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Learn Accounting Fund Accounting Cash Flow Fund of Funds
How to prepare Fund Flow
statement
>> MARCH 13, 2009
Before preparing of fund flow statement, you must know different accounting terms in
fund flow statement.
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Prof . Vinod Kumar has received
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Academic need to learn the fund flow statement
1. AS 3 units 1.
Accounting standard 3 units 1 of Institute of Chartered Accountant of India explains
preparation and presentation of statement of changes in financial position or fund
flow statement
2. UGC NET Commerce
If you want to clear UGC NET in commerce subject, you should also learn fund flow
statement. Because it includes in paper 11 and paper 3 A syllabus in the form of fund
flow analysis.
3. Graduate / Post Graduate Classes
Fund flow statement is full subject in B.Com. , B.B.A., B.C.A. and M.Com. , M.B.A.,
M.C.A. and C.A. classes . For succeeding in these classes, you should know the
whole system of fund flow statement.
4. Helpful in Practical business environment
Fund flow statement is very helpful for solving following practical problems of
business
Why are current assets are decreasing, even there are high profit?
1. Why did Company not issue dividend, even company has obtained profit?
2. What happened with net profit, where did it go?
3. What did Company do with the fund received from selling of shares and
debentures?
What are main sources of company to repay his debts?
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So, above questions answer can be given after making fund flow statements.
Definition of Fund
Fund means working capital. If current assets of company is more than current
liability of business, it is called working capital and working capitals other name is
Fund.
Fund = Working capital = Current assets Current liability
Definition of Flow of Fund
Flow of fund means movement of fund. I take the example of air; we can feel its
movement or flow of air. Same thing is happen with fund, due to the activity of
business fund is transfer from one asset to another assets. If fixed assets are
converted into current asset or fixed liability is converted into current liabilities, these
are the flow of fund. But if current assets are changed with current assets or current
assets are changed into current liabilities, then, there is no flow of fund because
there is no change working capital. Suppose, we get the money from debtor, this is
not flow of fund because, working capital is not changed. Both items of current
assets and when current assets change into current assets, there will not be change
in working capital.
Flow of Fund = Fixed asset changes into current asset or current asset changes into
fixed assets
Or
Fixed liability changes into current liability or current liability changes into fixed
liability.
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Definition of fund flow statement
Fund flow statement is a statement which shows the inflow and out flow of funds
between two dates of balance sheet. So, it is known as the statement of changes in
financial position. We all know that balance sheet shows our financial position and
inflow and outflow of fund affects it. So, in company level business, it is very
necessary to prepare fund flow statement to know what the sources are and what
are applications of fund between two dates of balance sheet. Generally, it is prepare
after getting two year balance sheet.
According to Prof. Anthony, The funds flow statement describes the sources from
which additional funds were derived and the use of which these funds were put.
Fund flow statements are known with different names
Statement of source and uses of funds
Or summary of financial operations
Movement of working capital statement
Or
Fund received and distributed statement
Or
Fund generated and expended statement.
Steps for making Fund flow statement
First Step
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Making of statement of Changes of Working Capital
For making of fund flow statement. It is very necessary to make statement of
changes of working capital. Because net increase in working capital is use of fund
and net decrease in working capital is source of fund. So, it is duty of accountant to
make statement of changes of working capital. Making of statement of changes
working capital is very easy and simple.
We take two balance sheets, one is current year balance sheet and other is previous
year balance sheet. Then we separate current assets and current liabilities.
If current assets are more than previous year current assets, it means increase in
working capital.
If current assets are less than previous year current assets, it means decrease in
working capital. Because, relationship between current assets and working capital is
positive and if any changes in current assets, working capital will change in same
direction.
If current liabilities are more than previous year current liabilities, it means decrease
in working capital.
If current liabilities are less than previous year current liabilities, it means increase in
working capital. Relationship between working capital and current liabilities are
inverse.
Statement or schedule of changes in working capital
---------------------------------------------------------------------------------
-------
Particular--------------- previous year Current year Effect on working capital
---------------------------------------------------------------------------------
--------
----------------------------------------------------------- Increase Decrease
---------------------------------------------------------------------------------
-------
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Current Assets
Cash in hand
Bills receivable
Sundry debtors
Temporary investments
Stocks / inventories
Prepaid expenses
Accrued incomes
---------------------------------------------------------------------------------
-----------
Total current assets----------- xxxx xxxxx
----------------------------------------------------------------------- ----------
-------
Current liabilities
Bills payables
Sundry creditors
Bank overdraft
Short term advances
Dividends payables
Provision for taxation
---------------------------------------------------------------------------------
------
Total current Liabilities ----------xxxx xxxx
------------------------------------------------------------------ ---------------
----
Working capital
CA- CL
---------------------------------------------------------------------------
Net increase or decrease in working capital =
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Increase in working capital Decrease in working capital
2nd Step
Statement showing the fund from operation
Because is the source of fund and will show in fund flow statements source side. So
before making fund flow statement, we must make statement showing the fund from
operation.
Operation means business activity and fund from operation means profit from
business activity. So, you will easy understand that profit from business activity
between two accounting period must be the source of fund.
Statement of fund from operations
---------------------------------------------------------------------------------
---------
------------------------------------------------------------------------>
Amount
---------------------------------------------------------------------------------
----------
Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non fund and non operating items which have been already
Debited to profit and loss account
1. depreciation
2. amortization of fictitious and intangible assets
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goodwill
patents
trade marks
preliminary expenses
discount on issue of shares
3. Appropriation of retained earning such as
Transfer to general reserve
Dividend equalization fund
Transfer to sinking fund
Contingency reserve etc.
4. Loss on sale of any non current or fixed assets such as
Loss on sale of land and building
Loss on sale of machinery
Loss on sale of furniture
Loss on sale of long term investments
5. Dividends including
Interim dividend
Proposed dividend
(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account
---------------------------------------------------------------------------------
--
Total ( A)-------------------------------------------------------> XXXXX
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---------------------------------------------------------------------------------
----
Less Non Fund or non operating items which have already been credited
to profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as
Profit on sale of land and building
Profit on sale of plant and machinery
Profit on sale of long term investment etc.
2. Appreciation in the value of fixed assets such as increase in the value of land if it
has been credited to profit and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the
balance sheet
---------------------------------------------------------------------------------
----
Total ( B)--------------------------------------------------------------> XXXXX

---------------------------------------------------------------------------------
-------
Funds received from operation or business activities = total ( A) Total ( B)
You can make also above statement in t shape adjusted profit and loss account form
.
3rd Step
Fund flow statement
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---------------------------------------------------------------------------------
-----
-------------------------------------------------------------------> Amount
---------------------------------------------------------------------------------
----
A ) Source of funds
1. fund from operation ( balance of second step )
2. issue of shares capital
3. issue of debentures
4. raising of long term loans
5. receipts from partly paid shares , called up
6. amount received from sales of non current or fixed assets
7. non trading receipts such as dividend received
8. sale of investments ( Long term )
9. decrease in working capital as per schedule of changes in working capital
-----------------------------------------------------------------------------
-----
total -------------------------------------------------------------> XXXXX

-----------------------------------------------------------------------------
----
Applications or uses of funds
1. Funds lost in operations ( Balance negative in second step )
2. redemption of preference share capital
3. redemption of debentures
4. repayment of long term loans
5. purchase of long term loans
6. purchase of long term investments
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14
7. non trading payments
8. payment of tax
9. payment of dividends
10. increase in working capital ( As per positive balance of ist step )
---------------------------------------------------------------------------------
----
total --------------------------------------------------------> XXXXX
---------------------------------------------------------------------------------
-----

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Written by Vinod Kumar
Labels: finance, fund, management accounting
13 comments:
rakesh kashyap, March 21, 2010 at 3:23 PM
hello in ur blog u have made a statement as follows
"net increase in working capital is use of fund and net decrease in
working capital is source of fund"
is it not the other way???
i saw it the other way in text...
im confused which is correct
Anonymous, March 27, 2010 at 4:33 AM
Can you solve this beloq question?
From the following Balance sheet as on 31-12-2006 & 31-12-2007, you
are required to prepare a schedule og changes in the working capital &
a Fund Flow statement.
a) The provision for tax & proposed dividends as a non-current
liabilities.
b) The provision for tax and proposed dividends as current liabilities.
Balance Sheet
-----------------------------------------------
Liabilities 2006 2007 Assets 2006 2007
Sh.Capital 10000 15000 F.A 10000 20000
P&L A/C 4000 6000 C.A 13000 14500
Prov.for tax 2000 3000
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Prop. divi. 1000 1500
S.Cr's 4000 6000
O/S.Exp 2000 3000
----------------------------------
23000 34500 23000 34500
-----------------------------------------------
Additional Info:
a) Tax paid during 1997 Rs.2500
b) Dividend paid during 1997 Rs.1000
kamal sahu, September 28, 2010 at 7:15 AM
ya i can solve ur problem______________it is very simple
buddy_______________
give ur id n i will send the answer to you____________
Ravi Kandera, April 23, 2012 at 1:19 AM
Hello Dear ,
This is very helpful to me the easy step & easily understand this step.
Thaking you.
Anonymous, September 15, 2012 at 7:11 AM
Hello
Thanks for sharing your experience
CA Karan Batra, November 1, 2012 at 6:12 AM
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Thanks for shring your detailed knowledge on How to prepare Funds
Flow statement
DIGVIJAY SRIVASTAVA, December 3, 2012 at 9:34 AM
thanks ,its very useful
DIGVIJAY SRIVASTAVA, December 3, 2012 at 9:35 AM
thanks,it is very useful
Anonymous, December 10, 2012 at 1:01 AM
Thank you
Anonymous, January 1, 2013 at 10:39 AM
thanks a lot for explaining fund flow statement so easily. I grabbed it in
the first go.
Anonymous, February 3, 2013 at 9:14 AM
i will pass my xam i guess:D
Udaya N, February 11, 2013 at 2:49 AM
very easy and nice
Anonymous, May 10, 2014 at 8:32 AM
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can u solve the question ?
Following are the balance sheets of a limited company as on 31st
December, 2000 and 2001.
Liabilities 2000
Rs. 2001
Rs. Assets 2000
Rs. 2001
Rs.
Share Capital 54,000 74,000 Goodwill 3,000 2,520
Reserves 13,000 15,500 Buildings 50,950 48,000
P. & L. A/c 8,600 8,800 Plant 35,000 43,000
Bank Loan (Long-term) 25,000 - Stock 25,500 18,800
Creditors 28,000 24,000 Debtors 22,000 16,200
Bills Payable 8,000 8,500 Cash 150 180
Bank - 2,100
1,36,600 1,30,800 1,36,600 1,30,800
Taking into account the following additional information, you are
required to prepare funds flow statement and statement of change in
working capital.
(a) Dividend paid was Rs. 6,000.
(b) Rs. 3,600 was written off as depreciation on plant and Rs. 2,950 on
buildings.
(c) Profit on sale of plant was Rs. 3,000.
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