Steps for making Fund flow statement
First Step
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
------
------↓ Increase ↓ Decrease
------
Current Assets
Þ Cash in hand
Þ Bills receivable
Þ Sundry debtors
Þ Temporary investments
Þ Stocks / inventories
Þ Prepaid expenses
Þ Accrued incomes
------
Total current assets------ ↓xxxx ↓ xxxxx↓
------ ------
Current liabilities
Þ Bills payables
Þ Sundry creditors
Þ Bank overdraft
Þ Short term advances
Þ Dividends payables
Þ Provision for taxation
------
Total current Liabilities ------↓xxxx ↓xxxx ↓
------ ------
Working capital
CA- CL
------
Net increase or decrease in working capital =
Increase in working capital – Decrease in working capital
2nd Step
Statement showing the fund from operation
Because is the source of fund and will show in fund flow statement’s source side. So before making fund flow statement, we must make statement showing the fund from operation.
Operation means business activity and fund from operation means profit from business activity. So, you will easy understand that profit from business activity between two accounting period must be the source of fund.
Statement of fund from operations
------
------>↓ Amount ↓
------
Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non –fund and non operating items which have been already
Debited to profit and loss account1. Depreciation
2. Amortization of fictitious and intangible assets
Þ goodwill
Þ patents
Þ trade marks
Þ preliminary expenses
Þ discount on issue of shares
3. Appropriation of retained earning such as
Þ Transfer to general reserve
Þ Dividend equalization fund
Þ Transfer to sinking fund
Þ Contingency reserve etc.
4. Loss on sale of any non current or fixed assets such as
Þ Loss on sale of land and building
Þ Loss on sale of machinery
Þ Loss on sale of furniture
Þ Loss on sale of long term investments
5. Dividends including
Þ Interim dividend
Þ Proposed dividend
(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account
------
Total ( A)------> ↓ XXXXX ↓
------
Less Non –Fund or non operating items which have already been credited to profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as
Þ Profit on sale of land and building
Þ Profit on sale of plant and machinery
Þ Profit on sale of long term investment etc.
2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit and loss account
3. Dividends received
4. Excess provision retransferred to profit and loss account or written back .
5. Any other non operating item which has been credited to profit and loss account
6. Opening balance of profit and loss account or retained earnings as given in the balance sheet
------
Total ( B)------> ↓ XXXXX ↓
------
Funds received from operation or business activities = total ( A) – Total ( B)
You can make also above statement in t shape adjusted profit and loss account form .
3rd Step
Fund flow statement
------
------> ↓ Amount ↓
------
A ) Source of funds
1.fund from operation ( balance of second step )
2.issue of shares capital
3.issue of debentures
4.raising of long term loans
5.receipts from partly paid shares , called up
6.amount received from sales of non current or fixed assets
7.non trading receipts such as dividend received
8.sale of investments ( Long term )
9.decrease in working capital as per schedule of changes in working capital
------
total ------> ↓ XXXXX ↓
------
Applications or uses of funds
1. Funds lost in operations ( Balance negative in second step )
2. Redemption of preference share capital
3. Redemption of debentures
4. Repayment of long term loans
5. Purchase of long term loans
6. Purchase of long term investments
7. Non trading payments
8. Payment of tax
9. Payment of dividends
10. Increase in working capital ( As per positive balance of ist step )
------
total ------> ↓ XXXXX ↓
------
First Step
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
------
------↓ Increase ↓ Decrease
------
Current Assets
Þ Cash in hand
Þ Bills receivable
Þ Sundry debtors
Þ Temporary investments
Þ Stocks / inventories
Þ Prepaid expenses
Þ Accrued incomes
------
Total current assets------ ↓xxxx ↓ xxxxx↓
------ ------
Current liabilities
Þ Bills payables
Þ Sundry creditors
Þ Bank overdraft
Þ Short term advances
Þ Dividends payables
Þ Provision for taxation
------
Total current Liabilities ------↓xxxx ↓xxxx ↓
------ ------
Working capital
CA- CL
------
Net increase or decrease in working capital =
Increase in working capital – Decrease in working capital
2nd Step
Statement showing the fund from operation
Because is the source of fund and will show in fund flow statement’s source side. So before making fund flow statement, we must make statement showing the fund from operation.
Operation means business activity and fund from operation means profit from business activity. So, you will easy understand that profit from business activity between two accounting period must be the source of fund.
Statement of fund from operations
------
------>↓ Amount ↓
------
Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non –fund and non operating items which have been already
Debited to profit and loss account1. Depreciation
2. Amortization of fictitious and intangible assets
Þ goodwill
Þ patents
Þ trade marks
Þ preliminary expenses
Þ discount on issue of shares
3. Appropriation of retained earning such as
Þ Transfer to general reserve
Þ Dividend equalization fund
Þ Transfer to sinking fund
Þ Contingency reserve etc.
4. Loss on sale of any non current or fixed assets such as
Þ Loss on sale of land and building
Þ Loss on sale of machinery
Þ Loss on sale of furniture
Þ Loss on sale of long term investments
5. Dividends including
Þ Interim dividend
Þ Proposed dividend
(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account
------
Total ( A)------> ↓ XXXXX ↓
------
Less Non –Fund or non operating items which have already been credited to profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as
Þ Profit on sale of land and building
Þ Profit on sale of plant and machinery
Þ Profit on sale of long term investment etc.
2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit and loss account
3. Dividends received
4. Excess provision retransferred to profit and loss account or written back .
5. Any other non operating item which has been credited to profit and loss account
6. Opening balance of profit and loss account or retained earnings as given in the balance sheet
------
Total ( B)------> ↓ XXXXX ↓
------
Funds received from operation or business activities = total ( A) – Total ( B)
You can make also above statement in t shape adjusted profit and loss account form .
3rd Step
Fund flow statement
------
------> ↓ Amount ↓
------
A ) Source of funds
1.fund from operation ( balance of second step )
2.issue of shares capital
3.issue of debentures
4.raising of long term loans
5.receipts from partly paid shares , called up
6.amount received from sales of non current or fixed assets
7.non trading receipts such as dividend received
8.sale of investments ( Long term )
9.decrease in working capital as per schedule of changes in working capital
------
total ------> ↓ XXXXX ↓
------
Applications or uses of funds
1. Funds lost in operations ( Balance negative in second step )
2. Redemption of preference share capital
3. Redemption of debentures
4. Repayment of long term loans
5. Purchase of long term loans
6. Purchase of long term investments
7. Non trading payments
8. Payment of tax
9. Payment of dividends
10. Increase in working capital ( As per positive balance of ist step )
------
total ------> ↓ XXXXX ↓
------