UNIT - V
FUNDS FLOW STATEMENT
(STATEMENT OF CHANGES IN FINANCIAL POSITION )
The basic financial statements i.e the balance sheet and profit & loss account or income statement of business,reveal the net effect of the various transactions on the operational and financial position of the company.The balance sheet gives a summary of the assets and liabilities of an undertaking at a particular point of time.It reveals the financial status of the company.Both these statements provides the essential basic information on the financial activities of a business,but their usefulness is limited for analysis and planning purposes.Another statement has to be prepared to show the changes in the assets and liabilities from the end of one period to the end of another period of time.The statement is called a statement of changes in financial position or a funds flow statement.
The funds flow statement is a statement which shows the movement of funds and is a report of the financial operations of the business undertaking.It indicates various means by which funds were obtained during a particular period and the ways in which these funds were employed.In simple words,it is a statement of sources and applications of funds.
MEANING AND CONCEPT OF FUNDS : The term funds has been defined in a number of ways.
(a) In a narrow sense it means cash only and a funds flow statement prepared on this basis is called a cash flow statement.
(b) In broader sense the term funds refers to many values in whatever form it may exist.
(c) In a popular sense the term funds means working capital i.e the excess of current assets over current liabilities the working capital concept of funds has emerged due to the fact that total resources of a business are invested partly kept in form of liquid or near liquid formas working capital.
MEANING AND CONCEPT OF FLOW OF FUNDS : The term flow means movement and includes both inflow and outflow.
The flow of funds occurs when a transaction changes on the one hand a non-current account and on the other a current account and vice versa.
In simple language funds move when a transaction affects:
(i) A current asset and a fixed asset or
(ii) A fixed and a current liability or
(iii) A current asset and a fixed liability or
(iv) A fixed liability and current liability and fund do not move when the transaction affects fixed assets and fixed liability or current assets and current liabilities.
LISTOF NON-CURRENT OR PERMANENT CAPITAL ACCOUNTS :
| NON-CURRENT OR PERMANENT LIABILITIES | NON-CURRENT OR PERMANENT ASSETS | ||
| 1 | Equity share capital | 1 | Good will |
| 2 | Preference share capital | 2 | Land |
| 3 | Redeemable preference share capital | 3 | Building |
| 4 | Debentures | 4 | Plant and machinery |
| 5 | Long term loans | 5 | Furniture and Fittings |
| 6 | Share premium Account | 6 | Trade Marks |
| 7 | Share forfeited account | 7 | Patent Rights |
| 8 | Profit&Loss A/C (balance of profit i.e credit balance) | 8 | Long-term investment |
| 9 | Capital Reserve | 9 | Debit balance of profit &Loss Account |
| 10 | Capital redemption reserve | 10 | Discount on issue of shares |
| 11 | Provision for depreciation against fixed asset | 11 | Preliminary Expenses |
| 12 |
Appropiation of profits : (a)General Reserve |
12 | Other deferred Expenses |
LISTOF NON-CURRENT OR PERMANENT CAPITAL ACCOUNTS :
| NON-CURRENT OR PERMANENT LIABILITIES | NON-CURRENT OR PERMANENT ASSETS | ||
| 1 | Equity share capital | 1 | Good will |
| 2 | Preference share capital | 2 | Land |
| 3 | Redeemable preference share capital | 3 | Building |
| 4 | Debentures | 4 | Plant and machinery |
| 5 | Long term loans | 5 | Furniture and Fittings |
| 6 | Share premium Account | 6 | Trade Marks |
| 7 | Share forfeited account | 7 | Patent Rights |
| 8 | Profit&Loss A/C (balance of profit i.e credit balance) | 8 | Long-term investment |
| 9 | Capital Reserve | 9 | Debit balance of profit &Loss Account |
| 10 | Capital redemption reserve | 10 | Discount on issue of shares |
| 11 | Provision for depreciation against fixed asset | 11 | Discount on issue of Debentures |
| 12 |
Appropiation of profits : (a)General Reserve |
12 | Preliminary Expenses |
| 13 | Other deferred Expenses |
MEANING AND DEFINITION OF FUNDS FLOW STATEMENT : Funds flow statement is a method by which we study changes in the financial position of a business enterprise between beginning and ending financial statements dates. It is a statement showing sources and uses of funds for a period of time.
Funds flow statement is a statement which indicates various means by which the funds have been obtained during a certain period and the ways to which these funds have been used during that period.The term funds used here means working capital i.e the excess of current asset over current liabilities.
USES, SIGNIFICANCE AND IMPORTANCE OF FUNDS FLOW STATEMENT : A funds flow statement is an essential tool for the financial analysis and is of primary importance to the financial management Now-a-days,it is being widely used by the financial analysis credit granting institutions and financial manegers.The basic purpose of a funds flow statement is to reveal the changes in the working capital on the two balance sheet dates.It also describes the sources from which additional working capital has been financed and the uses to which working capital has been applied.
The significance or importance of funds flow statements can be well followed from its various use given below :
1. It helps in the analysis of financial operations : The financial statement reveal the net effect of various transactions on the operational and financial position of a concern.
2. It throws light on many perplexing questions of general interest which otherwise maybe difficult to be answered such us :
(a) Why were the net current assets lesserin spite of higher profits and nice versa ?
(b) Why more dividends couldnot be declared in spite of available profits ?
(c) Whathappened to the net profit? Where did they go?
3. It helps in the formation of a realistic dividend policy
4. It helps in the proper allocation of resources
5. It acts as a future guide
6. It helps inappraising the use of working capital
7. It helps in knowing the overall credit weltheness of a firm
LIMITATIONS OF FUNDS FLOW STATEMENT : The funds flow statement has a number of uses however,it has sertain limitations also, which are listed below :
1. It should be remembered that a funds flow statement is not a substitute of an income statement or a balance sheet it provides only solve additional information as regards changes in working capital.
2. It cannot reveal continous changes.
3. It is not an original statement but simply a re-arrangement of data given in the financial statements.
4. It is essentially historic in nature and projected funds flow statement cannot be prepared with much acewasy
5. Changes in cash are more important and relevant for financial management than the working capital.
PROCEDURE FOR PREPARING A FUND FLOW STATEMENT : Funds flow statement is a method by which we study changes in the financial position of a business enterprise between beginning and ending financial statements dates.Hence,the funds flow statement is prepared by comparing two balance sheets and with the help of such other information derived from the accounts as may be needed.The preparation of funds flow statement consists of two parts;
1.Statement or schedule of changes in working capital.
2.Statement of sources and application of funds.
STATEMENT OR SCHEDULE OF CHANGES IN WORKING CAPITAL : Working capital means the excess of current assets over current liabilities statement of changes in working capital is prepared to show the changes in the working capital between the two balance sheet dates.This statement is prepared with the help of current assets and current liabilities derived from the two balance sheets.
