The uses of funds in the financial organization are called applications of funds. Following are some of the purposes for which funds may be used:
Uses of funds in financial organization
- Purchase of fixed assets: Purchase of fixed assets such as land, building, plant, machinery, long-term investment, etc., results in an increase of current assets without any decrease in current liabilities. Hence, there will be a flow of funds. But in case shares or debentures are issued for the acquisition of fixed assets, there will be no flow of funds.
- Payment of dividend: Payment of dividends results in a decrease of a fixed liability and, therefore, it affects fund. Generally, the recommendation of directors regarding the declaration of dividend (i.e., proposed dividends) is simply taken as an appropriation of profits and not an item affecting the working capital.
- Payment of fixed liabilities: Payment of a long-term liability such as redemption of debentures or redemption of redeemable preference shares, results in a reduction of working capital and hence it is taken as an application of fund.
- Payment of tax liability: Provision for taxation is generally taken as an appropriation of profits and not as the application of funds. But if the tax has been paid, it will be taken as an application of funds.
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