Elements of Funds Flow Statement

We have already seen that there are numerous movements in funds in an accounting year. It is important to understand these movements since they affect the financial position of a company. This is done by preparing a statement known as Funds Flow Statement, also known as Sources and Application of Funds Statement or the Statement of Changes in Financial Position. It shows the various sources and uses of funds during a year. Some of those sources and application are listed below:

Sources: Chiefly, these, in the case of a company, are the following:

(i) Issue of shares and debentures for cash;

(ii) Long-term loans;

(iii) Sale of investments and fixed assets;

(iv) Fund from operations; and (v) Decrease in working capital.

Applications: Funds expended are chiefly for:

(i) Purchase of fixed assets and investments;

(ii) Redemption of debentures and preference shares and repayment of loans;

(iii) Payment of dividend;

(iv) Payment of tax; and (v) Increase in working capital.

If payment of dividend and tax are shown as fund applications, tax provision and proposed dividend should not be taken to compute the working capital.

There is no prescribed form in which the statement should be prepared. However, it is customary to draw it in a manner as would disclose the main sources of funds and their uses.

2.9.3.1 Sources of Fund

(i) Issue of shares and debentures for cash: If shares or debentures are issued at par, the paid-up value constitutes the source of fund. If shares/debentures are issued at a premium, such premium is to be added and if shares/debentures are issued at a discount, such discount is to be subtracted to determine the source of fund.

But issue of bonus shares, conversion of debentures into equity shares or shares issued to the vendors in case of business purchases do not constitute sources of fund.

(ii) Long-term Loans: Amount of long-term loan raised constitutes source of fund. But if a long-term loan is just renewed for an old loan, then the money received by such renewal becomes the source.

(iii) Sale of investments and other fixed assets: Sale proceeds constitute a source of fund.

Illustration 5

An old machine costing Rs. 8 Lacs, W.D.V. Rs. 2 Lacs was sold for Rs.1.75 Lacs. Here source of fund was only Rs. 1.75 lakhs.

Financial Analysis and Planning

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(iv) Fund from Operations: Fund generated from operations is calculated as below:

Net Income Additions

1. Depreciation of fixed assets

2. Amortization of intangible and deferred charges (i.e. amortization of goodwill, trade marks, patent rights, copyright, discount on issue of shares and debentures, on redemption of preference shares and debentures, preliminary expenses, etc.) 3. Amortization of loss on sale of investments

4. Amortization of loss on sale of fixed assets 5. Losses from other non-operating items 6. Tax provision (created out of current profit) 7. Proposed dividend

8. Transfer to reserve Subtraction

1. Deferred credit (other than the portion already charged to Profit and Loss A/c) 2. Profit on sale of investment

3. Profit on sale of fixed assets 4. Any subsidy credited to P & L A/c.

5. Any written back reserve and provision.

Here, Fund from Operations, is calculated after adding back tax provision and proposed dividend. Students should note that if provision for taxation and proposed dividend are excluded from current liabilities, then only these items are to be added back to find out the

‘Fund from Operations’. By fund from operations if we want to mean gross fund generated before tax and dividend, then this concept is found useful. At the same time, fund from operations may also mean net fund generated after tax and dividend. For explaining the reasons for change in fund it would be better to follow the gross concept.

(v) Decrease in Working Capital: It is just for balancing the Fund Flow Statement. This figure will come from change in working capital statement.

2.9.3.2 Applications of Fund

(i) Purchase of fixed assets and investments: Cash payment for purchase is application of fund. But if purchase is made by issue of shares or debentures, such will not constitute

application of fund. Similarly, if purchases are on credit, these will not constitute fund applications.

(ii) Redemption of debentures, preference shares and repayment of loan: Payment made including premium (less discount) is to be taken as fund applications.

(iii) & (iv) Payment of dividend and tax: These two items are to be taken as applications of fund if provisions are excluded from current liabilities and current provisions are added back to profit to determine the ‘Fund from Operations’.

(v) Increase in working capital: It is the balancing figure. This figure will come from change in working capital statement.

2.9.3.3 Calculation of Fund from Operations Illustration 6

Profit and Loss Account

Rs. Rs.

To Stock 2,90,000 By Sales 50,20,000

To Purchases 27,30,000 By Stock 3,40,000

To Wages 10,10,000 By Interest Received 10,000

To Salaries & Admn. Exp. 6,35,000 By Transfer from Div.

To Depreciation 2,70,000 Equalisation Reserve 2,00,000 To Investment Reserve 1,20,000 By Profit on sale of

To Patents 15,000 Machinery 20,000

To Provision for Income-Tax 2,70,000

To Net Profit 2,50,000

55,90,000 55,90,000

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Funds generated by trading activities before tax was Rs. 7,05,000 as shown below:

Rs. Rs.

Net Profit (after tax) 2,50,000

Add: Non-cash charges

Depreciation 2,70,000

Patents written off 15,000

Investment Reserve 1,20,000 4,05,000

Less: Transfer from Dividend 6,55,000

Equalisation Reserve 2,00,000

Profit on sale of machinery 20,000 2,20,000

4,35,000

Add: Provision for income tax 2,70,000

7,05,000

2.9.3.4 Fund Flow from Opening Balance Sheet

The balance sheet at the end of the very first year of operations of a business is more or less the fund flow statement for that year. Suppose the balance sheet at the end of the year of a business is as follows:

Liabilities Rs. Assets Rs.

Share Capital 8,00,000 Fixed Assets 12,00,000

Profit & Loss A/c 20,000 Less: Depreciation 1,00,000

8% Debentures 3,00,000 11,00,000

Sundry Creditors 2,00,000

Bills Payable 1,00,000 Sundry Debtors 2,00,000

Provision for Taxation 1,00,000 Stock-in-trade 2,00,000

Proposed Dividend 80,000 Cash at Bank 1,00,000

Preliminary Exp. 20,000

Less : Written off 20,000 —

16,00,000 16,00,000

The Fund Flow Statement of the above mentioned business will be as follows:

Sources of Fund Rs. Rs.

Share Capital 8,00,000

8% Debentures 3,00,000

Fund from Operations:

P & L A/c 20,000

Add: Depreciation 1,00,000

Preliminary Exp. w/o 20,000

Provision for Taxation 1,00,000

Proposed Dividend 80,000 3,20,000

14,20,000

Applications of Fund

Purchase of Fixed Assets 12,00,000

Payment of Preliminary Exps. 20,000

Working Capital 2,00,000

14,20,000