Funds Flow Statement

  • Funds Flow Statement is a statement used by a company to determine the change in the Financial Position of a company between two years (or two balance sheets). It is also known as Statement of Sources and Applications of Funds, Movement of Funds Statement, Where Gone Statement, Inflow, and Outflow of Fund Statement, etc.
  • Funds can be better understood as Working Capital of the company; hence fund flow statement studies the change in Working Capital of the business between two years.

Funds Flow Statement vs Cash Flow Statement

At first glance, the cash flow statement and fund flow statement look the same, but they differ from each other in the following ways:

  1. Fund Flow Statement is based on the Accrual System of Accounting whereas Cash Flow Statement is based on the Cash System of Accounting. The cash system is one in which the effect is considered only when the cash is received or paid whereas Accrual System considers the effect as and when the transaction is accounted.
  2. Fund Flow Statement considers Long Term Instruments (Assets and Liabilities) whereas Cash Flow Statement considers Current Instruments (Assets and Liabilities).
  3. Fund Flow Statement shows the sources and application of funds whereas the Cash Flow statement shows the inflows and outflows of cash
  4. Fund Flow Statement involves Long Term Analysis of Financial Planning and Cash Flow Statement involves Short Term Analysis of Cash Planning.
  5. Fund Flow Statement is used for preparing Capital Budgeting and Cash Flow Statement is used for preparing Cash Budgeting of an Organization.
  6. Fund Flow Statement examines the firm’s efficiency in utilizing the working capital whereas Cash Flow Statement analyses the cash-generating efficiency of the entity.
The above points can be summarised as below:
Cash Flow Fund Flow
Based on the Cash System of Accounting Based on the Accrual System of Accounting
Considers Current Instruments (Assets and Liabilities). Considers Non-Current Instruments (Assets and Liabilities).
Shows the inflows and outflows of cash   Shows the sources and application of funds
Used for Short Term Analysis of Cash Planning Used for Long Term Analysis of Financial Planning
Used for preparing Cash Budgeting Used for preparing Capital Budgeting
Measures the cash-generating efficiency of the entity Measures the firm’s efficiency in utilizing the working capital.

Sources of Fund Inflow and Outflow

There are various sources that generate Fund Inflow and Fund Outflow, they are grouped in the table below:
Inflow Outflow
Issue of Share and Debenture Redemption of Share or Debenture and Payment of Dividend
Sale of Fixed Assets or Non-Current Assets Purchase of Fixed or Non-Current Assets
Income from Different Sources Payment of Miscellaneous Expenses
Increase in Liability Increase in Assets
However, there are set of transactions in the above sources which have no impact on Fund Inflow or Fund Outflow, such sources are listed below:
  • An increase/decrease in Current Assets with the same increase/decrease in Current Liability. (the net effect will be NIL)
  • An increase/decrease in Non- Current Assets with the same increase/decrease in Non-Current Liability. (the net effect will be NIL)
  • A shift from one current asset to another current asset by an equal amount or from one current liability to another current liability by an equal amount. (the net effect will be NIL)

Creating a Fund Flow Statement

Creating a Fund Flow Statement involves three steps as explained below:

I. Statement Showing Changes in Working Capital: Calculate the change in Working Capital of the company in two financial years.

Calculate the Working Capital of both years using the formula and then find the difference between both the Working Capital to find the change between them.
Working Capital = Current Assets - Current Liabilities
Illustration 1: An extract from the Balance Sheet of Pioneer Media Ltd for FY 18 and FY 19 is given below, use the information to calculate Changes in Working Capital.
Particulars FY 18 FY 19
Current Assets    
Stock 55000.00 57000.00
Debtor 40000.00 38000.00
Bills Receivable 28000.00 32000.00
Cash 70000.00 55000.00
Advances 35000.00 50000.00
Prepaid Expenses 28000.00 25000.00
Total Current Assets 256000.00 257000.00
Current Liabilities    
Creditors 25000.00 18000.00
Bills Payable 15000.00 27000.00
Bank Overdraft 55000.00 15000.00
Tax Expenses 38000.00 45000.00
Accounts Payable 45000.00 15000.00
Total Current Liabilities 178000.00 120000.00
Working Capital (CA - CL) 78000.00 137000.00
Change in Working Capital = 137000.00 – 78000.00 = +59000.00

II. Statement showing Funds from Operations (FFO): Calculate the change in Fund from Operations of the company in two financial years.
To calculate FFO following steps need to be performed:
  1. Take Current Year’s Profit and Loss
  2. Add Non-Operating Expenses. E.g. Depreciation, Tax Provision, etc.
  3. Subtract Non-Operating Income. E.g. Profit on Sale of Assets, Return on Investments, etc.
  4. Subtract Last Year’s Profit and Loss Account (Opening Balance of Current Year)
Let use see an Illustration to understand the above steps.

Illustration 2: Use the information give below to calculate Fund from Operations (FFO) for Pioneer Media Ltd.
Particulars FY19 Calculation of FFO
Opening Balance 125000.00  
Profit and Loss Account as on 31-Mar-2019 250000.00 250000.00
Add:    
Depreciation 15000.00 +15000.00
Amortization 12000.00 +12000.00
Tax Provision 11000.00 +11000.00
Subtract:    
Profit on Sale of Old Assets 18000.00 -18000.00
Return on Investment 15000.00 -15000.00
    255000.00
Subtract: Opening Balance   -125000.00
Fund from Operations (FFO)   130000.00

III. Statement of Fund Flow: This step highlights the Sources and Uses of Funds along with Fund from Operations (FFO), to generate a clear picture of Fund Flow in the organization. Let us again refresh the Sources of Fund Inflow and Outflow.
Inflow Outflow
Issue of Share and Debenture Redemption of Share or Debenture and Payment of Dividend
Sale of Fixed Assets or Non-Current Assets Purchase of Fixed or Non-Current Assets
Income from Different Sources Payment of Miscellaneous Expenses

Let us take an illustration to see how the final step is carried out to Create Fund Flow Statement.

Illustration 3: Use the FFO of Pioneer Media Ltd. obtained in Illustration along with additional information given below to create its Fund Flow Statement.
Particulars Amount
Sale of Fixed Assets 29000.00
Purchase of Inventory 80000.00
Issue of Preference Shares 20000.00
Payment of Dividend 40000.00

Particulars Amount
Fund Inflow  
Fund from Operation (FFO) 130000.00
Sale of Fixed Assets 29000.00
Issue of Preference Shares 20000.00
Total Inflow 179000.00
Fund Outflow  
Purchase of Inventory 80000.00
Payment of Dividend 40000.00
Total Outflow 120000.00
Net Flow of Funds = Total Outflow - Total Inflow = 179000- 120000 = 59000.00
It should be taken care that (as per the definition)
Net flow of funds  = Change in Working Capital
In our Illustration, Change in Working Capital (Illustration 1) = Net Flow of Funds (Illustration 3)

Significance and Limitation of Funds Flow Statement

Fund Flow Statement deals with change in the Working Capital of a company between two years, the change is either increasing or decreasing, let us see under what circumstances Increase and Decrease are observed.

No Change in Working Capital The Increase/Decrease in Assets and Liabilities are Equal
An Increase in Working Capital Increase in Current year Assets than the Previous year A decrease in Current year Liabilities than the previous year
A Decrease in Working Capital Increase in Current year Liabilities than the Previous year A decrease in Current year Assets than the previous year

Limitation:

  • It does not consider non-fund items.
  • It ignores transactions that have nil impact on Working Capital (already explained)
  • No additional information is obtained from the Fund Flow Statement, it just rearranges the Financial Statement.
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