Fund Flow Statement

Contents :                                              

  1. Meaning and Definition of Fund Flow Statement.
  2. Objectives of Fund Flow Statement.
  3. Advantages and Disadvantages / Limitations of Fund Flow Statement.
  4. Preparation of Fund Flow Statement.
  5. Adjustment of Typical Items.
  6. Statement of Sources and Uses (Applications) of Funds.
  7. Preparation of Schedule of Changes in Working Capital.
  8. Computation of Funds from Operations.

What is Funds Flow Statement ?

'Funds Flow Statement' is a statement which depicts the flow of working capital/funds during a specified period of time. A range of variations in working capital which has taken place during that period is revealed through the statement.

'Funds Flow Statement' is a technique which facilitates the study pertaining to the changes in the financial position of a business organisation which has taken place between the two financial statement dates (beginning and ending). It discloses the 'Sources' and 'Applications' of working capital for a specific period.

The statement, which is prepared with a view to ascertaining the inflow (sources) and outflow (applications) of funds, is known as 'Funds Flow Statement'.
'Funds Flow Statement' may be defined in a number of ways, some of which are discussed below :

Definition of Funds Flow Statement :

According to Foulke :
"A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates".

I.C.W.A. in the glossary of Management Accounting terms defines funds flow statement as :
"A statement prospective or retrospective, setting out the sources and applications of the funds of an enterprise.

The purpose of the statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same.

Objectives of Funds Flow Statement :

The statement's main objective is to ascertain various sources from where the funds were raised and the specific manner in which they (Funds/Working Capital) were utilised between the dates of the two balance sheets.

1) The statement draws special attention to the various sources and applications of "Working Capital'' of a business organisation between the two dates representing two accounting periods.

2) It highlights the financial Strengths and Weaknesses of a business organisation, which may be used as a management tool for future planning or taking corrective measures for the organisation's growth.

3) It is an effective technique for measuring the reasons behind the changes in 'Working Capital'.

4) In case of major deviations between the data of two Balance Sheets, it facilitates the management of the organisation in initiating necessary corrective measures.

5) Investors may also use the 'Funds Flow Statement' of an organisation for taking a decision with regard to their investment in that organisation.

6) It reflects a detailed information in respect to the performance of the organisation with regard to its profitability, operational efficiency and financial affairs.

7) The information gathered from the Funds Flow Statement of an organisation facilitates its management in formulating various policies, e.g. 'Dividend Policy', /Retention Policy', 'Investment Policy' etc.

8) The financial consequences of various business transactions of an organisation are easy to evaluate with the help of its 'Funds Flow Statement'.

9) It provides a detailed account of the movement of funds from different sources or uses of funds during a specific period.

Advantages of Funds Flow Statement :

Preparation of 'Funds Flow Statement' is beneficial in the following manner :

1) Helps in the Analysis of Financial Operations :
The net effect of different business transactions on the Operational' as well as "Financial' status of an organisation are disclosed through the 'Financial Statements' ('Balance Sheet and Profit and Loss Account') prepared for an accounting period. The 'Balance Sheet' reveals the position regarding various resources of funds of a business enterprise and the applications thereof as on a specific date. 
However, it does not bring to the forefront the reasons behind the changes in the assets and liabilities of an organisation between two different points of time. The analysis of 'Funds Flow Statement' not only explains the reasons for those changes, it also brings out the impact of such changes on the liquidity status of the organisation.

2) Helps in the Formation of a Reasonable Dividend Policy :
There may be a situation, where a company may have enough available profits for dividend distribution, still it is not advisable to distribute dividend due to liquidity constraints. Analysis of 'Funds Flow Statement' facilitates formulation of a reasonable dividend policy in such situations.

3) Helps in the Proper Distribution of Resources :
Generally, the resources of any organisation are constrained and it is the endeavour of the organisation to use those resources in an optimal and prudent manner. The 'Funds Flow Statement' is helpful to the management in taking appropriate decisions with regard to the deployment or allocation of limited resources.

4) Helps in Improving the Use of Working Capital :
A Funds Flow Statement' reveals the efficiency of the management in utilising the available 'Working Capital'. It also advices the steps to be taken for improving the Working Capital Management of the company.

5) Helps Knowing the Overall Creditworthiness of a Firm : 
Funds Flow Statement for a number of years is one of the most important documents required by the financial institutions and banks (e.g. State Financial Institutions (SFIs), State Industrial Development Corporations (SIDCs), Industrial Finance Corporation of India (IFC), and all the commercial banks), before granting loans.
It helps them in ascertaining the creditworthiness or repaying capacity of the business enterprise. Thus, it is mandatory for these financial institutions to prepare funds flow statement.

Also Read :

Disadvantages of Funds Flow Statement :

Funds flow statement, although useful in a number of ways as mentioned above, suffers from certain deficient features, some of which are as follows :

1) Fails to Disclose Cash Position : 
Cash position of an organisation is not disclosed by the 'Funds Flow Statement', as a result of which a separate/additional statement, viz, 'Cash Flow Statement' is required to be prepared to ascertain the cash position of the organisation.

2) Lack of Originality : 
There is nothing like originality or innovation in Funds Flow Statement. It is simply a rearrangement of data picked up from the 'Financial Statements'. The data are presented in such a systematic manner that it starts revealing vital information, which are otherwise not disclosed in "Financial Statements". 
This is precisely the reason why some of the companies do not feel the need to prepare 'Funds Flow Statement'.

3) Historic in Nature : 
Funds Flow Statement is based on past data of a business organisation. It reflects only the historical performance of the past and lacks any prediction/indication with regard to the future. 
Estimates can, however, be drawn on the basis of such reflections. Management of a company, therefore, is not in a position to make much of its use for future strategy.

4) Used Along with Financial Statements :
A meaningful conclusion may be drawn from the 'Funds Flow Statement', only when it is analysed along with other components of 'Financial Statements', viz., 'Balance Sheet and 'Profit and Loss Account'. It is of less or no use in isolation.

Preparation of Funds Flow Statement :

There are following steps in preparation of funds flow statement as shown below :
  1. Working Capital (preparation of schedule of changes in working capital).
  2. Computation of funds from operations/adjusted profit & loss account.
  3. Statement of sources and uses (Applications) of funds.

Adjustment of Typical Items :

Certain items require adjustments at the tine of preparation of "Funds Flow Statement" some of such items are as follows :

1) Provision for Taxation : 
Normally a 'Current Liability' like, "Provision for Taxation" needs to be shown in the statement of changes in the working capital. However, the treatment for provision for taxation if provided in the adjustment is required to be treated as 'Non Current Liability'. Such provision made should be added to the profit in order to calculate the Funds from Operations'. In the 'Funds Flow Statement', the tax paid is shown as an 'Application of Funds'.

2) Proposed Dividend : 
'Proposed Dividend' is of a nature similar to that of 'Provision for Taxation'. As such, it needs to be treated in the same manner.

3) Interim Dividend : 
Declaration of 'Interim Dividend' is an interim measure taken by a company's "Board of Directors" between two annual general meetings, before a final decision regarding declaration of dividend is taken. This is a debit item which is charged to Profit and Loss Adjustment Account' and is considered as an 'Application of Funds'.

4) Depreciation : 
Depreciation is an expense, which represents the cost incurred to take care of the normal wear and tear of the Fixed Assets owned by an organisation in the normal course. It is considered as 'Non Operating Expense' as it is a 'Non Fund Based' item. It causes reduction in the 'Net Profit', despite the fact that cash does not passes from it.
'Flow of Funds' is not involved in the Provision for Deprecation. In order to ascertain the Funds from Operations', if 'Profit after Depreciation' or 'Provision for Depreciation' is given, it needs to be added back to the 'Net Profit'.

5) Preliminary Expenses : 
Preliminary Expenses are also like 'Depreciation' in nature, as they are 'Non Operating Expenses', do not have real value, and as such are required to be written-oft. However, as the outflow of funds is not involved, it needs to be added to the 'Net Profit' in order to ascertain the 'Funds from Operation'.

6) Goodwill : 
Goodwill, being an intangible asset, does not have real value and as such needs to be written-off. Its charging from 'Profit & Loss Account' does not involve 'Outflow of Funds/Application of Funds'. The amount of goodwill written-off is added back to the Net Profit' of the year in order to determine the 'Funds from Operations.

7) Creation of the Reserves: 
As a prudent measure, certain reserves and funds are created out of the 'Net Profit' and maintained with a view to meeting specific liability (known liability) or general liability (unknown liability). These items are 'General Reserve', 'Specific Reserve', 'Reserve Fund', 'Sinking Fund', 'Workmen Compensation Fund', etc. As these items are 'Non Current' in nature, the 'Working Capital' does not undergo any changes. In order to determine the Funds from 'Operation', the current amount of such reserves is added to the 'Net Profit'.

8) Gain or Loss from the Sale of a Fixed Asset : 
The proceeds from the sale of Fixed Assets' are included in the 'Net Profit/Loss' of an organisation. It is an item of 'Inflow of Funds/Source of Funds. No adjustment is required on account of gain/loss from the sale of fixed assets. However, if unadjusted profit is treated as a source, the profit/loss on sale of the 'Fixed Asset needs to be shown in the statement twice once in the Funds from Operations' and the other in the 'Sale of 'Fixed Assets'. Such profit or loss is required to be adjusted to Net Profit/Loss' in order to calculate Funds from Operations'.

9) Foreign Currency Transactions: 
The impact of Exchange Rate Fluctuation' on the holding of 'Cash and Cash Equivalents' in foreign currency needs to be reported separately as a part of the reconciliation of 'Cash' and "Cash Equivalents''. Unrealised gains and losses due to fluctuation in 'Forex Rates' are not considered/treated as 'Cash Flows'.

10) Extraordinary Items : 
"Cash Flows pertaining" to the 'Extraordinary Items' are required to be categorised suitably according to the source of the relevant activities like Operating', 'Investing' or 'Financing', and disclosed separately.

11) Investments in Associates, Subsidiaries and Joint Venture : 
A business enterprise having investment in 'Associates Concerns', 'Subsidiaries' or 'Joint Ventures' needs to report in the 'Cash Flow Statement'. Only the "Cash Flows pertaining to those between it and the investees, viz. 'Associates Concerns', 'Subsidiaries' or 'Joint Ventures' should be reported.

12) Acquisition or Disposal of Subsidiaries : 
'Cash Flow' (Inflow or Outflow) generated as a result of 'Acquisition' and Disposal of subsidiaries is required to be shown separately and categorised as investing activities. It is of paramount importance to ensure that:
  • Separate disclosure needs to be made in respect of total purchase or total disposal.
  • Disclosure with regard to the status of the acquisition/disposal consideration, discharged by means of cash and cash equivalents, should be made.

Statement of Sources and Uses (Applications) of Funds :

Funds flow statement is a statement which indicates various sources from which funds (working capital) have been obtained during a certain period and the uses or applications to which.these funds have been put during that period.
Generally, this statement is prepared in two proforma :
1) Report Form.
2) T form or Account Form or Self Balancing Type.

Proforma of Report Form of Funds Flow Statement



Sources of Funds :

Funds from Operations

Issue of Share Capital

Raising of Long-term Loans

Receipts from Partly Paid Shares, Called up

Sales of Non Current (Fixed) Assets

Non-Trading Receipts, such as Dividends Received

Sale of Investments (Long-term)

Decrease in Working Capital (As per Schedule of

Changes in Working Capital)


Applications or Uses of Funds :

Funds Lost in Operations

Redemption of Preference Share Capital

Redemption of Debentures

Repayment of Long-term Loans

Purchase of Non-Current (Fixed) Assets

Purchase of Long-term Investments

Non-Trading Payments

Payments of Dividends*

Payment of Tax*

Increase in Working Capital

(As per Schedule of Changes in Working Capital)






T Form or An Account Form or Self Balancing Type

Funds Flow Statement
(for the year ended...)

Inflows/Sources of Funds


Outflows/Applications/Uses of Funds


Funds from Operations.

Issue of Share Capital.

Issue of Debentures.

Raising of Long-term Loans.

Receipts from Partly Paid Shares, Called up.

Sale of Non-Current (Fixed) Assets.

Non-Trading Receipts such as Dividends.

Sale of Long-term Investments.

Net Decrease in Working Capital.



Funds Lost in Operations.

Redemption of Preference Share Capital.

Redemption of Debentures.

Repayment of Long-term Loans.

Purchase of Non-Current (Fixed) Assets.

Purchase of Long-term Investments.

Non-Trading Payments.

Payment of Dividends.

Payment of Tax.

Net Increase- in Working Capital.




Note : Payment of dividend and tax will appear as an application of funds only when these items are appropriations of profits and not current liabilities.

Preparation of Schedule of Changes in Working Capital :

Statement of changes in working capital (also known as schedule of changes) is prepared with a view to providing information regarding the changes having taken place in each individual item of 'Current Assets' and 'Current Liabilities and the impact each of them have on the 'Working Capital (increase or decrease). The total of such increase or decrease is taken to ascertain the net result, which may either be 'Net Increase' or 'Net Decrease in 'Working Capital'.

The format of this statement is as follows :

Statement or Schedule of Changes in Working Capital


Current Year


Previous Year


Effect on/Changes in Working Capital


Decrease in Working Capital

Increase in Working Capital

Current Assets (CA):

Cash in Hand

Cash at Bank

Bills Receivable

Sundry Debtors

Temporary Investments


Prepaid Expenses

Accrued Incomes

Total Current Assets

Current Liabilities (CL):

Bills Payable

Sundry Creditors

Outstanding Expenses

Bank Overdraft

Short-term advances

Dividends Payable

Proposed Dividends

Provision for Taxation

Total Current Liabilities

Working Capital (CA-CL)


Net Increase or Decrease in

Working Capital

















* May or may not be a current liability
To find out the transactions relating to 'Sources' or 'Applications' of 'Working Capital' this exercise facilitates preparation of the funds flow statement.

Symbolically, WC = CA-CL
Where, WC = Working Capital, CA = Current Assets, CL = Current Liabilities

Computation of Funds from Operations :

Funds generated out of the core business operations are the sole internal source of funds. The 'Net Profit' of a business entity needs to be adjusted for all the 'Non-Fund' items or "Non-Operating Expenses' and 'Non-Operating' , 'Incomes' in order to find out the funds from operations. Such adjustment is carried out by preparing an 'Adjusted Profit and Loss Account'.

Proforma of Adjusted Profit and Loss Account

Adjusted Profit and Loss Account

Dr.                                                                                                          Cr.





To Depreciation and Depletion or amortization of fictitious and intangible assets, such as:

Goodwill, Patents, Trade Marks, Preliminary Expenses etc.

To Appropriation of Retained Earnings, such as:

Transfers to General Reserve, Dividend Equalization, Fund, Sinking Fund, etc.

To Loss on Sales of any Non-Current or Fixed Asset

To Dividends (including interim dividend)

To Proposed Dividend

(If not taken as a current liability)

To Provision for taxation

(If not taken as a current liability)

To Closing Balance (of P&L A/C)

To Funds Lost in Operations

(Balancing figure, in case credit side exceeds the debit side)



By Opening Balance (P&L A/C)

By Transfer From Excess Provision

By Appreciation In The Value Of Fixed Assets

By Dividends Received

By Profit On Sale Of Fixed Or Non Current Assets

By Funds From Operations ( Balance Figure In Case Debit Side Exceeds Credit Side)