Application or Uses of Funds

The uses of funds are put are called applications of funds. Following are some of the purposes for which funds may be used:

Uses of funds

  1. Purchase of fixed assets: Purchase of fixed assets such as land, building, plant, machinery, long-term investment, etc., results in increase of current assets without any decrease in current liabilities. Hence, there will be a flow of fund. But in case shares or debentures are issued for acquisition of fixed assets, there will be no flow of fund.
  2. Payment of dividend: Payment of dividends results in decrease of a fixed liability and, therefore, it affects fund. Generally, recommendation of directors regarding declaration of dividend (i.e., proposed dividends) is simply taken as an appropriation of profits and not an item affecting the working capital.

    Uses of Funds

    Uses of Funds

  3. Payment of fixed liabilities: Payment of a long-term liability such as redemption of debentures or redemption of redeemable preference shares, results in reduction of working capital and hence it is taken as an application of fund.
  4. Payment of tax liability: Provision for taxation is generally taken as an appropriation of profits and not as application of fund. But if the tax has been paid, it will be taken as an application of fund.

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