1. UNIT – III FUND FLOW STATEMENT
DEPARTMENT OF MANAGEMENT STUDIES
UNIT – III FUND FLOW STATEMENT
7/24/2018
Dr. G. MAHESWARAN/AP
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2.  Why we prepare fund flow statement?
The balance sheet and income statement are the
traditional basic financial statement of a business enterprise.
A serious limitation of these statements is that they do not
provide information regarding changes in the firm’s financial
position during a particular period of time. They fail to
answer following question
What funds were available during the accounting period and for what purpose these funds were utilized?
Have long term sources been adequate to finance fixed asset purchase?
Does the firm possess adequate working capital?
How much funds have been generated from operations?
Why did the firm not pay dividend in spite of adequate profit?   
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3. It is statement of asset and liabilities of the
The balance sheet is merely a static statement.
It is statement of asset and liabilities of the
business as on particular date. 
The fund flow statement overcomes
these limitations of basic financial statement.
Fund flow statement will provide us information about different sources of fund and their
various uses in particular time.
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Dr. G. MAHESWARAN/AP

4. business, whether in the form of men, money, material, machine &
MEANING OF FUND
The term fund has a variety of meaning such as cash fund, capital fund and
working capital fund.
1.Cash fund –In a narrow sense, fund means only cash. ‘Cash flow
statement’ portrays net effect of the various business transactions on
cash into account receipts & disbursement of cash.
This concept of preparing fund flow statement is not
accepted, as there are many such transactions which do not affect cash but represent the flow of fund .
for example: purchase of furniture on credit does not affect cash but
there is flow of fund.
2. Capital fund –Here fund means all financial resources used in the
business, whether in the form of men, money, material, machine &
others.
3.Net working capital -Net working capital means difference between
current asset and current liabilities .funds generally refers to cash or
cash equivalent or to working capital.
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Dr. G. MAHESWARAN/AP

5. MEANING OF FLOW 
The term ‘flow’ refers to changes or transfer and therefore the ‘flow of funds’ means transfer of economic values from one asset to another, from one liability to another, from one asset to liabilities or vice-versa or a combination of these. So flow of fund refers to increase or decrease in net working capital.
The increase or decrease in net working capital will take place
only when one account, out of two accounts to be affected in a
transaction ,is a current account i.e. current asset or current
liabilities and the other account is non current account i.e. fixed
asset or long term liability or capital.
When a change in non current account is followed by a change in another non current account, it does not amount to flow of fund. It is because, in such case, neither the working capital increase nor decrease.  
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Dr. G. MAHESWARAN/AP

6. In the above transaction both accounts are non current
For example
Machinery a/c Dr
To share capital a/c
(Machinery purchase in consideration of share) 
In the above transaction both accounts are non current
accounts which do not at all affect current asset and current liability. Therefore working capital will remain unaffected i.e. there will be no flow of fund. 
When changes in one current account results in a changes
in other current account ,it also does not affect working
capital i.e. there is no flow of funds.
For example
Cash a/c Dr
To debtor a/c
(Cash received from debtor) 
It represents an increase of cash –a current asset account and decrease of
debtor again a current asset account .thus there will be no net changes in the
amount of working capital, although the composition of working capital will be affected .
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Dr. G. MAHESWARAN/AP

7. In the above figure the dotted line displays there will be no flow of fund &
the dark line displays the flow of fund.
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8. The similar changes in non current accounts are shown in ‘Fund Flow
Preparation of Fund Flow Statement
The changes which occurred in the current accounts as a result flow of fund
are reflected in a statement known as ‘schedule of changes in
working capital’ .
The similar changes in non current accounts are shown in ‘Fund Flow
Statement’.
Therefore, following two statements under this techniques . 1.
Statement or Schedule of Changes in Working Capital. 2.
Statement of Sources and Uses of Funds or Funds Flow
Statement.
Schedule of Changes in Working Capital 
It discloses the changes in individual item of current asset & current
liabilities between two period & there effect on working capital. Working
capital will increase when there is an increase in current asset and
decrease in current liabilities, whereas, working capital will decrease when
there is a decrease in current asset & increase in current liabilities.
 Net increase in working capital is treated as use of funds & the net
decrease in working capital is treated as source of funds.
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Dr. G. MAHESWARAN/AP

9. Statement or Schedule of Changes in Working Capital.
Item
Previous Year
Current Year
Effect on
Working captial
Decrease Rs.
Incraese Rs.
(A) Current Assets
Cash at bank
Cash in hand
Stock in trade
Debtors
Bills receivable
Advance payment
Short term investment
Prepaid expense
Accrued income
Total (A)
(B) Current Liabilities
(1) Short term loans
(2) Bank overdraft
(3) Creditors
(4) Bills payable
(5) Outstanding expenses
(6) Unclaim dividend
Total (B)
Net Working Capital (A-B)
Incraese / Decrease in Working Capital
Total
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Dr. G. MAHESWARAN/AP

10. Meaning of fund flow statement :
This statement reveals resources from which funds were
obtain by the firm hand the specific uses to which such
funds were applied. The effectiveness of financial
management in procuring funds from various sources & 
using them
effectivel y
for generating income without position of the firm is reflected in
sacrificing the financial fund flow statement .
Definitions of
fund flow statement : 
In the words of Foulke, R.A., “a statement of source
and application of fund is a technical device design to
analysis the changes in the financial condition of business
enterprises between two dates”.
According to : Almond Coleman, “ The fund flow
statement summarizing the significant financial changes
which were occurred between the beginning & the end of
company’s accounting periods”.  a
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Dr. G. MAHESWARAN/AP
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11. This fund flow statement has two parts : Sources of fund  2. 3.
This fund flow statement has two parts :
Sources of fund
Application of fund 
The difference between these two parts that is sources &
uses of funds represents net changes in working capital. 
The excess of sources of funds over uses of fund is the net increase in working capital & excess of uses over
sources of fund is net decrease in working capital.
The amount of net increase or decrease as shown in fund
flow statement should be equal to the amount shown by
schedule of working capital changes. 
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Dr. G. MAHESWARAN/AP

12. Fund Flow Statement Sources of Fund Uses Of Funds Amount Amount
Fund from operation
Issue of share
Issue of debenture
long term loans
Sale of fixed assets /
Investment
Non trading receipts
Decrease in working
capital
(if any)
Loss from operation
preference shares debentures
long term loans
/ Investments
Payment of dividend & taxe
Increase in working capital
(if any) s
Redemption of
Redemption of
Repayment of
Purchase of fixed
assets
Payment of dividend & taxe
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Dr. G. MAHESWARAN/AP

13. Fund from operations : The profit made by a firm through normal
operations is a major source
The amount of sales as shown
A/c is a source of funds by
of funds.
in the P&L
way of
increase in cash , debtor and B/R.
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Dr. G. MAHESWARAN/AP

14. Profit & loss Adjustment a\c Profit on revaluation Particular
Amount
Particular
Amount
Depreciation
Loss on sale of fixed assets
Under writing commissions
Discount on issue of shares &
debentures
Preliminary expense written o
Deferred revenue expenses
Goodwill written off
Patent or trademark
Provision for taxes
(If treated non current)
Profit or gain on sale of
fixed asset
Dividend received
Interest received of
investment
Profit on revaluation
of asset
Fund from operation
Preliminary expense written
off
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Dr. G. MAHESWARAN/AP
7/24/2018

15. Q-Comparative Balance sheetof Z
Ltd. As on
year
2000 and 2001 were as
follow
Liabilities
2000
2001
Assets
2000
2001
Account payable
Notes payable
Loan on
Mortgage
Capital Sinking
fund Retained
Earning Provision
for DD
Accumulated
Depreciation-
Building
furniture
15000
10000
40000
50000
16000
13950
1350
12000
3200
18000
75000
40000
45000
12000
16275
1425
9000
Cash
Account receivable
Stock
Sinking fund investment
Land
Building
Furniture
11200
21300
35000
16000
10000
60000
8000
8500
23500
30600
12000
60000
10000
7000
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2400
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161500
151600
161500
151600
Dr. G. MAHESWARAN/AP

16. You are giving information:-
Net profit for the year
6675.
Dividend amounted to
during the year.
Prepare a statement of
of fund.
2001 amounted 
Rs.5000 was paid 
sources and uses
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Dr. G. MAHESWARAN/AP

17. Schedule of Changes in Working Capital
Items
2000
Amount
2001
Amount
Change in
Working
capital
Increase
Decrease
CURRENR ASSETS:-
Cash
Account receivable
Stock
TOTAL of CA (A)
CUURENT
LIABILITIES:-
Account payable
Note payable
Provision for D D
TOTAL of CL (B)
Difference b/w (A-B)
Decrease in W C
11200
21300
35000
8500
23500
30600
2200
2500
5475
2700
4400
3000 75
67500
62600
15000
10000
1350
18000
7500
1425
26350
26925
41150
35675
5475
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Dr. G. MAHESWARAN/AP
41150
41150
10175
10175

18. Fund flow statement Sources of fund Amount Application of fund Amount
Sale of sinking fund investment
Fund from operation
Decrease in working capital
4000
525
5475
Redemption of share capital
Dividend paid
5000
5000
10000
10000
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Dr. G. MAHESWARAN/AP

19. Profit & loss adjustment a\c operation Particular Amount Particular
To Accumulate dep. On furniture
To Dividend paid
To Balance c/d
200
5000
16275
By balance b/d
By accumulate dep. By fund flow
operation
13950
4000
3000
525
By sinking fund
On building
21475
21475
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Dr. G. MAHESWARAN/AP

20. Accumulativ e Building deprecation Furniture Particul ar furniture a/
Amou nt
Particula r
Amoun t
Particul ar
Amo
unt
Particula r
Amoun t To
furniture a/ c
To balance c/d
1000
2400 By
balance b/ d
By P/L a/c
3200
200
To P/L a/c
To balance c/d
3000
9000
12000
By balance b/d
12000
3400
3400
Furniture a\c
Particular
Amoun t
Particular
Amoun t
To balance b/d
8000
By deprecatio n
By balance c/d
1000
7000
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8000
8000
Dr. G. MAHESWARAN/AP