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.
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 ?
- Why did Company not issue dividend. even company has obtained profit?
- What happened with net profit, where did it go?
- What did Company do with the fund received from selling of shares and debentures ?
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 capital’s other name is Fund.
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
Fixed liability changes into current liability or current liability changes into fixed liability.
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
Fund received and distributed statement
Fund generated and expended statement.
Steps for making Fund flow statement
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
Current AssetsSource: www.svtuition.org