Fund flow statement is a statement that reflects the relative position of funds of the company over a two-period horizon and enables analysis of sources and uses of funds for a particular period of time. A fund flow statement highlights about where the funds have been generated and to what it has been put for use. This statement is also known as sources and application of funds.
Sources of Funds in Fund Flow Statement
The sources of funds would include the following:
- Sources of Funds in Fund Flow Statement
- Application / Uses of Funds in Fund Flow Statement
Issue of Shares and Debentures For Cash
Only fresh issue to be considered as inflow and not the case where bonus shares are issued as they do not generate any fresh inflow.
Sale of Assets
The amount received on sale of fixed assets is to be considered as a source of fund. Inflow on a sale of investments can also be considered.
Long Term Loans
Decrease in Working Capital
Working capital is current assets less current liabilities. A decrease in the net current assets leads to increase in fund flow which needs to be included.
Funds from Operations
This represents funds generated from operating activity of the firm and excludes funds generated from investment or financing activities of the business.
Application / Uses of Funds in Fund Flow Statement
The application of funds would include the following:
Redemption of Shares And Debentures
Premium if any paid also will have to be included in the outflow.
Purchase of Fixed Assets/ Investments
Any purchase made against shares or on credit shall not be included as outflows under this heading.
Repayment of Long-term Loans
Short-term repayment falls under working capital; only longer term which is not included in the short term would be a part of this.
Increase in Working Capital
This would arrive from changes in the working capital statement.
One has to ensure that dividend/tax payment provisions have not been included in the working capital statement else would amount to double counting.
Fund flow statement summarizes the list of sources made available to a firm to finance the activities and how these funds were utilized for the period under consideration. One can have a look at the difference between cash flow statement and fund flow statement to get further clarity. Also can have a look at the advantages and disadvantages o fund flow statement. 1