FUND FLOW AND CASH FLOW ANALYSIS

Presented by : Anu John & Anu Abraham

Definition of fund flow

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 firms 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

 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.

 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.

 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. 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.

Preparation of Fund Flow Statement

Fund Flow Analysis It consist of two different analysis:Working Capital analysis Cash Flow Analysis Working Capital is the excess of current asset over current liabilities. This analysis include two separate statements: Statement of changes in Working Capital Statement of Sources & Applications of funds Cash flow analysis is the analysis of inflow & out flows of cash. Cash flow analysis results in separate report: i.e. Sources & Application of cash

 Step 1:

Schedule of Changes in Working Capital

Particulars

Previou s year

Current year

Change Changes in s in WC WC increase decrease

A. Current assets Stock debtors Cash/bank Prepaid expense Total (A) B .Current liabilities Creditors Bills payable Outstanding expenses Bank overdraft Total(B) Working Capital (A-B) Increase/decrease in WC

 Step 2:

Inflow or outflow from Non-Current Items Step 3: Find Out Fund from Operation

Rs.
Sales Other operating revenues Less: Total operating cost(other than depreciation) (a) Cost of goods sold opening stock purchases direct expenses Less: closing stock (b) Office and administration expenses ** ** ** ** **

Rs.

Rs.
** **

**

(including outstanding but excluding prepaid) Selling and distribution expenses

(including outstanding but excluding prepaid) Fund from Operations

**
** ** **

 Step 4:

Prepare Fund Flow Statement

Sources Sources of funds Fund from operators Sale of fixed assets Issue of shares Issue of debentures Loan taken Decrease in working capital R s Application of funds Application of funds Purchases of fixed assets Redemption of preference share Redemption of debentures Payment of taxes Repayment of loans Increase in working capital R s

Definition of Cash Flow

A record of the amount of cash and cash equivalents that flow in and out of a company for a specific time. Cash=currency, checks on hand, Bank deposit etc. Cash equivalence= Treasury bills, certificates of deposits, commercial paper

THE NEED FOR A CASH FLOW STATEMENT Profit represents the increase in net assets in a business during an accounting period. This increase can be in : ---Cash ---Non-current assets ---Receivables ---Inventory

PREPARATION OF A CASH FLOW STATEMENT

Direct method :figure

for the cash statement derived from the accounting records or form the other financial statements.
financial accounting statements: ---Balance sheets for the current year end and the previous period ---Income statement for the period

Indirect method: figures derived from the other

 Direct method

---Gross cash flows can be derived: (1) from the accounting record: total the cash receipts and payments directly, or (2) for net cash flow from operating activities, from the opening and closing balance sheets and income statements for the year by constructing summary control accounts for: Sales (to derive cash received from customers) Purchases (to derive cash payments to suppliers) Wages( to derive cash paid to and on behalf of employees)

 Indirect method

---You are usually presented with two balance sheets: for the end of the prior period and for the end of the current period. All the differences between the opening and closing balances are various types of cash flow, or are otherwise needed to produce the cash flow statement. ---To calculate the operating cash flow: (1) Find the profit figure: Take it from operating cash flow, or Calculate the increase in retain profit and add back the periods dividends and tax charge to arrive at profit before tax.

(2)Adjust the profit figure for: Non cash expenses like depreciation, and Movements in working capital items such as inventory, receivables and payables. (3)where there are sales of non- current assets you will need to find figures for additions or disposals, and depreciation on disposals. Set up three T accounts for non-current asset cost, aggregate depreciation and disposal Enter the opening and closing balances from the balance sheets. Do the double entry in the ledger accounts and the cash flow statements for all additional information given to you in the question The balancing figures will give you the figures you need

 4) set up a format as follows, leaving plenty of

space between the headings, then go through the given balance sheets from the top entering the differences in the correct positions in the format.