How to make/prepare a Funds Flow Statement?

Funds Flow Cash Flow • Funds Flow Analysis • Study Notes •     ... 789 ...

Identifying inflow/outflow (source/application) of funds from changes in Balance Sheet figures

To prepare a funds flow statement, we need the information relating to the non-current area of the balance sheet at two points of time. The analysis we make from that information would be relating to the period between the two dates.

Balance Sheet of M/s ___
Liabilities As on 31st December Assets As on 31st December
2004 2005 2004 2005
Share Capital
Profit and Loss
Appropriation account
Long Term Loan
Sundry Creditors
Bills Payable 		10,000

5,000
4,000
8,000
5,000
  		15,000

8,000
6,000
12,000
3,000
  		Cash
Debtors
Stock
Machinery
Land
5,000
10,000
10,000
3,000
4,000
  		8,000
15,000
12,000
5,000
4,000
 
32,000 44,000 32,000 44,000

From the information relating to the non-current area from the balance sheet figures on 31st Dec 2004 and 31st Dec 2005, we would be able to prepare a funds flow statement for the period between 31st December 2004 and 31st December 2005 i.e. for the year 2005.

• Identify the accounts within the current area and the non-current area distinctly

Balance Sheet of M/s ___
Liabilities As on 31st December Assets As on 31st December
2004 2005 2004 2005
Share Capital
Profit and Loss
Appropriation account
Long Term Loan
Sundry Creditors
Bills Payable		 10,000

5,000
4,000
8,000
5,000
  		15,000

8,000
6,000
12,000
3,000
  		Cash
Debtors
Stock
Machinery
Land
 5,000
10,000
10,000
3,000
4,000
  		8,000
15,000
12,000
5,000
4,000
 
32,000 44,000 32,000 44,000

Current, Non-Current

• Prepare the statement/schedule of changes in working capital

With the accounts within the current area, we make up a schedule/statement of changes in working capital.

Though the statement is not a requisite for analysing funds flow or making up the funds flow statement, it would help in cross checking the accuracy of the results.

Both the statement of changes in working capital and the funds flow statement give the change in working capital (fund) as the residue figure.

Schedule/Statement of Changes in Working Capital for the period from __ to __
Particulars/AccountBalance as on 31st DecemberWorking Capital Change
20042005IncreaseDecrease
a) CURRENT ASSETS
1) Cash
2) Sundry Debtors
3) Stock

5,000
10,000
10,000 
8,000
15,000
12,000 


 
3,000
5,000
2,000 
TOTAL 25,000  35,000    10,000 
b) CURRENT LIABILITIES
1) Sundry Creditors
2) Bills Payable

8,000
5,000 
12,000
3,000 
4,000
 

2,000 
TOTAL 13,000  15,000  4,000  2,000 
Working Capital [(a) - (b)] 12,000 20,000
TOTAL 4,000 12,000
Net Change in Working Capital 8,000

• Ascertain the cross transactions

Using the non current account balances, identify the cross transactions that have caused a change in fund (working capital). Depending on the information available, such identification can be done by
  • simple comparison of the two figures (balances) pertaining to each of the non-current accounts.
    (Or)
  • drawing up ledgers for all the non-current accounts and ascertaining the reasons for changes if any.

• Prepare the funds flow statement

The last step would be building up the funds flow statement from the information relating to the cross transactions ascertained as above.

Ascertaining Cross transactions by comparing Balance Sheet figures

A preliminary conclusion with regard to cross transactions can be drawn by a simple comparison of the balance sheet figures pertaining to non-current accounts.

A change in the non-current account balance is an indication of a flow. Based on the following logic we can identify whether the change indicates an inflow or outflow.

Non-Current Asset

increase - outflow

Assets increase when we acquire them. We employ funds/capital in acquiring assets. There would be an outflow of funds on account of employing funds for acquisition.

We can assume an outflow of funds when there is an increase in the value of non-current assets.

decrease - inflow.

Assets decrease when we dispose (assume sale) them. Disposal of assets would bring in sale proceeds which can be used (as capital) for acquiring other assets or for disposing liabilities. There would be an inflow of funds on account of disposal of assets.

We can assume an inflow of funds when there is a decrease in the value of non-current assets.

Non-Current Liability

increase - inflow

Liabilities (assume loan) increase when we take up new ones. We get funds by taking up new/additional liabilities. There would be an inflow of funds on account of such new/enhanced liabilities.

We can assume an inflow of funds when there is an increase in the value of non-current liabilities.

decrease - outflow.

Liabilities decrease when we clear them. We employ funds/capital to clear liabilities. There would be an outflow of funds on account of clearing liabilities.

We can assume an outflow of funds when there is a decrease in the value of non-current liabilities.

From the above balance sheet, we can identify the inflows and outflows

Statement of changes in Non-Current Accounts
Account Balance as on 31st Dec Change Type Result
2004 2005 Amount Direction
Share Capital
P/L Appropriation account
Long Term Loans
Machinery
Land 		10,000
5,000
6,000
3,000
4,000  		15,000
8,000
4,000
5,000
4,000  		5,000
3,000
2,000
2,000
-   		Increase
Increase
Decrease
Increase
No Change 		Liability
Liability
Liability
Assets
Assets 		Inflow
Inflow
outflow
outflow
No Flow

Limitations

Such assumptions just based on the balance sheet amounts would be possible only in the absence of any other information to the contrary.

When there is other information available the changes have to be analysed taking that information also into consideration. In such cases the alternate method is the one to be followed for identifying cross transactions.

Note

You will have a better understanding of how to deal with the Profit and Loss appropriation account after getting aware of the idea of funds from operations.

For now, consider it as just another non-current liability.

Ascertaining Cross transactions by drawing up ledgers

Cross transactions can also be ascertained by drawing up ledgers for all the non-current accounts. Drawing up a ledger for a non-current account may be avoided where there is no change in the balance and we are sure that it has not been affected by any other transaction. When in doubt just draw up all the accounts.

Such an approach for analysing funds flow is necessitated when there is additional information available along with the balance sheets. This approach can be taken up in all cases.

We start with building the ledger accounts one by one by filling the opening and closing balances using the data available in the balance sheet.

Ledgers Show

Based on rational assumptions and the additional information provided, we need to fill up the ledger accounts with postings so as to make it complete.

Dr Machinery a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
01/01/04
— 		To Balance b/d
To Bank a/c (?) 		—
— 		3,000
2,000 
31/12/05
By Balance c/d
—
5,000
   
01/01/05 To Balance b/d — 5,000

Assumption : Increase in the value of machinery is on account of purchase of new machinery.

Dr Share Capital a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount

31/12/04
To Balance c/d
—
15,000 		01/01/04
— 		By Balance b/d
By Bank a/c (?) 		—
— 		10,000
5,000 
   
01/01/05 By Balance b/d — 15,000

Assumption : Additional Capital has been raised and received through cheque.

Dr Long Term Loan a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
—
31/12/04 		To Bank a/c (?)
To Balance c/d 		—
— 		2,000
4,000  		01/01/04
By Balance b/d
—
6,000
   
01/01/05 By Balance b/d — 4,000

Assumption : Loan repaid by cheque.

Land account

Assumption : No transactions affecting the account.

We may skip preparing a non-current ledger account, if we are sure that there are no cross transactions in relation to an account generally indicated by no change in its balance.

Dr Profit and Loss Appropriation a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount

31/12/04
To Balance c/d
—
8,000 		01/01/04
31/12/04
By Balance b/d
By Funds From
    Operations (?) 		—

— 		5,000

3,000 
   
01/01/05 By Balance b/d — 8,000

Assumption : Funds from operations (capital accumulated through profits).

Current account holding accumulated profits

During final accounting, the profit and loss account is closed by transferring the net profit to either the capital account or the profit and loss appropriation account.

The appropriation account may also be named Retained Earnings account or Profit and Loss account or with any other similar name.

Ensure that the account which holds the profits being transferred from the profit and loss account is placed towards the end irrespective of its position in the balance sheet.

But for this, the order in which we consider the ledger accounts is not important. This is only for giving us some help in deriving the funds flow statement.

For now, understand that the balancing figure in the account that holds accumulated profits would be posted to "Funds From Operations a/c".

Preparing the Funds Flow Statement

The information required for making up the funds flow statement is available in the statement of changes in non-current accounts or the ledgers prepared for the purpose.

Using the Statement of Changes in Non-Current accounts

Statement of changes in Non-Current Accounts
Account Balance as on 31st Dec Change Type Result
2004 2005 Amount Direction
Share Capital
P/L Appropriation account
Long Term Loans
Machinery
Land 		10,000
5,000
6,000
3,000
4,000  		15,000
8,000
4,000
5,000
4,000  		5,000
3,000
2,000
2,000
-   		Increase
Increase
Decrease
Increase
No Change 		Liability
Liability
Liability
Assets
Assets 		Inflow
Inflow
outflow
outflow
No Flow

Using the Non-Current account Ledgers

Consider the posting to Bank/Cash in the ledgers prepared. Postings on the credit side indicate an inflow and posting on the debit side indicate an outflow.

Ledgers Show

From the ledger account holding the accumulated profits, (P/L appropriation account, Retained Earnings a/c etc), locate the posting to Funds from Operations.

Consider that posting as being similar in nature to posting to Bank/Cash. If the posting is on the credit side, it indicates an inflow and if it is on the debit side, it indicates an outflow.

Ledgers Show

Once we identify the inflows and outflows, placing the inflows as a group and then outflows as a group is all that we need to do to obtain the funds flow statement.

Funds Flow Statement for the period from __ to __
Particulars Amount Amount
a) Sources (Inflow) of Funds
1) Share Capital
2) Funds from Operations
     [P/L appropriation account]

5,000
3,000 

8,000
b) Applications (Outflow) of Funds
1) General Reserve
2) Machinery


2,000
2,000 


4,000
Change in Working Capital [a - b] + 4,000

Since the Net change is positive, there is an increase in Fund (Working Capital)

This statement is also sometimes called Statement of Sources and Applications of Funds

Funds Flow Statement in T Form

The information presented in the funds flow statement can also be presented in a ledger format which is commonly called the 'T' form.

The sources/inflows of funds are shown on the left site and the outflows/applications are shown on the right side making up a format similar to a ledger account.

Statement of Sources and Applications of Funds for the period from __ to __
Sources/Inflows of Funds Amount Applications/Outflows of Funds Amount
Share Capital
Funds from Operations
    [P/L Appropriation account] 		5,000

3,000  		General Reserve
Machinery 		2,000
2,000 
8,000 4,000
Change in Fund (Working Capital) 4,000

Since the Sources/Inflows are more, there is a Net increase in Fund (Working Capital)

Is Funds Flow analysis meant only for Company form of Organisation?

Because we come across the item Equity Share Capital in most of the problems and illustrations relating to Funds Flow analysis, we may be driven to the misconception that such an analysis is meant only for company form of organisations.

Funds flow analysis is meant for analysing the changes in the balance sheet over a period of time. Such an analysis is possible in relation to balance sheets of any form of business organisation.

In balance sheets of forms of business organisations other than a company, we do not find the items like Equity Share Capital, Preference Share Capital, etc., which are specific to the company form of organisation.

But for the presence or absence of these, there is no difference in analysing Funds Flow for a Corporate entity and a Non-Corporate entity.

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