X X X X X X

(1 ) (1 ) (1 ) (1 ) (1 ) (1 }

(1 ) (S ) (1 ) (1 ) (1 ) (1 )

L o n gXX X X XX X X XX

N- C o un r r e n t

o f- N o n s s e t s

N o n O p e r a t i n g P r o f i t s a In d o m e s n c D R R C iv id e n d e f u n d o f R

N o n O p e r a t in g L o s s e s a E n xd p e n s e s D iv id e n d e P a i d P a id W

e c e i v e dX X T a x i n O W X X o r k X g in X

In c o m

T a x in

e d u c t i o n a p it a l f r o m

In c r e a s e C a p it a l

o r k i n g XX f r o m XX XX

(1 1 )F u n d s

p e r a t X o n s( 1 1 ) L o s s o f F u n d s iX O p e r a t i o n s X X

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Adjusted Profit & Loss Account

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Schedule of Changes in Working Capital

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Schedule of Changes in Working Capital for year ended XX/XX/XX Balance as on Increase in Reduction in Particulars Working Capital Working Capital
1 / 11 1 11 / 1 1 3 / 33 3 33 / 3 3

Rs. Sundry Debtors Stock Bills Receivable Cash on Hand Cash at Bank Other Current Assets Current Assets Sundry Creditors Bills Payable Liability for Expenses PDD Other Current Liabilities Current Liabilities Working Capital Increase/Decrease in W orking Capital XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX

Rs. XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX

Rs.

Rs.

XX

XX
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Differences Between Funds Flow and Cash Flow

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Funds Flow 1. It is based on the overall concept of working capital 2. Does not contain any opening or closing balances 3. Indicates sources and uses of funds 4. Not mandatory in India 5. No set format to follow in preparation 6. Useful in planning intermediate and long term financing purposes

Cash Flow 1. It is cash based which is just one element of working capital 2. Contains opening & closing balance of cash 3. Indicates only cash inflows and outflows 4. Mandatory in India 5. To be presented as per AS-3 statutory format given by ICAI 6. Used by management for short term financial analysis and cash planning purposes. 19

THE END

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